PURCHASE AND SALE AGREEMENT
Big Sand Spring Valley Prospect
November 7, 2005

THIS AGREEMENT, entered into this 7th day of November 2005, by and between
Merganser Limited (“Merganser”), whose address is 55 Gower Street, 3rd Floor,
London, England, WC1E 6HO, and Eternal Energy Corp. (“Eternal”), a Nevada
corporation, whose address is 2120 West Littleton Blvd., Suite 300, Littleton,
Colorado 80120. Merganser and Eternal may sometimes hereafter be referred to
individually as the “Party” and collectively as the “Parties.”

Merganser has entered into a Participation Agreement, dated November 1, 2005,
with Eden Energy Corp. (“Eden”) for the purpose of acquiring oil and gas leases
and drilling wells to explore for oil and natural gas reserves on the Big Sand
Spring Valley Prospect (the “Project”) as described therein. A copy of that
agreement (“Eden Agreement”) is attached hereto and made a part hereof as
Exhibit “A.”

Merganser desires to sell and Eternal desires to purchase all of the interest
owned by Merganser in the Eden Agreement.

For and in consideration of the mutual obligations and undertakings set forth
herein, and other good and valuable considerations, the receipt and sufficiency
of which is hereby acknowledged by each of the undersigned, the Parties agree as
follows:

1. Purchase and Consideration
Merganser hereby agrees to sell and assign one hundred percent (100%) of all its
right, title and interest in the Eden Agreement to Eternal for the consideration
as set forth herein below. 
A. Annual Reserve Report
Eternal hereby agrees to have a qualified, independent third party engineering
company prepare a detailed reserve report (“the Reserve Report”) each calendar
year, beginning in 2006, for the interest it owns in the Project. This
obligation shall continue for so long as the Eden Agreement is in full force and
effect. All of Eternals obligations to Merganser hereunder will terminate when
the Eden Agreement expires. The Reserve Report will be prepared in accordance
with standard industry practices and in accordance with the Securities and
Exchange Commission (“SEC”) guidelines governing these matters. The Reserve
Report will be completed no later than March 31st of the next ensuing calendar
year (i.e., by March 31, 2007 for calendar year 2006).
 
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B. Issuance of Common Shares
Based upon the results of the annual Reserve Report, Eternal will issue shares
of its common stock (or that of a successor entity subject to the reporting
requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended) to Merganser using the following formula:

1.  
One million (1,000,000) shares of common stock shall be issued to Merganser for
each Ten million (10,000,000) equivalent barrels of net proved oil reserves
attributable to Eternal’s interest in the Project. As used herein, “proved
reserves” shall be defined in accordance with SEC guidelines.

2.  
The issuance of any common shares due Merganser will be done no later than June
30th of the next ensuing calendar year for which they were due. For example, any
shares due Merganser for the calendar year 2006 will be issued no later than
June 30, 2007.

3.  
Any shares issued to Merganser hereunder will not be registered by Eternal and
will be subject to any and all restrictions on re-sale, which are imposed by the
SEC. Furthermore, Eternal makes no representations or warranties as to the value
of the shares to issued, if any, under the terms of this Agreement.

4.  
In the event the proved reserves attributable to Eternals net interest in the
Project for any calendar year are less than ten million (10,000,000) equivalent
barrels of oil Merganser will not be entitled to any common stock for that
calendar year. Shares will not be issued on a pro rata basis.

5.  
In each succeeding calendar year Merganser will be entitled to receive
additional shares for any new reserve additions to the Reserve Report done for
that calendar year. For purposes of this calculation proved reserves will only
be counted one time. Additional shares will be based upon the same formula as
described above (1,000,000 shares for each 10,000,000 equivalent barrels of
proved oil reserves) for any new proved reserve additions attributable to
Eternals interest in the Project.

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6.  
The maximum number of shares available to Merganser under the terms of this
Agreement is limited to ten million (10,000,000) shares for net proved reserves
attributable to Eternal’s interest of one hundred million (100,000,000) barrels
of oil equivalent.

7.  
All shares issued to Merganser pursuant to this Section 1.B shall be referred to
herein as “Common Shares.”

2.
Representations and Warranties of Merganser.

Merganser hereby makes the following representations and warranties to Eternal,
and Merganser agrees to indemnify, hold harmless, and pay all causes of action,
lawsuits, debts, controversies, damages, claims, demands and judgments
(including litigation expenses and reasonable attorneys' fees) incurred by
Eternal, and its past and present officers, directors, employees, agents,
successors and assigns, whether or not under federal or state securities laws,
arising out of or in connection with Merganser’s misrepresentation or breach of
any of the representations and warranties set forth herein, including, without
limitation,

(a) Merganser is the sole and true party in interest and is not purchasing the
Common Shares for the benefit of any other person or entity and has not granted
any other person or entity any right or option or any participation or
beneficial interest in any of the Common Shares;

(b) Merganser confirms receipt and careful review of all written material
provided by, or on behalf of, Eternal in respect of its business and prospects,
and all information provided by Eternal to its stockholders and Merganser in
respect of its business and prospects, including all attachments and exhibits
thereto. Merganser understands that all books, records, and documents of Eternal
relating to this investment have been and remain available for inspection by
Merganser upon reasonable notice. Merganser confirms that all documents
requested by Merganser have been made available, and that Merganser has been
supplied with all of the additional information concerning this investment that
has been requested. Merganser confirms that it has obtained sufficient
information, in its judgment or that of its independent purchaser
representative, if any, to evaluate the merits and risks of this investment.
Merganser confirms that it has had the opportunity to obtain such independent
legal and tax advice and financial planning services as Merganser has deemed
appropriate prior to making a decision to purchase the Common Shares;

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(c) MERGANSER IS AWARE THAT AN INVESTMENT IN ETERNAL IS HIGHLY SPECULATIVE AND
SUBJECT TO SUBSTANTIAL RISKS. Merganser has the financial ability to bear the
economic risks of its investment, has adequate means of providing for its
current needs, and has no need for liquidity in this investment;

(d) The offer to sell the Common Shares was directly communicated to Merganser
by such a manner that Merganser, or its purchaser representative, if any, was
able to ask questions of and receive answers from Eternal or a person acting on
its behalf concerning the terms and conditions of this transaction. At no time,
except in connection and concurrently with such communicated offer, was
Merganser presented with or solicited by or through any leaflet, public
promotional meeting, television advertisement, or any other form of general
advertising;

(e) The Common Shares are being acquired solely for Merganser’s own account, for
investment, and are not being purchased with a view to resale, distribution,
subdivision, or fractionalization thereof;

(f) Merganser understands that the Common Shares have not been registered under
the Common Shares Act of 1933, as amended (the “Common Shares Act”), or any
state securities laws, in reliance upon exemptions from regulation for
non-public offerings and/or Regulation S under the Securities Act. Merganser
understands that the Common Shares or any interest therein may not be, and
agrees that the Common Shares or any interest therein will not be, resold or
otherwise disposed of by Merganser unless the Common Shares are subsequently
registered under the Common Shares Act and under appropriate state securities
laws or unless Eternal receives an opinion of counsel satisfactory to it that an
exemption from registration is available;

(g) Merganser has been informed of and understands the following:

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(1) There are substantial restrictions on the transferability of the Common
Shares;

(2) No federal or state agency has made any finding or determination as to the
fairness for public investment, nor any recommendation nor endorsement, of the
Common Shares;

(h) None of the following information has ever been represented, guaranteed, or
warranted to Merganser, expressly or by implication by any broker, Eternal, or
agent or employee of the foregoing, or by any other person:

(1) The approximate or exact length of time that Merganser will be required to
remain a holder of the Common Shares;

(2) The amount of consideration, profit, or loss to be realized, if any, as a
result of an investment in Eternal;

(3) That the past performance or experience of Eternal, its officers, directors,
associates, agents, affiliates, or employees or any other person will in any way
indicate or predict economic results in connection with the plan of operations
of Eternal or the return on the investment;

(i) Merganser hereby agrees to indemnify Eternal and to hold it harmless from
and against any and all liability, damage, cost, or expense, including its
attorneys’ fees and costs, incurred on account of or arising out of:

(1) Any material inaccuracy in the declarations, representations, and warranties
hereinabove set forth;

(2) The disposition of the Common Shares or any part thereof by Merganser,
contrary to the foregoing declarations, representations, and warranties;

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(3) Any action, suit, or proceeding based upon:

(i) the claim that said declarations, representations, or warranties were
inaccurate or misleading or otherwise cause for obtaining damages or redress
from Eternal; or

(ii) the disposition of the Common Shares or any part thereof.

The foregoing representations, warranties, agreements, undertakings and
acknowledgements are made by Merganser with the intent that they be relied upon
in determining Merganser’s suitability as a purchaser of the Common Shares. In
addition, Merganser agrees to notify Eternal immediately of any change in any
representation, warranty or other information.

3.
Term of the Agreement.

The term of this Agreement shall be for so long as the Eden Agreement is in full
force and effect. This Agreement will terminate immediately upon the expiration
of the Eden Agreement. Eternal will have no obligations or liability to
Merganser once this Agreement terminates.

4.
Disputes and Governing Law.

This Agreement shall be interpreted and enforced in accordance with the laws of
the state of Nevada. If any Party shall institute proceedings to enforce its
rights under this Agreement, the prevailing Party in such proceedings (as
determined by the tribunal) shall be entitled to recover its costs and expenses
(including attorneys’ fees and costs) incurred by it in addition to any other
award or relief to which such Party may be determined to be entitled.

5.
Force Majeure.

If any Party is rendered unable, wholly or in part, by reason of the occurrence
and continuance of an event of force majeure, to carry out its obligations under
this Agreement, other than any obligation to make any payments, such Party shall
give to the other Party prompt written notice of the force majeure event, with
reasonably full particulars, and thereupon the obligations of the Party giving
the notice, so far as they are affected by the event of force majeure, shall be
suspended during, but not longer than the continuance of the force majeure
event, plus such reasonable further period of time, if any, required to resume
the suspended operation. The affected Party shall use all reasonable diligence
to remove the force majeure situation as quickly as practical; provided that, it
shall not be required to settle strikes, lockouts or other labor difficulty
contrary to its wishes. “Force majeure” means an act of God, strike, lock-out or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightning, fire, storm, flood or other adverse weather condition,
explosion, governmental action, governmental inaction, restraint or delay,
unavailability of equipment or any other cause which is not reasonably within
the control of the Party claiming the occurrence of an event of force majeure.

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6.
Severability.

In the event any portion of this Agreement is declared by a court of competent
jurisdiction to be invalid, illegal or unenforceable in a non-appealable order,
such portion shall be deemed severed from this Agreement and the remaining parts
hereof shall remain in full force and effect, as fully as though such portion
had never been a part of this Agreement.

7.
Relationships and Liability of the Parties.

The liability of the Parties shall be several, and not joint or collective. Each
Party shall be responsible only for its obligations. It is not the intent of the
Parties to create, nor shall this Agreement be construed as creating a
partnership or joint association for profit or otherwise render the Parties
liable as partners.

8.
Successors and Assigns.

All assignments shall be made expressly subject to the terms and provisions of
this Agreement. Subject to the foregoing, this Agreement shall be binding upon,
enforceable by and shall inure to the benefit of the successors and assigns of
the Parties.

9.
Headings.

The headings contained in this Agreement are for the purpose of reference and
convenience only and shall not limit or otherwise affect the meaning of any
provision of this Agreement.

10.
Entire Agreement.

This Agreement contains the entirety of the agreement between the Parties, and
any prior agreements, discussions or understandings, whether written or oral,
are superseded in their entirety by this Agreement and shall be of no force or
effect. No amendment or modification of any term or provision of this Agreement
shall be effective unless set forth in writing and signed by the Parties. In the
event of any conflict between the provisions of this Agreement and any
attachment or Exhibit hereto, the terms set forth in the body (in contrast to
any Exhibit, schedule or attachment) of this Agreement shall control.

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11.
Effective Date.

Notwithstanding the actual date of execution, this Agreement shall be effective
for all purposes as of November 7, 2005 (“Effective Date”).

This Agreement may be executed in counterpart with the same effect as if all the
Parties had executed the original copy hereof and it shall be binding upon any
Party signatory hereto and also binding upon that signatory Party’s successors
and assigns.

IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of
the Effective date, duly authorized.
 

 MERGANSER LIMITED      ETERNAL ENERGY CORP.         /s/ Marcel Ulrich    
/s/ Brad Colby

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Marcel Ulrich
Title:     Brad Colby
Title: President

  
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Exhibit “A” attached to and made a part of that certain Purchase Agreement dated
November 7, 2005 by and between Merganser Limited and Eternal Energy Corp.

PARTICIPATION AGREEMENT
Big Sand Spring Valley Prospect
November 1, 2005

THIS AGREEMENT, entered into this 1st day of November, 2005, by and among Eden
Energy Corp. (“Eden”), a Nevada corporation, whose address is 200 Burrard
Street, Suite 1925, Vancouver, B.C. Canada V6C 3L6 and Merganser Limited
(“Merganser”), whose address is 55 Gower Street, 3rd Floor, London, England,
WC1E 6HO. Eden and Merganser may sometimes hereafter be referred to individually
as the “Party” and collectively as the “Parties.”

Eden has entered into a Participation Agreement, dated effective June 14, 2005,
with Chamberlain Exploration Development and Research Stratigraphic Corporation
dba Cedar Strat Corporation (“Cedarstrat”), whose address is 948 Temple View
Drive, Las Vegas, Nevada 89110 for the purpose of acquiring oil and gas leases
and drilling wells to explore for oil and natural gas reserves on the Big Sand
Spring Valley Prospect (the “Project”) as described therein. A copy of that
agreement (“Cedarstrat Agreement”) is attached hereto and made a part hereof as
Exhibit “A.” The geographic area covered by Cedarstrat Agreement is outlined on
the map attached hereto and made a part hereof as Exhibit “B.” 

The Parties recognize that Eden has spent considerable money (approximately
$1,000,000 US) and time in development of the Project and the acquisition of oil
and gas leases covering approximately 82,184 gross and net federal acres in the
Project. Eden hereby represents to Merganser that it has made all the payments
that are due and payable as required under the Cedarstrat Agreement and that it
has paid for and has good and merchantable title to the federal oil and gas
leases (hereinafter the “Leases”) described on Exhibit “C” attached hereto and
made a part hereof. Eden also hereby acknowledges receipt of a non-refundable
deposit, in the amount of $100,000 US, that has been paid on behalf of Merganser
as earnest money for the option to enter into the joint venture contemplated
hereby.

Merganser desires to establish a joint venture with Eden to acquire a fifty
percent (50%) interest from Eden in all the Leases and contract rights it has
under the Cedarstrat Agreement and any future interests it may acquire
thereunder.

For and in consideration of the mutual obligations and undertakings set forth
herein, and other good and valuable considerations, the receipt and sufficiency
of which is hereby acknowledged by each of the undersigned, the Parties agree as
follows:

1. Purchase and Consideration
Eden hereby agrees to sell and assign an undivided fifty percent (50%) interest
to Merganser in the Leases and Cedarstrat Agreement for the sum of $2,667,000 US
(the “Consideration”). The Consideration shall be paid to Eden as set forth
below in Articles A. - D. When the sum of all the payments made by Merganser, as
set forth in Articles A. - D, equals $2,667,000 US Eden hereby agrees to
immediately assign an undivided fifty percent (50%) interest of all right,
title, and interest in and to the Cedarstrat Agreement, the Leases and any other
interests acquired thereunder. The assignments shall be specifically subject to
the terms of the Cedarstrat Agreement. It is hereby agreed and understood that
immediately following full payment of the Consideration, subject to the other
terms and conditions set forth herein, all subsequent costs will be borne fifty
percent (50%) by Eden and fifty percent (50%) by Merganser and ownership of the
Leases and Additional Acreage will be owned fifty percent (50%) by Eden and
fifty percent (50%) by Merganser.

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A. Initial Project Acquisition Cost
It is hereby agreed and understood that the initial project acquisition cost
(“Initial Project Acquisition Cost”) shall be defined, for purposes herein, as
$667,000 US. Within five (5) business days of the execution of this Agreement,
but in no event later than November 7, 2005, Merganser will pay, by certified
funds, $567,000 US to Eden. Such payment taken with the previously deposited
$100,000 US will equal the full amount due to Eden for the Initial Project
Acquisition Cost. The Parties hereby agree to execute this Agreement no later
than November 7, 2005.

B. Additional Acreage Acquisition Costs
Eden has identified additional acreage (the “Additional Acreage”) within the
Project that has been nominated for the December 2005 Nevada Federal Oil and Gas
Lease sale. The nominated acreage comprises approximately 24,000 gross and net
acres. Eden will attempt to purchase the Additional Acreage at the December 2005
sale. Merganser hereby agrees to pay 66.67% of all the costs necessary to
acquire the Additional Acreage including, but not limited to, lease bonus, first
year lease rentals and any brokerage costs paid in conjunction with said lease
sale. Upon full payment of the Consideration Merganser will be entitled to an
assignment of fifty percent (50%) of the Additional Acreage.

Any and all subsequent leasehold or acreage acquisitions in the Project will be
done in accordance with and subject to the area of mutual interest (“Area of
Mutual Interest”) as created and set forth in Article 7 of this Agreement.

C. Prospect Development Costs
Prospect development costs (“Prospect Development Costs”) shall be defined as
the costs of acquisition and evaluation of geological, geophysical, engineering,
and land data necessary to reasonably pick the drilling locations for the
Commitment Wells, defined below. These costs shall include the costs of shooting
and/or reprocessing 2-D and 3-D seismic data, acquisition of geological and
engineering data, title work, legal expenses, brokerage expenses, engineering
related costs, delay rentals and other reasonable and customary expenses
associated with the development and maturing of prospects to the point they are
ready to drill. Prospect Development Costs shall not include administrative
overhead, salaries and benefits paid to officers, directors or employees of the
Parties, or interest on any outstanding balance due any of the Parties. Prior to
drilling the Commitment Wells, as defined below, the Prospect Development Costs
shall be borne proportionately as follows:
 

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 Eden  33.33%  Merganser  66.67%

 
 
From and after the full payment by Merganser of the Consideration all Prospect
Development Costs shall be borne proportionately as follows:
 

 Eden  50.00%  Merganser  50.00%

 
The Parties hereby agree that the Prospect Development Costs will not exceed
$500,000 unless mutually agreed to by the Parties.

D. Drilling the Commitment Wells
The Parties hereby commit to participate in the drilling of at least two (2)
wells (“Commitment Wells”) in the Project. The Commitment Wells shall be drilled
to a depth of at least 10,000 feet, or drilled to a depth sufficient to
penetrate at least 1,000 feet into the Mississippian shale, whichever is
shallower and they shall be drilled at locations that are mutually agreed to by
the Parties. The Commitment Wells must be drilled within the time frame as set
forth in the Cedarstrat Agreement. Merganser hereby agrees to pay 66.67% of all
the costs to drill and complete the Commitment Wells until the point in time
that the Consideration is fully paid. Immediately thereafter Merganser shall
only be obligated to pay fifty percent (50%) of the costs to drill and complete
the Commitment Wells. Failure of either Party to participate in the drilling of
the Commitment Wells shall result in the forfeiture of all rights under this
Agreement and under the Cedarstrat Agreement. Such Party shall be required to
immediately re-assign all right, title, and interest in any leases or acreage
owned hereunder, without consideration, to the other Party. Notwithstanding
anything to the contrary herein, all revenues and production from the Commitment
Wells shall be owned fifty percent (50%) by Eden and fifty percent (50%) by
Merganser.

