KANSAS TEN WELL DRILLING PROGRAM

 

September 17, 2007

 

Tengasco, Inc. (the "Company") is making available for subscription ten Units
(the "Offering") of undivided working interest in a group of ten (10) wells (the
"Program Wells") to be drilled for commercial oil and gas production on
properties leased by the Company in Kansas. Each Unit that is subscribed will
convey an undivided 10% working interest in each of the ten Program Wells that
are productive. The Wells will be drilled to a depth sufficient to test the
Arbuckle or Lansing Kansas City Formations (the "Objective Formation"), at
approximately 4,000 feet depth, tested, and if warranted, completed and equipped
in the Objective Formation in an effort to obtain oil and/or gas production in
Commercial Quantities, all at the Company’s expense.

 

Each Unit may be subscribed by qualified investors for a maximum of $400,000 per
unit. In the event a Program Well is drilled but is nonproductive, then the
amount of $150,000 shall be deducted from the cost of one Unit for each
nonproductive well drilled so that the subscription cost for one Unit per
nonproductive well drilled shall be $250,000. No less than ten wells will be
drilled if all Units are subscribed. Unsubscribed Units, if any, will remain
owned in full by the Company.

 

Tengasco, Inc.

10215 Technology Drive, Suite 301

Knoxville, TN 37932

(865) 675-1554

 

 

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TABLE OF CONTENTS

TITLE

 

Page

TITLE PAGE

 

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TABLE OF CONTENTS

 

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2

TERMS OF THE KANSAS 10 WELL DRILLING PROGRAM

 

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3

PROPOSED ACTIVITIES

 

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6

REVENUE AND WORKING INTEREST ALLOCATIONS

 

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8

RISK FACTORS

 

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9

CONFLICTS OF INTEREST

 

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11

EXHIBIT “A”-Form of Assignment

 

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TERMS OF THE KANSAS TEN WELL DRILLING PROGRAM

 

The Program. The Company owns or will acquire oil and gas leases covering
properties in Kansas upon which the Company plans to drill ten or more wells,
consisting of at least seven developmental and three exploratory wells (the
“Program Wells”). The Company will drill the Program Wells to a depth sufficient
to test the Arbuckle or Lansing Kansas City Formations (the "Objective
Formation"), at approximately 4,000 feet depth, test, and if warranted, complete
and equip each well in the Objective Formation in an effort to obtain oil and/or
gas production in commercial quantities, all at the Company’s expense. In the
event the Company drills an unproductive well, the Company shall plug and
abandon such well at its own expense. The Company has agreed to drill the
Program Wells in the year 2007 subject to rig availability or as soon as
possible in 2008, as determined by the Company. The Company will convey ten
Units of participation representing an economic participation in the Program
Wells described below under “Units”.

 

The Company will establish the locations of the 10 Program Wells either in its
presently producing fields or properties acquired near the fields, based upon
its best assessment of information available to the Company, including analysis
of seismic information currently being finalized. The wells will be drilled to a
depth sufficient to adequately test the Pennsylvanian Limestone or Lansing
Kansas City Formations as the same are found in the area or to the maximum depth
of 4,000 feet beneath the surface (the “Objective Depth”). The Company may elect
to alter the list of well locations in the event an exploratory well is
successful and as a result additional developmental drilling locations are
established.

 

The Ordovician Arbuckle Formation on the Central Kansas Uplift has been a
prolific oil-producing zone since the first well was completed in 1928. Wells
completed in this formation have been characterized by their ability to produce
large volumes of fluid over a long period of time. The Pennsylvanian Limestones
on the Uplift are also prolific reservoirs producing both oil and gas. The
Lansing-Kansas City Formation is a series of cyclothymic limestones with
alternating shales consisting of twelve proven producing zones. These zones vary
from field to field and it is a rare occurrence that none are present in a
particular field. The objective of Lansing-Kansas City exploration is to find
structural highs.

 

Some of the Program Well locations are located on structural highs identified
with the aid of 3-D seismic data. It is anticipated that all of the Program
Wells are or will be located with the aid of nearby well control and geologic
information from nearby wells, and economic considerations that include a
comparative analysis using offsetting wells and their associated production
volumes.

 

Unit Interest. The Company is offering ten (10) Units. Each Unit consists of its
share of an undivided 10% of an approximately 87.5% oil and gas leasehold
working interest in the Program Wells [insofar and only insofar as each lease
covers a Spacing Unit comprising 20 acres, more or less, surrounding each
Program Well][?], subject to the management fee described under “Management
Fee”, below.

