PRODUCTION AGREEMENT

 

THIS PRODUCTION AGREEMENT ("Agreement") is made and entered into by Adino
Exploration, LLC, whose address is 2500 CityWest, Suite 300, Houston, Texas
77042 ("Grantor"), and BlueRock Energy Capital II, LLC, whose address is 20445
State Highway 249, Suite

160, Houston, Texas 77070 ("Grantee").

 

WHEREAS, by Conveyance of Production Payment effective as of September 1, 2011,
from Grantor to Grantee (the "Conveyance"), Grantor has sold and conveyed to
Grantee, and Grantee has purchased and acquired from Grantor, as a Production
Payment a term overriding royalty interest in the Subject Lands and the Subject
Interests described in the Conveyance, together with a Permanent ORRI therein;
and

 

NOW, THEREFORE, as a material inducement to cause Grantee to purchase the
Production Payment and the Permanent ORRI, and in consideration of the mutual
benefits and obligations of the parties hereunder, Grantee and Grantor have
agreed, and hereby agree, as follows:

 

1. Definitions.

 

Each capitalized term used herein but not defined herein shall have the meaning
given to it in the Conveyance.

 

2. Marketing.

 

(a) Subject to the provisions of Section 3., the Production Payment Hydrocarbons
shall be delivered to the credit of Grantee, free of cost, at the Delivery
Points.

 

(b) Grantor shall market and sell all Production Payment Oil on behalf of
Grantee on the same basis as Grantor markets its own share of Oil produced from
or attributable to land covered by Subject Interests, but never for less than
the net price received by Grantor at the Delivery Points.

 

(c) During the remaining term of each Existing Gas Sales Contract, Grantor shall
deliver or cause to be delivered thereunder on behalf of and for the credit of
Grantee all of the Production Payment Gas which is subject to such Existing Gas
Sales Contract at the contract price and terms applicable thereto without
deduction for nonperformance or noncompliance. Grantor shall not amend any of
the Existing Gas Sales Contracts or any gas gathering or transportation contract
without Grantee's prior written consent, which consent shall not be unreasonably
withheld.

 

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(d) All Production Payment Hydrocarbons marketed by Grantor on behalf of Grantee
shall be sold pursuant to arm's length contracts with parties not affiliated
with Grantor, containing terms negotiated by Grantor as a prudent operator.

 

(e) All proceeds received by Grantor from the sale of Production Payment
Hydrocarbons sold on behalf of Grantee pursuant to the terms hereof are received
by Grantor in trust for Grantee and shall be held in trust by Grantor for
Grantee; provided, however, Grantor shall pay such proceeds by electronic funds
transfer or corporate check to such account as Grantee shall have designated
from time to time to Grantee within seven (7) days after receipt thereof by
Grantor. The foregoing sentence is subject to Grantee's right at any time to
direct the purchasers of any Production Payment Hydrocarbons to pay the proceeds
thereof directly to Grantee by delivering to such purchasers the letters in lieu
of transfer orders previously executed by Grantor and held by Grantee. In the
event Grantee requests direct payment, Grantor shall cooperate in instructing
the purchasers to pay such proceeds directly to Grantee and shall execute such
additional instruments as may be necessary or appropriate in connection
therewith. In the event any Production Payment Hydrocarbons are sold by Grantor,
on behalf of Grantee, under the terms of any agreement between Grantor and
Grantee or any of its affiliates, Grantee shall at all times be entitled to
retain the proceeds of such sale or receive direct payment from its affiliate.

 

Notwithstanding any provision of this Agreement to the contrary, during the term
of the Production Payment, Grantee shall have the right, at Grantee's election,
to receive directly from the purchasers all proceeds attributable to Grantor's
and Grantee's interest in all Hydrocarbons produced from the Subject Lands and
the Leases. Subject to all of the provisions of the Conveyance and the
Production Agreement (including Grantor's obligation not to be in default),
after Grantee deducts the applicable Production Payment, Grantee shall pay the
remainder, if any, of such proceeds by electronic funds transfer or corporate
check to such account as Grantor shall have designated from time to time to
Grantee, within seven (7) days after the receipt of such proceeds from the
purchasers. Grantor shall execute any and all documents requested by purchasers
or by Grantee to facilitate the direct payment of all Hydrocarbon proceeds to
Grantee pursuant to this Subsection 2.(e), and Grantor shall cooperate fully in
instructing the purchasers to pay all such Hydrocarbon proceeds directly to
Grantee.

 

(f) Production Payment Gas shall be marketed by Grantor on the same basis as
Grantor markets its share of Gas produced from the Subject Interests.

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(g) All Production Payment Gas shall be delivered to Grantee's credit, into the
facilities installed and maintained by the Operator or the First Purchaser
located at each applicable Delivery Point, currently as produced and saved, in
its natural state after removal of liquids by conventional mechanical field
separation facilities (low temperature absorption, lean oil absorption, or
similar "separation", facility shall not be considered conventional mechanical
field separation facilities), and if Production Payment Gas is flowed through
any processing plant or cryogenic facilities after delivery to Grantee or to the
credit of Grantee at the Delivery Points the provisions of Section 4. shall be
applicable.

 

3. Gathering and Transportation.

 

Grantor shall gather or cause to be gathered all Production Payment Hydrocarbons
at the wellheads where produced and transport the same to the Delivery Points.
Grantor shall be in exclusive control and possession of the Production Payment
Hydrocarbons gathered at the wellheads and responsible for any loss, damage or
injury caused thereby. Grantee's Production Payment shall not bear any gas
processing, gathering or transportation charges attributable to Production
Payment Hydrocarbons, except to the extent provided in Section 1.02 of the
Conveyance.

 

4. Processing; Plant Products; Exchange.

 

It is recognized that as the owner of the Production Payment Grantee owns the
Production Payment Gas in its natural state, including, without limitation, all
liquefiable Hydrocarbons contained therein. It is recognized that certain of the
Subject Interests currently may be subject to existing processing agreements.
Grantee agrees that Grantor may commit Production Payment Gas to other
processing agreements to unaffiliated third parties on the same terms as it
commits Gas from its interests in the Subject Interests as long as such
agreements would not have an adverse affect on Grantee's or Grantor's interest
in the Production Payment. If as a result of any existing or future processing
agreement Grantor elects to process Production Payment Gas, Grantee will have an
interest in all plant products and liquids extracted (the "Liquids") and all
residue gas remaining ("Plant Residue Gas") attributable or allocable to the
Production Payment and the Production Payment Gas under the terms of the
Processing Agreements. Grantor agrees that it will not exercise any processing
rights if the Plant Residue Gas would not meet the quality requirements set
forth in Section 7.

 

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5. Rate of Production.

 

Grantor shall use its best efforts to prudently operate and produce the Subject
Wells (or, if any Subject Wells are operated by a third party, cause the Subject
Wells to be prudently operated and produced) in accordance with the terms of the
joint operating agreements and in accordance with good engineering practices and
the following requirements: (i) the amount of Hydrocarbons produced from any
Subject Well shall not exceed in any Month the lower of (x) the maximum amount
that in the good faith judgment of the operator is capable of producing at its
maximum efficient rate of flow or (y) the respective allowable rate of flow
under applicable orders, rules, regulations or laws, if any; (ii) the amount of
Hydrocarbons produced from the Subject Wells shall be in the good faith judgment
of the operator sufficient to prevent a net migration of Hydrocarbons from the
reservoirs to which proved reserves are attributed underlying the Subject
Interest; and (iii) subject to field rules established by governmental
authorities having or asserting jurisdiction, the amount of Hydrocarbons
produced from the Subject Wells shall be equitable and ratable, based on factors
used in determining such field rules.

 

6. Scheduling.

 

At all times from the Effective Time until the Termination Time, Grantor, at
Grantor's cost and expense, shall, to the best of Grantor's ability, perform, or
cause to be performed, the following:

 

(a) Grantor shall ensure that nominations of Gas quantities are timely made to
transporting pipelines and that such nominations reflect the actual expected
deliveries and receipts.

