Exhibit 10.6
 
 
CONTRACT OPERATOR AGREEMENT
 
THIS CONTRACT OPERATOR AGREEMENT (“Agreement”) is entered into on April 12,
2011, but will be effective on April 1, 2011 as outlined in the PSA between
Tucker Family Partnership, LLLP, DNR Oil & Gas, Inc., and Arete Industries, Inc.
at 7:00’clock a.m. MDT (“Effective Date”), between Arête Industries, Inc.
(“Arête”) and DNR Oil & Gas, Inc, a Colorado corporation (“Contractor”).
 
RECITALS
 
A. Simultaneously herewith, Arête has entered into a Purchase and Sale Agreement
(the “PSA”) with Contractor.  Terms capitalized but not defined herein shall
have the meaning given such terms in the PSA.
 
B. This Agreement is being executed contemporaneously with the PSA, pursuant to
which Contractor is assigning all of its right, title and interest in and to the
assets described therein as the Assets to Arête on the terms and conditions set
forth in the PSA. Due to the Contractor’s familiarity with and knowledge of the
Assets, the Parties believe that it would be efficient and economical for
Contractor to operate the Assets on Arête’s behalf as an independent contract
operator under the terms and provisions set forth below.
 
C. The Parties intend that Contractor will operate the Assets on behalf of Arête
under the terms and conditions set forth herein.
 
AGREEMENT
 
For good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
 
1. Scope of Services.  Contractor shall continue the physical operation of the
Assets as they are currently operated, and will account to Arête for all of the
Assets, subject to the limitations set forth in this Agreement
(“Services”).  Pursuant to the foregoing, Contractor shall:
 
(a) operate, manage, and maintain the Assets in accordance with past practices
of Contractor;
 
(b) employ such personnel as may be reasonably necessary to perform the
Services;
 
(c) provide a monthly joint interest billing statement and monthly revenue check
reflecting expenses and revenues on the Assets, but Contractor shall not be
required to provide full financial accounting and maintenance of books and
records on the Assets.  Arête shall have the right to review backup accounting
detail for JIBs and revenue checks during normal business hours at Contractor’s
office in Denver, Colorado;
 
(d) purchase supplies, materials, tools and equipment associated with ownership
and operation of the Assets; provided that without Arête’s prior written
consent,
 

 
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(e) Contractor will not purchase any of the above, if such purchase would result
in a charge or cost to Arête over $10,000 for a single item, except in cases
Contractor believes constitute an emergency;
 
(f) contract for Services associated with ownership and operation of the Assets;
provided that without Arête’s prior written consent, Contractor will not enter
into a service contract that is not terminable without penalty or cost upon
thirty (30) days prior notice or would result in a charge or cost to Arête over
$10,000 for a single item, except in cases Contractor believes constitute an
emergency;
 
(g) pay any lease settlement, lease rentals, shut-in royalties, minimum
royalties, payments in lieu of production, royalties, overriding royalties,
production payments, net profit payments and other similar burdens  associated
with ownership or operation of the Assets, and, at Arête’s direction, perform
and comply with covenants contained in the Leases and agreements relating to the
Assets;
 
(h) pay and perform all obligations of Arête which relate to the Assets,
including, without limitation, the payment of operating costs, vendor invoices
and contractor invoices associated with ownership or operation of the Assets;
 
(i) provide marketing, gas control and other similar services necessary to sell
the products produced from the Assets in a manner basically consistent with
Arête’s past practices;
 
(j) submit accurate and complete reports to state and federal authorities, as
appropriate and consistent with Arête’s past practices, with copies of all
reports to be provided to Arête, and provide to Arête daily production reports
and monthly production reports and other reports generated by Contractor in the
ordinary course of operation of the Assets; and
 
(k) inform Arête of any pending or threatened action or investigation of which
the Contractor receives written notice and which Contractor believes in good
faith could have a material adverse impact on the Assets, including all actions
initiated or investigations threatened by a third party or governmental
authority under applicable environmental laws.
 
Notwithstanding the foregoing, in carrying out its payment obligations
hereunder, Contractor never shall be obligated to advance its own funds.  In
addition, if any active well included in the Assets ceases production for any
reason that will require other than routine maintenance in the ordinary course
to restore production, Contractor shall notify Arête no later than five business
days after Contractor becomes aware of such cessation of production concerning
the action recommended by Contractor to restore production from such well.  The
Services shall not include the drilling, reworking, deepening, sidetracking,
plugging back, or recompletion of any well, or the plugging and abandonment of a
well, or any other operation that, under the terms of the applicable Operating
Agreement (or, in the absence of any applicable Operating Agreement, the
AAPL 610 (1989 Revision) Model Form Operating Agreement), requires the prior
approval of the non-operators, and Contractor shall have no obligation to
perform any such operations on behalf of Arête.
 