 

Management Fee. The Company retains a right to receive and the Participants
agree to pay a management fee for managing the Program Wells. The Participants
will receive all net revenues from their working interest in all drilled Program
Wells and pay to the Company 25% of the net revenues (net of operating expenses)
attributable to the Program Wells until such time that the sum of (i) the net
revenues from all drilled Program Wells (net of both operating expenses and
management fees) received by the Participants and (ii) receipts from the
Participants’ interests, if any, in that certain Agreement and Conveyance of Net
Profits Interest by Manufactured Methane Corporation dated as of the date hereof
(the “MMC Interests”) exceeds the sum of (i) one hundred thirty five and 47
hundredths percent (135.47%) of the Purchase Price of the Units purchased as
defined in the following section entitled “Purchase Price, Number of Wells to be
Drilled, Payment Schedule” and (ii) the amount of any further funding provided
by the Participants for operating or capital expenses, plugging and abandonment
costs, or in any other respect in relation to the Program Wells or the MMC
Interests. At that point in time, and for the entire remaining duration of the
productive life of each well, each Participant will retain ownership of all
working interest conveyed to him, but agrees to pay a management fee to the
Company for subsequent periods in the amount of 85% of the net revenues (net of
operating expenses) attributable to that Participant’s working interest in all
Program Wells in consideration of the Company’s agreement to manage the
Participant’s working interest and serve as operator of the Program Wells.. For
purposes of the calculation set forth in this paragraph, the Company shall

 

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maintain a reasonable reserve for plugging and abandonment costs and any other
reasonably foreseeable future expenses related to the Program Wells.

 

Purchase Price; Number of Wells to Be Drilled; Payment Schedule. The Company is
offering 10 Units for a maximum price of $400,000 per Unit. However, it is the
intention of the Company and the Participants that upon completion of the
drilling of ten program wells, the Unit price paid shall be $400,000 for that
number of Units as there are completed Program Wells, and $250,000 for that
number of Units as there are nonproductive drilled Program Wells. Accordingly,
for a total price of $4 million, ten wells would be drilled and, if all are
productive, completed on a turnkey basis, i.e. no additional funds will be
required of Participants for drilling and completion of those ten productive
wells. If ten program wells are drilled and all are nonproductive, the total
purchase price for ten Units shall be $2.5 million. The “Purchase Price” shall
be that number being $2.5 million, $4.0 million, or such figure between them as
the results of this Program dictate in accordance with the intention of the
parties.

 

For the purpose of scheduling payment of the Purchase Price, the Unit price for
the first Unit shall be $400,000. If the first Program Well is completed as a
producing well, the Unit price for the second Unit shall likewise be $400,000.
However, if the first Program Well is nonproductive, then the price for the
second Unit shall be $250,000. If the second Program Well is completed, then the
price for the third Unit shall be $400,000; if not, then the price for the third
Unit shall be $250,000. The price for each Unit shall be likewise be calculated
for each successive Unit sold based on the most recently drilled Program well.
The price for the final Unit sold shall be $250,000 and shall be paid prior to
drilling the tenth Program well; and if the tenth Program well is to be
completed as a producing well, then an additional $150,000 shall be paid before
completion is undertaken on that well. In all events, the total purchase price
for ten Units shall be calculated and paid in accordance with the intention of
the Company and the Participants stated above in the paragraph. Any Units
remaining unsold shall remain the property of the Company. No commission will be
paid to agents or brokers based on sales to any Participant. No commission will
be paid to any officer of the Company who sells any Unit, nor in connection with
any Unit purchased or acquired by the Company.

 

The Purchase Price as defined in this section may, by additional agreement in
writing amending this section signed by the Company and the Participants,
include from time to time, and only for the purpose of determining when the
management fee due hereunder be increased from 25% to 85%, any such additional
sums as may be agreed by the Company and the Participants to be included for
that purpose. No such additional sums included in the Purchase Price shall be
deemed to constitute consideration for the Unit interest in this Program for
federal income tax purposes by any person, but shall be included in Purchase
Price solely for the determination of the point in time when the Management Fee
shall increase from 25% to 85% as set out in the section entitled “Management
Fee” above.

 

Initial Capitalization, No Fractional Units. The Program will be completed and
all ten Program Wells drilled if any Units are subscribed and accepted by the
Company. No fractional Units will be sold. If all Units are not initially
purchased, then the Company shall remain obligated to complete the drilling of
all Program Wells and the Company may retain ownership of the working interest
attributable to any or all unsold Units.

 

Subscription Period. The Subscription Period will be the period of time during
which subscriptions will be accepted, subject to extension at the Company’s
election. In the event that all Units are not subscribed at the termination of
the Subscription Period, the Company shall own all remaining Units.

 

No Minimum Subscription Required. If less than ten Units are sold and accepted
at such time the Offering is to be closed, then the Company may offer any unsold
Units to previous subscribers or elect to continue the offer and sale of Units
and shall remain fully and completely liable to pay all costs for drilling and
completing all Program Wells. The Company shall be obligated to drill all
Program Wells if all Units are subscribed and accepted.

 

Proposed Operations. When the Program is capitalized the Company will act as
Operator (the "Operator") to conduct all Operations regarding drilling and
completing the Program Wells. The Company will enter into a drilling contract
(the "Drilling Contract") pursuant to which the Company will pay the cost to
drill and complete the Wells. Within sixty (60) days following the closing of
the offering, the Operator shall, subject to rig availability, commence, or
cause to be commenced, the actual drilling of the first Program Well, and drill
all Program Wells either concurrently or consecutively as the Company may
determine, at a location of its selection upon the well site [Spacing
Unit][defined?], in

 

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exploration for oil and/or gas and, thereafter, shall prosecute the drilling of
the same to the Objective Depth, or to any lesser depth at which oil and/or gas
in apparent commercial quantities may be encountered, whichever depth or
condition first occurs; and shall proceed with all due diligence and dispatch to
the completion of such well as a commercial producer of oil and/or gas, or shall
plug and abandon the same as a dry hole.