 

(b) If any charges, penalties, costs or expenses are incurred or payable to any
transporting pipeline, or any other party as a result of Grantor's failure to
nominate quantities of Gas, or Grantor's failure to deliver quantities of Gas so
nominated at any Delivery Point, then as between the parties hereto, Grantor
shall be liable for and shall hold Grantee harmless from and against all such
charges, penalties, costs and/or expenses. Grantor shall promptly notify Grantee
of any notice received from any transporting pipeline, or other party, that
indicates an imbalance in deliveries exist or is occurring that may give rise to
any such charges, penalties, costs and/or expenses.

 

7. Quality Requirements.

 

All Production Payment Gas delivered to Grantee's credit shall satisfy the
quality requirements and specifications as set forth in the First Purchaser's or
the First Transporter's

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agreements, as applicable. All costs and expenses of dehydrating, treating, and
compressing Production Payment Hydrocarbons, except those as set forth in
Section 1.02 of the Conveyance, to satisfy such quality requirements shall be
borne and paid by Grantor.

 

8. Pressure.

 

Grantor shall deliver, or cause to be delivered, the Production Payment Gas at a
pressure sufficient to deliver the same into the First Purchaser's or First
Transporter's pipeline, as applicable, at each Delivery Point against the
operating pressure in existence from time to time; provided that Grantor shall
not be required to install compression equipment or other equipment in
circumstances in which such installation is not economically feasible without
regard to the burden of the Production Payment. Grantor shall inform Grantee, as
often as may be necessary, of the delivery rate and pressure of the Production
Payment Gas delivered to Grantee's credit.

 

9. Operation of Subject Interests.

 

(a) At all times from the date hereof until the termination of the Production
Payment, Grantor, at Grantor's cost and expense shall:

 

(i) Cause the Subject Interests to be maintained in full force and effect, and
to be developed, protected against drainage, and continuously operated for the
production of Hydrocarbons in a good and workmanlike manner as would a prudent
operator (and without regard to the burden of the Production Payment), all in
accordance with generally accepted industry practices, applicable operating
agreements, and all applicable federal, state and local laws, rules and
regulations, and shall otherwise comply with all applicable laws, rules and
regulations;

 

(ii) Pay, or cause to be paid, promptly as and when due and payable, all rentals
and royalties payable in respect of the Subject Interests or the production
therefrom. Further, Grantor will, according to industry standard and practice
(but in no event beyond 90 days from the date of any invoice), promptly pay all
costs, expenses and liabilities incurred in or arising from the operation or
development of the Subject Interests, or the producing, treating, gathering,
storing, marketing or transporting of Hydrocarbons therefrom;

 

(iii) Cause all wells, machinery, equipment and Facilities of any kind now or
hereafter located on the Subject Interests, and necessary or useful in the
operation thereof for the production of Hydrocarbons therefrom, to be provided
and to be kept in good and effective operating condition as would a prudent

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operator (and without regard to the burden of the Production Payment), and all
repairs, renewals, replacements, additions and improvements thereof or thereto,
useful or needful to such end, shall be promptly made;

 

(iv) Give or cause to be given to Grantee written notice of every adverse claim
or demand made by any person affecting the Subject Interests, the Hydrocarbons
produced therefrom, the Production Payment and/or the Production Payment
Hydrocarbons in any manner whatsoever, and of any suit or other legal proceeding
instituted with respect thereto, and at Grantor's expense cause all necessary
and proper steps to be taken with reasonable diligence to protect and defend the
Subject Interests, the Hydrocarbons produced therefrom, the Production Payment
and/or the Production Payment Hydrocarbons against any such adverse claim or
demand, including (but not limited to) the employment of counsel for the
prosecution or defense of litigation and the contest, release or discharge of
such adverse claim or demand;

 

(v) Cause the Subject Interests to be kept free and clear of liens, charges and
encumbrances of every character;

 

(vi) Pay, or cause to be paid, all Taxes when due and before they become
delinquent, and shall provide Grantee with County Clerk's receipts (or receipts
from the applicable office having jurisdiction) evidencing proof of payment
within ten (10) days after payment. Grantor shall reimburse Grantee for any
Taxes paid by Grantee as a result of the Production Payment or the Production
Payment Hydrocarbons or the production of same, other than Grantee's respective
share of any Hydrocarbon Severance Taxes, which shall be paid by Grantee;

 

(vii) Pay, or cause to be paid, promptly when due and before they become
delinquent all operating expenses and all billings under the joint operating
agreement (except to the extent contested in good faith);

 

(viii) Not, without prior written approval from Grantee, resign as operator or
transfer operations to any other party, whether affiliated with Grantor or not,
or, if any of the Subject Interests are operated by third parties, not vote for
the removal of the operator as operator of any of the Subject Interests until
and unless the successor operator has been approved in writing by Grantee.

 

In addition, Grantor shall provide Grantee upon execution of this Agreement a
full and complete Texas Railroad Commission Form P-4 (or, if applicable, the
Form required by the applicable regulatory authority of the State where the
subject Wells are located) executed by Grantor, for change of operator on each

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Subject Well. The original Forms shall be held by Grantee during the term of the
Production Payment. If Grantor is in default under the terms of the Conveyance
and/or the Production Agreement, Grantor may, in Grantee's discretion in the
exercise of Grantee's remedies under Section 15. hereof, file such original
Forms with the applicable authority to change the operator to Grantee or
Grantee's designee on any or all of the Subject Wells;

 

(ix) Not change the purchaser(s) of any Hydrocarbons covered hereby without (1)
giving Grantee at least five (5) days written notice of Grantor's intent to
change purchasers; (2) first obtaining Grantee's written approval of such
change, which approval shall not be unreasonably withheld; and (3) first
delivering to Grantee executed originals of any additional letters in lieu that
may be requested by Grantee after receiving Grantor's notice;

 

(x) In conjunction with Grantor's obligation to protect the Subject Interests
from drainage as set forth in subsection (i) above, provide Grantee with at
least thirty (30) days prior written notice of Grantor's intention to drill
and/or complete a well located on the Subject Lands, together with detailed
information identifying the proposed well location and intended completion
location, together with any further documentation and/or information as may be
requested by Grantee relating to such drilling and/or completion proposal;

 

(xi) Subject only to Force Majeure, temporary cessation of production for normal
maintenance, operational difficulties that would cause a reasonably prudent
operator to temporarily cease production, and/or the abandonment provisions of
Section 11. hereof, cause all Subject Wells operated by Grantor to be maintained
in continuous production;

 

(xii) Maintain or cause to be maintained in full force and effect in accordance
with prudent operator standards, free of any right of cancellation, forfeiture
or termination, all permits, licenses, easements, servitudes, contracts and
other rights reasonably necessary or useful in connection with the development,
operation or management of the Subject Interests and the production, treating,
gathering, storing, marketing or transportation of the Hydrocarbons or of water
produced or used in connection therewith;

 

(xiii) Not conduct any work or operation in any wellbore of a Subject Well,
which work or operation is related to any horizon, zone, formation or interval
not included in the Subject Interests, without the prior written consent of
Grantee; and

 

(xiv) Whenever, Grantor is not the operator of a Subject Interest, use Grantor's
reasonable best efforts and diligently

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enforce its rights under any operating agreement for such Subject Interests in
order to cause such Subject Interests to be operated and dealt with as
contemplated herein.

