Exhibit 10.1
GAS PURCHASE AGREEMENT
          This Agreement is made and entered into as of November 21, 2007, by
and between WTG Benedum Joint Venture (as “Buyer”) and Approach Oil & Gas Inc.
and Approach Operating, LLC (as “Seller”).
          WHEREAS, Seller owns or controls natural gas produced from the
properties outlined in yellow on Exhibit “A” attached hereto and made a part
hereof (the “Area of Interest”); and
          WHEREAS, for any section of land in the Area of Interest that is
partially outlined in yellow, the entirety of such section shall be considered
to be part of the Area of Interest for purposes of this Agreement; and
          WHEREAS, Seller desires to sell and Buyer desires to purchase natural
gas produced from present and future wells located in the Area of Interest; and
          WHEREAS, Buyer agrees to install or has in place certain facilities
(“Facilities”) to effect receipt and purchase of natural gas production owned or
marketed by Seller as a source of supply for Buyer’s facilities, and for other
purposes.
          NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, Buyer and Seller hereby agree as follows:

1.   Commitment. Buyer agrees to accept and purchase, and Seller agrees to
deliver and sell and hereby dedicates to the performance of this Agreement all
natural gas produced from the present and future well(s) located on the acreage
described or depicted in the Area of Interest on Exhibit “A”, attached hereto
and made a part hereof, which Seller owns, controls, or represents with respect
to any and all interests, now or hereafter acquired (“Dedicated Gas”). Title to
the gas shall pass at the Receipt Point(s) from Seller and shall vest in Buyer
without regard to the purpose for which said gas may thereafter be used by
Buyer. Seller reserves the following rights with respect to all of said natural
gas and said well(s) and the lease(s) covering said well(s).

(a) to operate said well(s) and  lease(s)  free from any control by Buyer and in
such manner as Seller, in Seller’s sole discretion, may deem advisable,
including without limitation the right to determine the maximum efficient rate
of flow for any well(s), the right to drill new well(s), to repair and rework
old well(s), and to abandon any well or terminate or surrender any  lease(s)
when it no longer is deemed by Seller to be capable of producing gas in paying
quantities under normal methods of operation.
(b) to pool or unitize Seller’s lease(s) with other lease(s).
(c) to use gas produced from said well(s) and lease(s) for developing and
operating said lease(s) and for fulfilling obligations to the lessors in
Seller’s lease(s) or for delivery in kind to lessors as required under said
lease(s); provided, that gas so used is to be taken upstream from any of Buyer’s
facilities.
(d)  to retain oil and liquid hydrocarbons separated from the gas, prior to
delivery to Buyer at the Receipt Point(s), by the use of conventional mechanical
gas/liquid separators.

2.   Facilities. Buyer shall own, operate, and maintain all pipeline and other
facilities located downstream from the Receipt Point defined herein, including
Buyer’s Measuring Station. Seller shall own, operate, and maintain all equipment
and other property located upstream from the Receipt Point defined herein.
Except in the event of (a) termination or cancellation by Buyer (which
termination or cancellation is not caused by the default of Seller), or
(b) force majeure as set forth in Section 5 of Exhibit “C” hereto, if Seller
fails to deliver one million four hundred and sixty thousand (1,460,000) Mcf to
Buyer hereunder prior to February 1, 2010 or if Seller should cancel or
terminate this Agreement on any earlier date (unless such cancellation or
termination is caused by the default of Buyer), then Seller shall pay to Buyer
within thirty days of any such date an amount computed in accordance with the
following formula:

 

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

 

    $932,000.00 X (1,460,000 Mcf minus Actual Mcf Volume Delivered to Buyer
Hereunder Prior to February 1, 2010)
                                                                                     1,460,000
Mcf

3.   Pressure. Seller’s gas shall be delivered at pressures sufficient to
overcome the pressure maintained from time to time on Buyer’s Facilities at the
Receipt Point(s) defined hereinbelow. The pressure at the Receipt Point shall be
derived solely from the data provided by Buyer, provided that such pressure
shall not exceed 1,100 psig.

4.   Primary Term. This Agreement shall become effective on the date first
written above and shall continue in effect for a Primary Term of five (5) years
from the first day of the month following the date of first delivery hereunder.
Thereafter, this Agreement shall continue in effect on a year-to-year basis;
however, either party shall have the right to terminate this Agreement at the
expiration of the Primary Term or any anniversary date thereafter by giving to
the other party at least 90 days prior written notice.

5.   Pricing and Financial Terms. The consideration and terms of payment for
Seller’s gas and all of its components received by Buyer at each Receipt Point
hereunder shall be as set forth in Exhibits “B” and “B-1” of this Agreement.