 
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Limitation on Services.  Notwithstanding any other provisions in this Agreement,
Contractor is not obligated to provide Services that Contractor did not perform
immediately prior to the Closing Date.
 
2. Termination/Partial Termination.  This Agreement commences on the Effective
Date referenced above and will terminate one year thereafter, unless extended or
terminated earlier by mutual agreement of Arête and Contractor.
 
3. Reimbursement/Fee.  Arête shall reimburse Contractor for all third party
costs and expenses (including without limitation, operating costs, capital
expenditures, production taxes and producing, drilling and construction overhead
charges billed by third party operators) incurred or borne by Contractor and
associated with the Assets during the term of this Agreement.  In addition to
the foregoing reimbursements, Arête shall pay Contractor $25,000 per month (pro
rated for partial months) for the Services during the term of this Agreement.
Any adjustments of the fee shall be adjusted as of the first day of April each
year in accordance with the procedures established in Section III.1.A.3. of the
“Accounting Procedure, Joint Operations” form (1984, Onshore) published by the
Council of Petroleum Accountants Societies.  Contractor shall provide monthly
statements to Arête detailing third party costs and expenses and the fee for the
Services and Arête shall pay such invoices within 30 days following receipt.  If
payment is not made within such time, the unpaid balance shall bear interest
monthly at the prime rate in effect at JP Morgan Chase Bank, N.A. on the first
day of the month in which delinquency occurs plus 2% or the maximum contract
rate permitted by applicable Colorado law, whichever is lesser, plus attorneys’
fees, court costs, and other costs in connection with the collection of unpaid
amounts.  In the event that any delinquency in payment exists for a period of
more than 60 days, Contractor may, at its option, immediately declare this
Agreement terminated and shall provide no further Services with respect to the
Assets and shall have no further liability or responsibility with respect to the
Assets.
 
4. Independent Contractor.  Contractor shall perform the Services under the
general direction of Arête, but in all events Contractor shall be an independent
contractor in accordance with the specifications herein set out.  Arête shall
look to Contractor for results only and shall have no right at any time to
direct or supervise Contractor or its servants or employees as to the manner,
means, and method in which the Services are performed.  The detailed manner and
method of performing the Services shall be under the control of
Contractor.  Neither Contractor nor anyone employed by Contractor shall be
deemed to be an employee, agent, servant, or representative of
Arête.  Contractor shall be responsible for the payment of federal income tax,
social security tax, workers’ compensation insurance, unemployment tax, and
other similar payments, if any, relating to Contractor’s business and employees,
and Arête shall not withhold any amounts for such purposes from payments made to
Contractor.  As an independent contractor, neither Contractor nor anyone
employed by Contractor will be eligible for the benefits provided to regular
employees of Arête, including but not limited to health and disability
insurance.  Contractor’s engagement as an independent contractor by Arête will
terminate upon the termination of this Agreement as provided for herein.
 
5. No Agency.  Contractor shall not be deemed to be the agent or
attorney-in-fact of Arête.  Contractor shall have no authority to amend, modify,
or waive compliance with any operating agreement, oil and gas lease, or other
contract or agreement in effect with respect to the Assets.  Contractor shall
not undertake to negotiate new agreements or submit transaction
 

 
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6. proposals to other parties without Arête’s prior written consent.  Any new
contract or agreement negotiated by Contractor with respect to the Assets must
be executed by a duly authorized officer or representative of Arête before such
contract or agreement becomes binding on Arête.  Nothing contained in this
Agreement shall be deemed or construed to create a relationship among Arête and
Contractor of partnership, joint venture, agency, or other relationship creating
fiduciary, quasi-fiduciary, or similar duties or obligations inter se, or that
would otherwise subject Arête and Contractor to joint and several or vicarious
liability in favor of any other person.
 