 

(b) If at any time during the Production Payment, there is a change of control
(as hereinafter defined) in Grantor, Grantee shall immediately be provided
written notification thereof. As used herein, the term "change of control" shall
include (i) death of the principal officer or controlling shareholder or owner
of Grantor; (ii) disability of the controlling shareholder or owner of Grantor
to the point where such person cannot substantially perform on behalf of Grantor
under the Conveyance or this Agreement;(iii) Grantor becoming insolvent or files
a voluntary petition in bankruptcy or a receiver is appointed against any of the
Subject Interests; (iv) an involuntary bankruptcy proceeding is filed or
threatened against Grantor; (v) the issuance by Grantor to any shareholder, or
to any other person or entity, any common or preferred stock or membership
interests other than the authorized and issued stock and/or membership interests
of Grantor that exists as of the date of this Agreement; and (vi) if Grantor
dissolves, winds up, liquidates or otherwise terminates, or Grantor becomes a
party to any merger or consolidation without the written consent of Grantee.
Whether or not Grantor gives written notification to Grantee as required herein,
upon any change of control, as defined herein, Grantee shall have the right, but
not the obligation, to notify Grantor, in writing, that such change of control
constitutes an event of default under the Conveyance and the Production
Agreement, and Grantee thereafter shall have the right to exercise any and all
of Grantee's remedies under Section 15. hereof.

 

10. Insurance; Damage or Loss.

 

(a) Grantor shall maintain or cause to be maintained, at its sole cost and
expense and with financially sound and reputable insurers, insurance covering
the Subject Lands, Leases, Subject Wells and Facilities located thereon against
such liabilities, casualties, risks and contingencies, and in such types as is
customary in the case of independent oil companies engaged in similar operations
and having similar property. Such insurance shall name Grantee as an additional
insured as Grantee's interests appear. Grantor shall furnish certificates of
such insurance to Grantee and shall obtain endorsements to such policies
providing that the insurer will notify Grantee in writing not less than thirty
(30) days prior to the expiration or termination of such policy of insurance.
Grantor shall furnish Grantee with annual renewal certificates of insurance
within ten (10) days of renewal term.

 

(b) In the event of any damage to or loss of any Subject Well or to any of the
Facilities on the Subject Lands and/or the

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Leases, Grantor (at no cost to Grantee) shall promptly redrill, rebuild,
reconstruct, repair, restore or replace such damaged or lost property, unless to
do so would not be economically feasible (without regard to the burden of the
Production Payment, but taking into account insurance proceeds and recoveries).

 

11. Abandonment of Wells.

 

(a) Until the termination of the Production Payment, Grantor shall not, without
first obtaining the written consent of Grantee, abandon any Subject Well
heretofore or hereafter drilled and/or completed for production of Hydrocarbons
on any of the Subject Lands and/or Leases attributable to the Subject Interests
or surrender, abandon or release any Subject Lands and/or Leases or Subject
Interest or any part thereof; provided, however, that, without the consent of
Grantee:

 

(i) If and when, in Grantor's reasonable judgment, exercised in good faith and
as would a prudent operator not burdened by the Production Payment, a well
becomes no longer capable of producing Hydrocarbons in paying quantities
(without regard to the burden of the Production Payment) and it would not be
economically feasible (without regard to the burden of the Production Payment)
to restore the productivity of such well by reworking, reconditioning,
deepening, plugging back, or otherwise, Grantor shall have the right to abandon
such well, subject to the provisions of Section 11.(c) of this Agreement.

 

(ii) Subject to the provisions of Section 11.(c), Grantor shall have the right
to surrender and release any Subject Interest or part thereof when, in the
reasonable judgment of Grantor exercised in good faith and as would a prudent
operator not burdened by the Production Payment, there is no well located
thereon which is capable of producing Hydrocarbons in paying quantities and the
drilling of an additional well thereon would not, in Grantor's reasonable
opinion, be economically feasible (without regard to the burden of the
Production Payment).

 

(b) For all purposes of this Agreement, (i) a well shall be deemed to be capable
of producing Hydrocarbons "in paying quantities" unless and until there arises a
condition which reasonably appears to be permanent, such that the aggregate
value of the Hydrocarbons which are being produced from such well, net of
royalties and Taxes and appropriately risked and discounted but without regard
to the burden of the Production Payment, no longer exceeds or will not exceed
the costs and expenses directly related to the operation and maintenance of such
well (including the costs and expenses incurred by the Operator under the joint
operating agreement but excluding office and management overhead and similar
charges), and (ii) the restoration of the productivity of a well or

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the drilling of a well shall be deemed to be "economically feasible" whenever
the aggregate value of the Hydrocarbons which it reasonably appears will be
produced from such well, net of royalties and Taxes and appropriately risked and
discounted but without regard to the burden of the Production Payment, will
exceed the costs and expenses directly related to such restoration or drilling
and the operation and maintenance of such well (excluding office and management
overhead and similar charges).

 

(c) Before abandoning any well or surrendering or releasing any Subject Interest
or part thereof, Grantor shall offer, subject to the Permitted Encumbrances, to
assign the same to Grantee upon Grantee's payment of the net salvage value (if
any) attributable to Grantor's interest therein and assumption of the
obligations attributable to Grantor's interest therein.

 

12. Voting Under the Joint Operating Agreement.

 

Grantor shall not vote for, consent to, or otherwise endorse under the terms of
any applicable joint operating agreement or otherwise, any operation or action
that is inconsistent with Grantor's obligations under this Agreement.

 

13. Information.

 

At all times from the date hereof until the termination of the Production
Payment, Grantor, at its own expense (and in addition to any information and/or
documents requested by Grantee under Section 13.(h) hereof), shall furnish to
Grantee the following reports and information at the times indicated below:

 

(a) Grantor shall furnish a monthly report showing the gross production of
Hydrocarbons from each Subject Land and/or Lease, the quantity of Hydrocarbons
sold for Grantor's account, and the quantity of Production Payment Hydrocarbons
sold for Grantee's account.

 

(b) Grantor shall furnish Grantee monthly with full and complete copies of the
Joint Interest Billings (JIB's) covering each well located on the Subject Lands
(whether or not Grantor operates such well or wells). Upon Grantee's written
request, Grantor shall furnish appropriate "back up" information for the JIB's,
including, but not limited to all third party invoices, field tickets and daily
work and cost summaries identifying any work performed, or cost incurred, on the
Subject Wells.

 

(c) Upon written request from Grantee, Grantor shall make available to Grantee
for review and copying in Grantor's offices at the address stated herein surface
maps showing property lines and well locations, well logs, core analysis data,
flow and

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pressure tests, natural gas analysis and casing programs, title opinions,
regulatory filings; field notes and any and other information or documents
related to the Subject Interests and/or the Subject Wells and the production
therefrom.

 

(d) Grantor shall furnish Grantee a monthly report of all Hydrocarbon sales and
expenses covering each well located on the Subject Lands in a Lease Operating
Summary Statement format as set forth in Exhibit "C" attached hereto and made a
part hereof.

 

(e) Quarterly within sixty (60) days after the end of each calendar quarter, and
annually within one hundred twenty (120) days of the calendar year, Grantor
shall furnish financial statements, including balance sheet, income statement,
stockholder's equity and cash flow, prepared in accordance with generally
accepted accounting principles and, with respect to annual financial statements,
if requested in writing by Grantee, accompanied by a report of the Grantor's
independent certified public accountants stating that their examination was made
in accordance with generally accepted auditing standards and that, in their
opinion, such financial statements fairly present Grantor's financial condition,
results of operations and changes in financial position and in accordance with
general accepted accounting principles consistently applied.

 

(f) Quarterly, a Compliance Certificate (in a form to be submitted to Grantor by
Grantee) executed by an officer of Grantor certifying that, to the best of his
knowledge after reasonable investigation and due diligence, Grantor is in
compliance in all material respects with the terms of the Conveyance and this
Agreement, or if not, specifying in reasonable detail any exceptions thereto.

 

(g) Grantor shall provide an accounting to Grantee, on a monthly basis, for
funds advanced by Grantee to Grantor, if any, and used by Grantor for the
purposes of payment of Taxes, royalties or third party vendor invoices. The
accounting shall include copies of such third party invoices, evidences of
payment of the same, and evidence of payment of such Taxes and royalties.

