Exhibit 10.4
 
 
PARTICIPATION AGREEMENT

This Participation Agreement (hereinafter “Agreement”) is made and entered into
effective May 13, 2015, by and between PetroShare Corp. (“PetroShare”),  and 
Providence Energy Operators, LLC (“Participant”).

RECITALS:

A. PetroShare represents that it has acquired certain oil and gas leases, being
described on Exhibit “A” attached hereto (the “Existing Leases”).

B. Participant wishes to participate with PetroShare in the drilling and
development of the Leases (defined below) pursuant to the provisions of this
Agreement.

C. In addition, Participant, as “Lender”, is providing a revolving line of
credit facility (“Credit Facility”) for the benefit of PetroShare, as
“Borrower”, pursuant to that certain Revolving Line of Credit Facility dated May
13, 2015.

Now, therefore, the parties hereto, for the mutual promises contained herein and
other good and valuable consideration, the sufficiency of which is hereby
acknowledged, do hereby contract and agree as follows, hereby also incorporating
the recitals above:
 
I.  DEFINITIONS

1. AMI Acquisition Cost or Costs:  Shall include all Lease Costs and all other
expenditures related to the acquisition of the AMI Leases which would be treated
as a direct cost under Section II of the Accounting Procedure attached to the
Operating Agreement, including but not limited to, expenditures for contract
brokers, expenses associated with Exhibit C - Kingdom Resources Service
Agreement, abstracts, and outside attorneys, and, in the case of options and
contractual rights shall include an assumption by the Non-Acquiring Party of its
proportionate share of all burdens imposed on Acquiring Party by the related
contract, but shall not include any charges for Acquiring Party’s own personnel
or overhead or which would be treated as “indirect costs” under Section III of
said Accounting Procedure.

2. AMI Lease(s):  Any Lease which the Parties hereto elect to acquire within the
AMI.

3. Area of Mutual Interest or AMI: The Area of Mutual Interest shall consist of
the lands identified on Exhibit “D” attached hereto, plus an additional one mile
in diameter surrounding the outer boundaries of the lands identified on Exhibit
D.

4. Effective Date:  The Effective Date of this Agreement is May 13, 2015.

5. Existing Leases:  The oil and gas leases on Exhibit “A” attached hereto.

6. Leases:  Collectively, the Existing Leases and AMI Leases.

 
 
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7. Net Revenue Interest:  The share of the gross production proceeds net of all
royalty interests, overriding royalty interests and similar burdens and also net
of applicable production, severance and ad valorem taxes.

8. Operator:  As set forth in the applicable JOA.

9. Operating Agreement or JOA:  A joint operating agreement in the form attached
hereto as Exhibit “B”, as may be modified by the designated Operator at the time
of any modification; or, if any of the Leases are subject to an existing joint
operating agreement with a third party, such joint operating agreement will be
the applicable JOA for such Leases, as to the lands covered by said third party
JOA.

10. Party or Parties:  Shall refer to Participant and/or PetroShare,
individually or collectively.

11. Participant Interest:  A Working Interest in any of the Leases on a pro rata
basis of 50.0%, having a net revenue interest of not less than 80.00%, unless
otherwise mutually agreed to in writing by Participant and PetroShare.

12. Project Area:  Shall be any area(s) within the AMI in which there is ongoing
operations, including, but not limited to leasing, drilling and completion
operations, seismic operations, and/or producing wells.

13. Well or Wells: Any well which has been proposed within the Project Area or
the AMI.

14. Working Interest:  The cost bearing interest created by, through and from
oil and gas leases.

15. Credit Facility:  That certain revolving line of credit facility (“Credit
Facility”) by and between Participant (aka “Lender”) and PetroShare (aka
“Borrower”) dated May 13, 2015.

II. EXISTING LEASES AND LEASE EXPENSES

A.   Existing Lease.  Upon full execution of this Agreement, Participant shall
be assigned an undivided fifty percent (50.0%) of PetroShare’s right, title and
interest in and to the Existing Leases. All assignments hereunder will be
subject to all royalties, overriding royalties, production payments, net profits
interests and similar burdens existing of record as of the date of this
Agreement.

B.   Lease Expenses. With respect to the Existing Leases, and in the event any
other Lease is acquired within the AMI and Participant elects to acquire its
full 50% share of PetroShare’s right, title and interest in the Lease as
outlined herein (an “AMI Lease’), Participant shall pay its pro rata share of
lease acquisition expenses and the expenses necessary to maintain the Lease in
full force and effect (including without limitation delay rentals, minimum
royalties and shut-in payments).  At the outset of this Agreement, PetroShare
agrees to and shall grant Participant a onetime credit against Existing Leases’
acquisition expenses equal to $105,000 for Participant’s 50% share of such lease
acquisition expenses.
 
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III. DRILLING AND DEVELOPMENT.

A.   Participation Wells.  Participant shall have the right to participate in
any Well proposed within the Project Area or on any of the Leases in the AMI, or
on lands pooled or to be pooled therewith, in accordance with the associated
Operating Agreement and the provisions of this Agreement, with Participant being
responsible for its Participant Interest, subject to any elections to not
participate in such Well.

IV. OPERATIONS WITHIN PROJECT AREA

A.   Operating Agreement.  All operations within the Project Area shall be
conducted pursuant to one or more JOA’s, in the form attached hereto as Exhibit
“B”, reference to which is hereby made for all purposes, except as expressly
modified by the terms hereof. In the event of a conflict between this Agreement
and the Operating Agreement that has been executed by the Parties, the Operating
Agreement associated with any proposed Well shall control.  In the event that
any of the Leases are subject to a JOA in existence prior to the date of this
Agreement which has been disclosed to Participant prior to execution of this
Agreement, or are included in units that will be operated by a third party, then
the prior JOA’s or the third party operator’s JOA shall control.

B.   Cash Advances.  Cash Advances shall be due and payable and made in
accordance with the Operating Agreement governing a Well.

V. AMI

Acquisition of AMI Leases. The Parties hereby establish the AMI, as described on
Exhibit D attached hereto. The term of AMI shall be for a period three (3) years
from the Effective Date, and as long as thereafter as any well drilled pursuant
to this Agreement is producing oil and/or natural gas in paying quantities or
any of the Leases are in effect (“AMI Term”). During the AMI Term, if either
Party acquires any AMI Leases, the other Party shall have the right to acquire
its proportionate 50% interest in and to such AMI Leases, in accordance with the
terms and conditions of this Agreement.  The following provisions shall apply to
the AMI and AMI Leases:

1. Either Party to Acquire.  Either Party shall have the right to lease or
otherwise acquire AMI Leases within the AMI.  AMI Leases shall be subject to the
AMI and provisions below.

2. Notification Upon Acquiring Oil and Gas Rights.  The Party acquiring an AMI
Lease (“Acquiring Party”), shall notify the other Party (“Non-Acquiring Party”)
in writing within 20 days of such acquisition.  Such lease notice shall include
a full description of the AMI Lease so acquired, a copy of the instrument by
which such rights were acquired, together with all documentation relevant
thereto, including without limitation copies of the leases, abstracts, title
memos, assignments, subleases, farm outs or other contracts affecting the AMI
Lease, plus an itemized breakdown of the AMI Acquisition Cost (defined below).

 
 
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3. Option to Participate.  Within 15 days after the Non-Acquiring Party’s
receipt of the notice and information referred to in paragraph A.2. above, the
Non-Acquiring Party may elect to acquire its share in the AMI Leases so acquired
by notifying the Acquiring Party of such election in writing.  If the
Non-Acquiring Party so elects to acquire its proportionate share in the acquired
AMI Leases, the interests of the Parties in said AMI Leases shall be:

Participant: 50.0%

PetroShare: 50.0%

If the Non-Acquiring Party does not timely elect or elects to not acquire its
interest in any such AMI Leases, then it shall have no interest in any such
leases.

4. Acceptance and Reimbursement. Promptly after the acceptance of an offered AMI
Lease, the Acquiring Party shall invoice the Non-Acquiring Party for
Non-Acquiring Party’s Share of the AMI Acquisition Costs associated with the
acquired AMI Lease.  The Non-Acquiring Party shall promptly reimburse Acquiring
Party for the Non-Acquiring Party’s share of the AMI Acquisition Costs, as
reflected by the invoice.  Upon receipt of such reimbursement at a closing or
otherwise, Acquiring Party shall simultaneously convey the right, title and
interest in and to such Non-Acquiring Party’s 50% interest in said AMI Lease(s)
through a proper Assignment thereof.  If Acquiring Party does not receive the
amount due from the Non-Acquiring Party within thirty (30) days after the
receipt by such Non-Acquiring Party of the invoice for its costs, such failure
shall constitute a withdrawal by Non-Acquiring Party of its former election to
acquire the interest, and Non-Acquiring Party shall no longer have the right to
acquire an interest in the offered AMI Lease, unless the Acquiring Party agrees
in writing to do so.  The Acquiring Party, at its sole option, may elect by
written notice to the Non-Acquiring Party to extend the reimbursement timeframe.
During such extension of reimbursement timeframe, if granted, the Non-Acquiring
Party shall remain liable for payment.

5. Failure to Respond.  If Acquiring Party shall not have received notice of the
election of Non-Acquiring Party to acquire its proportionate interest within the
fifteen (15) day election period pursuant to the terms of Paragraph A.3. of this
Agreement, such failure to respond shall be deemed conclusively to be an
election by Non-Acquiring Party to not acquire its interest in the AMI Lease
being offered. If the Non-Acquiring Party elects in writing to not participate
in any AMI Leases, the Acquiring Party may retain such AMI Leases free and clear
of all of the terms of this Agreement, the AMI and any operating agreements
among the Parties.

 
 
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6. Responsive Notices.  Responsive notices required hereunder, including, but
not limited to elections to participate in an acquisition, may be given 
verbally by phone or in person, or E-mail but to be effective must be followed
by written notice delivered by mail, courier, personally, E-mail or by facsimile
within 24 hours of the delivery of the verbal notice.

7. Assignee Requirements.  Each Party agrees to require any assignee who
acquires an interest in any Leases within the AMI from such Party to agree to be
bound by the terms of the AMI set forth herein.

8. Participant will have the right on an ongoing basis, to participate for its
proportionate share (50%), in the acquisition or construction of any gathering,
processing, pipelines or plant facilities that may be necessary or convenient
for the production or transmission of any gas produced under the terms of this
Agreement and the associated AMI in which Participant has an interest.

VI. PROPORTIONATE REDUCTION

Proportionate Reduction Clause:  If an oil and gas lease or other Mineral
Interest covers less than the entire mineral fee estate in the lands covered
thereby, or if a party’s interest in the applicable Lease or Mineral Interest is
less than a 100% ownership interest, any interest conveyed or reserved pursuant
to this Agreement is intended to be proportionately reduced to (i) the
proportion of interest covered by the relevant oil and gas lease or other
Mineral Interest, and (ii) the proportion of ownership held by the conveying
party, in the case of a conveyance, or the burdened party, in the case of a
reservation of interest.

VII. REVOLVING CREDIT FACILITY

Loan Agreement: Participant (as Lender) and PetroShare (as Borrower) have
entered into a $5,000,000 revolving line of Credit Facility dated May 13, 2015,
which is secured by the Leases and resulting production contemplated hereunder.
In the event of a conflict between this Participation Agreement and the Credit
Facility, the Credit Facility shall control.

VIII. CONFIDENTIALITY

A.    Confidentiality.  The Parties acknowledge that the information that is the
subject matter of this Agreement (including but not limited to all well
information acquired by operations conducted under an Operating Agreement) is
sensitive and confidential proprietary information belonging to the Parties. 
Accordingly, each Party, for itself and its Affiliates, agrees not to release or
disclose or otherwise make the information available to or to furnish any of
said information to any third party without (i) obtaining the agreement of the
third party to maintain such information confidential and to not use such
information other than in connection with investing in or participating with or
purchasing interests from the disclosing party, or (ii) first obtaining the
express written consent of the other party.  Any such release or disclosure if
approved shall be conditioned upon the third party expressly agreeing to all
terms herein and becoming a party to and subject to a Confidentiality
Agreement.   Nothing contained above shall restrict or impair any Party’s right
to use or disclose any of the information which is:  (1) at the time of
disclosure available to the public through no act or omission of that Party; (2)
can be shown was lawfully in that Party’s possession prior to the time of this 
Agreement; or (3) is independently made available to that Party by a third party
who is independently entitled to disclose such information and that party shows
that the right of such third party to disclosure existed prior to the date of
this Agreement.  Also, nothing contained above shall restrict Participant from
providing production results to its investors or lending institutions for the
purposes of financing or requisite reporting.
 
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B.   Public Disclosure.  Subject to the exceptions set forth below, and unless
otherwise agreed upon by the Parties, prior to substantial leasing completion in
the AMI as contemplated by this Agreement, the Parties intend to keep material
information concerning the entering into of this Agreement and the location of
the Project Area confidential to the extent any disclosure thereof could impair
the leasing activities of the Parties.  Notwithstanding such intent, either
Party may make any public disclosure to the extent that, upon advice of such
Party’s counsel, such disclosure is advisable to comply with United States or
state securities laws, rules or regulations. Any proposed press release or other
disclosure, shall be provided to the other Party in advance on a confidential
basis for its information and comment.

IX. TAX ELECTION

This Agreement is not intended to create, and shall not be construed to create,
a relationship of partnership or an association for profit between or among the
Parties hereto except as provided herein.  Each Party hereby affected elects to
be excluded from the application of all the provisions of Subchapter “K”,
Chapter 1, Subtitle “A”, of the Internal Revenue Code of 1986 and all amendments
thereto.

X. PAYMENT OF DELAY RENTALS AND LEASE EXTENSIONS

The designated Operator of any Well covered by this Agreement shall be
responsible for making any payment of delay rentals, shut in royalties and
minimum royalty payments on the Leases.  Participant shall bear and pay its
share of such payments. Participant shall be billed and shall pay for said costs
in the manner set forth for the billing and paying of direct costs in the COPAS
accounting procedures attached to the form of Operating Agreement.  Operator
shall not be liable for any loss of a Lease or Leases, unless said loss is due
to bad faith, gross negligence or willful misconduct by the Operator.
 
 
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XI. NO JOINT LIABILITY

The rights, duties, obligations and liabilities of the Parties hereto shall be
several and not joint or collective.  Each Party hereto shall be responsible
only for its obligations as herein set out and shall be liable only for its
share of the cost and expense as herein provided; it being the express purpose
and intention of the Parties that their interest in this Agreement and the
rights and property acquired in connection herewith shall be held by them as
tenants-in-common.  Except for the tax election which the Parties may have made,
it is not the purpose or intention of this Agreement to create any mining
partnership, commercial partnership or other partnership, and it shall be deemed
not to have done so.

XII. ASSIGNMENTS OF LEASES

Any assignment of any interest pursuant to this Agreement by and between the
Parties hereto shall be made with a special warranty of title by through and
under the assignor, but not otherwise and on the form attached hereto as Exhibit
“E” which shall be for recording in the official records of the county in which
the Lease lies.  Where applicable, separate assignments of operating rights
shall likewise be made on such State and Federal forms as required by rule or
regulation.  Any assignment hereafter executed shall specifically refer to, and
be made subject to, the terms and conditions hereof, and shall convey a working
interest equal to the Participant Interest.

XIII. FORCE MAJEURE

Should any Party be prevented or hindered from complying with any obligation
created under this Agreement, other than the obligation to pay money, by reason
of fire, flood, storm, act of God, governmental authority, governmental action
or inaction, failure or delay in obtaining any necessary permits, labor
disputes, war, the inability to secure qualified labor, geoscience data, title
abstracts, curative title work, lease brokers, entry onto the land, drilling
equipment and drilling rig(s) at prevailing market rates, drilling tools,
materials or transportation, or any other cause not enumerated herein but which
is beyond the normal control of the Party whose performance is affected, then
the performance of any such obligation shall be suspended during the period of
such prevention or hindrance, provided the affected Party promptly notifies the
other Party of such force majeure circumstances and exercises all reasonable
diligence to remove the cause of force majeure.

XIV. EXHIBITS

The following exhibits are attached to this Agreement and incorporated herein by
reference:

Exhibit “A” – List of Existing Leases
Exhibit “B” – Form of Joint Operating Agreement
Exhibit “C” – Kingdom Resources LLC Service Agreement
Exhibit “D” – AMI Plat
Exhibit “E” – Form of Assignment
 

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If the terms or provisions of any of these Exhibits conflict with the terms of
this Agreement, this Agreement shall control.

XV. MISCELLANEOUS

A.    Assignment:  Either Party may assign its interest under this Agreement
provided that the assigning Party remains liable for or guarantees the
performance of its assignee and provided that the assigning Party gives the
non-assigning Party appropriate documentation evidencing such assignment.

B.    Governing Law:  This Agreement and other instruments executed in
accordance with it, except for assignments of lands, or the execution hereof
shall be governed by and interpreted according to the laws of the State of
Colorado.  Forum and venue shall be exclusively in Denver, Colorado.  As to
assignments of lands, they shall be governed by the laws of the State of
Colorado, unless otherwise agreed to in writing by the Parties.

C.    Entire Agreement:  This Agreement, the documents to be executed hereunder
and the Exhibits attached hereto constitute the entire agreement between the
Parties, supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, and there are no
warranties, representations or other agreements between the Parties as to the
substance and matters referenced in and made a part of this Agreement, except as
specifically set forth herein.  No supplement, amendment, alteration,
modification, waiver or termination of the Agreement shall be binding unless
executed in writing by the parties hereto.

D.    Waiver:  No waiver of any of the provisions of the Agreement shall be
deemed or shall constitute a waiver of any other provisions hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver unless
otherwise expressly provided.

E.    Captions; Definition of “Including”:  The captions in this Agreement are
for convenience only and shall not be considered a part of or affect the
construction or interpretation of any provision of this Agreement.  The term
“including” or “includes”, as used herein, shall mean “including, without
limitation,” and “includes, without limitation”.

F.    Binding:  This Agreement shall be binding upon and inure to the benefit of
the Parties hereto and their respective permitted successors, assigns and legal
representatives.

G.    Notices:  Any notice hereunder shall be given in writing by mail, courier,
personally, E-mail or by facsimile and shall be effective when delivered to the
party intended to be notified.  The contact information for each Party is as
follows:

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If to PetroShare:

PetroShare Corp.
7200 So. Alton Way, Ste B220
Centennial, CO 80112
Attn: Frederick J. Witsell
(303) 500-1168 Office
(303) 770-6885 fax
(303) 881-2157 cell
fwitsell@petrosharecorp.com
 

If to Participant:

Providence Energy Operators, LLC
Attn:  Jim Sinclair
16400 N Dallas Parkway, Ste 400
Dallas, TX 75248
Phone:   214.522.9131
Email: jsinclair@providence-energy.com

With a copy to:

Providence Energy Operators, LLC
Attn:  Mark L. Nastri
16400 N Dallas Parkway, Ste 400
Dallas, Texas 75248
Phone:   214.522.9131
Email: mnastri@providence-energy.com

(Any Party may change their foregoing contact information by notice to the other
Party.)

H.    Expenses:  Except as otherwise provided herein, each Party shall be solely
responsible for all expenses incurred by it in connection with this transaction
(including fees and expenses of its own counsel and accountants), other than
those otherwise agreed to and allocated herein.

I.    Execution:  This Agreement may be executed in multiple original
counterparts, all of which shall together constitute a single agreement and each
of which, when executed, shall be binding for all purposes thereof on the
executed Party, its successors and assigns.
 

 
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J.     Severability:  If any term or other provision of this Agreement is
invalid, illegal or incapable of being enforced by any rule of law, all other
conditions and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic or legal substance of the transactions
contemplated hereby is not affected in any materially adverse manner to either
Party.

K.   Arbitration:  Any dispute arising under this Agreement (“Arbitrable
Dispute”) shall be referred to and resolved by binding arbitration in Denver,
Colorado, to be administered by and in accordance with the Commercial
Arbitration Rules of the American Arbitration Association.  Arbitration shall be
initiated within the applicable time limits set forth in this Agreement and not
thereafter or if no time limit is given, within the time period allowed by the
applicable statute of limitations, by one party (“Claimant”) giving written
notice to the other party (“Respondent”) and to the Denver Regional Office of
the American Arbitration Association (“AAA”), that the Claimant elects to refer
the Arbitrable Dispute to arbitration.  All arbitrators must be neutral parties
who have never been officers, directors or employees of the parties or any of
their Affiliates, must have not less than ten (10) years’ experience in the oil
and gas industry, and must have a formal financial/accounting, engineering
and/or legal education.  The hearing shall be commenced within sixty (60) days
after the selection of the arbitrator.  The Parties and the arbitrators shall
proceed diligently and in good faith in order that the arbitral award shall be
made as promptly as possible.  The interpretation, construction and effect of
this Agreement shall be governed by the Laws of Colorado, and to the maximum
extent allowed by law, in all arbitration proceedings the Laws of Colorado shall
be applied, without regard to any conflicts of laws principles.  All statutes of
limitation and of repose that would otherwise be applicable shall apply to any
arbitration proceeding.  The tribunal shall not have the authority to grant or
award indirect or consequential damages, punitive damages or exemplary damages.

L.    Further Assurances:  During the time in which this Agreement is in effect,
the Parties shall, at any time and from time to time, and without further
consideration, execute and deliver or use reasonable efforts to cause to be
executed and delivered such other instruments of conveyance and contract, and to
take such other actions as either Party may reasonably may request effect the
intent of this Agreement.

M.    Not to be Construed Against Drafter: The Parties acknowledge that they
have had an adequate opportunity to review each and every provision contained in
this Agreement, that they have participated equally in the drafting hereof and
that they have had adequate time to submit same to legal counsel for review and
comment.  Based on said review and consultation, the parties agree with each and
every term contained in this Agreement.  Based on the foregoing, the parties
agree that the rule of construction that a contract be construed against the
drafter, if any, shall not be applied in the interpretation and construction of
this Agreement.

N.   Laws and Regulations:  Any reference to any federal, state, local, or
foreign statute or law will be deemed also to refer to all rules and regulations
promulgated thereunder, unless the context otherwise requires.
 
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O.   Third-Party Beneficiaries:  This Agreement is not intended to confer any
rights or remedies upon any Person other than the parties and their respective
successors and permitted assigns.

P.    Investment Representations:  Participant understands that the interests
evidenced by this Agreement have not been registered under the Securities Act of
1933, the Colorado Securities Act or any other state securities laws (the
“Securities Acts”).

Q.    Preferential Rights:  Notwithstanding anything contained in this Agreement
to the contrary, each Party shall have a first right of refusal to acquire any
interest in the Wells, Leases or AMI which a party (“Selling Party”) decides to
sell or otherwise transfer to a unrelated third party, other than an affiliate,
under the same terms and conditions as are being offered by the third party. 
The non-selling Party (“Non-Selling Party”) shall notify the Selling Party of
its election to participate in any additional interest or project under this
provision within thirty (30) days of its receipt of notice of the availability
of said interest and the terms related thereto. If the Non-Selling Party does
not elect to acquire the rights or interest being offered within said thirty
(30) day period, then the Selling Party shall be free to sell or transfer the
interest to the unrelated third party at the terms so tendered to the Selling
Party. In the event the sale of the interest is not closed under the same terms
and conditions as originally proposed within 120 days from the written notice to
the Non-Selling Party of the proposed sale, then the Preferential Right as set
forth herein shall be reinstated. Notwithstanding anything to the contrary
herein, this Preferential Right shall expire in its entirety on the maturity
date of the Credit Facility or any extension thereof.

R.    Tag-Along Rights:  In the event that PetroShare elects to transfer to any
third party in a transaction or series of related transactions all or
substantially all of PetroShare’s interests in the AMI, then Participant (at its
sole discretion) may require that PetroShare cause the third party to include
all or a portion of Participant’s corresponding interest in the AMI for the
terms, conditions and consideration as PetroShare’s intended sale.

IN WITNESS WHEREOF, this Agreement is executed effective as of the date
hereinabove provided.

Parties:

PETROSHARE CORP.
 
By:    /s/ Stephen J. Foley    
Name: Stephen J. Foley, CEO
 
PROVIDENCE ENERGY OPERATORS, LLC
 
By:      /s/ Jim Sinclair         
Name: Jim Sinclair, COO

 
 

 
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EXHIBIT “A”

EXISTING LEASES

Those certain leases Pursuant to the Lease Acceptance Letter dated February 27,
2015, by and between PetroShare Corp. and Kingdom Resources LLC, as amended and
Extended to May 13, 2015, comprising the general area described below:

Township 1 South, Range 67 West, Adams Co., CO 6th PM
Section 10: various parcels covering 203 net acres
Section 15: various parcels covering approx. 128 net acres

(detailed lease descriptions to be attached)
 
 
 

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C S M K F
CARVER SCHWARZ McNAB
KAMPER & FORBES, LLC
LAWYERS
 
HUDSON'S  BAY CENTRE
1600 STOUT STREET, SUITE 1700
DENVER, COLORADO 80202

MAIN LINE:  303.893.1815
FACSIMILE: 303.893.1829
 
PETER C. FORBES PFORBES@CSMKF.COM
303.893.1827

 
May 6, 2015
VIA EMAIL
 
Frederick J. Witsell President 
PetroShare Corp.
7200 South AltonWay Suite B220
Centennial, CO 80111
 

Re:
Kingdom Resources/Todd Creek Farms

 
Dear Fred:
 
TCF has cleared title to an additional approximately 22 acres of mineral
interests acres in Filings 1, 2 and 5, as reflected in the attached updated
spreadsheet. I have also enclosed copies of the lease amendments adding this
additional acreage to the TCF/Kingdom Lease. To the extent you think a
modification of the Kingdom/Petroshare lease assignment is necessary to include
these amendments, let me know and we can prepare one.

Because TCF's total net mineral acreage has increased to 333.24 net acres, I
have enclosed a revised Bonus Payment order and a revised Contractor’s Fee
invoice. Finally, I have included the additional invoices from our firm for
charges incurred after our original submission that arc payable pursuant to the
Contractor’s Agreement.

Therefore, assuming the closing goes forward on May 15, 2015 as scheduled, the
total amount payable (including the Borders  invoices and the CSMKF invoices
included with our original  submission) will be $785,630.10, broken down as
follows:

Payee
Item
 
Amount 
       
TCF
Bonus
 
$
683,142.00
 
Kingdom
Contractor's Fee
 
$
68,314.20
 
Kingdom
Borders Invoices
 
$
15,110.90
 
Kingdom
CSMKF Invoices
 
$
19,063.00
 

 

 

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Frederick J. Witsell
May 6, 2015
Page 2
CSMKF
Lawyers

Also, there is one additional lot in Filing 5 where TCF obtained a QCMD, but
where the homeowner had already executed a lease with Ward.  Therefore, TCF’s
interest in that lot is limited to the 17.5% landowner royalty provided by the
Ward lease. Kingdom has not included any net acreage for that lot in this
submission, because that lease does not comply with the parameters set forth in
the Contractor’s Agreement.  If that royalty is of interest to Ward, however,
let us know and we can discuss an appropriate payment arrangement for that lot.

Thanks much, and as always let me know if you have any questions.

Very truly yours,

  /s/ Peter C. Forbes

Peter C. Forbes

cc:  Gene Osborne
Enclosure

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Todd Creek Farms

SUMMARY OF NET ACREAGE ALL FILINGS
 
Homeowner
Leases
Summary
Judgments
Defaults
Quit
claims
ROW
TOTALS
Filling 1
1.86
3.635
35.96
30.72
12.12
84.29
Filing 2
0
13.79
39.51
6.58
18.68
64.77
Filing 3
0
0
0.00
0.00
0.00
0.00
Filing 4
0
0
24.10
3.29
67.06
94.45
Filings
0
0
32.99
14.02
28.93
75.94
    TOTAL
1.860
17.425
132.560
54.605
126.790
333.240

TOTAL NET ACRES:   333.240
 
 
Page 1 of 9

--------------------------------------------------------------------------------

 
 

Todd Creek Farms

FILING 1
Defaults
 
Quit Claim Mineral Deeds
 
Lot
Block
Total Acres
Net Acres
Comments
Lot
Block
Total Acres
Net Acres
Comments
15
3
1.57
1.570
 
5
2
1.74
0.870
50% Reduction - Tract 1
4
4
1.5
1.500
 
8
2
2.18
1.090
50% Reduction - Tract 1
2
1
1.59
1.590
 
11
3
1.73
1.730
 
6
4
1.5
1.500
 
10
3
1.75
1.750
 
15
2
2
1.000
50% Reduction - Tract 1
16
3
2.43
2.430
 
8
4
1.5
1.500
 
7
3
1.86
0.930
50% Reduction - Tract 1
12
2
2
1.000
50% Reduction - Tract 1
1
2
1.68
1.680
 
3
4
1.5
1.500
 
5
3
1.99
0.995
50% Reduction - Tract 1
2
5
1.97
1.970
 
19
3
1.94
0.970
50% Reduction - Tract 1
5
4
1.5
1.500
 
6
3
1.82
0.910
50% Reduction- Tract 1
10
2
2.49
1.245
50% Reduction - Tract 1
3
3
1.78
1.780
 
14
3
1.63
1.630
 
7
2
2.87
1.435
50% Reduction - Tract 1
13
3
1.94
1.940
 
1
3
1.86
1.860
 
13
2
2
1.000
50% Reduction - Tract 1
16
2
2
1.000
50% Reduction - Tract 1
22
3
2.09
1.045
50% Reduction - Tract 1
12
3
2.18
2.180
 
1
5
1.62
1.620
 
9
3
1.86
1.860
 
17
3
2.32
2.320
 
8
3
1.82
1.820
 
14
2
2
1.000
50% Reduction - Tract 1
3
5
2.26
2.260
 
21
3
2.09
1.045
50% Reduction - Tract 1
11
2
2.13
1.065
50% Reduction - Tract 1
4
5
2.64
2.640
 
4
3
2.1
2.100
 
7
4
1.5
1.500
 
TOTALS
39.98
30.72
 
1
4
1.5
1.500
   
9
2
2.07
1.035
50% Reduction - Tract 1
1
1
1.81
1.810
 
TOTALS
44.330
35.960
 

 
TOTAL ACREAGE FOR FILING NO. 1 LOTS:
84.31
 
 
REDUCTIONS:
17.64
 
 
TOTAL NET ACREAGE FOR FILING NO. 1 LOTS
66.68
 
 
 
 
 

 
Page 2 of 9

--------------------------------------------------------------------------------

 

Todd Creek Farms

FILING 2
Defaults
 
Quit Claim Mineral Deeds
Lot
Block
Total Acres
Net Acres
Plat
Comments
Lot
Block
Total Acres
Net Acres
Plat
Comments
1
5
1.69
1.69
Original
 
2
1
1.89
1.89
Amended
 
3
5
1.96
1.96
Original
 
7
3
2.90
1.45
Original
50% Reduction - Tract 1
6
5
1.51
1.51
Original
 
1
1
1.94
0.97
Original
50% Reduction - Tract 1
3
3
2.05
2.05
Original
 
3
1
1.87
1.87
Original
 
8
7
2.01
2.01
Original
 
Tract D
0.40
0.40
   
4
3
2.15
2.15
Original
 
TOTALS
9.00
6.58
 
2
4
1.69
1.69
Original
   
2
7
1.96
1.96
Original
 
1
4
1.49
1.49
Original
 
2
5
2.29
2.29
Original
 
5
1
2.15
2.15
Amended
 
5
3
2.25
2.25
Original
 
5
5
2.18
2.18
Original
 
4
5
2.14
2.14
Original
 
1
2
1.68
1.68
Amended
 
3
2
1.54
0.77
Original
50% Reduction - Tract 1
7
7
2.28
2.28
Original
 
1
3
2.29
2.29
Original
 
1
1
2.96
2.96
Amended
 
3
9
2.01
2.01
Original
 
TOTALS
40.28
39.51
   

 
 
TOTAL ACREAGE FOR FILING NO. 2
49.28
REDUCTIONS:
3.19
TOTAL NET ACREAGE FOR FILING NO. 2
46.09

 

 
Page 3 of 9

--------------------------------------------------------------------------------

 
 

Todd Creek Farms

Filing 3
Default
s
         
Quit Claim Mineral Deeds
Lot
Block
Total Acres
Net Acres
Comments
Lot Block Total Acres Net Acres
Comments
11
4
1.73
0.00
HBP Issue (1.73)
6 3 1.81 0.00
HBP Issue (1.81)
TOTALS
1.73
0.00
  TOTALS 1.81 0.00

 
 
TOTAL ACREAGE FOR FILING NO. 3
3.54
REDUCTIONS:
0.00
TOTAL NET ACREAGE FOR FILING NO.
0.00

 
 
 
 
Page 4 of 9

--------------------------------------------------------------------------------

 

Todd Creek Farms

Filing 4
Defaults
 
Quit Claim Mineral Deeds
 
Lot
Block
Total Acres
Net Acres
Comments
Lot   
Block
Total Acres
Net Acres
Comments
7
5
2.13
2.13
Guard Lease (void)
26
2
1.72
1.72
 
5
5
1.81
1.81
 
6
3
1.57
1.57
 
14
4
1.79
1.79
 
TOTAL ACREAGE
3.29
3.29
 
9
7
1.95
1.95
   
37
2
1.53
1.53
 
33
2
1.61
1.61
 
12
4
1.59
1.59
Extraction Lease (void)
23
2
1.51
1.51
 
16
3
1.54
1.54
Guard Lease {void)
40
4
1.88
1.88
 
38
4
1.78
1.78
 
9
4
1.88
1.88
Extraction Lease (void)
34
2
1.60
1.60
 
21
2
1.50
1.50
 
TOTAL ACREAGE
24.10
24.10
 

 
 
TOTAL ACREAGE FOR FILING NO. 4
27.39
REDUCTIONS:
0
TOTAL NET ACREAGE FOR FILING NO. 4 LOTS:
27.39

[image0.jpg]

Page 5 of 9

--------------------------------------------------------------------------------

 

Todd Creek Farms

Filing 5
Defaults
 
Quit Claim Mineral Deeds
 
Lot
Block
Total Acres
Net Acres
Comments
Lot
Block
Total Acres
Net Acres
Comments
25
1
1.67
1.67
 
38
1
1.67
1.67
 
30
1
1.80
1.80
 
3
3
1.52
0.00
Lease prior to QCMD
12
2
2.10
2.10
 
12
1
1.98
1.98
 
35
4
2.00
2.00
 
24
1
1.52
1.52
 
6
3
1.76
1.76
 
25
4
2.46
2.46
 
30
2
1.80
1.80
 
26
4
1.98
1.98
 
14
2
1.80
1.80
 
38
1
1.67
1.67
 
29
3
1.53
1.53
 
40
4
2.11
2.11
 
4
2
1.56
1.56
 
Outlots A, B, C, D. E
0.63
0.63
 
13
1
1.86
1.86
 
TOTALS
15.54
14.02
 
12
4
1.67
1.67
   
31
1
1.80
1.80
 
10
2
1.69
1.69
 
36
1
1.61
1.61
 
18
3
1.60
1.60
 
29
2
1.72
1.72
 
8
3
1.63
1.63
Guard Lease (void)
35
3
1.50
0.00
Title transfer issue (1.50)-Montano
10
3
1.71
1.71
 
17
1
1.68
1.68
 
TOTALS
34.49
32.99
 

 
 
 
 
TOTAL ACREAGE FOR FILING NO. 5
50.03
REDUCTIONS:
  4.58
TOTAL NET ACREAGE FOR FILING NO. 5 LOTS:
47.01

Page 6 of 9

--------------------------------------------------------------------------------

[image00001.jpg]
 

Todd Creek Farms

ROW
 
Total Acres
Reduction
Net Acreage
Comments
Filing 1
14.49
2.37
12.12
50% Reduction - Tract 1
Filing 2
18.92
0.24
18.68
50% Reduction - Tract 1
Filing 3
20.72
20.72
0.00
HBP Issue
Filing 4
67.06
0
67.06
 
Filing 5
28.93
0
28.93
 
TOTALS
150.12
23.33
126.79
 

Page 7 of 9

--------------------------------------------------------------------------------

Todd Creek Farms

Amendment No. 1 - Summary Judgments
 
Filing
Lot
Block
Total
Acres
Net
Acres
Comments
1
2
2
1.64
1.64
 
1
20
3
2.12
1.06
50% Reduction Tract 1
1
6
2
1.87
0.935
50% Reduction Tract 1
2
1
2
2.31
2.31
 
2A
2
2
1.89
1.89
 
2A
3
1
2.2
1.100
50% Reduction Tract 1
2
2
3
2.11
2.11
 
2
2
2
2.29
2.29
 
2
6
4
1.91
1.91
 
2
3
7
2.18
2.18
   
TOTALS
20.520
17.425
 

 
 
Page 8 of 9

--------------------------------------------------------------------------------

 

Todd Creek Farms

Amendment No. 2 -  Homeowner Leases
Filing
Lot 
Block
Total
Acres
Net Acres
Comments
1
2
3
1.86
1.86
85/15 Lease
 
TOTALS
1.860
1.860
 

 
 

 

Page 9 of 9

--------------------------------------------------------------------------------

 

KINGDOM RESOURCES, LLC
7501 Village Square Drive Suite 205
Castle Pines, CO 80108

ORDER OF PAYMENT

May 5, 2015

On approval of the Oil and Gas Lease associated herewith and on approval of the
title to same, Kingdom Resources, LLC will make or cause to be made the payment
indicated herein by check no later than May 15, 2015.  Payment is deemed
complete upon mailing or dispatch. No default shall be declared for failure to
make payment until 10 days after receipt of written notice from payee of
intention to declare such default.

If the Oil and Gas Lease referenced herein covers less than the entire undivided
interest in the oil and gas or other rights in such land, then the dollar amount
listed herein shall be paid to the Lessor only in the proportion which the
interest in said lands covered by this Agreement bears to the entire undivided
interest therein. Further, should Lessor own more or less than the net interest
defined herein, Lessee shall increase or reduce the dollar amount payable
hereunder proportionately.

PAY TO:  Todd Creek Farms, LLC

THE AMOUNT OF:  Six Hundred Eighty Three Thousand One Hundred Forty Two and
No/100 Dollars ($683,142.00)
 
ADDRESS: 7501 Village Square Drive, Suite 205, Castle Pines, CO 80108
 
Consideration for execution of a new Paid Up Oil and Gas Lease dated November
28, 2014 covering portions of Sections 10 and 15, Township 1 South, Range 67
West of the 6th  P.M, as amended.
 
KINGDOM  RESOURCES, LLC
 
LESSOR
TODD CREEK FARMS, LLC
 
LESSEE
 
 
By:  /s/ Gene Osborne
Name:  Gene Osborne
Title:  Manager
By:  /s/ Gene Osborne
Name:  Gene Osborne
Title:  Authorized Agent
 
 

 

--------------------------------------------------------------------------------

 
INVOICE
 
Date
Invoice #
5/5/2015
101

Kingdom Resources, LLC
7501 Village Square Dr.#205
Castle Pines, CO 80108
 
Bill to:
PetroShare Corp.
Frederick J. Witsell
7200 South Albion Way, Suite B220
Centennial, CO  80111
 
Description
Amount
 
 
Contract Fee pursuant to Article 1 of Exhibit B of the "Services Agreement"
$68,314.20
 
 
TOTAL
 
 
 
 
 
 
$68,134.20

 
 
 
 

--------------------------------------------------------------------------------

AMENDMENT NO. 1 TO PAID UP OIL AND GAS LEASE
 
 
The terms of that certain Paid-Up Oil and Gas Lease dated as of November 24,
2014 by and between Todd Creek Farms, LLC and Kingdom Resources, LLC, as
recorded with the Clerk and Recorder of Adams County, Colorado on or about
January 13, 2015 at Reception No.
2015000002735 (the "Lease") are hereby amended as follows:

The description of the property subject to the Lease is amended to include the
property in Exhibit A-4 to this Amendment, which is incorporated into the Lease,
and the description of the acreage covered by the Lease is amended to read
"containing 373.16 acres more or less."

Other than as set forth above, the terms of the Lease are not amended in any
way.

TODD CREEK FARMS, LLC

 
By:  /s/ Gene Osborne
Name:  Gene Osborne
Title:  Authorized Agent
 
STATE OF COLORADO
)
 
 
) ss.
 
COUNTY OF DENVER
)
 

 
The foregoing instrument was acknowledged before me on this 14th day of April,
2015, by Gene Osborne, as Authorized Agent for Todd Creek Farms, LLC, a Colorado
limited liability company, on behalf of said entity.
 
[SEAL]
MARY BAYER
NOTARY PUBLIC     
STATE OF COLORADO
NOTARY ID 20044029804
MY COMMISSION EXPIRES 02/27/2017
/s/ Mary Bayer
  Notary Public – State of Colorado
My Commission Expires: 2/27/2017
 
 
 
 

 

--------------------------------------------------------------------------------

Consented and Agreed To:

KINGDOM RESOURCES, LLC

By: /s/ Gene Osborne

Name:  Gene Osborne
Title:  Manager

 
STATE OF COLORADO
)
 
 
) ss.
 
COUNTY OF DENVER
)
 

 

The foregoing instrument was acknowledged before me on this 14th day of April,
2015, by Gene Osborne, as Manager of Todd Creek Farms, LLC, a Colorado limited
liability company, on behalf of said entity.
 
[SEAL]
MARY BAYER
NOTARY PUBLIC     
STATE OF COLORADO
NOTARY ID 20044029804
MY COMMISSION EXPIRES 02/27/2017
/s/ Mary Bayer
  Notary Public – State of Colorado
My Commission Expires: 2/27/2017
 
 
 
 

 

--------------------------------------------------------------------------------

EXHIBIT "A-4"

TODD CREEK FARMS SUBDIVISION
 
 Attached to and made part of that certain oil and gas lease dated November 24,
2014 by and between Todd Creek Farms, LLC as Lessor and Kingdom Resources, LLC
as Lessee:
 
1.
Lot 2, Block 2 of Filing No. 1 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County on March 22,
1996, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and
also known as 9195 E. 159th Avenue, Brighton, CO 80602 and containing 1.64 acres
more or less.

2.
Lot 20, Block 3 of Filing No. 1 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County on March 22,
1996, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and
also known as 15775 Dallas Street, Brighton, CO 80602 and containing 2.12 acres
more or less.

3.
Lot 6, Block 2 of Filing No. 1 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County on March 22,
1996, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and
also known as 9395 East 159th Avenue, Brighton, CO 80602 and containing

1.87 acres more or less.

4.
Lot 1, Block 2 of Filing No. 2 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County on May 22,
1997, and, as amended, March 19, 1998, located in Section 10, Township 1 South,
Range 67 West of the 61 P.M. and also known as 15600 Boston Street, Brighton, CO
80602 and containing 2.31 acres more or less.

5.
Lot 2, Block 2 of Filing No. 2 as shown on the amended plat of the Todd Creek
Farms subdivision, as recorded with the Clerk and Record of Adams County on
March 19, 1998, located in Section 10, Township 1 South, Range 67 West of the
6th P.M. and also known as 15250 Akron Street, Brighton, CO 80602 and containing
1.89 acres more or less.

6.
Lot 3, Block 1 of Filing No. 2 as shown on the amended plat of the Todd Creek
Farms subdivision, as recorded with the Clerk and Record of Adams County on
March 19, 1998, located in Section 10, Township 1 South, Range 67 West of the
6th P.M. and also known as 9081 East 153rd Avenue, Brighton, CO 80602 and
containing 2.2 acres more or less.

7.
Lot 2, Block 3 of Filing No. 2 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County on May 22,
1997, and, as amended, March 19, 1998, located in Section 10, Township 1 South,

 

--------------------------------------------------------------------------------

Range 67 West of the 6th P.M. and also known as 9303 East 155th Drive, Brighton,
CO 80602 and containing 2.11 acres more or less.