7. Standard of Performance.  Contractor shall perform the Services as a
reasonable and prudent operator, in good faith, in a good and workmanlike
manner, with due diligence and dispatch, in accordance with good oilfield
practices, and in compliance with all applicable laws and regulations and the
terms of the applicable oil and gas leases, operating agreements, and this
Agreement.  Notwithstanding the foregoing, the parties understand and agree that
Contractor shall never have any liability to Arête in connection with its
performance of the Services hereunder greater than that which it would have as
the operator to a non-operator under the applicable Operating Agreement (or, in
the absence of such an agreement, under the AAPL 610 (1989 Revision) Model Form
Operating Agreement), IT BEING RECOGNIZED THAT UNDER SUCH AGREEMENTS, THE PARTY
NAMED AS OPERATOR IS RESPONSIBLE ONLY FOR ITS GROSS NEGLIGENCE AND WILLFUL
MISCONDUCT.
 
8. Obligations of Arête.  Except for any obligations set forth in and assumed by
Contractor in this Agreement, Contractor shall not be responsible or liable for
the performance of, or for its failure to perform, any duties or obligations of
Arête under any operating agreement or any other contract or agreement between
Arête and any other person or persons, whether written or oral, including,
without limitation, any drilling contract.  In addition, Contractor shall not be
responsible or liable for any obligation, costs, or expenses related to
remediation of pollution or contamination of natural resources (including soil,
air, surface water or groundwater) which might exist on the Assets as of the
Effective Date of this Agreement.
 
9. Indemnification.  Contractor and its members, managers, officers, affiliates,
employees, attorneys, contractors and agents (the “Contractor Group”) shall have
no liability for or in connection with any and all claims, demands, suits,
causes of action, losses, damages, liabilities, fines, penalties and costs
(including reasonable attorneys’ fees and costs of litigation) whether known or
unknown, asserted or unasserted (including, without limitation, claims under
applicable environmental laws) that are brought by or owed to Arête or any third
party (“Claims”) arising out of or resulting from the Services; and Arête hereby
releases the Contractor Group from and shall fully protect, defend, indemnify
and hold the Contractor Group harmless from and against all Claims arising out
of or resulting from the Services, including, without limitation, Claims
relating to (a) injury or death of any person(s) whomsoever, (b) damages to or
loss of any property or resources, (c) breach of contract, (d) common law causes
of action such as negligence, strict liability, nuisance or trespass, or
(e) fault imposed by statute, rule, regulation or otherwise.  This indemnity and
defense obligation applies regardless of cause or of any negligent acts or
omissions of the Contractor Group including, without limitation sole negligence,
concurrent negligence or strict liability of the Contractor Group, but not
including gross negligence or willful misconduct of the Contractor Group.
 

 
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10. Assignability.  Neither Arête nor Contractor shall assign or sublease any
rights or obligations under this Agreement without prior written consent of the
non-assigning party; provided that without Arête’s consent, Contractor may
subcontract all or any portion of the Services to a third party, provided that
Contractor remains liable for all obligations hereunder.
 
11. Confidentiality.  Contractor shall treat as confidential information all
maps, logs, geological, geophysical, reserve, engineering, and other scientific
and technical information, reports, and data (including, without limitation,
conventional and 3-D seismic data) generated pursuant to operations performed
under this Agreement during the term of this Agreement, as well as all other
confidential or proprietary information and rights of Arête of which Contractor
becomes aware.  In like manner, Arête shall treat as confidential information
all accounting and other confidential or proprietary data and rights of
Contractor of which Arête becomes aware.  Each party agrees to keep confidential
all such information, reports, and data, and shall not disclose or disseminate
any such information, reports, or data to any third person without the prior
written consent of the other party.  In no event shall the obligations contained
in this Section 11 apply to information (a) required to be disclosed by or
pursuant to applicable law, rule or regulation (b) that is or becomes public
knowledge, other than as a result of a breach of this Agreement, (c) that Arête
or Contractor obtains from a third person when such disclosure by the third
person does not violate any confidentiality or other contractual obligation of
such third person, (d) that pertains to the excluded assets, or (e) that is
required to be provided to non-operators under any operating agreement.
 
12. Notices.  All notices and communications required or permitted to be given
hereunder shall be in writing and shall be delivered personally, or sent by
bonded overnight courier, or by facsimile transmission (provided any such
facsimile transmission is confirmed either orally or by written confirmation),
addressed to the appropriate party at the address for such party shown below or
at such other address as such party shall have theretofore designated by written
notice delivered to the party giving such notice:
 
If to Arête:
 
Arête Industries, Inc.
7260 Osceola Street
Westminster, CO 80030
Attn.: Donald W. Prosser
Fax: (303) 429-0664
E-mail: dpro-cpa@msn.com.
 