 

(h) Upon written request, Grantor shall furnish any other information and/or
documents as Grantee may reasonably request relating to the Subject Lands,
Leases and/or Subject Interests.

 

(i) Upon written request from Grantee, Grantor shall submit all or any portion
of the information required by this Section on a concise reporting exhibit in a
form determined by Grantee and supplied to Grantor.

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Notwithstanding the preceding provisions to the contrary, and notwithstanding
the fact that Grantee may be a non-operating working interest owner in some, or
all of the Subject Interests, during any and all times that Grantor is in
default of any of Grantor's obligations under this Agreement or the Conveyance,
Grantor shall be required to furnish to Grantee, at Grantor's expense, any and
all information (including access to such information) described in this Section
as may be requested by Grantee, in writing.

 

14. Access to Subject Interests.

 

Grantor shall permit the duly authorized representatives of Grantee, at any
reasonable time, but at Grantee's sole risk (except to the extent of any injury
or damage caused by the gross negligence or willful misconduct of Grantor or the
operator) and expense, to make such inspection of the Subject Lands, Leases
and/or Subject Interests and the property, machinery, equipment and facilities
used in the operation thereof as such representatives shall deem proper.

 

15. Remedies of Grantee.

 

(a) At any time and from time to time until the termination of the Production
Payment, if Grantor shall fail to perform or observe any of the covenants or
agreements provided herein or in the Conveyance to be performed or observed by
Grantor, Grantee (or Grantee's designee), in addition to Grantee's right to
recover damages and all other remedies available to Grantee at law or in equity,
may, if such failure shall continue unremedied after five (5) business days
after written notice thereof is delivered to Grantor:

 

(i) perform (or cause to be performed) on behalf of and at the expense of
Grantor, any obligation which has not been performed or observed by Grantor, in
which event Grantee may advance funds and incur and pay bills for expenses for
such purpose and shall be reimbursed out of the proceeds attributable to
Grantor's interest in the Subject Interests, together with interest on the
unpaid amounts thereof at the rate of interest publicly announced by Citibank,
N.A. as its prime or base rate plus five percent (5%), but not to exceed the
maximum nonusurious rate permitted by applicable law (the "Agreed Rate"), from
the date of such advance or payment by Grantee until the date reimbursed by
Grantor. Grantor and Grantee agree that none of the terms and/or provisions
contained herein or in the Conveyance shall ever be construed to create a
contract to pay, for the use, forbearance or detention of money, interest in
excess of the maximum amount of interest permitted to be charged by applicable
law from time to time in effect. The parties to this agreement or the Conveyance

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shall never be required to pay interest in excess of the maximum amount that may
be lawfully charged under applicable law from time to time in effect.

 

Notwithstanding any provision of the Conveyance or this Agreement to the
contrary, if Grantee advances any funds on behalf of Grantor under the terms of
this Section 15., in addition to Grantee having a right to be reimbursed for
such costs out of the proceeds attributable to Grantor's interest in the Subject
Interests, Grantee shall have the right to be reimbursed for all such funds,
together with the Agreed Rate, out of any proceeds attributable to the interests
of Grantor arising from or out of any written contracts between Grantor and any
third party, including, but not limited to (i) any fees or revenues payable to
Grantor as gathering, transportation and/or pipeline operator fees for any gas
or liquids or liquefiable Hydrocarbons produced from the Subject Lands or any
lands contiguous to the Subject Lands; (ii) any fees or revenues payable to
Grantor arising from or out of the treating, compressing, dehydrating and/or
processing of Hydrocarbons produced from the Subject Lands or any lands
contiguous to the Subject Lands; (iii) any fees or revenues payable to Grantor
from the sale of any Subject Wells and/or Facilities; and (iv) any proceeds
resulting from court judgments, arbitration awards and/or settlement of claims
in favor of Grantor arising from or out of any contracts relating to or
affecting the Subject Lands, Leases and/or the Subject Interests, and Grantee
shall have the right to receive all of such proceeds from Grantor, or directly
from any applicable third parties, and to apply any or all of such funds against
such advanced funds;

 

(ii) upon written notice to Grantor, succeed to and exercise (or appoint
Grantee's designee to succeed to and exercise) any and all rights of the Grantor
with respect to the possession, operation and development of the Subject
Interests and Subject Wells, and use in connection therewith all property of
Grantor as may be useful or appropriate for the production, treating, storing,
gathering, transporting, compressing and/or dehydrating of Hydrocarbons or other
minerals (including but not limited to the Facilities as defined in the
Conveyance), and all other properties and rights of a similar character then
held by Grantor and situated upon or useful or held for future use in connection
with the exploration, development or operation of the Subject Interests and
Subject Wells for the production, treating, storing, gathering, transporting,
compressing and/or dehydrating of Hydrocarbons or other minerals, and the
Grantee shall have the right on behalf and for the account of Grantor, to sell
and utilize (a) all of the Hydrocarbons attributable to Grantor's interest in
the Subject Interests and (b) any or all of the Facilities not essential to
production, and to receive from the purchasers of the Hydrocarbons and/or the
Facilities all proceeds attributable thereto, and to

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apply the proceeds thereof to the costs and expenses of the operation and
development of the same as reimbursement to Grantee for any amounts so expended
by Grantee;

 

(iii) pay (or cause to be paid) any of the costs, expenses, Taxes (which Taxes
are not being contested in good faith by the Grantor) or other amounts which the
Grantor has agreed to pay under the Conveyance and/or this Agreement which have
become delinquent, and to be reimbursed out of the proceeds of the Hydrocarbons
attributable to the Grantor's interest in the Subject Interests, together with
interest on the unliquidated amounts thereof, at the Agreed Rate from the date
of such payment; and/or

 

(iv) apply to a court of equity for the specific performance or observance of
any such covenant or condition and in aid of the execution of any power herein
granted and for the appointment of a receiver of the Subject Lands, Leases
and/or Subject Interests and the Hydrocarbons produced therefrom.

 

(b) Any purchaser of Hydrocarbons from or attributable to the Subject Interests
is authorized and directed to make payment to the Grantee of all proceeds from
the sale of Hydrocarbons attributable to Grantor's interest in the Subject
Interests upon written notification from Grantee of Grantor's unremedied breach
in any material respect of any provision of this Agreement and/or the
Conveyance, and of Grantee's exercise of Grantee's rights under this Section 15.
Any insurer is authorized and directed to make payment to the Grantee of
proceeds of insurance described in Section 10.(a) hereof for any amount which
Grantee shall certify to such insurer that it has expended in redrilling,
rebuilding, reconstructing, repairing, restoring or replacing damaged or lost
property which Grantor has failed or refused to do promptly pursuant to Section
10.(b) hereof.

 

(c) Grantor hereby designates Grantee as its agent and attorney in fact to
execute any instruments which may be necessary or appropriate, including without
limitation designations of operator, to enable Grantee to exercise its rights
under this Section 15. This designation and appointment shall be irrevocable as
long as the Production Payment remains in effect.

 

(d) Notwithstanding any provision of this Agreement to the contrary, for the
purposes of this Section 15. and Section 9.(b), any written notice of default
sent by Grantee to Grantor to the telecopy number, email address and/or the
mailing address for Grantor set forth in this Agreement shall be effective on
the date such notice is (i) sent by telecopy (as confirmed transmitted by
written report generated at the point of origin of such facsimile or telecopy
transmission); or (ii) sent by email (as confirmed transmitted by written
printout of such email transmittal by

14

 

Grantee), with hard copy of such notice of default to be transmitted by
certified mail (as evidenced by the postmark stamp on the "Receipt for Certified
Mail" held by the sender of such notice), and Grantee shall not be required to
take any further action to notify Grantor of such default prior to Grantee
exercising any of Grantee's remedies set forth in this Section.