8.
Lot 2, Block 2 of Filing No. 2 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County on May 22,
1997, and, as amended, March 19, 1998, located in Section 10, Township 1 South,
Range 67 West of the 6th P.M. and also known as 9453 East 155th Drive,

Brighton, CO 80602 and containing 2.29 acres more or less.

9.
Lot 6, Block 4 of Filing No. 2 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County on May 22,
1997, and, as amended, March 19, 1998, located in Section l 0, Township 1 South,
Range 67 West of the 6th P.M. and also known as 9347 East 153rd Avenue,
Brighton, CO 80602 and containing 1.91 acres more or less.

10.
Lot 3, Block 7 of Filing No. 2 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County on May 22,
1997, and, as amended, March 19, 1998, located in Section 10, Township 1 South,
Range 67 West of the 6th P.M. and also known as 9204 East 153rd Avenue,
Brighton, CO 80602 and containing 2.18 acres more or less.

--------------------------------------------------------------------------------

 
AMENDMENT NO. 2 TO PAID UP OIL AND GAS LEASE
 
The terms of that certain Paid-Up Oil and Gas Lease dated as of November 24,
2014 by and between Todd Creek Farms, LLC and Kingdom Resources, LLC, as
recorded with the Clerk and Recorder of Adams County, Colorado on or about
January 13, 2015 at Reception No. 2015000002735 (the "Lease") are hereby amended
as follows:

The description of the property subject to the Lease is amended to include the
property in Exhibit A-5 to this Amendment, which is incorporated into the Lease,
and the description of the acreage covered by the Lease is amended to read
"containing 375.02 acres more or less."

Other than as set forth above, the terms of the Lease are not amended in any
way.

 
TODD CREEK FARMS, LLC

 
By:  /s/ Gene Osborne
Name:  Gene Osborne
Title: Authorized Agent

 
STATE OF COLORADO
)
 
 
) ss.
 
COUNTY OF DENVER
)
 

 

The foregoing instrument was acknowledged before me on this 13th day of April,
2015, by Gene Osborne, as Authorized Agent for Todd Creek Farms, LLC, a Colorado
limited liability company, on behalf of said entity.
 
[SEAL]
MARY BAYER
NOTARY PUBLIC     
STATE OF COLORADO
NOTARY ID 20044029804
MY COMMISSION EXPIRES 02/27/2017
/s/ Mary Bayer
  Notary Public – State of Colorado
My Commission Expires: 2/27/2017
 
 
 
 

 
 

--------------------------------------------------------------------------------

Consented and Agreed To:
 

KINGDOM RESOURCES, LLC

By: /s/ Gene Osborne

Name:  Gene Osborne
Title:  Manager

 
STATE OF COLORADO
)
 
 
) ss.
 
COUNTY OF DENVER
)
 

 

The foregoing instrument was acknowledged before me on this 14th day of April,
2015, by Gene Osborne, as Manager of Todd Creek Farms, LLC, a Colorado limited
liability company, on behalf of said entity.
 
[SEAL]
MARY BAYER
NOTARY PUBLIC     
STATE OF COLORADO
NOTARY ID 20044029804
MY COMMISSION EXPIRES 02/27/2017
/s/ Mary Bayer
  Notary Public – State of Colorado
My Commission Expires: 2/27/2017
 
 
 
 

 
 

--------------------------------------------------------------------------------

 
EXHIBIT "A-5"

TODD CREEK FARMS SUBDIVISION

Attached to and made part of that certain oil and gas lease dated November 24,
2014 by and between Todd Creek Farms, LLC as Lessor and Kingdom Resources, LLC
as Lessee:

1.
Lot 1, Block 3 of Filing No. 1 as shown on the plat of the Todd Creek Farms
subdivision, as recorded with the Clerk and Record of Adams County, Colorado on
March 22, 1996, located in Section 10, Township 1 South, Range 67 West of the
6th P.M. and also known as 15985 Alton Street, Brighton, CO 80602 and containing
1.86 acres more or less.

--------------------------------------------------------------------------------

 
AMENDMENT NO. 3 TO PAID UP OIL AND GAS LEASE
 
The terms of that certain Paid-Up Oil and Gas Lease dated as of November 24,
2014 by and between Todd Creek Farms, LLC and Kingdom Resources, LLC, as
recorded with the Clerk and Recorder of Adams County, Colorado on or about
January 13, 2015 at Reception No.
2015000002735 (the "Lease") are hereby amended as follows:

Exhibit A-2 to the Lease is amended to include the following property:

Tract D, Todd Creek Farms Filing No. 2, according to the plat thereof recorded
May 22, 1997 in File 17, Map 688, as amended according to the plat thereof
recorded March 19, 1998 in File 17, Map 815 at County of Adams, State of
Colorado, consisting of 0.40 acres, more or less

Outlots A, B, C, D and E, Todd Creek Farms Filing No. 5, according to the plat
thereof recorded May 1, 2000 in File 18, Map 211, at County of Adams, State of
Colorado, consisting of 0.63 acres, more or less

And the description of the acreage covered by the Lease is amended to read
''containing 376.05 acres more or less."·

Other than as set forth above, the terms of the Lease are not amended in any
way.

 
By:  /s/ Gene Osborne
Name:  Gene Osborne
Title: Authorized Agent

 
STATE OF COLORADO
)
 
 
) ss.
 
COUNTY OF DOUGLAS
)
 

 

The foregoing instrument was acknowledged before me on this 5th day of May,
2015, by Gene Osborne, as Authorized Agent for Todd Creek Farms, LLC, a Colorado
limited liability company, on behalf of said entity.
 

[SEAL]
KIM T HARRISON
NOTARY PUBLIC     
STATE OF COLORADO
MY COMM EXP 05/23/2016
/s/ Kim T. Harrision
  Notary Public – State of Colorado
My Commission Expires: 5/23/16
 
 
 
 

 
 
 
 

--------------------------------------------------------------------------------

Consented and Agreed To:
 
KINGDOM  RESOURCES, LLC
 
By:  /s/ Gene Osborne
Name: Gene Osborne
Title: Manager
 

 
STATE OF COLORADO
)
 
 
) ss.
 
COUNTY OF DOUGLAS
)
 

 

The foregoing instrument was acknowledged before me on this 5th day of May,
2015, by Gene Osborne, as Manager of Kingdom Resources, LC, a Colorado limited
liability company, on behalf of said entity.
 

[SEAL]
KIM T HARRISON
NOTARY PUBLIC     
STATE OF COLORADO
MY COMM EXP 05/23/2016
/s/ Kim T. Harrision
  Notary Public – State of Colorado
My Commission Expires: 5/23/16
 
 
 
 

 

--------------------------------------------------------------------------------

CARVER SCHWARZ McNAB KAMPER & FORBES, LLC
ATTORNEYS AT LAW
EIN No. 20-0509232

 
HUDSON'S BAY CENTRE
1600 STOUT STREET. SUITE 1700
DENVER. COLORADO 80202-3164
 
TELEPHONE 303.893.1815
FAX 303.893.1829

March 06, 2015

Kingdom Resources, LLC
Attn: Gene A. Osborne
7501 Village Square Dr. #205
Castle Rock, CO 80108

 
Invoice Number 19419

In Reference  To:  Kingdom Resources, LLC - Lease Matters - 33030.002

Professional Services

  Hours Amount
 2/6/2015
PCF
Drafting correspondence to Petroshare concerning lease assignment.
 
0.60
   
255.00
 
2/10/2015
PCF
Work on matters concerning finalization of lease assignment;
   
2.60
     
1,105.00
 
2/11/2015
PCF
Work on resolution of various issues concerning lease   submission;
   
1.00
     
425.00
 
2/12/2015
MB
Review exhibits with deed information per P. Forbes.
   
1.70
     
178.50
 
 
 PCF
Reconciliation of matters for submission to Petroshare; revise and finalize
documents for Petroshare.
   
1.10
     
467.50
 
2/13/2015
MB
Review lot information on map and lease exhibits per P. Forbes.
   
2.40
     
252.00
 
 
PCF
Follow up on information request from Mr. Witsell.
   
1.30
     
552.50
 
2/24/2015
PCF
Follow up on questions from  Mr. Witsell.
   
0.20
     
85.00
 
2/26/2015
PCF
Prepare for and attend meeting with Mr. Osborne, Mr. Witsell, Mr. Foley at
Petroshare.
   
3.80
     
1,615.00
 
2/27/2015
PCF
Draft acceptance letter for Petroshare and correspondence concerning same;
telecon  Mr. Osborne.
   
1.20
     
510.00
                 
For professional services rendered
   
15.90
   
$
5,445.50
 
Previous balance
         
$
11,790.00
 

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CARVER SCHWARZ McNAB KAMPER & FORBES, LLC
 
Page 2
Kingdom Resources, LLC
 

  Amount      
 
Balance due
 
$17,235.50

 
 
 

 

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CARVER SCHWARZ McNAB KAMPER & FORBES, LLC
ATTORNEYS AT LAW
EIN No. 20-0509232

 
HUDSON'S BAY CENTRE
1600 STOUT STREET. SUITE 1700
DENVER. COLORADO 80202-3164
 
TELEPHONE 303.893.1815
FAX 303.893.1829

April 08, 2015

Kingdom Resources, LLC
Attn: Gene A. Osborne
7501 Village Square Dr. #205
Castle Rock, CO 80108

Invoice Number 19478

In Reference  To:  Kingdom Resources, LLC - Lease Matters - 33030.002

Professional Services

  Hours Amount
    3/2/2015 PCF
  Research issues concerning ownership of mineral rights under E-470
1.10
467.50
 
and condemnation  issues; begin work on Filing No. 2 MSJ Response.
   
3/6/2015 PCF
Follow up on various matters raised by Mr. Wltsel and various emails.
0.80
340.00
3/16/2015  PCF
Review documents, office conferences Ms. Bayer; draft letter concerning
0.30
127.50
 
supplemental acreage and various emails regarding  same.
   
For professional services rendered
2.20
$935.00
Previous balance
 
$17,235.50
Balance due
 
$18,170.50

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CARVER SCHWARZ McNAB KAMPER & FORBES, LLC
ATTORNEYS AT LAW
EIN No. 20-0509232

 
HUDSON'S BAY CENTRE
1600 STOUT STREET. SUITE 1700
DENVER. COLORADO 80202-3164
 
TELEPHONE 303.893.1815
FAX 303.893.1829

May 6, 2015

Kingdom Resources, LLC
Attn: Gene A. Osborne
7501 Village Square Dr. #205
Castle Rock, CO 80108

Invoice Number 19523

In Reference  To:  Kingdom Resources, LLC - Lease Matters - 33030.002

Professional Services
 

4/14/2015 PCF
Work on matters relating to additional lots to add to lease; office conferences
Ms. Bayer; letter to Mr. Witsell regarding extending closing
1.10
467.50
 
date; letter to Mr. Witsell regarding additional lots added to lease.
   
5/5/2015 PCF
Prepare additional lease amendment; review matters concerning title transfer
issues; revise and finalize net acreage spreadsheet; various
1.00
425.00
 
emails Mr. Osborne; draft letter to Mr. Witsell.
   
For professional services rendered
2.10
$892.50
Previous balance
 
$18,170.50
Balance due
 
$19,063.00

 
 
 

 

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EXHIBIT B

(There is no Exhibit B)
 
 

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FORM OF DEED TO NOTE

DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
from
_________________________
(Federal Income Tax Identification No. ________________)
(“Grantor,” “Mortgagor” and “Debtor”)
to
the PUBLIC TRUSTEE OF ______________ COUNTY, COLORADO, TRUSTEE
for the benefit of
_________________________________
(Federal Income Tax Identification No. _____________)
(“Grantee,” “Mortgagee” and “Secured Party,” as nominee)
A REPRODUCTION OF THIS INSTRUMENT IS SUFFICIENT AS A FINANCING STATEMENT.  FOR
PURPOSES OF FILING THIS INSTRUMENT AS A FINANCING STATEMENT, THE ADDRESS OF THE
GRANTOR AND DEBTOR IS:

AND THE ADDRESS OF THE GRANTEE AND SECURED PARTY IS:

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.
THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES.
THIS INSTRUMENT COVERS PROCEEDS OF COLLATERAL.
THIS INSTRUMENT COVERS PRODUCTS OF COLLATERAL.
THIS INSTRUMENT COVERS MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE
EXTRACTED FROM THE EARTH (INCLUDING, WITHOUT LIMITATION, OIL AND GAS).  THIS
FINANCING STATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL
ESTATE RECORDS OF THE COUNTY RECORDER OF WELD COUNTY, COLORADO.  THE GRANTOR HAS
AN INTEREST OF RECORD IN THE REAL ESTATE CONCERNED, WHICH INTEREST IS DESCRIBED
IN EXHIBIT A ATTACHED HERETO.
THIS INSTRUMENT WAS PREPARED BY AND WHEN RECORDED OR FILED SHOULD BE RETURNED
TO:

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DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
________________, a _____________ corporation (hereinafter referred to as
“Grantor”), for and in consideration of the sum of TEN DOLLARS ($10.00) to
Grantor in hand paid by ______________________, a __________ limited liability
company, as “Grantee,” “Holder” or “Secured Party” of the obligations as
hereinafter recited, and in order to secure the payment and performance of the
obligations, covenants, warranties, agreements and undertakings of Grantor
hereinafter described, does hereby GRANT, BARGAIN, SELL, CONVEY, MORTGAGE,
PLEDGE, TRANSFER, ASSIGN and SET OVER to the Public Trustee of _________ County,
Colorado (hereinafter called the “Trustee”) for the benefit of Grantee, and  IN
TRUST WITH POWER OF SALE, the following property to the fullest extent such
described interests are assignable:
(a)  All of Grantor’s rights, titles, and interests in, under and attributable
to the oil and gas leases described in Exhibit A (the “Leases”) including,
without limitation, any and all royalty interests and all other interests of
whatsoever nature or kind and however characterized in, under or attributable to
the Leases;
(b)  All Grantor’s rights, titles and interests in the mineral estate, whether
now owned or hereafter acquired, in the Lands described on attached Exhibit A
hereto (the “Lands”), including, without limitation, any and all reversionary
interests or other interests of whatsoever nature or kind and however
characterized in the Lands described on attached Exhibit A, all of which such
rights, titles, interests and estates of Grantor and howsoever characterized,
together with the rights, title and interests in the Leases described in
subparagraph (a) being hereinafter collectively called the “Mineral Interests”;
(c)  All rights, titles, interests and estates now owned or hereafter acquired
by Grantor in and to (i) the properties now or hereafter pooled or unitized with
any part of the Mineral Interests insofar as they are attributable to or derive
from the Mineral Interests; and (ii) all presently existing or future
unitization, communitization, pooling agreements and declarations of pooled
units and the units created thereby (including, without limitation, all units
created under orders, regulations, rules or other official acts of any Federal,
State or other governmental body or agency having jurisdiction), insofar as they
are attributable to or derive from the Mineral Interests;
(d)  Without limitation, all rights, titles and interests now owned or
hereinafter acquired by Grantor in oil and gas wells located on the Lands (the
“Wells”);
(e)  All rights, titles, and interests now owned or hereafter acquired by
Grantor in and to all oil, gas, casinghead gas, condensate, distillate, liquid
hydrocarbons, gaseous hydrocarbons and all products refined therefrom and all
other minerals (collectively called the “Hydrocarbons”) in, under and which may
be produced and saved from the Lands or attributable to the Mineral Interests,
including all oil in tanks and all rents, issues, profits, proceeds, products,
revenues and other income and proceeds from the sale or use of Hydrocarbons;
 

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(f)  All tenements, hereditaments, appurtenances and properties in anywise
appertaining, belonging, affixed or incidental to the Mineral Interests and
properties, rights, titles, interests and estates described above which are now
owned or which may hereafter be acquired by Grantor, including, without
limitation, any and all property, real or personal, now owned or hereafter
acquired and situated upon, used, held for use, or useful in connection with the
operating, working or development of the Leases or the Wells or properties
including without limitation, easements, servitudes, licenses and other surface
use rights;
 (g)  All of the rights, titles and interests of every nature whatsoever now
owned or hereafter acquired by Grantor in and to the Mineral Interests, as the
same may be enlarged by the removal of any charges or encumbrances to which the
Mineral Interests are subject, or otherwise; together with any and all renewals
and extensions of the Leases, properties, rights, titles, interests or estates;
all contracts and agreements supplemental to or amendatory of or in substitution
for the contracts and agreements described or mentioned above; and any and all
additional interests of any kind hereafter acquired by Grantor in and to the 
Lands, Leases and Wells described on Exhibit A;
(h)  All accounts, contract rights, choses in action and general intangibles as
such terms are defined in Article 9 of the Uniform Commercial Code from time to
time in effect in the State of Colorado (the “Uniform Commercial Code”) 
constituting a part of, relating to, or arising out of the Mineral Interests and
collateral described or mentioned above, and all proceeds and products of the
property and collateral described or mentioned in this and said preceding
paragraphs; and
(i)  All of Grantor’s rights, now owned or hereafter acquired, in and to all
records which relate to the Lands, Leases, Mineral Interests, and Wells.
All of the properties, interests and rights described in the preceding
subparagraphs (a) through (i) shall be hereinafter sometimes referred to as the
“Mortgaged Properties”.  If any of the lands covered by the Leases or other
instrument mentioned in Exhibit A are incorrectly described, then nevertheless
this Mortgage (as defined herein) shall cover all Grantor’s interest in such
Leases or other instrument as to all of the lands and interests covered thereby.
TO HAVE AND TO HOLD the Mortgaged Properties, together with all and singular the
rights, estates, hereditaments, powers and privileges appurtenant or incident
thereto, unto the Trustee and his successors or substitutes in this trust and to
his or their successors and assigns, forever.
BUT IN TRUST, NEVERTHELESS, for the benefit and security of the Holders of the
obligations and indebtedness secured hereby and upon the trusts and subject to
the terms and provisions herein set forth.
Secured Indebtedness
1.1  This instrument (hereinafter called the “Mortgage”) is made irrevocably in
trust, with power of sale to secure and enforce the following obligations and
indebtedness:
(a)  All Grantor’s obligations and indebtedness to Holder under that certain
Secured Promissory Note, of even date herewith, in the face amount of
$_______________ (the “Note”) of every kind and character now or hereafter owing
by Grantor to the Holder under, whether direct or indirect, primary or
secondary, fixed or contingent, and including, without limitation, all advances,
debts and liabilities arising under or out of the warranties, representations,
indemnity and other obligations made and assumed by Grantor under the Note,  and
any and all fees, expenses or costs (including attorneys’ fees) incurred by
Holder to enforce any of  their  rights against Grantor thereunder;
 

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(b)  All Grantor’s express and implied obligations assumed under the Leases
identified in Exhibit A, including, but not limited to, warranties of title and
all other express and implied obligations of Grantor thereunder;
(c)  All other future advances and sums paid by Holder and its successors and
assigns on behalf or for the benefit of Grantor, or in satisfaction of
obligations owed by Grantor to Holder under the Note.
(d)  All indebtedness and obligations, whether direct or indirect, primary or
secondary, fixed or contingent assumed by Grantor hereunder, or relating to the
enforcement of the rights of the “Holder” hereunder.
1.2  The indebtedness and obligations referred to in clauses (a), (b), (c) and
(d) of Section 1.1 are hereinafter sometimes referred to as the “Secured
Indebtedness.”  Grantee, as designated nominee and agent for and on behalf of
the Working Interest Owners and its successors and assigns, is referred to
herein  as the “Holder.”
ARTICLE II
Representations, Warranties and Covenants
2.1  Grantor represents, warrants and covenants that Grantor is a corporation in
good standing in the State of ________ and has full authority to enter into this
Mortgage, that Grantor has good right and authority to grant, bargain, sell,
transfer, convey, assign and mortgage all its right, title and interest in the
Mortgaged Properties; that Grantor is the lawful owner of an undivided 100%
mineral interest in the Lands free and clear from all liens, claims and
encumbrances by, through and under Grantor, except the lien evidenced by this
Mortgage and the rights of the lessee granted under the Leases; and Grantor does
hereby bind itself, its heirs, legal representatives, successors and assigns to
forever warrant and defend the title to an undivided 100% mineral interest in
the Lands unto the said Trustee and Grantee, and their successors and assigns,
against the claims of all persons whomsoever claiming or claim the same or any
part thereof by, through or under Grantor.  Any additional rights, title, or
interest which Grantor may hereafter acquire or become entitled to in the Lands
and properties aforesaid or in the oil, gas or other minerals in, under or
produced therefrom shall inure to the benefit of this trust and Grantee, the
same as if expressly described and conveyed herein.
2.2  With respect to advances and indebtedness arising out of Grantor’s
obligations under the Note that become due, Grantor covenants and agrees:
(a)  That Grantor will make timely payment of sums due or to become due under
the Note and will make timely payment of all other Secured Indebtedness
hereunder.
 

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(b)  That Grantor will observe and materially comply with all of the terms and
provisions, express or implied, of the Note.
(c)  That if the validity or priority of this Mortgage or of any right, titles,
liens or interests created or evidenced hereby with respect to the Mortgaged
Properties or any part thereof shall be endangered or questioned or shall be
attacked directly or indirectly or if any legal proceedings are instituted
against Grantor with respect thereto, Grantor will give written notice thereof
to the Holder promptly and, at Grantor’s own cost and expense, Grantor will
diligently endeavor to cure any defect that may be  claimed, and will take all
necessary and proper steps for the defense of such legal proceedings, including,
but not limited to, the employment of counsel agreeable to the Holder, the
prosecution or defense of litigation and the release or discharge of all adverse
claims.  If Grantor fails or refuses to take such action, the Trustee and the
Holder, or any of them (whether or not named as parties to legal proceedings
with respect thereto), are hereby authorized and empowered to take such
additional steps as in their judgment and discretion may be necessary or proper
for the defense of any such legal proceedings, including, but not limited to,
the employment of independent counsel, the prosecution or defense of litigation,
and the compromise or discharge of any adverse claims made with respect to the
Mortgaged Properties, and all expense so incurred of every kind and character
shall be a demand obligation owing by Grantor and shall bear interest at the
rate of 8 percent, compounded annually from the date of expenditure until paid
and shall be secured by the lien evidenced by this Mortgage, and the party
incurring such expenses shall be subrogated to all rights of the person
receiving such payment.
(d)  That Grantor will not, without the prior written consent of the Holder,
suffer or permit any lien to be hereafter claimed or created on any of the
Mortgaged Properties, and should a lien become attached hereafter in any manner
to any part of the Mortgaged Properties without the prior written consent of the
Holder, Grantor will cause such lien to be promptly discharged.
(e)  That Grantor will, on request of the Holder, promptly correct any defect,
error or omission which may be discovered in the contents of this Mortgage, the
Note, or other documents executed in connection herewith or in the execution or
acknowledgment of any thereof, and will execute and deliver any and all
additional instruments as may be requested by the Holder to correct such defect,
error or omission and will execute, acknowledge and deliver such further
assurances and instruments as shall be, in the opinion of the Holder, necessary
or proper to convey and assign to the Trustee all of the Mortgaged Properties
herein conveyed or assigned, or intended so to be.
(f)  Grantor will proceed with reasonable diligence to correct any material
defect in title to the Mineral Interest in the Lands arising by, through or
under Grantor which, in the reasonable opinion of Holder, constitutes a material
defect should any such defect be found to exist after the execution and delivery
of this instrument; and in this connection, should it be found after the
execution and delivery of this instrument that there exists upon the Mortgaged
Properties any lien or encumbrance, equal or superior in rank to the lien
created by this instrument arising by, through or under Grantor, or should any
such hereafter arise, Grantor will promptly discharge and remove any such lien
or encumbrance from said property.
 

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(g)  Holder at all times shall have the right to release any part of the
property now or hereafter subject to the lien hereof or any part of the proceeds
of production or other income herein or hereafter assigned or pledged or any
other security it now has or may hereafter have hereunder, without releasing any
other part of said property, proceeds or income, and without affecting the lien
hereof as to the part or parts thereof not so released, or the right to receive
future proceeds and income.
(h)  That, promptly upon receipt of any written request from the Holder, Grantor
will furnish and deliver, pursuant to such request, any information or data
possessed by Grantor with respect to the Mortgaged Properties, including all
title materials and other records in the possession, custody or control, and all
deeds, conveyances, instruments, contracts, documents, title opinions, title
abstracts, division orders, and other records concerning said property.
2.3  Grantor agrees that if Grantor fails to perform any act or to take any
action which hereunder Grantor is required to perform or take or to pay any
money which hereunder Grantor is required to pay, the Holder, in Grantor’s name
or its own name, may (but shall not be obligated to) perform or cause to be
performed such act or take such action or pay such money, and any expenses so
incurred by the Holder and any money so paid by the Holder: (a) shall be a part
of the obligations owing by Grantor, (b) shall bear interest from the date of
making such payment until paid at the rate of 10 percent compounded annually,
(c) shall be a part of the Secured Indebtedness, and (d) shall be secured by the
lien evidenced by this Mortgage.  The  Holder, upon making such payment, shall
be subrogated to all of the rights of the person, corporation or body politic
receiving such payment.
ARTICLE III
Assignment of Production, Accounts,
Contract Rights and Proceeds
3.1  To facilitate the discharge of any and all of Grantor’s indebtedness and
obligations under the Note and this Mortgage, and as cumulative of any and all
rights and remedies herein provided for, Grantor hereby BARGAINS, SELLS,
TRANSFERS, ASSIGNS, SETS OVER and DELIVERS to the Holder, its successors and
assigns, all of the following upon the failure of Grantee to promptly fulfill
its obligations and discharge and pay any indebtedness under the Note or
Mortgage:
(a)  All oil, gas, casinghead gas, distillate and other minerals, produced and
to be produced from or attributable to the Mineral Interests of Grantor and any
other interests now or hereafter constituting a part of the Mortgaged Properties
from and after the Effective Date (as hereafter defined);
(b)  All royalties and proceeds of production hereafter payable to or to become
payable to Grantor or to which Grantor is entitled by virtue of its Leases or
Mineral Interests, and Grantor authorizes and empowers said Holder to demand,
collect and receive said royalties and proceeds;
 

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(c)  All amounts, sums, revenues and income which otherwise become payable to
Grantor from any of the Lands or under the Leases; and
(d)  All of Grantor’s contract rights, choses in action, and claims of any kind
arising out of the Leases to the extent assignable.
Grantor hereby, irrevocably, authorizes and directs that all parties owing
royalties or other sums to Grantor attributable to Grantor’s Mineral Interests
pay all such amounts directly to the Holder.  The Holder is authorized to
collect such amounts and no party making payment shall have any responsibility
to see to the application of any funds paid to the Holder, but shall be fully
protected in making such payment to the Holder under the assignments herein
contained.  Should the Holder bring suit against any third party for collection
of any amounts or sums included within this assignment (and the Holder shall
have the right to bring any such suit) it may sue either in its own name or in
the name of Grantor.
3.2  Grantor authorizes and empowers the Holder to receive, hold and collect all
sums of money paid to the Holder in accordance with this assignment and to apply
the same as is hereinafter provided, all without any liability or responsibility
on the part of the Holder, save as to good faith in so receiving and applying
said sums.  All payments provided for in this assignment shall be paid promptly
to the Holder.  It is understood and agreed that should said payments provided
for by this assignment be less than the sum or sums then due on said
indebtedness, such sum or sums then due shall nevertheless be payable by
Holder.  Likewise, neither this assignment nor any provision herein contained
shall in any manner be construed to affect the lien, rights and remedies herein
granted securing said indebtedness, nor Grantor’s liability therefor.  The
rights under this assignment are cumulative of the other rights, remedies and
powers granted under this Mortgage and are cumulative of any other security
which the Noteholder now holds or may hereafter hold to secure the payment of
said indebtedness.
3.3  Nothing herein contained shall detract from or limit the absolute
obligation of Grantor to make prompt payment of any indebtedness arising under
the Note at the time and in the manner provided for therein or shall detract
from or limit the absolute obligation of Grantor to make prompt payment  of all
amounts owing hereunder at the time and in the manner provided herein,
regardless of whether the proceeds herein assigned are sufficient to pay the
same, and the rights under this assignment shall be cumulative of all other
security of any and every character now or hereafter existing to secure the
payment of sums due under the Note and all other Secured Indebtedness.
ARTICLE IV
Waiver and Partial Release
4.1  The Holder  may at any time and from time to time in writing:
(a)  Waive compliance by Grantor with any covenant herein made by Grantor to the
extent and in the manner specified in such writing;
 

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(b)  Consent to Grantor’s doing any act which hereunder Grantor is prohibited
from doing, or to Grantor’s failing to do any act which hereunder Grantor is
required to do, to the extent and in the manner specified in writing; or,
(c)  Release any part of the Mortgaged Properties, or any interest therein, or
any proceeds of Hydrocarbon sales from the lien of this Mortgage, without the
joinder of the Trustee.
No such act by Noteholder shall in any way impair the rights of the Holder
hereunder except to the extent specifically agreed to by the Holder in such
writing.
4.2  The lien and other security rights of the Holder hereunder shall not be
impaired by any indulgence, including but not limited to (a) any forbearance,
renewal, extension or modification (whether one or more) which the Holder may
grant with respect to any Secured Indebtedness, or (b) any surrender,
compromise, release, renewal, extension, exchange or substitution which the
Holder may grant in respect of any item of the Mortgaged Properties or any part
thereof or any interest therein.
ARTICLE V
Possession Until Default; Defeasance and Termination
5.1  Unless a default specified in Section 6.1 hereof shall occur and be
continuing, Grantor shall retain full right to the Mortgaged Properties subject,
however, to all of the terms and provisions of this Mortgage, including without
limitation, the assignments under Article III.
ARTICLE VI
Remedies in Event of Default
6.1  The term “default” as used in this Mortgage shall mean the failure of
Grantor to pay any sums due Holder under the Note or under this Mortgage within
ten (10) days of receipt by Grantor of demand for payment.
6.2           (a)  If a default shall occur and be continuing, the Mortgagee
shall have the right and option to proceed with foreclosure and to sell, to the
extent permitted by law, all or any portion of the Mortgaged Property at one or
more sales, as an entirety or in parcels, at such place or places and otherwise
in such manner and upon such notice as may be required by applicable law or, in
the absence of any such requirements, as the Mortgagee may deem appropriate, and
to make conveyance to the purchaser or purchasers.
(b)  With regard to any part of the Mortgaged Property, it is agreed that the
appraisement of any such properties is expressly waived at the option of the
Mortgagee, and any such option may be exercised prior to the time judgment is
rendered in any foreclosure hereon.
(c)  Notwithstanding any other provision of this Section 6.2, if any of the
Secured Indebtedness is not promptly paid, Mortgagee shall have the right and
power to proceed by a suit or suits in equity or at law, whether for the
specific performance of any covenant or agreement herein contained or in aid of
the execution of any power herein granted, or for any foreclosure hereunder or
for the sale of the Mortgaged Property under the judgment or decree of any court
or courts of competent jurisdiction.
 

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(d)  Notwithstanding any other provision, Mortgagee shall also have the option
to proceed with foreclosure in satisfaction of any Secured Indebtedness which
has not been paid when due either through the courts or by proceeding with
foreclosure.  It is further agreed that several sales may be made hereunder
without exhausting the right of sale for any subsequent Secured Indebtedness, it
being the purpose hereof to provide for a foreclosure and sale of the security
for any matured portion of the Secured Indebtedness without exhausting the power
to foreclose and sell the Mortgaged Property for any subsequently maturing
portion of the Secured Indebtedness.
(e)  The Mortgaged Property may be sold in one or more parcels and in such
manner and order as Mortgagee, in his sole discretion, may elect, it being
expressly understood and agreed that the right of sale arising out of any event
of default shall not be exhausted by any one or more sales.
(f)  Grantor agrees to the full extent that it lawfully may, that in the event
of a default that has not been remedied, Mortgagee shall have the right and
power to enter into and upon and take possession of all or any part of the
Mortgaged Property in the possession of Grantor, its successors or assigns, or
its or their agents or servants.
(g)  Every right, power and remedy herein given to Mortgagee shall be cumulative
and in addition to every other right, power and remedy herein specifically given
or now or hereafter existing in equity, at law or by statute (including
specifically those granted by the Uniform Commercial Code in effect and
applicable to the Mortgaged Property or any portion thereof) each and every
right, power and remedy whether specifically herein given or otherwise existing
may be exercised from time to time and so often and in such order as may be
deemed expedient by Mortgagee, and the exercise, or the beginning of the
exercise, of any such right, power or remedy shall not be deemed a waiver of the
right to exercise, at the same time or thereafter any other right, power or
remedy.  No delay or omission by Mortgagee in the exercise of any right, power
or remedy shall impair any such right, power or remedy or operate as a waiver
thereof or of any other right, power or remedy then or thereafter existing.
(h)  Grantor shall not be relieved of any obligation herein by reason of the
failure of Mortgagee to comply with any request of Grantor to foreclose the lien
of this Mortgage or the release, regardless of consideration, of the Mortgaged
Property or any portion thereof or interest therein.
(i)  Mortgagee may release, regardless of consideration, any part of the
Mortgaged Property without, as to the remainder, in any way impairing,
affecting, subordinating or releasing the lien or security interest created in
or evidenced by this Mortgage or its stature as a first and prior lien and
security interest in and to the Mortgaged Property, and without in any way
releasing or diminishing the liability of any person or entity liable for the
repayment of the Secured Indebtedness.  For payment of the Secured Indebtedness,
Mortgagee may resort to any other security therefor held by Mortgagee in such
order and manner as Mortgagee may elect.
 

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(j)  To the fullest extent permitted by law, Grantor hereby irrevocably and
unconditionally waives and releases (a) all benefits that might accrue to
Grantor by virtue of any present or future moratorium law or other law exempting
the Mortgaged Property from attachment, levy or sale on execution or providing
for any appraisement, valuation, stay of execution, exemption from civil
process, redemption or extension of time for payment; (b) all notices of any
event of default or of Mortgagee’s election to exercise (or his actual exercise
of) any right, remedy or recourse provided for hereunder; and (c) any right to a
marshaling of assets.
(k)  In case Mortgagee shall have proceeded to invoke any right, remedy or
recourse permitted hereunder and shall thereafter elect to discontinue or
abandon same for any reason, Mortgagee shall have the unqualified right so to do
and, in such an event, Grantor and Mortgagee shall be restored to their former
positions with respect to the Secured Indebtedness, this Mortgage, the Mortgaged
Property and otherwise, and the rights, remedies, recourses and powers of
Mortgagee shall continue as if same had never been invoked.
(l)  The proceeds of any sale of the Mortgaged Property or any part thereof and
all other monies received by Mortgagee through any proceedings for the
enforcement hereof or otherwise, shall be applied:
FIRST, to the payment of all expenses incurred by Mortgagee incident to the
enforcement of this Mortgage, the Note or any of the Secured Indebtedness
(including, without limiting the generality of the foregoing, expenses of any
entry or taking of possession, of any sale, of advertisement thereof and of
conveyances, and court costs, compensation of agents and employees, legal fees
and a reasonable commission to the Trustee acting), and to the payment of all
other charges, expenses, liabilities and advances incurred or made by Mortgagee
under this Mortgage or in executing any power hereunder;
SECOND, to payment of the Secured Indebtedness in such order and manner as
Mortgagee may elect; and,
THIRD, to Grantor or as otherwise required by any governmental authority having
jurisdiction over the application of such proceeds.
6.3  To foreclose this Mortgage pursuant to the power of public sale contained
herein in accordance with the laws of the State of Colorado, in which case
Mortgagee/Holder shall (i) deliver to Trustee a written notice of default and
election to cause Grantor’s interest in the Mortgaged Properties to be sold, and
(ii) deposit with Trustee this Mortgage, and such receipts or evidence of the
Secured Indebtedness as Trustee may require.  Upon receipt of such notice from
Mortgagee/Holder, Trustee shall give notice of sale and shall sell the Mortgaged
Properties according to the laws of the State of Colorado.  The costs and
expenses incurred by Mortgagee/Holder in the exercise of any of the remedies
provided in this Mortgage shall be secured by this Mortgage.
 

--------------------------------------------------------------------------------

ARTICLE VII
Security Agreement
7.1  Without limiting any of the provisions of this instrument, Grantor,
referred to in this Article VII as “Debtor”  expressly GRANTS unto the Holder
(referred to in this Article VII as “Secured Party”, whether one or more), a
security interest in all the Mortgaged Properties hereinabove described
(including both those now and those hereafter existing) to the full extent that
such properties may be subject to the Uniform Commercial Code of the State of
Colorado.  The security interest granted hereby also covers and includes all
contract rights, general intangibles, choses in actions, and accounts with
respect to said properties and all products and proceeds of said properties
(said properties, contract rights, choses in action, general intangibles,
accounts, products and proceeds thereof being hereinafter collectively referred
to as the “Collateral” for the purposes of this paragraph).  Debtor covenants
and agrees with Secured Party that:
(a)  In addition to and cumulative of any other remedies granted in this
instrument to Secured Party or the Trustee, Secured Party may, in event of
default, proceed under said Uniform Commercial Code as to all or any part of the
Collateral and shall have and may exercise with respect to the Collateral all
the rights, remedies and powers of a secured party under said Uniform Commercial
Code, including, without limitation, the right and power to sell, at public or
private sale or sales, or otherwise dispose of, lease or utilize the Collateral
and any part or parts thereof in any manner authorized or permitted under said
Uniform Commercial Code after default by a debtor, and to apply the proceeds
thereof toward payment of any costs and expenses and attorneys’ fees and legal
expenses thereby incurred by Secured Party, and toward payment of the Secured
Indebtedness in such order or manner as Secured Party may elect.
(b)  Upon a default, Secured Party shall have the right (without limitation,
subject to said Uniform Commercial Code) to take possession of the Collateral
and to enter upon any premises where same may be situated for such purpose
without being deemed guilty of trespass and without liability for damages
thereby occasioned, and to take any action deemed necessary or appropriate or
desirable by Secured Party, at its option and in its discretion, to repair,
refurbish or otherwise prepare the Collateral for sale, lease or other use or
disposition as herein authorized.
(c)  To the extent permitted by law, Debtor expressly waives any notice of sale
or other disposition of the Collateral and any other right or remedies of a
debtor or formalities prescribed by law relative to sale or disposition of the
Collateral or exercise of any other right or remedy of Secured Party existing
after default hereunder; and to the extent any such notice is required and
cannot be waived, Debtor agrees that if such notice is mailed, postage prepaid,
to Debtor at the address shown with debtor’s signature hereinbelow at least ten
days before the time of the sale or disposition, such notice shall be deemed
reasonable and shall fully satisfy any requirement for giving of said notice.
(d)  Secured Party is expressly granted the right to receive the monies, income,
proceeds or benefits attributable or accruing to the Collateral and to hold the
same as security for the Secured Indebtedness or to apply it on the principal
and interest or other amounts owing on any of the Secured Indebtedness, in such
order or manner as Secured Party may elect.  All rights to marshaling of assets
of Debtor, including any such right with respect to the Collateral, are hereby
waived.
 

--------------------------------------------------------------------------------

(e)  All recitals in any instrument of assignment or any other instrument
executed by Secured Party incident to sale, transfer, assignment, lease or other
disposition or utilization of the Collateral or any part thereof hereunder shall
be prima facie evidence of the matter stated therein, no other proof shall be
required to establish full legal propriety of the sale or other action or of any
fact, condition or thing incident thereto, and all prerequisites of such sale or
other action and of any fact, condition or thing incident thereto shall be
presumed to have been performed or to have occurred.
(f)  Should Secured Party elect to exercise its right under said Uniform
Commercial Code as to part of the personal property described herein, this
election shall not preclude Secured Party or the Trustee from exercising the
rights and remedies granted by the preceding paragraphs of this instrument as to
the remaining personal property.
(g)  Secured Party may, at its election, at any time after delivery of this
instrument, sign one or more copies hereof in order that such copies may be used
as a financing statement under said Uniform Commercial Code.  Such signature by
Secured Party may be placed between the last sentence of this instrument and the
Debtor’s acknowledgment or may follow the Debtor’s acknowledgment.  Secured
Party’s signature need not be acknowledged and is not necessary to the
effectiveness hereof as a deed of trust, mortgage, assignment, or security
agreement.
7.2  Any copy of this instrument which is signed by both Debtor and Secured
Party may also serve as a financing statement under said Uniform Commercial Code
between the DEBTOR, WHOSE ADDRESS IS:

and the SECURED PARTY, WHOSE ADDRESS IS:

This Mortgage secures and shall be security for any and all future advances made
by or costs and expenses incurred by Grantee/Holder for the benefit of Grantor,
provided, however, that the total unpaid balance secured hereby at any one time
shall not exceed $__________.  Nothing contained herein shall be deemed an
obligation on the part of Secured Party/Holder Holder to make any further
advances or incur any expenses for the benefit of Debtor.
 

--------------------------------------------------------------------------------

ARTICLE VIII
Miscellaneous
8.1  This instrument is a deed of trust and mortgage of both real and personal
property, a security agreement, a financing statement and an assignment, and
also covers proceeds and fixtures.
8.2  All options and rights of election herein provided for the benefit of the
Holder are continuing, and the failure to exercise any such option or right of
election upon a particular default or breach or upon any subsequent default or
breach shall not be construed as waiving the right to exercise such option or
election at any later date.  By the acceptance of payment of any indebtedness
secured hereby after its due date, the Holder does not waive the right either to
require prompt payment when due of all other sums so secured or to regard as a
default failure to pay any other sums due which are secured hereby.  No exercise
of the rights and powers herein granted and no delay or omission in the exercise
of such rights and powers shall be held to exhaust the same or be construed as a
waiver thereof, and every such right and power may be exercised at any time and
from time to time. No release of any part of the Mortgaged Properties shall in
anywise alter, vary or diminish the force, effect or lien of this instrument on
the balance of Mortgaged Properties.
8.3  Any notice, request, demand or other instrument which may be required or
permitted to be given or furnished to or served upon Grantor shall be addressed
to it at its address set forth below, or such other address as Grantor may
furnish to the Trustee and the Holder in writing:

Notices to the Trustee and the Holder shall be deemed to have been properly
given if delivered in like fashion to them at:
(1) _________ County Public Trustee, ___________________, and
(2) ___________________________________

or at such other address as the Trustee or the Noteholder may furnish to Grantor
in writing.
8.4 If any provision hereof is invalid or unenforceable in any jurisdiction, the
other provisions hereof shall remain in full force and effect, and the remaining
provisions hereof shall be liberally construed in favor of the Trustee, Lender
and the Noteholder in order to effectuate the provisions hereof, and the
invalidity or unenforceability of any provision hereof shall not affect the
validity or enforceability of any such provision in any other jurisdiction.
8.5 Grantee and Trustee shall at all times have the right to assign and/or
transfer any and all of their rights and privileged under this Mortgage.  All of
the terms, provisions, covenants and conditions hereof shall be binding upon
Grantor and the successors and assigns of Grantor, and the Holder and successors
and assigns of Holder, and shall inure to the benefit of the Trustee and the
Holder and their respective successors and assigns. Grantor’s covenants shall
constitute covenants running with the lands covered by the Mortgaged Properties,
but this provision shall not be construed to authorize any sale or other
disposition of the Mortgaged Properties contrary to any other provisions hereof.
 

--------------------------------------------------------------------------------

8.6 The Mortgage may be executed in multiple counterparts, each of which is
deemed to be an original for all purposes although all such executed copies
shall evidence and constitute one and the same Mortgage.
8.7 The term “Grantor,” “Mortgagor” and “Debtor” herein used shall include
their  successor(s) in interest in the Mortgaged Properties.  The number and
gender of pronouns used in referring to Grantor shall be construed to mean and
correspond with the number and gender of the individuals and/or corporations
executing this instrument as Grantor, and, further, the term “Grantor” herein
used shall mean and include both all of the parties executing this instrument as
Grantor as well as any single one or more of them.
8.8 The “Effective Date” of this instrument is 7:00 a.m. local time at the
location of the Mortgaged Properties on the date this Mortgage is executed and
delivered to Grantee by Grantor.
8.9 This Mortgage shall be governed by and construed and interpreted under the
laws of the State of Colorado (without giving effect to conflicts of laws
principles).
THIS WRITTEN AGREEMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH
RESPECT HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS
OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.