2. Operations and the Operating Agreement.
The Project will be governed by and subject to subject to the AAPL Form 610-1989
Model Form Operating Agreement (the “Operating Agreement”) substantially in the
same form attached hereto as Exhibit “D,” including the additions and
modifications set forth in Article XVI. “Other Provisions.” The Operating
Agreement will be binding upon the Parties whether or not executed. Eden shall
be named the Operator under the terms of the Operating Agreement.

3. Drilling subsequent to the Commitment Wells
After the Commitment Wells have been drilled any Party may propose the drilling
of a well on a prospect. For purposes of this Agreement, a prospect (“Prospect”)
shall be defined as subsurface geological feature, or outline, which appears
from review of the available geological, geophysical and engineering data to
have a likely probability of encountering the accumulation of commercial
hydrocarbons. A Prospect shall consist of nine (9) governmental sections
configured in a square. The initial exploratory test well (“Initial Exploratory
Test Well”) for any Prospect may be a new well bore, a re-completion, re-work,
or a re-entry of an existing well (but not producing well-bore) that has been
acquired by the Parties hereunder. The Parties receiving notice of the Initial
Exploratory Test Well proposal on a Prospect shall have sixty (60) days after
receiving all the Prospect Information (as defined in Article 6) for such
Prospect to either:

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A. Elect in writing to participate for its proportionate share of the cost of
drilling the Initial Exploratory Test Well by signing and returning one copy of
the Authorization for Expenditure (“AFE”) and prepaying the dry hole costs to
the operator of the well five (5) days prior to the actual spudding of the
Initial Test Well. Despite anything to the contrary, failure to pay the dry hole
cost five (5) days prior to spudding will be deemed an election not to
participate and go non-consent, or

B. Elect in writing to non-consent the Initial Exploratory Test well in which
case the non-consenting Party will be required to assign, for no consideration,
to the participating Party all of its right, title and interest in the entire
Prospect. Such assignment shall be made without warranty of title, except by,
through and under the assignor, and the assignment shall cover all the right,
title and interest of the non-participating Party within the Prospect. Said
leases shall be assigned free and clear of all burdens other than

(i) lessor’s royalty or other burdens which were burdening the lease(s) at the
time of acquisition.

Notwithstanding anything to the contrary contained herein, the sixty (60) day
period may be reduced due to applicable contractual obligations or limitations
(e.g., farmout, farmout option terms or lease expiration dates), in which case
the Parties may be required to respond in a shorter time period as may be
reasonably appropriate under the circumstances. But in no event will the time be
reduced, unless agreed to by all the Parties, if the Prospect Information has
not been furnished to all the Parties.

Within sixty (60) days of receipt of the non-proposing Party’s election to
participate, Operator (unless the Operator is a non-participating Party) shall
commence or cause to be commenced operations for the drilling of the Initial
Exploratory Test Well on a Prospect in search of oil and/or gas pursuant to the
Operating Agreement and AFE and such drilling shall be conducted with reasonable
diligence and in a good and workmanlike manner in order to test and evaluate the
objective formation in accordance with the AFE. After drilling and evaluating
the well, the Operator shall either complete said well as a producer or shall
plug and abandon it, if the well is a dry hole, in accordance with the
provisions of the Operating Agreement.

If the Initial Exploratory Test Well is not commenced within sixty (60) days of
receipt of the non-proposing Party’s election to participate or not to
participate as the case may be, the proposing Party must re-propose the well
under the above provisions. In the event the non-proposing Party elects to
participate in the re-proposed well and had previously elected not to
participate in the well, then the participating Party shall reassign any and all
acreage or interests of any kind previously assigned to the participating Party
by the non-participating Party in connection with the original election.

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4.
Multiple Operations Within Each Prospect and withn the Project.

No Party to this Agreement shall propose the drilling of more than one (1) well
at a time within a Prospect nor shall any Party to this Agreement propose the
drilling of a well within a Prospect during the time that another well is being
drilled within the same Prospect except:
(i)  by the mutual consent of the Parties hereto.

Unless mutually agreed to by the Parties, no more than five (5) Initial
Exploratory Test Wells per year may be drilled on Prospects within the first
four (4) years of this Agreement. Furthermore it is agreed that at no time
during the term of this Agreement that no more than two (2) Initial Exploratory
Test Wells may be proposed at one time or within any thirty (30) day period.

5. Subsequent Wells in a Prospect.
Provided the Initial Exploratory Test Well on a Prospect results in a well
capable of producing commercial quantities of oil and/or gas all subsequent
wells drilled within that Prospect, after the Initial Exploratory Test Well,
will be drilled and operated in accordance with the terms and conditions of the
Operating Agreement. If the Initial Exploratory Test Well on a Prospect results
in a non-commercial well or a dry hole then the next well proposed on that
Prospect will be deemed the Initial Exploratory Test Well for such Prospect.

6. Information and Data (“Prospect Information”).
A. Prospect Information. For the drilling of the Initial Exploratory Test Well
on a Prospect, the proposing Party will furnish, without cost to the
non-proposing Parties, copies of all drilling reports, logs, drillstem test data
and interpreted geological and geophysical maps relevant to the proposal. In
addition, the proposing Party must furnish the following:

 

·  
Authorization of Expenditure (“AFE”), as prepared by competent engineers with
experience drilling wells to the depths contemplated herein

 

·
Drilling and geological prognosis for the proposed well,

 

·
Title Opinion for the drillsite, or like title information, and

 

·
All farmouts, farmins and other contracts taken in support of the Initial Test
Well.

 
The above information is referred to as the “Prospect Information.” If the
non-proposing Party has not received all of the Prospect Information, the sixty
(60) day time period for electing to participate in the proposed well will not
start to run until all the Prospect Information is received by the non-Proposing
Party.

7.
Area of Mutual Interest (“AMI”).

The Parties hereto create among themselves an Area of Mutual Interest ("AMI")
covering the Big Sand Spring Valley Prospect as described (or outlined) on
Exhibit A of the Operating Agreement which is attached hereto as Exhibit D. The
AMI shall be in effect for a period of ten (10) years from the Effective Date of
this Agreement. The proportionate shares and percentage of interests, which the
Parties are entitled to purchase and acquire within the AMI, are as follows:
 

 Eden  50.00%  Merganser  50.00%

 
If, during the duration of such AMI, any Party should acquire ("Acquiring
Party") any oil and gas lease, leasehold interest or mineral interest by any
means including, but not limited to, purchase, top lease, farmins, farmouts,
farmout options, or acreage contributions, then the Acquiring Party shall
immediately notify the Non-Acquiring Party, in writing, of such acquisition
setting forth the nature of the interest acquired, all terms, provisions and
contracts related to the acquisition (along with copies of all documents
relating to the acquisition or rights to earn a leasehold or mineral interest)
and the price paid therefor. The Non-Acquiring Party shall have a period of
thirty (30) days following the receipt of notice to elect in writing to purchase
at the Acquiring Party's cost its proportionate share of such acquisition by
remitting the required payment to the Acquiring Party during such thirty (30)
day period. The Acquiring Party shall assign to the Party electing to
participate in the acquisition its proportionate share of such acquired
interest, subject to a like proportionate share of the costs and obligations
relating thereto. If the interest is to be earned by drilling and/or shooting
seismic, the Non-Acquiring Party must ratify all appropriate agreements within
the thirty (30) day period. Notwithstanding the preceding sentence, such thirty
(30) day notice period may be reduced due to applicable contractual obligations
or limitations (e.g., farmout terms or lease expiration dates), in which case
the Non-Acquiring Party may be required to respond in a shorter time period as
may be reasonably appropriate under the circumstances. If the Non-Acquiring
Party turns down any interest, the Acquiring Party shall hold such interest free
and clear of any further AMI obligations of this Agreement.

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The Parties specifically agree that if a lease or interest covers land both
inside and outside the AMI, the Acquiring Party must offer the entire lease or
interest to the other Parties and if the Party elects to acquire an interest in
the lease or interest, it must agree to proportionately acquire an interest in
the entire lease or interest notwithstanding the fact that a portion of the
lease or interest lies outside the AMI.

8.
Term of the Agreement.

The term of this Agreement is ten (10) years from the Effective Day (November 1,
2005). After October 31, 2014 this Agreement will terminate and each Prospect
will be operated in accordance with and subject to the terms and conditions of
the Operating Agreement covering any oil and gas leases acquired hereunder, and
the terms of Articles 2, 3, 4, 5, and 6, herein will extend for the life of the
Operating Agreement as to lands then subject to the Operating Agreement.

9.
Disputes and Governing Law.

This Agreement shall be interpreted and enforced in accordance with the laws of
the state of Nevada. If any Party shall institute proceedings to enforce its
rights under this Agreement, the prevailing Party in such proceedings (as
determined by the tribunal) shall be entitled to recover its costs and expenses
(including attorneys’ fees and costs) incurred by it in addition to any other
award or relief to which such Party may be determined to be entitled.

10.
Force Majeure.

If any Party is rendered unable, wholly or in part, by reason of the occurrence
and continuance of an event of force majeure, to carry out its obligations under
this Agreement, other than any obligation to make any payments, such Party shall
give to the other Party prompt written notice of the force majeure event, with
reasonably full particulars, and thereupon the obligations of the Party giving
the notice, so far as they are affected by the event of force majeure, shall be
suspended during, but not longer than the continuance of the force majeure
event, plus such reasonable further period of time, if any, required to resume
the suspended operation. The affected Party shall use all reasonable diligence
to remove the force majeure situation as quickly as practical; provided that, it
shall not be required to settle strikes, lockouts or other labor difficulty
contrary to its wishes. “Force majeure” means an act of God, strike, lock-out or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightning, fire, storm, flood or other adverse weather condition,
explosion, governmental action, governmental inaction, restraint or delay,
unavailability of equipment or any other cause which is not reasonably within
the control of the Party claiming the occurrence of an event of force majeure.

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

11.
Conflicts.

In the event of any conflict between the terms of this Agreement and those of
the Operating Agreement attached as Exhibit D, or any other Exhibits attached
hereto, the terms of this Agreement shall prevail and control. If there is any
conflict between the terms of this Agreement and the Operating Agreement
attached as Exhibit D and any third party Operating Agreement, then the
Operating Agreement attached, as Exhibit D and this Agreement will prevail among
the Parties hereto.

12.
Severability.

In the event any portion of this Agreement is declared by a court of competent
jurisdiction to be invalid, illegal or unenforceable in a non-appealable order,
such portion shall be deemed severed from this Agreement and the remaining parts
hereof shall remain in full force and effect, as fully as though such portion
had never been a part of this Agreement.

13.
Notices.

The notices provisions of the Operating Agreement will apply with respect to all
notices. However, any telecopier or telex must be followed by delivery of a hard
copy, either through an overnight service or mail, receipt requested.
 

 To Eden   To Merganser    
 Eden Energy Corp.
 Merganser Limited
 200 Burrard Street 
 55 Gower Street
 Suite 1925 
 3rd Floor
 Vancouver, B.C. V6C 3L6 
 London, England WC1E 6HO
 Attention: Don Sharpe 
 Attention: Marcel Ulrich
 Phone 604-693-0179 
 Phone 0207 323 6807
 FAX 604-357-1062 
 email marcel@goweraccountancy.co.uk
   

 

14.
Preferential Right to Purchase Leasehold Interests.

For a period of two (2) years from the date hereof, all non-producing oil and
gas leases, on a Prospect-by-Prospect basis (regardless of how the non-producing
oil and gas leases are sold) will be subject to a Preferential Right of Purchase
as outlined in Article VIII.F., of the Operating Agreement. Notwithstanding
anything herein to the contrary, however, this provision shall not apply to such
a sale if it is part of the sale of the stock of or substantially all of the
assets of a Party, if a Party merges with another entity or if the sale is part
of a transaction in which such interests are not of material value in relation
to the entire such transaction. There shall be no preferential right to purchase
any interests hereunder from and after two (2) years from the effective date of
this Agreement.

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

15.
Relationships and Liability of the Parties.

The liability of the Parties shall be several, and not joint or collective. Each
Party shall be responsible only for its obligations. It is not the intent of the
Parties to create, nor shall this Agreement be construed as creating a
partnership or joint association for profit or otherwise render the Parties
liable as partners.

16.
Successors and Assigns.

All assignments shall be made expressly subject to the terms and provisions of
the Cedarsrtat Agreement and this Agreement. Subject to the foregoing, this
Agreement shall be binding upon, enforceable by and shall inure to the benefit
of the successors and assigns of the Parties.

17.
Headings.

The headings contained in this Agreement are for the purpose of reference and
convenience only and shall not limit or otherwise affect the meaning of any
provision of this Agreement.

18.
Entire Agreement.

This Agreement contains the entirety of the agreement between the Parties, and
any prior agreements, discussions or understandings, whether written or oral,
are superseded in their entirety by this Agreement and shall be of no force or
effect. No amendment or modification of any term or provision of this Agreement
shall be effective unless set forth in writing and signed by the Parties. In the
event of any conflict between the provisions of this Agreement and any
attachment or Exhibit hereto, the terms set forth in the body (in contrast to
any Exhibit, schedule or attachment) of this Agreement shall control.

19.
Effective Date.

Notwithstanding the actual date of execution, this Agreement shall be effective
for all purposes as of November 1, 2005 (“Effective Date”).

This Agreement may be executed in counterpart with the same effect as if all the
Parties had executed the original copy hereof and it shall be binding upon any
Party signatory hereto and also binding upon that signatory Party’s successors
and assigns.

IN WITNESS WHEREOF, the Parties have executed and delivered this Agreement as of
the Effective date, duly authorized.
 
 

EDEN ENERGY CORP     MERGANSER LIMITED                

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Big Sand Spring Valley Project     

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Donald Sharpe
Title: President 
    Marcel Ulrich
Title:

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EXHIBIT “B”

Attached to and made a part of that certain Participation Agreement, dated
November 1, 2005, by and between Eden Energy Corp. and Merganser Limited
 
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EXHIBIT "C"
                               
To that certain Participation Agreement dated effective November 1, 2005
by and between Eden Energy Corp. and Merganser Limited
                               
Lease
Number
Bonus
Paid
Bonus Per
Acre Cost
Number of Acres
Rental
Amount
Filing
Fees
Effective
Date
Total
Cost
               
NVN080228
$4,160.00
$2.00
2,080
$3,120.00
$75.00
1-Jul-05
$7,355.00
NVN080229
$3,834.00
$2.00
1,917
$2,875.50
$75.00
1-Jul-05
$6,784.50
NVN080230
$2,560.00
$2.00
1,280
$1,920.00
$75.00
1-Jul-05
$4,555.00
NVN080231
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080232
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080233
$3,216.00
$2.00
1,608
$2,412.00
$75.00
1-Jul-05
$5,703.00
NVN080234
$3,840.00
$2.00
1,920
$2,880.00
$75.00
1-Jul-05
$6,795.00
NVN080235
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080237
$1,442.00
$2.00
721
$1,081.50
$75.00
1-Jul-05
$2,598.50
NVN080238
$2,884.00
$2.00
1,442
$2,163.00
$75.00
1-Jul-05
$5,122.00
NVN080239
$3,240.00
$2.00
1,620
$2,430.00
$75.00
1-Jul-05
$5,745.00
NVN080240
$3,840.00
$2.00
1,920
$2,880.00
$75.00
1-Jul-05
$6,795.00
NVN080241
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080242
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080243
$4,804.00
$2.00
2,402
$3,603.00
$75.00
1-Jul-05
$8,482.00
NVN080244
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080245
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080246
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080247
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080248
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080278
$17,759.00
$7.00
2,537
$3,805.50
$75.00
1-Jul-05
$21,639.50
NVN080280
$5,120.00
$2.00
2,560
$3,840.00
$75.00
1-Jul-05
$9,035.00
NVN080281
$5,078.00
$2.00
2,539
$3,808.50
$75.00
1-Jul-05
$8,961.50
NVN080408
$6,586.00
$2.00
3,293
$4,939.50
$75.00
1-Aug-05
$11,600.50
NVN080409
$16,592.00
$2.00
8,296
$12,444.00
$75.00
1-Aug-05
$29,111.00
NVN080410
$20,452.00
$2.00
10,226
$15,339.00
$75.00
1-Aug-05
$35,866.00
NVN080411
$20,446.00
$2.00
10,223
$15,334.50
$75.00
1-Aug-05
$35,855.50
               
Total:
$177,053.00
 
82,184
$123,276.00
$2,025.00
 
$302,354.00

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EXHIBIT “ C “

Attached to and made a part of that certain Operating Agreement, dated November
1, 2005 by and between Eden Energy Corp. as Operator, and Merganser Limited, as
Non-Operator,

ACCOUNTING PROCEDURE
JOINT OPERATIONS

I. GENERAL PROVISIONS

1.
Definitions

“Joint Property” shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached.
“Joint Operations” shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
“Joint Account” shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared by
the Parties.
“Operator” shall mean the party designated to conduct the Joint Operations.
“Non-Operators” shall mean the Parties to this agreement other than the
Operator.
“Parties” shall mean Operator and Non-Operators.
“First Level Supervisors” shall mean those employees whose primary function in
Joint Operations is the direct supervision of other employees and/or contract
labor directly employed on the Joint Property in a field operating capacity.
“Technical Employees” shall mean those employees having special and specific
engineering, geological or other professional skills, and whose primary function
in Joint Operations is the handling of specific operating conditions and
problems for the benefit of the Joint Property.
“Personal Expenses” shall mean travel and other reasonable reimbursable expenses
of Operator’s employees.
“Material” shall mean personal property, equipment or supplies acquired or held
for use on the Joint Property.
“Controllable Material” shall mean Material which at the time is so classified
in the Material Classification Manual as most recently recommended by the
Council of Petroleum Accountants Societies.

2.
Statement and Billings

Operator shall bill Non-Operators on or before the last day of each month for
their proportionate share of the Joint Account for the preceding month. Such
bills will be accompanied by statements which identify the authority for
expenditure, lease or facility, and all charges and credits summarized by
appropriate classifications of investment and expense except that items of
Controllable Material and unusual charges and credits shall be separately
identified and fully described in detail.

3.
Advances and Payments by Non-Operators

 
A.
Unless otherwise provided for in the agreement, the Operator may require the
Non-Operators to advance their share of estimated cash outlay for the succeeding
month’s operation within thirty (30) days after receipt of the bill-ing or by
the first day of the month for which the advance is required, whichever is
later. Operator shall adjust each monthly billing to reflect advances received
from the Non-Operators.

 
B.
Each Non-Operator shall pay its proportion of all bills within thirty (30) days
after receipt. If payment is not made within such time, the unpaid balance shall
bear interest monthly at the prime rate in effect at Chase Bank of Texas,
Houston, Texas on the first day of the month in which delinquency occurs plus 1%
or the maximum contract rate permitted by the applicable usury laws in the state
in which the Joint Property is located, whichever is the lesser, plus attorney’s
fees, court costs, and other costs in connection with the collection of unpaid
amounts.

4.
Adjustments

Payment of any such bills shall not prejudice the right of any Non-Operator to
protest or question the correctness thereof; provided, however, all bills and
statements rendered to Non-Operators by Operator during any calendar year shall
con-clusively be presumed to be true and correct after twenty-four (24) months
following the end of any such calendar year, unless within the said twenty-four
(24) month period a Non-Operator takes written exception thereto and makes claim
on Operator for adjustment. No adjustment favorable to Operator shall be made
unless it is made within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical inventory of
Controllable Material as provided for in Section V.