 

16. Force Majeure. In the event of either party being rendered unable, wholly or
in part, by Force Majeure to carry out its obligations under this Agreement
other than to make payments due hereunder, it is agreed that on such party's
giving notice and full particulars of such force majeure in writing or by
telecopy to the other party as soon as practicable after the occurrence of the
cause relied on, then the obligations of the party giving such notice, so far as
they are affected by such force majeure, shall be suspended during the
continuance of any inability so caused but for no longer period, and such cause
shall as far as practicable be remedied with all reasonable dispatch. It is
expressly agreed that Force Majeure shall not include the level of market prices
being offered and/or received by Grantor (or by the operator of a Subject Well
if not Grantor) for the sale of Hydrocarbons produced from the Subject Wells.

 

17. Notices.

 

Unless otherwise specifically provided herein to the contrary, all notices,
requests, demands, instructions, payments and other communications required or
permitted to be given hereunder shall be in writing and shall be delivered
personally or by telex/telecopier, email, regular mail and/or by certified mail,
postage prepaid and return receipt requested, as follows:

 

If to Grantor, addressed to:

 

Adino Exploration, LLC

2500 CityWest, Suite 300

Houston, Texas 77042

Attention: Shannon W. McAdams

Telephone No.: (___) ___ -____

Telecopy No.:    (___) ___-____

Email Address: smcadams@adinoenergycorp.com

 

15

 

If to Grantee, addressed to:

 

BlueRock Energy Capital II, LLC

20445 State Highway 249, Suite 160

Houston, Texas 77070

Attention: Catherine L. Sliva, President

Telephone No.: (281) 376-0111

Telecopy No.:    (281) 376-2121

Email Address: sabel@bluerockenergycapital.com

 

or to such other place within the United States of America as either party may
designate as to itself by written notice to the other. Unless otherwise
specifically provided herein to the contrary, all notices given by personal
delivery or mail shall be effective on the date of actual receipt at the
appropriate address. Notice given by telex/telecopier or by email shall be
effective upon actual receipt if received during recipient's normal business
hours or at the beginning of the next business day after receipt if received
after the recipient's normal business hours. All material notices by email shall
be confirmed promptly after transmission by regular mail, certified mail,
telex/telecopier or personal delivery.

 

18. INDEMNITY.

 

(a) IT IS UNDERSTOOD AND AGREED THAT, EXCEPT AS EXPRESSLY SET FORTH IN THIS
AGREEMENT OR THE CONVEYANCE, GRANTEE DOES NOT ASSUME NOR SHALL GRANTEE EVER BE
LIABLE OR RESPONSIBLE IN ANY WAY FOR THE PAYMENT OF ANY COSTS, EXPENSES OR
LIABILITIES INCURRED IN CONNECTION WITH DEVELOPING, EXPLORING, DRILLING,
EQUIPPING, TESTING, OPERATING, PRODUCING, MAINTAINING, PLUGGING OR ABANDONING
THE SUBJECT INTERESTS OR ANY WELL OR FACILITY THEREON OR STORING, HANDLING,
TREATING OR TRANSPORTING TO THE DELIVERY POINTS PRODUCTION THEREFROM.

 

(b) GRANTOR SHALL FULLY DEFEND, PROTECT, INDEMNIFY AND HOLD GRANTEE, ITS
OFFICERS, EMPLOYEES, REPRESENTATIVES AND AGENTS HARMLESS FROM AND AGAINST ANY
AND ALL CLAIMS, DEMANDS, SUITS AND CAUSES OF ACTION OF EVERY KIND AND CHARACTER,
INCLUDING REASONABLE ATTORNEYS' FEES AND COSTS OF DEFENSE, WHICH MAY BE MADE OR
ASSERTED BY ANY THIRD PARTY OR GOVERNMENTAL AGENCY OR ENTITY, OR BY GRANTOR,
GRANTOR'S EMPLOYEES, AGENTS, CONTRACTORS AND SUBCONTRACTORS AND THEIR EMPLOYEES,
AGENTS, AND REPRESENTATIVES ON ACCOUNT OF PERSONAL INJURY, DEATH OR PROPERTY
DAMAGE (INCLUDING, WITHOUT LIMITATION, CLAIMS FOR POLLUTION AND ENVIRONMENTAL
DAMAGE), ANY CIVIL OR CRIMINAL FINES OR PENALTIES AND ANY CAUSES OF ACTION
ALLEGING STATUTORY LIABILITY, RELATING TO, ARISING OUT OF, OR IN ANY WAY
INCIDENTAL TO THE SUBJECT INTERESTS, THE WELLS AND FACILITIES

16

 

THEREON OR USED IN CONNECTION THEREWITH, THE OPERATION THEREOF AND THE
PRODUCTION THEREFROM, WHETHER THROUGH AN ACT OR OMISSION OF GRANTEE, OR
OTHERWISE, AND WHETHER OR NOT ARISING OUT OF THE SOLE, JOINT OR CONCURRENT
NEGLIGENCE, FAULT OR STRICT LIABILITY OF GRANTOR OR ANY OTHER PERSON OR ENTITY
INDEMNIFIED HEREUNDER, EXCEPT FOR ACTS OR OMISSIONS OF GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF GRANTEE OR GRANTEE'S OFFICERS, EMPLOYEES, REPRESENTATIVES
AND AGENTS. THIS INDEMNITY SHALL APPLY, WITHOUT LIMITATION, TO ANY LIABILITY
IMPOSED UPON ANY PARTY INDEMNIFIED HEREUNDER AS A RESULT OF ANY STATUTE, RULE,
REGULATION OR THEORY OF STRICT LIABILITY.

 

19. Successors and Assigns.

 

All the covenants and agreements herein contained shall be deemed to be
covenants running with the land and shall be binding upon the successors and
assigns of Grantor's interest in the Subject Interests and Grantee's interest in
the Production Payment and shall inure to the benefit of Grantor, Grantee, and
their respective successors and permitted assigns. The foregoing
notwithstanding, nothing herein is intended to modify or shall have the effect
of modifying the restrictions on assignment set forth in the Conveyance
regarding mortgage, assignments, transfer or pooling of Grantor's interest in
the Subject Interests; and the preceding sentence shall not be deemed to permit
any assignment or other transfer of the interest of Grantor in any of the
Subject Interests that is not specifically permitted by the provisions of the
Conveyance. Grantee's interest in the Production Payment is assignable.

 

20. Damages.

 

It is recognized that Grantee will look solely to the Production Payment
Hydrocarbons for satisfaction and discharge of the Production Payment, and that
neither Grantor nor its principal officers is personally or corporately liable
for the payment and discharge thereof. However, satisfaction of the Production
Payment by Grantor shall not relieve Grantor of any obligations under this
Agreement or any obligation to respond in damages for any breach of any of the
provisions hereof, or provisions of the Conveyance other than the payment of the
Production Payment.

 

21. Cost of Litigation.

 

In the event of a breach of this Agreement or of the Conveyance, or if a dispute
arising hereunder or under the Conveyance is not resolved by mutual agreement,
and either party should sue the other party to enforce its rights under the
same, or for breach thereof, the party prevailing in such litigation shall be
entitled to recover its costs and reasonable attorneys' fees in

17

 

addition to any other remedy or recovery to which it may be entitled.

 

22. Confidentiality.

 

Grantor and Grantee shall keep all of the terms and provisions of this Agreement
confidential, and shall not disclose the contents thereof to any third party,
other than their respective attorneys, accountants and/or lending institutions
on a strictly "need to know" basis, and except as may be required by the ruling
of a court of competent jurisdiction. Grantor and Grantee shall take appropriate
steps to comply with the terms of this confidentiality provision including, but
not limited to, specifically advising all of its employees, officers, directors
and/or owners about this confidentiality requirement. Grantor and Grantee are
entering into this Agreement in reliance upon each others compliance with this
confidentiality provision.

 

23. Headings.

 

The headings of the sections of this Agreement are for guidance and convenience
of reference only and shall not limit or otherwise affect any of the terms or
provisions of this Agreement.