[The Next Page is the Signature Page]
 
 

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the undersigned have caused this instrument to be executed
by their duly authorized undersigned officers effective as of May 13, 2015.
 
“GRANTOR,” “MORTGAGOR” AND “DEBTOR”
 
 
 
 
 
 
By: ______________________________________
 
 
 
Printed Name: ______________________________
 
 
 
Title: _____________________________________
 

This Deed of Trust, Mortgage, Assignment of Production, Security Agreement and
Financing Statement is executed by the undersigned solely for the purpose of
acknowledging and accepting the benefits conferred on Grantee and to evidence
its agreement with the covenants of Lender set forth herein.
 
“GRANTEE,”  “MORTGAGEE” AND “SECURED PARTY”
 
 
 
 
 
 
By: ______________________________________
 
 
 
Printed Name: ______________________________
 
 
 
Title: _____________________________________
 

 

[The Next Page is the Acknowledgment Page]

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ACKNOWLEDGMENTS
STATE OF _____________
§
 
 
§
 
COUNTY OF ___________
§
 

 
 
This instrument was acknowledged before me on this _____ day of ______________.
2015, by ________________________, _________________ of ______________________,
on behalf of said corporation.
Witness my hand and official seal.

__________________________________________
Notary Public, State of _______________________
My commission expires: _________________

STATE OF _____________
§
 
 
§
 
COUNTY OF ___________
§
 

 
 
This instrument was acknowledged before me on this _____ day of _____________,
2015, by ___________ the ____________ of __________________________.
Witness my hand and official seal.

__________________________________________
Notary Public, State of  ______________________
My commission expires: _________________

--------------------------------------------------------------------------------

EXHIBIT A
ATTACHED TO AND FORMING A PART OF THE
DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,
SECURITY AGREEMENT AND FINANCING STATEMENT
DATED __________________________,  2015
FROM

This Exhibit A contains specific description of the “Lands,” “Leases,” “Mineral
Interests”  and Wells comprising a portion of the “Mortgaged Properties”, as
those terms are defined in the Deed of Trust, Mortgage, Assignment of
Production, Security Agreement and Financing Statement (the “Mortgage”) to which
this Exhibit A is attached.
LANDS
The Mortgage covers all right, title and interest the Mortgagor now owns or
subsequently acquires in the following lands situated in ____________ County,
Colorado (“Lands”):
 
 
 
 

--------------------------------------------------------------------------------

EXHIBIT “B”

FORM OF JOINT OPERATING AGREEMENT

(form of JOA to be attached)
 
 
 
 

--------------------------------------------------------------------------------

 
 

A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
 
OPERATING AGREEMENT
DATED
 

                                                ,      ,      2015      ,      
         year  

 
 

OPERATOR PETROSHARE CORP.
 
 
 
CONTRACT AREA
 
 
 
 
 
 
 
 
 
 
 
 

 

COUNTY OR PARISH OF   , STATE OF COLORADO

 

 
COPYRIGHT 1989 – ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD. FORT
WORTH, TEXAS, 76137, APPROVED FORM.
A.A.P.L. NO. 610 – 1989

 

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989
 
TABLE OF CONTENTS

Article     Page  I.   DEFINITIONS  1  II.   EXHIBITS  1  III.   INTERESTS OF
PARTIES  2     A.  OIL AND GAS INTERESTS:  2     B.  INTERESTS OF PARTIES IN
COSTS AND PRODUCTION  2     C.  SUBSEQUENTLY CREATED INTERESTS:  2  IV.   TITLES
 2     A.  TITLE EXAMINATION  2     B.  LOSS OR FAILURE OF TITLE  3     1. 
Failure of Title  3     2.  Loss by Non-Payment or Erroneous Payment of Amount
Due  3     3.  Other Losses  3     4.  Curing Title  3  V.   OPERATOR  4     A. 
DESIGNATION AND RESPONSIBILITIES OF OPERATOR  4     B.  RESIGNATION OR REMOVAL
OF OPERATOR AND SELECTION OF SUCCESSOR  4     1.  Resignation or Removal of
Operator  4     2.  Selection of Successor Operator  4     3.  Effect of
Bankruptcy  4     C.  EMPLOYEES AND CONTRACTORS  4     D.  RIGHTS AND DUTIES OF
OPERATOR:  4     1.  Competitive Rates and Use of Affiliates  4     2. 
Discharge of Joint Account Obligations  4     3.  Protection from Liens  4    
4.  Custody of Funds  5     5.  Access to Contract Area and Records  5     6. 
Filing and Furnishing Governmental Reports  5     7.  Drilling and Testing
Operations  5     8.  Cost Estimates  5     9.  Insurance  5  VI.   DRILLING AND
DEVELOPMENT  5     A.  INITIAL WELL  5     B.  SUBSEQUENT OPERATIONS:  5     1. 
Proposed Operations  5     2.  Operations by Less Than All Parties  6     3. 
Stand-By Costs  7     4.  Deepening  8     5.  Sidetracking  8     6.  Order of
Preference of Operations  8     7.  Conformity to Spacing Pattern  9     8. 
Paying Wells  9     C.  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK  9    
1.  Completion  9     2.  Rework, Recomplete or Plug Back  9     D.  OTHER
OPERATIONS  9     E.  ABANDONMENT OF WELLS  9     1.  Abandonment of Dry Holes
 9     2.  Abandonment of Wells That Have Produced  10     3.  Abandonment of
Non-Consent Operations  10     F.  TERMINATION OF OPERATIONS  10     G.  TAKING
PRODUCTION IN KIND  10     (Option 1) Gas Balancing Agreement  10     (Option 2)
No Gas Balancing Agreement  11  VII.   EXPENDITURES AND LIABILITY OF PARTIES  11
    A.  LIABILITY OF PARTIES  11     B.  LIENS AND SECURITY INTERESTS  12    
C.  ADVANCES  12     D.  DEFAULTS AND REMEDIES  12     1.  Suspension of Rights
 13     2.  Suit for Damages  13     3.  Deemed Non-Consent  13     4.  Advance
Payment  13     5.  Costs and Attorneys’ Fees  13     E.  RENTALS, SHUT-IN WELL
PAYMENTS AND MINIMUM ROYALTIES  13     F.  TAXES  13  VIII.   ACQUISITION,
MAINTENANCE OR TRANSFER OF INTEREST  14     A.  SURRENDER OF LEASES  14     B. 
RENEWAL OR EXTENSION OF LEASES  14     C.  ACREAGE OR CASH CONTRIBUTIONS  14

                                                       
i

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989

            D.  ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: 15     E.  WAIVER
OF RIGHTS TO PARTITION 15     F.  PREFERENTIAL RIGHT TO PURCHASE 15 IX.  
INTERNAL REVENUE COEDE ELECTION 15 X.   CLAIMS AND LAWSUITS 15 XI.   FORCE
MAJEURE 16 XII.   NOTICES 16 XIII.   TERM OF AGREEMENT 16 XIV.   COMPLIANCE WITH
LAWS AND REGULATIONS 16     A.  LAWS, REGULATIONS AND ORDERS 16     B. 
GOVERNING LAW 16     C.  REGULATORY AGENCIES: 16 XV.   MISCELLANEOUS 17     A. 
EXECUTION 17     B.  SUCCESSORS AND ASSIGNS 17     C.  COUNTERPARTS 17     D. 
SEVERABILITY 17 XVI.   OTHER PROVISIONS 17                

 
ii

--------------------------------------------------------------------------------

 
1
OPERATING AGREEMENT
2
THIS AGREEMENT, entered into by and between               PetroShare
Corp.           ,
3
hereinafter designated and referred to as  "Operator,"  and 
the  signatory  party  or  parties   other  than  Operator,  sometimes
4
hereinafter referred to individually as "Non-Operator," and collectively as
"Non-Operators."
5
WITNESSETH:
6
WHEREAS, the parties to this  agreement  are  owners  of  Oil  and  Gas  Leases 
and/or  Oil  and  Gas  Interests  in  the  land
7
identified  in  Exhibit  "A,"  and  the  parties  hereto  have  reached  an 
agreement  to  explore  and  develop  these  Leases  and/or  Oil
8
and Gas Interests for the production of Oil and Gas to the extent and as
hereinafter provided,
9
NOW, THEREFORE, it is agreed as follows:
10
ARTICLE I.
11
DEFINITIONS
12
As used in this agreement, the following words and terms shall have the meanings
here ascribed to them:
13
A.   The term "AFE" shall mean an Authority for Expenditure prepared by a party
to this agreement for the purpose of
14
estimating the costs to be incurred in conducting an operation hereunder.
15
B.   The term "Completion" or "Complete" shall mean a single operation intended
to complete a well as a producer of Oil
16
and  Gas  in  one  or  more  Zones,  including,  but  not  limited  to,  the 
setting  of  production  casing,  perforating,  well  stimulation
17
and production testing conducted in such operation.
18
C.   The term "Contract Area" shall mean all of the lands, Oil and Gas Leases
and/or Oil and Gas Interests intended to be
19
developed  and  operated  for  Oil  and  Gas  purposes  under  this  agreement. 
Such  lands,  Oil  and  Gas  Leases  and  Oil  and  Gas
20
Interests are described in Exhibit "A."
21
D.   The term "Deepen" shall mean a single operation whereby a well is drilled
to an objective Zone below the deepest
22
Zone  in  which  the  well  was  previously  drilled,  or  below  the  Deepest 
Zone  proposed  in  the  associated  AFE,  whichever  is  the
23
lesser.
24
E.   The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the
25
cost of any operation conducted under the provisions of this agreement.
26
F.   The term "Drilling Unit" shall mean the area fixed for the drilling of one
well by order or rule of any state or federal
27
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
28
established by the pattern of drilling in the Contract Area unless fixed by
express agreement of the Drilling Parties.
29
G.   The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be
30
located.
31
H.  The term "Initial Well" shall mean the well required to be drilled by the
parties hereto as provided in Article VI.A.
32
I.    The  term  "Non-Consent  Well"  shall  mean  a  well  in  which  less 
than  all  parties  have  conducted  an  operation  as
33
provided in Article VI.B.2.
34
J.    The  terms  "Non-Drilling  Party"  and  "Non-Consenting  Party"  shall 
mean  a  party  who  elects  not  to  participate  in  a
35
proposed operation.
36
K.    The  term  "Oil  and  Gas"  shall  mean  oil,  gas,  casinghead  gas, 
gas  condensate,  and/or  all  other  liquid  or  gaseous
37
hydrocarbons and  other  marketable  substances  produced  therewith,  unless 
an  intent  to  limit  the  inclusiveness  of  this  term  is
38
specifically stated.
39
L.   The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and
mineral interests in Oil and Gas in tracts
40
of land lying within the Contract Area which are owned by parties to this
agreement.
41
M.    The  terms  "Oil  and  Gas  Lease,"  "Lease"  and  "Leasehold"  shall 
mean  the  oil  and  gas  leases  or  interests  therein
42
covering tracts of land lying within the Contract Area which are owned by the
parties to this agreement.
43
N.    The  term  "Plug  Back"  shall  mean  a  single  operation  whereby  a 
deeper  Zone  is  abandoned  in  order  to  attempt  a
44
Completion in a shallower Zone.
45
O.   The term "Recompletion" or "Recomplete" shall mean an operation whereby a
Completion in one Zone is abandoned
46
in order to attempt a Completion in a different Zone within the existing
wellbore.
47
P.    The  term  "Rework"  shall  mean  an  operation  conducted  in  the 
wellbore  of  a  well  after  it  is  Completed  to  secure,
48
restore, or improve production  in  a  Zone  which  is  currently  open  to 
production  in  the  wellbore.    Such  operations  include,  but
49
are not limited  to,  well  stimulation  operations  but  exclude  any  routine 
repair  or  maintenance  work  or  drilling,  Sidetracking,
50
Deepening, Completing, Recompleting, or Plugging Back of a well.
51
Q.   The  term  "Sidetrack"  shall  mean  the  directional  control  and 
intentional  deviation  of  a  well  from  vertical  so  as  to
52
change  the  bottom  hole  location  unless  done  to  straighten  the  hole 
or  drill  around  junk  in  the  hole  to  overcome  other
53
mechanical difficulties.
54
R.   The term "Zone" shall mean a stratum of earth containing or thought to
contain a common accumulation of Oil and
55
Gas separately producible from any other common accumulation of Oil and Gas.
56
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the word "person" includes
57
natural and artificial persons, the plural includes the singular, and any gender
includes the masculine, feminine, and neuter.
58
ARTICLE II.
59
EXHIBITS
60
The following exhibits, as indicated below and attached hereto, are incorporated
in and made a part hereof:
61 
    X     A. Exhibit "A," shall include the following information:
62
(1) Description of lands subject to this agreement,
63
(2) Restrictions, if any, as to depths, formations, or substances,
64
(3) Parties to agreement with addresses and telephone numbers for notice
purposes,
65
(4) Percentages or fractional interests of parties to this agreement,
66
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement,
67
(6) Burdens on production.
68 
             B.  Exhibit "B," Form of Lease.
69 
    X     C.   Exhibit "C," Accounting Procedure.
70 
    X      D.  Exhibit "D," Insurance.
71 
             E.   Exhibit "E," Gas Balancing Agreement.
72 
             F.   Exhibit "F," Non-Discrimination and Certification of
Non-Segregated Facilities.
73 
             G.  Exhibit "G," Tax Partnership.
74 
             H.  Other:     Memorandum of Operating Agreement and Financing
Statement

 
1

--------------------------------------------------------------------------------

 
A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
If  any  provision  of  any  exhibit,  except  Exhibits  "E,"  "F"  and  "G," 
is  inconsistent  with  any  provision  contained  in
2
the body of this agreement, the provisions in the body of this agreement shall
prevail.
3
ARTICLE III.
4
INTERESTS OF PARTIES
5
A. Oil and Gas Interests:
6
If  any  party  owns  an  Oil  and  Gas  Interest  in  the  Contract  Area, 
that  Interest  shall  be  treated  for  all  purposes  of  this
7
agreement  and  during  the  term  hereof  as  if  it  were  covered  by  the 
form  of  Oil  and  Gas  Lease  attached  hereto  as  Exhibit  "B,"
8
and the owner thereof shall be deemed to own both royalty interest in such lease
and the interest of the lessee thereunder.
9
B. Interests of Parties in Costs and Production:
10
Unless  changed  by other provisions,  all costs  and  liabilities  incurred 
in  operations under this  agreement  shall  be borne
11
and  paid,  and  all  equipment  and  materials  acquired  in  operations  on 
the  Contract  Area  shall  be  owned,  by  the  parties  as  their
12
interests  are  set  forth  in  Exhibit  "A."    In  the  same  manner,  the 
parties  shall  also  own  all  production  of  Oil  and  Gas  from  the
13
Contract Area subject, however, to the payment of royalties and other burdens on
production as described hereafter.
14
Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas
Interest on which royalty or other
15
burdens may be payable and except as otherwise expressly provided in this
agreement, each party  Operator / shall pay or deliver, or
16
cause to be paid or delivered, all burdens on its share of the production from
the Contract Area for the account of all parties.   /up to, but not in excess
of,
17
______   and shall indemnify, defend and hold the other parties free from any
liability therefor.
18
Except as otherwise expressly provided in this agreement, if any party has
contributed hereto any Lease or Interest which is
19 
burdened with any royalty, overriding royalty, production payment or other
burden on production in excess of the amounts
20 
stipulated above, such party so burdened shall assume and alone bear all such
excess obligations and shall indemnify, defend
21
and hold the other parties hereto harmless from any and all claims attributable
to such excess burden. However, so long as
22
theDrilling Unit for the productive Zone(s) is identical with the Contract Area,
each party shall pay or deliver, or cause to
23
be paid or delivered, all burdens on production from the Contract Area due under
the terms of the Oil and Gas Lease(s)
24
which such party has contributed to this agreement, and shall indemnify, defend
and hold the other parties free from any
25
liability therefor.Operator shall have no liability with respect to the payment
of burdens except to the extent of its gross negligence.
26
No party shall ever be responsible, on a price basis higher than the price
received by such party, to any other party's
27
lessor or royalty owner, and if such other party's lessor or royalty owner
should demand and receive settlement on a higher
28
price basis, the party contributing the affected Lease shall bear the additional
royalty burden attributable to such higher price.
29
Nothing contained  in  this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby,
30
and  in  the  event  two  or  more  parties  contribute  to  this  agreement 
jointly  owned  Leases,  the  parties'  undivided  interests  in
31
said Leaseholds shall be deemed separate leasehold interests for the purposes of
this agreement.
32
C.  Subsequently Created Interests:
33
If any party has contributed hereto a Lease or Interest that is burdened with an
assignment of production given as security
34
for   the   payment   of   money,   or   if,   after   the  date   of   this  
agreement,   any   party   creates   an   overriding   royalty,   production
35
payment,  net  profits  interest,  assignment  of  production  or  other 
burden  payable  out  of  production  attributable  to  its  working
36
interest  hereunder,  such  burden  shall  be  deemed  a  "Subsequently 
Created  Interest."Further,  if  any  party  has  contributed
37
hereto  a  Lease  or  Interest  burdened  with  an  overriding  royalty, 
production  payment,  net  profits  interests,  or  other  burden
38
payable  out  of  production  created  prior  to  the  date  of  this 
agreement,  and  such  burden  is  not  shown  on  Exhibit  "A,"  such
39
burden  also  shall  be  deemed  a  Subsequently  Created  Interest  to  the 
extent  such  burden  causes  the  burdens  on  such  party's
40
Lease or Interest to exceed the amount stipulated in Article III.B. above.
41
The  party  whose  interest  is  burdened  with  the  Subsequently  Created 
Interest  (the  "Burdened  Party")  shall  assume  and
42
alone  bear,  pay  and  discharge  the  Subsequently  Created  Interest  and 
shall  indemnify,  defend  and  hold  harmless  the  other
43
parties  from  and  against  any  liability  therefor.    Further,  if  the 
Burdened  Party  fails  to  pay,  when  due,  its  share  of  expenses
44
chargeable  hereunder,  all  provisions  of  Article  VII.B.  shall  be 
enforceable  against  the  Subsequently  Created  Interest  in  the
45
same  manner  as  they  are  enforceable  against  the  working  interest  of 
the  Burdened  Party.    If  the  Burdened  Party  is  required
46
under  this  agreement  to  assign  or  relinquish  to  any  other  party,  or 
parties,  all  or  a  portion  of  its  working  interest  and/or  the
47
production  attributable  thereto,  said  other  party,  or  parties,  shall 
receive  said  assignment  and/or  production  free  and  clear  of
48
said  Subsequently  Created  Interest,  and  the  Burdened  Party  shall 
indemnify,  defend  and  hold  harmless  said  other  party,  or
49
parties, from any and all claims and demands for payment asserted by owners of
the Subsequently Created Interest.
50
ARTICLE IV.
51
TITLES
52
A.  Title Examination:
53
Title examination shall be made on the Drillsite of any proposed well prior to
commencement of drilling operations and,
54
if  a  majority  in  interest  of  the  Drilling  Parties  so  request  or 
Operator  so  elects,  title  examination  shall  be  made  on  the  entire
55
Drilling  Unit,  or  maximum  anticipated  Drilling  Unit,  of  the 
well.   The  opinion  will  include  the  ownership  of  the  working
56
interest,  minerals,  royalty,  overriding  royalty  and  production  payments 
under  the  applicable  Leases.Each  party  contributing
57
Leases  and/or  Oil  and  Gas  Interests  to  be  included  in  the  Drillsite 
or  Drilling  Unit,  if  appropriate,  shall  furnish  to  Operator
58
all  abstracts  (including  federal  lease  status  reports),  title  opinions, 
title  papers  and  curative  material  in  its  possession  free  of
59
charge.   All  such  information  not  in  the  possession  of  or  made 
available  to  Operator  by  the  parties,  but  necessary  for  the
60
examination  of  the  title,  shall  be  obtained  by  Operator.    Operator 
shall  cause  title  to  be  examined  by  attorneys  on  its  staff  or
61
by  outside  attorneys.   Copies  of  all  title  opinions  shall  be 
furnished  to  each  Drilling  Party. Costs  incurred  by  Operator  in
62
procuring   abstracts,   fees   paid   outside   attorneys or title examination 
(including preliminary, supplemental, shut-in royalty
63
opinions and division order title opinions),  ( fees paid to outside landmen or
brokers) / and other direct charges as provided in Exhibit "C" shall be borne by
the Drilling
64 
Parties  in  the  proportion  that  the  interest  of  each  Drilling  Party 
bears  to  the  total  interest  of  all  Drilling  Parties  as  such
65
interests  appear  in  Exhibit  "A."    Operator  shall  make  no  charge  for 
services  rendered  by  its  staff  attorneys  or  other  personnel
66
in the performance of the above functions.
67 
Each party  Operator /shall be responsible for securing curative matter and
pooling amendments or agreements required in
68
connection with any title opinion obtained as set forth above./ Leases or Oil
and Gas Interests contributed by such party. Operator shall be responsible for
the preparation
69
and  recording  of  pooling  designations  or  declarations  and 
communitization  agreements  as  well  as  the  conduct  of  hearings
70
before  governmental  agencies  for  the  securing  of  spacing  or  pooling 
orders  or  any  other  orders  necessary  or  appropriate  to
71
the  conduct  of  operations  hereunder.   This  shall  not  prevent  any 
party  from  appearing  on  its  own  behalf  at  such  hearings.
72
Costs  incurred  by  Operator,  including  fees  paid  to  outside  attorneys, 
which  are  associated  with  hearings  before  governmental
73
agencies,  and   which   costs  are   necessary  and  proper   for   the 
activities   contemplated   under  this  agreement,   shall   be  direct
74
charges to the joint account and shall not be covered by the administrative
overhead charges as provided in Exhibit "C."

 
 
2

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1  
Operator  shall  make  no  charge  for  services  rendered  by  its
 staff  attorneys  or  other  personnel  in  the  performance  of  the  above
2  
functions.
3
No well shall be drilled on the Contract Area until after (1) the title to the
Drillsite or Drilling Unit, if appropriate, has
4  
been  examined  as  above  provided,  and  (2)  the  title  has  been  approved  by  the  examining  attorney  or  title  has  been  accepted  by
5  
Operator. a/ ll of the Drilling Parties in such well.
6 
B. Loss or Failure of Title:
7
1. Failure of Title: Should any Oil and Gas Interest or Oil and Gas Lease be
lost through failure of title, which results in a
8  
reduction  of  interest  from  that  shown  on  Exhibit  "A,"  the
 party  credited  with  contributing  the  affected  Lease  or  Interest
9  
(including,  if  applicable,  a  successor  in  interest  to
 such  party)  shall  have  ninety  (90)  days  from  final
 determination  of  title
10  
failure  to  acquire  a  new  lease  or  other  instrument  curing  the
 entirety  of  the  title  failure,  which  acquisition  will  not  be  subject
11  
to  Article  VIII.B.,  and  failing  to  do  so,  this
 agreement,  nevertheless,  shall  continue  in  force  as  to
 all  remaining  Oil  and  Gas
12  
Leases and Interests; and,
13  
                 (a) The party credited with contributing the Oil and Gas Lease or Interest affected by the title failure (including, if
14  
applicable,  a  successor  in  interest  to
 such  party)  shall  bear  alone  the  entire  loss  and  it  shall  not  be
 entitled  to  recover  from
15  
Operator  or  the
 other  parties  any  development  or  operating  costs  which  it
 may  have  previously  paid  or  incurred,  but  there
16  
shall be no additional liability on its part to the other parties hereto
by reason of such title failure;
17  
                 (b)  There  shall  be  no
 retroactive  adjustment  of  expenses  incurred  or  revenues  received  from  the
 operation  of  the
18  
Lease  or  Interest  which  has  failed,  but  the  interests  of  the
 parties  contained  on  Exhibit  "A"  shall  be  revised  on  an  acreage
19  
basis,  as  of  the  time  it  is  determined  finally  that
 title  failure  has  occurred,  so  that  the  interest  of  the  party
 whose  Lease  or
20  
Interest is affected by the title failure will thereafter be reduced in
the Contract Area by the amount of the Lease or Interest failed;
21  
                 (c) If the proportionate interest of the other parties hereto in any producing well previously drilled on the Contract
22  
Area  is  increased  by  reason  of  the  title  failure,  the
 party  who  bore  the  costs  incurred  in
 connection  with  such  well  attributable
23  
to  the  Lease  or  Interest  which  has  failed  shall  receive  the
 proceeds  attributable  to
 the  increase  in  such  interest  (less  costs  and
24  
burdens  attributable  thereto)  until  it
 has  been reimbursed  for  unrecovered  costs  paid  by  it
 in  connection  with  such  well
25  
attributable to such failed Lease or Interest;
26  
                 (d) Should any person not a party to this agreement, who is determined to be the owner of any Lease or Interest
27  
which  has  failed,  pay  in  any  manner  any  part
 of  the  cost  of  operation,  development,  or  equipment,  such  amount  shall  be
 paid
28  
to the party or parties who bore the costs which are so refunded;
29  
                 (e) Any liability to account to a person not a party to this agreement for prior production of Oil and Gas which arises
30  
by  reason  of  title  failure  shall  be  borne  severally  by  each  party
 (including  a  predecessor  to  a  current  party)  who  received
31  
production  for  which  such  accounting  is
 required  based  on  the  amount  of  such  production  received,  and  each  such  party  shall
32  
severally indemnify, defend and hold harmless all other parties hereto for
any such liability to account;
33  
                 (f) No charge shall be made to the joint account for legal expenses, fees or salaries in connection with the defense of
34  
the  Lease  or  Interest  claimed  to  have  failed,  but  if
 the  party  contributing  such  Lease  or  Interest  hereto  elects  to
 defend  its  title
35  
it shall bear all expenses in connection therewith; and
36  
                 (g)  If  any party is  given credit  on Exhibit "A" to a
 Lease or  Interest  which  is  limited solely to  ownership  of an
37  
interest  in  the  wellbore  of  any  well  or  wells  and
 the  production  therefrom,  such  party's  absence  of  interest  in
 the  remainder
38  
of  the  Contract  Area  shall  be  considered  a  Failure  of  Title  as  to
 such  remaining  Contract  Area  unless  that  absence  of  interest
39  
is reflected on Exhibit "A."
40  
           2.   Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake or oversight, any rental, shut-in well
41  
payment,  minimum  royalty  or
 royalty  payment,  or  other  payment  necessary  to  maintain  all  or  a
 portion  of  an  Oil  and  Gas
42  
Lease  or  interest  is  not  paid  or  is  erroneously  paid,  and  as  a
 result  a  Lease  or  Interest  terminates,  there  shall  be  no  monetary
43  
liability  against  the  party  who  failed  to  make  such
 payment.  Unless  the  party  who  failed  to  make  the  required  payment
44  
secures  a  new  Lease  or  Interest  covering  the
 same  interest  within  ninety  (90)  days  from  the  discovery  of  the
 failure  to  make
45  
proper  payment,  which  acquisition  will  not  be  subject  to
 Article  VIII.B.,  the  interests  of  the  parties  reflected  on  Exhibit  "A"
46  
shall  be  revised  on  an  acreage  basis,  effective  as
 of  the  date  of  termination  of  the  Lease  or  Interest  involved,  and  the  party
47  
who  failed  to  make  proper  payment  will  no  longer  be
 credited  with  an  interest  in
 the  Contract  Area  on  account  of  ownership
48  
of  the  Lease  or  Interest  which  has  terminated.  If  the
 party  who  failed  to  make  the
 required  payment  shall  not  have  been  fully
49
reimbursed,  at  the  time  of  the  loss,  from  the  proceeds  of  the
 sale  of  Oil  and  Gas  attributable  to  the  lost  Lease  or  Interest,
50  
calculated  on  an  acreage  basis,  for  the
 development  and  operating  costs  previously  paid
 on  account  of  such  Lease  or  Interest,
51  
it  shall  be  reimbursed  for  unrecovered  actual  costs  previously  paid  by
 it  (but  not  for  its  share  of  the  cost  of  any  dry  hole
52  
previously drilled or wells previously abandoned) from so much of the following
as is necessary to effect reimbursement:
53  
                 (a) Proceeds of Oil and Gas produced prior to termination of the Lease or Interest, less operating expenses and lease
54  
burdens  chargeable  hereunder  to  the  person  who  failed  to  make
 payment,  previously  accrued  to  the  credit  of  the  lost  Lease  or
55  
Interest, on an acreage basis, up to the amount of unrecovered costs;
56  
                 (b) Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable hereunder to the person who failed
57  
to  make  payment,  up  to
 the  amount  of  unrecovered  costs  attributable  to  that
 portion  of  Oil  and  Gas  thereafter  produced  and
58  
marketed  (excluding  production  from  any  wells  thereafter  drilled)  which,  in
 the  absence  of  such  Lease  or  Interest  termination,
59  
would  be  attributable  to  the  lost  Lease  or
 Interest  on  an  acreage  basis  and  which  as  a
 result  of  such  Lease  or  Interest
60  
termination  is  credited  to  other  parties,  the
 proceeds  of  said  portion  of  the  Oil  and  Gas  to  be  contributed  by
 the  other  parties
61  
in proportion to their respective interests reflected on Exhibit "A"; and,
62  
                 (c) Any monies, up to the amount of unrecovered costs, that may be paid by any party who is, or becomes, the owner
63  
of the Lease or Interest lost, for the privilege of participating in
the Contract Area or becoming a party to this agreement.
 64 
3. Other  Losses:  All losses of Leases or Interests committed to this
agreement, other than those set forth in Articles
65  
IV.B.1.  and  IV.B.2.  above,  shall  be  joint  losses  and  shall  be  borne  by  all  parties  in  proportion  to  their  interests  shown  on
66  
Exhibit  "A."    This  shall  include  but  not  be  limited  to  the  loss  of  any  Lease  or  Interest  through  failure  to  develop  or  because
67  
express  or  implied  covenants  have  not  been  performed  (other  than  performance  which  requires  only  the  payment  of  money),
68  
and  the  loss  of  any  Lease  by  expiration  at  the  end  of  its  primary  term  if  it  is  not  renewed  or  extended.    There  shall  be  no
69  
readjustment of interests in the remaining portion of the Contract Area on
account of any joint loss.
70 
4. Curing Title: In the event of a Failure of Title / as set forth under Article
IV.B.1. or a loss of title under Article IV.B.2. above, any
71  
Lease  or  Interest  acquired  by  any  party  hereto  (other  than  the  party  whose  interest  has
 failed  or  was  lost)  during  the  ninety
72  
(90)  day  period  / following discovery of such failure provided  by
 Article  IV.B.1.  and  Article  IV.B.2.  above  covering  all  or  a  portion  of  the  interest  that  has  failed
73  
or  was  lost  shall  be  offered  at  cost  to  the  party  whose  interest  has  failed  or  was  lost,  and  the  provisions  of  Article  VIII.B.
74  
shall not apply to such acquisition.

 
 
 
3

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
 
 
1
ARTICLE V.
2
OPERATOR
3
A. Designation and Responsibilities of Operator:
4
  PetroShare
Corp.  shall  be  the  Operator  of  the  Contract  Area,  and  shall  conduct
5
and  direct  and  have full control  of  all  operations  on  the Contract Area 
as permitted and  required  by,  and  within  the  limits  of
6
this agreement.  In its performance of services hereunder for the
Non-Operators, Operator  shall  be  an  independent  contractor
7
not  subject  to  the  control  or  direction  of  the  Non-Operators  except 
as  to  the  type  of  operation  to  be  undertaken  in  accordance
8
with the election procedures contained in this agreement. Operator shall not be
deemed, or hold itself out as, the agent of the
9
Non-Operators with authority to bind them to any obligation or liability assumed
or incurred by Operator as to any third
10
party. Operator shall conduct its activities under this agreement as a
reasonable prudent operator, in a good and workmanlike
11
manner, with due diligence and dispatch, in accordance with good oilfield
practice, and in compliance with applicable law and
12
regulation, but in no event shall it have any liability as Operator to the other
parties for losses sustained or liabilities incurred
13
except such as may result from gross negligence or willful misconduct.
14
B. Resignation or Removal of Operator and Selection of Successor:
15
1. Resignation or Removal of Operator: Operator may resign at any time by giving
written notice thereof to Non-Operators.
16
If Operator terminates its legal existence, no longer owns an interest hereunder
in the Contract Area, or is no longer capable of
17
serving as Operator, Operator shall be deemed to have resigned without any
action by Non-Operators, except the selection of a
18
successor. Operator may be removed only for good cause by the affirmative vote
of Non-Operators owning a majority interest
19
based on ownership as shown on Exhibit "A" remaining after excluding the voting
interest of Operator; such vote shall not be
20
deemed effective until a written notice has been delivered to the Operator by a
Non-Operator detailing the alleged default and
21
Operator has failed to cure the default within thirty (30) days from its receipt
of the notice or, if the default concerns an
22
operation then being conducted, within forty-eight (48) hours of its receipt of
the notice.   For purposes hereof, "good cause" shall
23
mean not only gross negligence or willful misconduct but also the material
breach of or inability to meet the standards of
24
operation contained in Article V.A. or material failure or inability to perform
its obligations under this agreement.
25
Subject to Article VII.D.1., such resignation or removal shall not become
effective until 7:00 o'clock A.M. on the first
26
day of the calendar month following the expiration of ninety (90) days after the
giving of notice of resignation by Operator
27
or action by the Non-Operators to remove Operator, unless a successor Operator
has been selected and assumes the duties of
28
Operator at an earlier date. Operator, after effective date of resignation or
removal, shall be bound by the terms hereof as a
29
Non-Operator. A change of a corporate name or structure of Operator or transfer
of Operator's interest to any single
30
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator.
31
2.   Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a
32
successor Operator shall be selected by the parties. The successor Operator
shall be selected from the parties owning an
33
interest in the Contract Area at the time such successor Operator is selected.
The successor Operator shall be selected by the
34
affirmative vote of two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit "A";
35
provided, however, if an Operator which has been removed or is deemed to have
resigned fails to vote or votes only to
36
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or parties owning a majority
37
interest based on ownership as shown on Exhibit "A" remaining after excluding
the voting interest of the Operator that was
38
removed or resigned. The former Operator shall promptly deliver to the successor
Operator all records and data relating to
39
the operations conducted by the former Operator to the extent such records and
data are not already in the possession of the
40
successor operator. Any cost of obtaining or copying the former Operator's
records and data shall be charged to the joint
41
account.
42
3.   Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is placed
in receivership, it shall be deemed to have
43
resigned without any action by Non-Operators, except the selection of a
successor. If a petition for relief under the federal
44
bankruptcy laws is filed by or against Operator, and the removal of Operator is
prevented by the federal bankruptcy court, all
45
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or
46
assume this agreement pursuant to the Bankruptcy Code, and an election to reject
this agreement by Operator as a debtor in
47
possession, or by a trustee in bankruptcy, shall be deemed a resignation as
Operator without any action by Non-Operators,
48
except the selection of a successor. During the period of time the operating
committee controls operations, all actions shall
49
require the approval of two (2) or more parties owning a majority interest based
on ownership as shown on Exhibit "A." In
50
the event there are only two (2) parties to this agreement, during the period of
time the operating committee controls
51
operations, a third party acceptable to Operator, Non-Operator and the federal
bankruptcy court shall be selected as a
52
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating
53
committee without regard for their interest in the Contract Area based on
Exhibit "A."
54
C.  Employees and Contractors:
55
The number of employees or contractors used by Operator in conducting operations
hereunder, their selection, and the
56
hours of labor and the compensation for services performed shall be determined
by Operator, and all such employees or
57
contractors shall be the employees or contractors of Operator.
58
D.  Rights and Duties of Operator:
59
1.  Competitive  Rates and Use of Affiliates: All wells drilled on the Contract
Area shall be drilled on a competitive
60
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in
61
the drilling of wells, but its charges therefor shall not exceed the prevailing
rates in the area and the rate of such charges
62
shall be agreed upon by the parties in writing before drilling operations are
commenced, and such work shall be performed by
63
Operator under the same terms and conditions as are customary and usual in the
area in contracts of independent contractors
64
who are doing work of a similar nature. All work performed or materials supplied
by affiliates or related parties of Operator
65
shall be performed or supplied at competitive rates, pursuant to written
agreement, and in accordance with customs and
66
standards prevailing in the industry.
67
2. Discharge of Joint Account Obligations: Except as herein otherwise
specifically provided, Operator shall promptly pay
68
and discharge expenses incurred in the development and operation of the Contract
Area pursuant to this agreement and shall
69
charge each of the parties hereto with their respective proportionate shares
upon the expense basis provided in Exhibit "C."
70
Operator shall keep an accurate record of the joint account hereunder, showing
expenses incurred and charges and credits
71
made and received.
72
3. Protection from Liens: Operator shall pay, or cause to be paid, as and when
they become due and payable, all accounts
73
of contractors and suppliers and wages and salaries for services rendered or
performed, and for materials supplied on, to or in
74
respect of the Contract Area or any operations for the joint account thereof,
and shall keep the Contract Area free from

 
 
4

--------------------------------------------------------------------------------

A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
liens and encumbrances resulting therefrom except for those resulting from a
bona fide dispute as to services rendered or
2
materials supplied.
3
4. Custody of Funds: Operator shall hold for the account of the Non-Operators
any funds of the Non-Operators advanced
4
or paid to the Operator, either for the conduct of operations hereunder or as a
result of the sale of production from the
5
Contract Area, and such funds shall remain the funds of the Non-Operators on
whose account they are advanced or paid until
6
used  for their intended purpose or otherwise delivered  to the Non-Operators or
applied toward the payment of debts as
7
provided in Article VII.B.  Nothing in this paragraph shall be construed to
establish a fiduciary relationship between Operator
8
and Non-Operators for any purpose other than to account for Non-Operator funds
as herein specifically provided.  Nothing in
9
this paragraph shall require the maintenance by Operator of separate accounts
for the funds of Non-Operators unless the
10
parties otherwise specifically agree.
11
5. Access to Contract Area and Records: Operator shall, except as otherwise
provided herein, permit each Non-Operator
12
or its duly authorized representative, at the Non-Operator's sole risk and cost,
full and free access at all reasonable times to
13
all operations of every kind and character being conducted for the joint account
on the Contract Area and to the records of
14
operations conducted thereon or production therefrom, including Operator's books
and records relating thereto.  Such access
15
rights shall not be exercised in a manner interfering with Operator's conduct of
an operation hereunder and shall not obligate
16
Operator  to  furnish  any  geologic  or  geophysical  data  of  an 
interpretive  nature  unless  the  cost  of  preparation  of  such
17
interpretive data was charged to the joint account.  Operator will furnish to
each Non-Operator upon request copies of any
18
and  all reports and  information obtained by Operator in connection  with
production  and  related  items,  including,  without
19
limitation,  meter and chart  reports,  production purchaser statements,  run 
tickets and  monthly gauge  reports,  but  excluding
20
purchase contracts and pricing information to the extent not applicable to the
production of the Non-Operator seeking the
21
information.Any audit of Operator's records relating to amounts expended and the
appropriateness of such expenditures
22
shall be conducted in accordance with the audit protocol specified in Exhibit
"C."
23
6. Filing and Furnishing Governmental Reports: Operator will file, and upon
written request promptly furnish copies to
24
each  requesting  Non-Operator  not  in  default  of  its  payment 
obligations,  all  operational  notices,  reports  or  applications
25
required to be filed by local, State, Federal or Indian agencies or authorities
having jurisdiction over operations hereunder.
26
Each Non-Operator shall provide to Operator on a timely basis all information
necessary to Operator to make such filings.
27
7. Drilling and Testing Operations: The following provisions shall apply to each
well drilled hereunder, including but not
28
limited to the Initial Well:
29
(a) Operator will promptly advise Non-Operators of the date on which the well is
spudded, or the date on which
30
drilling operations are commenced.
31
(b) Operator will send to Non-Operators such reports, test results and notices
regarding the progress of operations on the well
32
as the Non-Operators shall reasonably request, including, but not limited to,
daily drilling reports, completion reports, and well logs.
33
(c) Operator shall adequately test all Zones encountered which may reasonably be
expected to be capable of producing
34
Oil and Gas in paying quantities as a result of examination of the electric log
or any other logs or cores or tests conducted
35
hereunder.
36
8. Cost Estimates: Upon request of any Consenting Party, Operator shall furnish
estimates of current and cumulative costs
37
incurred  for  the  joint  account  at  reasonable  intervals  during  the 
conduct  of  any  operation  pursuant  to  this  agreement.
38
Operator shall not be held liable for errors in such estimates so long as the
estimates are made in good faith.
39
9.  Insurance:  At  all  times  while  operations  are  conducted  hereunder, 
Operator  shall  comply  with  the  workers
40
compensation law of the state where the operations are being conducted;
provided, however, that Operator may be a self-
41
insurer for liability under said compensation laws in which event the only
charge that shall be made to the joint account shall
42
be as provided in Exhibit "C."  Operator shall also carry or provide insurance
for the benefit of the joint account of the parties
43
as outlined in Exhibit "D" attached hereto and made a part hereof.  Operator
shall require all contractors engaged in work on
44
or for the Contract Area to comply with the workers compensation law of the
state where the operations are being conducted
45
and to maintain such other insurance as Operator may require.
46
In the event automobile liability insurance is specified in said Exhibit "D," or
subsequently receives the approval of the
47
parties,  no  direct  charge  shall  be  made  by  Operator  for  premiums 
paid  for  such  insurance  for  Operator's  automotive
48
equipment.
49
ARTICLE VI.
50
DRILLING AND DEVELOPMENT
51
A.  Initial Well:
52
On or before the______ day of   ______________  ,  ____ , Operator shall
commence the drilling of the Initial
53
Well at  the following location: There is no Initial Well.  All wells hereunder
will be proposed in Article VI.B.
54
 
55
 
56
 
57
 
58
 
59
 
60 
and shall thereafter continue the drilling of the well with due diligence to
61
 
62
 
63
 
64
 
65
 
66
 
67
The drilling of the Initial Well and the participation therein by all parties is
obligatory, subject to Article VI.C.1. as to participation
68
in Completion operations and Article VI.F. as to termination of operations and
Article XI as to occurrence of force majeure.
69
B.Subsequent Operations:
70
1. Proposed Operations: If any party hereto should desire to drill any well on
the Contract Area other than the Initial Well, or
71 
if  any party should  desire to  /  Rework,  Sidetrack,  Deepen,  Recomplete or
Plug Back  a  dry hole  or  a  well  no  longer  capable of
72
producing in paying quantities in which such party has not otherwise
relinquished its interest in the proposed objective Zone under
73
this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written
74
notice  of  the  proposed  operation  to  the  parties  who  have  not 
otherwise  relinquished  their  interest  in  such  objective  Zone

 
 