 

Following logging and testing, the Operator may attempt to complete the Well.
Upon reaching Objective Depth in the Program Wells, the Operator will determine
whether to attempt to complete such well as a commercial producer. If the
decision is made to attempt completion, the such completion work shall be
completed at the Company’s sole expense. If, upon reaching the Objective Depth
in the Well, the Company determines that no attempt will be made to complete the
same as a commercial producer, the well will be plugged and abandoned as a dry
hole at the Company’s sole expense.

 

In the event the Well is lost at any depth by reason of any accident or
casualty, or as an uncompletable prospect in the event of excessive water,
chert, granite, heaving shale, igneous rock, down hole blowout, or other
undrillable condition or impenetrable substance is encountered prior to reaching
the Objective Depth, the Company may, in its sole discretion, elect (a) to plug
and abandon the Well and commence a subsequent well, at a location of its
choice, in replacement of the lost Well at no additional cost to the
Participants, within 45 days after loss, OR (b) to plug and abandon the Well
totally and cease operations on the Program Well, in each case at its sole
expense.

 

In the event production in commercial quantities is obtained in a Program Well,
each Program Well will be operated by Company as Operator under an Operating
Agreement in form customary in the industry and in all ways consistent with the
provisions hereof. Pursuant to such agreement, after each well is drilled and
completed as a producer, Participants will be responsible in the future for the
Units’ proportionate share of all ongoing well maintenance, workover, and
physical operating costs such as utilities. This future responsibility and
obligation of the Unit working interest owner may call for additional payment or
contribution of funds in the course of normal operations. The Company may
determine as Operator whether to proceed to incur any additional expenses. In
the event Operator determines to incur additional expenses, each working
interest owner’s allocated portion of such additional expenses will be payable
by each working interest owner in cash.

 

During all periods of time as any Program Well is producing, the net revenues
payable to the Participants shall be calculated as gross revenues less the total
actual costs and expenses normally attributable to the working interest. Each
Participant will appoint the Company as its agent and representative for the
purpose of receiving payment for all production of oil or gas attributable to
that Participant’s interest. The Company will receive such payment from the
purchasers of production and forward all amounts due to the Participant after
deduction of all expenses or fees attributable to that Participant under the
Program. The Company will bill such participant for any additional costs (i.e.
not deducted) attributable to the participant’s working interest.

 

Subscription Agreement. Each prospective investor will be required to complete
and return his Subscription Agreement included with this Memorandum. It will be
the policy of the Company to make inquiries to establish that the prospective
investor has adequate net worth to bear the economic risks of an investment in
the Units and has the requisite knowledge and experience to analyze the merits
and risks of such investment. If the Company determines that the prospective
investor does not have the requisite knowledge and experience, but is able to
bear the economic risks of the investment, he will be required to retain a
qualified investment advisor meeting the requisites of knowledge and experience
in investments to assist in analyzing the merits and risks of an investment in
these Units.

 

Company's Right to Own Units. The Company reserves the right to own one or more
Units if and only if no potential Participant to whom the Company determines to
offer same desires to purchase the Unit to be owned by the Company. The Company
will have the same rights, benefits, obligations and liabilities as each other
Participant with respect to the Units owned by the Company.

 

Subscription Procedure. A subscriber to a Unit in the Program must complete,
execute and deliver to the Company the Subscription Agreement and all other
documentation required by the Company. The Company will notify each subscriber
whose subscription is accepted that payment for the subscription has been
received and accepted by the Company and, upon closing the offering will return
one copy of the Subscription Agreement, executed by the Company in the space
provided for its acceptance. Each subscriber whose subscription is accepted will
become a Participant. The

 

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Company reserves the right to reject any subscription in whole, or in part, for
any reason, in its absolute discretion. By his execution of the Subscription
Agreement, each subscriber agrees to be bound by all the terms and conditions
thereof. No alterations or other changes in the terms thereof will be accepted.

 

Limited Transferability. Since the Units have not been registered under the
Securities Act of 1933, as amended, or under the securities laws of any state
jurisdiction, owners of the Units will not be able to readily liquidate their
interests, inasmuch as the Units cannot be readily assigned or transferred.
However, the working interests conveyed by the Company shall be assignable and
transferable upon conveyance to the Participants, provided, however, that the
owners of the Units (as well as of the working interests) may not sell, transfer
or assign such Units or working interests if, in the reasonable opinion of the
Company’s counsel, such sale, transfer, or assignment would prejudice the
exemption of the sale of the Units from the registration requirements of the
Securities Act of 1933, as amended, or of any state securities laws. In this
regard, the Company may condition the transfer or disposition of any Unit and/or
working interest on the receipt by it of an opinion of counsel reasonably
acceptable to the Company (the cost of which shall be borne by the transferor)
to the effect that such transaction would not violate the Securities Act of
1933, as amended, or any other applicable securities laws, or regulations
promulgated thereunder, and that such transfer is being made under a lawful
exemption from registration, if any exists. The Company has not obligated itself
to repurchase, has not established a procedure for repurchasing, and has no
present plan to repurchase Units or working interests from the owners thereof.
Unless the Company is willing to repurchase a Participant's Unit or working
interest, a Participant may experience difficulty and perhaps a loss of his
entire investment in disposing of his Unit or Working Interest. In addition, any
assignee of any Unit interest would remain liable for payment of the Management
Fee to the Company for the productive life of the well.