 

24. Certain References.

 

Certain agreements, contracts and other documents are included in the definition
of Permitted Encumbrances. References herein to Permitted Encumbrances are made
solely for the purpose of protecting Grantor on Grantor's warranties and
representations as to the Subject Interests, and without regard to whether or
not any Permitted Encumbrance is valid, subsisting, legal or enforceable or
affects the Production Payment; and such references are not intended to
constitute and shall not constitute any sort of recognition or acknowledgment by
any party as to the validity, legality, or enforceability of the same or of any
term, provision or condition thereof or the applicability thereof to the
Production Payment, and shall not revive or ratify the same or create any rights
in any third person.

 

25. Counterpart Execution.

 

This Agreement may be executed by Grantor and Grantee in any number of
counterparts, each of which shall be deemed an original instrument, but all of
which shall constitute but one and the same Agreement.

18

 

26. Partial Invalidity.

 

Except as otherwise expressly stated herein, in the event any provision
contained in this Agreement shall for any reason be held invalid, illegal or
unenforceable by a court or regulatory agency of competent jurisdiction, such
invalidity, illegality or unenforceability shall not affect the remaining
provisions of this Agreement.

 

27. Applicable Law and Venue.

 

THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF TEXAS. VENUE FOR ANY LAWSUIT OR LAWSUITS ARISING OUT OF THIS
AGREEMENT SHALL BE IN STATE OR FEDERAL COURT IN HOUSTON, HARRIS COUNTY, TEXAS.
THE PARTIES HERETO HEREBY WAIVE AND AGREE NOT TO ASSERT, BY WAY OF MOTION, AS A
DEFENSE OR OTHERWISE, THAT ANY SUCH PROCEEDING BROUGHT HEREUNDER OR UNDER THE
CONVEYANCE IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE THEREOF IS
IMPROPER, AND EACH PARTY HERETO FURTHER AGREES TO A TRANSFER OF ANY SUCH
PROCEEDING TO THE VENUE STATED ABOVE. THE PARTIES HERETO HEREBY ACKNOWLEDGE AND
AGREE THAT IT WILL BE NEITHER INCONVENIENT NOR UNFAIR TO LITIGATE OR OTHERWISE
RESOLVE ANY DISPUTES OR CLAIMS IN THE ABOVE NAMED COUNTY.

 

EACH PARTY HERETO HEREBY KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND IRREVOCABLY
(A) WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREUNDER OR UNDER THE
CONVEYANCE, OR DIRECTLY OR INDIRECTLY AT ANY TIME ARISING OUT OF, UNDER OR IN
CONNECTION WITH THIS AGREEMENT OR THE CONVEYANCE OR ANY TRANSACTION CONTEMPLATED
THEREBY OR ASSOCIATED THEREWITH; (B) WAIVES, TO THE MAXIMUM EXTENT NOT
PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY SUCH
LITIGATION ANY EXEMPLARY OR PUNITIVE DAMAGES OR (C) CERTIFIES THAT NO PARTY
HERETO NOR ANY REPRESENTATIVE OR AGENT OR COUNSEL FOR ANY PARTY HERETO HAS
REPRESENTED, EXPRESSLY OR OTHERWISE, OR IMPLIED THAT SUCH PARTY WOULD NOT, IN
THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVERS; AND (D)
ACKNOWLEDGES THAT IT HAS BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE
CONVEYANCE AND THE TRANSACTIONS CONTEMPLATED HEREBY AND THEREBY BY, AMONG OTHER
THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS CONTAINED IN THIS SECTION.

 

28. Termination Time.

 

As used in this Agreement, "Termination Time" means the later of (A) the date
upon which the proceeds actually received by Grantee from the Production Payment
after the Effective Time (net of any charges described in Section 1.02 of the
Conveyance and paid

19

 

by Grantee) equal (i) the Production Payment Amount, plus (ii) an amount
sufficient to provide Grantee with an eighteen percent (18%) internal rate of
return on the Production Payment Amount, as determined in accordance with the
formula set forth in Exhibit "A" of this Agreement, or (B) the date that Grantor
executes and delivers to Grantee the Permanent ORRI Assignment. In addition to
the foregoing, this Agreement shall terminate as of the Termination Time.

 

29. Gas Imbalances.

 

Notwithstanding anything in this Agreement or in the Conveyance to the contrary,
to the extent any of the Subject Interests are subject to any gas imbalances
that would reduce the amount of Hydrocarbons that would otherwise be
attributable to such Subject Interests, the existence of any such gas imbalance
shall not decrease, in any manner, the Production Payment Percentage applicable
to such Subject Interest or the quantity of Production Payment Hydrocarbons to
which Grantee is entitled, it being agreed that Grantor shall bear the entire
burden of any such gas imbalance.

 

30. Use by Grantor of Portion of Production Payment Amount.

 

(a) In consideration of the payment by Grantee to Grantor of the Production
Payment Amount, Grantor agrees (i) to complete in a good and workmanlike manner,
in accordance with industry standards and as a reasonably prudent operator, the
Work Plan described in Exhibit "B" hereto, inclusive of any and all written
materials related thereto previously given by Grantor to Grantee ("Work Plan");
and (ii) that Grantor shall use at least Three Hundred Seventy-Five Thousand and
No/100 Dollars ($375,000.00) of the Production Payment Amount to pay the costs
associated with the Work Plan. If the actual cost of completing the Work Plan is
less than $375,000.00, Grantor shall, subject to the terms of the Work Plan, use
the remaining funds to further increase production on any of the Subject Wells.
If the actual cost of completing the Work Plan exceeds $375,000.00, Grantor
shall use a greater portion of the Production Payment Amount or other funds
available to Grantor to pay such excess. If Grantor fails to comply with any of
the provisions of this subsection (a), Grantee shall be entitled to exercise any
and all of the remedies set forth in Section 15. hereof relating to Grantor's
breach of this Agreement.

 

(b) Grantor shall provide promptly to Grantee, on a monthly basis, reports
detailing the progress of the Work Plan including work performed, costs incurred
(including copies of all third party invoices if specifically requested by
Grantee in writing) and operating results, and any other information required

20

 

to be included as set forth in the Work Plan in Exhibit "B" hereto. Grantor
shall also provide to Grantee a detailed written accounting of the expenditure
of the $375,000.00 portion of the Production Payment Amount described in Section
30(a) above, including equipment purchases and labor expense.

 

(c) Nothing in this Section 30., or in any other provision of this Agreement or
the Conveyance, shall obligate Grantee to make available, or to pay, any amounts
in addition to the Production Payment Amount to Grantor, it being agreed that
the Production Payment Amount is the sole and exclusive consideration from
Grantee for the acquisition by Grantee of the Production Payment and the
Permanent ORRI.

 

31. Option to Purchase Production Payment.

 

Grantee hereby grants to Grantor the right and option to purchase the Production
Payment, which right shall be exercisable as follows: (i) Grantor may purchase
the Production Payment at any time after September 1, 2011 and prior to
September 1, 2012 by paying to Grantee an amount equal to one hundred twenty
percent (120%) of the Option Price (as defined below); (ii) Grantor may purchase
the Production Payment on or after September 1, 2012 and prior to September 1,
2013 by paying to Grantee an amount equal to one hundred fifteen percent (115%)
of the Option Price; and (iii) Grantor may purchase the Production Payment on or
after September 1, 2013 and prior to Termination Time by paying to Grantee an
amount equal to one hundred ten percent (110%) of the Option Price. The purchase
price shall be paid by cashier's check or by wire transfer, with confirmed
receipt of funds. The closing shall take place in the offices of Grantee, or at
such other place and time as Grantor and Grantee may agree. Grantor shall
exercise such option by giving Grantee notice not less than forty-five (45) days
prior to the date of the purchase. As used in this Agreement, the term "Option
Price" means an amount equal to (A) the Production Payment Amount less any
proceeds actually received by Grantee from the Production Payment prior to the
date Grantor repurchases the Production Payment (net of any charges paid by
Grantee pursuant to Section 1.02 of the Conveyance), plus (B) an amount
sufficient to provide Grantee with a eighteen percent (18%) internal rate of
return on the Production Payment Amount, as determined in accordance with the
formula set forth in Exhibit "A".