5

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
 
1
under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be
2
performed, the location, proposed depth, objective Zone and the estimated cost
of the operation.  The parties to whom such a
3
notice is delivered shall have thirty (30) days after receipt of the notice
within which to notify the party proposing to do the work
4
whether they elect to participate in the cost of the proposed operation.  If a
drilling rig is on location, notice of a proposal to
5
Rework, Sidetrack, Recomplete, Plug Back or Deepen may be given by telephone and
the response period shall be limited to forty-
6
eight (48) hours, exclusive of Saturday, Sunday and legal holidays.  Failure of
a party to whom such notice is delivered to reply
7
within the period above fixed shall constitute an election by that party not to
participate in the cost of the proposed operation.
8
Any proposal by a party to conduct an operation conflicting with the operation
initially proposed shall be delivered to all parties
9
within the time and in the manner provided in Article VI.B.6.
10
If all parties to whom such notice is delivered elect to participate in such a
proposed operation, the parties shall be
11
contractually committed to participate therein provided such operations are
commenced within the time period hereafter set
12
forth, and Operator shall, no later than ninety (90) days after expiration of
the notice period of thirty (30) days (or as
13
promptly as practicable after the expiration of the forty-eight (48) hour period
when a drilling rig is on location, as the case
14
may be), actually commence the proposed operation and thereafter complete it
with due diligence at the risk and expense of
15
the parties participating therein; provided, however, said commencement date may
be extended upon written notice of same
16
by Operator to the other parties, for a period of up to thirty (30) additional
days if, in the sole opinion of Operator, such
17
additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights-of-
18
way) or appropriate drilling equipment,  or to complete title examination  or
curative matter required  for title approval or
19
acceptance.  If the actual operation has not been commenced within the time
provided (including any extension thereof as
20
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct
21
said operation, written notice proposing same must be resubmitted to the other
parties in accordance herewith as if no prior
22
proposal had been made.  Those parties that did not participate in the drilling
of a well for which a proposal to Deepen or
23
Sidetrack is made hereunder shall, if such parties desire to participate in the
proposed Deepening or Sidetracking operation,
24
reimburse the Drilling Parties in accordance with Article VI.B.4. in the event
of a Deepening operation and in accordance
25
with Article VI.B.5. in the event of a Sidetracking operation.
26
2. Operations by Less Than All Parties:
27
(a) Determination of Participation.  If any party to whom such notice is
delivered as provided in Article VI.B.1. or
28
VI.C.1. (Option No. 2) elects not to participate in the proposed operation,
then, in order to be entitled to the benefits of this
29
Article, the party or parties giving the notice and such other parties as shall
elect to participate in the operation shall, no
30
later than ninety (90) days after the expiration of the notice period of thirty
(30) days (or as promptly as practicable after the
31
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be) actually commence the
32
proposed operation and complete it with due diligence. Operator shall perform
all work for the account of the Consenting
33
Parties; provided, however, if no drilling rig or other equipment is on
location, and if Operator is a Non-Consenting Party,
34
the Consenting Parties shall either: (i) request Operator to perform the work
required by such proposed operation for the
35
account of the Consenting Parties, or (ii) designate one of the Consenting
Parties as Operator to perform such work. The
36
rights and duties granted to and imposed upon the Operator under this agreement
are granted to and imposed upon the party
37
designated as Operator for an operation in which the original Operator is a
Non-Consenting Party.  Consenting Parties, when
38
conducting operations on the Contract Area pursuant to this Article VI.B.2.,
shall comply with all terms and conditions of this
39
agreement.
40
If less than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the
41
applicable  notice  period,  shall  advise  all  Parties  of  the  total 
interest  of  the  parties  approving  such  operation  and  its
42
recommendation as to whether the Consenting Parties should proceed with the
operation as proposed.  Each Consenting Party,
43
within forty-eight (48) hours (exclusive of Saturday, Sunday, and legal
holidays) after delivery of such notice, shall advise the
44
proposing party of its desire to (i) limit participation to such party's
interest as shown on Exhibit "A" or (ii) carry only its
45
proportionate part (determined by dividing such party's interest in the Contract
Area by the interests of all Consenting Parties in
46
the Contract Area) of Non-Consenting Parties' interests, or (iii) carry its
proportionate part (determined as provided in (ii)) of
47
Non-Consenting  Parties'  interests  together  with  all  or  a  portion  of 
its  proportionate  part  of  any  Non-Consenting  Parties'
48
interests that any Consenting Party did not elect to take.   Any interest of
Non-Consenting Parties that is not carried by a
49
Consenting Party shall be deemed to be carried by the party proposing the
operation if such party does not withdraw its
50
proposal.  Failure to advise the proposing party within the time required shall
be deemed an election under (i). In the event a
51
drilling rig is on location, notice may be given by telephone, and the time
permitted for such a response shall not exceed a
52
total of forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays).  The proposing party, at its election, may
53
withdraw such proposal if there is less than 100% participation and shall notify
all parties of such decision within ten (10)
54
days, or within twenty-four (24) hours if a drilling rig is on location,
following expiration of the applicable response period.
55
If 100% subscription to the proposed operation is obtained, the proposing party
shall promptly notify the Consenting Parties
56
of their proportionate interests in the operation and the party serving as
Operator shall commence such operation within the
57
period provided in Article VI.B.1., subject to the same extension right as
provided therein.
58
(b) Relinquishment of Interest for Non-Participation. The entire cost and risk
of conducting such operations shall be
59
borne  by  the  Consenting  Parties  in  the  proportions  they  have  elected 
to  bear  same  under  the  terms  of  the  preceding
60
paragraph.  Consenting Parties shall keep the leasehold estates involved in such
operations free and clear of all liens and
61
encumbrances of every kind created by or arising from the operations of the
Consenting Parties.  If such an operation results
62
in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the Consenting
Parties shall plug and abandon the well and restore
63
the  surface  location  at  their  sole  cost,  risk  and  expense;  provided, 
however,  that  those  Non-Consenting  Parties  that
64
participated in the drilling, Deepening or Sidetracking of the well shall remain
liable for, and shall pay, their proportionate
65
shares of the cost of plugging and abandoning the well and restoring the surface
location insofar only as those costs were not
66
increased by the subsequent operations of the Consenting Parties.   If any well
drilled, Reworked, Sidetracked, Deepened,
67
Recompleted or Plugged Back under the provisions of this Article results in a
well capable of producing Oil and/or Gas in
68
paying quantities, the Consenting Parties shall Complete and equip the well to
produce at their sole cost and risk, and the
69
well shall then be turned over to Operator (if the Operator did not conduct the
operation) and shall be operated by it at the
70
expense and for the account  of the Consenting Parties.   Upon commencement  of
operations for the drilling, Reworking,
71
Sidetracking, Recompleting, Deepening or Plugging Back of any such well by
Consenting Parties in accordance with the
72
provisions of this Article, each Non-Consenting Party shall be deemed to have
relinquished to Consenting Parties, and the
73
Consenting  Parties  shall  own  and  be  entitled  to  receive,  in 
proportion  to  their  respective  interests,  all  of  such  Non-
74
Consenting Party's interest  in  the well and  share of production  therefrom 
or,  in  the case of  a  Reworking,  Sidetracking,

 
 
 
6

--------------------------------------------------------------------------------

A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.1.  Option No. 2, all of such Non-
2
Consenting Party's interest in the production obtained from the operation in
which the Non-Consenting Party did not elect
3
to participate.  Such relinquishment shall be effective until the proceeds of
the sale of such share, calculated at the well, or
4
market value thereof if such share is not sold (after deducting applicable ad
valorem, production, severance, and excise taxes,
5
royalty, overriding royalty and other interests not excepted by Article III.C.
payable out of or measured by the production
6
from such well accruing with respect to such interest until it reverts), shall
equal the total of the following:
7
(i)   100% of each such Non-Consenting Party's share of the cost of any newly
acquired surface equipment
8
beyond  the  wellhead  connections  (including  but  not  limited  to  stock 
tanks,  separators,  treaters,  pumping  equipment  and
9
piping), plus 100% of each such Non-Consenting Party's share of the cost of
operation of the well commencing with first
10
production  and  continuing  until  each  such  Non-Consenting  Party's 
relinquished  interest  shall  revert  to  it  under  other
11
provisions of this Article, it being agreed that each Non-Consenting Party's
share of such costs and equipment will be that
12
interest which would have been chargeable to such Non-Consenting Party had it
participated in the well from the beginning
13
of the operations; and
14
(ii) 
400%  of (a) that portion of  the costs and expenses of drilling, Reworking, Sidetracking, Deepening,
15
Plugging Back, testing, Completing, and Recompleting, after deducting any cash
contributions received under Article VIII.C.,
16
and of (b) that portion of the cost of newly acquired equipment in the well (to
and including the wellhead connections),
17
which would have been chargeable to such Non-Consenting Party if it had
participated therein.
18
Notwithstanding anything to the contrary in this Article VI.B., if the well does
not reach the deepest objective Zone
19
described  in  the notice proposing the well  for reasons other than  the
encountering of granite or practically impenetrable
20
substance or other condition in the hole rendering further operations
impracticable, Operator shall give notice thereof to each
21
Non-Consenting  Party  who  submitted  or  voted  for  an  alternative 
proposal  under  Article  VI.B.6.  to  drill  the  well  to  a
22
shallower Zone than the deepest objective Zone proposed in the notice under
which the well was drilled, and each such Non-
23
Consenting Party shall have the option to participate in the initial proposed
Completion of the well by paying its share of the
24
cost of drilling the well to its actual depth, calculated in the manner provided
in Article VI.B.4. (a).  If any such Non-
25
Consenting Party does not elect to participate in the first Completion proposed
for such well, the relinquishment provisions
26
of this Article VI.B.2. (b) shall apply to such party's interest.
27
(c)  Reworking,  Recompleting  or  Plugging  Back.  An  election  not  to 
participate  in  the  drilling,  Sidetracking  or
28
Deepening of a well shall be deemed an election not to participate in any
Reworking or Plugging Back operation proposed in
29
such a well, or portion thereof, to which the initial non-consent election
applied that is conducted at any time prior to full
30
recovery  by  the  Consenting  Parties  of  the  Non-Consenting  Party's 
recoupment  amount.  Similarly,  an  election  not  to
31
participate in the Completing or Recompleting of a well shall be deemed an
election not to participate in any Reworking
32
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at
33
any time prior to full recovery by the Consenting Parties of the Non-Consenting
Party's recoupment amount. Any such
34
Reworking, Recompleting or Plugging Back operation conducted during the
recoupment period shall be deemed part of the
35
cost of operation of said well and there shall be added to the sums to be
recouped by the Consenting Parties 400% of
36
that portion of the costs of the Reworking, Recompleting or Plugging Back
operation which would have been chargeable to
37
such Non-Consenting Party had it participated therein.  If such a Reworking,
Recompleting or Plugging Back operation is
38
proposed during such recoupment period, the provisions of this Article VI.B.
shall be applicable as between said Consenting
39
Parties in said well.
40
(d) Recoupment Matters. During the period of time Consenting Parties are
entitled to receive Non-Consenting Party's
41
share of production, or the proceeds therefrom, Consenting Parties shall be
responsible for the payment of all ad valorem,
42
production, severance, excise, gathering and other taxes, and all royalty,
overriding royalty and other burdens applicable to
43
Non-Consenting Party's share of production not excepted by Article III.C.
44
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or
Deepening operation, the Consenting
45
Parties shall be permitted to use, free of cost, all casing, tubing and other
equipment in the well, but the ownership of all
46
such equipment shall remain unchanged; and upon abandonment of a well after such
Reworking, Sidetracking, Plugging Back,
46
Recompleting or Deepening, the Consenting Parties shall account for all such
equipment to the owners thereof, with each
48
party receiving its proportionate part in kind or in value, less cost of
salvage.
49
Within ninety (90) days after the completion of any operation under this
Article, the party conducting the operations
50
for the Consenting Parties shall furnish each Non-Consenting Party with an
inventory of the equipment in and connected to
51
the well, and  an  itemized  statement of the cost of drilling, Sidetracking,
Deepening, Plugging Back, testing, Completing,
52
Recompleting, and equipping the well for production; or, at its option, the
operating party, in lieu of an itemized statement
53
of such costs of operation, may submit a detailed statement of monthly
billings.  Each month thereafter, during the time the
54
Consenting Parties are being reimbursed as provided above, the party conducting
the operations for the Consenting Parties
55
shall furnish the Non-Consenting Parties with an itemized statement of all costs
and liabilities incurred in the operation of
56
the well, together with a statement of the quantity of Oil and Gas produced from
it and the amount of proceeds realized from
57
the sale of the well's working interest production during the preceding month. 
In determining the quantity of Oil and Gas
58
produced during any month, Consenting Parties shall use industry accepted
methods such as but not limited to metering or
59
periodic well tests.  Any amount realized from the sale or other disposition of
equipment newly acquired in connection with
60
any such operation which would have been owned by a Non-Consenting Party had it
participated therein shall be credited
61
against the total unreturned costs of the work done and of the equipment
purchased in determining when the interest of such
62
Non-Consenting Party shall revert to it as above provided; and if there is a
credit balance, it shall be paid to such Non-
63
Consenting Party.
64
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided
65
for above, the relinquished interests of such Non-Consenting Party shall
automatically revert to it as of 7:00 a.m. on the day
66
following the day on which such recoupment occurs, and, from and after such
reversion, such Non-Consenting Party shall
67
own the same interest in such well, the material and equipment in or pertaining
thereto, and the production therefrom as
68
such  Non-Consenting  Party  would  have  been  entitled  to  had  it 
participated  in  the  drilling,  Sidetracking,  Reworking,
69
Deepening, Recompleting or Plugging Back of said well. Thereafter, such
Non-Consenting Party shall be charged with and
70
shall pay its proportionate part of the further costs of the operation of said
well in accordance with the terms of this
71
agreement and Exhibit "C" attached hereto.
72
3. Stand-By Costs: When a well which has been drilled or Deepened has reached
its authorized depth and all tests have
73
been  completed  and  the  results  thereof  furnished  to  the  parties,  or 
when  operations  on  the  well  have  been  otherwise
74
terminated pursuant to Article VI.F., stand-by costs incurred pending response
to a party's notice proposing a Reworking,

 
 
7

--------------------------------------------------------------------------------

 
A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in
such a well (including the period required
2
under Article VI.B.6. to resolve competing proposals) shall be charged and borne
as part of the drilling or Deepening
3
operation just completed. Stand-by costs subsequent to all parties responding,
or expiration of the response time permitted,
4
whichever first occurs, and prior to agreement as to the participating interests
of all Consenting Parties pursuant to the terms
5
of the second grammatical paragraph of Article VI.B.2. (a), shall be charged to
and borne as part of the proposed operation,
6
but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated
7
between the Consenting Parties in the proportion each Consenting Party's
interest as shown on Exhibit "A" bears to the total
8
interest as shown on Exhibit "A" of all Consenting Parties.
9
In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party
10
may request and receive up to five (5) additional days after expiration of the
forty-eight hour response period specified in
11
Article VI.B.1. within which to respond by paying for all stand-by costs and
other costs incurred during such extended
12
response period; Operator may require such party to pay the estimated stand-by
time in advance as a condition to extending
13
the response period. If more than one party elects to take such additional time
to respond to the notice, standby costs shall be
14
allocated between the parties taking additional time to respond on a day-to-day
basis in the proportion each electing party's
15
interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit
"A" of all the electing parties.
16
4. Deepening: If less than all parties elect to participate in a drilling,
Sidetracking, or Deepening operation proposed
17
pursuant to Article VI.B.1., the interest relinquished by the Non-Consenting
Parties to the Consenting Parties under Article
18
VI.B.2. shall relate only and be limited to the lesser of (i) the total depth
actually drilled or (ii) the objective depth or Zone
19
of which the parties were given notice under Article VI.B.1. ("Initial
Objective"). Such well shall not be Deepened beyond the
20
Initial Objective without first complying with this Article to afford the
Non-Consenting Parties the opportunity to participate
21
in the Deepening operation.
22
In the event any Consenting Party desires to drill or Deepen a Non-Consent Well
to a depth below the Initial Objective,
23
such party shall give notice thereof, complying with the requirements of Article
VI.B.1., to all parties (including Non-
24
Consenting Parties). Thereupon, Articles VI.B.1. and 2. shall apply and all
parties receiving such notice shall have the right to
25
participate or not participate in the Deepening of such well pursuant to said
Articles VI.B.1. and 2. If a Deepening operation
26
is approved pursuant to such provisions, and if any Non-Consenting Party elects
to participate in the Deepening operation,
27
such Non-Consenting party shall pay or make reimbursement (as the case may be)
of the following costs and expenses.
28
(a) If the proposal to Deepen is made prior to the Completion of such well as a
well capable of producing in paying
29
quantities, such Non-Consenting Party shall pay (or reimburse Consenting Parties
for, as the case may be) that share of costs
30
and expenses incurred in connection with the drilling of said well from the
surface to the Initial Objective which Non-
31
Consenting Party would have paid had such Non-Consenting Party agreed to
participate therein, plus the Non-Consenting
32
Party's share of the cost of Deepening and of participating in any further
operations on the well in accordance with the other
33
provisions of this Agreement; provided, however, all costs for testing and
Completion or attempted Completion of the well
34
incurred by Consenting Parties prior to the point of actual operations to Deepen
beyond the Initial Objective shall be for the
35
sole account of Consenting Parties.
36
(b) If the proposal is made for a Non-Consent Well that has been previously
Completed as a well capable of producing
37
in paying quantities, but is no longer capable of producing in paying
quantities, such Non-Consenting Party shall pay (or
38
reimburse Consenting Parties for, as the case may be) its proportionate share of
all costs of drilling, Completing, and
39
equipping said well from the surface to the Initial Objective, calculated in the
manner provided in paragraph (a) above, less
40
those costs recouped by the Consenting Parties from the sale of production from
the well. The Non-Consenting Party shall
41
also pay its proportionate share of all costs of re-entering said well. The
Non-Consenting Parties' proportionate part (based
42
on the percentage of such well Non-Consenting Party would have owned had it
previously participated in such Non-Consent
43
Well) of the costs of salvable materials and equipment remaining in the hole and
salvable surface equipment used in
44
connection with such well shall be determined in accordance with Exhibit "C." If
the Consenting Parties have recouped the
45
cost of drilling, Completing, and equipping the well at the time such Deepening
operation is conducted, then a Non-
46
Consenting Party may participate in the Deepening of the well with no payment
for costs incurred prior to re-entering the
47
well for Deepening
48
The foregoing shall not imply a right of any Consenting Party to propose any
Deepening for a Non-Consent Well prior
49
to the drilling of such well to its Initial Objective without the consent of the
other Consenting Parties as provided in Article
50
VI.F.
51
5. Sidetracking: Any party having the right to participate in a proposed
Sidetracking operation that does not own an
52
interest in the affected wellbore at the time of the notice shall, upon electing
to participate, tender to the wellbore owners its
53
proportionate share (equal to its interest in the Sidetracking operation) of the
value of that portion of the existing wellbore
54
to be utilized as follows:
55
(a) If the proposal is for Sidetracking an existing dry hole, reimbursement
shall be on the basis of the actual costs
56
incurred in the initial drilling of the well down to the depth at which the
Sidetracking operation is initiated.
57
(b) If the proposal is for Sidetracking a well which has previously produced,
reimbursement shall be on the basis of
58
such party's proportionate share of drilling and equipping costs incurred in the
initial drilling of the well down to the depth
59
at which the Sidetracking operation is conducted, calculated in the manner
described in Article VI.B.4(b) above. Such party's
60
proportionate share of the cost of the well's salvable materials and equipment
down to the depth at which the Sidetracking
61
operation is initiated shall be determined in accordance with the provisions of
Exhibit "C."
62
6. Order of Preference of Operations. Except as otherwise specifically provided
in this agreement, if any party desires to
63
propose the conduct of an operation that conflicts with a proposal that has been
made by a party under this Article VI, such
64
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
65
an operation on a well where no drilling rig is on location, or twenty-four (24)
hours, exclusive of Saturday, Sunday and legal
66
holidays, from delivery of the initial proposal, if a drilling rig is on
location for the well on which such operation is to be
67
conducted, to deliver to all parties entitled to participate in the proposed
operation such party's alternative proposal, such
68
alternate proposal to contain the same information required to be included in
the initial proposal. Each party receiving such
69
proposals shall elect by delivery of notice to Operator within five (5) days
after expiration of the proposal period, or within
70
twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays) if a
drilling rig is on location for the well that is the
71
subject of the proposals, to participate in one of the competing proposals. Any
party not electing within the time required
72
shall be deemed not to have voted. The proposal receiving the vote of parties
owning the largest aggregate percentage
73
interest of the parties voting shall have priority over all other competing
proposals; in the case of a tie vote, the
74
 

 
 
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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
initial proposal shall prevail. Operator shall deliver notice of such result to
all parties entitled to participate in the operation
2
within five (5) days after expiration of the election period (or within
twenty-four (24) hours, exclusive of Saturday, Sunday
3
and legal holidays, if a drilling rig is on location).  Each party shall then
have two (2) days (or twenty-four (24) hours if a rig
4
is on location) from receipt of such notice to elect by delivery of notice to
Operator to participate in such operation or to
5
relinquish interest in the affected well pursuant to the provisions of Article
VI.B.2.; failure by a party to deliver notice within
6
such period shall be deemed an election not to participate in the prevailing
proposal.
7
7. Conformity to Spacing Pattern. Notwithstanding the provisions of this Article
VI.B.2., it is agreed that no wells shall be
8
proposed to be drilled to or Completed in or produced from a Zone from which a
well located elsewhere on the Contract
9
Area is producing, unless such well conforms to the then-existing well spacing
pattern for such Zone.
10
8. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging Back,
Completion, Recompletion, or
11
Sidetracking operation under this agreement with respect to any well then
capable of producing in paying quantities except
12
with the consent of all parties that have not relinquished interests in the well
at the time of such operation.
13
C. Completion of Wells; Reworking and Plugging Back:
14
1. Completion: Without the consent of all parties, no well shall be drilled,
Deepened or Sidetracked, except any well
15
drilled, Deepened or Sidetracked pursuant to the provisions of Article VI.B.2.
of this agreement.  Consent to the drilling,
16
Deepening or Sidetracking shall include:
17
☐    Option  No.  1:  All  necessary  expenditures  for  the  drilling, 
Deepening  or  Sidetracking,  testing,  Completing  and
18
equipping of the well, including necessary tankage and/or surface facilities.
19
☑    Option No. 2: All necessary expenditures for the drilling, Deepening or
Sidetracking and testing of the well. When
20
such well has reached its authorized depth, and all logs, cores and other tests
have been completed, and the results
21
thereof furnished to the parties, Operator shall give immediate notice to the
Non-Operators having the right to
22
participate  in  a  Completion  attempt  whether  or  not  Operator  recommends 
attempting  to  Complete  the  well,
23
together with Operator's AFE for Completion costs if not previously provided. 
The parties receiving such notice
24
shall have forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) in which to elect by delivery of
25
notice to Operator to participate in a recommended Completion attempt or to make
a Completion proposal with an
26
accompanying AFE.  Operator shall deliver any such Completion proposal, or any
Completion proposal conflicting
27
with Operator's proposal, to the other parties entitled to participate in such
Completion in accordance with the
28
procedures specified in Article VI.B.6.  Election to participate in a Completion
attempt shall include consent to all
29
necessary expenditures for the Completing and equipping of such well, including
necessary tankage and/or surface
30
facilities but excluding any stimulation  operation  not  contained  on the
Completion  AFE. Failure  of any party
31
receiving  such  notice to  reply  within  the period  above  fixed  shall 
constitute  an  election  by that party not to
32
participate  in  the  cost  of  the  Completion  attempt;  provided,  that 
Article  VI.B.6.  shall  control  in  the  case  of
33
conflicting Completion proposals.  If one or more, but less than all of the
parties, elect to attempt a Completion, the
34
provision  of  Article  VI.B.2.  hereof  (the  phrase  "Reworking, 
Sidetracking,  Deepening,  Recompleting  or  Plugging
35
Back"  as contained  in  Article  VI.B.2.  shall  be  deemed  to  include 
"Completing")  shall  apply to  the  operations
36
thereafter conducted by less than all parties; provided, however, that Article
VI.B.2. shall apply separately to each
37
separate Completion or Recompletion attempt undertaken hereunder, and an
election to become a Non-Consenting
38
Party as to one Completion or Recompletion attempt shall not prevent a party
from becoming a Consenting Party
39
in  subsequent  Completion  or  Recompletion  attempts  regardless  whether 
the  Consenting  Parties  as  to  earlier
40
Completions  or  Recompletion  have  recouped  their  costs  pursuant  to 
Article  VI.B.2.;  provided  further,  that  any
41
recoupment of costs by a Consenting Party shall be made solely from the
production attributable to the Zone in
42
which the Completion attempt is made.  Election by a previous Non-Consenting
party to participate in a subsequent
43
Completion or Recompletion attempt shall require such party to pay its
proportionate share of the cost of salvable
44
materials  and  equipment  installed  in  the  well  pursuant  to  the 
previous  Completion  or  Recompletion  attempt,
45
insofar and only insofar as such materials and equipment benefit the Zone in
which such party participates in a
46
Completion attempt.
47
2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted or
Plugged Back except a well Reworked,
48
Recompleted, or Plugged Back pursuant to the provisions of Article VI.B.2. of
this agreement. Consent to the Reworking,
49
Recompleting  or  Plugging  Back  of  a  well  shall  include  all  necessary 
expenditures  in  conducting  such  operations  and
50
Completing and equipping of said well, including necessary tankage and/or
surface facilities.
51
D. Other Operations:
52
Operator shall not undertake any single project reasonably estimated to require
an expenditure in excess of ______________
53
  Fifty thousand           Dollars ($ 50,000.00) except in connection with the
54
drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or
Plugging Back of a well that has been previously
55
authorized  by or  pursuant  to  this  agreement;  provided,  however,  that, 
in  case  of  explosion,  fire,  flood  or  other  sudden
56
emergency, whether of the same or different nature, Operator may take such steps
and incur such expenses as in its opinion
57
are required to deal with the emergency to safeguard life and property but
Operator, as promptly as possible, shall report the
58
emergency to the other parties. If Operator prepares an AFE for its own use,
Operator shall furnish any Non-Operator so
59
requesting an information copy thereof for any single project costing in excess
of   Fifty thousand      Dollars
60
($ 50,000.00 ). Any party who has not relinquished its interest in a well shall
have the right to propose that
61
Operator perform repair work or undertake the installation of artificial lift
equipment or ancillary production facilities such as
62
salt water disposal wells or to conduct additional work with respect to a well
drilled hereunder or other similar project (but
63
not including the installation of gathering lines or other transportation or
marketing facilities, the installation of which shall
64
be governed  by separate agreement between  the parties) reasonably estimated to
require an  expenditure in  excess of the
65
amount first set forth above in this Article VI.D. (except in connection with an
operation required to be proposed under
66
Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed exclusively be
those Articles).  Operator shall deliver such
67
proposal to all parties entitled to participate therein. If within thirty (30)
days thereof Operator secures the written consent
68
of any party or parties owning at least 75% of the interests of the parties
entitled to participate in such operation,
69
each party having the right to participate in such project shall be bound by the
terms of such proposal and shall be obligated
70
to pay its proportionate share of the costs of the proposed project as if it had
consented to such project pursuant to the terms
71
of the proposal.
72
E. Abandonment of Wells:
73
1.  Abandonment of Dry Holes: Except for any well drilled or Deepened pursuant
to Article VI.B.2., any well which has
74
been drilled or Deepened under the terms of this agreement and is proposed to be
completed as a dry hole shall not be

 
9

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
plugged and abandoned without the consent of all parties. Should Operator, after
diligent effort, be unable to contact any
2 
party, or should any party fail to reply within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after
3
delivery of notice of the proposal to plug and abandon such well, such party
shall be deemed to have consented to the
4
proposed abandonment.  All such wells shall be plugged and abandoned in
accordance with applicable regulations and at the
5
cost, risk and expense of the parties who participated in the cost of drilling
or Deepening such well.  Any party who objects to
6
plugging and abandoning such  well by notice delivered  to Operator within 
forty-eight  (48) hours (exclusive of Saturday,
7
Sunday and legal holidays) after delivery of notice of the proposed plugging
shall take over the well as of the end of such
8
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of
9
Article VI.B.; failure of such party to provide proof reasonably satisfactory to
Operator of its financial capability to conduct
10
such operations or to take over the well within such period or thereafter to
conduct operations on such well or plug and
11
abandon such well shall entitle Operator to retain or take possession of the
well and plug and abandon the well.  The party
12
taking over the well shall indemnify Operator (if Operator is an abandoning
party) and the other abandoning parties against
13
liability for any further operations conducted on such well except for the costs
of plugging and abandoning the well and
14
restoring the surface, for which the abandoning parties shall remain
proportionately liable.
15
2.  Abandonment  of  Wells  That  Have  Produced:  Except  for  any  well  in 
which  a  Non-Consent  operation  has  been
16
conducted hereunder for which the Consenting Parties have not been fully
reimbursed as herein provided, any well which has
17
been completed as a producer shall not be plugged and abandoned without the
consent of all parties.  If all parties consent to
18
such abandonment, the well shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk
19
and expense of all the parties hereto.  Failure of a party to reply within sixty
(60) days of delivery of notice of proposed
20
abandonment shall be deemed an election to consent to the proposal.  If, within
sixty (60) days after delivery of notice of the
21
proposed abandonment of any well, all parties do not agree to the abandonment of
such well, those wishing to continue its
22
operation  from the Zone then  open  to production  shall be obligated  to take
over the well as  of the expiration  of the
23
applicable notice period and shall indemnify Operator (if Operator is an
abandoning party) and the other abandoning parties
24
against liability for any further operations on the well conducted by such
parties.  Failure of such party or parties to provide
25
proof reasonably satisfactory to Operator of their financial capability to
conduct such operations or to take over the well
26
within the required period or thereafter to conduct operations on such well
shall entitle operator to retain or take possession
27
of such well and plug and abandon the well.
28
Parties taking over a well as provided herein shall tender to each of the other
parties its proportionate share of the value of
29
the well's salvable material and equipment, determined in accordance with the
provisions of Exhibit "C," less the estimated cost
30
of salvaging and the estimated cost of plugging and abandoning and restoring the
surface; provided, however, that in the event
31
the estimated plugging and abandoning and surface restoration costs and the
estimated cost of salvaging are higher than the
32
value of the well's salvable material and equipment, each of the abandoning
parties shall tender to the parties continuing
33
operations their proportionate shares of the estimated excess cost.  Each
abandoning party shall assign to the non-abandoning
34
parties, without warranty, express or implied, as to title or as to quantity, or
fitness for use of the equipment and material, all
35
of its interest in the wellbore of the well and related equipment, together with
its interest in the Leasehold insofar and only
36
insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production.  If the
37
interest of the abandoning party is or includes and Oil and Gas Interest, such
party shall execute and deliver to the non-
38
abandoning party or parties an oil and gas lease, limited to the wellbore and
the Zone then open to production, for a term of
39
one (1) year and so long thereafter as Oil and/or Gas is produced from the Zone
covered thereby, such lease to be on the form
40
attached as Exhibit "B."  The assignments or leases so limited shall encompass
the Drilling Unit upon which the well is located.
41
The payments by, and the assignments or leases to, the assignees shall be in a
ratio based upon the relationship of their
42
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract
43
Area of all assignees. There shall be no readjustment of interests in the
remaining portions of the Contract Area.
44
Thereafter, abandoning parties shall have no further responsibility, liability,
or interest in the operation of or production
45
from the well in the Zone then open other than the royalties retained in any
lease made under the terms of this Article.  Upon
46
request, Operator shall continue to operate the assigned well for the account of
the non-abandoning parties at the rates and
47
charges contemplated by this agreement, plus any additional cost and charges
which may arise as the result of the separate
48
ownership of the assigned well.  Upon proposed abandonment of the producing Zone
assigned or leased, the assignor or lessor
49
shall then have the option to repurchase its prior interest in the well (using
the same valuation formula) and participate in
50
further operations therein subject to the provisions hereof.
51
3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1. or
VI.E.2. above shall be applicable as
52
between Consenting Parties in the event of the proposed abandonment of any well
excepted from said Articles; provided,
53
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further
54
operations therein have been notified of the proposed abandonment and afforded
the opportunity to elect to take over the well
55
in accordance with the provisions of this Article VI.E.; and provided further,
that Non-Consenting Parties who own an interest
56
in a portion of the well shall pay their proportionate shares of abandonment and
surface restoration cost for such well as
57
provided in Article VI.B.2.(b).
58
F. Termination of Operations:
59
Upon the commencement of an operation for the drilling, Reworking, Sidetracking,
Plugging Back, Deepening, testing,
60
Completion or plugging of a well, including but not limited to the Initial Well,
such operation shall not be terminated without
61
consent of parties bearing 75% of the costs of such operation; provided,
however, that in the event granite or other
62
practically  impenetrable  substance  or  condition  in  the  hole  is 
encountered  which  renders  further  operations  impractical,
63
Operator may discontinue operations and give notice of such condition in the
manner provided in Article VI.B.1, and the
64
provisions of Article VI.B. or VI.E. shall thereafter apply to such operation,
as appropriate.
65
G. Taking Production in Kind:
66
☐   Option No. 1: Gas Balancing Agreement Attached
67
Each  party  shall  take  in  kind  or  separately  dispose  of  its 
proportionate  share  of  all  Oil  and  Gas  produced  from  the
68
Contract Area, exclusive of production which may be used in development and
producing operations and in preparing and
69
treating Oil and Gas for marketing purposes and production unavoidably lost.  
Any extra expenditure incurred in the taking
70
in kind or separate disposition by any party of its proportionate share of the
production shall be borne by such party.   Any
71
party  taking  its  share  of  production  in  kind  shall  be  required  to 
pay  for  only  its  proportionate  share  of  such  part  of
72
Operator's surface facilities which it uses.
73 
Each  party  shall  execute  such  division  orders  and  contracts  as  may 
be  necessary  for  the  sale  of  its  interest  in
74
production  from  the  Contract  Area,  and,  except  as  provided  in  Article 
VII.B.,  shall  be  entitled  to  receive  payment

 
 
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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
  
1
directly from the purchaser thereof for its share of all production.
2
If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate
3
share of the Oil produced from the Contract Area, Operator shall have the right,
subject to the revocation at will by
4
the party owning it, but not the obligation, to purchase such Oil or sell it to
others at any time and from time to
5
time,  for  the  account  of  the  non-taking  party.  Any  such  purchase or 
sale  by Operator  may  be  terminated  by
6
Operator upon at least ten (10) days written notice to the owner of said
production and shall be subject always to
7
the right of the owner of the production upon at least ten (10) days written
notice to Operator to exercise at any
8
time its right to take in kind, or separately dispose of, its share of all Oil
not previously delivered to a purchaser.
9
Any purchase or sale by Operator of any other party's share of Oil shall be only
for such reasonable periods of time
10
as are consistent with the minimum needs of the industry under the particular
circumstances, but in no event for a
11
period in excess of one (1) year.
12
Any such sale by Operator shall be in a manner commercially reasonable under the
circumstances but Operator
13
shall have no duty to share any existing market or to obtain a price equal to
that received under any existing
14
market.   The sale or delivery by Operator of a non-taking party's share of Oil
under the terms of any existing
15
contract of Operator shall not give the non-taking party any interest in or make
the non-taking party a party to said
16
contract.   No purchase shall be made by Operator without first giving the
non-taking party at least ten (10) days
17
written notice of such intended purchase and the price to be paid or the pricing
basis to be used.
18
All  parties shall give timely  written  notice to Operator of their  Gas
marketing arrangements for the following
19
month,  excluding  price,  and  shall  notify  Operator  immediately  in  the 
event  of  a  change  in  such  arrangements.
20
Operator shall maintain records of all marketing arrangements, and of volumes
actually sold or transported, which
21
records shall be made available to Non-Operators upon reasonable request.
22
In the event one or more parties' separate disposition of its share of the Gas
causes split-stream deliveries to separate
23
pipelines and/or deliveries which on a day-to-day basis for any reason are not
exactly equal to a party's respective proportion-
24
ate share of total Gas sales to be allocated to it, the balancing or accounting
between the parties shall be in accordance with
25
any Gas balancing agreement between the parties hereto, whether such an
agreement is attached as Exhibit "E" or is a
26
separate agreement.  Operator shall give notice to all parties of the first
sales of Gas from any well under this agreement.
27
☑ Option No. 2: No Gas Balancing Agreement:
28
Each party shall / may take in kind or separately dispose of its proportionate
share of all Oil and Gas produced from
29
the  Contract  Area,  exclusive of  production  which  may be  used  in 
development  and  producing  operations  and  in
30
preparing and treating Oil and Gas for marketing purposes and production
unavoidably lost.Any extra expenditures
31
incurred in the taking in kind or separate disposition by any party of its
proportionate share of the production shall
32
be borne by such party.  Any party taking its share of production in kind shall
be required to pay for only its
33
proportionate share of such part of Operator's surface facilities which it uses.
34
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in
35
production from the Contract Area, and, except as provided in Article VII.B.,
shall be entitled to receive payment
36
directly from the purchaser thereof for its share of all production.
37
If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate
38
share  of  the  Oil  and/or  Gas  produced  from  the  Contract  Area,  Operator
shall  have  the  right,  subject  to  the
39
revocation at will by the party owning it, but not the obligation, to purchase
such Oil and/or Gas or sell such Oil and/or Gas to others
40
at any time and from time to time, for the account of the non-taking party.  Any
such purchase or sale by Operator
41
may be terminated by Operator upon at least ten (10) days written notice to the
owner of said production and shall
42
be subject always to the right of the owner of the production upon at least ten
(10) days written notice to Operator
43
to exercise its right to take in kind, or separately dispose of, its share of
all Oil and/or Gas not previously delivered
44
to  a purchaser;  provided, however,  that the effective date of  any  such 
revocation  may be deferred  at  Operator's
45
election  for  a  period  not  to  exceed  ninety  (90)  days  if  Operator 
has  committed  such  production  to  a  purchase
46
contract having a term extending beyond such ten (10) -day period. Any purchase
or sale by Operator of any other
47
party's  share  of  Oil  and/or  Gas  shall  be  only  for  such  reasonable 
periods  of  time  as  are  consistent  with  the
48
minimum needs of the industry under the particular circumstances, but in no
event for a period in excess of one (1)
49
year.
50
Any such sale by Operator shall be in a manner commercially reasonable under the
circumstances, but Operator
51
shall have no duty to share any existing market or transportation arrangement or
to obtain a price or transportation
52
fee  equal  to  that  received  under  any  existing  market  or 
transportation  arrangement.The  sale  or  delivery  by
53
Operator of a non-taking party's share of production under the terms of any
existing contract of Operator shall not
54
give the non-taking party any interest in or make the non-taking party a party
to said contract.  No purchase of Oil
55
and Gas and no sale of Gas shall be made by Operator without first giving the
non-taking party ten days written
56
notice of such intended purchase or sale and the price to be paid or the pricing
basis to be used. Operator shall give
57
notice to all parties of the first sale of Gas from any well under this
Agreement.
58
All  parties shall give timely  written  notice to Operator of their  Gas
marketing arrangements for the following
59
month,  excluding  price,  and  shall  notify  Operator  immediately  in  the 
event  of  a  change  in  such  arrangements.
60
Operator shall maintain records of all marketing arrangements, and of volumes
actually sold or transported, which
61
records shall be made available to Non-Operators upon reasonable request.
62
ARTICLE VII.
63
EXPENDITURES AND LIABILITY OF PARTIES
64
A. Liability of Parties:
65
The liability of the parties shall be several, not joint or collective. Each
party shall be responsible only for its obligations,
66
and shall be liable only for its proportionate share of the costs of developing
and operating the Contract Area.  Accordingly, the
67
liens granted among the parties in Article VII.B. are given to secure only the
debts of each severally, and no party shall have
68
any liability to third parties hereunder to satisfy the default of any other
party in the payment of any expense or obligation
69
hereunder.  It is not the intention of the parties to create, nor shall this
agreement be construed as creating, a mining or other
70
partnership,  joint  venture,  agency  relationship  or  association,  or  to 
render  the  parties  liable  as  partners,  co-venturers,  or
71
principals.  In their relations with each other under this agreement, the
parties shall not be considered fiduciaries or to have
72
established a confidential relationship but rather shall be free to act on an
arm's-length basis in accordance with their own
73
respective self-interest, subject, however, to the obligation of the parties to
act in good faith in their dealings with each other
74
with respect to activities hereunder.