COPYRIGHT© 1985 by the Council of Petroleum Accountants Societies.
  
-1-

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5.
Audits

 
A.
A Non-Operator, upon notice in writing to Operator and all other Non-Operators,
shall have the right to audit Operator’s accounts and records relating to the
Joint Account for any calendar year within the twenty-four (24) month period
following the end of such calendar year; provided, however, the making of an
audit shall not extend the time for the taking of written exception to and the
adjustments of accounts as provided for in Paragraph 4 of this Section I. Where
there are two or more Non-Operators, the Non-Operators shall make every
reasonable effort to conduct a joint audit in a manner which will result in a
minimum of inconvenience to the Operator. Operator shall bear no por-tion of the
Non-Operators’ audit cost incurred under this paragraph unless agreed to by the
Operator. The audits shall not be conducted more than once each year without
prior approval of Operator, except upon the resignation or removal of the
Operator, and shall be made at the expense of those Non-Operators approving such
audit.

 
B.
The Operator shall reply in writing to an audit report within 60 days after
receipt of such report.

6.
Approval By Non-Operators

Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if the
agreement to which this Accounting Procedure is attached contains no contrary
provisions in regard thereto, Operator shall notify all Non-Operators of the
Operator’s proposal, and the agreement or approval of a majority in interest of
the Non-Operators shall be controlling on all Non-Operators.

II. DIRECT CHARGES

Operator shall charge the Joint Account with the following items:

1. Ecological and Environmental

Costs incurred for the benefit of the Joint Property as a result of governmental
or regulatory requirements to satisfy environ-mental considerations applicable
to the Joint Operations. Such costs may include surveys of an ecological or
archaeological nature and pollution control procedures as required by applicable
laws and regulations.

2. Rentals and Royalties

Lease rentals and royalties paid by Operator for the Joint Operations.

3.
Labor

A.(1)
Salaries and wages of Operator’s field employees directly employed on the Joint
Property in the conduct of Joint Operations.

 
(2)
Salaries of First Level Supervisors in the field.

(3)
Salaries and wages of Technical Employees directly employed on the Joint
Property if such charges are excluded from the overhead rates.

 
(4)
Salaries and wages of Technical Employees either temporarily or permanently
assigned to and directly employed in the operation of the Joint Property if such
charges are excluded from the overhead rates.

 
B.
Operator’s cost of holiday, vacation, sickness and disability benefits and other
customary allowances paid to employees whose salaries and wages are chargeable
to the Joint Account under Paragraph 3A of this Section II. Such costs under
this Paragraph 3B may be charged on a “when and as paid basis” or by “percentage
assessment” on the amount of salaries and wages chargeable to the Joint Account
under Paragraph 3A of this Section II. If percentage assessment is used, the
rate shall be based on the Operator’s cost experience.

 
C.
Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator’s costs chargeable to
the Joint Account under Paragraphs 3A and 3B of this Section II.

 
D.
Personal Expenses of those employees whose salaries and wages are chargeable to
the Joint Account under Paragraph 3A of this Section II.

4.
Employee Benefits

Operator’s current costs of established plans for employees’ group life
insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus,
and other benefit plans of a like nature, applicable to Operator’s labor cost
chargeable to the Joint Account under Paragraphs 3A and 3B of this Section II
shall be Operator’s actual cost.

5.
Material

Material purchased or furnished by Operator for use on the Joint Property as
provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and is
reasonably practical and consistent with efficient and economical operations.
The accumulation of surplus stocks shall be avoided.

6.
Transportation

Transportation of employees and Material necessary for the Joint Operations but
subject to the following limitations:

 
A.
If Material is moved to the Joint Property from the Operator’s warehouse or
other properties, no charge shall be made to the Joint Account for a distance
greater than the distance from the nearest reliable supply store where like
material is normally available or railway receiving point nearest the Joint
Property unless agreed to by the Parties.

-2-

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B.
If surplus Material is moved to Operator’s warehouse or other storage point, no
charge shall be made to the Joint Account for a distance greater than the
distance to the nearest reliable supply store where like material is normally
available, or railway receiving point nearest the Joint Property unless agreed
to by the Parties. No charge shall be made to the Joint Account for moving
Material to other properties belonging to Operator, unless agreed to by the
Parties.

C.
In the application of subparagraphs A and B above, the option to equalize or
charge actual trucking cost is available when the actual charge is $400 or less
excluding accessorial charges. The $400 will be adjusted to the amount most
recently recommended by the Council of Petroleum Accountants Societies.

7.
Services

The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and Paragraph i,
ii, and iii, of Section III. The cost of professional consultant services and
contract services of technical personnel directly engaged on the Joint Property
if such charges are excluded from the overhead rates. The cost of professional
consultant services or contract services of technical personnel not directly
engaged on the Joint Property shall not be charged to the Joint Account unless
previously agreed to by the Parties.

8.
Equipment and Facilities Furnished By Operator

 

A.
Operator shall charge the Joint Account for use of Operator owned equipment and
facilities at rates commensurate with costs of ownership and operation. Such
rates shall include costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross investment less
accumulated depreciation not to exceed ten percent ( 10 %) per annum. Such rates
shall not exceed average commercial rates currently prevailing in the immediate
area of the Joint Property.

 

B.
In lieu of charges in paragraph 8A above, Operator may elect to use average
commercial rates prevailing in the immediate area of the Joint Property less
20%. For automotive equipment, Operator may elect to use rates published by the
Petroleum Motor Transport Association.

   

9.
Damages and Losses to Joint Property

All costs or expenses necessary for the repair or replacement of Joint Property
made necessary because of damages or losses incurred by fire, flood, storm,
theft, accident, or other cause, except those resulting from Operator’s gross
negligence or willful misconduct. Operator shall furnish Non-Operator written
notice of damages or losses incurred as soon as practicable after a report
thereof has been received by Operator.

10.
Legal Expense

Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgements and amounts paid for settlement of
claims incurred in or resulting from operations under the agreement or necessary
to protect or recover the Joint Property, except that no charge for services of
Operator’s legal staff or fees or expense of outside attorneys shall be made
unless previously agreed to by the Parties. All other legal expense is
considered to be covered by the overhead provisions of Section III unless
otherwise agreed to by the Parties, except as provided in Section I, Paragraph
3.
  
11.
Taxes

All taxes of every kind and nature assessed or levied upon or in connection with
the Joint Property, the operation thereof, or the production therefrom, and
which taxes have been paid by the Operator for the benefit of the Parties. If
the ad valorem taxes are based in whole or in part upon separate valuations of
each party’s working interest, then notwithstanding anything to the contrary
herein, charges to the Joint Account shall be made and paid by the Parties
hereto in accordance with the tax value generated by each party’s working
interest.
   
12.
Insurance

Net premiums paid for insurance required to be carried for the Joint Operations
for the protection of the Parties. In the event Joint Operations are conducted
in a state in which Operator may act as self-insurer for Worker’s Compensation
and/or Employers Liability under the respective state’s laws, Operator may, at
its election, include the risk under its self-insurance program and in that
event, Operator shall include a charge at Operator’s cost not to exceed manual
rates.
Notwithstanding the foregoing, if non-operator provides coverages and provides
Operator with a certificate evidencing same to the extent shown in Exhibit “D”,
then no billing will be made to him under the joint account for insurance. The
Operator will furnish and bill the non-operator for insurance required to bring
the non-operator into compliance with Exhibit “D”.

13.
Abandonment and Reclamation

Costs incurred for abandonment of the Joint Property, including costs required
by governmental or other regulatory authority.

14.
Communications

Cost of acquiring, leasing, installing, operating, repairing and maintaining
communication systems, including radio and microwave facilities directly serving
the Joint Property. In the event communication facilities/systems serving the
Joint Property are Operator owned, charges to the Joint Account shall be made as
provided in Paragraph 8 of this Section II.
  
15.
Other Expenditures

Any other expenditure not covered or dealt with in the foregoing provisions of
this Section II, or in Section III and which is of direct benefit to the Joint
Property and is incurred by the Operator in the necessary and proper conduct of
the Joint Operations.

-3-

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III. OVERHEAD

1. Overhead - Drilling and Producing Operations

i.  As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing operations on
either:

( X ) Fixed Rate Basis, Paragraph 1A, or
(   ) Percentage Basis, Paragraph lB

Unless otherwise agreed to by the Parties, such charge shall be in lieu of costs
and expenses of all offices and salaries or wages plus applicable burdens and
expenses of all personnel, except those directly chargeable under Paragraph 3A,
Section II. The cost and expense of services from outside sources in connection
with matters of taxation, traffic, accounting or matters before or involving
governmental agencies shall be considered as included in the overhead rates
provided for in the above selected Paragraph of this Section III unless such
cost and expense are agreed to by the Parties as a direct charge to the Joint
Account.

ii. The salaries, wages and Personal Expenses of Technical Employees and/or the
cost of professional consultant services and contract services of technical
personnel directly employed on the Joint Property:

( ) shall be covered by the overhead rates,
( X ) or shall not be covered by the overhead rates.

iii. The salaries, wages and Personal Expenses of Technical Employees and/or
costs of professional consultant services and contract services of technical
personnel either temporarily or permanently assigned to and directly employed in
the operation of the Joint Property:

( X ) shall be covered by the overhead rates, or
( ) shall not be covered by the overhead rates.

A. Overhead - Fixed Rate Basis

(1) Operator shall charge the Joint Account at the following rates per well per
month:

Drilling Well Rate $7,000.00
(Prorated for less than a full month)

Producing Well Rate $700.00

(2) Application of Overhead - Fixed Rate Basis shall be as follows:

(a) Drilling Well Rate

(1) Charges for drilling wells shall begin on the date the well is spudded and
terminate on the date the drill-ing rig, completion rig, or other units used in
completion of the well is released, whichever is later, except that no charge
shall be made during suspension of drilling or completion operations for fifteen
(15) or more consecutive calendar days.

(2) Charges for wells undergoing any type of workover or recompletion for a
period of five (5) consecutive work days or more shall be made at the drilling
well rate. Such charges shall be applied for the period from date workover
operations, with rig or other units used in workover, commence through date of
rig or other unit release, except that no charge shall be made during suspension
of operations for fifteen (15) or more consecutive calendar days.

(b) Producing Well Rates

(1) An active well either produced or injected into for any portion of the month
shall be considered as a one-well charge for the entire month.

(2) Each active completion in a multi-completed well in which production is not
commingled down hole shall be considered as a one-well charge providing each
completion is considered a separate well by the govern-ing regulatory authority.

(3) An inactive gas well shut in because of overproduction or failure of
purchaser to take the production shall be considered as a one-well charge
providing the gas well is directly connected to a permanent sales outlet.

(4) A one-well charge shall be made for the month in which plugging and
abandonment operations are completed on any well. This one-well charge shall be
made whether or not the well has produced except when drilling well rate
applies.

(5) All other inactive wells (including but not limited to inactive wells
covered by unit allowable, lease allowable, transferred allowable, etc.) shall
not qualify for an overhead charge.

(3) The well rates shall be adjusted as of the first day of April each year
following the effective date of the agreement to which this Accounting Procedure
is attached. The adjustment shall be computed by multiplying the rate currently
in use by the percentage increase or decrease in the average weekly earnings of
Crude Petroleum and Gas Production Workers for the last calendar year compared
to the calendar year preceding as shown by the index of average weekly earnings
of Crude Petroleum and Gas Production Workers as published by the United States
Department of Labor, Bureau of Labor Statistics, or the equivalent Canadian.
index as published by Statistics Canada, as applicable. The adjusted rates shall
be the rates currently in use, plus or minus the computed adjustment.

B. Overhead - Percentage Basis

(1) Operator shall charge the Joint Account at the following rates:

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(a) Development

______________ Percent ( _____ %) of the cost of development of the Joint
Property exclusive of costs provided under Paragraph 10 of Section II and all
salvage credits.

 
(b)
Operating

______________ Percent ( _____ %) of the cost of operating the Joint Property
exclusive of costs provided under Paragraphs 2 and 10 of Section II, all salvage
credits, the value of injected substances purchased for secondary recovery and
all taxes and assessments which are levied, assessed and paid upon the mineral
interest in and to the Joint Property.

 
(2)
Application of Overhead -  Percentage Basis shall be as follows:

For the purpose of determining charges on a percentage basis under Paragraph lB
of this Section III, development shall include all costs in connection with
drilling, redrilling, deepening, or any remedial operations on any or all wells
involving the use of drilling rig and crew capable of drilling to the producing
interval on the Joint Prop-erty; also, preliminary expenditures necessary in
preparation for drilling and expenditures incurred in abandoning when the well
is not completed as a producer, and original cost of construction or
installation of fixed assets, the expansion of fixed assets and any other
project clearly discernible as a fixed asset, except Major Construction as
defined in Paragraph 2 of this Section III. All other costs shall be considered
as operating.

2.
Overhead - Major Construction

To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset required for the development and
operation of the Joint Property, Operator shall either negotiate a rate prior to
the beginning of construction, or shall charge the Joint Account for overhead
based on the following rates for any Major Construction project in excess of
$    :

 
A.
______5_____ % of first $100,000 or total cost if less, plus

 
B.
______3____ % of costs in excess of $100,000 but less than $1,000,000, plus

 
C.
______2____ % of costs in excess of $1,000,000.

Total cost shall mean the gross cost of any one project. For the purpose of this
paragraph, the component parts of a single project shall not be treated
separately and the cost of drilling and workover wells and artificial lift
equipment shall be excluded.

3.
Catastrophe Overhead

To compensate Operator for overhead costs incurred in the event of expenditures
resulting from a single occurrence due to oil spill, blowout, explosion, fire,
storm, hurricane, or other catastrophes as agreed to by the Parties, which are
necessary to restore the Joint Property to the equivalent condition that existed
prior to the event causing the expenditures, Operator shall either negotiate a
rate prior to charging the Joint Account or shall charge the Joint Account for
overhead based on the following rates:

 
A.
_____5_____ % of total costs through $100,000; plus

 
B.
_____3_____ % of total costs in excess of $100,000 but less than $1,000,000;
plus

 
C.
_____2_____ % of total costs in excess of $1,000,000.

Expenditures subject to the overheads above will not be reduced by insurance
recoveries, and no other overhead provisions of this Section III shall apply.

4.
Amendment of Rates

The overhead rates provided for in this Section III may be amended from time to
time only by mutual agreement between the Parties hereto if, in practice, the
rates are found to be insufficient or excessive.

IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS

Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator’s option, such Material may be supplied by the
Non-Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.

1. Purchases

Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In case of Material found to be defective
or returned to vendor for any other reasons, credit shall be passed to the Joint
Account when adjustment has been received by the Operator.

2.
Transfers and Dispositions

Material furnished to the Joint Property and Material transferred from the Joint
Property or disposed of by the Operator, unless otherwise agreed to by the
Parties, shall be priced on the following basis exclusive of cash discounts:

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A. New Material (Condition A)

 
(1)
Tubular Goods Other than Line Pipe

 
(a)
Tubular goods, sized 2% inches OD and larger, except line pipe, shall be priced
at Eastern mill published carload base prices effective as of date of movement
plus transportation cost using the 80,000 pound carload weight basis to the
railway receiving point nearest the Joint Property for which published rail
rates for tubular goods exist. If the 80,000 pound rail rate is not offered, the
70,000 pound or 90,000 pound rail rate may be used. Freight charges for tubing
will be calculated from Lorain, Ohio and casing from Youngstown, Ohio.

 
(b)
For grades which are special to one mill only, prices shall be computed at the
mill base of that mill plus transportation cost from that mill to the railway
receiving point nearest the Joint Property as provided above in Paragraph
2.A.(1)(a). For transportation cost from points other than Eastern mills, the
30,000 pound Oil Field Haulers Association interstate truck rate shall be used.

 
(c)
Special end finish tubular goods shall be priced at the lowest published
out-of-stock price, f.o.b. Houston, Texas, plus transportation cost, using Oil
Field Haulers Association interstate 30,000 pound truck rate, to the railway
receiving point nearest the Joint Property.

 
(d)
Macaroni tubing (size less than 2% inch OD) shall be priced at the lowest
published out-of-stock prices f.o.b. the supplier plus transportation costs,
using the Oil Field Haulers Association interstate truck rate per weight of
tubing transferred, to the railway receiving point nearest the Joint Property.

 
(2)
Line Pipe

 
(a)
Line pipe movements (except size 24 inch OD and larger with walls 3/4 inch and
over) 30,000 pounds or more shall be priced under provisions of tubular goods
pricing in Paragraph A.(1)(a) as provided above. Freight charges shall be
calculated from Lorain, Ohio.

 
(b)
Line pipe movements (except size 24 inch OD and larger with walls 3/4 inch and
over) less than 30,000 pounds shall be priced at Eastern mill published carload
base prices effective as of date of shipment, plus 20 percent, plus
transportation costs based on freight rates as set forth under provisions of
tubular goods pricing in Para-graph A.(1)(a) as provided above. Freight charges
shall be calculated from Lorain, Ohio.

 
(c)
Line pipe 24 inch OD and over and 3/4 inch wall and larger shall be priced
f.o.b. the point of manufacture at current new published prices plus
transportation cost to the railway receiving point nearest the Joint Property.

 
(d)
Line pipe, including fabricated line pipe, drive pipe and conduit not listed on
published price lists shall be priced at quoted prices plus freight to the
railway receiving point nearest the Joint Property or at prices agreed to by the
Parties.

 
(3)
Other Material shall be priced at the current new price, in effect at date of
movement, as listed by a reliable supply store nearest the Joint Property, or
point of manufacture, plus transportation costs, if applicable, to the railway
receiving point nearest the Joint Property.

 
(4)
Unused new Material, except tubular goods, moved from the Joint Property shall
be priced at the current new price, in effect on date of movement, as listed by
a reliable supply store nearest the Joint Property, or point of manufacture,
plus transportation costs, if applicable, to the railway receiving point nearest
the Joint Property. Unused new tubulars will be priced as provided above in
Paragraph 2 A (1) and (2).

B. Good Used Material (Condition B)

Material in sound and serviceable condition and suitable for reuse without
reconditioning:

 
(1)
Material moved to the Joint Property

At seventy-five percent (75%) of current new price, as determined by Paragraph
A.

 
(2)
Material used on and moved from the Joint Property

 
(a)
At seventy-five percent (75%) of current new price, as determined by Paragraph
A, if Material was originally charged to the Joint Account as new Material or

 
(b)
At sixty-five percent (65%) of current new price, as determined by Paragraph A,
if Material was originally charged to the Joint Account as used Material.

 
(3)
Material not used on and moved from the Joint Property

At seventy-five percent (75%) of current new price as determined by Paragraph A.

The cost of reconditioning, if any, shall be absorbed by the transferring
property.

C. Other Used Material

 
(1)
Condition C

Material which is not in sound and serviceable condition and not suitable for
its original function until after reconditioning shall be priced at fifty
percent (50%) of current new price as determined by Paragraph A. The cost of
reconditioning shall be charged to the receiving property, provided Condition C
value plus cost of reconditioning does not exceed Condition B value.

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(2)
Condition D

Material, excluding junk, no longer suitable for its original purpose, but
usable for some other purpose shall be priced on a basis commensurate with its
use. Operator may dispose of Condition D Material under procedures normally used
by Operator without prior approval of Non-Operators.