 

32. Area of Mutual Interest for the Production Payment/Rights to Fund.

 

(a) Notwithstanding any provision of the Conveyance or this Agreement to the
contrary, the Production Payment shall also extend to any fee interest, mineral
interest, leasehold interest, royalty interest, overriding royalty interest,
operating rights

21

 

interest, and any and all other right, title, interest or claim of every kind
and character purchased or otherwise acquired by Grantor (or any Affiliate of
Grantor), or by any owner, member, shareholder or partner of Grantor (or any
Affiliate of such person) during the term of the Production Payment in and to
the Subject Lands and in and to any lands extending outward one (1) mile from
the boundaries of each Subject Lands and/or Leases described or referenced in
Exhibit "A" of the Conveyance ("Additional Interest"). Within five (5) days from
the date that any Additional Interest is so targeted by Grantor to be acquired,
Grantor shall give written notice thereof to Grantee, together with a specific
description of the interest targeted, and a legally sufficient description of
the lands affected. Grantor shall also furnish Grantee with any additional
information and/or documents requested by Grantee relating to the Additional
Interest including, but not limited to, the contracts and/or agreements pursuant
to which the Additional Interest is intended to be acquired. If Grantor acquires
an Additional Interest, Grantee shall prepare and submit to Grantor for
execution an original Amendment of Conveyance of Production Payment adding the
Additional Interest to the Conveyance, together with a conforming original of an
Amendment of Production Agreement. Within five (5) days from receipt thereof,
Grantor shall execute and deliver the original Amendment of Conveyance to
Grantee, in recordable form, together with the conforming Amendment of
Production Agreement. The Amendment shall be recorded in the appropriate
property records evidencing, as contractually agreed to by the parties as of the
Effective Time of the Conveyance, that the Production Payment covers the
Additional Interest.

 

(b) In addition to the foregoing provisions of this Section, Grantee shall have
the right of first refusal to provide the funding to Grantor for the purchase of
any and/or all such Additional Interest, under the terms and conditions of the
Conveyance and this Agreement. Upon receipt by Grantee from Grantor of the
information required above to be furnished regarding a targeted Additional
Interest, Grantee shall have fifteen (15) days from receipt of such information
to notify Grantor in writing whether or not Grantee elects to provide funding
under the terms and conditions of the Conveyance and this Agreement for the
purchase of such Additional Interest. Grantee's failure to notify Grantor of
Grantee's election within such time period shall constitute Grantee's waiver of
its right to fund, but only with respect to the specific Additional Interest
identified in Grantor's written notice in subsection (a) above.

 

(c) In addition to the foregoing provisions of this Section, and notwithstanding
any provision of the Conveyance or this Agreement to the contrary, if Grantor
elects to drill an additional well or wells on the Subject Lands and Leases
(including lands and leases in which Grantor acquired an Additional Interest

22

 

under subsection (a) above), or on lands with which all or a portion of such
Subject Lands and Leases are pooled, Grantor hereby grants to Grantee, during
the term extending from the Effective Time until Termination Time, a first right
of refusal to fund such drilling under the terms and conditions of the
Conveyance and this Agreement. Grantor shall provide at least thirty (30) days
prior written notice to Grantee of Grantor's intention to drill an additional
well or wells, together with documentation specifically describing the proposed
drilling operation. Grantee shall also have the right to request that Grantor
submit for Grantee's review any documentation that Grantee reasonably requests
relating to such proposed drilling operation. Grantee shall have fifteen (15)
days from receipt of Grantor's notice and the additional information requested
by Grantee, to notify Grantor whether Grantee elects to fund such additional
drilling operation. Grantee's failure to notify Grantor of Grantee's election
within such time period shall constitute Grantee's waiver of its right to fund,
but only with respect to the specific drilling operation identified in Grantor's
notice.

 

(d) If Grantee declines to fund the acquisition by Grantor of an Additional
Interest in the area of mutual interest in subsection (a) above, or the drilling
of a new well under subsection (c) above on the area of mutual interest, (i)
Grantor may obtain alternate third party funding of the same and (ii) if the
Additional Interest to be obtained by Grantor by such acquisition or drilling is
in a wellbore located (or to be located) within the boundaries of the area of
mutual interest described in subsection (a) above, which wellbore is not, in
Grantee's sole discretion, completed (or to be completed) in a zone or formation
that could drain reserves from any of the Subject Lands and Leases hereof, then
if subsections (d)(i) and (d)(ii) hereof are applicable, such Additional
Interest in such wellbore shall not be subject to the Production Payment.

 

33. Grantor's Representations and Warranties; Liquidated Damages.

 

(a) Notwithstanding any provision of the Conveyance or this Agreement to the
contrary, Grantor represents and warrants to Grantee the following:

 

(i) All of the written information (including, but not limited to, financial,
production, engineering, geological, geophysical, title or ownership) provided
by Grantor to Grantee prior to the date this Agreement and the Conveyance are
executed by Grantor is, to the best of Grantor's knowledge and after reasonable
due diligence, true and correct. Grantor shall execute the verification page
("Verification") attached as Exhibit "D" hereto and made a part hereof relating
to the information provided by

23

 

Grantor to Grantee prior to the date Grantor executes this Agreement and the
Conveyance, and Grantor shall also execute such Verification effective as of the
time any written amendments to the Conveyance and/or the Production Agreement
are entered into by Grantor and Grantee;

 

(ii) No material information relating to the valuation of the Subject Interests
has been knowingly withheld by Grantor from Grantee including, but not limited
to, information relating to existing or potential liens or encumbrances
affecting the Subject Interests and/or knowing violations of environmental laws
affecting the Subject Interests;

 

(iii) Grantor has, as of the date this Agreement is executed by Grantor,
furnished Grantee full and complete (including all referenced Exhibits), copies
of all written agreements between Grantor and (1) the entity from which Grantor
is purchasing all or any part of the Subject Interests and/or (2) any other
entity, whether affiliated with Grantor or not, relating to or in any way
affecting the Subject Interests;

 

(iv) All of the information relating to the Subject Interests provided by
Grantor to Grantee after the date hereof and during the term of the Production
Payment shall be, to the best of Grantor's knowledge and after reasonable due
diligence, true and correct;

 

(v) Grantor shall promptly notify Grantee, in writing, if Grantor becomes aware,
during the term of the Production Payment, of any material change in any
information provided by Grantor to Grantee hereunder; and

 

(vi) Grantor shall timely pay all Taxes and royalties and Grantor shall pay all
operating charges, joint interest billings before they become delinquent and
third party vendor charges due and owing (but no later than 90 days from the
date of any invoice) arising from the Subject Interests and/or production
therefrom (except to the extent being contested in good faith), and Grantor
shall comply with the requirements of Section

36. hereof.

 

(b) Grantor acknowledges that a material inducement for Grantee to purchase the
Production Payment is Grantee's reliance upon Grantor's representations and
warranties herein, and that Grantee has relied upon the same. If Grantor
breaches any of the representations and warranties in subsections (a)(i),
(a)(ii), (a)(iii) and/or (a)(iv) hereof, Grantor shall be liable to Grantee for
liquidated damages in the amount of Ten Percent (10%) of all amounts actually
funded by Grantee to Grantor during the term of the Conveyance. If Grantor
breaches the representation and

24

 

warranty in subsection (a)(vi) hereof, and such breach is not cured within five
(5) days from the date that Grantee gives Grantor written notice thereof,
Grantor shall be liable to Grantee for liquidated damages in addition to the
actual amount of such Taxes, royalties, operating charges, joint interest
billings and/or third party vendor charges that Grantee may, in its discretion,
pay on behalf of Grantor in accordance with other provisions of this Agreement,
such liquidated damage amount being equal to $1,000.00 for each day that such
breach or breaches are not cured, until they are cured; provided however, that
the maximum amount of liquidated damages under this sentence shall be Ten
Percent (10%) of all amounts actually funded by Grantee to Grantor during the
term of the Conveyance.