If to Contractor:
 
DNR Oil & Gas Inc.
12741 E. Caley, Unit 142
Englewood, CO 80111
Attn:  Charles B. Davis, President
Fax:   303-825-2968
 

 

 
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ny notice given in accordance herewith shall be deemed to have been given on the
business day when delivered to the addressee in person or by facsimile or bonded
overnight courier; provided, however, that if any such notice is received after
normal business hours, the notice will be deemed to have been given on the next
succeeding business day.  Any party may change the address, telephone number, or
facsimile number to which such communications to such party are to be addressed
by giving written notice to the other party in the manner provided in this
Section 12.
 
13. Amendment.  This Agreement may be amended only by an instrument in writing
executed by the party against whom enforcement is sought.
 
14. GOVERNING LAW.  THIS AGREEMENT AND THE LEGAL RELATIONS AMONG THE PARTIES
SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
COLORADO, EXCLUDING ANY CONFLICTS OF LAW RULE OR PRINCIPLE THAT MIGHT REFER
CONSTRUCTION OF SUCH PROVISIONS TO THE LAWS OF ANOTHER JURISDICTION.
 
15. Limitation on Damages.  For the breach or non-performance by any party of
any representation, warranty, covenant, or agreement contained in this
Agreement, the liability of the obligor shall be limited to direct actual
damages only, except to the extent that the obligee is entitled to specific
performance or injunctive relief.  AS BETWEEN THE PARTIES, NOTWITHSTANDING
ANYTHING TO THE CONTRARY IN THIS AGREEMENT, NEITHER CONTRACTOR NOR ARÊTE SHALL
BE LIABLE TO THE OTHER AS THE RESULT OF A BREACH OR A VIOLATION OF ANY
REPRESENTATION, WARRANTY, COVENANT, AGREEMENT, OR CONDITION CONTAINED IN THIS
AGREEMENT FOR CONSEQUENTIAL, PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES, IN TORT,
IN CONTRACT, UNDER ANY INDEMNITY PROVISION, ARISING BY OPERATION OF LAW
(INCLUDING, WITHOUT LIMITATION, STRICT LIABILITY), OR OTHERWISE.
 
16. Dispute Resolution.
 
(a) Senior management of Arête and Contractor will attempt to resolve any and
all disputes arising from this Agreement. Failing a settlement between the
parties, any matters shall be handled as set forth herein.
 
(b) Any disagreement, difference, or dispute between the parties provided in
this Agreement to be resolved by arbitration shall be resolved pursuant to
arbitration according to the procedures set forth in this Section 16.
 
(c) Either Arête or Contractor may commence an arbitration proceeding hereunder
by giving written notice to the other party.  No later than five (5) business
days after the delivery of the notice commencing the arbitration proceeding,
Arête and Contractor shall each select an arbitrator.  Promptly following their
selection, the arbitrators selected by the parties jointly shall select a third
arbitrator.  All arbitrators selected under this Agreement shall have at least
eight (8) years of professional experience in the oil and gas industry and shall
not previously have been employed by either party and shall not have a direct or
indirect interest in either party or the subject matter of the arbitration.  The
arbitration hearing shall commence as soon as is practical, but in no event
later than thirty (30) days after the
 

 
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(d) selection of the third arbitrator.  If any arbitrator selected under this
Section 16(c) should die, resign, or otherwise be unable to perform his duties
hereunder, a successor arbitrator shall be selected pursuant to the procedures
set forth in this Section 16(c).  The arbitrators shall settle all disputes in
accordance with the Federal Arbitration Act and the Commercial Arbitration Rules
of the American Arbitration Association, to the extent that such Rules do not
conflict with the terms of such Act or the terms of this Agreement.  Any
arbitration hearing shall be held in Denver, Colorado.  The arbitrators shall
render their decision within thirty (30) days after the hearing(s) conclude,
unless the parties settle the matter.
 
(e) The decision of the arbitrators shall be final and binding on the parties
and, if necessary, may be enforced in any court of competent jurisdiction.  The
law governing all such disputes shall be the laws of the State of Colorado, but
without regard to conflicts of laws.  The fees and expenses of the arbitrators
shall be borne by the party not substantially prevailing, or, if that cannot be
determined, shall be shared one-half by Contractor and one-half by Arête.
 
The Parties have caused their duly authorized representatives to execute this
Agreement as of the day and year first set forth above.
 
 

 
DNR OIL & GAS, INC.
     
By: /s/ Charles B. Davis
 
Name: Charles B. Davis
 
Title:President
         
ARÊTE INDUSTRIES, INC.
     
By: /s/ Donald W. Prosser
 
Name: Donald W. Prosser
 
Title:  Chairman

 
 
 
 
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