6.   Profitability. In the event the gathering and/or processing of Seller’s gas
becomes unprofitable (as demonstrated by the books and records of Buyer) due to
compliance with rules, regulations or orders of any local, state or federal
governmental authority, or a material change in the volume and/or content of
said natural gas, Buyer may terminate the Agreement in its entirety following
ninety (90) days prior written notice. In no event shall Buyer exercise this
provision before February 1, 2010. In the event that Buyer should terminate this
Agreement pursuant to this Section 6, then Buyer will transport Seller’s gas for
a mutually agreeable fee throughout the remainder of the term of this Agreement
(as if this Agreement had not been cancelled or terminated), provided, however,
such fee shall not exceed twenty-five cents ($0.25) per MMBtu.

7.   Buyer’s Reservations. The receipt and delivery of gas by Buyer shall comply
with the General Terms and Conditions attached hereto as Exhibit “C” and made a
part hereof. The performance of Buyer under this Agreement is further subject to
laws and regulations, either State or Federal, and shall comply with all valid
present and future orders, rules, and regulations of duly constituted
authorities having jurisdiction. With regards to the quality specifications
contained therein, if any gas hereunder does not meet said specifications, then
Seller shall promptly bring the gas into compliance prior to its delivery to
Buyer at the Receipt Point(s). Acceptance of non-conforming gas shall not
constitute any waiver of Buyer’s rights to accept or reject all or part of any
gas under this Agreement not meeting the quality specifications.

8.   Modifications. Modifications to this Agreement will only be allowed through
express written agreement executed by authorized officers or representatives of
both Buyer and Seller.

9.   Taxes and Royalties. Seller shall bear all production, severance, excise,
and similar taxes imposed or levied by the state or any other governmental
agency on the gas and all of its components until they are produced, sold, or
delivered hereunder, as applicable. The price payable shall be inclusive of all
such taxes, and Seller shall remit such taxes to the proper governmental agency.
Buyer shall bear all taxes that may be imposed on Buyer at and after title and
possession of the gas and all of its components delivered hereunder passes to
Buyer. Furthermore, Seller shall be responsible for all royalties, bonus
payments, production payments, and the like accruing from the production and
sale of gas and all of its components hereunder.

10.   Indemnification. EACH PARTY AGREES TO PROTECT, DEFEND, INDEMNIFY AND HOLD
HARMLESS THE OTHER PARTY, ITS AFFILIATES, SUBSIDIARIES, AND THEIR RESPECTIVE
DIRECTORS, STOCKHOLDERS, OFFICERS, EMPLOYEES, SUCCESSORS, TRANSFEREES AND
ASSIGNS (THE “INDEMNIFIED PARTIES”) AGAINST ANY AND ALL CLAIMS, SUITS,
LIABILITIES, COST, AND EXPENSE ON ACCOUNT OF INJURY OR DEATH OF PERSONS, DAMAGE
TO PROPERTY, OR ENVIRONMENTAL DEGRADATION, WITHOUT LIMIT, RESULTING FROM,
ARISING FROM, OR GROWING OUT OF THE INDEMNIFYING PARTIES’ INSTALLATION,
OPERATION, AND MAINTENANCE OF THE FACILITIES, APPURTENANCES, OR PROPERTY; OR
NEGLIGENT ACTS

2

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

 

    OR OMISSIONS OF THE INDEMNIFYING PARTY IN THE POSSESSION AND HANDLING OF GAS
OR CONDENSATE WHICH OCCUR WHILE SAME IS IN THE POSSESSION AND CONTROL OF THE
INDEMNIFYING PARTY, REGARDLESS OF THE CAUSE OR CAUSES THEREOF, OR BREACH OF THIS
AGREEMENT; PROVIDED, THAT IN NO EVENT WILL A PARTY BE LIABLE TO THE OTHER PARTY
FOR PUNITIVE, EXEMPLARY, OR INDIRECT DAMAGES OR LOSSES. HOWEVER, NEITHER PARTY
TO THIS AGREEMENT SHALL BE INDEMNIFIED FOR ITS OWN WILLFUL MISCONDUCT. THE ABOVE
INDEMNITY OBLIGATIONS SHALL SURVIVE THE COMPLETION OF THE TERMINATION OF THIS
AGREEMENT.