 
(a)
Casing, tubing, or drill pipe used as line pipe shall be priced as Grade A and B
seamless line pipe of comparable size and weight. Used casing, tubing or drill
pipe utilized as line pipe shall be priced at used line pipe prices.

(b)
Casing, tubing or drill pipe used as higher pressure service lines than standard
line pipe, e.g. power oil lines, shall be priced under normal pricing procedures
for casing, tubing, or drill pipe. Upset tubular goods shall be priced on a non
upset basis.

(3)
Condition E

Junk shall be priced at prevailing prices. Operator may dispose of Condition E
Material under procedures normally utilized by Operator without prior approval
of Non-Operators.

 
D.
Obsolete Material

Material which is serviceable and usable for its original function but condition
and/or value of such Material is not equivalent to that which would justify a
price as provided above may be specially priced as agreed to by the Parties.
Such price should result in the Joint Account being charged with the value of
the service rendered by such Material.

 
E.
Pricing Conditions

 
(1)
Loading or unloading costs may be charged to the Joint Account at the rate of
twenty-five cents ($0.25) per hundred weight on all tubular goods movements, in
lieu of actual loading or unloading costs sustained at the stocking point. The
above rate shall be adjusted as of the first day of April each year following
January 1,1985 by the same percentage increase or decrease used to adjust
overhead rates in Section III, Paragraph 1.A(3). Each year, the rate calculated
shall be rounded to the nearest cent and shall be the rate in effect until the
first day of April next year. Such rate shall be published each year by the
Council of Petroleum Accountants Societies.

 
(2)
Material involving erection costs shall be charged at applicable percentage of
the current knocked-down price of new Material.

3.
Premium Prices

Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which the
Operator has no control, the Operator may charge the Joint Account for the
required Material at the Operator’s actual cost incurred in providing such
Material, in making it suitable for use, and in moving it to the Joint Property;
provided notice in writing is furnished to Non-Operators of the proposed charge
prior to billing Non-Operators for such Material. Each Non-Operator shall have
the right, by so electing and notifying Operator within ten days after receiving
notice from Operator, to furnish in kind all or part of his share of such
Material suitable for use and acceptable to Operator.

4.
Warranty of Material Furnished By Operator

Operator does not warrant the Material furnished. In case of defective Material,
credit shall not be passed to the Joint Account until adjustment has been
received by Operator from the manufacturers or their agents.

V. INVENTORIES

The Operator shall maintain detailed records of Controllable Material.

1.
Periodic Inventories, Notice and Representation

At reasonable intervals, inventories shall be taken by Operator of the Joint
Account Controllable Material. Written notice of intention to take inventory
shall be given by Operator at least thirty (30) days before any inventory is to
begin so that Non-Operators may be represented when any inventory is taken.
Failure of Non-Operators to be represented at an inventory shall bind
Non-Operators to accept the inventory taken by Operator.

2.
Reconciliation and Adjustment of Inventories

Adjustments to the Joint Account resulting from the reconciliation of a physical
inventory shall be made within six months following the taking of the inventory.
Inventory adjustments shall be made by Operator to the Joint Account for
overages and shortages, but, Operator shall be held accountable only for
shortages due to lack of reasonable diligence.

3.
Special Inventories

Special inventories may be taken whenever there is any sale, change of interest,
or change of Operator in the Joint Property. It shall be the duty of the party
selling to notify all other Parties as quickly as possible after the transfer of
interest takes place. In such cases, both the seller and the purchaser shall be
governed by such inventory. In cases involving a change of Operator, all Parties
shall be governed by such inventory.

4.
Expense of Conducting Inventories

 
A.
The expense of conducting periodic inventories shall not be charged to the Joint
Account unless agreed to by the Parties.

 
B.
The expense of conducting special inventories shall be charged to the Parties
requesting such inventories, except inventories required due to change of
Operator shall be charged to the Joint Account.

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

 

EXHIBIT “D”

Attached to and made a part of that certain Participation Agreement dated
November 1, 2005 by and between Eden Energy Corp. and Merganser Limited

 
MODEL FORM OPERATING AGREEMENT

OPERATING AGREEMENT
 

 
DATED
 
November 1, 2005

OPERATOR: EDEN ENERGY CORP.

CONTRACT AREA: BIG SAND SPRING VALLEY PROSPECT

COUNTY OF: NYE STATE OF: NEVADA

BIG SAND SPRING VALLEY JOA initial ____

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between Eden Energy Corp., hereinafter
designated and referred to as “Operator”, and the signatory party or parties
other than Operator, sometimes hereinafter referred to individually as
“Non-Operator”, and collectively as “Non-Operators”.

WITNESSETH:
WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or
Oil and Gas Interests in the land identified in Exhibit “A”, and the parties
hereto have reached an agreement to explore and develop these Leases and/or Oil
and Gas Interests for the production and/or storage of Oil and/or Gas to the
extent and as hereinafter provided.
NOW, THEREFORE, it is agreed as follows:

ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the meanings
here ascribed to them:
A. The term "AFE" shall mean an Authority for Expenditure prepared by a party to
this agreement for the purpose of estimating the costs to be incurred in
conducting an operation hereunder.
B. The term "Completion" or "Complete" shall mean a single operation intended to
complete a well as a producer of Oil and Gas in one or more Zones, including,
but not limited to, the setting of production casing, perforating, well
stimulation and production testing conducted in such operation.
C. The term "Contract Area" shall mean all of the lands, Oil and Gas Leases
and/or Oil and Gas Interests intended to be developed and operated for Oil and
Gas purposes under this agreement. Such lands, Oil and Gas Leases and Oil and
Gas Interests are described in Exhibit “A”.
D. The term "Deepen" shall mean a single operation whereby a well is drilled to
an objective Zone below the deepest Zone in which the well was previously
drilled, or below the Deepest Zone proposed in the associated AFE, whichever is
the lesser.
E. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.
F. The term "Drilling Unit" shall mean the area fixed for the drilling of one
well by order or rule of any state or federal body having authority. If a
Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
unless fixed by express agreement of the Drilling Parties.
G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas Interest
on which a proposed well is to be located.
H. The term "Initial Well" shall mean the well required to be drilled by the
parties hereto as provided in Article VI.A.
I. The term "Non-Consent Well" shall mean a well in which less than all parties
have conducted an operation as provided in Article Vl.B.2.
J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party
who elects not to participate in a proposed operation.
K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas condensate,
and/or all other liquid or gaseous hydrocarbons and other marketable substances
produced therewith, unless an intent to limit the inclusiveness of this term is
specifically stated.
L. The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and
mineral interests in Oil and Gas in tracts of land lying within the Contract
Area which are owned by parties to this agreement.
M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the oil and
gas leases or interests therein covering tracts of land lying within the
Contract Area which are owned by the parties to this agreement.
N. The term "Plug Back" shall mean a single operation whereby a deeper Zone is
abandoned in order to attempt a Completion in a shallower Zone.
O. The term "Recompletion" or "Recomplete" shall mean an operation whereby a
Completion in one Zone is abandoned in order to attempt a Completion in a
different Zone within the existing wellbore.
P. The term "Rework" shall mean an operation conducted in the wellbore of a well
after it is Completed to secure, restore, or improve production in a Zone which
is currently open to production in the wellbore. Such operations include, but
are not limited to, well stimulation operations but exclude any routine repair
or maintenance work or drilling, Sidetracking, Deepening, Completing,
Recompleting, or Plugging Back of a well.
Q. The term "Sidetrack" shall mean the directional control and intentional
deviation of a well from vertical so as to change the bottom hole location
unless done to straighten the hole or to drill around junk in the hole to
overcome other mechanical difficulties.
R. The term "Zone" shall mean a stratum of earth containing or thought to
contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.
S. The term “Hydrocarbon” shall mean “Oil and/or Gas” as defined in I.K.
T. The term “Producer” shall mean either capable of producing and/or injecting
hydrocarbon.
U. The term “Production” shall mean either capable of production and/or
injection of hydrocarbon.
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the word "person" includes natural and artificial persons,
the plural includes the singular, and any gender includes the masculine,
feminine, and neuter.

BIG SAND SPRING VALLEY JOA initial ____

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are incorporated
in and made a part hereof: ___X____ A. Exhibit “A” shall include the following
information:
(1) Description of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Parties to agreement with addresses and telephone numbers for notice
purposes,
(4) Percentages or fractional interests of parties to this agreement,
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement,
(6) Burdens on production.
_______ B. Exhibit “B”, Form of Lease.
____X_ C. Exhibit “C”, Accounting Procedure.
__ _X _D. Exhibit “D”, Insurance.
_______E. Exhibit “E”, Gas Balancing Agreement.
_______F. Exhibit “F”, Non-Discrimination and Certification of Non-Segregated
Facilities.
_______G. Exhibit “G”, Tax Partnership.
H. Other:          

If any provision of any exhibit, except Exhibits “E”, “F”, and “G”, is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.

ARTICLE III.
INTERESTS OF PARTIES
A. Oil and Gas Interests:
If any party owns an Oil and Gas Interest in the Contract Area, that Interest
shall be treated for all purposes of this agreement and during the term hereof
as if it were covered by the form of Oil and Gas Lease attached hereto as
Exhibit “B”, and the owner thereof shall be deemed to own both royalty interest
in such lease and the interest of the lessee thereunder.
B. Interests of Parties in Costs and Production:
Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit “A”. In the same manner, the
parties shall also own all production of Oil and Gas from the Contract Area
subject, however, to the payment of royalties and other burdens on production as
described hereafter.
Regardless of which has contributed any Oil and Gas Lease or Oil and Gas
Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each shall pay or deliver, or
cause to be paid or delivered, all burdens on its share of the production from
the Contract Area up to, but not in excess of, seventeen and one half percent
(17.5%) and shall indemnify, defend and hold the other parties free from any
liability therefor. Except as otherwise expressly provided in this agreement, if
any party has contributed hereto any Lease or Interest which is burdened with
any royalty, overriding royalty, production payment or other burden on
production in excess of the amounts stipulated above, such party so burdened
shall assume and alone bear all such excess obligations and shall indemnify,
defend and hold the other parties hereto harmless from any and all claims
attributable to such excess burden. However, so long as the Drilling Unit for
the productive Zone(s) is identical with the Contract Area, each party shall pay
or deliver, or cause to be paid or delivered, all burdens on production from the
Contract Area due under the terms of the Oil and Gas Lease(s) which such party
has contributed to this agreement, and shall indemnify, defend and hold the
other parties free from any liability therefor.
No party shall ever be responsible, on a price basis higher than the price
received by such party, to any other party's lessor or royalty owner, and if
such other party's lessor or royalty owner should demand and receive settlement
on a higher price basis, the party contributing the affected Lease shall bear
the additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. Subsequently Created Interests:
If any party has contributed hereto a Lease or Interest that is burdened with an
assignment of production given as security for the payment of money, or if,
after the date of this agreement, any party creates an overriding royalty,
production payment, net profits interest, assignment of production or other
burden payable out of production attributable to its working interest hereunder,
such burden shall be deemed a "Subsequently Created Interest." Further, if any
party has contributed hereto a Lease or Interest burdened with an overriding
royalty, production payment, net profits interest, or other burden payable out
of production created prior to the date of this agreement, and such burden is
not shown on Exhibit “A”, such burden also shall be deemed a Subsequently
Created Interest to the extent such burden causes the burdens on such party's
Lease or Interest to exceed the amount stipulated in Article III.B. above.
The party whose interest is burdened with the Subsequently Created Interest (the
"Burdened Party") shall assume and alone bear, pay and discharge the
Subsequently Created Interest and shall indemnify, defend and hold harmless the
other Parties from and against any liability therefor. Further, if the Burdened
Party fails to pay, when due, its share of expenses chargeable hereunder, all
provisions of Article VII.B. shall be enforceable against the Subsequently
Created Interest in the same manner as they are enforceable against the working
interest of the Burdened Party. If the Burdened Party is required under this
agreement to assign or relinquish to any other party, or parties, all or a
portion of its working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or production free
and clear of said Subsequently Created Interest, and the Burdened Party shall
indemnify, defend and hold harmless said other party, or parties, from any and
all claims and demands for payment asserted by owners of the Subsequently
Created Interest.

BIG SAND SPRING VALLEY JOA initial ____

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

ARTICLE IV.
TITLES
A. Title Examination:
Title examination shall be made on the Drillsite of any proposed well prior to
commencement of drilling operations and, if a majority in interest of the
Drilling Parties so request or Operator so elects, title examination shall be
made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of the
well. The opinion will include the ownership of the working interest, minerals,
royalty, overriding royalty and production payments under the applicable Leases.
Each party contributing Leases and/or Oil and Gas Interests to be included in
the Drillsite or Drilling Unit, if appropriate, shall furnish to Operator all
abstracts (including federal lease status reports), title opinions, title papers
and curative material in its possession free of charge. All such information not
in the possession of or made available to Operator by the parties, but necessary
for the examination of the title, shall be obtained by Operator. Operator shall
cause title to be examined by attorneys on its staff or by outside attorneys.
Copies of all title opinions shall be furnished to each Drilling Party. Costs
incurred by Operator in procuring abstracts, fees paid outside attorneys for
title examination (including preliminary, supplemental, shut-in royalty opinions
and division order title opinions) and other direct charges as provided in
Exhibit “C” shall be borne by the Drilling Parties in the proportion that the
interest of each Drilling Party bears to the total interest of all Drilling
Parties as such interests appear in Exhibit “A”. Operator shall make no charge
for services rendered by its staff attorneys or other personnel in the
performance of the above functions.
Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any other
orders necessary or appropriate to the conduct of operations hereunder. This
shall not prevent any party from appearing on its own behalf at such hearings.
Costs incurred by Operator, including fees paid to outside attorneys, which are
associated with hearings before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement, shall
be direct charges to the joint account and shall nor be covered by the
administrative overhead charges as provided in Exhibit "C.”
No well shall be drilled on the Contract Area until after (1) the title to the
Drillsite or Drilling Unit, if appropriate, has been examined as above provided,
and (2) the title has been approved by the examining attorney or title has been
accepted by all of the Drilling Parties in such well.
B. Loss or Failure of Title:
1. Failure of Title: Should any Oil and Gas Interest or Oil and Gas Lease be
lost through failure of title, which results in a reduction of interest from
that shown on Exhibit "A," the party credited with contributing the affected
Lease or Interest (including, if applicable, a successor in interest to such
party) shall have ninety (90) days from final determination of title failure to
acquire a new lease or other instrument curing the entirety of the title
failure, which acquisition will not be subject to Article VIII.B., and failing
to do so, this agreement, nevertheless, shall continue in force as to all
remaining Oil and Gas Leases and Interests; and, The party credited with
contributing the Oil and Gas Lease or Interest affected by the title failure
(including, if applicable, a successor in interest to such party) shall bear
alone the entire loss and it shall not be entitled to recover from Operator or
the other parties any development or operating costs which it may have
previously paid or incurred, but there shall be no additional liability on its
part to the other parties hereto by reason of such title failure;
There shall be no retroactive adjustment of expenses incurred or revenues
received from the operation of the Lease or Interest which has failed, but the
interests of the parties contained on Exhibit "A" shall be revised on an acreage
basis, as of the time it is determined finally that title failure has occurred,
so that the interest of the party whose Lease or Interest is affected by the
title failure will thereafter be reduced in the Contract Area by the amount of
the Lease or Interest failed;
If the proportionate interest of the other parties hereto in any producing well
previously drilled on the Contract Area is increased by reason of the title
failure, the party who bore the costs incurred in connection with such well
attributable to the Lease or Interest which has failed shall receive the
proceeds attributable to the increase in such interest (less costs and burdens
attributable thereto) until it has been reimbursed for unrecovered costs paid by
it in connection with such well attributable to such failed Lease or Interest;
Should any person not a party to this agreement, who is determined to be the
owner of any Lease or Interest which has failed, pay in any manner any part of
the cost of operation, development, or equipment, such amount shall be paid to
the party or parties who bore the costs which are so refunded;
Any liability to account to a person not a party to this agreement for prior
production of Oil and Gas which arises by reason of title failure shall be borne
severally by each party (including a predecessor to a current party) who
received production for which such accounting is required based on the amount of
such production received, and each such party shall severally indemnify, defend
and hold harmless all other parties hereto for any such liability to account;
No charge shall be made to the joint account for legal expenses, fees or
salaries in connection with the defense of the Lease or Interest claimed to have
failed, but if the party contributing such Lease or Interest hereto elects to
defend its title it shall bear all expenses in connection therewith; and
If any party is given credit on Exhibit "A" to a Lease or Interest which is
limited solely to ownership of an interest in the wellbore of any well or wells
and the production therefrom, such party's absence of interest in the remainder
of the Contract Area shall be considered a Failure of Title as to such remaining
Contract Area unless that absence of interest is reflected on Exhibit “A”.
2. Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake
or oversight, any rental, shut-in well payment, minimum royalty or royalty
payment, or other payment necessary to maintain all or a portion of an Oil and
Gas Lease or Interest is not paid or is erroneously paid, and as a result a
Lease or Interest terminates, there shall be no monetary liability against the
party who failed to make such payment. Unless the party who failed to make the
required payment secures a new Lease or Interest covering the same interest
within ninety (90) days from the discovery of the failure to make proper
payment, which acquisition will not be subject to Article VIII.B., the interests
of the parties reflected on Exhibit "A" shall be revised on an acreage basis,
effective as of the date of termination of the Lease or Interest involved, and
the party who failed to make proper payment will no longer be credited with an
interest in the Contract Area on account of ownership of the Lease or Interest
which has terminated. If the party who failed to make the required payment shall
not have been fully reimbursed, at the time of the loss, from the proceeds of
the sale of Oil and Gas attributable to the lost Lease or Interest, calculated
on an acreage basis, for the development and operating costs previously paid on
account of such Lease or Interest, it shall be reimbursed for unrecovered actual
costs previously paid by it (but not for its share of the cost of any dry hole
previously drilled or wells previously abandoned) from so much of the following
as is necessary to effect reimbursement:

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Proceeds of Oil and Gas produced prior to termination of the Lease or Interest,
less operating expenses and lease burdens chargeable hereunder to the person who
failed to make payment, previously accrued to the credit of the lost Lease or
Interest, on an acreage basis, up to the amount of unrecovered costs;
Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable
hereunder to the person who failed to make payment, up to the amount of
unrecovered costs attributable to that portion of Oil and Gas thereafter
produced and marketed (excluding production from any wells thereafter drilled)
which, in the absence of such Lease or Interest termination, would be
attributable to the lost Lease or Interest on an acreage basis and which as a
result of such Lease or Interest termination is credited to other parties, the
proceeds of said portion of the Oil and Gas to be contributed by the other
parties in proportion to their respective interests reflected on Exhibit "A";
and,
Any monies, up to the amount of unrecovered costs, that may be paid by any party
who is, or becomes, the owner of the Lease or Interest lost, for the privilege
of participating in the Contract Area or becoming a party to this agreement.
3. Other Losses: All losses of Leases or Interests committed to this agreement
other than those set forth in Articles IV.B.1. and IV.B.2. above shall be joint
losses and shall be borne by all parties in proportion to their interests shown
on Exhibit “A”. This shall include but not be limited to the loss of any Lease
or Interest through failure to develop or because express or implied covenants
have not been performed (other than performance which requires only the payment
of money), and the loss of any Lease by expiration at the end of its primary
term if it is not renewed or extended. There shall be no readjustment of
interests in the remaining portion of the Contract Area on account of any joint
loss.
4. Curing Title: In the event of a Failure of Title under Article IV.B1. or a
loss of title under Article IV,B.2. above, any Lease or Interest acquired by any
party hereto (other than the party whose interest has failed or was lost) during
the ninety (90) day period provided by Article IV.B. I. and Article IV.B.2.
above covering all or a portion of the interest that has failed or was lost
shall be offered at cost to the party whose interest has failed or was lost, and
the provisions of Article VIII.B. shall not apply to such acquisition.