 
 
11

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

 
1
B. Liens and Security Interests:
2
Each party grants to the other parties hereto a lien upon any interest it now
owns or hereafter acquires in Oil and Gas
3
Leases and Oil and Gas Interests in the Contract Area, and a security interest
and/or purchase money security interest in any
4
interest it now owns or hereafter acquires in the personal property and fixtures
on or used or obtained for use in connection
5
therewith, to secure performance of all of its obligations under this agreement
including but not limited to payment of expense,
6
interest and fees, the proper disbursement of all monies paid hereunder, the
assignment or relinquishment of interest in Oil
7
and Gas Leases as required hereunder, and the proper performance of operations
hereunder.  Such lien and security interest
8
granted by each party hereto shall include such party's leasehold interests,
working interests, operating rights, and royalty and
9
overriding royalty interests in the Contract Area now owned or hereafter
acquired and in lands pooled or unitized therewith or
10
otherwise becoming subject to this agreement, the Oil and Gas when extracted
therefrom and equipment situated thereon or
11
used or obtained for use in connection therewith (including, without limitation,
all wells, tools, and tubular goods), and accounts
12
(including, without limitation, accounts arising from gas imbalances or from the
sale of Oil and/or Gas at the wellhead),
13
contract rights, inventory and general intangibles relating thereto or arising
therefrom, and all proceeds and products of the
14
foregoing.
15
To perfect the lien and security agreement provided herein, each party hereto
shall execute and acknowledge the recording
16
supplement and/or any financing statement prepared and submitted by any party
hereto in conjunction herewith or at any time
17
following execution hereof, and Operator is authorized to file this agreement or
the recording supplement executed herewith as
18
a lien or mortgage in the applicable real estate records and as a financing
statement with the proper officer under the Uniform
19
Commercial Code in the state in which the Contract Area is situated and such
other states as Operator shall deem appropriate
20
to perfect the security interest granted hereunder.  Any party may file this
agreement, the recording supplement executed
21
herewith, or such other documents as it deems necessary as a lien or mortgage in
the applicable real estate records and/or a
22
financing statement with the proper officer under the Uniform Commercial Code.
23
Each party represents and warrants to the other parties hereto that the lien and
security interest granted by such party to
24
the other parties shall be a first and prior lien, and each party hereby agrees
to maintain the priority of said lien and security
25
interest against all persons acquiring an interest in Oil and Gas Leases and
Interests covered by this agreement by, through or
26
under such party.  All parties acquiring an interest in Oil and Gas Leases and
Oil and Gas Interests covered by this agreement,
27
whether  by  assignment,  merger,  mortgage,  operation  of  law,  or 
otherwise,  shall  be  deemed  to  have  taken  subject
28
to the lien and security interest granted by this Article VII.B. as to all
obligations attributable to such interest hereunder
29
whether or not such obligations arise before or after such interest is acquired.
30
To  the  extent  that  parties  have  a  security  interest  under  the 
Uniform  Commercial  Code  of  the  state  in  which  the
31
Contract Area is situated, they shall be entitled to exercise the rights and
remedies of a secured party under the Code.
32
The bringing of a suit and the obtaining of judgment by a party for the secured
indebtedness shall not be deemed an
33
election  of  remedies  or  otherwise  affect  the  lien  rights  or  security 
interest  as  security  for  the  payment  thereof.In
34
addition, upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use
35
of funds by the Operator, the other parties shall have the right, without
prejudice to other rights or remedies, to collect
36
from the purchaser the proceeds from the sale of such defaulting party's share
of Oil and Gas until the amount owed by
37
such  party,  plus interest  as provided  in  "Exhibit  C," has been  received, 
and  shall  have  the  right  to  offset  the amount
38
owed against the proceeds from the sale of such defaulting party's share of Oil
and Gas.  All purchasers of production
39
may rely on a notification of default from the non-defaulting party or parties
stating the amount due as a result of the
40
default,  and  all  parties  waive  any  recourse  available  against 
purchasers  for  releasing  production  proceeds  as  provided  in
41
this paragraph.
42
If any party fails to pay its share of cost within one hundred twenty (120) days
after rendition of a statement therefor by
43
Operator,  the  non-defaulting  parties,  including  Operator,  shall  upon 
request  by  Operator,  pay  the  unpaid  amount  in  the
44
proportion that the interest of each such party bears to the interest of all
such parties.  The amount paid by each party so
45
paying its share of the unpaid amount shall be secured by the liens and security
rights described in Article VII.B., and each
46
paying party may independently pursue any remedy available hereunder or
otherwise.
47
If any party does not perform all of its obligations hereunder, and the failure
to perform subjects such party to foreclosure
48
or execution proceedings pursuant to the provisions of this agreement, to the
extent allowed by governing law, the defaulting
49
party waives any available right of redemption from and after the date of
judgment, any required valuation or appraisement
50
of the mortgaged or secured property prior to sale, any available right to stay
execution or to require a marshaling of assets
51
and any required bond in the event a receiver is appointed.  In addition, to the
extent permitted by applicable law, each party
52
hereby grants to the other parties a power of sale as to any property that is
subject to the lien and security rights granted
53
hereunder, such power to be exercised in the manner provided by applicable law
or otherwise in a commercially reasonable
54
manner and upon reasonable notice.
55
Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien
56
law of any state in which the Contract Area is situated to enforce the
obligations of each party hereunder.  Without limiting
57
the generality of the foregoing, to the extent permitted by applicable law,
Non-Operators agree that Operator may invoke or
58
utilize the mechanics' or materialmen's lien law of the state in which the
Contract Area is situated in order to secure the
59
payment  to  Operator  of  any  sum  due  hereunder  for  services  performed 
or  materials  supplied  by  Operator.
60
C. Advances:
61
Operator, at its election, shall have the right from time to time to demand and
receive from one or more of the other
62
parties payment in advance of their respective shares of the estimated amount of
the expense to be incurred in operations
63
hereunder during the next succeeding month, which right may be exercised only by
submission to each such party of an
64
itemized statement of such estimated expense, together with an invoice for its
share thereof.  Each such statement and invoice
65
for the payment in advance of estimated expense shall be submitted on or before
the 20th day of the next preceding month.
66
Each party shall pay to Operator its proportionate share of such estimate within
fifteen (15) days after such estimate and
67
invoice is received.  If any party fails to pay its share of said estimate
within said time, the amount due shall bear interest as
68
provided in Exhibit "C" until paid.  Proper adjustment shall be made monthly
between advances and actual expense to the end
69
that each party shall bear and pay its proportionate share of actual expenses
incurred, and no more.
70
D. Defaults and Remedies:
71
If any party fails to discharge any financial obligation under this agreement,
including without limitation the failure to
72
make any advance under the preceding Article VII.C. or any other provision of
this agreement, within the period required for
73
such payment hereunder, then in addition to the remedies provided in Article
VII.B. or elsewhere in this agreement, the
74
remedies specified below shall be applicable.  For purposes of this Article
VII.D., all notices and elections shall be delivered

 
 
 
12

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
only by Operator, except that Operator shall deliver any such notice and
election requested by a non-defaulting Non-Operator,
2
and  when  Operator  is  the party  in  default,  the applicable notices  and 
elections  can  be delivered  by any Non-Operator.
3
Election of any one or more of the following remedies shall not preclude the
subsequent use of any other remedy specified
4
below or otherwise available to a non-defaulting party.
5
1. Suspension of Rights: Any party may deliver to the party in default a Notice
of Default, which shall specify the default,
6
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
7
or more of the remedies provided in this Article.  If the default is not cured
within thirty (30) days of the delivery of such
8
Notice of Default, all of the rights of the defaulting party granted by this
agreement may upon notice be suspended until the
9
default is cured, without prejudice to the right of the non-defaulting party or
parties to continue to enforce the obligations of
10
the defaulting party previously accrued or thereafter accruing under this
agreement. If Operator is the party in default, the
11
Non-Operators shall have in addition the right, by vote of Non-Operators owning
a majority in interest in the Contract Area
12
after excluding the voting interest of Operator, to appoint a new Operator
effective immediately.  The rights of a defaulting
13
party that may be suspended hereunder at the election of the non-defaulting
parties shall include, without limitation, the right
14
to receive information  as to any operation  conducted  hereunder during the
period  of such  default, the right to elect to
15
participate in an operation proposed under Article VI.B. of this agreement, the
right to participate in an operation being
16
conducted under this agreement even if the party has previously elected to
participate in such operation, and the right to
17
receive proceeds of production from any well subject to this agreement.
18
2.  Suit  for  Damages:  Non-defaulting  parties  or  Operator  for  the 
benefit  of  non-defaulting  parties  may  sue  (at  joint
19
account expense) to collect the amounts in default, plus interest accruing on
the amounts recovered from the date of default
20
until the date of collection at the rate specified in Exhibit "C" attached
hereto.  Nothing herein shall prevent any party from
21
suing any defaulting party to collect consequential damages accruing to such
party as a result of the default.
22
3.  Deemed  Non-Consent:  The  non-defaulting  party  may  deliver  a  written 
Notice  of  Non-Consent  Election  to  the
23
defaulting party at any time after the expiration of the thirty-day cure period
following delivery of the Notice of Default, in
24
which event if the billing is for the drilling a new well or the Plugging Back,
Sidetracking, Reworking or Deepening of a
25
well which is to be or has been plugged as a dry hole, or for the Completion or
Recompletion of any well, the defaulting
26
party will be conclusively deemed to have elected not to participate in the
operation and to be a Non-Consenting Party with
27
respect  thereto  under  Article  VI.B.  or  VI.C.,  as  the  case  may  be, 
to  the  extent  of  the  costs  unpaid  by  such  party,
28
notwithstanding any election to participate theretofore made. If election is
made to proceed under this provision, then the
29
non-defaulting parties may not elect to sue for the unpaid amount pursuant to
Article VII.D.2.
30
Until the delivery of such Notice of Non-Consent Election to the defaulting
party, such party shall have the right to cure
31
its default by paying its unpaid share of costs plus interest at the rate set
forth in Exhibit "C," provided, however, such
32
payment shall not prejudice the rights of the non-defaulting parties to pursue
remedies for damages incurred by the non-
33
defaulting parties as a result of the default.  Any interest relinquished
pursuant to this Article VII.D.3. shall be offered to the
34
non-defaulting parties in proportion to their interests, and the non-defaulting
parties electing to participate in the ownership
35
of such interest shall be required to contribute their shares of the defaulted
amount upon their election to participate therein.
36
4. Advance Payment: If a default is not cured within thirty (30) days of the
delivery of a Notice of Default, Operator, or
37
Non-Operators  if  Operator  is  the  defaulting  party,  may  thereafter 
require  advance  payment  from  the  defaulting
38
party of such defaulting party's anticipated share of any item of expense for
which Operator, or Non-Operators, as the case may
39
be, would be entitled to reimbursement under any provision of this agreement,
whether or not such expense was the subject of
40
the previous default.  Such right includes, but is not limited to, the right to
require advance payment for the estimated costs of
41
drilling a well or Completion of a well as to which an election to participate
in drilling or Completion has been made.  If the
42
defaulting party fails to pay the required advance payment, the non-defaulting
parties may pursue any of the remedies provided
43
in the Article VII.D. or any other default remedy provided elsewhere in this
agreement.  Any excess of funds advanced remaining
44
when the operation is completed and all costs have been paid shall be promptly
returned to the advancing party.
45
5. Costs and Attorneys' Fees: In the event any party is required to bring legal
proceedings to enforce any financial
46
obligation of a party hereunder, the prevailing party in such action shall be
entitled to recover all court costs, costs of
47
collection, and a reasonable attorney's fee, which the lien provided for herein
shall also secure.
48
E. Rentals, Shut-in Well Payments and Minimum Royalties:
49
Rentals, shut-in well payments and minimum royalties which may be required under
the terms of any lease shall be paid
50
by the party or parties who subjected such lease to this agreement at its or
their expense.  In the event two or more parties
51
own and have contributed interests in the same lease to this agreement, such
parties may designate one of such parties to
52
make said payments for and on behalf of all such parties.  Any party may
request, and shall be entitled to receive, proper
53
evidence of all such payments.  In the event of failure to make proper payment
of any rental, shut-in well payment or
54
minimum royalty through mistake or oversight where such payment is required to
continue the lease in force, any loss which
55
results from such non-payment shall be borne in accordance with the provisions
of Article IV.B.2.
56
Operator  shall  notify Non-Operators  of  the  anticipated  completion  of  a 
shut-in  well,  or  the  shutting  in  or  return  to
57
production of a producing well, at least five (5) days (excluding Saturday,
Sunday, and legal holidays) prior to taking such
58
action, or at the earliest opportunity permitted by circumstances, but assumes
no liability for failure to do so.  In the event of
59
failure by Operator to so notify Non-Operators, the loss of any lease
contributed hereto by Non-Operators for failure to make
60
timely payments of any shut-in well payment shall be borne jointly by the
parties hereto under the provisions of Article 61
61 
IV.B.3.
62
F. Taxes:
63
Beginning with the first calendar year after the effective date hereof, Operator
shall render for ad valorem taxation all
64
property subject to this agreement which by law should be rendered for such
taxes, and it shall pay all such taxes assessed
65
thereon before they become delinquent.  Prior to the rendition date, each
Non-Operator shall furnish Operator information as
66
to burdens (to include, but not be limited to, royalties, overriding royalties
and production payments) on Leases and Oil and
67
Gas Interests contributed by such Non-Operator. If the assessed valuation of any
Lease is reduced by reason of its being
68
subject  to  outstanding  excess  royalties,  overriding  royalties  or 
production  payments,  the  reduction  in  ad  valorem  taxes
69
resulting therefrom shall inure to the benefit of the owner or owners of such
Lease, and Operator shall adjust the charge to
70
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
71
upon separate valuations of each party's working interest, then notwithstanding
anything to the contrary herein, charges to
72
the joint account shall be made and paid by the parties hereto in accordance
with the tax value generated by each party's
73
working interest. Operator shall bill the other parties for their proportionate
shares of all tax payments in  the manner
74
provided in Exhibit "C."

 
 
13

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner
2
prescribed by law, and prosecute the protest to a final determination, unless
all parties agree to abandon the protest prior to final
3
determination.  During the pendency of administrative or judicial proceedings,
Operator may elect to pay, under protest, all such taxes
4
and any interest and penalty.  When any such protested assessment shall have
been finally determined, Operator shall pay the tax for
5
the joint account, together with any interest and penalty accrued, and the total
cost shall then be assessed against the parties, and be
6
paid by them, as provided in Exhibit "C."
7
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect
8
to the production or handling of such party's share of Oil and Gas produced
under the terms of this agreement.
9
ARTICLE VIII.
10
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
11
A. Surrender of Leases:
12
The Leases covered by this agreement, insofar as they embrace acreage in the
Contract Area, shall not be surrendered in whole
13
or in part unless all parties consent thereto.
14
However, should any party desire to surrender its interest in any Lease or in
any portion thereof, such party shall give written
15
notice of the proposed surrender to all parties, and the parties to whom such
notice is delivered shall have thirty (30) days after
16
delivery of the notice within which to notify the party proposing the surrender
whether they elect to consent thereto.  Failure of a
17
party to whom such notice is delivered to reply within said 30-day period shall
constitute a consent to the surrender of the Leases
18
described in the notice.  If all parties do not agree or consent thereto, the
party desiring to surrender shall assign, without express or
19
implied warranty of title, all of its interest in such Lease, or portion
thereof, and any well, material and equipment which may be
20
located thereon and any rights in production thereafter secured, to the parties
not consenting to such surrender.  If the interest of the
21
assigning party is or includes an Oil and Gas Interest, the assigning party
shall execute and deliver to the party or parties not
22
consenting to such surrender an oil and gas lease covering such Oil and Gas
Interest for a term of one (1) year and so long
23
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."
24
Upon such assignment or lease, the assigning party shall be relieved from all
obligations thereafter accruing, but not theretofore
25
accrued, with respect to the interest assigned or leased and the operation of
any well attributable thereto, and the assigning party
26
shall have no further interest in the assigned or leased premises and its
equipment and production other than the royalties retained
27
in any lease made under the terms of this Article.  The party assignee or lessee
shall pay to the party assignor or lessor the
28
reasonable salvage value of the latter's interest in any well's salvable
materials and equipment attributable to the assigned or leased
29
acreage.  The value of all salvable materials and equipment shall be determined
in accordance with the provisions of Exhibit "C," less
30
the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface.  If such value is less
31
than such costs, then the party assignor or lessor shall pay to the party
assignee or lessee the amount of such deficit.  If the
32
assignment or lease is in favor of more than one party, the interest shall be
shared by such parties in the proportions that the
33
interest of each bears to the total interest of all such parties.  If the
interest of the parties to whom the assignment is to be made
34
varies according to depth, then the interest assigned shall similarly reflect
such variances.
35
Any assignment, lease or surrender made under this provision shall not reduce or
change the assignor's, lessor's or surrendering
36
party's interest as it was immediately before the assignment, lease or surrender
in the balance of the Contract Area; and the acreage
37
assigned, leased or surrendered, and subsequent operations thereon, shall not
thereafter be subject to the terms and provisions of this
38
agreement but shall be deemed subject to an Operating Agreement in the form of
this agreement.
39
B. Renewal or Extension of Leases:
40
If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties
41
shall be notified promptly upon such acquisition or, in the case of a
replacement Lease taken before expiration of an existing Lease,
42
promptly upon expiration of the existing Lease.  The parties notified shall have
the right for a period of thirty (30) days following
43
delivery of such notice in which to elect to participate in the ownership of the
renewal or replacement Lease, insofar as such Lease
44
affects lands within the Contract Area, by paying to the party who acquired it
their proportionate shares of the acquisition cost
45
allocated to that part of such Lease within the Contract Area, which shall be in
proportion to the interest held at that time by the
46
parties in the Contract Area.  Each party who participates in the purchase of a
renewal or replacement Lease shall be given an
47
assignment of its proportionate interest therein by the acquiring party.
48
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
49
by the parties who elect to participate therein, in a ratio based upon the
relationship of their respective percentage of participation in
50
the Contract Area to the aggregate of the percentages of participation in the
Contract Area of all parties participating in the
51
purchase of such renewal or replacement Lease.  The acquisition of a renewal or
replacement Lease by any or all of the parties hereto
52
shall not cause a readjustment of the interests of the parties stated in Exhibit
"A," but any renewal or replacement Lease in which
53
less than all parties elect to participate shall not be subject to this
agreement but shall be deemed subject to a separate Operating
54
Agreement in the form of this agreement.
55
If the interests of the parties in the Contract Area vary according to depth,
then their right to participate proportionately in
56
renewal or replacement Leases and their right to receive an assignment of
interest shall also reflect such depth variances.
57
The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by
58
the expiring Lease or cover only a portion of its area or an interest therein. 
Any renewal or replacement Lease taken before the
59
expiration of its predecessor Lease, or taken or contracted for or becoming
effective within six (6) months after the expiration of the
60
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
61
the renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the
62
expiration of an existing Lease shall not be deemed a renewal or replacement
Lease and shall not be subject to the provisions of this
63
agreement.
64
The provisions in this Article shall also be applicable to extensions of Oil and
Gas Leases.
65
C. Acreage or Cash Contributions:
66
While this agreement is in force, if any party contracts for a contribution of
cash towards the drilling of a well or any other
67
operation on the Contract Area, such contribution shall be paid to the party who
conducted the drilling or other operation and shall
68
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
69
the contribution is made shall promptly tender an assignment of the acreage,
without warranty of title, to the Drilling Parties in the
70
proportions said Drilling Parties shared the cost of drilling the well. Such
acreage shall become a separate Contract Area and, to  the
71
extent possible, be governed by provisions identical to this agreement.  Each
party shall promptly notify all other parties of any
72
acreage or cash contributions it may obtain in support of any well or any other
operation on the Contract Area.  The above
73
provisions shall also be applicable to optional rights to earn acreage outside
the Contract Area which are in support of well drilled
74
inside Contract Area.

  
 

14

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A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
If any party contracts for any consideration relating to disposition of such
party's share of substances produced hereunder,
2
such consideration shall not be deemed a contribution as contemplated in this
Article VIII.C.
3
D. Assignment; Maintenance of Uniform Interest:
4
For the purpose of maintaining uniformity of ownership in the Contract Area in
the Oil and Gas Leases, Oil and Gas
5
Interests, wells, equipment and production covered by this agreement no party
shall sell, encumber, transfer or make other
6
disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests
embraced within the Contract Area or in wells,
7
equipment and production unless such disposition covers either:
8
1. the entire interest of the party in all Oil and Gas Leases, Oil and Gas
Interests, wells, equipment and production; or
9
2. an equal undivided percent of the party's present interest in all Oil and Gas
Leases, Oil and Gas Interests, wells,
10
equipment and production in the Contract Area.
11
Every sale, encumbrance, transfer or other disposition made by any party shall
be made expressly subject to this agreement
12
and shall be made without prejudice to the right of the other parties, and any
transferee of an ownership interest in any Oil and
13
Gas Lease or Interest shall be deemed a party to this agreement as to the
interest conveyed from and after the effective date of
14
the  transfer  of  ownership;  provided,  however,  that  the  other  parties 
shall  not  be  required  to  recognize  any  such  sale,
15
encumbrance, transfer or other disposition for any purpose hereunder until
thirty (30) days after they have received a copy of the
16
instrument of transfer or other satisfactory evidence thereof in writing from
the transferor or transferee.  No assignment or other
17
disposition of interest by a party shall relieve such party of obligations
previously incurred by such party hereunder with respect
18
to the interest transferred, including without limitation the obligation of a
party to pay all costs attributable to an operation
19
conducted hereunder in which such party has agreed to participate prior to
making such assignment, and the lien and security
20
interest granted by Article VII.B. shall continue to burden the interest
transferred to secure payment of any such obligations.
21
If, at any time the interest of any party is divided among and owned by four or
more co-owners, Operator, at its discretion,
22
may require such co-owners to appoint a single trustee or agent with full
authority to receive notices, approve expenditures,
23
receive billings for and approve and pay such party's share of the joint
expenses, and to deal generally with, and with power to
24
bind, the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-
25
owners shall have the right to enter into and execute all contracts or
agreements for the disposition of their respective shares of
26
the Oil and Gas produced from the Contract Area and they shall have the right to
receive, separately, payment of the sale
27
proceeds thereof.
28
E. Waiver of Rights to Partition:
29
If permitted by the laws of the state or states in which the property covered
hereby is located, each party hereto owning an
30
undivided interest in the Contract Area waives any and all rights it may have to
partition and have set aside to it in severalty its
31
undivided interest therein.
23
F. Preferential Right to Purchase:
33
☐ (Optional; Check if applicable.)
34
Should any party desire to sell all or any part of its interests under this
agreement, or its rights and interests in the Contract
35
Area, it shall promptly give written notice to the other parties, with full
information concerning its proposed disposition, which
36
shall include the name and address of the prospective transferee (who must be
ready, willing and able to purchase), the purchase
37
price, a legal description sufficient to identify the property, and all other
terms of the offer.  The other parties shall then have an
38
optional prior right, for a period of ten (10) days after the notice is
delivered, to purchase for the stated consideration on the
38
same terms and conditions the interest which the other party proposes to sell;
and, if this optional right is exercised, the
40
purchasing parties shall share the purchased interest in the proportions that
the interest of each bears to the total interest of all
41
purchasing parties.  However, there shall be no preferential right to purchase
in those cases where any party wishes to mortgage
42
its interests, or to transfer title to its interests to its mortgagee in lieu of
or pursuant to foreclosure of a mortgage of its interests,
43
or to dispose of its interests by merger, reorganization, consolidation, or by
sale of all or substantially all of its Oil and Gas assets
44
to any party, or by transfer of its interests to a subsidiary or parent company
or to a subsidiary of a parent company, or to any
45
company in which such party owns a majority of the stock.
46
ARTICLE IX.
47
INTERNAL REVENUE CODE ELECTION
48
If, for federal income tax purposes, this agreement and the operations hereunder
are regarded as a partnership, and if the
49
parties have not otherwise agreed to form a tax partnership pursuant to Exhibit
"G" or other agreement between them, each
50
party thereby affected elects to be excluded from the application of all of the
provisions of Subchapter "K," Chapter 1, Subtitle
51
"A," of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and
authorized by Section 761 of the Code and
52
the regulations promulgated thereunder.  Operator is authorized and directed to
execute on behalf of each party hereby affected
53
such evidence of this election as may be required by the Secretary of the
Treasury of the United States or the Federal Internal
54
Revenue Service, including specifically, but not by way of limitation, all of
the returns, statements, and the data required by
55
Treasury Regulation §1.761.   Should there be any requirement that each party
hereby affected give further evidence of this
56
election, each such party shall execute such documents and furnish such other
evidence as may be required by the Federal Internal
57
Revenue Service or as may be necessary to evidence this election.  No such party
shall give any notices or take any other action
58
inconsistent with the election made hereby.  If any present or future income tax
laws of the state or states in which the Contract
59
Area is located or any future income tax laws of the United States contain
provisions similar to those in Subchapter "K," Chapter
60
1, Subtitle "A," of the Code, under which an election similar to that provided
by Section 761 of the Code is permitted, each party
61
hereby affected shall make such election as may be permitted or required by such
laws.  In making the foregoing election, each
62
such party states that the income derived by such party from operations
hereunder can be adequately determined without the
63
computation of partnership taxable income.
64
ARTICLE X.
65
CLAIMS AND LAWSUITS
66
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure
67
does not exceed Fifty thousand Dollars ($ 50,000.00) and if the payment is in
complete settlement
68
of such claim or suit.  If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over
69
the further handling of the claim or suit, unless such authority is delegated to
Operator.  All costs and expenses of handling settling,
70
or otherwise discharging such claim or suit shall be a the joint expense of the
parties participating in the operation from which the
71
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
72
hereunder over which such individual has no control because of the rights given
Operator by this agreement, such party shall
73
immediately notify all other parties, and the claim or suit shall be treated as
any other claim or suit involving operations hereunder. 74
74
 

 
 
15

--------------------------------------------------------------------------------

A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
 
1
ARTICLE XI.
2
FORCE MAJEURE
3
If any party is rendered unable, wholly or in part, by force majeure to carry
out its obligations under this agreement, other
4
than the obligation to indemnify or make money payments or furnish security,
that party shall give to all other parties
5
prompt written notice of the force majeure with reasonably full particulars
concerning it; thereupon, the obligations of the
6
party giving the notice, so far as they are affected by the force majeure, shall
be suspended during, but no longer than, the
7
continuance of the force majeure.  The term "force majeure," as here employed,
shall mean an act of God, strike, lockout, or
8
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightening, fire, storm, flood or other act of
9
nature, explosion, governmental action, governmental delay, restraint or
inaction, unavailability of equipment, and any other
10
cause, whether of the kind specifically enumerated above or otherwise, which is
not reasonably within the control of the party
11
claiming suspension.
12
The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The
13
requirement that any force majeure shall be remedied with all reasonable
dispatch shall not require the settlement of strikes,
14
lockouts, or other labor difficulty by the party involved, contrary to its
wishes; how all such difficulties shall be handled shall
15
be entirely within the discretion of the party concerned.
16
ARTICLE XII.
17
NOTICES
18
All  notices  authorized  or  required  between  the  parties  by any of  the 
provisions  of  this  agreement,  unless  otherwise
19
specifically provided, shall be in writing and delivered in person or by United
States mail, courier service, telegram, telex,
20
telecopier or any other form of facsimile, postage or charges prepaid, and
addressed to such parties at the addresses listed on
21
Exhibit "A."  All telephone or oral notices permitted by this agreement shall be
confirmed immediately thereafter by written
22
notice.  The originating notice given under any provision hereof shall be deemed
delivered only when received by the party to
23
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date
24
the originating notice is received.  "Receipt" for purposes of this agreement
with respect to written notice delivered hereunder
25
shall be actual delivery of the notice to the address of the party to be
notified specified in accordance with this agreement, or
26
to the telecopy, facsimile or telex machine of such party.  The second or any
responsive notice shall be deemed delivered when
27
deposited in the United States mail or at the office of the courier or telegraph
service, or upon transmittal by telex, telecopy
28
or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or
29 
48 hours, such response shall be given orally or by telephone, telex, telecopy
or other facsimile within such period. Each party
30
shall have the right to change its address at any time, and from time to time,
by giving written notice thereof to all other
31
parties.  If a party is not available to receive notice orally or by telephone
when a party attempts to deliver a notice required
32
to be delivered within 24 or 48 hours, the notice may be delivered in writing by
any other method specified herein and shall
33
be deemed delivered in the same manner provided above for any responsive notice.
34
ARTICLE XIII.
35
TERM OF AGREEMENT
36
This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject
37
hereto for the period of time selected below; provided, however, no party hereto
shall ever be construed as having any right, title
38
or interest in or to any Lease or Oil and Gas Interest contributed by any other
party beyond the term of this agreement.
39
☐ Option No. 1: So long as any of the Oil and Gas Leases subject to this
agreement remain or are continued in
40
force as to any part of the Contract Area, whether by production, extension,
renewal or otherwise.
41
☑ Option No. 2: In the event the well described in Article VI.A., or any
subsequent well drilled under any provision
42
of this agreement, results in the Completion of a well as a well capable of
production of Oil and/or Gas in paying
43
quantities, this agreement shall continue in force so long as any such well is
capable of production, and for an
44
additional  period  of     90     days  thereafter;  provided,  however,  if, 
prior  to  the  expiration  of  such
45
additional period, one or more of the parties hereto are engaged in drilling,
Reworking, Deepening, Sidetracking,
46
Plugging Back, testing or attempting to Complete or Re-complete a well or wells
hereunder, this agreement shall
47
continue  in  force  until  such  operations  have  been  completed  and  if 
production  results  therefrom,  this  agreement
48
shall continue in force as provided herein.  In the event the well described in
Article VI.A., or any subsequent well
49
drilled  hereunder,  results  in  a  dry  hole,  and  no  other  well  is 
capable  of  producing  Oil  and/or  Gas  from  the
50
Contract  Area,  this  agreement  shall  terminate  unless  drilling, 
Deepening,  Sidetracking,  Completing,  Re-
51
completing, Plugging Back or Reworking operations are commenced within 
 180    days from the
52
date of abandonment of said well.  "Abandonment" for such purposes shall mean
either (i) a decision by all parties
53
not  to  conduct  any  further  operations  on  the  well  or  (ii)  the 
elapse  of  180  days  from  the  conduct  of  any
54
operations on the well, whichever first occurs.
55
The termination of this agreement shall not relieve any party hereto from any
expense, liability or other obligation or any
56
remedy therefor which has accrued or attached prior to the date of such
termination.
57
Upon termination of this agreement and the satisfaction of all obligations
hereunder, in the event a memorandum of this
58
Operating Agreement has been filed of record, Operator is authorized to file of
record in all necessary recording offices a
59
notice of termination, and each party hereto agrees to execute such a notice of
termination as to Operator's interest, upon
60
request of Operator, if Operator has satisfied all its financial obligations.
61
ARTICLE XIV.
62
COMPLIANCE WITH LAWS AND REGULATIONS
63
A. Laws, Regulations and Orders:
64
This agreement shall be subject to the applicable laws of the state in which the
Contract Area is located, to the valid rules,
65
regulations,  and  orders  of  any  duly  constituted  regulatory  body  of 
said  state;  and  to  all  other  applicable  federal,  state,
66
and local laws, ordinances, rules, regulations and orders.
67
B. Governing Law:
68
This  agreement  and  all  matters  pertaining  hereto,  including  but  not 
limited  to  matters  of  performance,  non-
69
performance,  breach,  remedies, procedures,  rights,  duties, and
interpretation or  construction,  shall  be  governed and
70
determined by the law of the state in which the Contract Area is located.  If
the Contract Area is in two or more states,
71
the law of the state of   Colorado shall govern.
72
C. Regulatory Agencies:
73
Nothing herein contained shall grant, or be construed to grant, Operator the
right or authority to waive or release any
74
rights, privileges, or obligations which Non-Operators may have under federal or
state laws or under rules, regulations or

 
 
16

--------------------------------------------------------------------------------

A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
 
1
orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or
2
production of wells, on tracts offsetting or adjacent to the Contract Area.
3
With respect to the operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages,
4
injuries, claims and causes of action arising out of, incident to or resulting
directly or indirectly from Operator's interpretation
5
or application of rules, rulings, regulations or orders of the Department of
Energy or Federal Energy Regulatory Commission
6
or predecessor or successor agencies to the extent such interpretation or
application was made in good faith and does not
7
constitute  gross  negligence.   Each  Non-Operator  further  agrees  to 
reimburse  Operator  for  such  Non-Operator's  share  of
8
production or any refund, fine, levy or other governmental sanction that
Operator may be required to pay as a result of such
9
an incorrect interpretation or application, together with interest and penalties
thereon owing by Operator as a result of such
10 
incorrect interpretation or application.
11
ARTICLE XV.
12
MISCELLANEOUS
13
A. Execution:
14
This  agreement  shall  be  binding  upon  each  Non-Operator  when  this 
agreement  or  a  counterpart  thereof  has  been
15
executed by such Non-Operator and Operator notwithstanding that this agreement
is not then or thereafter executed by all of
16
the parties to which it is tendered or which are listed on Exhibit "A" as owning
an interest in the Contract Area or which
17
own, in fact, an interest in the Contract Area.   Operator may, however, by
written notice to all Non-Operators who have
18
become bound by this agreement as aforesaid, given at any time prior to the
actual spud date of the Initial Well but in no
19
event later than five days prior to the date specified in Article VI.A. for
commencement of the Initial Well, terminate this
20
agreement  if Operator in its sole discretion  determines that there is
insufficient participation to justify commencement of
21
drilling operations.  In the event of such a termination by Operator, all
further obligations of the parties hereunder shall cease
22
as  of  such  termination.  In  the  event  any  Non-Operator  has  advanced 
or  prepaid  any  share  of  drilling  or  other  costs
23
hereunder, all sums so advanced shall be returned to such Non-Operator without
interest.In the event Operator proceeds
24
with drilling operations for the Initial Well without the execution hereof by
all persons listed on Exhibit "A" as having a
25
current  working  interest  in  such  well,  Operator  shall  indemnify
Non-Operators  with  respect  to all costs  incurred  for  the
26
Initial Well which would have been charged to such person under this agreement
if such person had executed the same and
27
Operator shall receive all revenues which would have been received by such
person under this agreement if such person had
28
executed the same.
29
B. Successors and Assigns:
30
This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs,
31
devisees, legal representatives, successors and  assigns, and  the terms hereof
shall be deemed  to  run  with the Leases  or
32
Interests included within the Contract Area.
33
C. Counterparts:
34
This instrument may be executed in any number of counterparts, each of which
shall be considered an original for all
35
purposes.
36
D. Severability:
37
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws,
38
this agreement shall not be severable, but rather must be assumed or rejected in
its entirety, and the failure of any party to
39
this agreement to comply with all of its financial obligations provided herein
shall be a material default.
40
ARTICLE XVI.
41
OTHER PROVISIONS

42
43
SEE ATTACHED PAGE 17

43
44
45
46
47
48
49
50
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
 
 
17

--------------------------------------------------------------------------------

A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
 
1
IN WITNESS WHEREOF, this agreement shall be effective as of the _________   day
of _____________    ,
2
 ________.
3
_____________________, who has prepared and circulated this form for execution,
represents and warrants that the form was printed from and, with the
exception(s) listed below, is identical to the AAPL Form 610-1989 Model Form
4
Operating Agreement, as published in computerized form by Forms On-A-Disk, Inc.
No changes, alterations, or modifications, other than those made by
strikethrough and/or insertion and that are clearly recognizable as changes
in Articles
5
, have been made to the form.

 
6
ATTEST OR WITNESS:
 
 
OPERATOR
 
7
 
 
 
 
PETROSHARE CORP.
 
 
8
/s/ Fredrick J. Witsell
 
 
By:
 
 
9
Secretary
 
 
 
 
 
10
 
 
 
Type or print name
 
11
 
 
 
Title
 
12
 
 
 
 
Date
 
13
 
 
 
Tax ID or S.S. No.
 
 
14
 
 
 
 
 
 
 
 
 
15
NON-OPERATORS
16
 
 
 
 
 
17
 
 
 
Providence Energy Corp.
 
 
 
 
 
 
By:
 
 
18
 
 
 
Jim Sinclair
 
19
 
 
 
Type or print name
 
20
 
 
 
Title
COO
21
 
 
 
Date
 
22
 
 
 
Tax ID or S.S. No.
 
 
23
 
 
 
 
 
 
 
 
 
24
 
 
 
.
25
 
 
 
 
 
 
 
 
By:
 
 
26
 
 
 
 
 
 
27
 
 
 
Type or print name
 
28
 
 
 
 
Title
 
 
29
 
 
 
Date
 
30
 
 
 
Tax ID or S.S. No.
 
 
31
 
 
 
 
 
 
 
 
 
32
 
 
 
 
 
 
 
 
 
 
 
 
 
By:
 
 
33
 
 
 
 
 
 
34
 
 
 
Type or print name
 
35
 
 
 
 
Title
 
36
 
 
 
Date
 
37
 
 
 
Tax ID or S.S. No.
 
 
 
 
 
 

 
 
 
18

--------------------------------------------------------------------------------

 
A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
1
ACKNOWLEDGMENTS
2
Note: The following forms of acknowledgment are the short forms approved by the
Uniform Law on Notarial Acts.
3
The validity and effect of these forms in any state will depend upon the
statutes of that state.
4
 
5
Individual acknowledgment:
6
State of                               )
7
State of _______________ ) ss.
8
County of                           )
9
This instrument was acknowledged before me on
10
                     ,              by
11
 
12
(Seal, if any) ___ _                              ____
13
NOTARY
PUBLIC                                                                               
Title (and Rank) Notary Public
14
STATE OF                       
                                                                      My
commission expires:
15
NOTARY ID                            / MY COMMISSION EXPIRES
16
Acknowledgment in representative capacity:
17
State of                                )
18
State of _______________ ) ss.
19
County of                             )
20
This instrument was acknowledged before me on
21
                                       by                                     as
22
                        of ________________________
23
_________ (Seal, if any) __________________________________________           
_ ___________________________
24
_________ (Seal, if any) ____________________________________Title (and Rank)
___________________________
25
_________ (Seal, if any) ____________________________________My commission
expires:  ______________
26
 
27
NOTARY PUBLIC, STATE OF  ______________
28
 
29
 
30
MY COMMISSION EXPIRES ______________

31
32
33
34
35
36
37
 
 
 
19

--------------------------------------------------------------------------------

ARTICLE XVI. OTHER PROVISIONS

Notwithstanding the foregoing provisions:

A.
When a well which has been authorized under the terms of this Agreement as a
vertical well shall have been drilled to the objectives authorized in the AFE
("authorized depthn), and all tests have been comleted and the results thereof
furnished to the participating parties, and after the Operator has attempted in
good faith to reach a mutual agreement with Non-Operator(s) regarding further
operations, but sch parties cannot agree upon the sequence and timing of further
operations regarding said well, the following proposals shall control in the
order enumerated hereafter: (1) a proposal to do additional logging, coring, or
testing; (2) a proposal to attempt to complete the well at the authorized depth
in the manner set forth in the AFE (i.e., in accordance with the casing,
stimulation and other completion programs as set forth in the AFE); (3) a
proposal to attempt to complete the well at the authorized depth in a manner
different than as set forth in the AFE; (4) a proposal to plug back and attempt
to complete the well at a depth shallower than the authorized depth, with
priority given to objectives in ascending order up the hole; (5) a proposal to
drill the well to a depth below the authorized depth, with priority given to
objectives in descending order; (6) a proposal to sidetrack the well to a new
target objective for a vertical or deviated hole, with priority given first in
ascending order to targets above the authorized depth, and then in descending
order to targets below the authorized depth; and (7) a proposal to drill a
horizontal well, with priority given first to a lateral drain hole at the
authorized depth, and then to objectives in ascending order above the authorized
depth, and then to objectives in descending order below the authorized depth.

When a well which has been authorized under the terms of this Agreement as a
horizontal well shall have been drilled to the authorized depth, and all tests
have been completed and the results thereof furnished to the participating
parties, and such parties cannot agree upon the sequence and timing of further
operations regarding said well, the following proposals shall control in the
order enumerated hereafter: (1) a proposal to do additional logging, coring, or
testing; (2) a proposal to attempt to complete the well at the authorized depth
in the manner set forth in the AFE (i.e. , in accordance with casing,
stimulation and other completion programs set forth in the AFE); (3) a proposal
to attempt to complete the well at the authorized depth in a manner different
than as set forth in the AFE; (4) a proposal to extend the length of the lateral
drain hole for a specified number of feet in the direction it is drilling, with
priority given to the shortest additional length proposed by any of the
participating parties; (5) a proposal to drill a new lateral drain hole in a
different direction at the authorized depth; (6) a proposal to drill a new
lateral drain hole at a different depth, with priority given in ascending order
to objectives above the authorized depth, and then in descending order to
objectives below the authorized depth; (7) a proposal to plug back and attempt
to complete the well at a depth shallower than the authorized depth, with
priority given to objectives in ascending order up the hole; (8) a proposal to
deepen the well below the authorized depth; and (9) a proposal to sidetrack the
well to a new target objective, with priority given first in ascending order to
objectives above the authorized depth, and then in descending order to
objectives below the authorized depth.

In a horizontal well, the Operator shall have the right to cease drilling at any
time, for any reason, after it has drilled a well to the objective formation and
has drilled laterally for a distance which is at least equal to fifty percent
(50%) of the length of the total horizontal displacement (displacement from true
vertical) proposed for the operation; if in such event the well will be deemed
to be at its "authorized depthh as that term is used in this Agreement.

If at the time the parties are considering a proposed operation, the well is in
such condition, in the Operator's judgment, that a reasonably prudent operator
would not conduct such operation for fear of mechanical difficulties, placing
the hole, equipment or personnel in danger of loss or injury, or fear of loss of
the well for any reason without being able to attempt a completion at the
authorized depth, then the proposal shall be given no priority to any proposed
operation except for plugging and abandoning the well.

B.
In the event any Consenting Party desires to deepen a Non-Consent Well to a
depth below the authorized depth, such party shall give notice thereof,
complying with the requirements of Article Vl.8.1., to all parties (including
Non-Consenting Parties). Thereupon Articles Vl.8.1. and 2. shall apply and all
parties receiving such notice shall have the right to participate or not
participate in the deepening of such well pursuant to said Articles Vl.8.1. and
2 . If a deepening operation is approved pursuant to such provisions, and if any
Non-Consenting Party elects to participate in the deepening operation, such Non­
Consenting Party shall pay or make reimbursement (as the case may be) of the
following costs and expenses:

(i)
If the proposal to deepen is made prior to the completion of such well as a well
capable of producing in paying quantities, such Non-Consenting Party shall pay
(or reimburse Consenting Parties for, as the case may be) that share of costs
and expenses incurred in connection with the drilling of said well from the
surface to the authorized depth which Non-Consenting Party would have paid had
such Non­ Consenting Party agreed to participate therein, plus the
Non-Consenting Party's share of the cost of deepening and of participating in
any further operations on the well in accordance with the other provisions of
this Agreement; provided, however, all costs for testing and completion or
attempted completion of the well incurred by Consenting Parties prior to the
point of actual operations to deepen beyond the authorized depth shall be for
the sole account of Consenting Parties. Notwithstanding the foregoing, if the
Non-Consent well was drilled as a horizontal well, the Non-Consenting Party will
be obligated to pay or reimburse the Consenting

 
17 -A

--------------------------------------------------------------------------------

 Parties only that share of the costs and expenses of drilling the vertical
portion of the well from the surface to the point that the well is deviated from
the vertical.

(ii)
If the proposal is made for a Non-Consent Well that has been previously
completed as a well capable of producing in paying quantities. but is no longer
capable of producing in paying Quantities. such Non-Consenting Party shall pay
(or reimburse Consenting Parties for. as the case may be) its proportionate
share of all costs of drilling, completing, and equipping said well from the
surface to the authorized depth. calculated in the manner provided in paragraph
(i) above, less those costs recouped by the Consenting Parties from the sale of
production from the well. The Non-Consenting Party shall also pay its
proportionate share of all costs of re­ entering said well. The Non-Consenting
Parties' proportionate part (based on the percentage of such well Non-Consenting
Party would have owned had it previously participated in such Non-Consent Well)
of the costs of salvable materials and equipment remaining in the hole and
salvable surface equipment used in connection with such well shall be determined
in accordance with Exhibit "C". If the Consenting Parties have recouped the cost
of drilling, completing, and equipping the well at the time such deepening
operation is conducted, then a Non-Consenting Party may participate in the
deepening of the well with no payment for costs incurred prior to re-entering
the well for deepening.  Notwithstanding the foregoing, if the Non-Consent well
was drilled as a horizontal well. the Non-Consenting Party will be obligated to
pay or reimburse the Consenting Parties only that share of the costs and
expenses of drilling the vertical portion of the well from the surface to the
point that the well is deviated from the vertical.

C.
Gas production attributable to any Non-Consenting Party's relinquished interest
which was committed to a gas sales contract prior to the date of the
relinquishment shall, upon such party's election, be sold to its purchaser, if
the purchaser elects to take such production under the terms of its existing gas
sales contract. Such Non-Consenting Party shall direct its purchaser to remit
the proceeds received from such sale directly to the Consenting Parties until
the amounts provided in Article VI.B.2 are recovered from the Non-Consenting
Party's relinquished interest. If such Non-Consenting Party has not contracted
for sale of its gas at the time such gas is available for delivery, or does not
elect to have its gas delivered to its purchaser as provided above, the
Consenting Party shall be entitled to receive and sell such Non-Consenting
Party's share of gas during the recoupment period.

D.
If operations (including a completion attempt) are necessary to maintain lease
acreage which would otherwise expire under the terms of the lease or leases
covering such acreage. or are required as a result of a demand for drilling by a
lessor, or are necessary to earn leasehold interests or acreage under a farmout
or other exploration agreement. the Non-Consent provision shall be changed from
that set forth in Article VI to require a non-reversionary assignment of all
rights, title. and interest by the party or parties not participating in such
operations as to that portion of the acreage (but not any mineral interests
owned by a party hereto except to the extent of the lessee's interest under a
lease effected under Article Ill.A hereof) and/or leasehold interest which would
otherwise have been lost or not earned without such operations. The provisions
of Article VI shall. however. continue to apply to any portion of the Contract
Area which is not so jeopardized or not to be earned and which is within the
same drilling, production or proration unit. The interests of the parties in
said unit shall be adjusted on a surface acreage basis after recovery by the
Consenting Parties of the costs to be recouped pursuant to Articles VI.B (2) (a)
and (b) and/or VII.D (I), as applicable, with respect to the Non-Consenting
Party's interest in the unit subject thereto, and, for avoidance of doubt, the
reversion as to such interests not in jeopardy or not to be earned shall occur
at the same point in time as such reversion would have occurred absent the
forfeiture and assignment. The leasehold interests and oil and gas interests so
required to be forfeited and assigned (and the unit, should it contain both
forfeiture and reversionary interests) to the Consenting Parties by the
Non-Consenting Parties shall no longer be subject to this agreement but shall be
subject to an operating agreement) identical to this agreement changed only to
reflect the names and new interests of the parties. If operations are proposed
on a lease, or on lands pooled therewith, within the last six (6) months of the
primary term of a lease not otherwise maintained by other operations or
production, such proposed operations will be considered as operations necessary
to maintain the lease.

E.
If the parties hereto into an agreement between themselves and/or with any third
party covering drilling and/or operations on the Contract Area or on other land
and leases which are pooled or unitized therewith. then such operating agreement
shall supersede this Agreement as to the rights and obligations of the parries
with respect to such land and operations. During the term of such other
operating agreement, this Agreement shall continue to govern the rights and
obligations of the parties as to the balance of the land and depths covered by
this Agreement. At such time. if ever, that such other operating agreement shall
terminate, or any portion of the Contract Area is released therefrom, then this
Agreement shall again become effective as to such land and depths, it being the
intent of the parties that there shall never be a time during the term of this
Agreement when a portion of the Contract Area is not subject to an operating
agreement between the parties hereto.