 

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PROPOSED ACTIVITIES

 

PARTICIPANTS SHOULD CAREFULLY REVIEW THIS INFORMATION REVIEWED BY A GEOLOGIST OR
PETROLEUM ENGINEER FAMILIAR WITH OIL AND GAS PROPERTIES.

 

Leasehold Interest. The Company owns the rights to an approximately 100.00%
working interest in approximately 87.50% net revenue leases covering the Program
Wells, more or less, for the purpose of drilling ten Program Wells in
exploration for oil and/or gas. The Program Wells will be drilled at a location
on the well Spacing Unit, comprising 20 acres, more or less as is generally
described on the maps attached hereto or on the locations to be selected by the
Company after further evaluation of additional information including seismic
information currently being analyzed.

 

Operating Agreement. The Participants will enter into an AAPL Model Form
Operating Agreement (the "Operating Agreement") naming the Company the Operator
of the Program Well(s), provided such Operating Agreement shall be in all
respects consistent with the provisions hereof. Operator shall drill and
complete the Program Wells, or cause the same to be drilled and completed, and
upon completion operate such wells and produce the same in accordance with the
terms hereof and of the Operating Agreement. The Company as Operator will
maintain insurance customary in the industry and in customary amounts and will
have all Participants named as additional insureds as to operation of the
Program Wells. Costs of operating the Program Wells after completion as a
commercial producer shall be borne by the parties in the ratio that their
respective undivided working interest in such well bears to the entire undivided
working interest in the well.

 

Participants will pay their proportionate share of operating expenses for the
Program Wells and their pro rata share of the taxes on production from the
Program Wells. Operating expenses will be charged against revenues in accordance
with generally accepted accounting procedures, and in accordance with the
Accounting Procedures attached as an Exhibit to the Operating Agreement. All
production revenues attributable to the working interests held by Participants
will, after payment of severance taxes levied at the wellhead, be paid to the
Operator, under a limited and revocable appointment to act as agent for each
working interest owner. Each month the agent will, after deduction of operating
and marketing expenses limited to marketing expenses for selling hydrocarbons
from any Program Well, distribute Net Operating Revenues to each Participant in
accordance with his pro rata interest as such interest is reported to the agent
by the Company. It has been the experience of the Company that comparable wells
in the area have annual operating expenses of approximately $9,000 and that
revenues from the sale of production from such comparable wells has been
sufficient to pay such operating expenses. However, in the event revenues held
by the agent from the sale of Products for the account of working interest
owners are from time to time insufficient to pay Operating Costs of any Program
Well as they come due, Participants will be liable for same and may be billed
for their pro rata share of the deficiency.

 

Completion Phase. Upon reaching the Objective Depth in the drilling of the
Program Well(s) the Operator shall decide whether to attempt to complete such
well as a commercial producer of oil and/or gas. The Operator’s decision shall
be based upon information available, indicia obtained from the well bore, and
recommendations obtained from professional consultants, but shall be within the
Operator’s discretion as authorized by the Operating Agreement. If it is decided
that no completion attempt should be made, the well will be plugged and
abandoned as a dry hole at the Company’s sole expense. If it is decided that the
attempt should be made to complete the well as a commercial producer, the
Operator will notify the Company of the decision to make the completion attempt,
and the Operator will proceed to complete and equip the well in an attempt to
obtain commercial production of oil and/or gas at the Company’s sole expense.

 

Once the Well has been prepared for commercial production if natural gas is
discovered, the costs for pipelines, pipeline connections or other equipment
required for operation of the Program Well(s) shall be borne by the working
interest owners in proportion to their respective ownership in the Program Well.
It is not possible to predict with any accuracy the cost of pipe, laying of
pipe, metering or connection facilities that may result therefrom but such costs
may be significant and would be borne by the Unit working interest holders in
their proportionate share of such costs.

 

Plugging and Abandonment. The Company shall also determine whether the Well
should, at any point, be abandoned. In the event that the Well must be abandoned
prior to the completion of cementing of the casing in the vertical hole, or if
the Well is lost at any depth by reason of any accident or casualty, or if
igneous rock or other impenetrable

 

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substances are encountered, or loss of circulation or other conditions render
further drilling impractical by methods to be employed, the Company may, in its
sole discretion, elect:

 

(a) to plug and abandon such Well and commence an additional Well on the
Prospect, in replacement of the lost Well, within 45 days after loss of such
Well; it being understood and agreed that any such additional Well located on
the applicable spacing unit of the plugged and abandoned well shall be deemed to
be a replacement well for the plugged and abandoned well and not a new Program
Well; or

 

(b) to plug and abandon such Well and cease operations on the Program Well;

 

provided, however, that either option shall be pursued at the Company’s sole
cost and expense.

 

The nature of the Company's election will depend on the facts and circumstances
available to it at the time, and the nature of the agreements hereafter made by
the Company with the drilling contractors and others. No matter what the
decision of the Company, the Participants will not receive a refund of any
portion of amounts paid by Participants.