ARTICLE V.
OPERATOR
A. Designation and Responsibilities of Operator:
EDEN ENERGY CORP.     shall be the Operator of the Contract Area, and shall
conduct and direct and have full control of all operations on the Contract Area
as permitted and required by, and within the limits of this agreement. In its
performance of services hereunder for the Non-Operators, Operator shall be an
independent contractor not subject to the control or direction of the
Non-Operators except as to the type of operation to be undertaken in accordance
with the election procedures contained in this agreement. Operator shall not be
deemed, or hold itself out as, the agent of the Non-Operators with authority to
bind them to any obligation or liability assumed or incurred by Operator as to
any third party. Operator shall conduct its activities under this agreement as a
reasonable prudent operator, in a good and workmanlike manner, with due
diligence and dispatch, in accordance with good oilfield practice, and in
compliance with applicable law and regulation, but in no event shall it have any
liability as Operator to the other parties for losses sustained or liabilities
incurred except such as may result from gross negligence or willful misconduct.
B. Resignation or Removal of Operator and Selection of Successor:
1. Resignation or Removal of Operator: Operator may resign at any time by giving
written notice thereof to Non-Operators. If Operator terminates its legal
existence, no longer owns an interest hereunder in the Contract Area, or is no
longer capable of serving as Operator, Operator shall be deemed to have resigned
without any action by Non-Operators, except the selection of a successor.
Operator may be removed only for good cause by the affirmative vote of
Non-Operators owning a majority interest based on ownership as shown on Exhibit
"A" remaining after excluding the voting interest of Operator; such vote shall
not be deemed effective until a written notice has been delivered to the
Operator by a Non-Operator detailing the alleged default and Operator has failed
to cure the default within thirty (30) days from its receipt of the notice or,
if the default concerns an operation then being conducted, within forty-eight
(48) hours of its receipt of the notice. For purposes hereof, "good cause" shall
mean not only gross negligence or willful misconduct but also the material
breach of or inability to meet the standards of operation contained in Article
V.A. or material failure or inability to perform its obligations under this
agreement.       Sixty (60)
Subject to Article VII.D.l., such resignation or removal shall not become
effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator.
2. Selection of Successor Operator: Upon the resignation or removal of Operator
under any provision of this agreement, a successor Operator shall be selected by
the parties. The successor Operator shall be selected from the parties owning an
interest in the Contract Area at the time such successor Operator is selected.
The successor Operator shall be selected by the affirmative vote of two (2) or
more parties owning a majority interest based on ownership as shown on Exhibit
"A" provided, however, if an Operator which has been removed or is deemed to
have resigned fails to vote or votes only to succeed itself, the successor
Operator shall be selected by the affirmative vote of the party or parties
owning a majority interest based on ownership as shown on Exhibit "A" remaining
after excluding the voting interest of the Operator that was removed or
resigned. The former Operator shall promptly deliver to the successor Operator
all records and data relating to the operations conducted by the former Operator
to the extent such records and data are not already in the possession of the
successor operator. Any cost of obtaining or copying the former Operator's
records and data shall be charged to the joint account.

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3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is placed in
receivership, it shall be deemed to have resigned without any action by
Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit “A”.
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit “A”.
C. Employees and Contractors:
The number of employees or contractors used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees or
contractors shall be the employees or contractors of Operator.
D. Rights and Duties of Operator:
1. Competitive Rates and Use of Affiliates: All wells drilled on the Contract
Area shall be drilled on a competitive contract basis at the usual rates
prevailing in the area. If it so desires, Operator may employ its own tools and
equipment in the drilling of wells, but its charges therefor shall not exceed
the prevailing rates in the area and the rate of such charges shall be agreed
upon by the parties in writing before drilling operations are commenced, and
such work shall be performed by Operator under the same terms and conditions as
are customary and usual in the area in contracts of independent contractors who
are doing work of a similar nature. All work performed or materials supplied by
affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.
2. Discharge of Joint Account Obligations: Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expenses
incurred in the development and operation of the Contract Area pursuant to this
agreement and shall charge each of the parties hereto with their respective
proportionate shares upon the expense basis provided in Exhibit “C”. Operator
shall keep an accurate record of the joint account hereunder, showing expenses
incurred and charges and credits made and received.
3. Protection from Liens: Operator shall pay, or cause to be paid, as and when
they become due and payable, all accounts of contractors and suppliers and wages
and salaries for services rendered or performed, and for materials supplied on,
to or in respect of the Contract Area or any operations for the joint account
thereof, and shall keep the Contract Area free from liens and encumbrances
resulting therefrom except for those resulting from a bona fide dispute as to
services rendered or materials supplied.
4. Custody of Funds: Operator shall hold for the account of the Non-Operators
any funds of the Non-Operators advanced or paid to the Operator, either for the
conduct of operations hereunder or as a result of the sale of production from
the Contract Area, and such funds shall remain the funds of the Non-Operators on
whose account they are advanced or paid until used for their intended purpose or
otherwise delivered to the Non-Operators or applied toward the payment of debts
as provided in Article VII.B. Nothing in this paragraph shall be construed to
establish a fiduciary relationship between Operator and Non-Operators for any
purpose other than to account for Non-Operator funds as herein specifically
provided. Nothing in this paragraph shall require the maintenance by Operator of
separate accounts for the funds of Non-Operators unless the parties otherwise
specifically agree.
5. Access to Contract Area and Records: Operator shall, except as otherwise
provided herein, permit each Non-Operator or its duly authorized representative,
at the Non-Operator's sole risk and cost, full and free access at all reasonable
times to all operations of every kind and character being conducted for the
joint account on the Contract Area and to the records of operations conducted
thereon or production therefrom, including Operator's books and records relating
thereto. Such access rights shall not be exercised in a manner interfering with
Operator's conduct of an operation hereunder and shall not obligate Operator to
furnish any geologic or geophysical data of an interpretive nature unless the
cost of preparation of such interpretive data was charged to the joint account.
Operator will furnish to each Non-Operator upon request copies of any and all
reports and information obtained by Operator in connection with production and
related items, including, without limitation, meter and chart reports,
production purchaser statements, run tickets and monthly gauge reports, but
excluding purchase contracts and pricing information to the extent not
applicable to the production of the Non-Operator seeking the information. Any
audit of Operator's records relating to amounts expended and the appropriateness
of such expenditures shall be conducted in accordance with the audit protocol
specified in Exhibit “C”.
6. Filing and Furnishing Governmental Reports: Operator will file, and upon
written request promptly furnish copies to each requesting Non-Operator not in
default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.
7. Drilling and Testing Operations: The following provisions shall apply to each
well drilled hereunder, including but not limited to the Initial Well:
(a) Operator will promptly advise Non-Operators of the date on which the well is
spudded, or the date on which drilling operations are commenced.
(b) Operator will send to Non-Operators such reports, test results and notices
regarding the progress of operations on the well as the Non-Operators shall
reasonably request, including, but not limited to, daily drilling reports,
completion reports, and well logs.
(c) Operator shall adequately test all Zones encountered which may reasonably be
expected to be capable of producing Oil and Gas in paying quantities as a result
of examination of the electric log or any other logs or cores or tests conducted
hereunder.
8. Cost Estimates. Upon request of any Consenting Party, Operator shall furnish
estimates of current and cumulative costs incurred for the joint account at
reasonable intervals during the conduct of any operation pursuant to this
agreement. Operator shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.

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9. Insurance: At all times while operations are conducted hereunder, Operator
shall comply with the workers compensation law of the state where the operations
are being conducted; provided, however, that Operator may be a self-insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit “C”. Operator shall
also carry or provide insurance for the benefit of the joint account of the
parties as outlined in Exhibit “D” attached hereto and made a part hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workers compensation law of the state where the
operations are being conducted and to maintain such other insurance as Operator
may require.
In the event automobile liability insurance is specified in said Exhibit “D”, or
subsequently receives the approval of the parties, no direct charge shall be
made by Operator for premiums paid for such insurance for Operator's automotive
equipment.

ARTICLE VI.
DRILLING AND DEVELOPMENT
A. Initial Well:
On or before the  day of   , 20 , Operator shall commence the drilling of the
Initial Well at the following location:

See Participation Agreement dated November 1, 2005 by and between Eden Energy
Corp. and Merganser Limited

and shall thereafter continue the drilling of the well with due diligence to

The drilling of the Initial Well and the participation therein by all Parties is
obligatory, subject to Article VI.C.1. as to participation in Completion
operations and Article VI.F. as to termination of operations and Article XI as
to occurrence of force majeure.
B. Subsequent Operations:
1. Proposed Operations: If any party hereto should desire to drill any well on
the Contract Area other than the Initial Well, or if any party should desire to
Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a well no
longer capable of producing in paying quantities in which such party has not
otherwise relinquished its interest in the proposed objective zone under this
agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or
Plug Back such a well shall give written notice of the proposed operation to the
parties who have not otherwise relinquished their interest in such objective
zone under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing to do the work
whether they elect to participate in the cost of the proposed operation. If a
drilling rig is on location, notice of a proposal to Rework, Sidetrack,
Recomplete, Plug Back or Deepen may be given by telephone and the response
period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday
and legal holidays. Failure of a party to whom such notice is delivered to reply
within the period above fixed shall constitute an election by that party not to
participate in the cost of the proposed operation. Any proposal by a party to
conduct an operation conflicting with the operation initially proposed shall be
delivered to all parties within the time and in the manner provided in Article
VI.B.6.
If all parties to whom such notice is delivered elect to participate in such a
proposed operation, the parties shall be contractually committed to participate
therein provided such operations are commenced within the time period hereafter
set forth, and Operator shall, no later than ninety (90) days after expiration
of the notice period of thirty (30) days (or as promptly as practicable after
the expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
thereafter complete it with due diligence at the risk and expense of the parties
participating therein; provided, however, said commencement date may be extended
upon written notice of same by Operator to the other parties, for a period of up
to thirty (30) additional days if, in the sole opinion of Operator, such
additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights-of-way) or appropriate drilling
equipment, or to complete title examination or curative matter required for
title approval or acceptance. If the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein or in the force majeure provisions of Article XI) and if any
party hereto still desires to conduct said operation, written notice proposing
same must be resubmitted to the other parties in accordance herewith as if no
prior proposal had been made. Those parties that did not participate in the
drilling of a well for which a proposal to Deepen or Sidetrack is made hereunder
shall, if such parties desire to participate in the proposed Deepening or
Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.
2. Operations by Less Than All Parties:
(a) Determination of Participation. If any party to whom such notice is
delivered as provided in Article VI.B. 1. or VI.C.l. (Option No. 2) elects not
to participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the forty-eight (48) hour
period when a drilling rig is on location, as the case may be) actually commence
the proposed operation and complete it with due diligence. Operator shall
perform all work for the account of the Consenting Parties; provided, however,
if no drilling rig or other equipment is on location, and if Operator is a
Non-Consenting Party, the Consenting Parties shall either: (i) request Operator
to perform the work required by such proposed operation for the account of the
Consenting Parties, or (ii) designate one of the Consenting Parties as Operator
to perform such work. The rights and duties granted to and imposed upon the
Operator under this agreement are granted to and imposed upon the party
designated as Operator for an operation in which the original Operator is a
Non-Consenting Party. Consenting Parties, when conducting operations on the
Contract Area pursuant to this Article VI.B.2., shall comply with all terms and
conditions of this agreement.

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If less than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the applicable notice period, shall advise
all Parties of the total interest of the parties approving such operation and
its recommendation as to whether the Consenting Parties should proceed with the
operation as proposed. Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party's interest as shown on Exhibit “A” or (ii) carry
only its proportionate part (determined by dividing such party's interest in the
Contract Area by the interests of all Consenting Parties in the Contract Area)
of Non-Consenting Parties' interests, or (iii) carry its proportionate part
(determined as provided in (ii)) of Non-Consenting Parties' interests together
with all or a portion of its proportionate part of any Non-Consenting Parties'
interests that any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election, may
withdraw such proposal if there is less than 100% participation and shall notify
all parties of such decision within ten (10) days, or within twenty-four (24)
hours if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained, the
proposing party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as Operator shall
commence such operation within the period provided in Article VI.B.1., subject
to the same extension right as provided therein.
(b) Relinquishment of Interest for Non-Participation. The entire cost and risk
of conducting such operations shall be borne by the Consenting Parties in the
proportions they have elected to bear same under the terms of the preceding
paragraph. Consenting Parties shall keep the leasehold estates involved in such
operations free and clear of all liens and encumbrances of every kind created by
or arising from the operations of the Consenting Parties. If such an operation
results in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the
Consenting Parties shall plug and abandon the well and restore the surface
location at their sole cost, risk and expense; provided, however, that those
Non-Consenting Parties that participated in the drilling, Deepening or
Sidetracking of the well shall remain liable for, and shall pay, their
proportionate shares of the cost of plugging and abandoning the well and
restoring the surface location insofar only as those costs were not increased by
the subsequent operations of the Consenting Parties. If any well drilled,
Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip the well
to produce at their sole cost and risk, and the well shall then be turned over
to Operator (if the Operator did not conduct the operation) and shall be
operated by it at the expense and for the account of the Consenting Parties.
Upon commencement of operations for the drilling, Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non-Consenting Party's interest in the well and share of
production therefrom or, in the case of a Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back, or a Completion pursuant to Article VI.C.1.
Option No. 2, all of such Non-Consenting Party's interest in the production
obtained from the operation in which the Non-Consenting Party did not elect to
participate. Such relinquishment shall be effective until the proceeds of the
sale of such share, calculated at the well, or market value thereof if such
share is not sold (after deducting applicable ad valorem, production, severance,
and excise taxes, royalty, overriding royalty and other interests not excepted
by Article III.C. payable out of or measured by the production from such well
accruing with respect to such interest until it reverts), shall equal the total
of the following:
500% of each such Non-Consenting Party's share of the cost of any newly acquired
surface equipment beyond the wellhead connections (including but not limited to
stock tanks, separators, treaters, pumping equipment and piping), plus 100% of
each such Non-Consenting Party's share of the cost of operation of the well
commencing with first production and continuing until each such Non-Consenting
Party's relinquished interest shall revert to it under other provisions of this
Article, it being agreed that each Non-Consenting Party's share of such costs
and equipment will be that interest which would have been chargeable to such
Non-Consenting Party had it participated in the well from the beginning of the
operations; and
500% of (a) that portion of the costs and expenses of drilling, Reworking,
Sidetracking, Deepening, Plugging Back, testing, Completing, and Recompleting,
after deducting any cash contributions received under Article VIlI.C., and of
(b) that portion of the cost of newly acquired equipment in the well (to and
including the wellhead connections), which would have been chargeable to such
Non-Consenting Party if it had participated therein.
Notwithstanding anything to the contrary in this Article VI.B., if the well does
not reach the deepest objective Zone described in the notice proposing the well
for reasons other than the encountering of granite or practically impenetrable
substance or other condition in the hole rendering further operations
impracticable, Operator shall give notice thereof to each Non-Consenting Party
who submitted or voted for an alternative proposal under Article VI.B.6. to
drill the well to a shallower Zone than the deepest objective Zone proposed in
the notice under which the well was drilled, and each such Non-Consenting Party
shall have the option to participate in the initial proposed Completion of the
well by paying its share of the cost of drilling the well to its actual depth,
calculated in the manner provided in Article VI.B.4. (a). If any such
Non-Consenting Party does not elect to participate in the first Completion
proposed for such well, the relinquishment provisions of this Article VI.B.2.
(b) shall apply to such party's interest.

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(c ) Reworking, Recompletion or Plugging Back. An election not to participate in
the drilling, Sidetracking or Deepening of a well shall be deemed an election
not to participate in any Reworking or Plugging Back operation proposed in such
a well, or portion thereof, to which the initial non-consent election applied
that is conducted at any time prior to full recovery by the Consenting Parties
of the Non-Consenting Party's recoupment amount. Similarly, an election not to
participate in the Completing or Recompleting of a well shall be deemed an
election not to participate in any Reworking operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party's recoupment amount. Any such Reworking, Recompleting or
Plugging Back operation conducted during the recoupment period shall be deemed
part of the cost of operation of said well and there shall be added to the sums
to be recouped by the Consenting Parties 500% of that portion of the costs of
the Reworking, Recompleting or Plugging Back operation which would have been
chargeable to such Non-Consenting Party had it participated therein. If such a
Reworking, Recompleting or Plugging Back operation is proposed during such
recoupment period, the provisions of this Article VI.B. shall be applicable as
between said Consenting Parties in said well.
(d) Recoupment Matters. During the period of time Consenting Parties are
entitled to receive Non-Consenting Party's share of production, or the proceeds
therefrom, Consenting Parties shall be responsible for the payment of all ad
valorem, production, severance, excise, gathering and other taxes, and all
royalty, overriding royalty and other burdens applicable to Non-Consenting
Party's share of production not excepted by Article III.C.
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or
Deepening operation, the Consenting Parties shall be permitted to use, free of
cost, all casing, tubing and other equipment in the well, but the ownership of
all such equipment shall remain unchanged; and upon abandonment of a well after
such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening, the
Consenting Parties shall account for all such equipment to the owners thereof,
with each party receiving its proportionate part in kind or in value, less cost
of salvage.
Within ninety (90) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well's
working interest production during the preceding month. In determining the
quantity of Oil and Gas produced during any month, Consenting Parties shall use
industry accepted methods such as but not limited to metering or periodic well
tests. Any amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by a
Non-Consenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it as of 7:00 a.m. on
the day following the day on which such recoupment occurs, and, from and after
such reversion, such Non-Consenting Party shall own the same interest in such
well, the material and equipment in or pertaining thereto, and the production
therefrom as such Non-Consenting Party would have been entitled to had it
participated in the drilling, Sidetracking, Reworking, Deepening, Recompleting
or Plugging Back of said well. Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and
Exhibit “C” attached hereto.
3. Stand-By Costs: When a well which has been drilled or Deepened has reached
its authorized depth and all tests have been completed and the results thereof
furnished to the parties, or when operations on the well have been otherwise
terminated pursuant to Article VI.F., stand-by costs incurred pending response
to a party's notice proposing a Reworking, Sidetracking, Deepening,
Recompleting, Plugging Back or Completing operation in such a well (including
the period required under Article VI.B.6. to resolve competing proposals) shall
be charged and borne as part of the drilling or Deepening operation just
completed. Stand-by costs subsequent to all parties responding, or expiration of
the response time permitted, whichever first occurs, and prior to agreement as
to the participating interests of all Consenting Parties pursuant to the terms
of the second grammatical paragraph of Article VI.B.2. (a), shall be charged to
and borne as part of the proposed operation, but if the proposal is subsequently
withdrawn because of insufficient participation, such stand-by costs shall be
allocated between the Consenting Parties in the proportion each Consenting
Party's interest as shown on Exhibit “A” bears to the total interest as shown on
Exhibit “A” of all Consenting Parties.
In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive up
to five (5) additional days after expiration of the forty-eight hour response
period specified in Article Vl.B.1. within which to respond by paying for all
stand-by costs and other costs incurred during such extended response period;
Operator may require such party to pay the estimated stand-by time in advance as
a condition to extending the response period. If more than one party elects to
take such additional time to respond to the notice, standby costs shall be
allocated between the parties taking additional time to respond on a day-to-day
basis in the proportion each electing party's interest as shown on Exhibit "A"
bears to the total interest as shown on Exhibit “A” of all the electing parties.
4. Deepening: If less than all the parties elect to participate in a drilling,
Sidetracking, or Deepening operation proposed pursuant to Article VI.B.1., the
interest relinquished by the Non-Consenting Parties to the Consenting Parties
under Article VI.B.2. shall relate only and be limited to the lesser of (i) the
total depth actually drilled or (ii) the objective depth or Zone of which the
parties were given notice under Article VI.B. 1. ("Initial Objective"). Such
well shall not be Deepened beyond the Initial Objective without first complying
with this Article to afford the Non-Consenting Parties the opportunity to
participate in the Deepening operation.
In the event any Consenting Party desires to drill or Deepen a Non-Consent Well
to a depth below the Initial Objective, such party shall give notice thereof,
complying with the requirements of Article VI.B. 1., to all parties (including
Non-Consenting Parties). Thereupon, Articles VI.B.1. and 2. shall apply and all
parties receiving such notice shall have the tight to participate or not
participate in the Deepening of such well pursuant to said Articles VI.B.1. and
2. If a Deepening operation is approved pursuant to such provisions, and if any
Non-Consenting Party elects to participate in the Deepening operation, such
Non-Consenting party shall pay or make reimbursement (as the case may be) of the
following costs and expenses:

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If the proposal to Deepen is made prior to the Completion of such well as a well
capable of producing in paying quantities, such Non-Consenting Party shall pay
(or reimburse Consenting Parties for, as the case may be) that share of costs
and expenses incurred in connection with the drilling of said well from the
surface to the Initial Objective which Non-Consenting Party would have paid had
such Non-Consenting Party agreed to participate therein, plus the Non-Consenting
Party's share of the cost of Deepening and of participating in any further
operations on the well in accordance with the other provisions of this
Agreement; provided, however, all costs for testing and Completion or attempted
Completion of the well incurred by Consenting Parties prior to the point of
actual operations to Deepen beyond the Initial Objective shall be for the sole
account of Consenting Parties.
If the proposal is made for a Non-Consent Well that has been previously
Completed as a well capable of producing in paying quantities, but is no longer
capable of producing in paying quantities, such Non-Consenting Party shall pay
(or reimburse Consenting Parties for, as the case may be) its proportionate
share of all costs of drilling, Completing, and equipping said well from the
surface to the Initial Objective, calculated in the manner provided in paragraph
(a) above, less those costs recouped by the Consenting Parties from the sale of
production from the well. The Non-Consenting Party shall also pay its
proportionate share of all costs of re-entering said well. The Non-Consenting
Parties' proportionate part (based on the percentage of such well Non-Consenting
Party would have owned had it previously participated in such Non-Consent Well)
of the costs of salvable materials and equipment remaining in the hole and
salvable surface equipment used in connection with such well shall be determined
in accordance with Exhibit "C." If the Consenting Parties have recouped the cost
of drilling, Completing, and equipping the well at the time such Deepening
operation is conducted, then a Non-Consenting Party may participate in the
Deepening of the well with no payment for costs incurred prior to re-entering
the well for Deepening.
The foregoing shall not imply a right of any Consenting Party to propose any
Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article Vl.F.
5. Sidetracking: Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore at
the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:
If the proposal is for Sidetracking an existing dry hole, reimbursement shall be
on the basis of the actual costs incurred in the initial drilling of the well
down to the depth at which the Sidetracking operation is initiated.
If the proposal is for Sidetracking a well which has previously produced,
reimbursement shall be on the basis of such party's proportionate share of
drilling and equipping costs incurred in the initial drilling of the well down
to the depth at which the Sidetracking operation is conducted, calculated in the
manner described in Article VI.B.4(b) above. Such party's proportionate share of
the cost of the well's salvable materials and equipment down to the depth at
which the Sidetracking operation is initiated shall be determined in accordance
with the provisions of Exhibit "C."
6. Order of Preference of Operations. Except as otherwise specifically provided
in this agreement, if any party desires to propose the conduct of an operation
that conflicts with a proposal that has been made by a party under this Article
VI, such party shall have fifteen (15) days from delivery of the initial
proposal, in the case of a proposal to drill a well or to perform an operation
on a well where no drilling rig is on location, or twenty-four (24) hours,
exclusive of Saturday, Sunday and legal holidays, from delivery of the initial
proposal, if a drilling rig is on location for the well on which such operation
is to be conducted, to deliver to all parties entitled to participate in the
proposed operation such party's alternative proposal, such alternate proposal to
contain the same information required to be included in the initial proposal.
Each party receiving such proposals shall elect by delivery of notice to
Operator within five (5) days after expiration of the proposal period, or within
twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays) if a
drilling rig is on location for the well that is the subject of the proposals,
to participate in one of the competing proposals. Any Party not electing within
the time required shall be deemed not to have voted. The proposal receiving the
vote of parties owning the largest aggregate percentage interest of the parties
voting shall have priority over all other competing proposals; in the case of a
tie vote, the initial proposal shall prevail. Operator shall deliver notice of
such result to all parties entitled to participate in the operation within five
(5) days after expiration of the election period (or within twenty-four (24)
hours, exclusive of Saturday, Sunday and legal holidays, if a drilling rig is on
location). Each party shall then have two (2) days (or twenty-four (24) hours if
a rig is on location) from receipt of such notice to elect by delivery of notice
to Operator to participate in such operation or to relinquish interest in the
affected well pursuant to the provisions of Article Vl.B.2.; failure by a party
to deliver notice within such period shall be deemed an election not to
participate in the prevailing proposal.
7. Conformity to Spacing Pattern. Notwithstanding the provisions of this Article
VI.B.2., it is agreed that no wells shall be proposed to be drilled to or
Completed in or produced from a Zone from which a well located elsewhere on the
Contract Area is producing, unless such well conforms to the then-existing well
spacing pattern for such Zone.
8. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging Back,
Completion, Recompletion, or Sidetracking operation under this agreement with
respect to any well then capable of producing in paying quantities except with
the consent of all parties that have not relinquished interests in the well at
the time of such operation.
C. Completion of Wells; Reworking and Plugging Back:
1. Completion: Without the consent of all parties, no well shall be drilled,
Deepened or Sidetracked, except any well drilled, Deepened or Sidetracked
pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the
drilling, Deepening or Sidetracking shall include:

[  ]
Option No. 1: All necessary expenditures for the drilling, Deepening or
Sidetracking, testing, Completing and equipping of the well, including necessary
tankage and/or surface facilities.

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[X]
Option No. 2: All necessary expenditures for the drilling, Deepening or
Sidetracking and testing of the well. When such well has reached its authorized
depth, and all logs, cores and other tests have been completed, and the results
thereof furnished to the parties, Operator shall give immediate notice to the
Non-Operators having the right to participate in a Completion attempt whether or
not Operator recommends attempting to Complete the well, together with
Operator's AFE for Completion costs if not previously provided. The parties
receiving such notice shall have forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays) in which to elect by delivery of notice to Operator
to participate in a recommended Completion attempt or to make a Completion
proposal with an accompanying AFE. Operator shall deliver any such Completion
proposal, or any Completion proposal conflicting with Operator's proposal, to
the other parties entitled to participate in such Completion in accordance with
the procedures specified in Article VI.B.6. Election to participate in a
Completion attempt shall include consent to all necessary expenditures for the
Completing and equipping of such well, including necessary tankage and/or
surface facilities but excluding any stimulation operation not contained on the
Completion AFE. Failure of any party receiving such notice to reply within the
period above fixed shall constitute an election by that party not to participate
in the cost of the Completion attempt; provided, that Article VI.B.6. shall
control in the case of conflicting Completion proposals. If one or more, but
less than all of the parties, elect to attempt a Completion, the provisions of
Article VI.B.2. hereof (the phrase "Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back" as contained in Article VI.B.2. shall be deemed
to include "Completing") shall apply to the operations thereafter conducted by
less than all parties; provided, however, that Article VI.B.2 shall apply
separately to each separate Completion or Recompletion attempt undertaken
hereunder, and an election to become a Non-Consenting Party as to one Completion
or Recompletion attempt shall not prevent a party from becoming a Consenting
Party in subsequent Completion or Recompletion attempts regardless whether the
Consenting Parties as to earlier Completions or Recompletions have recouped
their costs pursuant to Article VI.B.2.; provided further, that any recoupment
of costs by a Consenting Party shall be made solely from the production
attributable to the Zone in which the Completion attempt is made. Election by a
previous Non-Consenting Party to participate in a subsequent Completion or
Recompletion attempt shall require such party to pay its proportionate share of
the cost of salvable materials and equipment installed in the well pursuant to
the previous Completion or Recompletion attempt, insofar and only insofar as
such materials and equipment benefit the Zone in which such party participates
in a Completion attempt.

2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted or
Plugged Back except a well Reworked, Recompleted, or Plugged Back pursuant to
the provisions of Article VI.B.2. of this agreement. Consent to the Reworking,
Recompleting or Plugging Back of a well shall include all necessary expenditures
in conducting such operations and Completing and equipping of said well,
including necessary tankage and/or surface facilities.
D. Other Operations:
Operator shall not undertake any single project reasonably estimated to require
an expenditure in excess of
Twenty-five thousand Dollars ($ 25,000.00) except in connection with the
drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or
Plugging Back of a well that has been previously authorized by or pursuant to
this agreement; provided, however, that, in case of explosion, fire, flood or
other sudden emergency, whether of the same or different nature, Operator may
take such steps and incur such expenses as in its opinion are required to deal
with the emergency to safeguard life and property but Operator, as promptly as
possible, shall report the emergency to the other parties. If Operator prepares
an AFE for its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of _
Twenty-five thousand Dollars ($ 25,000.00) . Any party who has not relinquished
its interest in a well shall have the right to propose that Operator perform
repair work or undertake the installation of artificial lift equipment or
ancillary production facilities such as salt water disposal wells or to conduct
additional work with respect to a well drilled hereunder or other similar
project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the Parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed
exclusively by those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein. If within thirty (30) days thereof
Operator secures the written consent of any party or parties owning at least 51%
of the interests of the parties entitled to participate in such operation, each
party having the right to participate in such project shall be bound by the
terms of such proposal and shall be obligated to pay its proportionate share of
the costs of the proposed project as if it had consented to such project
pursuant to the terms of the proposal.
E. Abandonment of Wells:
1. Abandonment of Dry Holes: Except for any well drilled or Deepened pursuant to
Article VI.B.2., any well which has been drilled or Deepened under the terms of
this agreement and is proposed to be completed as a dry hole shall not be
plugged and abandoned without the consent of all parties. Should Operator, after
diligent effort, be unable to contact any party, or should any party fail to
reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice of the proposal to plug and abandon such
well, such party shall be deemed to have consented to the proposed abandonment.
All such wells shall be plugged and abandoned in accordance with applicable
regulations and at the cost, risk and expense of the parties who participated in
the cost of drilling or Deepening such well. Any Party who objects to plugging
and abandoning such well by notice delivered to Operator within forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays) after delivery of
notice of the proposed plugging shall take over the well as of the end of such
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of Article Vl.B.; failure of such party
to provide proof reasonably satisfactory to Operator of its financial capability
to conduct such operations or to take over the well within such period or
thereafter to conduct operations on such well or plug and abandon such well
shall entitle Operator to retain or take possession of the well and plug and
abandon the well. The party taking over the well shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations conducted on such well except for the costs
of plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.

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2. Abandonment of Wells That Have Produced: Except for any well in which a
Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto. Failure of a party to
reply within sixty (60) days of delivery of notice of proposed abandonment shall
be deemed an election to consent to the proposal. If, within sixty (60) days
after delivery of notice of the proposed abandonment of any well, all parties do
not agree to the abandonment of such well, those wishing to continue its
operation from the Zone then open to production shall be obligated to take over
the well as of the expiration of the applicable notice period and shall
indemnify Operator (if Operator is an abandoning Party) and the other abandoning
parties against liability for any further operations on the well conducted by
such parties. Failure of such party or parties to provide proof reasonably
satisfactory to Operator of their financial capability to conduct such
operations or to take over the well within the required period or thereafter to
conduct operations on such well shall entitle Operator to retain or take
possession of such well and plug and abandon the well.
Parties taking over a well as provided herein shall tender to each of the other
parties its proportionate share of the value of the well's salvable material and
equipment, determined in accordance with the provisions of Exhibit “C”, less the
estimated cost of salvaging and the estimated cost of plugging and abandoning
and restoring the surface; provided, however, that in the event the estimated
plugging and abandoning and surface restoration costs and the estimated cost of
salvaging are higher than the value of the well's salvable material and
equipment, each of the abandoning parties shall tender to the parties continuing
operations their proportionate shares of the estimated excess cost. Each
abandoning party shall assign to the non-abandoning Parties, without warranty,
express or implied, as to title or as to quantity, or fitness for use of the
equipment and material, all of its interest in the wellbore of the well and
related equipment, together with its interest in the Leasehold insofar and only
insofar as such Leasehold covers the tight to obtain production from that
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes an Oil and Gas Interest, such party shall execute and
deliver to the non-abandoning party or parties an oil and gas lease, limited to
the wellbore and the Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit “B”. The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility, liability,
or interest in the operation of or production from the well in the Zone then
open other than the royalties retained in any lease made under the terms of this
Article. Upon request, Operator shall continue to operate the assigned well for
the account of the non-abandoning parties at the rates and charges contemplated
by this agreement, plus any additional cost and charges which may arise as the
result of the separate ownership of the assigned well. Upon proposed abandonment
of the producing Zone assigned or leased, the assignor or lessor shall then have
the option to repurchase its prior interest in the well (using the same
valuation formula) and participate in further operations therein subject to the
provisions hereof.
3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1. or
VI.E.2. above shall be applicable as between Consenting Parties in the event of
the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article VI.E.; and
provided further, that Non-Consenting Parties who own an interest in a portion
of the well shall pay their proportionate shares of abandonment and surface
restoration costs for such well as provided in Article VI.B.2.(b).

F. Termination of Operations:
Upon the commencement of an operation for the drilling, Reworking, Sidetracking,
Plugging Back, Deepening, testing, Completion or plugging of a well, including
but not limited to the Initial Well, such operation shall not be terminated
without consent of parties bearing  51 % of the costs of such operation;
provided, however, that in the event granite or other practically impenetrable
substance or condition in the hole is encountered which tenders further
operations impractical, Operator may discontinue operations and give notice of
such condition in the manner provided in Article Vl.B. 1, and the provisions of
Article VI.B. or VI.E. shall thereafter apply to such operation, as appropriate.
G. Taking Production in Kind:
[ ] Option No. 1: Gas Balancing Agreement Attached
Each party shall take in kind or separately dispose of its proportionate share
of all Oil and Gas produced from the Contract Area, exclusive of production
which, may be used in development and producing operations and in preparing and
treating Oil and Gas for marketing purposes and production unavoidably lost. Any
extra expenditure incurred in the taking in kind or separate disposition by any
party of its proportionate share of the production shall be borne by such party.
Any party taking its share of production in kind shall be required to pay for
only its proportionate share of such part of Operator's surface facilities,
which it uses.
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in production from the Contract Area, and, except
as provided in Article VIl.B., shall be entitled to receive payment directly
from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate share of the Oil produced from the
Contract Area, Operator shall have the right, subject to the revocation at will
by the party owning it, but not the obligation, to purchase such Oil or sell it
to others at any time and from time to time, to the account of the non-taking
party. Any such purchase or sale by Operator may be terminated by Operator upon
at least ten (10) days written notice to the owner of said production and shall
be subject always to the right of the owner of the production upon at least ten
(10) days written notice to Operator to exercise at any time its right to take
in kind, or separately dispose of, its share of all Oil not previously delivered
to a purchaser. Any purchase or sale by Operator of any other party's share of
Oil shall be only for such reasonable periods of time as are consistent with the
minimum needs of the industry under the particular circumstances, but in no
event for a period in excess of one (1) year.

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Any such sale by Operator shall be in a manner commercially reasonable under the
circumstances but Operator shall have no duty to share any existing market or to
obtain a price equal to that received under any existing market. The sale or
delivery by Operator of a non-taking party's share of Oil under the terms of any
existing contract of Operator shall not give the non-taking party any interest
in or make the non-taking party a party to said contract. No purchase shall be
made by Operator without first giving the non-taking party at least ten (10)
days written notice of such intended purchase and the price to be paid or the
pricing basis to be used.
All parties shall give timely written notice to Operator of their Gas marketing
arrangements for the following month, excluding price, and shall notify Operator
immediately in the event of a change in such arrangements. Operator shall
maintain records of all marketing arrangements, and of volumes actually sold or
transported, which records shall be made available to Non-Operators upon
reasonable request.
In the event one or more parties' separate disposition of its share of the Gas
causes split-stream deliveries to separate pipelines and/or deliveries which on
a day-to-day basis for any reason are not exactly equal to a party's respective
proportion-ate share of total Gas sales to be allocated to it, the balancing or
accounting between the parties shall be in accordance with any Gas balancing
agreement between the parties hereto, whether such an agreement is attached as
Exhibit "E" or is a separate agreement. Operator shall give notice to all
parties of the first sales of Gas from any well under this agreement.
[X] Option No. 2: No Gas Balancing Agreement:
Each party shall take in kind or separately dispose of its proportionate share
of all Oil and Gas produced from the Contract Area, exclusive of production,
which may be used in development and producing operations and in preparing and
treating Oil, and Gas for marketing purposes and production unavoidably lost.
Any extra expenditure incurred in the taking in kind or separate disposition by
any party of its proportionate share of the production shall be borne by such
party. Any party taking its share of production in kind shall be required to pay
for only its proportionate share of such part of Operator's surface facilities,
which it uses.
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in production from the Contract Area, and, except
as provided in Article VII.B., shall be entitled to receive payment directly
from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate share of the Oil and/or Gas produced
from the Contract Area, Operator shall have the right, subject to the revocation
at will by the party owning it, but not the obligation, to purchase such Oil
and/or Gas or sell it to others at any time and from time to time, for the
account of the non-taking party. Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to the owner
of said production and shall be subject always to the right of the owner of the
production upon at least ten (10) days written notice to Operator to exercise
its right to take in kind, or separately dispose of, its share of all Oil and/or
Gas not previously delivered to a purchaser; provided, however, that the
effective date of any such revocation may be deferred at Operator's election for
a period not to exceed ninety (90) days if Operator has committed such
production to a purchase contract having a term extending beyond such ten (10)
-day period. Any purchase or sale by Operator of any other party's share of Oil
and/or Gas shall be only for such reasonable periods of time as are consistent
with the minimum needs of the industry under the particular circumstances, but
in no event for a period in excess of one (1) year.
Any such sale by Operator shall be in a manner commercially reasonable under the
circumstances, but Operator shall have no duty to share any existing market or
transportation arrangement or to obtain a price or transportation fee equal to
that received under any existing market or transportation arrangement. The sale
or delivery by Operator of a non-taking party's share of production under the
terms of any existing contract of Operator shall not give the non-taking party
any interest in or make the non-taking party a party to said contract. No
purchase of Oil and Gas and no sale of Gas shall be made by Operator without
first giving the non-taking party ten days written notice of such intended
purchase or sale and the price to be paid or the pricing basis to be used.
Operator shall give notice to all parties of the first sale of Gas from any well
under this Agreement.
All parties shall give timely written notice to Operator of their Gas marketing
arrangements for the following month, excluding price, and shall notify Operator
immediately in the event of a change in such arrangements. Operator shall
maintain records of all marketing arrangements, and of volumes actually sold or
transported, which records shall be made available to Non-Operators upon
reasonable request.

ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. Liability of Parties:
The liability of the parties shall be several, not joint or collective. Each
party shall be responsible only for its obligations, and shall be liable only
for its proportionate share of the costs of developing and operating the
Contract Area Accordingly, the liens granted among the parties in Article VII.B.
are given to secure only the debts of each severally, and no party shall have
any liability to third parties hereunder to satisfy the default of any other
party in the payment of any expense or obligation hereunder. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership, joint venture, agency relationship or
association, or to render the parties liable as partners, co-venturers, or
principals. In their relations with each other under this agreement, the parties
shall not be considered fiduciaries or to have established a confidential
relationship but rather shall be free to act on an arm's-length basis in
accordance with their own respective self-interest, subject, however, to the
obligation of the parties to act in good faith in their dealings with each other
with respect to activities hereunder.

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B. Liens and Security Interests:
Each party grants to the other parties hereto a lien upon any interest it now
owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in
the Contract Area, and a security interest and/or purchase money security
interest in any interest it now owns or hereafter acquires in the personal
property and fixtures on or used or obtained for use in connection therewith, to
secure performance of all of its obligations under this agreement including but
not limited to payment of expense, interest and fees, the proper disbursement of
all monies paid hereunder, the assignment or relinquishment of interest in Oil
and Gas Leases as required hereunder, and the proper performance of operations
hereunder. Such lien and security interest granted by each party hereto shall
include such party's leasehold interests, working interests, operating rights,
and royalty and overriding royalty interests in the Contract Area now owned or
hereafter acquired and in lands pooled or unitized therewith or otherwise
becoming subject to this agreement, the Oil and Gas when extracted therefrom and
equipment situated thereon or used or obtained for use in connection therewith
(including, without limitation, all wells, tools, and tubular goods), and
accounts (including, without limitation, accounts arising from gas imbalances or
from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and
general intangibles relating thereto or arising therefrom, and all proceeds and
products of the foregoing.
To perfect the lien and security agreement provided herein, each party hereto
shall execute and acknowledge the recording supplement and/or any financing
statement prepared and submitted by any party hereto in conjunction herewith or
at any time following execution hereof, and Operator is authorized to file this
agreement or the recording supplement executed herewith as a lien or mortgage in
the applicable real estate records and as a financing statement with the proper
officer under the Uniform Commercial Code in the state in which the Contract
Area is situated and such other states as Operator shall deem appropriate to
perfect the security interest granted hereunder. Any party may file this
agreement, the recording supplement executed herewith, or such other documents
as it deems necessary as a lien or mortgage in the applicable real estate
records and/or a financing statement with the proper officer under the Uniform
Commercial Code.
Each party represents and warrants to the other parties hereto that the lien and
security interest granted by such party to the other parties shall be a first
and prior lien, and each party hereby agrees to maintain the priority of said
lien and security interest against all persons acquiring an interest in Oil and
Gas Leases and Interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.
To the extent that parties have a security interest under the Uniform Commercial
Code of the state in which the Contract Area is situated, they shall be entitled
to exercise the rights and remedies of a secured party under the Code. The
bringing of a suit and the obtaining of judgment by a party for the secured
indebtedness shall not be deemed an election of remedies or otherwise affect the
lien rights or security interest as security for the payment thereof. In
addition, upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party's
share of Oil and Gas until the amount owed by such party, plus interest as
provided in Exhibit “C”, has been received, and shall have the right to offset
the amount owed against the proceeds from the sale of such defaulting party's
share of Oil and Gas. All purchasers of production may rely on a notification of
default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.
If any party fails to pay its share of cost within one hundred twenty (120) days
after rendition of a statement therefor by Operator, the non-defaulting parties,
including Operator, shall, upon request by Operator, pay the unpaid amount in
the proportion that the interest of each such party bears to the interest of all
such parties. The amount paid by each party so paying its share of the unpaid
amount shall be secured by the liens and security rights described in Article
VII.B., and each paying party may independently pursue any remedy available
hereunder or otherwise.
If any party does not perform all of its obligations hereunder, and the failure
to perform subjects such party to foreclosure or execution proceedings pursuant
to the provisions of this agreement, to the extent allowed by governing law, the
defaulting party waives any available right of redemption from and after the
date of judgment, any required valuation or appraisement of the mortgaged or
secured property prior to sale, any available right to stay execution or to
require a marshalling of assets and any required bond in the event a receiver is
appointed. In addition, to the extent permitted by applicable law, each party
hereby grants to the other parties a power of sale as to any property that is
subject to the lien and security rights granted hereunder, such power to be
exercised in the manner provided by applicable law or otherwise in a
commercially reasonable manner and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien law of any state in which the
Contract Area is situated to enforce the obligations of each party hereunder.
Without limiting the generality of the foregoing, to the extent permitted by
applicable law, Non-Operators agree that Operator may invoke or utilize the
mechanics' or materialmen's lien law of the state in which the Contract Area is
situated in order to secure the payment to Operator of any sum due hereunder for
services performed or materials supplied by Operator.
C. Advances:
Operator, at its election, shall have the right from time to time to demand and
receive from one or more of the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of such
estimated expense, together with an invoice for its share thereof. Each such
statement and invoice for the payment in advance of estimated expense shall be
submitted on or before the 20th day of the next preceding month. Each party
shall pay to Operator its proportionate share of such estimate within fifteen
(15) days after such estimate and invoice is received. If any party fails to pay
its share of said estimate within said time, the amount due shall bear interest
as provided in Exhibit “C” until paid. Proper adjustment shall be made monthly
between advances and actual expense to the end that each party shall bear and
pay its proportionate share of actual expenses incurred, and no more.

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

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If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party’s share of Oil and Gas produced under the terms of this
agreement.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. Surrender of Leases:
The Leases covered by this agreement, insofar as they embrace acreage in the
Contract Area, shall not be surrendered in whole or in part unless all parties
consent thereto. However, should any party desire to surrender its interest in
any Lease or in any portion thereof, such party shall give written notice of the
proposed surrender to all parties, and the parties to whom such notice is
delivered shall have thirty (30) days after delivery of the notice within which
to notify the party proposing the surrender whether they elect to consent
thereto. Failure of a party to whom such notice is delivered to reply within
said 30 day period shall constitute a consent to the surrender of the Leases
described in the notice. If all parties do not agree or consent thereto, the
party desiring to surrender shall assign, without express or implied warranty of
title, all of its interest in such Lease, or portion thereof, and any well,
material and equipment which may be located thereon and any rights in production
thereafter secured, to the parties not consenting to such surrender. If the
interest of the assigning party is or includes an Oil and Gas Interest, the
assigning party shall execute and deliver to the party or parties not consenting
to such surrender an oil and gas lease covering such Oil and Gas Interest for a
term of one (1) year and so long thereafter as Oil and/or Gas is produced from
the land covered thereby, such lease to be on the form attached hereto as
Exhibit “B”. Upon such assignment or lease, the assigning party shall be
relieved from all obligations thereafter accruing, but not theretofore accrued,
with respect to the interest assigned or leased and the operation of any well
attributable thereto, and the assigning party shall have no further interest in
the assigned or leased premises and its equipment and production other than the
royalties retained in any lease made under the terms of this Article. The party
assignee or lessee shall pay to the party assignor or lessor the reasonable
salvage value of the latter's interest in any well's salvable materials and
equipment attributable to the assigned or leased acreage. The value of all
salvable materials and equipment shall be determined in accordance with the
provisions of Exhibit “C”, less the estimated cost of salvaging and the
estimated cost of plugging and abandoning and restoring the surface. If such
value is less than such costs, then the party assignor or lessor shall pay to
the party assignee or lessee the amount of such deficit. If the assignment or
lease is in favor of more than one party, the interest shall be shared by such
parties in the proportions that the interest of each bears to the total interest
of all such parties. If the interest of the parties to whom the assignment is to
be made varies according to depth, then the interest assigned shall similarly
reflect such variances.
Any assignment, lease or surrender made under this provision shall not reduce or
change the assignor's, lessor's or surrendering party’s interest as it was
immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to an Operating Agreement in the
form of this agreement.
B. Renewal or Extension of Leases:
If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement lease, insofar as such lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interests
held at that time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring party.
If some, but less than all, of the parties elect to participate in the purchase
of a renewal or replacement Lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal or replacement lease. The acquisition of a
renewal or replacement lease by any or all of the parties hereto shall not cause
a readjustment of the interests of the parties stated in Exhibit “A”, but any
renewal or replacement Lease in which less than all parties elect to participate
shall not be subject to this agreement but shall be deemed subject to a separate
Operating Agreement in the form of this agreement.
If the interests of the parties in the Contract Area vary according to depth,
then their right to participate proportionately in renewal or replacement leases
and their right to receive an assignment of interest shall also reflect such
depth variances.
The provisions of this Article shall apply to renewal or replacement leases
whether they are for the entire interest covered by the expiring lease or cover
only a portion of its area or an interest therein. Any renewal or replacement
Lease taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement lease becomes effective; but any lease taken or
contracted for more than six (6) months after the expiration of an existing
lease shall not be deemed a renewal or replacement lease and shall not be
subject to the provisions of this agreement. The provisions in this Article
shall also be applicable to extensions of Oil and Gas leases.

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C. Acreage or Cash Contributions:
While this agreement is in force, if any party contracts for a contribution of
cash towards the drilling of a well or any other operation on the Contract Area,
such contribution shall be paid to the party who conducted the drilling or other
operation and shall be applied by it against the cost of such drilling or other
operation. If the contribution be in the form of acreage, the party to whom the
contribution is made shall promptly tender an assignment of the acreage, without
warranty of title, to the Drilling Parties in the proportions said Drilling
Parties shared the cost of drilling the well. Such acreage shall become a
separate Contract Area and, to the extent possible, be governed by provisions
identical to this agreement. Each party shall promptly notify all other parties
of any acreage or cash contributions it may obtain in support of any well or any
other operation on the Contract Area The above provisions shall also be
applicable to optional rights to earn acreage outside the Contract Area which
are in support of well drilled inside the Contract Area.
If any party contracts for any consideration relating to disposition of such
party's share of substances produced hereunder, such consideration shall not be
deemed a contribution as contemplated in this Article VIlI.C.
D. Assignment; Maintenance of Uniform Interest:
For the purpose of maintaining uniformity of ownership in the Contract Area in
the Oil and Gas leases, Oil and Gas Interests, wells, equipment and production
covered by this agreement no party shall sell, encumber, transfer or make other
disposition of its interest in the Oil and Gas leases and Oil and Gas Interests
embraced within the Contract Area or in wells, equipment and production unless
such disposition covers either:
1. the entire interest of the party in all Oil and Gas Leases, Oil and Gas
Interests, wells, equipment and production; or
2. an equal undivided percent of the party's present interest in all Oil and Gas
Leases, Oil and Gas Interests, wells, equipment and production in the Contract
Area.
Every sale, encumbrance, transfer or other disposition made by any party shall
be made expressly subject to this agreement and shall be made without prejudice
to the right of the other parties, and any transferee of an ownership interest
in any Oil and Gas Lease or Interest shall be deemed a party to this agreement
as to the interest conveyed from and after the effective date of the transfer of
ownership; provided, however, that the other parties shall not be required to
recognize any such sale, encumbrance, transfer or other disposition for any
purpose hereunder until thirty (30) days after they have received a copy of the
instrument of transfer or other satisfactory evidence thereof in writing from
the transferor or transferee. No assignment or other disposition of interest by
a party shall relieve such party of obligations previously incurred by such
party hereunder with respect to the interest transferred, including without
limitation the obligation of a party to pay all costs attributable to an
operation conducted hereunder in which such party has agreed to participate
prior to making such assignment, and the lien and security interest granted by
Article VII.B. shall continue to burden the interest transferred to secure
payment of any such obligations.
If, at any time the interest of any party is divided among and owned by four or
more co-owners, Operator, at its discretion, may require such co-owners to
appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the Oil and Gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.
E. Waiver of Rights to Partition:
If permitted by the laws of the state or states in which the property covered
hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.
F. Preferential Right to Purchase:
[ ] (Optional; Check if applicable.)
Should any party desire to sell all or any part of its interests under this
agreement, or its rights and interests in the Contract Area, it shall promptly
give written notice to the other parties, with full information concerning its
proposed disposition, which shall include the name and address of the
prospective transferee (who must be ready, willing and able to purchase), the
purchase price, a legal description sufficient to identify the property, and all
other terms of the offer. The other parties shall then have an optional prior
right, for a period of ten (10) days after the notice is delivered, to purchase
for the stated consideration on the same terms and conditions the interest which
the other party proposes to sell; and, if this optional right is exercised, the
purchasing parties shall share the purchased interest in the proportions that
the interest of each bears to the total interest of all purchasing parties.
However, there shall be no preferential right to purchase in those cases where
any party wishes to mortgage its interests, or to transfer title to its
interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage
of its interests, or to dispose of its interests by merger, reorganization,
consolidation, or by sale of all or substantially all of its Oil and Gas assets
to any party, or by transfer of its interests to a subsidiary or parent company
or to a subsidiary of a parent company, or to any company in which such party
owns a majority of the stock.

ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations hereunder
are regarded as a partnership, and if the parties have not otherwise agreed to
form a tax partnership pursuant to Exhibit “G” or other agreement between them,
each party thereby affected elects to be excluded from the application of all of
the provisions of Subchapter “K”, Chapter 1, Subtitle “A” of the Internal
Revenue Code of 1986, as amended ("Code"), as permitted and authorized by
Section 761 of the Code and the regulations promulgated thereunder. Operator is
authorized and directed to execute on behalf of each party hereby affected such
evidence of this election as may be required by the Secretary of the Treasury of
the United States or the Federal Internal Revenue Service, including
specifically, but not by way of limitation, all of the returns, statements, and
the data required by Treasury Regulations Â§1.761. Should there be any
requirement that each party hereby affected give further evidence of this
election, each such party shall execute such documents and furnish such other
evidence as may be required by the Federal Internal Revenue Service or as may be
necessary to evidence this election. No such party shall give any notices or
take any other action inconsistent with the election made hereby. If any present
or future income tax laws of the state or states in which the Contract Area is
located or any future income tax laws of the United States contain provisions
similar to those in Subchapter “K”, Chapter 1, Subtitle “A”, of the Code, under
which an election similar to that provided by Section 761 of the Code is
permitted, each party hereby affected shall make such election as may be
permitted or required by such laws. In making the foregoing election, each such
party stares that the income derived by such party from operations hereunder can
be adequately determined without the computation of partnership taxable income.

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ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed __ten
thousand_ Dollars ($10,000.00) and if the payment is in complete settlement of
such claim or suit. If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises. If a claim is made against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given Operator by
this agreement, such party shall immediately notify all other parties, and the
claim or suite shall be treated as any other claim or suit involving operations
hereunder.

ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to carry
out its obligations under this agreement, other than the obligation to indemnify
or make money payments or furnish security, that party shall give to all other
parties prompt written notice of the force majeure with reasonably full
particulars concerning it; thereupon, the obligations of the party giving the
notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The term
"force majeure," as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightning, fire, storm, flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.
The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.

ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the provisions
of this agreement, unless otherwise specifically provided, shall be in writing
and delivered in person or by United States mail, courier service, telegram,
telex, telecopier or any other form of facsimile, postage or charges prepaid,
and addressed to such parties at the addresses listed on Exhibit "A." All
telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is received.
"Receipt" for purposes of this agreement with respect to written notice
delivered hereunder shall be actual delivery of the notice to the address of the
party to be notified specified in accordance with this agreement, or to the
telecopy, facsimile or telex machine of such party. The second or any responsive
notice shall be deemed delivered when deposited in the United States mail or at
the office of the courier or telegraph service, or upon transmittal by telex,
telecopy or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or 48 hours, such response
shall be given orally or by telephone, telex, telecopy or other facsimile within
such period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties. If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 or 48 hours, the
notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice.

ARTICLE XIII,
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.
[ X ] Option No. 1: So long as any of the Oil and Gas Leases subject to this
agreement remain or are continued in force as to any part of the Contract Area,
whether by production, extension, renewal or otherwise.
[ ] Option No. 2: In the event the well described in Article VI.A., or any
subsequent well drilled under any provision of this agreement, results in the
Completion of a well as a well capable of production of Oil and/or Gas in paying
quantities, this agreement shall continue in force so long as any such well is
capable of production, and for an additional period of  days thereafter;
provided, however, if, prior to the expiration of such additional period, one or
more of the parties hereto are engaged in drilling, Reworking, Deepening,
Sidetracking, Plugging Back, testing or attempting to Complete or Re-complete a
well or wells hereunder, this agreement shall continue in force until such
operations have been completed and if production results therefrom, this
agreement shall continue in force as provided herein. In the event the well
described in Article VI.A., or any subsequent well drilled hereunder, results in
a dry hole, and no other well is capable of producing Oil and/or Gas from the
Contract Area, this agreement shall terminate unless drilling, Deepening,
Sidetracking, Completing, Re-completing, Plugging Back or Reworking operations
are commenced within    days from the date of abandonment of said well.
"Abandonment" for such purposes shall mean either (i) a decision by all parties
not to conduct any further operations on the well or (ii) the elapse of 180 days
from the conduct of any operations on the well, whichever first occurs.

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

The termination of this agreement shall not relieve any party hereto from any
expense, liability or other obligation or any remedy therefor which has accrued
or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all obligations
hereunder, in the event a memorandum of this Operating Agreement has been filed
of record, Operator is authorized to file of record in all necessary recording
offices a notice of termination, and each party hereto agrees to execute such a
notice of termination as to Operator's interest, upon request of Operator, if
Operator has satisfied all its financial obligations.

ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS

A. Laws, Regulations and Orders:
This agreement shall be subject to the applicable laws of the state in which the
Contract Area is located, to the valid rules, regulations, and orders of any
duly constituted regulatory body of said state; and to all other applicable
federal, state, and local laws, ordinances, rules, regulations and orders.
B. Governing Law:
This agreement and all matters pertaining hereto, including but not limited to
matters of performance, non-performance, breach, remedies, procedures, rights,
duties, and interpretation or construction, shall be governed and determined by
the law of the state in which the Contract Area is located. If the Contract Area
is in two or more states, the law of the state of Nevada shall govern.
C. Regulatory Agencies:
Nothing herein contained shall grant, or be construed to grant, Operator the
right or authority to waive or release any rights, privileges, or obligations
which Non-Operators may have under federal or state laws or under rules,
regulations or orders promulgated under such laws in reference to oil, gas and
mineral operations, including the location, operation, or production of wells,
on tracts offsetting or adjacent to the Contract Area.
With respect to the operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or Federal Energy Regulatory Commission or predecessor or
successor agencies to the extent such interpretation or application was made in
good faith and does not constitute gross negligence. Each Non-Operator further
agrees to reimburse Operator for such Non-Operator's share of production or any
refund, fine, levy or other governmental sanction that Operator may be required
to pay as a result of such an incorrect interpretation or application, together
with interest and penalties thereon owing by Operator as a result of such
incorrect interpretation or application.