F.
In the event it is evident in any party's reasonable judgment that AFE overruns
of more than ten percent (10%) of the total AFE for such operations are likely
to occur prior to the completion of the approved operations. then such party
shall notify the other parties and Operator shall immediately furnish to
Non-Operators a revised a AFE for approval of the parties. All parties who wish
to consent to the revised AFE shall notify Operator of such fact within
forty-eight (48) hours after receipt of the revised AFE and Operator shall
advise the consenting parties of the total interest of parties approving such
AFE and its recommendation as to whether the consenting parties should proceed
with the operation as proposed. Each consenting party, within forty-eight (48)
hours inclusive of Saturday. Sunday and legal holidays after eceipt of such
notice, shall advise the proposing party of its desire to {a) limit
participation to such party's interest as shown on Exhibit "A" or (b) carry its
proportionate part of non-consenting party's interest and failure to advise the
proposing party shall be deemed an election under (a) or (c) only during the
drilling and completion operations  originally proposed, reduce its percentage
interest so its total expenditures would be equal to the amount committed to the
original AFE.  The proposing party, at its election, may withdraw  such 
proposal if there is insufficient participation and shall promptly notify all
parties of such decision.  Should less than all parties consent to the revised
AFE, and at least one consenting party commences operation under the revised AFE
within forty-eight (48) hours after expiration of the original forty-eight (48)
hour notice period, the non-consenting parties shall be subject to the
non-consent penalties prescribed herein. Provided however, Operator shall have
the responsibility and authority to take any actions deemed necessary to conduct
continuous operations of a well until such time as Operator receives the
required approval mentioned hereinabove.  In this event, a party that does not 
wish  to participate in such operation shall remain liable for its share of such
operation unless and until such time as its interest is assumed by the
participating parties.  In the event no party elects to proceed under any such
revised AFE, Operator shall immediately proceed to abandon the applicable
operation in accordance with the terms set forth herein.

 
17 -B

--------------------------------------------------------------------------------

 

G.
Each Non-Operator will have the right, on an ongoing basis, to participate for
its proportionate share as set out on Exhibit "A" to this Agreement, in the
acquisition or construction of any gathering, processing. or plant facilities
that may be necessary or convenient for the production or transmission of any
gas produced under the terms of this Agreement, in which the Non-Operator has an
interest.

H.
In addition to the terms set forth in Exhibit "C" COPAS Accounting Procedure,
Joint Operations, in the event Operator receives a volume discount or other
price reduction for any operations conducted or for any goods purchased,
Non-Operator shall also be entitled to such discount or reduction.

I.
If at any time after one (1) year after oil and/or gas is found in commercial
quantities on said Contract Area, any Non-Operator, owning at least a
twenty-percent (20%) interest in the unit or having the approval from
thirty-five percent (35%) of the working interest owners in the Contract Area
(including Non-Operator's percent interest). considers the cost of operating the
Contract Area to be excessive and is willing to operate the same for a period of
one (1) year at a cost which is at least ten percent (10%) less than the cost or
operating under the direct control of Operator, such Non-Operator shall deliver
to Operator a written statement detailing the items of expense contributing to
the alleged excessive costs proposing that such Non-Operator assume such
operations, and specifying the proposed economics. Within ten (10) days of such
statement, Operator shall elect in writing delivered to such Non­ Operator to
either (a) surrender operations to the proposing Non-Operator for a period of
one (1) year upon the terms contained in Non-Operator's proposal, or (b) agree
to operate the Contract Area for such period of one (1) year at a cost
consistent with the economics proposed by Non-Operator. If Operator elects to
surrender operations, then such proposing Non-Operator forthwith shall become
Operator for a minimum period on one (1) year as fully as though such
Non-Operator had been herein designated Operator under the terms hereof as
modified by his proposed economics. If the Non-Operator fails to reduce
operating costs by at least ten percent (10%) during such one (1) year period,
operations shall automatically transfer to Operator within thirty (30) days of
Operator's written request and such transfer will be evidenced by filing a
statement with the appropriate state authority.

17 -C

--------------------------------------------------------------------------------

 
EXHIBIT A
 
 
Attached to that certain Operating Agreement dated effective __________________,
_____, 2015, between PetroShare Corp, as Operator, and Providence Energy Corp.,
as Non-Operator.

I.
Oil and Gas Leases Subject to Agreement:

The Oil and Gas Leases more particularly described on Exhibit "A-1" attached
hereto.

II.
Participants and Addresses:

 
 
Expense Interest
 
PetroShare Corp
7200 S. Alton Way, Suite B220
Centennial, CO 80111
Attn: Frederick J. Witsell
(303) 500-1168 Office
(303) 881-2157 Cell
fwitsell@petrosharecorp.com
 
 
50.0000%
 
 
 
 
 
 
Providence Energy Corp.
 
 
50.0000%
 
16400 North Dallas Pkwy., Ste. 400
Dallas, TX 75248
Attn: Jim Sinclair
(214) 522-9131 Office
 
 
 
 
(972) 934-2310 Fax
jsinclair@providence-energy.com
 
 
 
 

 
 
 

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 [image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
Exhibit  “C”
ACCOUNTING PRODECURE
JOINT OPERATIONS
1
 
 
2
Attached to and made part of that certain Operating Agreement
dated                                      , 2015, between PetroShare Corp, as
Operator, and
3
Providence Energy Corp., as Non-Operator.
4
 
 
5
 
 
6
 
 
7
 
 
8
 
I. GENERAL PROVISIONS
9
 
 
10
IF THE PARTIES FAIL TO SELECT EITHER ONE OF COMPETING "ALTERNATIVE'' PROVISIONS,
OR SELECT ALL THE
11
COMPETING "ALTERNATIVE" PROVISIONS, ALTERNATIVE 1 IN EACH SUCH INSTANCE SHALL BE
DEEMED TO HAVE
12
BEEN ADOPTED BY THE PARTIES AS A RESULT OF ANY SUCH OMISSION OR DUPLICATE
NOTATION.
13
 
 
14
IN THE EVENT THAT ANY "OPTIONAL" PROVISION OF THIS ACCOUNTING PROCEDURE IS NOT
ADOPTED BY THE
15
PARTIES TO THE AGREEMENT BY A TYPED, PRINTED OR HANDWRITTEN INDICATION, SUCH
PROVISION SHALL NOT
16
FORM A PART OF THIS ACCOUNTING PROCEDURE, AND NO INFERENCE SHALL BE MADE
CONCERNING THE INTENT
17
OF THE PARTIES IN SUCH EVENT.
18
 
 
19
1.
DEFINITIONS
20
 
 
21
 
All terms used in this Accounting Procedure shall have the following meaning,
unless otherwise expressly defined in the Agreement:
22
 
 
23
 
"Affiliate'' means for a person, another person that controls, is controlled by,
or is under common control with that person. In this
24
 
definition, (a) control means the ownership by one person, directly or
indirectly, of more than fifty percent (50%) of the voting securities
25
 
of a corporation or, for other persons, the equivalent ownership interest (such
as partnership interests), and (b) "person" means an
26
 
individual, corporation, partnership, trust, estate, unincorporated
organization, association, or other legal entity.
27
 
 
28
 
"Agreement" means the operating agreement, farmout agreement, or other contract
between the Parties to which this Accounting
29
 
Procedure is attached.
30
 
 
31
 
"Controllable Material" means Material that, at the time of acquisition or
disposition by the Joint Account, as applicable, is so classified
32
 
in the Material Classification Manual most recently recommended by the Council
of Petroleum Accountants Societies (COPAS).
33
 
 
34
 
"Equalized Freight" means the procedure of charging transportation  cost to the
Joint Account based upon the distance from the nearest
35
 
Railway Receiving Point to the property.
36
 
 
37
 
"Excluded Amount" means a specified excluded trucking amount most recently
recommended by COPAS.
38
 
 
39
 
"Field Office" means a structure, or portion of a structure, whether a temporary
or permanent installation, the primary function of which is
40
 
to directly serve daily operation and maintenance activities of the Joint
Property and which serves as a staging area for directly chargeable
41
 
field personnel.
42
 
 
43
 
"First Level Supervision" means those employees whose primary function in Joint
Operations is the direct oversight of the Operator's
44
 
field employees and/or contract labor directly employed  On-site in a field
operating  capacity.  First Level Supervision functions may
45
 
include, but are not limited to:
46
 
 
47
 
▪  Responsibility for field employees and contract labor engaged in activities
that can include field operations, maintenance,
48
 
construction, well remedial work, equipment movement and drilling
49
 
▪  Responsibility for day-to-day direct oversight of rig operations
50
 
▪  Responsibility for day-to-day direct oversight of construction operations
51
 
▪  Coordination of job priorities and approval of work procedures
52
 
▪  Responsibility for optimal resource utilization (equipment, Materials,
personnel)
53
 
▪  Responsibility for meeting production and field operating expense targets
54
 
▪  Representation of the Parties in local matters involving community, vendors,
regulatory agents and landowners, as an incidental
55
 
part of the supervisor’s operating responsibilities
56
 
▪  Responsibility for all emergency responses with field staff
57
 
▪  Responsibility for implementing safety and environmental practices
58
 
▪  Responsibility for field adherence to company policy
59
 
▪  Responsibility for employment decisions and performance appraisals for field
personnel
60
 
▪  Oversight of sub-groups for field functions such as electrical, safety,
environmental, telecommunications, which may have group
61
 
or team leaders.
62
 
 
63
 
"Joint Account" means the account showing the charges paid and credits received
in the conduct of the Joint Operations that are to be
64
 
shared by the Parties, but does not include proceeds attributable to
hydrocarbons and by-products produced under the Agreement.
65
 
 
66
 
"Joint Operations" means all operations necessary or proper for the exploration,
appraisal, development, production, protection, maintenance, repair,
abandonment, and restoration of the Joint Property.

 
 
 
1

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
1
 
 
2
 
3
 
4
 
 
5
 
 
6
 
 
7
 
 
8
 
 
9
 
 
10
 
11
 
12
 
13
 
 
14
 
15
 
16
 
17
 
18
 
 
19
 
 
20
 
 
21
 
 
22
 
 
23
 
 
24
 
 
25
 
 
26
 
 
27
 
 
28
 
 
29
 
 
30
 
 
31
 
 
32
 
 
33
 
 
34
 
 
35
 
 
36
 
 
37
 
 
38
 
 
39
 
 
40
 
 
41
 
 
42
 
 
43
 
 
44
 
 
45
 
 
46
 
 
47
 
 
48
 
 
49
 
 
50
 
 
51
 
 
52
 
 
53
 
 
54
 
 
55
 
 
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57
 
 
58
 
 
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61
 
 
62
 
 
63
 
 
64
 
 
65
 
 
66
 
 

 
 
 
2

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
1
 
"Joint Property" means the real and personal property subject to the Agreement.
2
 
 
3
 
"Laws" means any laws, rules, regulations, decrees, and orders of the United
States of America or any state thereof and all other
4
 
goverenental bodies, agencies, and other authorities having jurisdiction over or
affecting the provisions contained in or the transactions
5
 
contemplated by the Agreement or the Parties and their operations, whether such
laws now exist or are hereafter amended, enacted,
6
 
promulgated or issued.
7
 
 
8
 
"Material" means personal property, equipment, supplies, or consumables acquired
or held for use by the Joint Property.
9
 
 
10
 
"Non-Operators" means the Parties to the Agreement other than the Operator.
11
 
 
12
 
"Offshore Facilities" means platforms, surface and subsea development and
production systems, and other support systems such as oil and
13
 
gas handling facilities, living quarters, offices, shops, cranes, electrical
supply equipment and systems, fuel and water storage and piping,
14
 
heliport, marine docking installations, communication facilities, navigation
aids, and other similar facilities necessary in the conduct of
15
 
offshore operations, all of which are located offshore.
16
 
 
17
 
"Off-site" means any location that is not considered On-site as defined in this
Accounting Procedure.
18
 
 
19
 
"On-site" means on the Joint Property when in direct conduct of Joint
Operations. The term "On-site" shall also include that portion of
20
 
Offshore Facilities, Shore Base Facilities, fabrication yards, and staging areas
from which Joint Operations are conducted, or other
21
 
facilities that directly control equipment on the Joint Property, regardless of
whether such facilities are owned by the Joint Account.
22
 
 
23
 
"Operator" means the Party designated pursuant to the Agreement to conduct the
Joint Operations.
24
 
 
25
 
"Parties" means legal entities signatory to the Agreement or their successors
and assigns. Parties shall be referred to individually as
26
 
"Party."
27
 
 
28
 
"Participating Interest" means the percentage of the costs and risks of
conducting an operation under the Agreement that a Party agrees,
29
 
or is otherwise obligated, to pay and bear.
30
 
 
31
 
"Participating Party" means a Party that approves a proposed operation or
otherwise agrees, or becomes liable, to pay and bear a share of
32
 
the costs and risks of conducting an operation under the Agreement.
33
 
 
34
 
"Personal Expenses" means reimbursed costs for travel and temporary living
expenses.
35
 
 
36
 
"Railway Receiving Point" means the railhead nearest the Joint Property for
which freight rates are published, even though an actual
37
 
railhead may not exist.
38
 
 
39
 
"Shore Base Facilities" means onshore support facilities that during Joint
Operations provide such services to the Joint Property as a
40
 
receiving and transshipment point for Materials; debarkation point for drilling
and production personnel and services; communication,
41
 
scheduling and dispatching center; and other associated functions serving the
Joint Property.
42
 
 
43
 
"Supply Store" means a recognized source or common stock point for a given
Material item.
44
 
 
45
 
"Technical Services" means services providing specific engineering, geoscience,
or other professional skills, such as those performed by
46
 
engineers, geologists, geophysicists, and technicians, required to handle
specific operating conditions and problems for the benefit of Joint
47
 
Operations; provided, however, Technical Services shall not include those
functions specifically identified as overhead under the second
48
 
paragraph of the introduction of Section III (Overhead). Technical Services may
be provided by the Operator, Operator's Affiliate, Non-
49
 
Operator, Non-Operator Affiliates, and/or third parties.
50
 
 
51
2.
STATEMENTS AND BILLINGS
52
 
 
53
 
The Operator shall bill Non-Operators on or before the last day of the month for
their proportionate share of the Joint Account for the
54
 
preceding month. Such bills shall be accompanied by statements that identify the
AFE (authority for expenditure), lease or facility, and all
55
 
charges and credits summarized by appropriate categories of investment and
expense. Controllable Material shall be separately identified
56
 
and fully described in detail, or at the Operator's option, Controllable
Material may be summarized by major Material classifications.
57
 
Intangible drilling costs, audit adjustments, and unusual charges and credits
shall be separately and clearly identified.
58
 
 
59
 
The Operator may make available to Non-Operators any statements and bills
required under Section I.2 and/or Section I.3.A (Advances
60
 
and Payments by the Parties) via email, electronic data interchange, internet
websites or other equivalent electronic media in lieu of paper
61
 
copies. The Operator shall provide the Non-Operators instructions and any
necessary information to access and receive the statements and
62
 
bills within the timeframes specified herein. A statement or billing shall be
deemed as delivered twenty-four (24) hours (exclusive of
63
 
weekends and holidays) after the Operator notifies the Non-Operator that the
statement or billing is available on the website and/or sent via
64
 
email or electronic data interchange transmission. Each Non-Operator
individually shall elect to receive statements and billings
65
 
electronically, if available from the Operator, or request paper copies. Such
election may be changed upon thirty (30) days prior written
66
 
notice to the Operator.

 
 
 
 
3

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
1
3.
ADVANCES AND PAYMENTS BY THE PARTIES
2
 
 
3
 
A.   Unless otherwise provided for in the Agreement, the Operator may require
the Non-Operators to advance their share of the estimated
4
 
cash outlay for the succeeding month's operations within fifteen (15) days after
receipt of the advance request or by the first day of
5
 
the month for which the advance is required, whichever is later. The Operator
shall adjust each monthly billing to reflect advances
6
 
received from the Non-Operators for such month. If a refund is due, the Operator
shall apply the amount to be refunded to the
7
 
subsequent month's billing or advance, unless the Non-Operator sends the
Operator a written request for a cash refund. The Operator
8
 
shall remit the refund to the Non-Operator within fifteen (15) days of receipt
of such written request.
9
 
 
10
 
B.    Except as provided below, each Party shall pay its proportionate share of
all bills in full within fifteen (15) days of receipt date. If
11
 
payment is not made within such time, the unpaid balance shall bear interest
compounded monthly at the prime rate published by the
12
 
Wall Street Journal on the first day of each month the payment is delinquent
plus three percent (3%), per annum, or the maximum
13
 
contract rate permitted by the applicable usury Laws governing the Joint
Property, whichever is the lesser, plus attorney's fees, court
14
 
costs, and other costs in connection with the collection of unpaid amounts. If
the Wall Street Journal ceases to be published or
15
 
discontinues publishing a prime rate, the unpaid balance shall bear interest
compounded monthly at the prime rate published by the
16
 
Federal Reserve plus three percent (3%), per annum. Interest shall begin
accruing on the first day of the month in which the payment
17
 
was due. Payment shall not be reduced or delayed as a result of inquiries or
anticipated credits unless the Operator has agreed.
18
 
Notwithstanding the foregoing, the Non-Operator may reduce payment, provided it
furnishes documentation and explanation to the
19
 
Operator at the time payment is made, to the extent such reduction is caused by:
20
 
 
21
 
(1)   being billed at an incorrect working interest or Participating Interest
that is higher than such Non-Operator's actual working
22
 
interest or Participating Interest, as applicable; or
23
 
(2)   being billed for a project or AFE requiring approval of the Parties under
the Agreement that the Non-Operator has not approved
24
 
or is not otherwise obligated to pay under the Agreement; or
25
 
(3)   being billed for a property in which the Non-Operator no longer owns a
working interest, provided the Non-Operator has
26
 
furnished the Operator a copy of the recorded assignment or letter in-lieu.
Notwithstanding the foregoing, the Non-Operator
27
 
shall remain responsible for paying bills attributable to the interest it sold
or transferred for any bills rendered during the thirty
28
 
(30) day period following the Operator's receipt of such written notice; or
29
 
(4)   charges outside the adjustment period, as provided in Section I.4
(Adjustments).
30
 
 
31
4.
ADJUSTMENTS
32
 
 
33
 
A.    Payment of any such bills shall not prejudice the right of any Party to
protest or question the correctness thereof; however, all bills
34
 
and statements, including payout statements, rendered during any calendar year
shall conclusively be presumed to be true and correct,
35
 
with respect only to expenditures, after twenty-four (24) months following the
end of any such calendar year, unless within said
36
 
period a Party takes specific detailed written exception thereto making a claim
for adjustment. The Operator shall provide a response
37
 
to all written exceptions, whether or not contained in an audit report, within
the time periods prescribed in Section I.5 (Expenditure
38
 
Audits).
39
 
 
40
 
B.    All adjustments initiated by the Operator, except those described in items
(1) through (4) of this Section I.4.B, are limited to the
41
 
twenty-four (24) month period following the end of the calendar year in which
the original charge appeared or should have appeared
42
 
on the Operator's Joint Account statement or payout statement. Adjustments that
may be made beyond the twenty-four (24) month
43
 
period are limited to adjustments resulting from the following:
44
 
 
45
 
(1)   a physical inventory of Controllable Material as provided for in Section V
(Inventories of Controllable Material), or
46
 
(2)   an offsetting entry (whether in whole or in part) that is the direct
result of a specific joint interest audit exception granted by the
47
 
Operator relating to another property, or
48
 
(3)   a government/regulatory audit, or
49
 
(4)   a working interest ownership or Participating Interest adjustment.
50
 
 
51
5.
EXPENDITURE AUDITS
52
 
 
53
 
A.   A Non-Operator, upon written notice to the Operator and all other
Non-Operators, shall have the right to audit the Operator's
54
 
accounts and records relating to the Joint Account within the twenty-four (24)
month period following the end of such calendar year in
55
 
which such bill was rendered; however, conducting an audit shall not extend the
time for the taking of written exception to and the
56
 
adjustment of accounts as provided for in Section I.4 (Adjustments). Any Party
that is subject to payout accounting under the
57
 
Agreement shall have the right to audit the accounts and records of the Party
responsible for preparing the payout statements, or of
58
 
the Party furnishing information to the Party responsible for preparing payout
statements. Audits of payout accounts may include the
59
 
volumes of hydrocarbons produced and saved and proceeds received for such
hydrocarbons as they pertain to payout accounting
60
 
required under the Agreement. Unless otherwise provided in the Agreement, audits
of a payout account shall be conducted within the
61
 
twenty-four (24) month period following the end of the calendar year in which
the payout statement was rendered.
62
 
 
63
 
Where there are two or more Non-Operators, the Non-Operators shall make every
reasonable effort to conduct a joint audit in a
64
 
manner that will result in a minimum of inconvenience to the Operator. The
Operator shall bear no portion of the Non-Operators'
65
 
audit cost incurred under this paragraph unless agreed to by the Operator. The
audits shall not be conducted more than once each year
66
 
without prior approval of the Operator, except upon the resignation or removal
of the Operator, and shall be made at the expense of

 
 
 
 
4

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
1
 
those Non-Operators approving such audit.
2
 
 
3
 
The Non-Operator leading the audit (hereinafter "lead audit company") shall
issue the audit report within ninety (90) days after
4
 
completion of the audit testing and analysis; however, the ninety (90) day time
period shall not extend the twenty-four (24) month
5
 
requirement for taking specific detailed written exception as required in
Section I.4.A (Adjustments) above. All claims shall be
6
 
supported with sufficient documentation.
7
 
 
8
 
A timely filed written exception or audit report containing written exceptions
(hereinafter "written exceptions") shall, with respect to
9
 
the claims made therein, preclude the Operator from asserting a statute of
limitations defense against such claims, and the Operator
10
 
hereby waives its right to assert any statute of limitations defense against
such claims for so long as any Non-Operator continues to
11
 
comply with the deadlines for resolving exceptions provided in this Accounting
Procedure. If the Non-Operators fail to comply with
12
 
the additional deadlines in Section I.5.B or I.5.C, the Operator's waiver of its
rights to assert a statute of limitations defense against
13
 
the claims brought by the Non-Operators shall lapse, and such claims shall then
be subject to the applicable statute of limitations,
14
 
provided that such waiver shall not lapse in the event that the Operator has
failed to comply with the deadlines in Section I.5.B or
15
 
I.5.C.
16
 
 
17
 
B.    The Operator shall provide a written response to all exceptions in an
audit report within one hundred eighty (180) days after Operator
18
 
receives such report. Denied exceptions should be accompanied by a substantive
response. If the Operator fails to provide substantive
19
 
response to an exception within this one hundred eighty (180) day period, the
Operator will owe interest on that exception or portion
20
 
thereof, if ultimately granted, from the date it received the audit report.
Interest shall be calculated using the rate set forth in Section
21
 
I.3.B (Advances and Payments by the Parties).
22
 
 
23
 
C.    The lead audit company shall reply to the Operator's response to an audit
report within ninety (90) days of receipt, and the Operator
24
 
shall reply to the lead audit company's follow-up response within ninety (90)
days of receipt; provided, however, each Non-Operator
25
 
shall have the right to represent itself if it disagrees with the lead audit
company's position or believes the lead audit company is not
26
 
adequately fulfilling its duties. Unless otherwise provided for in Section
I.5.E, if the Operator fails to provide substantive response
27
 
to an exception within this ninety (90) day period, the Operator will owe
interest on that exception or portion thereof, if ultimately
28
 
granted, from the date it received the audit report. Interest shall be
calculated using the rate set forth in Section I.3.B (Advances and
29
 
Payments by the Parties).
30
 
 
31
 
D.    If any Party fails to meet the deadlines in Sections I.5.B or I.5.C or if
any audit issues are outstanding fifteen (15) months after
32
 
Operator receives the audit report, the Operator or any Non-Operator
participating in the audit has the right to call a resolution
33
 
meeting, as set forth in this Section I.5.D or it may invoke the dispute
resolution procedures included in the Agreement, if applicable.
34
 
The meeting will require one month's written notice to the Operator and all
Non-Operators participating in the audit. The meeting
35
 
shall be held at the Operator's office or mutually agreed location, and shall be
attended by representatives of the Parties with
36
 
authority to resolve such outstanding issues. Any Party who fails to attend the
resolution meeting shall be bound by any resolution
37
 
reached at the meeting. The lead audit company will make good faith efforts to
coordinate the response and positions of the
38
 
Non-Operator participants throughout the resolution process; however, each
Non-Operator shall have the right to represent itself.
39
 
Attendees will make good faith efforts to resolve outstanding issues, and each
Party will be required to present substantive information
40
 
supporting its position. A resolution meeting may be held as often as agreed to
by the Parties. Issues unresolved at one meeting may
41
 
be discussed at subsequent meetings until each such issue is resolved.
42
 
 
43
 
If the Agreement contains no dispute resolution procedures and the audit issues
cannot be resolved by negotiation, the dispute shall
44
 
shall choose a mutually acceptable mediator and share the costs of mediation
services equally. The Parties shall each have present
45
 
be submitted to mediation. In such event, promptly following one Party's written
request for mediation, the Parties to the dispute
46
 
at the mediation at least one individual who has the authority to settle the
dispute. The Parties shall make reasonable efforts to
47
 
ensure that the mediation commences within sixty (60) days of the date of the
mediation request. Notwithstanding the above, any
48
 
Party may file a lawsuit or complaint (1) if the Parties are unable after
reasonable efforts, to commence mediation within sixty (60)
49
 
days of the date of the mediation request, (2) for statute of limitations
reasons, or (3) to seek a preliminary injunction or other
50
 
provisional judicial relief, if in its sole judgment an injunction or other
provisional relief is necessary to avoid irreparable damage or
51
 
to preserve the status quo. Despite such action, the Parties shall continue to
try to resolve the dispute by mediation.
52
 
 
53
 
E.    ☐ (Optional Provision- Forfeiture Penalties)
54
 
If the Non-Operators fail to meet the deadline in Section I.5.C, any unresolved
exceptions that were not addressed by the Non­
55
 
Operators within one (1) year following receipt of the last substantive response
of the Operator shall be deemed to have been
56
 
withdrawn by the Non-Operators. If the Operator fails to meet the deadlines
in Section I.5.B or I.5.C, any unresolved exceptions that
57
 
were not addressed by the Operator within one ( 1) year following receipt of the
audit report or receipt of the last substantive response
58
 
of the Non-Operators, whichever is later, shall be deemed to have been granted
by the Operator and adjustments shall be made,
59
 
without interest, to the Joint Account.
60
 
 
61
6.
APPROVAL BY PARTIES
62
 
 
63
 
A.    GENERAL MATTERS
64
 
 
65
 
Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other Sections of this Accounting
66
 
Procedure and if the Agreement to which this Accounting Procedure is attached
contains no contrary provisions in regard thereto, the

 
 
 
 
5

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
 
1
 
Operator shall notify all Non-Operators of the Operator's proposal and the
agreement or approval of a majority in interest of the
2
 
Non-Operators shall be controlling on all Non-Operators.
3
 
 
4
 
This Section I.6.A applies to specific situations of limited duration where a
Party proposes to change the accounting for charges from
5
 
that prescribed in this Accounting Procedure. This provision does not apply to
amendments to this Accounting Procedure, which are
6
 
covered by Section I.6.B.
7
 
 
8
B.
AMENDMENTS
9
 
 
10
 
If the Agreement to which this Accounting Procedure is attached contains no
contrary provisions in regard thereto, this Accounting
11
 
Procedure can be amended by an affirmative vote of    One     (  1  ) or more
Parties, one of which is the Operator,
12
 
having a combined working interest of at least     Seventy Six      percent   (
76 %), which approval shall be binding on all Parties,
13
 
provided, however, approval of at least one (1) Non-Operator shall be required.
14
 
 
15
C.
AFFILIATES
16
 
 
17
 
For the purposes of administering the voting procedures in Section I.6.A and
I.6.B, if Parties to this Agreement are Affiliates of each
18
 
other, then such Affiliates shall be combined and treated as a single Party
having the combined working interest or Participating
19
 
Interest of such Affiliates.
20
 
 
21
 
For the purposes of administering the voting procedures in Section I.6.A, if a
Non-Operator is an Affiliate of the Operator, votes
22
 
under Section I.6.A shall require the majority in interest of the
Non-Operator(s) after excluding the interest of the Operator's
23
 
Affiliate.
24
 
 
25
 
 II. DIRECT CHARGES
26
 
 
27
 
The Operator shall charge the Joint Account with the following items:
28
 
 
29
1.
RENTALS AND ROYALTIES
30
 
 
31
 
Lease rentals and royalties paid by the Operator, on behalf of all Parties, for
the Joint Operations.
32
 
 
33
2.
LABOR
34
 
 
35
 
A.    Salaries and wages, including incentive compensation programs as set forth
in COPAS MFI-37 ("Chargeability of Incentive
36
 
Compensation Programs"), for
37
 
 
38
 
(1)   Operator's field employees directly employed On-site in the conduct of
Joint Operations,
39
 
 
40
 
(2)   Operator's employees directly employed on Shore Base Facilities, Offshore
Facilities, or other facilities serving the Joint
41
 
Property if such costs are not charged under Section II.6 (Equipment and
Facilities Furnished by Operator) or are not a
42
 
function covered under Section III (Overhead),
43
 
 
44
 
(3)   Operator's employees providing First Level Supervision,
45
 
 
46
 
(4)   Operator's employees providing On-site Technical Services for the Joint
Property if such charges are excluded from the
47
 
overhead rates in Section III (Overhead),
48
 
 
49
 
(5)   Operator's employees providing Off-site Technical Services for the Joint
Property if such charges are excluded from the
50
 
overhead rates in Section III (Overhead).
51
 
 
52
 
Charges for the Operator's employees identified in Section II.2.A may be made
based on the employee's actual salaries and wages,
53
 
or in lieu thereof, a day rate representing the Operator's average salaries and
wages of the employee's specific job category.
54
 
 
55
 
Charges for personnel chargeable under this Section II.2.A who are foreign
nationals shall not exceed comparable compensation paid
56
 
to an equivalent U.S. employee pursuant to this Section II.2, unless otherwise
approved by the Parties pursuant to Section
57
 
I.6.A (General Matters).
58
 
 
59
 
B.     Operator's cost of holiday, vacation, sickness, and disability benefits,
and other customary allowances paid to employees whose
60
 
salaries and wages are chargeable to the Joint Account under Section II.2.A,
excluding severance payments or other termination
61
 
allowances. Such costs under this Section II.2.B may be charged on a "when and
as-paid basis" or by "percentage assessment" on the
62
 
amount of salaries and wages chargeable to the Joint Account under Section
II.2.A. If percentage assessment is used, the rate shall
63
 
be based on the Operator's cost experience.
64
 
 
65
 
C.    Expenditures or contributions made pursuant to assessments imposed by
governmental authority that are applicable to costs
66
 
chargeable to the Joint Account under Sections II.2.A and B

 

 
 
6

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS
1
 
D.    Personal Expenses of personnel whose salaries and wages are chargeable to
the Joint Account under Section II.2.A when the
2
 
expenses are incurred in connection with directly chargeable activities.
3
 
 
4
 
E.    Reasonable relocation costs incurred in transferring to the Joint Property
personnel whose salaries and wages are chargeable to the
5
 
Joint Account under Section 11.2.A. Notwithstanding the foregoing, relocation
costs that result from reorganization or merger of a
6
 
Party, or that are for the primary benefit of the Operator, shall not be
chargeable to the Joint Account. Extraordinary relocation
7
 
costs, such as those incurred as a result of transfers from remote locations,
such as Alaska or overseas, shall not be charged to the
8
 
Joint Account unless approved by the Parties pursuant to Section I.6.A (General
Matters).
9
 
 
10
 
F.    Training costs as specified in COPAS MFI-35 ("Charging of Training Costs
to the Joint Account") for personnel whose salaries and
11
 
wages are chargeable under Section II.2.A. This training charge shall include
the wages, salaries, training course cost, and Personal
12
 
Expenses incurred during the training session. The training cost shall be
charged or allocated to the property or properties directly
13
 
benefiting from the training. The cost of the training course shall not exceed
prevailing commercial rates, where such rates are
14
 
available.
15
 
 
16
 
G.   Operator's current cost of established plans for employee benefits, as
described in COPAS MFI-27 ("Employee Benefits Chargeable
17
 
to Joint Operations and Subject to Percentage Limitation"), applicable to the
Operator's labor costs chargeable to the Joint Account
18
 
under Sections II.2.A and B based on the Operator's actual cost not to exceed
the employee benefits limitation percentage most
19
 
recently recommended by COPAS.
20
 
 
21
 
H.    Award payments to employees, in accordance with COPAS MFI-49 ("Awards to
Employees and Contractors") for personnel whose
22
 
salaries and wages are chargeable under Section II.2.A.
23
 
 
24
3.
MATERIAL
25
 
 
26
 
Material purchased or furnished by the Operator for use on the Joint Property in
the conduct of Joint Operations as provided under Section
27
 
IV (Material Purchases, Transfers, and Dispositions). Only such Material shall
be purchased for or transferred to the Joint Property as
28
 
may be required for immediate use or is reasonably practical and consistent with
efficient and economical operations. The accumulation
29
 
of surplus stocks shall be avoided.
30
 
 
31
4.
TRANSPORTATION
32
 
 
33
 
A.   Transportation of the Operator's, Operator's Affiliate's, or contractor's
personnel necessary for Joint Operations.
34
 
 
35
 
B.    Transportation of Material between the Joint Property and another
property, or from the Operator's warehouse or other storage point
36
 
to the Joint Property, shall be charged to the receiving property using one of
the methods listed below. Transportation of Material
37
 
from the Joint Property to the Operator's warehouse or other storage point shall
be paid for by the Joint Property using one of the
38
 
methods listed below:
39
 
 
40
 
(1)   If the actual trucking charge is less than or equal to the Excluded Amount
the Operator may charge actual trucking cost or a
41
 
theoretical  charge from the Railway  Receiving  Point to the Joint
Property.  The basis for the theoretical  charge is the per
42
 
hundred  weight  charge plus  fuel surcharges from the Railway Receiving  Point
to  the Joint Property. The Operator  shall
43
 
consistently  apply the selected alternative.
44
 
 
45
 
(2)   If the actual trucking charge is greater than the Excluded Amount the
Operator shall charge Equalized Freight. Accessorial
46
 
charges such as loading and unloading costs, split pick-up costs, detention,
call out charges, and permit fees shall be charged
47
 
directly to the Joint Property and shall not be included when calculating the
Equalized Freight.
48
 
 
49
5.
SERVICES
50
 
 
51
 
The cost of contract services, equipment, and utilities used in the conduct of
Joint Operations, except for contract services, equipment, and
52
 
utilities covered by Section III (Overhead), or Section II.7 (Affiliates), or
excluded under Section II.9 (Legal Expense). Awards paid to
53
 
contractors shall be chargeable pursuant to COPAS MFl-49 ("Awards to Employees
and Contractors").
54
 
 
55
 
The costs of third party Technical Services are chargeable to the extent
excluded from the overhead rates under Section III (Overhead).
56
 
 
57
6.
EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR
58
 
 
59
 
In the absence of a separately negotiated agreement, equipment and facilities
furnished by the Operator will be charged as follows:
60
 
 
61
 
A.   The Operator  shall charge the Joint Account  for use
of  Operator-owned  equipment  and facilities, including but  not limited to
62
 
production facilities, Shore Base Facilities, Offshore Facilities, and Field
Offices, at rates commensurate with the costs of ownership
63
 
and operation. The cost of Field Offices shall be chargeable to the extent the
Field Offices provide direct service to personnel who
64
 
are chargeable pursuant  to Section II.2.A (Labor). Such rates may include
labor, maintenance,  repairs, other operating expense,
65
 
insurance, taxes, depreciation using straight line depreciation method, and
interest on gross investment less accumulated depreciation
66
 
not to exceed       ten          percent (    10   %) per annum; provided,
however, depreciation shall not be charged when the

 
 
 
 
7

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COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
 
1
 
equipment and facilities investment have been fully depreciated. The rate may
include an element of the estimated cost for
2
 
abandonment, reclamation, and dismantlement. Such rates shall not exceed the
average commercial rates currently prevailing in the
3
 
immediate area of the Joint Property.
4
 
 
5
 
B.    In lieu of charges in Section II.6.A above, the Operator may elect to use
average commercial rates prevailing in the immediate area
6
 
of the Joint Property, less twenty percent (20%). If equipment and facilities
are charged under this Section II.6.B, the Operator shall
7
 
adequately document and support commercial rates and shall periodically review
and update the rate and the supporting
8
 
documentation. For automotive equipment, the Operator may elect to use rates
published by the Petroleum Motor Transport
9
 
Association (PMTA) or such other organization recognized by COPAS as the
official source of rates.
10
 
 
11
7.
AFFILIATES
12
 
 
13
 
A.   Charges for an Affiliate's goods and/or services used in operations
requiring an AFE or other authorization from the Non-Operators
14
 
may be made without the approval of the Parties provided (i) the Affiliate is
identified and the Affiliate goods and services are
15
 
specifically detailed in the approved AFE or other authorization, and (ii) the
total costs for such Affiliate's goods and services billed
16
 
to such individual project do not exceed     $  200.000.00          If the total
costs for an Affiliate's goods and services charged to such
17
 
individual project are not specifically detailed in the approved AFE or
authorization or exceed such amount, charges for such
18
 
Affiliate shall require approval of the Parties, pursuant to Section I.6.A
(General Matters).
19
 
 
20
 
B.    For an Affiliate's goods and/or services used in operations not requiring
an AFE or other authorization from the Non-Operators,
21
 
charges for such Affiliate's goods and services shall require approval of the
Parties, pursuant to Section I.6.A (General Matters), if the
22
 
charges exceed   $  200.000.00       in a given calendar year.
23
 
 
24
 
C.   The cost of the Affiliate's goods or services shall not exceed average
commercial rates prevailing in the area of the Joint Property,
25
 
unless the Operator obtains the Non-Operators' approval of such rates. The
Operator shall adequately document and support
26
 
commercial rates and shall periodically review and update the rate and the
supporting documentation; provided, however,
27
 
documentation of commercial rates shall not be required if the Operator obtains
Non-Operator approval of its Affiliate's rates or
28
 
charges prior to billing Non-Operators for such Affiliate's goods and services.
Notwithstanding the foregoing, direct charges for
29
 
Affiliate-owned communication facilities or systems shall be made pursuant to
Section II.12 (Communications).
30
 
 
31
 
If the Parties fail to designate an amount in Sections II.7.A or II.7.B, in each
instance the amount deemed adopted by the Parties as a
32
 
result of such omission shall be the amount established as the Operator's
expenditure limitation in the Agreement. If the Agreement
33
 
does not contain an Operator's expenditure limitation, the amount deemed adopted
by the Parties as a result of such omission shall be
34
 
zero dollars ($ 0.00).
35
 
 
36
8.
DAMAGES AND LOSSES TO JOINT PROPERTY
37
 
 
38
 
All costs or expenses necessary for the repair or replacement of Joint Property
resulting from damages or losses incurred, except to the
39
 
extent such damages or losses result from a Party's or Parties' gross negligence
or willful misconduct, in which case such Party or Parties
40
 
shall be solely liable.
41
 
 
42
 
The Operator shall furnish the Non-Operator written notice of damages or losses
incurred as soon as practicable after a report has been
43
 
received by the Operator.
44
 
 
45
9.
LEGAL EXPENSE
46
 
 
47
 
Recording fees and costs of handling, settling, or otherwise discharging
litigation, claims, liens and /title and regulatory work incurred in or
resulting from
48
 
operations under the Agreement, or necessary to protect or recover the Joint
Property, to the extent permitted under the Agreement. Costs
49
 
of the Operator's or Affiliate's legal staff or outside attorneys, including
fees and expenses, are not chargeable unless approved by the
50
 
Parties pursuant to Section I.6.A (General Matters) or otherwise provided for in
the Agreement.
51
 
 
52
 
Notwithstanding the foregoing paragraph, costs for procuring abstracts, fees
paid to outside attorneys for title examinations (including
53
 
preliminary, supplemental, shut-in royalty opinions, division order title
opinions), and curative work shall be chargeable to the extent
54
 
permitted as a direct charge in the Agreement.
55
 
 
56
 
 
57
10.
TAXES AND PERMITS
58
 
 
59
 
All taxes and permitting fees of every kind and nature, assessed or levied upon
or in connection with the Joint Property, or the production
60
 
therefrom, and which have been paid by the Operator for the benefit of the
Parties, including penalties and interest, except to the extent the
61
 
penalties and interest result from the Operator's gross negligence or willful
misconduct.
62
 
 
63
 
If ad valorem taxes paid by the Operator are based in whole or in part upon
separate valuations of each Party's working interest, then
64
 
notwithstanding any contrary provisions, the charges to the Parties will be made
in accordance with the tax value generated by each Party's
65
 
working interest.
66
 
 

 
 
8

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COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
1
 
Costs of tax consultants or advisors, the Operator's employees, or Operator's
Affiliate employees in matters regarding ad valorem or other
2
 
tax matters, are not permitted as direct charges unless approved by the Parties
pursuant to Section I.6.A (General Matters).
3
 
 
4
 
Charges to the Joint Account resulting from sales/use tax audits, including
extrapolated amounts and penalties and interest, are permitted,
5
 
provided the Non-Operator shall be allowed to review the invoices and other
underlying source documents which served as the basis for
6
 
tax charges and to determine that the correct amount of taxes were charged to
the Joint Account. If the Non-Operator is not permitted to
7
 
review such documentation, the sales/use tax amount shall not be directly
charged unless the Operator can conclusively document the
8
 
amount owed by the Joint Account.
9
 
 
10
11.
INSURANCE
11
 
 
12
 
Net premiums paid for insurance required to be carried for Joint Operations for
the protection of the Parties. If Joint Operations are
13
 
conducted at locations where the Operator acts as self-insurer in regard to its
worker's compensation and employer's liability insurance
14
 
obligation, the Operator shall charge the Joint Account manual rates for the
risk assumed in its self-insurance program as regulated by the
15
 
jurisdiction governing the Joint Property. In the case of offshore operations in
federal waters, the manual rates of the adjacent state shall be
16
 
used for personnel performing work On-site, and such rates shall be adjusted for
offshore operations by the U.S. Longshoreman and
17
 
Harbor Workers (USL&H) or Jones Act surcharge, as appropriate.
18
 
 
19
12.
 COMMUNICATIONS
20
 
 
21
 
Costs of acquiring, leasing, installing. operating. repairing. and maintaining
communication facilities or systems, including satellite, radio
22
 
and microwave facilities, between the Joint Property and the Operator's
office(s) directly responsible for field operations in accordance
23
 
with the provisions of COPAS MFI-44 ("Field Computer and Communication
Systems"). If the communications facilities or systems
24
 
serving the Joint Property are Operator-owned, charges to the Joint Account
shall be made as provided in Section II.6 (Equipment and
25
 
Facilities Furnished by Operator). If the communication facilities or systems
serving the Joint Property are owned by the Operator's
26
 
Affiliate, charges to the Joint Account shall not exceed average commercial
rates prevailing in the area of the Joint Property. The Operator
27
 
shall adequately document and support commercial rates and shall periodically
review and update the rate and the supporting
28
 
documentation.
29
 
 
30
13.
ECOLOGICAL, ENVIRONMENTAL, AND SAFETY
31
 
 
32
 
Costs incurred for Technical Services and drafting to comply with ecological,
environmental and safety Laws or standards recommended by
33
 
Occupational Safety and Health Administration (OSHA) or other regulatory
authorities. All other labor and functions incurred for
34
 
ecological, environmental and safety matters, including management,
administration, and permitting, shall be covered by Sections II.2
35
 
(Labor), II.5 (Services), or Section III (Overhead), as applicable.
36
 
 
37
 
Costs to provide or have available pollution containment and removal equipment
plus actual costs of control and cleanup and resulting
38
 
responsibilities of oil and other spills as well as discharges from permitted
outfalls as required by applicable Laws, or other pollution
39
 
containment and removal equipment deemed appropriate by the Operator for prudent
operations, are directly chargeable.
40
 