11.   Execution and Assignment. This Agreement shall not become a binding
contract between the parties unless and until it has been executed by duly
authorized officers or representatives of both Seller and Buyer. Upon full
execution, this Agreement shall be binding upon the parties hereto and their
representatives, heirs, successors, and assigns. Either party may assign all,
but not part, of its rights under this Agreement only with the prior written
consent of the other party, such consent not to be unreasonably withheld. The
assigning party shall furnish the other party with a copy of the fully executed
instrument(s) effecting such assignment, and any change in ownership shall not
become effective or binding upon such other party until it receives said
document(s), and (ii) the assigning party shall continue to be liable for all of
its obligations under this Agreement that occur during or are related to that
period of time prior to the receipt by the other party of all instrument(s)
effecting such assignment.       Notwithstanding anything to the contrary in
this Agreement, Seller may, without Buyer’s consent, assign this Agreement to
any Affiliate or Successor (as such terms are defined below). For purposes of
this Agreement, the following terms shall have the following meanings:      
“Affiliate” means any corporation or other business entity that controls, is
controlled by or is under common control with Seller. For purposes of the
preceding sentence, “control” means either (i) ownership or voting control,
directly or indirectly, of 50% or more of the voting stock, partnership
interests or other beneficial ownership interests of the entity in question or
(ii) the power to direct the management and policies of such entity.      
“Successor” means any one of the following: (i) an entity resulting from a
merger, consolidation, reorganization or recapitalization of or with Seller or
(ii) a purchaser (or other transferee) of all or substantially all of Seller’s
assets and all or substantially all of such Seller’s liabilities (including the
liabilities of Seller hereunder).       Notwithstanding any such transfer,
Seller shall remain liable for all of Seller’s obligations under this Agreement
prior to such transfer.

12.   Notices. Written notification as provided for in this Agreement shall be
deemed given when delivered: (a) by U.S. mail or other nationally recognized
commercial carrier of mail, postage prepaid, to the following addresses, (b) by
hand delivery to the following addresses, or (c) by facsimile transmission,
electronically confirmed to the number below:

                          Approach Oil & Gas Inc.       WTG Benedum Joint
Venture     Approach Operating, LLC       4000 N. Big Spring Ste. 114     One
Ridgmar Centre       Midland, TX 79705     6500 W. Freeway, Suite 800          
      Fort Worth, Texas 76116            
 
                   
 
  Attn:   Mr. Bob Howell       Attn:   Contract Administration
 
  Tel:   817-989-9000       Tel:   (432) 620-6105
 
  Fax:   817-989-9001       Fax:   (432) 570-4246

13.   General Terms and Conditions. The General Terms and Conditions attached
hereto as Exhibit “C” are hereby made a part of this Agreement.

3

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

 

14.   Termination of Prior Agreements. Upon execution by both parties of this
Agreement, and except as otherwise agreed by the parties hereto in writing, all
previous contracts and agreements between the parties pertaining to the purchase
and sale of Seller’s gas from the Area of Interest shall terminate and be
displaced and superseded hereby, except for any audit and/or payment obligations
under any such agreements..

15.   Statements and Payment. On or before the 20th day of the month following
the month of production, Buyer shall render to Seller a statement reflecting the
actual volumes and supporting detail for the payment that will be rendered to
Seller on or before the last day of the month following the month of production.
If a payment is not rendered within ten (10) days of the date due, interest
shall accrue from the due date until the date of payment at a rate equal to the
lower of (i) the then-effective prime rate of interest published under “Money
Rates” by the Wall Street Journal, plus two percent per annum; or (ii) the
maximum applicable lawful interest rate.

     IN WITNESS WHEREOF, the undersigned authorized officers or representatives
of Buyer Joint Venture and Seller have executed this Agreement by signature
below.

                  “Seller”       “Seller”
 
                Approach Oil & Gas Inc.       Approach Operating, LLC
 
               
By:
  /s/ Robert B. Howell       By:   /s/ Robert B. Howell
 
               
 
                “Buyer”            
 
                WTG BENEDUM JOINT VENTURE, a Texas Joint            
 
  Venture by Benedum Gas Partners, L.P., its Managing Venturer, and Upton Gas
GP, Inc.,
its General Partner            
 
               
By:
  /s/ J. L. Davis            
 
               
 
  J. L. Davis            
 
  President            

4

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

 

STATE OF Texas
COUNTY OF Tarrant
     BEFORE ME, the undersigned authority, a notary public in and for the State
of Texas , Robert B. Howell, personally appeared and is known to me to be the
person whose name is subscribed to the foregoing instrument, and acknowledged to
me that he/she is the proper authority and having the proper capacity to execute
the foregoing instrument and has executed the same for the purposes and
consideration therein expressed.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 21st day of November, 2007.
Print of Stamp Notary’s Name
and Date Commission Expires:

                  /s/ Pam M. Wilson       Notary Public in and for the State of
Texas           

STATE OF TEXAS
COUNTY OF MIDLAND
     BEFORE ME, the undersigned authority, a notary public in and for the State
of Texas, J. L. Davis, an officer of , WTG BENEDUM JOINT VENTURE, a Texas Joint
Venture by Benedum Gas Partners, L.P., its Managing Venturer, and Upton Gas GP,
Inc., its General Partner Inc., personally appeared and is known to me to be the
person whose name is subscribed to the foregoing instrument, and acknowledged to
me that he executed the same for the purposes and consideration therein
expressed, in the capacity therein stated.
GIVEN UNDER MY HAND AND SEAL OF OFFICE, this the 26th day of November, 2007.
Print of Stamp Notary’s Name
and Date Commission Expires:

                  /s/ Dana Johnson       Notary Public in and for the State of
Texas           

5

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

 

EXHIBIT “A”
     This Exhibit “A” is for all purposes attached to and made a part of that
certain Agreement dated November 21, 2007, by and between WTG Benedum Joint
Venture (“Buyer”) and Approach Oil & Gas Inc. and Approach Operating, LLC
(“Seller”) covering the properties described below.
(EXHIBIT A) [d51852d5185203.jpg]

6

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

 

EXHIBIT “B”
RESIDUE AND PLANT PRODUCT PRICING CALCULATIONS
     This Exhibit “B” is for all purposes attached to and made a part of that
certain Agreement dated November 21, 2007, by and between WTG Benedum Joint
Venture (“Buyer”) and Approach Oil & Gas Inc. and Approach Operating, LLC
(“Seller”). Said price and consideration payable to Seller hereunder shall be
based on and determined from a percentage of the value of Plant Products and
Surplus Residue Gas attributable to Seller’s gas hereunder as defined below:

1.   Settlement Percentage of the Value of Plant Product Due Seller:
Eighty-eight Percent (88%)   2.   Settlement Percentage of the Value of Surplus
Residue Gas Due Seller: Eighty-eight Percent (88%)   3.   Field Fuel & Loss
Allowance: 6.0% of the volume delivered at the Receipt Point hereunder by Seller
  4.   Component Plant Product Recovery Rates:

         
Ethane
    75 %
Propane
    85 %
Iso-Butane
    97 %
Normal Butane
    97 %
Pentanes and Heavier
    97 %

5.   Plant Fuel & Loss Allowance: 1.82% of the volume delivered at the Receipt
Point hereunder by Seller.   6.   Plant Product Price: The Plant Product Price
for each component product shall be the average component price per gallon
published during the month in which deliveries are made hereunder by the “Oil
Price Information Service” or “OPIS” publication for Mt. Belvieu, (“Purity
Ethane” for ethane and “Non-TET” for propane and heavier hydrocarbons), less a
“T&F Fee” of $0.058 per gallon for product transportation, fractionation,
handling, and marketing charges. Said T&F Fee shall be adjusted simultaneously
and proportionately to reflect actual transportation and fractionation fee
changes incurred after October 31, 2007 by Buyer for gas purchased from Seller.
Should the above mentioned OPIS publication or the referenced prices no longer
be available, a mutually acceptable replacement listing component prices at Mt.
Belvieu shall be used.   7.   Monthly Index Price: The Monthly Index Price shall
mean the index price posted for “West Texas WAHA” on or about the first of each
production month by McGraw-Hill’s “Inside F.E.R.C.’s-Gas Market Report”
publication under the table entitled “Delivered Spot-Gas Prices” less $0.08. A
mutually agreeable successor index shall be used in the event that the above
referenced index is no longer published or available.   8.   Plant Product MMBtu
Conversion Factors (Gallons to MMBtu Volumes): The factors to be used to convert
the component gallons of plant products attributable to Seller’s gas hereunder
shall be as follows:

         
Ethane
    0.066320  
Propane
    0.091523  
Iso-Butane
    0.099692  
Normal Butane
    0.103732  
Pentanes and Heavier
    0.119000  

9.   Monthly Settlement Computatin Method: The monthly compensation due Seller
for gas purchased by Buyer hereunder shall be made in accordance with the
illustration attached hereto as Exhbit “B-1”

10. Notwithstanding anything to the contrary herein, effective the first day of
the month following the date on which Seller delivers one million four hundred
and sixty thousand (1,460,000) Mcf to Buyer hereunder, the payment percentages
referenced above in 1. and 2. of this Exhibit “B” shall be increased to ninety
percent (90%) for the duration of this Agreement.

7

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

 

EXHIBIT “B-1”
FINANCIAL TERMS FOR PRICING CALCULATIONS
     This Exhibit “B-1” is for all purposes attached to and made a part of that
certain Agreement dated November 21, 2007, by and between WTG Benedum Joint
Venture (“Buyer”) and Approach Oil & Gas Inc. and Approach Operating, LLC
(“Seller”). As full consideration for Seller’s gas and all components thereof
purchased by Buyer hereunder, Buyer shall pay to Seller a value computed in
accordance with the method used in the following illustration:
(EXHIBIT B-1) [d51852d5185204.jpg]

8

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

 

Exhibit “C”
     This Exhibit “C” is for all purposes attached to and made a part of that
certain Agreement dated November 21, 2007, by and between WTG Benedum Joint
Venture (“Buyer”) and Approach Oil & Gas Inc. and Approach Operating, LLC
(“Seller”).
GENERAL TERMS AND CONDITIONS