 

Reservation of Right. The Company reserves the right to drill the Program Wells
in such order as it determines to be necessary and to move the location of the
Program Well(s) or substitute a comparable drill site in the event such action
becomes necessary. Any substituted well locations or drill sites will compare
favorably with the general character of the Program Well(s) described regarding
degree of risk, drilling depth and cost.

 

Well Abandonment. At any time after drilling of the Well begins, the Company or
the Operator in its sole discretion may determine that the Well is not capable,
or is no longer capable, of producing Products in Commercial Quantities, and
shall thereupon proceed to abandon and plug the Well. In the event the Program
Well was productive in commercial quantities prior to abandonment, plugging
expense will be shared by the owners of the working interest in accordance with
their respective interests and any proceeds accruing from the sale of salvage
equipment and casing shall be distributed in the same manner. The net cost of
plugging a well of the description of the Program Wells is approximately $2,500
per well. Plugging expense would be incurred immediately upon abandonment of the
Program Well as a dry hole; if production is obtained, it is not possible to
determine when such production may cease and the well be plugged upon cessation
of production. Some wells in the area have been producing for decades.

 

Return on Investment. There is absolutely no assurance that any well drilled and
completed will produce Commercial Quantities of oil or gas. However, if
Commercial Quantities of Products are achieved, all Participants will
participate in any oil and gas production revenues.

 

Sale of Oil and Gas Production. Oil and gas produced from the Program Well will
be sold on a competitive basis to third parties, such as pipeline companies,
gathering companies, refineries, major oil companies and utilities and will not
be sold to or otherwise acquired by the Company. The Company will collect all
revenues from the sale of any oil and gas production and pay directly, less
operating expenses, to the Participants monthly.

 

The Program Wells. The Program Wells are to be located in the Ordovician
Arbuckle Formation on the Central Kansas Uplift, which has been a prolific
oil-producing zone since the first well was completed in 1928. Wells completed
in this formation have been characterized by their ability to produce large
volumes of fluid over a long period of time. The Company believes that this
characteristic has created an opportunity to recover previously un-recovered
hydrocarbons. It is believed that as much as 50% of the original recoverable
reserves in place have been bypassed due to reservoir heterogeneity.

 

The Pennsylvanian Limestones on the Uplift are also prolific reservoirs
producing both oil and gas. The Lansing-Kansas City Formation is a series of
cyclothymic limestones with alternating shales. The Formation consists of twelve
proven producing zones. These zones vary from field to field and it is a rare
occurrence that none are present in any particular field. The objective of
Lansing-Kansas City exploration is to find structural highs.

 

The selected locations, as well as those expected to be selected by the Company
for Program Wells, are excellent drilling prospects based on the 3-D seismic
data, abundant geologic information from nearby wells, and

 

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economic considerations that include a comparative analysis using offsetting
wells and their associated production volumes. Considering the risk assessment
process, these prospective locations for the Program Wells fall either into a
category of Proven Undeveloped (PUD) or Probable (PRO). PUD is defined as proved
reserves from undeveloped spacing units in a given field that are sufficiently
close to developed production that there is every reasonable probability that
new wells will produce at commercial rates when drilled. PRO is defined as
primary reserves which have not been proved by production at a commercial rate,
but, being based on limited evidence of commercially producible oil or gas
within the geological limits of a reservoir above a known or inferred water
table, are susceptible to being proved further by additional drilling and
testing.

 

The prospects within the Kansas Properties for the Program Wells are presented
in Table 1 below. Table 1 was calculated by the Company’s geological and
engineering staff. The prospective wells will be located on structural highs
identified by the Company with the aid of any available 3-D seismic data and any
nearby well control. The reserves were calculated using the volumetric approach.
Since all of these reservoirs are under a water drive mechanism, a recovery
factor of 53% was used in the equation. Also considered was a comparative
analogy of offsetting wells, production performance, depositional
characteristics, and rock properties. The risking process utilized by the
Company reviewed trap, seal, source, timing of migration, and economics. Any
stated “risk” percentages are indications of the perceived likelihood that
commercial production may not be obtained; e.g. a “10%” risk factor indicates
that there appears to be a 90% likelihood of commercial production being
obtained. As to each well, the risk factors would be added together so that, for
example, a ten percent geologic risk and a ten percent economic risk would yield
an overall eighty percent assessment of the likelihood of that well obtaining
commercial production. The calculation of these risk factors is, however,
largely subjective, and can neither be assessed with any range of accuracy nor
guaranteed. They are intended only as the Company’s estimate of the likelihood
of successful production.

 

TABLE 1. Developmental Drilling Prospects- Geologic and Economic Risk Factors  

 

WELL / CATEGORY

GEOLOGIC RISK

ECONOMIC RISK

Seven Developmental Wells

10-15%

UNKNOWN

Three Exploratory Wells

50%

UNKNOWN

 

 

 

REVENUE AND WORKING INTEREST ALLOCATIONS

 

The Company will, at an appropriate time or upon request, deliver to each
Participant an assignment of oil and gas lease, in the form attached hereto as
Exhibit "A," representing such Participant's undivided interest in the Program
Wells and their Spacing Units only. This assignment will be properly recorded in
the respective county courthouse(s) and delivered to each Participant for his or
her record. Operating expenses and the cost of plugging and abandoning the
Program Well(s) after being placed in production in commercial quantities will
be allocated among all holders of the working interest in proportion to their
respective interest therein. Revenue from the sale of production will be
credited in accordance with respective interests in the Program Wells. Severance
taxes and operating expenses will be borne in the same proportion as revenue.