 
41
14.
ABANDONMENT AND RECLAMATION
42
 
 
43
 
Costs incurred for abandonment and reclamation of the Joint Property, including
costs required by lease agreements or by Laws.
44
 
 
45
15.
OTHER EXPENDITURES
46
 
 
47
 
Any other expenditure not covered or dealt with in the foregoing provisions of
this Section II (Direct Charges), or in Section III
48
 
(Overhead) and which is of direct benefit to the Joint Property and is incurred
by the Operator in the necessary and proper conduct of the
49
 
Joint Operations. Charges made under this Section II.1.5 shall require approval
of the Parties, pursuant to Section I.6.A (General Matters).
50
 
 
51
 
 
52
 
III. OVERHEAD
53
 
 
54
 
As compensation for costs not specifically identified as chargeable to the Joint
Account pursuant to Section II (Direct Charges), the Operator
55
 
shall charge the Joint Account in accordance with this Section III.
56
 
 
57
 
Functions included in the overhead rates regardless of whether performed by the
Operator, Operator's Affiliates or third parties and regardless
58
 
of location, shall include, but not be limited to, costs and expenses of:
59
 
 
60
 
▪  warehousing, other than for warehouses that are jointly owned under this
Agreement
61
 
▪  design and drafting (except when allowed as a direct charge under Sections
II.13, III..I.A.(ii), and III.2, Option B)
62
 
▪  inventory costs not chargeable under Section V (Inventories of Controllable
Material)
63
 
▪  procurement
64
 
▪  administration
65
 
▪  accounting and auditing
66
 
▪  gas dispatching and gas chart integration

 
 
9

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
 
1
 
▪  human resources
2
 
▪  management
3
 
▪  supervision not directly charged under Section II.2 (Labor)
4
 
▪  legal services not directly chargeable under Section II.9 (Legal Expense)
5
 
▪  taxation, other than those costs identified as directly chargeable under
Section II.10 (Taxes and Permits)
6
 
▪  preparation and monitoring of permits and certifications; preparing
regulatory reports; appearances before or meetings with
7
 
governmental agencies or other authorities having jurisdiction over the Joint
Property, other than On-site inspections; reviewing,
8
 
interpreting, or submitting contents on or lobbying with respect to Laws or
proposed Laws.
9
 
 
10
 
Overhead charges shall include the salaries or wages plus applicable payroll
burdens, benefits, and Personal Expenses of personnel performing
11
 
overhead functions, as well as office and other related expenses of overhead
functions.
12
 
 
13
1.
OVERHEAD-DRILLING AND PRODUCING OPERATIONS
14
 
 
15
 
As compensation for costs incurred but not chargeable under Section II (Direct
Charges) and not covered by other provisions of this
16
 
Section III, the Operator shall charge on either:
17
 
 
18
 
 ☑   (Alternative 1) Fixed Rate Basis, Section III.1.B.
19
 
 ☐   (Alternative 2) Percentage Basis, Section III.1.C.
20
 
 
21
A.
TECHNICAL SERVICES
22
 
 
23
 
(i)     Except as otherwise provided in Section II.13 (Ecological Environmental
and Safety) and Section III.2 (Overhead - Major
24
 
Construction and Catastrophe), or by approval of the Parties pursuant to Section
I.6.A (General Matters), the salaries, wages,
25
 
related payroll burdens and benefits, and Personal Expenses for On-site
Technical Services, including third party Technical
26
 
Services:
27
 
 
28
 
☑   (Alternative 1- Direct) shall be charged direct to the Joint Account.
29
 
 
30
 
 ☐  (Alternative 2 - Overhead) shall be covered by the overhead rates.
31
 
 
32
 
(ii)    Except as otherwise provided in Section II.13 (Ecological,
Environmental, and Safety) and Section III.2 (Overhead - Major
33
 
Construction and Catastrophe), or by approval of the Parties pursuant to Section
I.6.A (General Matters), the salaries, wages,
34
 
related payroll burdens and benefits, and Personal Expenses for Off-site
Technical Services, including third party Technical
35
 
Services:
36
 
 
37
 
☐   (Alternative 1 - All Overhead) shall be covered by the overhead rates.
38
 
 
39
 
☐   (Alternative 2 - All Direct) shall be charged direct to the Joint Account.
40
 
 
41
 
☑   (Alternative 3 - Drilling Direct) shall be charged direct to the Joint
Account, only to the extent such Technical Services
42
 
are directly attributable to drilling, redrilling, deepening, or sidetracking
operations, through completion, temporary
43
 
abandonment, or abandonment if a dry hole. Off-site Technical Services for all
other operations, including workover,
44
 
recompletion, abandonment of producing wells, and the construction or expansion
of fixed assets not covered by Section
45
 
III.2 (Overhead · Major Construction and Catastrophe) shall be covered by the
overhead rates.
46
 
 
47
 
Notwithstanding anything to the contrary in this Section III, Technical Services
provided by Operator's Affiliates are subject to limitations
48
 
set forth in Section II.7 (Affiliates). Charges for Technical personnel
performing non-technical work shall not be governed by this Section
49
 
III.1 .A. but instead governed by other provisions of this Accounting Procedure
relating to the type of work being performed.
50
 
 
51
B.
OVERHEAD-FIXED RATE BASIS
52
 
 
53
 
(1)   The Operator shall charge the Joint Account at the following rates per
well per month:
54
 
 
55
 
Drilling Well Rate per month $7,500.00 (prorated for less than a full month) /
for wells drilled to a TVD of 4,200 feet or more.  5,000.00 for well drilled to
a TVD of less than 4,200 feet
56
 
 
57
 
Producing Well Rate per month $750.00  for wells drilled to a TVD of 4,200 feet
or more.  500.00 for wells drilled to a TVD of less than 4,200 feet.
58
 
 
59
 
(2)  Application of Overhead-Drilling Well Rate shall be as follows:
60
 
 
61
 
(a)    Charges for onshore drilling wells shall begin on the spud date /location
work begins and terminate on the date the drilling and/or completion
62
 
equipment used on the well is released, whichever occurs later. Charges for
offshore and inland waters drilling wells shall
63
 
begin on the date the drilling or completion equipment arrives on location and
terminate on the date the drilling or completion
64
 
equipment moves off location, or is released, whichever occurs first. No charge
shall be made during suspension of drilling
65
 
and/or completion operations for fifteen (15) or more consecutive calendar days.
66
 
 

 
 

10

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
 
1
 
(b)   Charges for any well undergoing any type of workover, recompletion, and/or
abandonment for a period of five (5) or more
2
 
consecutive work-days shall be made at the Drilling Well Rate. Such charges
shall be applied for the period from date
3
 
operations, with rig or other units used in operations, commence through date of
rig or other unit release, except that no charges
4
 
shall be made during suspension of operations for fifteen (15) or more
consecutive calendar days.
5
 
 
6
 
(3)  Application of Overhead-Producing Well Rate shall be as follows:
7
 
 
8
 
(a)   An active well that is produced, injected into for recovery or disposal,
or used to obtain water supply to support operations for
9
 
any portion of the month shall be considered as a one-well charge for the entire
month.
10
 
 
11
 
(b)   Each active completion in a multi-completed well shall be considered as a
one-well charge provided each completion is
12
 
considered a separate well by the governing regulatory authority.
13
 
 
14
 
(c)   A one-well charge shall be made for the month in which plugging and
abandonment operations are completed on any well,
15
 
unless the Drilling Well Rate applies, as provided in Sections III.1.B.(2)(a) or
(b). This one-well charge shall be made whether
16
 
or not the well has produced.
17
 
 
18
 
(d)  An active gas well shut in because of overproduction or failure of a
purchaser, processor, or transporter to take production shall
19
 
be considered as a one-well charge provided the gas well is directly connected
to a permanent sales outlet.
20
 
 
21
 
(e)   Any well not meeting the criteria set forth in Sections III.1.B.(3) (a),
(b), (c), or (d) shall not qualify for a producing overhead
22
 
charge.
23
 
 
24
 
(4)  The well rates shall be adjusted on the first day of April each year
following the effective date of the Agreement; provided,
25
 
however, if this Accounting Procedure is attached to or otherwise governing the
payout accounting under a farmout agreement, the
26
 
rates shall be adjusted on the first day of April each year following the
effective date of such farmout agreement. The adjustment
27
 
shall be computed by applying the adjustment factor most recently published by
COPAS. The adjusted rates shall be the initial or
28
 
amended rates agreed to by the Parties increased or decreased by the adjustment
factor described herein, for each year from the
29
 
effective date of such rates, in accordance with COPAS MFI-47 ("Adjustment of
Overhead Rates").
30
 
 
31
C.
OVERHEAD-PERCENTAGE BASIS
32
 
 
33
 
(1)  Operator shall charge the Joint Account at the following rates:
34
 
 
35
 
(a)   Development Rate ______ percent (_____ ) % of the cost of development of
the Joint Property, exclusive of costs
36
 
provided under Section II.9 (Legal Expense) and all Material salvage credits.
37
 
 
38
 
(b)   Operating Rate _________percent (_____%) of the cost of operating the
Joint Property, exclusive of costs
39
 
provided under Sections II.1 (Rentals and Royalties) and II.9 (Legal Expense);
all Material salvage credits; the value
40
 
of substances purchased for enhanced recovery; all property and ad valorem
taxes, and any other taxes and assessments that
41
 
are levied, assessed, and paid upon the mineral interest in and to the Joint
Property.
42
 
 
43
 
(2)  Application of Overhead-Percentage Basis shall be as follows:
44
 
 
45
 
(a)   The Development Rate shall be applied to all costs in connection with:
46
 
 
47
 
[i]     drilling, redrilling, sidetracking, or deepening of a well
48
 
[ii]    a well undergoing plugback or workover operations for a period of five
(5) or more consecutive work-days
49
 
[iii]   preliminary expenditures necessary in preparation for drilling
50
 
[iv]   expenditures incurred in abandoning when the well is not completed as a
producer
51
 
[v]    construction or installation of fixed assets, the expansion of fixed
assets and any other project clearly discernible as a
52
 
 fixed asset, other than Major Construction or Catastrophe as defined in Section
lli.2 (Overhead-Major Construction
53
 
 and Catastrophe).
54
 
 
55
 
(b)   The Operating Rate shall be applied to all other costs in connection with
Joint Operations, except those subject to Section III.2
56
 
(Overhead-Major Construction and Catastrophe).
57
 
 
58
2.
OVERHEAD-MAJOR CONSTRUCTION AND CATASTROPHE
59
 
 
60
 
To compensate the Operator for overhead costs incurred in connection with a
Major Construction project or Catastrophe, the Operator
61
 
shall either negotiate a rate prior to the beginning of the project, or shall
charge the Joint Account for overhead based on the following
62
 
rates for any Major Construction project in excess of the Operator's expenditure
limit under the Agreement, or for any Catastrophe
63
 
regardless of the amount. If the Agreement to which this Accounting Procedure is
attached does not contain an expenditure limit, Major
64
 
Construction Overhead shall be assessed for any single Major Construction
project costing in excess of $100,000 gross.
65
 
 
66
 
 

 
 
 
 
11

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
 
 
 
1
 
Major Construction shall mean the construction and installation of fixed assets,
the expansion of fixed assets, and any other project clearly
2
 
discernible as a fixed asset required for the development and operation of the
Joint Property, or in the dismantlement, abandonment,
3
 
removal, and restoration of platforms, production equipment, and other operating
facilities.
4
 
 
5
 
Catastrophe is defined as a sudden calamitous event bringing damage, loss, or
destruction to property or the environment, such as an oil
6
 
spill, blowout, explosion, fire, storm, hurricane, or other disaster. The
overhead rate shall be applied to those costs necessary to restore the
7
 
Joint Property to the equivalent condition that existed prior to the event.
8
 
 
9
 
A.  If the Operator absorbs the engineering, design and drafting costs related
to the project:
10
 
 
11
 
(1)  5.0 % of total costs if such costs are less than $!00,000; plus
12
 
 
13
 
(2)   3.0 % of total costs in excess of $100,000 but less than $1,000,000; plus
14
 
 
15
 
(3)   2.0 % of total costs in excess of $1,000,000.
16
 
 
17
 
B.   If the Operator charges engineering, design and drafting costs related to
the project directly to the Joint Account:
18
 
 
19
 
(1)   5.0 % of total costs if such costs are less than $!00,000; plus
20
 
 
21
 
(2)   3.0 % of total costs in excess of $100,000 but less than $1,000,000; plus
22
 
 
23
 
(3)   2.0 % of total costs in excess of $1,000,000.
24
 
 
25
 
Total cost shall mean the gross cost of any one project. For the purpose of this
paragraph, the component parts of a single Major
26
 
Construction project shall not be treated separately, and the cost of drilling
and workover wells and purchasing and installing pumping
27
 
units and downhole artificial lift equipment shall be excluded. For
Catastrophes, the rates shall be applied to all costs associated with each
28
 
single occurrence or event.
29
 
 
30
 
On each project, the Operator shall advise the Non-Operator(s) in advance which
of the above options shall apply.
31
 
 
32
 
For the purposes of calculating Catastrophe Overhead, the cost of drilling
relief wells, substitute wells, or conducting other well operations
33
 
directly resulting from the catastrophic event shall be included. Expenditures
to which these rates apply shall not be reduced by salvage or
34
 
insurance recoveries. Expenditures that qualify for Major Construction or
Catastrophe Overhead shall not qualify for overhead under any
35
 
other overhead provisions.
36
 
 
37
 
In the event of any conflict between the provisions of this Section III.2 and
the provisions of Sections II.2 (Labor), II.5 (Services), or II.7
38
 
(Affiliates), the provisions of this Section III.2 shall govern.
39
 
 
40
3.
AMENDMENT OF OVERHEAD RATES
41
 
 
42
 
The overhead rates provided for in this Section III may be amended from time to
time if, in practice, the rates are found to be insufficient
43
 
Or excessive, in accordance with the provisions of Section I.6.B (Amendments).
44
 
 
45
 
 
46
 
IV. MATERIAL PURCHASES, TRANSFERS, AND DISPOSITIONS
47
 
 
48
 
The Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for direct purchases, transfers, and
49
 
dispositions. The Operator shall provide all Material for use in the conduct of
Joint Operations; however, Material may be supplied by the Non-
50
 
Operators, at the Operator's option. Material furnished by any Party shall be
furnished without any express or implied warranties as to quality,
51
 
fitness for use, or any other matter.
52
 
 
53
1.
DIRECT PURCHASES
54
 
 
55
 
Direct purchases shall be charged to the Joint Account at the price paid by the
Operator after deduction of all discounts received. The
56
 
Operator shall make good faith efforts to take discounts offered by suppliers,
but shall not be liable for failure to take discounts except to
57
 
the extent such failure was the result of the Operator's gross negligence or
willful misconduct A direct purchase shall be deemed to occur
58
 
when an agreement is made between an Operator and a third party for the
acquisition of Material for a specific well site or location.
59
 
Material provided by the Operator under "vendor stocking programs," where the
initial use is for a Joint Property and title of the Material
60
 
does not pass from the manufacturer, distributor, or agent until usage, is
considered a direct purchase. If Material is found to be defective
61
 
or is returned to the manufacturer, distributor, or agent for any other reason,
credit shall be passed to the Joint Account within sixty (60)
62
 
days after the Operator has received adjustment from the manufacturer,
distributor, or agent.
63
 
 
64
 
 
65
 
 
66
 
 
 
 
 

 
 
12

--------------------------------------------------------------------------------

 
[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
 
1
2.
 TRANSFERS
2
 
 
3
 
A transfer is determined to occur when the Operator (i) furnishes Material from
a storage facility or from another operated property, (ii) has
4
 
assumed liability for the storage costs and changes in value, and (iii) has
previously secured and held title to the transferred Material.
5
 
Similarly, the removal of Material from the Joint Property to a storage facility
or to another operated property is also considered a transfer;
6
 
provided, however, Material that is moved from the Joint Property to a storage
location for safe-keeping pending disposition may remain
7
 
charged to the Joint Account and is not considered a transfer. Material shall be
disposed of in accordance with Section IV.3 (Disposition of
8
 
Surplus) and the Agreement to which this Accounting Procedure is attached.
9
 
 
10
 
A.   PRICING
11
 
 
12
 
The value of Material transferred to/from the Joint Property should generally
reflect the market value on the date of physical transfer.
13
 
Regardless of the pricing method used, the Operator shall make available to the
Non-Operators sufficient documentation to verify the
14
 
Material valuation. When higher than specification grade or size tubulars are
used in the conduct of Joint Operations, the Operator
15
 
shall charge the Joint Account at the equivalent price for well design
specification tubulars, unless such higher specification grade or
16
 
sized tubulars are approved by the Parties pursuant to Section l.6.A (General
Matters). Transfers of new Material will be priced
17
 
using one of the following pricing methods; provided, however, the Operator
shall use consistent pricing methods, and not alternate
18
 
between methods for the purpose of choosing the method most favorable to the
Operator for a specific transfer:
19
 
 
20
 
(1)   Using published prices in effect on date of movement as adjusted by the
appropriate COPAS Historical Price Multiplier (HPM)
21
 
or prices provided by the COPAS Computerized Equipment Pricing System (CEPS).
22
 
 
23
 
(a)    For oil country tubulars and line pipe, the published price shall be
based upon eastern mill carload base prices (Houston,
24
 
Texas, for special end) adjusted as of date of movement, plus transportation
cost as defined in Section IV.2.B (Freight).
25
 
 
26
 
(b)   For other Material, the published price shall be the published list price
in effect at date of movement, as listed by a Supply
27
 
Store nearest the Joint Property where like Material is normally available, or
point of manufacture plus transportation
28
 
costs as defined in Section IV.2.B (Freight).
29
 
 
30
 
(2)   Based on a price quotation from a vendor that reflects a current realistic
acquisition cost.
31
 
 
32
 
(3)   Based on the amount paid by the Operator for like Material in the vicinity
of the Joint Property within the previous twelve (12)
33
 
months from the date of physical transfer.
34
 
 
35
 
(4)   As agreed to by the Participating Parties for Material being transferred
to the Joint Property, and by the Parties owning the
36
 
Material for Material being transferred from the Joint Property.
37
 
 
38
 
B.  FREIGHT
39
 
 
40
 
Transportation costs shall be added to the Material transfer price using the
method prescribed by the COPAS Computerized
41
 
Equipment Pricing System (CEPS). If not using CEPS, transportation costs shall
be calculated as follows:
42
 
 
43
 
(1)  Transportation costs for oil country tubulars and line pipe shall be
calculated using the distance from eastern mill to the
44
 
Railway Receiving Point based on the carload weight basis as recommended by the
COPAS MFI-38 ("Material Pricing
45
 
Manual") and other COPAS MFIs in effect at the time of the transfer.
46
 
 
47
 
(2)  Transportation costs for special mill items shall be calculated from that
mill's shipping point to the Railway Receiving Point.
48
 
For transportation costs from other than eastern mills, the 30,000-pound
interstate truck rate shall be used. Transportation costs
49
 
for macaroni tubing shall be calculated based on the interstate truck rate per
weight of tubing transferred to the Railway
50
 
Receiving Point.
51
 
 
52
 
(3)  Transportation costs for special end tubular goods shall be calculated
using the interstate truck rate from Houston, Texas, to the
53
 
Railway Receiving Point.
54
 
 
55
 
(4)  Transportation costs for Material other than that described in Sections
IV.2.B.(l) through (3), shall be calculated from the
56
 
Supply Store or point of manufacture, whichever is appropriate, to the Railway
Receiving Point
57
 
 
58
 
Regardless of whether using CEPS or manually calculating transportation costs,
transportation costs from the Railway Receiving Point
59
 
to the Joint Property are in addition to the foregoing, and may be charged to
the Joint Account based on actual costs incurred. All
60
 
transportation costs are subject to Equalized Freight as provided in Section
II.4 (Transportation) of this Accounting Procedure.
61
 
 
62
 
C.  TAXES
63
 
 
64
 
Sales and use taxes shall be added to the Material transfer price using either
the method contained in the COPAS Computerized
65
 
Equipment Pricing System (CEPS) or the applicable tax rate in effect for the
Joint Property at the time and place of transfer. In either
66
 
case, the Joint Account shall be charged or credited at the rate that would have
governed had the Material been a direct purchase.

 
 
13

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[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
 
1
D.
CONDITTON
2
 
 
3
 
(1)   Condition "A" - New and unused Material in sound and serviceable condition
shall be charged at one hundred percent (100%)
4
 
of the price as determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and
IV.2.C (Taxes). Material transferred from the
5
 
Joint Property that was not placed in service shall be credited as charged
without gain or loss; provided, however, any unused
6
 
Material that was charged to the Joint Account through a direct purchase will be
credited to the Joint Account at the original
7
 
cost paid less restocking fees charged by the vendor. New and unused Material
transferred from the Joint Property may be
8
 
credited at a price other than the price originally charged to the Joint Account
provided such price is approved by the Parties
9
 
owning such Material, pursuant to Section I.6.A (General Matters). All
refurbishing costs required or necessary to return the
10
 
Material to original condition or to correct handling, transportation, or other
damages will be borne by the divesting property.
11
 
The Joint Account is responsible for Material preparation, handling, and
transportation costs for new and unused Material
12
 
charged to the Joint Property either through a direct purchase or transfer. Any
preparation costs incurred, including any internal
13
 
or external coating and wrapping, will be credited on new Material provided
these services were not repeated for such Material
14
 
for the receiving property.
15
 
 
16
 
(2)   Condition "B" - Used Material in sound and serviceable condition and
suitable for reuse without reconditioning shall be priced
17
 
by multiplying the price determined in Sections IV.2.A (Pricing), IV.2.B
(Freight), and IV.2.C (Taxes) by seventy-five percent
18
 
(75%).
19
 
 
20
 
Except as provided in Section IV.2.0(3), all reconditioning costs required to
return the Material to Condition "B" or to correct
21
 
handling, transportation or other damages will be borne by the divesting
property.
22
 
 
23
 
If the Material was originally charged to the Joint Account as used Material and
placed in service for the Joint Property, the
24
 
Material will be credited at the price determined in Sections IV.2.A (Pricing),
IV.2.B (Freight), and IV.2.C (Taxes) multiplied
25
 
by sixty-five percent (65%).
26
 
 
27
 
Unless otherwise agreed to by the Parties that paid for such Material, used
Material transferred from the Joint Property that was
28
 
not placed in service on the property shall be credited as charged without gain
or loss.
29
 
 
30
 
(3)   Condition "C" - Material that is not in sound and serviceable condition
and not suitable for its original function until after
31
 
reconditioning shall be priced by multiplying the price determined in Sections
IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C
32
 
(Taxes) by fifty percent (50%).
33
 
 
34
 
The cost of reconditioning may be charged to the receiving property to the
extent Condition "C" value, plus cost of
35
 
reconditioning, does not exceed Condition "B" value.
36
 
 
37
 
(4)   Condition ''D" - Material that (i) is no longer suitable for its original
purpose but useable for some other purpose, (ii) is
38
 
obsolete, or (iii) does not meet original specifications but still has value and
can be used in other applications as a substitute for
39
 
 items with different specifications, is considered Condition "D" Material.
Casing, tubing, or drill pipe used as line pipe shall be
40
 
priced as Grade A and B seamless line pipe of comparable size and weight. Used
casing, tubing, or drill pipe utilized as line
41
 
pipe shall be priced at used line pipe prices. Casing, tubing, or drill pipe
used as higher pressure service lines than standard line
42
 
pipe, e.g., power oil lines, shall be priced under normal pricing procedures for
casing, tubing, or drill pipe. Upset tubular goods
43
 
shall be priced on a non-upset basis. For other items, the price used should
result in the Joint Account being charged or credited
44
 
with the value of the service rendered or use of the Material, or as agreed to
by the Parties pursuant to Section 1.6.A (General
45
 
Matters).
46
 
 
47
 
(5)   Condition "E" -Junk shall be priced at prevailing scrap value prices.
48
 
 
49
E.
OTHER PRICING PROVISIONS
50
 
 
51
 
(1)   Preparation Costs
52
 
 
53
 
Subject to Section II (Direct Charges) and Section III (Overhead) of this
Accounting Procedure, costs incurred by the Operator
54
 
in making Material serviceable including inspection, third party surveillance
services, and other similar services will be charged
55
 
to the Joint Account at prices which reflect the Operator's actual costs of the
services. Documentation must be provided to the
56
 
Non-Operators upon request to support the cost of service. New coating and/or
wrapping shall be considered a component of
57
 
the Materials and priced in accordance with Sections IV.l (Direct Purchases) or
IV.2.A (Pricing), as applicable. No charges or
58
 
credits shall be made for used coating or wrapping. Charges and credits for
inspections shall be made in accordance with
59
 
COPAS MFl-38 ("Material Pricing Manual").
60
 
 
61
 
(2)   Loading and Unloading Costs
62
 
 
63
 
Loading and unloading costs related to the movement of the Material to the Joint
Property shall be charged in accordance with
64
 
the methods specified in COPAS MFI-38 ("Material Pricing Manual").
65
 
 
66
 
 

 
 
14

--------------------------------------------------------------------------------

 
 
[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
1
3.
DISPOSITION OF SURPLUS
2
 
 
3
 
Surplus Material is that Material, whether new or used, that is no longer
required for Joint Operations. The Operator may purchase, but
4
 
shall be under no obligation to purchase, the interest of the Non-Operators in
surplus Material.
5
 
 
6
 
Dispositions for the purpose of this procedure are considered to be the
relinquishment of title of the Material from the Joint Property to
7
 
either a third party, a Non-Operator, or to the Operator. To avoid the
accumulation of surplus Material, the Operator should make good
8
 
faith efforts to dispose of surplus within twelve (12) months through buy/sale
agreements, trade, sale to a third party, division in kind, or
9
 
other dispositions as agreed to by the Parties.
10
 
 
11
 
Disposal of surplus Materials shall be made in accordance with the terms of the
Agreement to which this Accounting Procedure is
12
 
attached. If the Agreement contains no provisions governing disposal of surplus
Material, the following terms shall apply:
13
 
 
14
 
▪     The Operator may, through a sale to an unrelated third party or entity,
dispose of surplus Material having a gross sale value that
15
 
is less than or equal to the Operator's expenditure limit as set forth in the
Agreement to which this Accounting Procedure is
16
 
attached without the prior approval of the Parties owning such Material.
17
 
 
18
 
▪      If the gross sale value exceeds the Agreement expenditure limit, the
disposal must be agreed to by the Parties owning such
19
 
Material.
20
 
 
21
 
▪      Operator may purchase surplus Condition "A" or "B" Material without
approval of the Parties owning such Material, based on
22
 
the pricing methods set forth in Section IV.2 (Transfers).
23
 
 
24
 
▪      Operator may purchase Condition "C' Material without prior approval of
the Parties owning such Material if the value of the
25
 
Materials, based on the pricing methods set forth in Section IV.2 (Transfers),
is less than or equal to the Operator's expenditure
26
 
limitation set forth in the Agreement. The Operator shall provide documentation
supporting the classification of the Material as
27
 
Condition C.
28
 
 
29
 
▪      Operator may dispose of Condition "D" or "E" Material under procedures
normally utilized by Operator without prior approval
30
 
of the Parties owning such Material.
31
 
 
32
4.
SPECIAL PRICING PROVISIONS
33
 
 
34
 
A.    PREMIUM PRICING
35
 
 
36
 
Whenever Material is available only at inflated prices due to national
emergencies, strikes, government imposed foreign trade
37
 
restrictions, or other unusual causes over which the Operator has no control,
for direct purchase the Operator may charge the Joint
38
 
Account for the required Material at the Operator's actual cost incurred in
providing such Material, making it suitable for use, and
39
 
moving it to the Joint Property. Material transferred or disposed of during
premium pricing situations shall be valued in accordance
40
 
with Section IV.2 (Transfers) or Section IV.3 (Disposition of Surplus), as
applicable.
41
 
 
42
 
B.     SHOP-MADE ITEMS
43
 
 
44
 
Items fabricated by the Operator's employees, or by contract laborers under the
direction of the Operator, shall be priced using the
45
 
value of the Material used to construct the item plus the cost of labor to
fabricate the item. If the Material is from the Operator's
46
 
scrap or junk account, the Material shall be priced at either twenty-five
percent (25%) of the current price as determined in Section
47
 
IV.2.A  (Pricing)  or  scrap  value,  whichever  is  higher.  In  no  event  shall  the  amount  charged  exceed  the  value  of  the  item
48
 
commensurate with its use.
49
 
 
50
 
C.     MILL REJECTS
51
 
 
52
 
Mill rejects purchased as "limited service" casing or tubing shall be priced at
eighty percent (80%) of K-55/J-55 price as determined in
53
 
Section IV.2 (Transfers). Line pipe converted to casing or tubing with casing or
tubing couplings attached shall be priced as K-55/J-
54
 
55 casing or tubing at the nearest size and weight.
55
 
 
56
 
 
57
 
V. INVENTORIES OF CONTROLLABLE MATERIAL
58
 
 
59
 
 
60
 
The Operator shall maintain records of Controllable Material charged to the
Joint Account, with sufficient detail to perform physical inventories.
61
 
 
62
 
Adjustments to the Joint Account by the Operator resulting from a physical
inventory of Controllable Material shall be made within twelve (12)
63
 
months following the taking of the inventory or receipt of Non-Operator
inventory report. Charges and credits for overages or shortages will be
64
 
valued for the Joint Account in accordance with Section IV.2 (Transfers) and
shall be based on the Condition "B" prices in effect on the date of
65
 
physical inventory unless the inventorying Parties can provide sufficient
evidence another Material condition applies.
66
 
 

 
 
 
15

--------------------------------------------------------------------------------

 
[image00003.jpg]
COPAS 2005 Accounting Procedure
Recommended by COPAS

 
 
1
1.
DIRECTED INVENTORIES
2
 
 
3
 
Physical inventories shall be performed by the Operator upon written request of
a majority in working interests of the Non-Operators
4
 
(hereinafter, "directed inventory"); provided, however, the Operator shall not
be required to perform directed inventories more frequently
5
 
than once every five (5) years. Directed inventories shall be commenced within
one hundred eighty (180) days after the Operator receives
6
 
written notice that a majority in interest of the Non-Operators has requested
the inventory. All Parties shall be governed by the results of
7
 
any directed inventory.
8
 
 
9
 
Expenses of directed inventories will be borne by the Joint Account; provided,
however, costs associated with any post-report follow-up
10
 
work in settling the inventory will be absorbed by the Party incurring such
costs. The Operator is expected to exercise judgment in keeping
11
 
expenses within reasonable limits. Any anticipated disproportionate or
extraordinary costs should be discussed and agreed upon prior to
12
 
commencement of the inventory. Expenses of directed inventories may include the
following:
13
 
 
14
 
A.   A per diem rate for each inventory person, representative of actual
salaries, wages, and payroll burdens and benefits of the personnel
15
 
performing the inventory or a rate agreed to by the Parties pursuant to Section
I.6.A (General Matters). The per diem rate shall also
16
 
 be applied to a reasonable number of days for pre-inventory work and report
preparation.
17
 
 
18
 
B.   Actual transportation costs and Personal Expenses for the inventory team
19
 
 
20
 
C.   Reasonable charges for report preparation and distribution to the
Non-Operators.
21
 
 
22
2.
NON-DIRECTED INVENTORIES
23
 
 
24
 
A.   OPERATOR INVENTORIES
25
 
 
26
 
Physical inventories that are not requested by the Non-Operators may be
performed by the Operator, at the Operator's discretion. The
27
 
expenses of conducting such Operator-initiated inventories shall not be charged
to the Joint Account.
28
 
 
29
 
B.    NON-OPERATOR INVENTORIES
30
 
 
31
 
Subject to the terms of the Agreement to which this Accounting Procedure is
attached, the Non-Operators may conduct a physical
32
 
inventory at reasonable times at their sole cost and risk after giving the
Operator at least ninety (90) days prior written notice. The
33
 
Non-Operator inventory report shall be furnished to the Operator in writing
within ninety (90) days of completing the inventory
34
 
fieldwork.
35
 
 
36
 
C.   SPECIAL INVENTORIES
37
 
 
38
 
The expense of conducting inventories other than those described in Sections V.1
(Directed Inventories), V.2.A (Operator
39
 
Inventories), or V.2.B (Non-Operator Inventories), shall be charged to the Party
requesting such inventory; provided, however,
40
 
inventories required due to a change of Operator shall be charged to the Joint
Account in the same manner as described in Section
41
 
V.1 (Directed Inventories).
42
 
 
43
 
 
44
 
 
45
 
 
46
 
 
47
 
 
48
 
 
49
 
 
50
 
 
51
 
 
52
 
 
53
 
 
54
 
 
55
 
 
56
 
 
57
 
 
58
 
 
59
 
 
60
 
 
61
 
 
62
 
 
63
 
 
64
 
 
65
 
 
66
 
 

 
 
 
 
16

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EXHIBIT  "D"

Attached to and made a part of that certain Operating Agreement dated effective
May 15, 2015, by and between PetroShare Corp as Operator, and Providence Energy
Operators LLC as Non-Operator.

INSURANCE

As to all operations hereunder, Operator shall carry for the benefit and
protection of the parties hereto the following insurance coverage:

    (i) 
Worker's Compensation or Employer's Liability Insurance as required by the laws
of the states in which the operations are conducted.
    (ii)
Comprehensive General Liability Insurance, including contractual liability, with
a combined single limit per occurrence of not less than $1,000,000 for bodily
injury and property damage and a combined occurrence limit of $2,000,000.
   (iii)
Comprehensive Automobile Insurance, including hired and non-owned vehicles, with
a combined single limit per occurrence of not less than $1,000,000 for bodily
injury and property damage.
   (iv)
Liability Umbrella Insurance (excess of underlying insurance coverage mentioned
above) with a combined limit per occurrence coverage of not less than
$5,000,000.

The cost of the foregoing insurance coverage shall be charged to the parties
pursuant to the Accounting Procedure (Exhibit "C") as follows: item (i) will be
included in labor rates, items (ii) and (iv) will be charged to the joint
account, and item (iii) is included in mileage rates.

If a Non-Operator wishes to obtain its own insurance coverage for any of the
above categories, such party shall provide Operator with a certificate
evidencing such coverage. In such event, Operator shall not invoice such party
for its share of the cost of that particular coverage. Additionally, all such
insurance coverages and all of the insurance coverages described above shall
contain a waiver of subrogation in favor of all other parties hereto.

Each party may obtain its own well control or OEE insurance for its
proportionate share of such obligation and provide Operator with a certificate
evidencing such coverage. In the event a Non-Operator wishes to be covered under
Operators OEE insurance, it shall give the Operator its written election to be
covered under Operators policy and it shall be responsible for its proportionate
share of such premiums and associated deductible expense and receive the
coverage benefits as provided under such policy.

To the extent not covered by the aforementioned insurance, the liability of the
parties hereto for damages or claims arising out of illness or personal injury
to or death of any person or damage to or destruction or loss of property of any
person or entity resulting from operations conducted hereunder shall be borne by
the parties hereto in the proportions in which they bear the costs of such
operations. Additionally, Operator shall not be liable to Non-Operator for
damage to or for loss or destruction of jointly owned property from operations
hereunder, unless such damage, loss, or destruction arises solely out of the
gross negligence or willful misconduct of Operator.

--------------------------------------------------------------------------------

 
 
 
EXHIBIT “C”

KINGDOM RESOURCES LLC SERVICES AGREEMENT

(copy to be attached)
 
 

 

14

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EXHIBIT C TO PA
 

AGREEMENT FOR SERVICES

This Agreement for Services ("Agreement") is entered into as of this 12th day of
November, 2014 between PetroShare Corp., a Colorado corporation ("Company"), and
Kingdom Resources, LLC, a Colorado limited liability ("Contractor"), each of
whom is sometimes referred to as a "Party" and both of whom are sometimes
collectively referred to as the "Parties. " The purpose of this Agreement is to
set forth the terms under which Contractor shall perform services for Company in
acquiring oil and gas interests and the consideration that shall be given by
Company to Contractor for performing those services.

ARTICLE  I-CONTRACTOR SERVICES

Contractor shall pursue the acquisition of oil and gas leases and/or other oil
and gas interests in the Contract Area defined on Exhibit A to this Agreement,
including but not limited to gathering title and leasehold information, securing
the acquisition of fee, leasehold and other interests in oil and gas rights,
ordering necessary abstracts of title, promptly submitting all necessary
documentation concerning any acquisition or lease of such mineral rights to
Company, and performing or obtaining all other services needed to secure such
leases or other acquisitions of oil and gas mineral rights within the Contract
Area, pursuant to Company's guidance.

Contractor further agrees to use reasonable efforts to assist Company with
surface use negotiations on land located within the Contract Area that Company
intends to operate, which assistance shall include without limitation securing
potential drill sites and access to water for drilling operations based on
ordinary, reasonable and customary arm's length terms.

ARTICLE II-RELATIONSHIP OF PARTIES

The relationship of Contractor to Company throughout the term of this Agreement
shall be that of an Independent Contractor only, and it is understood and agreed
that nothing in this Agreement makes, or shall be construed to make, Contractor
an employee, agent or representative of the Company. Therefore, this Agreement
does not give Company any authority or right to direct or control Contractor's
actions and Contractor is fully responsible for determining when and how the
services being provided pursuant to this Agreement will be performed. Contractor
is also responsible for furnishing all supplies, equipment, and materials
necessary to provide the services set forth in this Agreement. All persons
engaged by Contractor to assist it in providing such services shall be employees
or subcontractors of Contractor.

ARTICLE III - SUBCONTRACTORS

If Contractor determines that subcontractors are necessary to assist it in
performing the services set forth herein, it may engage such subcontractors at
its sole cost and expense, subject to the reimbursement provisions set forth
herein. Contractor shall obtain from any such subcontractor a written agreement
containing, at a minimum, terms substantially similar to those set forth herein,
other than those relating to compensation to Contractor, and shall furnish an
executed copy of any such agreement to Company upon request. Notwithstanding
its decision to engage one or more subcontractors to assist it in performing
services hereunder, Contractor shall remain primarily liable to Company for all
of Contractor's obligations hereunder.
 

 
1

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ARTICLE IV-STANDARD OF CARE

Contractor shall perform its services under this Agreement in accordance with
the highest standards within the industry for the type of services provided
herein, and shall comply with all applicable laws, regulations, orders and
standards in providing services under this Agreement.

ARTICLE V-CONTRACTOR INSURANCE

Contractor shall be solely responsible for all of its own insurance and shall at
all times maintain such types and amounts of insurance, including without
limitation automobile, general liability and worker’s compensation insurance, as
may be reasonably be required by Company. Contractor shall furnish to Company
proof of required insurance upon request.

ARTICLE VI-CONFIDENTIALITY

Because the services contemplated by this Agreement relate to information that
is highly proprietary and of considerable value to Company, Contractor agrees to
hold all work­ related information, title information, areas of interest, maps,
letters, memoranda, negotiations with companies or persons and all other
materials, plans and conversations concerning the services performed hereunder
strictly confidential while this Agreement is in effect and for a period of two
(2) years after termination hereof.  Contractor shall obtain a like agreement
from any subcontractors it retains to assist it in providing services under this
Contract.

ARTICLE VII-PAYMENT AND AUDIT OF CONTRACTOR EXPENSES

Contractor agrees to pay all claims for labor, material, services and supplies
furnished by Contractor and to take all reasonable precautions to ensure that no
lawful lien or similar encumbrance is fixed upon any lease or other property of
Company as a result of Contractor's negligence, willful misconduct, intentional
act or misrepresentation. Company shall reimburse Contractor for such actual
expenses it incurs with respect to any leases or other acquisitions approved and
consummated under this Agreement, as set forth in Exhibit "B" hereto. Company
shall have the right at any time within six (6) months after making any payment
pursuant to this Article to audit any and all records, books and invoices
related thereto, and this audit right shall survive the termination of this
agreement.

ARTICLE VIII-PAYMENT OF ACQUISITION COSTS

Unless otherwise agreed by the Parties, all lease bonus or similar payments
necessary to acquire fee, leasehold, royalty or other oil and gas interests
under this Agreement shall be paid by means of Company sight drafts payable to
the proper owner of the interest involved, by time drafts payable to such
owners, or by such other method as may be agreed upon in writing by the Parties
hereto. Any lease bonus or similar payments necessary to acquire fee, leasehold,
royalty or other oil and gas interests under this Agreement advanced by
Contractor shall be reimbursed as set forth in Exhibit C hereto.
 

 
2

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ARTICLE IX-ACQUISITION DOCUMENTS

Company agrees that the form of lease attached hereto as Exhibit C, the form of
lease assignment attached hereto as Exhibit D, and the form of Access and Damage
Settlement Agreement attached hereto as Exhibit E may be used to lease oil and
gas mineral rights in the Contract Area, and that any lease obtained using those
forms shall be acceptable to Company, subject to the other provisions of this
Agreement, including without limitation those concerning the acceptability of
title to the mineral rights identified in any such lease. Company shall have the
right to approve in advance of execution the form and terms of any agreement
concerning the acquisition of oil and gas mineral rights by Contractor in the
Contract Area not in the forms attached hereto as Exhibits C, D and E, subject
to the other provisions of this Agreement, including without limitation those
concerning the acceptability of title to the mineral rights identified in any
such lease.

ARTICLE X–COMPENSATION

Contractor shall be entitled to compensation tor the acquisition of any lease or
other oil and gas mineral rights in the Contract Area pursuant to the terms set
forth in Exhibit "B" hereto.

ARTICLE X-CONTRACTOR TAX INDEMNITY

Contractor agrees to indemnify and hold Company, its parent, subsidiaries, and
affiliates harmless from payment of all federal, state and local taxes, as well
as the preparation and submission of all reports, returns and monies which may
be imposed or required under Unemployment Insurance, Social Security, Workmen's
Compensation, Federal or State Income Tax. Law and all other applicable laws,
regulations and orders relative to any payments that Company makes to Contractor
pursuant to this contract. If required by federal or state taxing laws, Company
is authorized to withhold monies due to Contractor and remit same to such taxing
authority.

ARTICLE XII-MUTUAL LIABILITY INDEMNITY

To the full extent permitted by applicable law, Contractor and Company shall
indemnify, defend and hold each other, and their parents, subsidiaries,
affiliates and all members, officers and employees thereof; harmless against all
losses, expenses or judgments, including reasonable attorneys’ fees, arising out
of or related to claims made by any third-parties as a result of actions taken
by either of them in connection with the performance of this Agreement.  This
obligation shall survive the termination of this Agreement.

3

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ARTICLE XIII- CONTRACTOR ASSIGNMENT AND POST-TERMINATION
OBLIGATIONS

During the term of this Agreement and for a period of six (6) months after this
Agreement terminates Contractor shall not acquire directly or indirectly for
itself or anyone other than Company any fee interest, leasehold, royalty or
other interest in or options upon lands or mineral rights within the Contract
Area, without first obtaining the Company’s written consent, provided that if
Company does not accept any lease obtained by Contractor within the Contract
Area within five (S)business days of being offered such lease by Contractor,
subject only to such standard conditions as acceptability of title to Company,
then notwithstanding this provision Contractor shall have the right to offer
that lease to other parties. If Contractor acquires any such interest in
violation of this paragraph, upon Company's demand it shall assign such interest
to Company on such form as Company may approve.

ARTICLE XIV-COMPANY POST-TERMINATION OBLIGATIONS

Following termination of this Agreement, whether upon the expiration of its Term
or for cause, Company shall pay Contractor compensation, and shall reimburse
Contractor for all lease acquisition expenses, as set forth in Exhibit B hereto,
for all leases and other interests within the Contract Area that were identified
to Company by Contractor prior to such termination and that are acquired by
Company, either directly or indirectly, within six (6) months after the
effective date of such termination.