1.   Definitions. Except in those certain instances where the context states
another meaning, the following terms, when used in these General Terms and
Conditions or in the Agreement into which these General Terms and Conditions are
incorporated, shall have the following meanings:

  A.   The terms “gas” and “natural gas” shall mean natural gas as produced in
its natural state, whether or not stored or processed prior to receipt or
delivery, and that meets the respective quality standards for receipt and
delivery contained in Article 2 below.     B.   The term “Btu” shall mean
British thermal unit and, where appropriate, shall mean the plural thereof. A
British thermal unit is the amount of heat required to raise the temperature of
one (1) pound of water one (1) degree Fahrenheit at a starting point of sixty
(60) degrees Fahrenheit. The term “MMBtu” shall mean one million (1,000,000)
Btu.     C.   The term “thermal content” shall mean the aggregate number of Btu
contained in that volume, when applied to any volume of gas.     D.   The term
“psig” shall mean pounds per square inch gauge. The term “psia” shall mean
pounds per square inch absolute.     E.   The term “cubic foot” shall mean the
amount of gas required to fill a cubic foot of space at a base pressure of 14.65
psia and at a base temperature of 60 degrees Fahrenheit. The term “MCF/D” shall
mean one thousand (1,000) cubic feet of gas per day.     F.   The term “heating
value” shall mean, when applied to a cubic foot of gas, the number of Btu
produced by the combustion, at a constant pressure, of the amount of gas which
would occupy a volume of one (1) cubic foot at a temperature of sixty (60)
degrees Fahrenheit if saturated with water vapor and at a constant pressure of
fourteen and sixty-five hundredths pounds per square inch absolute (14.65 psia)
and under standard gravitational force (acceleration 980.655 centimeters per
second2), with air of the same temperature and pressure as the gas, when the
products of combustion are cooled to the initial temperature of the gas and air
and when the water formed by combustion is condensed to the liquid state;
provided, however, if the gas as received and/or delivered contains seven
(7) pounds of water vapor or less per one million (1,000,000) cubic feet, such
gas shall be assumed to be dry.     G.   The term “day” shall mean a period of
time beginning at 9:00 a.m. local time and ending 9:00 a.m. local time the
following day.     H.   The term “month” shall mean a period of time beginning
at 9:00 a.m. local time on the first (1st) day of a calendar month and extending
to 9:00 a.m. local time on the first (1st) day of the following calendar month.
    I.   The terms “Receipt Point”, “receipt”, “receive”, or “received” shall
refer to Buyer taking physical possession of gas from Seller or Seller’s
designee from Seller-owned or Seller’s designee-owned facilities located in the
vicinity of Section 8, Block AB, GC&SF RR Co Survey, Crockett County, Texas.    
J.   The terms “Delivery Point”, “delivery”, “deliver”, or “delivered” shall
refer to the physical transfer of possession of gas from Buyer to any downstream
pipeline.

9

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

 

  K.   The term “GPM” shall mean the sum of equivalent liquid gallons of
contained ethane, propane, butane and natural gasoline (pentanes plus heavier
hydrocarbons components) per Mcf as measured by chromatograph analysis.     L.  
The term “Plant” shall mean the equipment, gathering system and/or processing
facilities constructed for the purpose of removing liquefiable hydrocarbons from
natural gas streams and to which Buyer has the right to deliver Seller’s gas for
processing.     M.   The term “Plant Products” or “NGLs” shall mean the natural
gas liquids, including ethane, propane, butane and natural gasoline and mixtures
thereof which may be extracted from the Receipt Point gas stream by Buyer in the
liquid extraction process at the Plant as contemplated in Exhibits “B” and “B-1”
hereto.     N.   The term “Residue Gas” or “Residue” shall mean the natural gas
remaining after liquefiable hydrocarbons are extracted by Buyer at the Plant and
the term “Surplus Residue Gas” shall mean that portion of the Residue Gas
remaining after Field Fuel and Loss Allowance and Plant Fuel and Loss Allowance
as contemplated in Exhibits “B” and “B-1” hereto.     O.   The term “Plant
Product Conversion Factor” as used in the calculations in Exhibit “B-1” hereto
shall mean the conversion factor, by component, under the volume heading
“Btu/gal. fuel as ideal gas” as published in the Gas Processors Association
Publication Standard 2145, as amended from time to time.