 

INTERESTS IN ALL TEN PROGRAM WELLS

 

Note: it is assumed for the following net revenue calculations that landowner
royalty is 1/8 (i.e. 12.5%) as is the case with most of the Company’s Kansas
leases; however, net revenue allocations will be adjusted to account for any
additional landowner royalty above 1/8 that may be required to be paid at any
drillsite selected by the Company for this Program.

 

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Allocations: Working Interests in each of 10 Program Wells shall be owned, if
all 10 Units are subscribed, as follows:

10 UNITS SUBSCRIBED

Working Interest

Net Revenue Interest (With 25% Management Fee

Net Revenue Interest

(With 85% Management Fee)

All Units Participants

100.00% WI

.75 X .875 = .65625 NRI

.15 X .875=.13125 NRI

Tengasco, Inc. (the “Company”)

0% WI

.25 X .875= .21875 NRI

(bears proportionate share of expenses)

.85 X .875=.74375 NRI (bears proportionate share of expenses)

Royalty Owners

n/a

.125

.125

TOTAL

100.00% WI

100.00% NRI

100.00% NRI

 

RISK FACTORS

 

THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND SHOULD NOT BE
PURCHASED BY PERSONS WHO CANNOT AFFORD THE LOSS OF THEIR TOTAL INVESTMENT.
PROSPECTIVE INVESTORS OF THE UNITS OFFERED HEREIN SHOULD GIVE CAREFUL
CONSIDERATION, IN ADDITION TO THE OTHER INFORMATION IN THIS MEMORANDUM, TO THE
FOLLOWING RISK FACTORS.

 

Success Is Dependent Upon the Production of Its Wells. There can be no assurance
that all, or even any of the wells to be drilled will produce oil or gas , or,
that, if they do produce oil or gas, the quantities of such production will be
large enough and without extraordinary cost so that it will be economically
feasible to operate such wells. The Company anticipates, however, based upon the
production of wells owned and operated by the Company in the same area, and,
based upon seismic studies, that it will be able to locate sufficient drilling
sites to enable it to develop economically viable oil or gas wells.

 

Volatile Oil Prices Can Materially Affect The Company. The results of operations
will depend upon the prices received for oil production and the costs of
developing and producing reserves. Prices for oil are subject to fluctuations in
response to relatively minor changes in supply, market uncertainty and a variety
of additional factors that are beyond the control of the Company. These factors
include the level of drilling activity, the level of consumer product demand,
government regulations and taxes, the price and availability of alternative
fuels and the overall economic and political environment. A substantial or
extended decline in oil prices would have a material adverse effect on the
results of operations. Oil prices have historically been and are likely to
continue to be volatile. This volatility makes it difficult to estimate with
precision the value of the return on exploration and development of drilling
projects.

 

Uncertainty of Reserve Estimates. Oil and gas reserve estimates and the
estimates of present value associated therewith are based upon numerous
engineering, geological, and operational assumptions that generally are derived
from limited data. Common assumptions include such matters as the extent and
average thickness of a particular reservoir, the average porosity and
permeability of the reservoir, the anticipated future production from existing
and future wells, future development and production costs and the ultimate
hydrocarbon recovery percentage. As a result, oil and gas reserve estimates and
present value estimates are frequently revised in subsequent periods to reflect
production data obtained after the date of the original estimates. If reserve
estimates are inaccurate, production rates may decline more rapidly than
anticipated, and future production and revenues may be less than estimated.

 

Oil and Gas Operations Involve Substantial Cost and Are Subject to Various
Economic Risks. The drilling activities in drilling the Program Wells are
subject to the economic risks typically associated with exploration, development
and production activities, including the necessity of significant expenditures
to drill wells. In conducting exploration and development activities, the
presence of unanticipated pressure or irregularities in formations,
miscalculations or accidents may cause the Company’s exploration, development
and production activities to be unsuccessful. This could result in a total loss
of the investors’ investment. In addition, the cost and timing of drilling,
completing and operating wells is often uncertain.

 

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Costs Incurred To Conform to Government Regulation of the Oil and Gas Industry.
The exploration, production and marketing operations of the Company and all such
entities are regulated extensively at the federal, state and local levels. The
Company and the Participants may be required to make large expenditures in its
efforts to comply with the requirements of environmental and other regulations.
This may include legal costs to determine compliance with regulations or contest
the applicability or legality of such regulations or requirements, cleanup costs
of any hazardous or dangerous substance, or costs to comply with new or changed
regulatory or safety requirements. Further, the oil and gas regulatory
environment could change in ways that might substantially increase these costs.
Hydrocarbon-producing states regulate conservation practices and the protection
of correlative rights. These regulations will affect operations and limit the
quantity of oil and gas that may be produced and sold from any or all of the
Program Wells. Other regulated matters include marketing, pricing,
transportation and valuation of royalty payments. These costs and expenditures
may be substantial. As working interest owners, the Participants will be liable
for their proportionate share of all such costs and expenditures to the extent
and only to the extent such proportionate share of such costs and expenses may
be recovered from proceeds of production attributable to their working
interests.