ARTICLE XV-AUDIT OF CONTRACTOR

Company shall have the right to audit Contractor’s books and records relating to
services performed hereunder. To facilitate such audit, Contractor shall retain
its books and records made in any calendar year during the term of Agreement,
for a period of two (2) years from the end of such calendar year. This
obligation survives termination of this Agreement.  For the purpose of audit,
Company and its authorized representatives or agents shall have the right to
examine during business hours at Contractor's office and for a reasonable length
of time all books, records, accounts, correspondence, instructions,
specification, maps, receipts and memoranda insofar as they are pertinent to
this Agreement.

ARTICLE XVI-AUDIT OF COMPANY

Contractor shall have the right to audit Company's books and records relating to
any amounts payable to Contractor or that Contractor contends are payable
pursuant to the terms of this Agreement  To facilitate such audit, Company shall
retain its books and records made in any calendar year during the term of
Agreement, for a period of two (2) years from the end of such calendar year.
This obligation survives termination of this Agreement.  For the purpose of
audit, Contractor and its authorized representatives or agents shall have the
right to examine during business hours at Company’s office and for a reasonable
length of time all books, record, accounts, correspondence, instructions,
specification, maps, receipts and memoranda insofar as they are pertinent to
this Agreement.

4

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ARTICLE XVII-TERM AND TERMINATION

This Agreement shall commence on the Effective Date and shall expire on December
31, 2015, unless earlier terminated for cause pursuant to the terms hereof.
Thereafter, the Parties may, each in its sole discretion, decide whether to
renew this Agreement on the same or different terms. During the term of this
Agreement it may be terminated for cause, consisting of actions by either
Company or Contractor in material breach of this Agreement, provided that
written notice of any such alleged breach is provided by the non-breaching party
to the breaching party pursuant to the notice provisions of this Agreement,
which notice shall set forth the alleged material breach or breaches
insufficient detail to allow the breaching party to attempt to cure the alleged
breach or breaches and (b) the non-breaching party fails to cure the breach or
breaches within thirty (30) days of such notice or, in the case of a breach or
breaches that cannot reasonably be cured within such thirty (30) day period,
within a reasonable time for curing such breach or breaches.

ARTICLE XVIII-NOTICES

Unless otherwise provided herein, any notice given pursuant to the terms of this
Agreement shall be in writing and shall be delivered by fax or email, with a
copy in writing sent by regular mail, to the addresses set forth below, which
addresses may be changed by notice sent to the addresses set forth below, with
such changes to be effective only when actually received:

To Company:

PetroShare Corp.
7200 South Alton Way, Suite 8220
Centennial, CO 80112
Attn: Stephen J. Foley
(303) 770-6885 (Facsimile)
sfoley@PetroShareCorp.com

To Contractor:

Kingdom Resources LLC
7501 Village Square Drive Suite 205
Castle Pines, CO 80108
(303) 600-9695 (Facsimile)
gene@eguinoxland.com

5

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With a copy to:

Peter C. Forbes, Esq.
Carver Schwarz McNab Kamper & Forbes, LLC
1600 Stout Street, Suite 1700
Denver.CO 80203
(303) 893-1829
(Facsimile)
pforbes@csmkf.com

ARTICLE XIX-ENTIRE AGREEMENT

All exhibits to this Agreement are expressly made a part of this Agreement, and
the parties acknowledge and agreed that the written terms of this Agreement,
including the Exhibits incorporated herein constitute the complete agreement of
the Parties with respect to the subject matter hereof, that any prior oral
agreements or understandings between the Parties concerning the subject matter
hereof are merged herein, and that no oral agreements or understandings between
the Parties concerning the subject matter hereof including any amendments
hereto, shall be binding or enforceable unless agreed to in a writing signed by
the Parties or their authorized representatives.

ARTICLE XX-AUTHORIZED SIGNATURES

The persons executing this Agreement below represent that they have been duly
authorized to do so by the Party upon whose behalf they are executing this
Agreement, and that this Agreement shall accordingly be binding on such Party.

ARTICLE XXI-EFFECTIVE DATE

This Agreement may be executed in counterparts, and shall be effective as of the
date first written above upon execution by both Parties.

ARTICLE XXII-GOVERNING LAW

This Agreement shall be interpreted according to the laws of the State of
Colorado applicable to contracts made within, and to be performed within, the
State of Colorado. Venue for any action between the Parties arising out of or
relating to this Agreement shall lie exclusively in the District Court for the
City and County of Denver.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date
first written above.

(Signatures on following page]

6

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PETROSHARE CORP

By:  /s/ Stephen J. Foley
Name:  Stephen J. Foley
Title:  CEO

KINGDOM RESOURCES LLC

By:  /s/ Gene Osborne
Name:  Gene Osborne      11/12/14
Title:  Manager

7

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EXHIBIT A
CONTRACT AREA

The project  area  subject to this Agreement shall be as follows:

Sections 1  through 36,  All,
Township 1 South, Range 67 West, 6th PM
Adams County, Colorado

Any  other  areas  as  may be  added to by mutual agreement by virtue  of a
revised Exhibit A.

--------------------------------------------------------------------------------

EXHIBIT B
GUIDELINES FOR OIL & GAS LEASE AND MINERAL INTEREST ACQUISITIONS

It is the intent of these general guidelines to provide the basic terms and
conditions which are acceptable to Company for acquisitions made hereunder.  All
obligations hereunder will be performed in good faith.

I.
LEASING OIL & GAS MINERAL INTERESTS

LESSEE OF RECORD: Unless agreed otherwise, Contractor shall be the Lessee of
record, as provided in the oil and gas lease form at Exhibit C.

INTEREST TO BE LEASED: Within the Contract Area, any unleased fee minerals,
including fee minerals owned by affiliates of Contractor.·

MAXIMUM LEASE BONUS: No less than $2,000 and no more than $3,000 per net acre to
Landowner unless agreed to otherwise by the Parties. Contractor shall receive a
payment equal to 10% of Landowner Bonus (the "Standard Contractor Fee"),
provided that the total of the Landowner Bonus and the Standard Contractor Fee
will not exceed $3,000 without Company's consent.

Example No. 1: Landowner Bonus is $2,500. Company pays $2,500 to Landowner as
Landowner Bonus and $250 to Contractor as Standard Contractor Fee.

Example No. 2: Landowner Bonus is $2,900. Company pays $2,900 to Landowner as
Landowner Bonus. Because total of Landowner Bonus and Standard Contractor Fee
would exceed $3,000, Company would only pay $100 to Contractor as Contractor Fee
unless Company agrees otherwise.

OIL & GAS LEASE TERMS: 3 year primary term with a minimum 2 year extension
option at up to 75% of original lease bonus per net acre, or 5 + year primary
lease term.

LANDOWNER ROYALTY ("LOR"): Maximum of 18.75%, unless agreed to otherwise by the
Parties.

 
1

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NET REVENUE INTEREST (''NRI"): Company shall own and/or retain no less than
79.00% NRI, proportionately reduced, except with respect to leases obtained from
entities affiliated with Contractor, where Company shall own and/or retain no
less than 80.00% NRI, proportionately reduced.

OVERRIDING  ROYALTY INTEREST: Company and Contractor agree as to the following
overriding royalty interest ("ORRI'') distribution, proportionately reduced:

Unaffiliated  Leases-79. 00% Company NRI
•
Reign Energy Partners, LLC ("Reign"): 2.00% ORRI

•
Contractor: ORRI equal to positive difference between existing burdens of
record, including Reign ORRI, and 21.00%.

•
Note: ORRI is subject to change if the Parties agree to an LOR greater than
18.75%, and could result in a net zero ORRI to Reign and/or Contractor.

Affiliated Leases-80. 00% Company NRI
•
Reign: 1.00% ORRI if LOR equals 18.75%; 2.00% ORRI if LOR is less than 18.75%.

•
Contractor: ORRI equal to positive difference between existing burdens of
record, including Reign ORRI, and 20.00%:

•
Note: ORRI is subject to change if the Parties agree to an LOR greater than
18.75%, which could result in a net zero ORRI to Reign and/or Contractor.

 

ORRI DISTRIBUTION METHOD:  Scenario I-Contractor is Lessee: Contractor acquires
and submits oil and gas lease(s) acceptable to the Company for recording, which
names Contractor as Lessee. Within ten (10) business days of a return receipt
of  recorded lease, Contractor shall assign all its right, title and interest in
the subject lease(s) to Company in the form of Exhibit D, and reserve an ORRI
into  Contractor. Within a reasonable time thereafter, Contractor shall assign
an ORRI in accordance with the distribution amounts agreed to herein.

2

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Scenario 2-Company is Lessee: Contractor acquires and submits oil and gas lease(s) acceptable to the Company for recording, which name Company as Lessee. Within ten (10) business days of a return receipt of recorded lease, Company shall execute an
Assignment of ORRI to Reign and Contractor in accordance with the distribution amounts agreed to herein.

NRI/ORRI EXAMPLES: Example 1-15.00% LOR/Scenario 1-Unaffiliated: Contractor
secures an oil and gas lease in the Contract Area in the name of Contractor from
an unaffiliated entity, subject to a 15.00% LOR, and files it  of  record.
Within ten (10) business days of return receipt of recorded lease, Contractor
shall assign  Company all right, title and interest in said lease, delivering a
79.00% NRI, and reserve an ORRI equal to the positive difference between
existing lease burdens and 21.00%. Within a reasonable time thereafter,
Contractor shall assign a 2.00% ORRI to Reign, and retain a 4.00% ORRI. All
interests being proportionately reduced.

Example 2-18.75% LOR/Scenario 1-Unaffiliated: Contractor secures an oil and gas
lease in the Contract Area in the name of Contractor from an unaffiliated
entity, subject to an 18.75% LOR, and files it of record. Within ten (10)
business days of return receipt of recorded lease, Contractor shall assign
Company all right, title and interest in said lease, delivering a 79.00% NRI,
and reserve an ORRI equal to the positive difference between existing lease
burdens and 21.00%. Within a reasonable time thereafter, Contractor shall assign
a 2.00% ORRI to Reign, and retain a 0.25% ORRI. All interests being
proportionately reduced.

Example 3-21.00% LOR/Scenario  1-Unaffiliated: Subject to
prior agreement by the Parties, Contractor secures an oil and gas lease in the
Contract Area in the name of Contractor from an unaffiliated party, subject to a
21.00% LOR, and files it of record. Within ten (10) business days of return
receipt of recorded lease, Contractor shall assign Company all right, title and
interest in said lease, delivering a 79.00% NRI, and reserve an

 
3

--------------------------------------------------------------------------------

ORRI equal to the positive difference between existing lease burdens and 21.00%.
Under this scenario, there is no ORRI reserved or distributed. All interests
being proportionately reduced.

Example 4-18.75% LOR/Scenario I-Affiliated: Contractor secures an oil and gas
lease in the Contract Area in the name of Contractor from an affiliated entity,
subject to an 18.75% LOR, and files it of record. Within ten (10) business days
of return receipt of recorded lease, Contractor shall assign Company all right,
title and interest in said lease, delivering an 80.00% NRI, and reserve an ORRI
equal to the positive difference between existing lease burdens and 20.00%.
Within a reasonable time thereafter, Contractor shall assign a 1.00% ORRI to
Reign, and retain a 0.25% ORRI. All interests being proportionately reduced.

II.
PURCHASING OIL & GAS MINERAL RIGHTS:

To be negotiated on a property by property basis, pursuant to subsequent
parameters established by and between the Parties. If applicable, the above ORRI
guidelines and understanding applies.

III.
PURCHASING OIL & GAS LEASEHOLD INTEREST:

To be negotiated on a property by property basis, pursuant to subsequent
parameters established by and between the Parties. If applicable, the above ORRI
guidelines and understanding applies.

IV.
COMPENSATION AND COST REIMBURSEMENT:

Company agrees to reimburse Contractor for actual documented land and title
costs related to Company's leasing and mineral acquisition efforts within the
Contract Area, based on customary industry standards which shall include, but
not be limited to, subcontractor day rates and related costs, related attorney's
fees, clerk and recorder fees, and as necessary, reasonable daily stipend for
meals, mileage, and office supplies. Contractor shall undertake reasonable best
efforts to control costs and work closely and transparently with Company towards
that objective, relative to the task that Company has assigned to Contractor.
Contractor shall submit an invoice for the costs related to the tasks assigned
to Company on a bi-monthly basis, and Company agrees to make payment to
Contractor within ten (10) days from receipt of said invoice.

Company and Contractor ·agree that the ORRI and Standard Contractor Fee, if any,
as described herein are just and adequate compensation for Contractor's
services, paid by Company in lieu of a Contractor day-rate.

 
4

--------------------------------------------------------------------------------

Company further agrees to pay all landowner lease bonus payments, lease option
or extension payments, surface use and access fees, and seismic costs associated
with leasing or the acquisition of other mineral interests within the Contract
Area pursuant to this Agreement

Any costs incurred by Contractor that are unrelated to Company's leasing and
mineral acquisition efforts in the Contract Area, specifically costs
attributable to the drilling and completion of oil and gas wells that would
typically and proportionately be passed through to the Company's working
interest partners if Company were the operator of such wells shall not be billed
by Contractor to Company. However, in the event Company is the operator of wells
being drilled and completed on lands located in the Contract Area and such lands
coincide with materials that Contractor has in its possession that are
attributable to the drilling and completion of an oil and gas well, but which
Contractor has not previously billed to Company, then Company shall have the
option to obtain said materials by paying the cost incurred by Contractor to
obtain such materials.

5

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Producers 88-Paid Up
PetroShare Standard
 (Colorado Rev. 9/2014)
 
EXHIBIT C -FORM OF PAID-UP
OIL AND GAS LEASE

This Lease Agreement. made and entered Into thisday of,by and between
---------------------------------- whose mailing address is
_____________________________________________, hereinafter called Lessor
(whether one or more), and PetroShare Corporation whose mailing address is
Corporate 26, 7200 S.  Alton Way #B220, Centennial, Colorado, 80112 hereinafter
called Lessee:

WITNESSETH:
1.    That Lessor, for and in consideration of Ten and More dollars
($10.00 & More) cash in hand paid, the receipt of Which Is hereby acknowledged,
and the covenants and agreements hereinafter contained, has granted, demised,
leased and let, and by these presents does grant, demise, lease and let
exclusively unto the said Lessee, for the purpose of mining, exploring for (by
geophysical and other methods), developing, producing, and marketing oil, gas
and other substances covered hereby on the leased premises as hereinafter
described, or lands pooled or unitized therewith, with rights of way and
easements for ingress and egress from lands by Lessee, or its assignees, agents
or permittees, as may be reasonably necessary to or associated with, but not
limited to, the construction and maintenance of pipelines, telephone and
electric fines, communication towers, tanks, ponds, pits, roadways, canals,
water wells, disposal wells, injection wells, power stations, equipment,
structures and other facilities deemed necessary by Lessee to produce, store,
maintain, treat and transport said oil, gas, and other substances.
 
Being situated in the County of  Adams State of Colorado, described as follows,
to-wit:

See Exhibit A-Contract Area

and containing _______________ acres, more or less.

In addition to the land described above, the term leased premises shall include
to the same extent as if specifically described, lands riparian in  nature;
lands acquired or retained by avulsion, accretion, relection or ether natural
causes that result in changes to any boundaries or centerline of any bodies of
water, as commonly defined regardless of size, traversing or adjoining the above
described lands;  lands located in and under any road, easement or right-of-way
traversing or adjoining the lands described above; any small strips or parcels
of land adjacent or contiguous to the lands described above now owned or
subsequently acquired, along with; any and all Interests of Lessor now owned or
subsequently acquired through other methods regardless of the mineral or gross
acreage assumed or stated in this Lease, and if Lessor owns or subsequently
acquires more mineral acres than the amount upon which Lessor's bonus payment
was calculated, lessor shall notify Lessee and afford Lessee the opportunity to
pay Lessor for the additional mineral acres at the same rate of the original
bonus payment  In consideration of that additional bonus payment, Lessor agrees
to execute at Lessee's request any additional or supplemental instrument
required to cure and more accurately describe the leased premises.  The term
“1oil” as used herein shall Include and be defined as any liquid hydrocarbon
substance that occurs naturally in the earth, including natural condensate
recovered from gas without resort to manufacturing process. The term gas as used
herein shall include and be defined as any substance which is produced in a
natural state from the earth and maintains a gaseous or rarefied state at
ordinary temperature and pressure conditions, including but not limited
to, helium, carbon dioxide, coal-bed methane, nitrogen, sulphur, casinghead gas
and other commercial gases.

2. Subject to the other provisions herein contained, this lease shall remain in
force for a primary term of 6 years from the date hereof, and for as long
thereafter as oil, gas or other substances covered hereby are produced in paying
quantities from said leased promises or lands pooled therewith, or drilling
operations are continuously prosecuted. "Drilling Operations" as used herein
shall include operations for both the drilling of a new well and such other
operations conducted In efforts to establish, resume or re­ establish production
of oil and gas including, but not limited to, reworking, deepening or plugging
back of a well or hole; such operations shall be considered “continuously
prosecuted” if not more than one hundred twenty (120) days shall elapse between
the completion and abandonment of one well or hole and the commencement of
drilling operations on another well or hole; for a new well, drilling operations
shall be deemed to have commenced when construction of the well site location or
the road providing access to the wellsite location begins; for such other
operations including but not limited to re-working, deepening, and plugging back
of a well or hole, drilling operations shall be deemed to have commenced when
Lessee has the requisite equipment in place at the wellsite.

3. If at the expiration of the primary term of this lease, oil, gas or other
substances covered hereby are not being produced in paying quantities from the
leased premises or lands pooled therewith but drilling operations are being
continuously prosecuted, and such efforts results in production of oil, gas or
other substances therefrom, then this lease shall continue in force for so long
thereafter as oil, gas, or other substances continue to be produced from the
leased premises or lands pooled therewith.
 
4. This Is a PAID-UP LEASE and all cash consideration first recited above have
been paid  to Lessor in advance to keep this lease in full force and effect
throughout the primary term. In consideration of the payment, Lessor agrees that
Lessee shall not be obligated, except as otherwise provided herein, to commence
or continue any operations during the primary term or pay any annual

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rentals. Lessee may at any time or times during or after the primary tem,
surrender this lease as to all or any portion of the lands described above, and
as to any strata or stratum, by delivering to Lessor or by filing of record a
release or releases, and be relieved of all obligations thereafter accruing to
the acreage surrendered.

5. Lessee shall deliver to the credit of Lessor as royalty, free of cost but not
applicable taxes, into the tanks or in the pipeline on the leased premises to
which lessee may connect its wells the equal one-sixth (116th) part of all oil
produced and saved from the leased premises, or Lessee may from time to time at
its option purchase any royalty oil in its possession, paying the market price
thereof prevailing for oil of like grade and gravity in the field where produced
on the date of purchase. The Lessee shall pay Lessor, as royalty, on gas,
including casinghead gas or other gaseous substances, produced from the leased
premises and sold or used off the premises or used in the manufacture of
gasoline or other products, the market value at the well of one-sixth (1/8th) of
the gas sold or used, provided that on gas sold the royalty shall be one-sixth
(1/6th) of the amount realized from such sale. The amount realized from the sale
of gas shall be the price established by the gas sales contract entered into in
good faith by lessee and a gas purchaser for such tem, and under such conditions
as are customary in the industry. Price shall mean the net amount received by
after lessee after giving effect to applicable regulatory orders and after
application of any applicable price adjustments specified in such contract or
regulatory orders. In the event lessee compresses, treats, purifies or
dehydrates such gas (whether on or off the leased premises) or transports gas
off the leased premises, lessee in computing royalty hereunder may deduct from
such price a reasonable charge for each of such functions performed, including
associated fuel.

6. If at any time, either before or after the expiration of the primary tem, of
this lease, there is one or more wells capable of producing oil, gas or ether
associated substances ln paying quantities on lands covered by this lease, or on
other lands with which lands covered by this lease are pooled or unitized
therewith, but such well or wells are shut-In, whether before or after
production thereof, and this lease is not being maintained otherwise as provided
herein, this lease shall not terminate (unless released by Lessee) and it shall
nevertheless be considered that oil, gas or other associated substances are
being produced from lands covered by this lease during all times while the well
is so shut-In. Lessee shall use reasonable diligence to market the oil or gas
capable of being produced from such shut-In well, but shall be under no
obligation to market the oil or gas under terms, conditions or circumstances
which, in Lessee's Judgment exercised in good faith, are unsatisfactory. When
the lease is continued in force in this manner, Lessee shall pay or tender to
the Lessor or Lessor's successors or assigns, an amount equal to $1.00 per year
per net mineral acre covered by the lease. Such payments shall be made on or
before the shut-in royalty payment date, as defined below, next occurring after
the expiration of one hundred twenty (120) days from the date the well was
shut-In, unless prior to such date oil or gas from the well Is sold or used or
the lease is otherwise maintained as provided herein. In like manner, on or
before each succeeding shut-In royalty payment date while such well remains
shut-In, lessee shall make payment of shut-in royalty in the same amount and
manner. The tem, shut-In royalty payment date• shall mean the anniversary date
of this lease. Any shut-in royalty payment may be made by cash, draft or check,
mailed or tendered at Lessor's address on or before the shut-In royalty date.
Lessee's failure to pay or tender, or property pay or tender, any such sum shall
render Lessee liable for the amount due but it shall not operate to terminate
the Lease.

7. If Lessor owns less than the full mineral estate in all or any part of the
leased premises, the royalties and shut-In royalties payable hereunder for any
well or wells on any part of the leased premises or lands pooled therewith shall
be reduced to the proportion that lessor's interest in such part of the leased
premises bears to the full mineral estate in such part of the leased premises,
calculated on a net acreage basis.

8. Lessee shall have the right to use, free of cost. gas, oil and water produced
on said lands for Lessee's operation thereon, except water from wells and
reservoirs of Lessor.

9. Lessee shall pay to lessor reasonable amounts for damages caused by its
operations on said land.
 
10.  When requested by Lessor, Lessee shall bury its pipelines which traverse
cultivated lands below plow depth.
 
11. No well shall be drilled nearer than five hundred (500) feet to an occupied
dwelling on said premises, without written consent of Lessor.

12. Lessee shall have the right at any time (but not the obligation), to remove
all improvements, machinery. and fixtures placed or erected by Lessee on said
premises, including the right to pull and remove casings.

13. The interest of either Lessor or Lessee hereunder may be assigned, devised
or otherwise transferred in whole or in part, by area and/or by depth or zone,
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 one hundred twenty (120) 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 of the death of any person entitled
to shut-In royalties hereunder, Lessee may pay or tender such shut-In royalties
to the credit of decedent or decedents estate in the depository designated
above. If at any time two or more persons are entitled to shut-In royalties
hereunder, Lessee may pay or tender such shut-In royalties to such persons or to
their credit in the depository, either Jointly or separately in proportion to
the interest which each owns.  If Lessee transfers its interests 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 i in all or any portion of the
area covered by this lease, the obligation to pay or tender shut-in royalties
hereunder shall be divided between Lessee and the transferee in proportion to
the net acreage interest in this lease then held by each.

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14. Lessee, at its option, is hereby given the right and power at any time and
from time to time as a recurring right. either before or after production, as to
all or any part of the lands described herein and as to any one or more of the
formations hereunder, to pool or unitize the leasehold estate and the mineral
estate covered by this Lease with other land(s), lease or leases.  In the
immediate vicinity for the production of oil and gas, or separately for the
production of either, when in Lessee's judgment It is necessary or advisable to
do so, and irrespective of other authority similar to this exists with respect
to such other land(s), lease, or leases.  Likewise, units previously formed to
include formations not producing oil or gas, may be reformed to exclude such
non­ producing formations. The fanning or reforming of any unit shall be
accomplished by Lessee executing and filing of record a declaration of such
unitization or reformation, which declaration shall describe the unit. Any unit
may include land upon which a well has theretofore been completed or upon which
operations for drilling have therefore been commenced. Production, drilling or
reworking operations or a well shut in for want of a market anywhere on a unit
which includes all or a part of this lease shall be treated as If it were
production, drilling or reworking operations or a well shut in for want of
market under this lease.  In lieu of the royalties elsewhere herein specified,
including shut-in gas royalties, Lessor shall receive on production from the
unit so pooled royalties only on the portion of such production allocated to
this lease; such allocation shall be that proportion of the unit production that
the total number of surface acres covered by this lease and included in the unit
bears to the total number of surface acres in such unit. In addition to the
foregoing, lessee shall have the right to unitize, pool, or combine all or any
part of the above described lands as to one or more of the formations thereunder
with other land(s) in the same general area by entering into a cooperative or
unit plan of development or operation approved by any governmental authority
and, from time to time, with like approval, to modify, change or terminate any
such plan or agreement and, in such event, the terms, conditions, and provisions
of this lease shall be deemed modified to conform to the terms, conditions, and
provisions of such approved cooperative or unit plan of development or operation
and, particularly, all drilling and development requirements of this lease,
express or implied, shall be satisfied by compliance with the drilling and
development requirements of such plan or agreement. and this lease shall not
terminate or expire during the life of such plan or agreement  In the event that
said above described lands or any part thereof, shall hereafter be operated
under such cooperative or unit plan of development or operation whereby the
production therefrom is allocated to different portions of the land covered by
said plan, then the production allocated to any particular tract of land shall,
for the purpose of computing the royalties to be paid hereunder to Lessor, be
regarded as having been produced from the particular tract of land to which it
is allocated and not to any other tract of land; and the royalty payments
to be made hereunder to Lessor shall be based upon production only as so
allocated.

15. In the event that Lessor, during the primary term of this lease, receives a
bona fide offer which Lessor is willing to accept from any party offering to
purchase from Lessor a lease covering any or all of the substances covered by
this lease and covering all or a portion of the land described herein, with the
lease becoming effective upon expiration of this lease, Lessor hereby agrees to
notify Lessee in writing of said offer immediately, including in the notice the
name and address of the offeror, the price offered and all other pertinent terms
and conditions of the offer. Lessee, for a period of fifteen (15) days after
receipt of the notice, shall have the prior and preferred right and option to
purchase the lease or part thereof or interest therein, covered by the offer at
the price and according to the terms and conditions specified in the offer.

16. Lessee's obligations and covenants hereunder, whether express or implied,
shall be subject to all federal and state, county or municipal laws, executive
orders, rules and regulations and Lessee's obligations and covenants by Lessee
hereunder, whether express or implied, shall be suspended at the time or from
time to time as compliance with such obligations and covenants Is prevented or
hindered by or is in conflict with federal, state, county, or municipal laws,
rules, regulations or executive orders asserted as official by or under public
authority claiming jurisdiction, or Act of God, adverse field, weather, or
market conditions, inability to obtain materials in the open market or
transportation thereof, wars, strikes, lockouts, riots, or other conditions or
circumstances not wholly controlled by Lessee, and this lease shall not be
terminated in whole or in part, nor Lessee held liable for damages for failure
to comply with any such obligations or covenants if compliance therewith is
prevented or hindered by or is in conflict with any of the foregoing
eventualities. The time during which Lessee shall be prevented from conducting,
drilling or reworking operations during the primary term of this lease, under
the contingencies above stated, shall be added to the primary term of the lease.

17. No litigation shall be initiated by Lessor with respect to any breach or
default by Lessee hereunder, for a period of at least ninety days (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 canceled in whole or in part unless Lessee is given a reasonable
time after said Judicial determination to remedy the breach or default and
Lessee fails to do so.

18. Lessor hereby warrants and agrees to defend the title to the lands described
above, and agrees that the lessee. at its option, shall have the right at any
time to pay for Lessor, any mortgage, taxes or other liens existing, levied or
assessed on or against the above described lands in the event of default of
payment by Lessor and be subrogated to the rights of the holder thereof, and
Lessor hereby agrees that any such payments made by Lessee for the Lessor may
be deducted from any amounts of money which may become due the Lessor under the
terms of this lease.

IN WITNESS WHEREOF, this lease is executed to be effective as of the date first
written above, but upon execution shall be binding on the signatory and the
signatory's heirs, devisees, executors, administrators, successors and assigns,
whether or not this lease has been executed by all parties herein above named as
Lessor.

[image00004.jpg][image00005.jpg]

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ACKNOWLEDGMENT
 
STATE OF _________________
)
 
) ss.
COUNTY OF _______________
)

BE IT REMEMBERED, that on this ______ day of ______ day of ______________,
20_____, before me, a Notary Public in and for said County and State, personally
appeared _________________, known to me to be the identical person(s) described
in and who executed the within and foregoing instrument as his/her free and
voluntary act and deed for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I have hereunto set my hand an affixed my Official Seal the
day and year first above written.
 

 
 
 
Notary Public
SEAL
 
 
 
 
Residing at ____________________________________________
 
 
 
My commission expires: __________________________________

 
WHEN RECORDED, MAIL TO:
Kingdom Resources, LLC
Address:

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EXHIBIT D -FORM OF OIL AND GAS LEASE ASSIGNMENT
 
ACKNOWLEDGMENT
 
STATE OF COLORADO
)
 
)  KNOW ALL MEN BY THESE PRESENTS:
COUNTY OF DOUGLAS
)

 
THAT for the sum of Ten Dollars ($10.00) and other good and valuable
consideration paid to it, the receipt and sufficiency of which are hereby
acknowledged, KINGDOM RESOURCES, LLC, a Colorado limited liability company,
whose address is 7501 Village Square Drive, Suite 205, Castle Pines, Colorado
80108 (hereinafter referred to as "Assignor") has GRANTED, SOLD, TRANSFERRED,
ASSIGNED, and CONVEYED and by these presents does GRANT, SELL, TRANSFER, ASSIGN,
and CONVEY unto PETROSHARE CORPORATION, a Colorado corporation, whose address is
Corporate 25, 7200 S. Alton Way, #B220, Centennial, CO 80112 (hereinafter
referred to as "Assignee"), all of Assignor's right, title and interest in and
to the oil, gas, and mineral lease(s) set forth on Exhibit "A" attached hereto,
insofar and only insofar as said lease(s) cover the lands described on Exhibit
"A" (the "Leases"), all being located in Adams County, Colorado.
 
Reserving unto Assignor an overriding royalty interest in and to such leases to
KINGDOM RESOURCES, LLC equal to the positive difference between existing lease
burdens of record and _____ percent (___%) of all oil, gas and other
hydrocarbons produced, saved and marketed from the Leases hereby assigned, and
further reserving unto REIGN ENERGY PARTNERS, LLC an overriding royalty interest
in and to such leases equal to the positive difference between  existing lease
burdens of record and _____ percent (___%) of all oil, gas and other
hydrocarbons produced, saved and marketed from the Leases hereby assigned. The
foregoing reserved overriding royalties and all other terms and conditions of
this Assignment shall apply to any and all extensions, renewal and substitute
leases obtained by Assignee, its successors or assigns, on the land described
herein. If said Leases cover less than the full fee simple estate in the oil,
gas and other hydrocarbons under any tract or tracts of the land assigned, with
respect to that tract or tracts, the overriding royalty herein reserved by
Assignor shall be proportionately reduced.
 
Assignor hereby warrants that the Leases conveyed herein shall be free and clear
of any and all claims, liens, and encumbrances created by, through, or under
Assignor, but not otherwise. Except for the special warranty of title set forth
in the immediately preceding sentence, this Assignment of Oil and Gas Lease is
made and delivered to Assignee without any warranty of title, express, implied
or statutory.
 
The terms and provisions of this Assignment of Oil and Gas Lease shall be
binding upon and inure to the benefit of the parties hereto together with their
respective heirs, successors and assigns.
 
Executed and effective thisday of 201___.
 
 
ASSIGNOR
 
KINGDOM  RESOURCES, LLC

 
By: _________________________________
Name:
Title:

 
 

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STATE OF _________________
)
 
) ss.
COUNTY OF _______________
)

The  foregoing  instrument  was  acknowledged  before  me  on   this _____  day
of 2014, by for Kingdom Resources, LLC, a Colorado limited liability company, on
behalf of said entity.

(Seal)

 

 
 
Notary Public – State of Colorado
My Commission Expires: ___________________________

 
 

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Exhibit E-Form of Access and Damage Settlement Agreement

KNOW ALL MEN BY THESE PRESENTS THAT:

This Access and Damage Settlement Agreement made and entered into this ______day
of ________________, 2014, by and between hereinafter referred to as "Owners"
and PetroShare Corporation, whose address is Corporate 25, 7200 S. Alton Way
#B220, Centennial, Colorado 80112.

For and in consideration of the sum of Ten and more dollars and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, we, the undersigned each of lawful age, do hereby release acquit
and forever discharge PetroShare Corporation, hereinafter referred to as
"Operator", its employees, agents and contractors, from any and all losses,
liabilities, claims, damages, demands and causes of action for any and all
injuries and damage to the surface of the tract of land herein below described
and to the appurtenances, improvements and vegetation on said tract of land
owned by the undersigned, their respective employees and/or tenants, arising
directly or indirectly in connection with the operations of Operator, its
employees, agents and contractors, which include but is not limited to i)
accessing, ii) building a drillsite, iii) drilling, completing and producing a
well or wells, and iv) exercising other contractual, lease, or statutory rights
of the Operator on the subject tract of land being more particularly described
as follows, to wit:

A strip of land ("Access Road'') in the __________of Section ______, Township 1
South, Range 67 West, 6th P.M., Adams County, Colorado and the tract of land for
a Drillsite ("Drillsite") located in the NW of said Section _____, the Drillsite
and Access Road to occupy approximately __________ acres more or less.

The parties do hereby further agree as follows:

Operator shall pay the Sum of __________1/4 Thousand and No/100 Dollars
($_,000.00) per acre as surface damages to build the Access Road and Drillsite
location, to drill a well(s) for the purposes of developing the minerals
underlying the drilling and spacing unit comprised of Section(s) _ and ___,
Township 1 South, Range 67 West, or lands pooled therewith or adjacent thereto,
and in the event the well(s) is completed as producer or in the effort thereof,
then to use, install, construct and maintain gathering lines, transportation
lines, and power lines as well as the ability to use, .install, construct and
maintain on the Drillsite equipment and facilities for production, storage,
transportation and/or marketing of produced substances. Operator shall have the
option to drill more than one well from the Drillsite and shall pay Owner the
sum of ______Thousand Five Hundred Dollars ($_,500.00) for each additional well
drilled therefrom within Thirty (30) days of the date that Operator begins
drilling operations on such well(s). Operator shall also have the option to
expand the size of the Drillsite and Access Road by paying Owner the Sum
of_________ Thousand Dollars {$_,000.00) for each additional acreage, or
fraction thereof, which shall not exceed ____________________ (__) total acres
for the Drillsite.

It is expressly agreed by the undersigned that if a well is not drilled on said
Drillsite, or if the captioned premises are not entered for the purposes
described herein in preparation for the drilling of a well, then and in that
event, this Access and Damage Settlement Agreement shall be deemed null and
void, the

 
1

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payment in the amount described above for the surface damages is hereby waived
and Operator shall not be required by this agreement to make such payment to the
undersigned.

Access to the property shall be limited to Operator and its contractors,
personnel and agents involved in the drilling and operation of such well(s) and
shall not be open to the general public. Operator shall be responsible for the
repair and maintenance of the Access Road and Drillsite constructed hereunder
prior to termination of Operator's use. Operator shall leave all cattle guards
installed, if any, permanently in place.

Operator shall comply with and be subject to all applicable hazardous materials
laws and other applicable regulations or restrictions duly and validly adopted
by the State of Colorado or any political subdivision thereof and agrees to
indemnify and hold harmless Owner from and against any and all responsibility or
liability for violation of the same by Operator's agents or employees, including
responsibility for any hazardous waste spills that may be associated with
Operator's use of the premises.

Upon the termination of Operator's activities on the Access Road and Drillsite,
Operator agrees to restore the surface to its original condition (as nearly as
practicable) including reseeding or at Owner's written request, Operator may
leave the Access Road and/or Drillsite in place, as is, for Owner's use.

Operator shall indemnify and hold Owner, its officers, employees, agents,
successors and assigns harmless from and against any and all liability, loss
damage claims, demand actions, causes of actions, including court costs and
attorney's fees which may result from property damage for personal injury to, or
death to persons whomsoever, including any person using the Access Road and
Drillsite when such personal injury, death loss, destruction, or damage arises
because of the existence of any of the improvements or the construction,
operation, maintenance, repair, removal reconstruction, or use of the roadway
and Drillsite or any part thereof, except to the extent that such liability,
loss damage, claims, demands actions, causes of actions, including court costs
and attorney's fee arise out of the negligence, willful misconduct, or any act
or omission of Owner, or its agents, employees, successors or assigns. This
indemnity shall cease at such time as (i) Operator completes restoration of the
Access Road or Drillsite or (ii) Owner elects in writing to have the Operator
leave the Access Road and/or Drillsite in place.

The undersigned Owners, do hereby further agree that payment of the
consideration as set forth above shall be full and complete payment, settlement,
compromise and satisfaction of any and all of the above mentioned losses,
liabilities, claims, damages demands and causes of action accrued or accruing to
the undersigned, their respective employees and/or tenants arising directly or
indirectly in connection with the above mentioned operations by Operator, its
employees, agents and contractors and that such payment is in no way an
admission of liability by Operator, its employees, agents or contractors.

Any notice or payment required or permitted to be given hereunder shall be
deemed to be delivered when deposited in the U.S. Mail, postage prepaid,
certified with return receipt requested, or registered mail, addressed to the
party to which it is intended at the address set forth above for such part and
that each party may rely on the last known address of the other party until
notified by the other part, their successors or assigns.

This instrument may be executed in any number of counterparts and shall
be binding upon all parties who have executed such a counterpart with the same
force and effect as if all parties have signed the same document.

This Agreement shall inure to the benefit of the Owners and Operator as well as their Successors and Assignees.
 
2

--------------------------------------------------------------------------------

Executed this ___________day of___________, _______.

Name:

____________________
Signature Owner

ACKNOWLEDGEMENT

 
STATE OF _________________
)
 
) ss.
COUNTY OF _______________
)

On this _____ day of ______________, 2014, before me, a Notary Public,
personally appeared _______________________ known to me to be the persons
described in and who executed the within instrument and acknowledged to me that
he executed the same as his free and voluntary act and deed for the uses and
purposes therein set forth.
 
IN WITNESS WHEREOF, I have hereunto set my hand and affixed by Notarial seal the
day and year first above written.

(SEAL)

 

 
 
Notary Public – State of Colorado
My Commission Expires: ____________________________

 
 
 
PETROSHARE CORPORATION
By its representative, ______________

___________________________
TITLE: Duly Authorized Representative

 
3

--------------------------------------------------------------------------------

 
STATE OF _________________
)
 
) ss.
COUNTY OF _______________
)

Before me, the undersigned, a Notary Public in and for said county and state, on
this ______day of ___________________, 2014, personally appeared
___________________________, the Duly Authorized Representative of PetroShare
Corporation, and that said instrument was signed on behalf of said corporation
and said instrument to be the free act and deed of said corporation.

IN WITNESS WHEREOF, I have hereto set my hand and affixed my notarial seal the
day and year last above written.

 
____________________________
Notary Public

My Commission Expires:________________

4

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EXHIBIT "D"

AREA OF MUTUAL INTEREST

1.
All of Township 1 South, Range 67 West, Adams Co., CO 6th PM, comprising
approximately 36 square miles, plus a one mile buffer zone around the perimeter
of said Township.

2.
Any other mutually agreeable areas.

 
 
 
 
15

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[map.jpg]
 

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EXHIBIT “E”

ASSIGNMENT
 
STATE OF COLORADO
)
 
COUNTY OF _________________
)
 

 

KNOW ALL MEN BY THESE PRESENTS, that PetroShare Corp., with an office at 7200 S.
Alton Way, Suite B220, Centennial, CO 80112, hereinafter referred to as
“Assignor”, for and in consideration of the sum of TEN AND NO/100 DOLLARS
($10.00), the receipt and adequacy of which is hereby acknowledged and full
acquittance granted therefor, has granted, sold, conveyed and delivered and does
hereby grant, sell, convey and deliver unto Providence Energy Operators, LLC,
 hereinafter referred to as “Assignee”, ______% of Assignor’s right, title and
interest in the following properties (real, personal or mixed) and leasehold
and/or other rights (contractual or otherwise), unless expressly reserved or
excluded herein, the following being referred to herein collectively as the
Assets:

(a) the oil and gas leases described on Exhibit “A”, attached hereto, in the
amounts of the working interests specified thereon (the “Leases”) and the real
properties covered by said Leases (the “Properties”);

(b) The rights and interests in, to and under, or derived from, all of the
presently existing and valid unitization and pooling agreements and units
(including all units formed by voluntary agreement and those formed under the
rules, regulations, orders or other official acts of any governmental entity
having appropriate jurisdiction), if any, to the extent they relate to any of
the Leases;

(c) The rights and interests in, to and under, or derived from, all of the
presently existing and valid joint operating agreements, oil sales contracts,
casinghead gas sales contracts, gas sales contracts, processing contracts,
gathering contracts, transportation contracts, easements, rights-of-way,
servitudes, surface leases and other contracts to the extent they are described
on Exhibit “C” attached hereto or relate to the Leases or the Properties (the
“Contracts”);

(d) The rights and interests in and to all personal property and improvements,
including without limitation, tanks, buildings, fixtures, machinery, equipment,
pipelines, utility lines, power lines, telephone lines, roads and other
appurtenances, to the extent the same are situated upon and/or used or held for
use by Seller in connection with the ownership, operation, maintenance and
repair of the Leases or on the Properties; and

(f) The rights and interests in all permits and licenses of any nature owned,
held or operated in connection with operations for the exploration and
production of oil, gas or other minerals to the extent the same are used or
obtained in connection with any of the Leases or Properties described in Exhibit
“A” (the “Permits”);

 

 
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TO HAVE AND TO HOLD the Assets, together with all and singular the rights and
appurtenances thereunto in anywise belonging, unto Assignee, its successors and
assigns, forever, subject to the following terms and conditions:

1.    Special Warranty of Title.  Assignor represents and warrants that the
Assets are free and clear of all liens, encumbrances, security interests or
other adverse claims arising by, through or under Assignor, but not otherwise. 
Assignor shall warrant and defend the title to the Assets conveyed to Assignee
against every person whomsoever lawfully claims the Assets or any part thereof
by, through, or under Assignor, but not otherwise.

2.    Successors and Assigns.  The terms, covenants and conditions contained in
this Assignment shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and assigns, and such terms, covenants
and conditions shall be covenants running with the land and with each subsequent
transfer or assignment of the Assets, or any part thereof.

3.    Participation Agreement.  This Assignment is made in accordance with and
is subject to the terms, covenants and conditions contained in that certain
Participation Agreement dated as of May 13, 2015, by and between Assignor and
Assignee (“Participation Agreement”), which shall remain in full force and
effect in accordance with the terms as set forth therein and shall not be deemed
to have been merged with this Assignment.  If there is a conflict between the
provisions of the Participation Agreement and this Assignment, the provisions of
the Participation Agreement shall control the rights and obligations of the
parties.

4.    Further Assurances.  Assignor and Assignee agree to take all such further
actions and to execute, acknowledge and deliver all such further documents that
are necessary or useful in carrying out the purpose of this Assignment.

5.    Counterparts.  This Assignment is being executed in multiple counterparts
each of which shall for all purposes be deemed to be an original and all of
which shall constitute one instrument.

ASSIGNOR:
PetroShare Corp.

By:
Name: ______________________________
Title: _______________________________
 
 
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ASSIGNEE:

By: _______________________________________
Name: _____________________________________
Title: ______________________________________
 
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STATE OF ___________________
)
 
  )  ss.
COUNTY OF _________________
)
 

 

The foregoing instrument was acknowledged before me this ____ day of ________,
2015, by _______________, as ___________of PetroShare Corp.

Witness my hand and seal.

My Commission Expires: ___________________________                
____________________________
Notary Public

 
STATE OF ___________________
)
 
  )  ss.
COUNTY OF _________________
)
 

 

The foregoing instrument was acknowledged before me this ____ day of ________,
2015, by _____________________, as _________________________________.

Witness my hand and seal.

My Commission Expires: ___________________________                
____________________________
Notary Public

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