2.   Quality

  2.1   Gas delivered by Seller under this Agreement shall meet the minimum
quality specifications below:

  A.   No free water or liquid is to be delivered to Buyer hereunder and the gas
shall not contain more than seven (7) pounds of water vapor per million cubic
feet of gas.     B.   The gas shall be free of objectionable or deleterious
substances and other potentially harmful matter and shall be commercially free
from dust or other solids, gum, gum-forming constituents, chemicals or hazardous
substances other than hydrocarbon gases.     C.   The gas shall not contain any
oxygen.     D.   The gas shall not contain more than one-fourth (1/4) grain of
hydrogen sulphide per one hundred (100) cubic feet.     E.   The gas shall not
contain more than five (5) grains of total sulphur (including the sulphur in any
hydrogen sulphide and mercaptans) per one hundred (100) cubic feet.     F.   The
gas shall not contain mercaptans in excess of five (5) parts per million by
volume.     G.   The gas shall not have a carbon dioxide content in excess of
two (2) percent by volume.     H.   The gas shall not contain more than four
(4) percent inert gases by volume; provided, however, that Buyer may, on a
commercially reasonable efforts basis accept gas having a nitrogen content in
excess of (3) three percent if such does not adversely affect Buyer.     I.  
The gas shall have a total heating value per cubic foot of not less than eleven
hundred (1100) Btu.     J.   The gas shall be received at a temperature not in
excess of one hundred (120) degrees Fahrenheit.

10

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

 

  K.   The gas shall not be processed prior to receipt by Buyer except through
conventional separators and other conventional field devices.

  2.2   If, at any time, gas tendered for receipt shall fail to conform to any
of the quality specifications set forth above, Buyer may, at its option, refuse
to accept receipt of such gas without incurring any liability to Seller.     2.3
  Gas tendered to Buyer at the Receipt Point(s) must meet or exceed the quality
specifications in Paragraph 2.1 above or such higher standards as may be
required at the Delivery Point(s).

3.   Measurement and Tests. The measurement of gas at the Receipt Point(s) shall
be in accordance with the following provisions:

  3.1   For all of the purposes of this Agreement, a cubic foot of gas shall be
that quantity as defined in Section 1(E) of these General Terms and Conditions.
For measurement purposes, the atmospheric pressure shall be the greater of
(a) thirteen and two-tenths (13.2) pounds per square inch absolute or (b) the
actual atmospheric pressure at which the gas is measured. The volumes of gas
received and delivered hereunder shall be computed in accordance with methods
prescribed in the Gas Measurement Committee Report No. 3 of the American Gas
Association as reprinted and revised September 1992, together with all
subsequent revisions, supplements and appendices to said Report.     3.2   A
representative sample of the gas from each delivery point hereunder shall be
taken Buyer for use in settlement computations, quality conformance, or other
purpose contemplated by this Agreement. Buyer shall capture samples of Seller’s
gas hereunder on either a spot basis, by means continuous sampling device, or by
other mutually acceptable method for analysis by chromatography analysis or
other instrument or equipment generally accepted in the industry. Spot samples
of Seller’s gas hereunder shall be obtained by Buyer (i) at least monthly for
delivery points where the volume of Seller’s gas averages one thousand (1,000)
Mcf or more per day, (ii) at least quarterly for delivery points where the
volume of Seller’s gas averages five hundred (500) Mcf or more per day, (iii) at
least semi-annually for delivery points where the volume of Seller’s gas
averages more than one hundred (100) but less than five hundred (500) Mcf or
more per day or (iv) at least annually for delivery points where the volume of
Seller’s gas averages less than one (100) Mcf per day. Such samples shall be
analyzed at no cost to Seller. The component analyses of each routine set of
samples shall become effective commencing with the first of the month following
the month in which samples were taken. Buyer will notify Seller reasonably in
advance of the time of any sampling so that Seller may conveniently have its
representative present to witness the sampling procedure.     3.3   The gas
shall be measured with orifice meters using flange taps and whose computations
of volume are made in accordance with provisions of Gas Measurement Committee
Report No. 3 of the American Gas Association (1985 edition).     3.4   The
flowing temperature of gas shall be determined by means of a recording
thermometer, and the arithmetical average of hourly temperatures recorded while
gas is flowing during each day shall be used in computing the volume of gas
received and delivered during the day.     3.5   If, at any time during the term
hereof, a new method or technique is developed with respect to gas measurement
or determination of factors used in such gas measurement, such new method or
technique may be substituted for the gas measurement set forth herein upon
notice by Buyer to Seller.     3.6   Buyer may, at its sole option, install
computers, transducers, and other associated sensing devices to accomplish the
accurate measurement of gas received and/or delivered.