 

Costs Incurred Related to Environmental Matters. The Company, as an Operator of
oil and gas properties, is subject to various federal, state and local laws and
regulations relating to discharge of materials into, and protection of, the
environment. These laws and regulations may, among other things, impose
liability on the lessee under an oil and gas lease for the cost of pollution
clean-up resulting from operations, subject the lessee to liability for
pollution damages, and require suspension or cessation of operations in affected
areas. The Company maintains insurance coverage, which it believes is customary
in the industry, although it is not fully insured against all environmental
risks. These exposures and costs may be substantial. As working interest owners,
the Participants will be liable for their proportionate share of all such
exposures and costs to the extent and only to the extent such proportionate
share of such costs and expenses may be recovered from proceeds of production
attributable to their working interests.

 

Insurance Does Not Cover All Risks. Exploration for and production of oil and
gas can be hazardous, involving unforeseen occurrences such as blowouts,
cratering, fires and loss of well control, which can result in damage to or
destruction of wells or production facilities, injury to persons, loss of life,
or damage to property or the environment. The Company maintains insurance
against certain losses or liabilities arising from its operations in accordance
with customary industry practices and in amounts that management believes to be
prudent; however, insurance is not available to the Company against all
operational risks. These costs may be substantial. As working interest owners,
the Participants will be liable for their proportionate share of all such
uninsured risks to the extent and only to the extent such proportionate share of
such costs and expenses may be recovered from proceeds of production
attributable to their working interests.

 

Other Risks Related to the Production of Oil or Gas. There can be no assurances
that it will be economically feasible to produce and market the oil or gas
reserves, if any, underlying any of the Program Wells. The cost and length of
time necessary to produce the reserves may be such that it will not be
economically viable to market this oil or gas. There is also the risk that the
geology reports on which the Company may rely are inaccurate, that the oil or
gas reserves are less than anticipated, that the Company will not be able to
market the oil due to a lack of a market and that fluctuations in the prices of
oil and gas will make development of those leases uneconomical.

 

Dependence on Technical Personnel. Certain members of present management have
substantial expertise in the areas of endeavor presently conducted and to be
engaged in by the Company. To the extent that their services become unavailable,
the Company will be required to retain other qualified personnel. There can be
no assurance that it will be able to recruit and hire qualified persons upon
acceptable terms. Similarly, the oil and gas exploration industry requires the
use of personnel with substantial technical expertise. In the event that the
services of its current technical personnel become unavailable, the Company will
need to hire qualified personnel to take their place; no assurance can be given
that it will be able to recruit and hire such persons on mutually acceptable
terms.

 

General Economic Conditions. Virtually all of the operations concerning the
Program Wells will be subject to the risks and uncertainties of adverse changes
in general economic conditions, the outcome of pending and/or potential legal or
regulatory proceedings, changes in environmental, tax, labor and other laws and
regulations, and the condition of the capital markets utilized by the Company to
finance its operations.

 

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Locations for Program Wells Have Not Been Determined. These locations will be
determined by the Company based on all available information including 3-D
seismic analysis if available. These undetermined locations will be on property
currently owned by the Company, or on property in Kansas acquired by the Company
based on the Company’s view of the likelihood of oil and gas being present or
possibly being present in commercial quantities. There can be no assurance that
the locations for the nine remaining wells can or will be determined with the
same degree of expectation for potential production of oil and gas as the
Company has determined for the first three wells of its current drilling
program, or for any level of potential production at all, and all such locations
may be totally unproductive of oil or gas. There can be no assurance that the
same amount or quality of seismic information or nearby well production history
is or will be available for any of the locations to be utilized in the Program.

 

No Legal or Tax Advice. The Purchaser of any Unit should consult with their
respective counsel, accountant or business adviser as to legal, tax and related
matters concerning investment in the Units offered hereby. An investment in the
Units may involve certain material federal and state tax consequences. Any
discussion contained in this Memorandum with respect to the Tax Consequences is
not intended to constitute advice to the Investor.

 

CONFLICTS OF INTEREST

 

Most of the areas of conflicts of interest described below are common to many
oil and gas drilling programs. The terms contained herein are intended to
ameliorate the conflicts of interest inherent in such a situation to the extent
practicable, taking into consideration, among other things, the uncertainties
involved in attempting to determine, in advance, the location of the Well to be
drilled, progress of drilling and other exploration in the area of the Program
Well(s), and the outcome of drilling operations.

 

(a) Prior and Subsequent Activities of the Company. The Company and its officers
will be actively engaged in other oil and gas acquisitions and operations. Such
activities could create conflicts of interest with this Program. The Company
anticipates sponsoring, managing, and participating in other private drilling
programs, including other drilling programs in the area of the Program Wells or
drilling operations solely to the interests of the Company in such wells. Such
activities may create conflicts of interest between this Program and the
Company. In all instances of operation and management of drilling programs for
the account of others, the Company and its management, where potential conflicts
arise, will not prefer its own or other drilling programs over the interests of
this Program and its Participants. Notwithstanding this potential conflict of
interest, the Company is cognizant of the obligations to Participants under the
Operating Agreement, and intends to make all such decisions by adhering to the
"prudent operator" standard.