 

(c) Grantor and Grantee agree that the amount of damages above actual out of
pocket capital expenditures that might be sustained by Grantee in the event of a
breach of any of the representations or warranties of Grantor in this Section
33. are uncertain and difficult to ascertain, and that the above stated
liquidated damages constitute reasonable compensation for such additional
damages. Each signatory party hereby agrees that the liquidated damages provided
for hereunder do not constitute a penalty.

 

(d) The undersigned officer or representative of Grantor shall also, by the
execution of the Verification, be jointly and severally liable with Grantor to
Grantee for all liquidated damages applicable herein, and such individual
personally guarantees that Grantor shall pay to Grantee all such liquidated
damages, if any, applicable under this Section 33., but not to exceed Ten
Percent (10%) of all amounts actually funded by Grantee to Grantor during the
term of the Conveyance.

 

(e) Grantor also warrants and represents to Grantee that, at the time of
execution of the Conveyance and this Agreement;

 

(i) Grantor has fully read, and comprehends, all of the provisions of the
Conveyance and this Agreement;

 

(ii) Grantor has relied upon Grantor's own knowledge and judgment and upon the
advice of independent counsel and/or consultants of Grantor's own free choice;
and

 

(iii) in entering into the Conveyance and this Agreement, Grantor has acted in
reliance upon Grantor's own independent judgment, and not upon any
representation, advice or action by Grantee or by any agent or representative of
Grantee.

25

 

34. Capacity.

 

Grantor represents and warrants that (i) Grantor is a corporation, limited
liability company, partnership or trust in good standing/existence under all
laws of such party Grantor's state of incorporation or formation; and (ii) the
undersigned officer or representative of Grantor is fully authorized by Grantor
to execute this Agreement on behalf of such Grantor, in the capacity stated
herein, and to bind such Grantor to perform all of such Grantor's obligations
hereunder.

 

35. Further Assurances.

 

Grantor, at Grantee's request, shall execute and deliver such further
instruments and do such further acts as may be necessary to carry out the
purposes of this Agreement, as the same may relate to the Subject Interests.

 

36. Use of Production Proceeds.

 

Notwithstanding any provision of the Conveyance or this Agreement to the
contrary, commencing as of the Effective Time and continuing until Termination
Time, if during any month production revenues attributable to the Subject
Interests covered by the Production Payment are insufficient (after deducting
applicable taxes, royalties and Grantee's Production Payment revenues) to pay
all of the leasehold operating expenses for such properties for such month
("Monthly Deficit"), Grantor shall not make any distribution to any of Grantor's
officers, directors, shareholders, beneficiaries, owners, managers, members,
employees, Affiliates or any person or entity having any ownership interest in
Grantor, of any proceeds attributable to Grantor's interest in the Subject
Interests covered by this Conveyance until such time as the Monthly Deficit for
such month, and for all succeeding months, if any, in which a Monthly Deficit
occurs, are fully paid off out of Grantor's production revenues attributable to
the Subject Interests and/or from other funds owned by, or obtained by, Grantor.
Grantor's failure to comply with the terms of the above provisions shall
constitute a breach of this Agreement and shall, in addition to all other
remedies available at equity or in law, entitle Grantee to exercise any and all
of the remedies set forth in Section 15. hereof.

 

37. Use of Funding.

 

Notwithstanding any provision of this Agreement or the Conveyance to the
contrary, the Production Payment Amount funding made by Grantee to Grantor shall
be utilized by Grantor as follows:

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(a) Three Hundred Seventy-Five Thousand and No/100 Dollars ($375,000.00) to
complete the Work Plan (which Work Plan includes, but is not limited to,
drilling and completing 5 new PUD wells on the James Leonard Lease in Coleman
County, Texas described in Part I. of Exhibit "A" of the Conveyance);

 

(b) Thirty Thousand and No/100 Dollars ($30,000.00) for Working Capital relating
to the Work Plan; and

 

(c) Five Thousand and No/100 Dollars ($5,000.00) for the Production Payment
origination fee associated with the Conveyance and this Agreement.

 

At Grantee's request, Grantor shall furnish Grantee with any and all
documentation requested by Grantee to confirm Grantor's use of such funding
amounts as set forth above, and in accordance with the other terms of this
Agreement. Grantor's failure to comply with the terms of the above provisions,
without a written waiver of such provisions executed by Grantee, shall
constitute a breach of this Agreement, and shall, in addition to all other
remedies available at equity or in law, entitle Grantee to exercise any and all
of the remedies set forth in Section 15. hereof.

 

38. Entire Agreement; Amendments; Waiver.

 

This Agreement and the Conveyance constitute the entire agreement between the
parties hereto. This Agreement and/or the Conveyance may not be amended and no
rights thereunder may be waived except by a written document signed by the duly
authorized representatives of the parties. No waiver of any of the provisions of
this Agreement and/or the Conveyance shall be deemed to be or shall constitute a
waiver of any other provisions thereof (whether or not similar), nor shall such
waiver constitute a continuing waiver unless otherwise expressly provided.

 

39. No Adverse Claim Against the Production Payment.

 

During the term of the Production Payment,

 

(i) Each party Grantor, and each shareholder, member and/or owner of each party
Grantor, agrees that the real property interest conveyed to Grantee in the
Conveyance is not subject to, nor shall be adversely affected by, any monetary
obligations owed and/or incurred, or to be owed and/or to be incurred, between
the shareholders, members and/or owners of each party Grantor, or between each
party Grantor and any such shareholder, member and/or owner, in any way related
to the Subject Interests, Subject Lands and/or the Leases; and

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(ii) neither of each party Grantor, nor any shareholder, member and/or owner of
each party Grantor, either individually or through any entity owned or
controlled by, or owned or under common control with, such shareholder, member
and/or owner and/or such party Grantor, shall assert any adverse action or claim
against the Production Payment conveyed to Grantee under the Conveyance and this
Agreement, and each party Grantor and each shareholder, member and/or owner of
each party Grantor hereby waives the right, either contractual, statutory or in
equity, to asset any such action or claim of record and/or in any court or legal
forum having jurisdiction.

 

40. Due Diligence/Documentation Costs.

 

Notwithstanding any provision of the Conveyance and/or this Agreement to the
contrary, Grantor shall reimburse Grantee for all costs incurred by Grantee for
due diligence and documentation costs relating to the Subject Lands, Leases
and/or Subject Interests including, but not limited to, land/title, legal,
recording and travel expenses (collectively "Closing Costs"). Grantee
acknowledges receipt from Grantor of a prepayment of

$10,000.00 toward the Closing Costs. If the total of the Closing Costs exceeds
the initial $10,000.00 payment, Grantor shall pay Grantee at Closing the
remainder of such total Closing Costs. If the total Closing Costs are less than
the initial $10,000.00 payment, Grantee will refund the overpayment to Grantor.

 

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EXECUTED in multiple originals as of the date first set forth above, effective
as of the Effective Time.

 

  ADINO EXPLORATION, LLC           By: /s/       Shannon W. McAdams       Chief
Financial Officer                     Shannon W. McAdams, Individually          
/s/     Shannon W. McAdams,   Individually, BUT SOLELY FOR THE
PURPOSES OF SECTION 33. AND SECTION
39. OF THIS AGREEMENT     GRANTOR           BLUEROCK ENERGY CAPITAL II, LLC    
      By: /s/       Catherine L. Sliva       President GRANTEE

 

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