11

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

 

  3.7   It is recognized that all facilities necessary to measure gas at Receipt
Point (s) have been or will be installed and in operation as of the date of
first delivery of gas to Buyer hereunder. Unless otherwise agreed, Buyer shall
install, maintain, and operate all facilities and equipment for the accurate
measurement of the gas received, processed, transported, and delivered
hereunder. Seller shall have access to the measuring equipment at all reasonable
times, including Level 1 electronic data retrieval, but readings, calibrations,
and adjustments thereof, and changing of charts, if applicable, shall be done by
Buyer unless otherwise agreed.     3.8   Seller shall have the right, at its
option, to install, maintain, and operate such check measuring equipment at the
Receipt Point(s) as it may desire. Each party shall have the right of access, at
all reasonable times when gas is being received or delivered, to the measuring
equipment installed by the other party. The calibrating and adjusting of Buyer’s
measuring equipment and changing of meter charts on Buyer’s meters shall be done
only by Buyer, and the calibrating and adjusting of Seller’s measuring equipment
and changing of meter charts on its check meters shall be performed only by
Seller. Buyer, upon request by Seller, or Seller, upon request by Buyer, shall
mail or deliver to the other all meter charts and/or records used in measurement
of gas received and delivered hereunder during any specified period for which
charts and/or records are required to be retained as hereinafter provided, but
such charts and/or records shall be mailed or returned to Buyer or Seller, as
the case may be, within thirty (30) days after their receipt.     3.9   Each
party shall have the right to be present at the time of any installation,
testing, cleaning, changing, repairing, inspection, calibration, or adjusting of
measuring equipment of another party used in measurement of gas received and
delivered hereunder. Each party shall notify the other, with at least a 24 hour
notice, to witness any such activity.     3.10   The accuracy of the measuring
equipment at each Receipt Point shall be verified at intervals not exceeding
180 days and at such other times as may be requested by Seller or Buyer; and if
any such verification shall be requested by Seller or Buyer and the measuring
equipment is found to be not more than two percent (2%) inaccurate, the expense
of such verification shall be borne by the party requesting verification.    
3.11   If, upon test, the measuring equipment at any Receipt Point is found to
be not more than two percent (2%) inaccurate or amounts to less than 100 MCF,
previous readings of such equipment after the last preceding test shall be
considered correct, but the equipment shall be adjusted to record accurately.
If, at the Receipt Point, on any test, the measuring equipment is found to be
inaccurate by an amount exceeding two percent (2%) and amounts to more than 100
MCF, or if at any time the measuring equipment should be out of service or not
registering, gas received or delivered through the period during which the
measuring equipment was registering inaccurately or was out of service or not
registering shall be estimated and agreed upon by use of the first of the
following methods which may be applicable:

  A.   By using the registration of any check measuring equipment installed by
either party if registering accurately; or     B.   By computing the error if
the percentage of error is ascertainable by calibration, test, or mathematical
calculation; or     C.   By estimating the quantity received or delivered and/or
its thermal content by reference to actual receipts or deliveries during
preceding periods under similar conditions when the measuring equipment was
registering accurately. If the period during which the measuring equipment at
the Receipt Point had been registering inaccurately or had been out of service
or not registering is not definitely known or agreed upon, correction shall be
made for the last half of the time elapsed since the measuring equipment was
previously tested and found to be registering within two

12

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

 

      percent (2%) of accurate or was adjusted to register accurately. All
corrections made as above provided shall be made to zero error.

  3.12   The charts and/or records from the measuring equipment shall remain the
property of the party owning the measuring equipment and shall be kept on file
for a period of not less than two (2) years.

4.   Governmental Rules, Regulations and Authorizations

  4.1   This Agreement is subject to all valid orders, laws, rules, and
regulations of duly constituted governmental authorities having jurisdiction or
control over the parties, their facilities or gas supplies, this Agreement, or
any provisions hereof. If at any time during term of this Agreement such
governmental authority shall take or threaten to take any action, directly or
indirectly, whereby the receipt, sale, purchase or delivery of gas as
contemplated hereunder shall be proscribed or possibly subjected to terms,
conditions, restraints, or regulations, including without limitation by
enumeration, rate or price controls or ceilings that, in the reasonable judgment
of the party affected, would make performance unprofitable (as demonstrated by
the books and records of the affected party) to that party, such party may, upon
ninety (90) days written notice, cancel and terminate this Agreement without
further liability hereunder except for payment for services or products provided
hereunder prior to such cancellation and termination.     4.2   The parties
agree to timely file and prosecute all applications, statements, and notices
with any governmental regulatory authority having appropriate and applicable
jurisdiction.

5.   Force Majeure. Either party shall not be liable for the breach of any
express or implied obligation under this Agreement, except for the payment of
money due and owing, to the extent such breach is the result of any cause beyond
the reasonable control of such party, including, but not limited to, (i) any
action by a governmental entity, (ii) storms, floods, earthquakes, acts of
terrorism or insurrection, and other acts of God, (iii) sabotage, (iv) war,
riot, strike, (v) explosions, breakage or accident to machinery or lines of
pipe, freezing of wells or pipelines, (vi) the making of repairs or alterations
to pipelines or facilities, or (vii) the inability to secure rights-of-way,
leases and/or easements at prices deemed reasonable and necessary in the
performing party’s reasonable judgment. The parties’ time for performance of any
obligation hereunder (except for payment of amounts due and owing to Buyer or
Seller hereunder) shall be tolled during any period of force majeure hereunder,
provided however, the tolling period shall not extend past the term of the
Agreement, except by mutual agreement.