 

(b) Operator. The Company will be the Operator of the Program Well(s) drilled.
As Operator, the Company will receive overhead reimbursements and will be solely
responsible for overseeing the conduct of operations of the wells. The Company,
in its capacity as manager of the Program, is obligated to pay all of the costs
of turnkey operations through drilling and completion. In performing its
obligations, the Company will be the Operator about a number of matters,
including the number and types of tests to be performed, completion techniques
to be employed, and whether to purchase and install new or used production
equipment.

 

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EXHIBIT “A” - FORM OF ASSIGNMENT

 

 

ASSIGNMENT OF WORKING INTEREST

 

THIS AGREEMENT is between Tengasco, Inc., 10215 Technology Drive, Suite 301,
Knoxville TN 37932, hereinafter referred to as Assignor or Operator, and
_____________________________________________, hereinafter referred to as
Assignee or Working Interest Owner.

 

WITNESSETH:      That for consideration previously received, the receipt of
which is hereby acknowledged, the Assignor for itself and its successors and
assigns, does hereby grant, convey, sell, assign, transfer and set over unto
said Assignee and its successors and assigns, an undivided ______________percent
(___%) of the working interest (________Net Revenue Interest) in and to the

 

[Description of Program Well; Lease and Spacing Unit Description]

 

It is expressly understood and agreed that this assignment of working interest
conveys an interest in the _______________ Well and its Spacing Unit only and
that the Working Interest Owner by reason of this assignment acquires no other
or additional interest in the oil and gas lease covering the realty upon which
the ____________Well is located.

 

Its expressly understood and agreed that the interest conveyed hereby is and
shall remain subject to the obligation of Assignee to pay to Assignor 25% or 85%
of the net proceeds attributable to the working interest assigned hereby as a
management fee (the “Management Fee”) for the entire remaining life of the well
subject to this Assignment, and that such obligation to pay the Management Fee
shall be binding upon Assignee and upon Assignee’s heirs, successors, and
assigns, commencing at the time of payout to Assignee and in all respects in
accordance with the provisions set out in that certain document entitled the
Kansas Ten Unit Drilling Program dated September [13], 2007, which is expressly
incorporated herein by this reference.  

 

None of the rights, duties or obligations of the parties hereto or terms hereof
shall be construed as creating a joint venture, a general partnership or any
other legal entity whereby one party can be held individually responsible for
all the debts, liabilities or charges incurred in connection with the operation
or abandonment of such leasehold property, but, rather, each party hereunder is
a Tenant in Common with the others and as such is liable only for his, her or
its proportionate share in connection with any operation and abandonment of such
leasehold property and incurred in accordance with this Agreement, only to the
extent and limit of the Working Interest Owner’s undivided interest. 
Furthermore, both Operator and Working Interest Owner each elect to be excluded
from the operation of Chapter 1, Subtitle A, Subchapter K of the Internal
Revenue Code of 1954, or any subsequent rulings of similar intent, insofar as
such Subchapter or any portion thereof may be applicable to Operator or Working
Interest Owner in respect to operations covered by this Agreement.  Operator is
hereby authorized and directed to execute for and on behalf of Working Interest
Owner any additional evidence of said election that may be required to comply
with the Subchapter K and, should these regulations require both Operator and
Working Interest Owner to execute additional evidence, each party agrees to
comply with the regulations and to join in the execution of any documents
required, thereby eliminating the necessity of filing a Partnership income tax
return, or similar returns, which otherwise could be required under the above
Subchapter K or a like ruling.

 

In case of any controversy the parties hereto agree that the laws of the State
of Tennessee shall apply. This Agreement shall be binding upon the heirs,
successors and assigns of the parties hereto.

 

SIGNED AND EFFECTIVE THIS ___ day of ______, ________.

 

TENGASCO, INC. as Assignor and Operator

 

 

By:  

___________________________________________

Chief Executive Officer

 

 

By:  

________________________________________

Assignee and Working Interest Owner

 

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STATE OF TENNESSEE  

}

}

 

COUNTY OF KNOX  

}

 

On this the _____ day of ____________, 200_ before me, personally appeared

_________________________, known to me to be the President of Tengasco, Inc. and
acknowledged to me that he executed the same as such officer in the name of and
on behalf of the corporation.

 

IN WITNESS WHEREOF, I have hereunto set my hand and official seal.

 

________________________________________________

Notary Public

 

My Commission Expires: ____________________

 

 

STATE OF ___________  

}  

}

 

COUNTY OF__________  

}  

 

On this the ______ day of _______________, 200_, before me, personally appeared
____________________, known to me to be the President of
_____________________________________,and acknowledged that he executed the same
as such officer in the name of and on behalf of the said corporation.

 

IN WITNESS WHEREOF, I have hereunto set my hand and official seal.

 

_______________________________________

Notary Public

 

My Commission Expires: ____________________

 

 

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