ARTICLE XV.
MISCELLANEOUS
A. Execution:
This agreement shall be binding upon each Non-Operator when this agreement or a
counterpart thereof has been executed by such Non-Operator and Operator
notwithstanding that this agreement is not then or thereafter executed by all of
the parties to which it is tendered or which are listed on Exhibit “A” as owning
an interest in the Contract Area or which own, in fact, an interest in the
Contract Area. Operator may, however, by written notice to all Non-Operators who
have become bound by this agreement as aforesaid, given at any time prior to the
actual spud date of the Initial Well but in no event later than five days prior
to the date specified in Article VI.A. for commencement of the Initial Well,
terminate this agreement if Operator in its sole discretion determines that
there is insufficient participation to justify commencement of drilling
operations. In the event of such a termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination. In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
"A" as having a current working interest in such well, Operator shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.
B. Successors and Assigns:
This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Contract Area.
C. Counterparts:
This instrument may be executed in any number of counterparts, each of which
shall be considered an original for all purposes.
D. Severability:
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws, this agreement shall not be
severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

ARTICLE XVI.
OTHER PROVISIONS

Article XVI.
Other Provisions

1. AFE Overruns: Notwithstanding anything hereinabove to the contrary, in the
event it appears that the actual costs and expenses to be incurred in a proposed
operation as defined hereinabove by Article VI., will exceed one hundred
twenty-five percent (125%) of the estimated costs and expenses therefore as set
forth in the most recent Authorization for Expenditure (AFE) mutually agreed
upon by the Consenting Parties, then any of such Consenting Parties shall have
the right (subject to the obligation to pay their pro rata share of the one
hundred twenty-five percent (125%) of the costs set forth in the last mutually
agreed upon AFE) to elect to become a Non-Consenting Party and be governed by
Article VI.B.2. hereof. The additional costs and expenses incurred in the
proposed operation by any of the other Consenting Parties and the penalties
provided for in Article VI.B.2. (b) hereof, as modified below, shall be based
upon only those costs and expenses exceeding one hundred twenty-five percent
(125%) of the last mutually agreed upon AFE which would have been chargeable to
the Non-Consenting Party if it had continued to participate in the operations
being conducted. The election provided above must be sent in writing by the
Party making such election to each of the Consenting Parties within five (5)
days after: (1) Such Party sending the notice has actually paid one hundred
twenty-five percent (125%) of the costs and expenses set forth on the last
mutually approved AFE, (2) Such Party has received from the Operator a proposed,
revised AFE setting forth costs and expenses totaling more than one hundred
twenty-five percent (125%) of the last mutually approved AFE, whichever shall
first occur. The Operator shall furnish all Consenting Parties with daily
drilling reports, which shall show the cumulative costs, and expenses, which
have been incurred in the proposed operation. In addition, a proposed revised
AFE shall be prepared by the Operator and furnished to all Consenting Parties
immediately after that point in time when the Operator estimates that costs and
expenses have been incurred which total more than one-hundred twenty-five
percent (125%) of the last mutually approved AFE.

In the event a Party elects to be a Non-Consenting Party under the provisions of
this Article, the penalties shall be the same as those provided for in Article
VI.B.2 (a) and (b).

These provisions shall never be applicable to emergency situations such as
blowouts and other catastrophes and all Consenting Parties shall continue to be
liable for their proportionate share of all costs until such emergency situation
has been resolved and all costs associated therewith, including the cost of any
damages which may have been incurred, have been paid, unless the emergency
develops after a Party elects to go non-consent pursuant to this provision.

2.  Priority of Operations. If at any time there is more than one operation
proposed in connection with any well subject to this agreement, then unless all
Consenting Parties agree on the sequence of such operations, such proposals
shall be considered and disposed of in the following order of priority:

(a). Proposals to do additional testing, coring or logging.

(b). Proposals to attempt a completion in the objective zone.

(c). Proposals to plug back and attempt completions in shallower zones, in
ascending order.

(d). Proposals to deepen the well, in descending order.

(e). Proposals to sidetrack the well.

With respect to any single well, no Party may propose conducting any new
operation on such well (i) while there is pending a prior proposal for any
operation respecting such well until that proposal is withdrawn or until the
operation contemplated thereby has been completed, or (ii) while there is in
progress any operation on such well until such operation has been completed.

3. Accounting Procedures. Notwithstanding anything to the contrary in the COPAS,
attached as Exhibit C to the JOA, Non-Operator has the right to request and
receive from the Operator any third party backup invoices for any itemized
statement furnished to the Non-Operator by the Operator and the Operator agrees
to furnish such backup as requested by the Non-Operator within thirty (30) days
of such request, at no expense to the non-operator.

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

4. Discounts, Credits and Tubulars. The following, notwithstanding anything
herein to the contrary, shall be made a part of and included in the Accounting
Procedure attached hereto as Exhibit "C":

a.
In the event any Non-Operator is required under any applicable provisions of the
Operating Agreement or under Article I (3) of the Accounting Procedure attached
hereto as Exhibit "C" to advance or prepay funds for any operation to which it
has consented, any discounts offered by vendors selling to the Joint Account
during the applicable provision of such prepay situation shall be credited pro
rata by Operator to such Non-Operator.

 
b.
Any volume discounts or special rebates, which are credited to the Operator by
vendors selling to the Joint Account, shall be credited to the Joint Account
when received by Operator.

 
c.
In the event Operator plans to use its own equipment for any operations
hereunder, or the equipment of any subsidiary, parent company or sister company,
Operator agrees that the charge to the Joint Account for the use of such
equipment shall be lower than or equal to the competitive market price for the
use of similar equipment.

 
d.
In the event Operator plans to purchase goods and/or services for the Joint
Account from its own subsidiaries, parent company or sister companies, such
goods and services shall be competitively priced.

 
e.
After close of operations on any well drilled hereunder, any unused or salvaged
tubulars shall be credited to the Joint Account, offered proportionately to the
Non-Operators "in kind" or sold to a third party with a credit being reflected
to the Joint Account.

  

f.
Operator agrees to acquire any tubular goods obtained for the Joint Account at
competitive market price. If Operator wishes to use tubular goods from its own
inventory, or the inventory of any subsidiary, parent company or sister company,
such tubulars shall be charged to the Joint Account at prices, which are equal
to or lower than competitive market price. In no event shall Operator charge the
Joint Account for material transfers from its own inventory at mill price when
mill price is in excess of competitive market price

5. Option to Act as Operator. Notwithstanding anything herein contained to the
contrary, in the event that Operator is a Non-Consenting Party for any
particular operation, then a Non-Operator may conduct such operation upon
approval of a majority of the Consenting Parties. Such Non-Operator will operate
the well through the Non-Consent period and handle. the accounting and
distribution of funds.

6. Participation in Required Wells:

a. The parties understand and agree that the non-consent provisions of Article
VI.B.2. of this Agreement shall be applicable only to any well that is not (i)
an earning well that will earn an additional lease or leases or interest therein
pursuant to any farmout or other agreement or (ii) a well that will prevent the
expiration of a lease that is within six (6) months of expiration. Any such well
that is an earning well or a lease perpetuation well shall be deemed to be a
"Required Well."

b. As to any Required Well proposed by any party that is an earning well under a
farm-in or other agreement in which any other party elects not to participate,
if the well is drilled within the time and to the depth stated in the notice of
such well, the Non-Consenting Party shall release and relinquish forever to the
Consenting Parties, in proportion to their interests, all of its interest in and
to the farmin agreement not theretofore earned under the terms of the farm-in
agreement. If a party elects not to participate in a completion attempt of such
a Required Well and if completion of the well as a producer is necessary to earn
interest under the farm-in or other agreement, such non-participation shall be
treated as a non-participation in the drilling of such well for purposes of this
Article XVI.6.

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

c. As to any well proposed by a party that is necessary to perpetuate an
expiring lease or leases in which any other party elects not to participate the
Non-Consenting Party shall release and relinquish forever to the Consenting
Parties, in proportion to their interests, all of its interest in the lease or
leases to be perpetuated by such well, together with any lease or interest
therein pooled therewith to form a spacing or production unit pursuant to
governmental regulation. For purposes of this para-graph, a well shall be deemed
necessary to perpetuate an expiring lease if proposed within six (6) months of
the date of expiration of the term of the lease.

d. The interests relinquished under this Article XVI.6. shall be assigned by a
Non-Consenting Party to the Consenting Parties with warranty of title as to
claims by, through, or under assignor and shall be free of any additional
burdens not otherwise described in this Operating Agreement or the Agreement to
which this Operating Agreement is attached. Nothing in this Article XVI.6. shall
be construed as requiring a relinquishment of any Non-Consenting Party's
interest in any producing wells or spacing units associated therewith. Jointly
owned interests in which a party relinquishes interest thereunder shall be
deemed subject to an Operating Agreement in the form of this Operating
Agreement, modified to reflect the interests of the parties thereto.

7. Non-Drilling Operations: Notwithstanding any provision hereof to the
contrary, should any Party to this Agreement propose the acquisition,
construction, and/or operation of gathering line(s), disposal well(s), or any
production, transportation or marketing facilities to serve, in whole or in
part, the Contract Area, then such Party shall deliver written notice thereof to
all other parties to this Agreement providing each such Party with the estimated
costs and terms of such acquisition, construction and/or operation. Each
non-proposing Party shall have the option, for a period of thirty (30) days from
its receipt of such notice, to elect to participate in the proposed non-drilling
operation for the same undivided interest as set forth on Exhibit "A." If any
Party to this Agreement elects not to participate in the proposed non-drilling
operation, then such Party shall have no interest in such facility and shall be
subject to such fees for use of the facility as may be charged by the owner(s)
thereof that are reasonable for the area. Any Party who elects to participate in
the proposed non-drilling operation shall be obligated to pay its proportionate
share of the costs of the proposed project in accordance with Article VII.C. Any
Party who elects to participate in the proposed project and who pays its share
of the cost thereof shall own that undivided interest in the facility. No fee
shall ever be charged to a participating Party for any use of the non-drilling
facility attributable to production from the Contract Area.

If any Party to this Agreement conducts seismic operations on the Contract Area,
that Party shall offer all the other Parties their proportionate share and
interest in the seismic operations, subject to the other Parties paying their
proportionate share of such cost of the seismic operations. Any Party electing
not to participate in the seismic operations shall have no access to the seismic
operations. All Parties must pay their proportionate share of the seismic costs
within thirty (30) days, or at the option of the Party or Parties conducting the
seismic operations, the Parties will be denied access to such seismic operations
and resulting data.

8. Operator's Reporting Obligations: Operator shall inform Non-Operators of its
recommendation for drilling, completing, testing, equipping, including building
of facilities, in enough time to allow Non-Operators to provide their input
regarding these operations. Operator shall, throughout the course of all
operations conducted hereunder, keep Non-Operators fully informed with respect
thereto, furnishing to Non-Operators in a timely manner, among other things,
copies of all location plats, well prognosis, forms required by any governmental
office or body, daily drilling reports, notices of shows, notices prior to
logging, coring and testing, and copies of all logs, core analysis and testing
results. Non-Operators shall be notified in sufficient time prior to logging,
coring or testing in order to have the opportunity of having their
representatives present. Non-Operators and its duly authorized agents,
employees, and representatives shall have access to said well at all times at
their sole risk and expense.

9. Receipt of Revenue: Subject to Operator's liens, the Operator will use its
best efforts to facilitate the Non-Operator's right to receive its revenue
directly from the crude oil purchaser. However, in the event any purchaser of
production from the Contract Area remits all of the proceeds therefore to the
Operator for distribution, the Operator shall remit to each working interest
owner and royalty owner his or its proportionate share of said proceeds received
by the Operator within thirty (30) days after receipt by the Operator of such
proceeds, and if Non-Operator does not receive its proceed within said thirty
(30) day period, the Operator will be liable for interest payments of prime plus
1 % as reported by Chase Manhattan Bank, New York, New York, which interest
payments will be computed after the expiration of the thirty (30) day period set
forth above. .

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

10. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is placed
in receivership, it shall be deemed to have resigned without any action by
Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
Parties owning a majority interest based on ownership as shown on Exhibit "A".
In the event there are only two (2) Parties to this agreement, during the period
of time the operating committee controls operations, a third Party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit" A".

11. Marketing of Hydrocarbons: On all sales of hydrocarbons, the Non-Operator's
revenue shall be based on total gross proceeds received by the Operator or its
affiliates. The Operator shall disclose to the Non-Operator any affiliate
transactions or trades related to crude oil and gas sales from the Contract
Area.

12. Confidentiality: Each Party entitled to information obtained hereunder or
pursuant to this Agreement may use such information for its sole benefit.
However, the Parties shall take such measures with respect to operations of
internal security as are appropriate in the circumstances to keep confidential
from third parties all such information, except information which the Parties
have expressly agreed among themselves to release and information: disclosed by
a Party:

a.
when and to the extent required by the Regulations and Securities laws
applicable to such Party, provided that such Party shall invoke any
confidentiality protection permitted by such Regulation and Securities laws;

 

b.
to a third person to which such Party has been permitted to assign a portion of
its interest hereunder, provided that a binding covenant is obtained from such
third person prior to disclosure which provides, inter alia, that none of such
information shall be disclosed by it to any other third person; and

 
to the technical, financial or other professional consultants of such Party
which require such information to provide their services to such Party or to a
bank or other financial institution from which such Party is attempting to
obtain financing, provided that a binding covenant is obtained from such
consultant or financier, as the case may be, prior to such disclosure, which
provides, inter alia, that none of such information shall be disclosed by it to
any other third person or used for any purposes other than advising such Party
or providing financing to such Party, as the case may be.

13. Casing Point Election for Horizontal Wells (Pilot Well): In the event any
well proposed hereunder or under the Participation Agreement to which this is
Operating Agreement is attached is proposed as a horizontal well the Parties
electing to participate in such well shall have a casing point election as
further described in this Article 13. When such pilot hole has reached its
authorized depth, has been logged, and a copy of such log has been furnished to
the participating parties, Operator shall give immediate notice to the
Non-Operators who have participated in the drilling of the pilot hole if
Operator proposes drilling a horizontal borehole from such pilot hole,
describing in such notice the formation and the length of horizontal borehole to
be drilled. The parties receiving such notice shall have twenty-four (24) hours
(inclusive of Saturday, Sunday and legal holidays) in which to elect to
participate in the drilling of the proposed horizontal borehole. Such election,
when made, shall include consent to all necessary expenditures for the drilling
of the proposed horizontal borehole, any open hole completion costs and all
necessary tankage and/or surface facilities. Failure of any party receiving such
notice to reply within the period above fixed shall constitute an election by
that party not to participate in the cost of the drilling of the horizontal
borehole. If the well to which this election applies is an Initial Exploratory
Test Well, as described in Article 3. of the Participation Agreement and if one
or more, but less than all of the parties, elect to drill the horizontal
borehole, the provisions of said Article 3. shall apply to the Parties electing
not to participate in the drilling of the horizontal bore hole. For all other
wells to which such election applies any Party electing not to participate in
the drilling of the horizontal bore hole shall be subject to the terms of
Article VI.B.2 hereof (the phrase "reworking, deepening or plugging back" as
contained in Article VI.B.2 shall be deemed to include "drilling of a horizontal
borehole").
  

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

 

IN WITNESS WHEREOF, this agreement shall be effective as of the 1st day of
November 2005

                  ATTEST OR WITNESS:     OPERATOR               By:            
Type or print name   Title     Date     Tax ID or S.S. No.  

     
NON-OPERATORS

                              By:             Type or print name   Title    
Date     Tax ID or S.S. No.  

                              By:             Type or print name   Title    
Date     Tax ID or S.S. No.  

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

ACKNOWLEDGMENTS

Note: The following forms of acknowledgment are the short forms approved by the
Uniform Law on Notarial Acts. The validity and effect of these forms in any
state will depend upon the statutes of that state.
 
Individual acknowledgment:

State of __________________)

) ss.

County of________________)

This instrument was acknowledged before me on
 

by
             
(Seal, if any)
   
Title (and Rank)____________________________________________
 
My commission expires:______________________________________

Acknowledgment in representative capacity:

State of __________________)

) ss.

County of________________)

This instrument was acknowledged before me on

by
   as                
(Seal, if any)
     
Title (and Rank)____________________________________________
   
My commission expires:______________________________________
 

 

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

EXHIBIT “A”

Attached to and made a part of that certain Operating Agreement, dated November
1, 2005, by and between Eden Energy Corp., as Operator and Merganser Limited as
Non Operator.

1. LANDS SUBJECT TO THE OPERATING AGREEMENT (“CONTRACT AREA”)
Township 9 North, Ranges 53-54 East
Township 10 North, Ranges 53-54 East
Township 11 North, Ranges 53-54 East
Township 12 North, Ranges 53-54 East
Township 13 North, Ranges 53-54 East

2. RESTRICTIONS, IF ANY, AS TO DEPTH, FORMATIONS AND SUBSTANCES

None

3. PARTIES WORKING INTEREST OWNERSHIP WITHIN THE CONTRACT AREA

Eden Energy Corp.
50%
Merganser Limited
50%*

*After payment of the Consideration as described in the Participation Agreement
to which this is attached.

4. OIL AND GAS LEASES SUBJECT TO THIS AGREEMENT

To be provided at a later date

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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989 (REVISED)

EXHIBIT “D”

Attached to and made a part of that certain Operating Agreement, dated November
1, 2005, by and between Eden Energy Corp., as Operator and Merganser Limited as
Non Operator

INSURANCE EXHIBIT

Operator shall maintain the following insurance coverage with respect to
operations performed on the properties under the Operating Agreement to which
this Exhibit D is attached for the benefit of the Joint Account of the Parties.

1. WORKERS’ COMPENSATION AND EMPLOYER’S LIABILITY INSURANCE

a.
Statutory workers’ compensation coverage as required by the laws of the state in
which operations are conducted.

b.
Employer’s liability limit of at least $1,000,000 for bodily injury or death.

2. COMPREHENSIVE GENERAL LIABILITY INSURANCE

a.
$1,000,000 per occurrence combined single limit bodily injury and property
damage including all operations, independent contractors, completed operations
and blanket contractual liability (including oral contracts).

b.
$1,000,000 per occurrence broad form property damage liability, including all
operations, independent contractors, completed operations and blanket
contractual liability (including oral contracts).

3. AUTOMOBILE LIABILITY INSURANCE

a.
$1,000,000 each accident combined single limit bodily injury and property damage
liability including owned, non-owned and hired vehicles.

4. UMBRELLA POLICY

a.
Limits of at least $5,000,000 covering liability of the parties for loss or
damage exceeding the insurance coverage specified above or otherwise not covered
by insurance maintained by Operator or any third party contractor.

5. WELL CONTROL INSURANCE

Each participant will automatically be included under the coverage provided by
Operator’s policy unless within ten (10) days of commencing actual drilling
operations for the affected well, Operator has received a written refusal of the
coverage provided by Operator and proof of such refusing party's equivalent or
better coverage. Joint participants afforded coverage under Operator’s policy
will be billed for their proportionate share of insurance costs that will
include both drilling and producing costs. This policy will protect from losses
customarily covered by well control and operator extra expense coverage. The
policy limits afforded will depend upon the location of the well and its
proposed total depth and may vary from year to year based on the prices and
coverage’s reasonably and commercially available to Operator.

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