6.   Audit Rights. All parties hereto shall have the right at any and all
reasonable times to examine the books and records of the other party to the
extent necessary to verify the accuracy of any statement, charge, computation,
or demand made under or pursuant to this Agreement. Any statement or charge
shall be final as to both parties hereto unless questioned within two (2) years
of the rendering thereof to the other party.

7   Creditworthiness

  7.1   Seller shall not be required to commence or continue gas sales under the
terms of the Agreement to Buyer, if Buyer:

  A.   Fails to make any payment when due and fails to cure such failure within
ten (10) days of such due date; or     B.   Fails to demonstrate
creditworthiness when reasonably requested by Seller. Seller shall use all means
available, including but not limited to previous payment experience and prudent
credit analysis, to determine credit worthiness.

  7.2.   If either party has reasonable grounds for insecurity regarding
performance of any obligation under this Agreement by the other party, such
first party may demand adequate assurance

13

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

 

      of performance from such other party in the form and amount reasonably
acceptable to the demanding party. Such assurance may include, but not be
limited to, a standby irrevocable letter of credit, a prepayment, a security
interest in an asset or performance bond or guaranty. In the event (each an
Event of Default) either party or its guarantor shall: (i) make an assignment or
any general arrangement for the benefit of creditors; (ii) file a petition or
otherwise commence, authorize, or acquiesce in the commencement of a proceeding
or case under any bankruptcy or similar law for the protection of creditors or
have such petition filed or proceeding commenced against it; (iii) otherwise
become bankrupt or insolvent; (iv) be unable to pay its debts as they fall due;
(v) have a receiver, provisional liquidator, conservator, custodian, trustee, or
other similar official appointed with respect to it or substantially all of its
assets; (vi) fail to perform any obligation to the other party with respect to
any credit support obligations relating to this Agreement; (vii) fail to give
adequate assurance of performance under this Section 7 within 48 hours but at
least one day of a written request of the other party; or (viii) not have paid
any amount due the other party hereunder on or before the second day following
written notice that such payment is due; then the other party shall have the
right, at its sole election, to immediately withhold and/or suspend deliveries
or receipts of gas upon notice. If an Event of Default has occurred and is
continuing, the non-defaulting party shall have the right, by notice to the
defaulting party, to designate a day, no earlier than the day such notice is
given and no later than 20 days after such notice is given to terminate this
Agreement.

8.   Transfer and Warranty of Title. As between the parties hereto, Seller shall
be in control and in possession of the gas prior to such gas being received
hereunder by Buyer at the Receipt Point(s) and shall be responsible for any
damages, losses, or injuries caused thereby; and upon Buyer’s physical receipt
of such gas at the Receipt Point(s), Buyer shall thereafter be deemed to be in
exclusive control and possession of such gas, and responsible for any injuries,
losses, or damages caused thereby; provided, however, neither party shall be
indemnified for damages, losses, or injuries caused by its own omissions or
negligent acts. Each party hereby warrants to the other that at the time of
receipt of delivery of gas hereunder, it will have the right to receive or
deliver, as the case may be, such gas, and that such gas shall be free and clear
of all liens and adverse claims; and each party agrees, with respect to the gas
received or delivered by it, to indemnify the other party against all suits,
actions, debts, accounts, damages, costs (including attorney fees), losses, and
expenses arising from or out of any adverse claim of any and all persons to or
against said gas while that party has responsibility for the gas; PROVIDED, THAT
IN NO EVENT WILL A PARTY BE LIABLE TO THE OTHER PARTY FOR PUNITIVE, EXEMPLARY,
OR INDIRECT DAMAGES OR LOSSES.

9.   Confidentiality. Buyer and Seller agree to keep the content and nature of
this Agreement, and any other material or information provided during the
negotiation of this Agreement, strictly confidential and to not disclose the
nature or contents to any third party without prior written consent from the
other party to this Agreement, which consent will not be unreasonably withheld;
provided, however that either party may make any public disclosure it believes
in good faith is required by applicable law or any listing or trading agreement
concerning its publicly traded securities, in which case the disclosing party
agrees to use reasonable efforts to advise the other party prior to making such
disclosure.

10.   Descriptive Headings. The descriptive headings of the provisions of this
Agreement, including these General Terms and Conditions, are formulated and used
for convenience only and shall not be deemed to affect the meaning or
construction of any such provision.

14