EXHIBIT 10.14

 

 

 

 

May 8, 2006

 

 

 

Cortez Exploration, LLC

Mr. O. F. Duffield, Manager

16786 Kincheloe Rd.

Siloam Springs, AR 72761

 

RE: Participation Agreement,

Gabbs Valley Prospect,

Nye & Mineral Counties, Nevada

 

Dear Mr. Duffield:

 

This letter is to confirm Empire’s decision to commit to forty-five (45%)
percent of the cost of a 5,000’ test well to be known as the PetroWorld Cobble
Cuesta 1-12-T12N-R34E, Nye County. In return for paying forty-five (45%) percent
of the cost of this test well Cortez will assign to Empire a thirty (30%)
percent interest in the oil and gas leases listed on Schedule “A” attached to
and made a part of this letter.

 

Empire also agrees to pay Cortez the Sum of Six Hundred and Seventy-Five
Thousand ($675,000) dollars for its share of the lease costs. Such payment to be
made prior to the commencement of drilling operations or by August 1, 2006,
whichever first occurs.

 

Empire agrees that all drilling and production operations shall be carried out
pursuant to the terms of the Cobble Cuesta (formerly Gabbs Valley Unit) Unit No.
N-78845X and the Operating Agreement attached as Schedule “D” in the
Cortez-PetroWorld Letter Agreement dated April 15, 2005, attached hereto as
Schedule “B”.

 

After the signing of this instrument and all obligations are met, the ownership
of the Oil & Gas Leases will be PetroWorld 30%; Empire 40%; Cortez 30% subject
to the A.M.I. and royalties set out in Schedule “A” of the agreement. Any lease
rentals that might become due prior to PetroWorld’s and Empire’s earning an
interest shall be paid by PetroWorld 30%, Empire 40%, and Cortez 30%.

 

This agreement inures to the heirs, administrators, successors, and
beneficiaries.

 

If this letter meets with your understanding of our agreement please sign and
return one copy to the undersigned.

 

Yours very truly,

 

 

 

A. E. Whitehead

President

 

 

 

Agreed to this 11TH day of May, 2006

Cortez Exploration, LLC

 

 

 

By: /s/ O. F. Duffield     O. F. Duffield, Manager  

 

 
 

 

SCHEDULE "A"   OIL & GAS LEASES GABBS VALLEY PROSPECT NEVADA                  
Lease   Effective             Serial #   Date Term Lessor Lessee Assignee Acres
N.R.I.                                     N-59901   9/1/1995 10 yr BLM James P.
Duffield O. F.Duffield 3,840.56 80%                   N-60885   9/1/1995 10 yr
BLM James P. Duffield O. F. Duffield 6,388.16 80%                   N-60812  
6/1/1996 10 yr BLM James P.Duffield O. F. Duffield 10,205.16 80%                
  N-60815   6/1/1996 10 yr BLM James P. Duffield O. F. Duffield 960.00 80%      
            N-60816   6/1/1996 10yr BLM James P. Duffield O. F. Duffield
6,080.00 80%                   N-60793   6/1/1997 10 yr BLM John L. Messenger O.
F. Duffield 1,920.00 80%                   N-60808   6/1/1997 10 yr BLM John L.
Messenger O. F. Duffield 2,553.43 80%                   N-60807   6/1/1997 10 yr
BLM John L. Messenger O. F. Duffield 1,760.00 80%                   N-60791  
9/1/1996 10 yr BLM John L. Messenger O. F. Duffield 3,200.00 80%                
  N-60806   6/1/1997 10 yr BLM John L. Messenger O. F. Duffield 2,235.70 80%    
              N-60792   6/1/1996 10 yr BLM John L. Messenger O. F. Duffield
5,461.37 80%                                               TOTAL   44,604.38  

 

 
 

 

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980 (Pages 2, 3, 4, 6, 7, 8, 9, 10, 10A, and 16 Revised 1985)

 

 

 

EXHIBIT "B"

 

UNIT OPERATING AGREEMENT

GABBS VALLEY UNIT AREA

COUNTIES OF MINERAL AND NYE

STATE OF NEVADA

 

 

 

TABLE OF CONTENTS Preliminary Recitals 1           ARTICLE I-DEFINITIONS Section
1.1   Definitions 2           ARTICLE 2-EXHIBITS Section 2.1   Exhibits. 2      
    ARTICLE 3-INITIAL TEST WELL Section 3.1   Location 2 Section 3.2   Costs of
Drilling 2           ARTICLE 4-SUBSEQUENT TEST WELLS Section 4.1   Right to
Drill 2           ARTICLE 5-ESTABLISHMENT, REVISION, AND CONSOLIDATION OF
PARTICIPATING AREAS Section 5.1   Proposal 2 Section 5.2   Objections to
Proposal 2 Section 5.3   Revised Proposal 2 Section 5.4   Rejection of Proposal
2 Section 5.5   Consolidation 2           ARTICLE 6-APPORTIONMENT OF COSTS AND
OWNERSHIP AND DISPOSITION OF PRODUCTION AND PROPERTY Section 6.1   Apportionment
and Ownership Within Participating Area 3       A.  Costs 3       B.  Production
3       C.  Property 3 Section 6.2   Ownership and Costs Outside Participating
Area 3       A.  When All Drilling Block Parties Participate 3       B.  When
Less Than All Drilling Block Parties Participate 3 Section 6.3   Cost Liability
of Subsequently Created Interests 3 Section 6.4   Taking in Kind 3 Section 6.5  
Failure to Take in Kind 3 Section 6.6   Surplus Materials and Equipment 4      
    ARTICLE 7-PLANS OF DEVELOPMENT Section 7.1   Submittal of Plans 4 Section
7.2   Proposal 4 Section 7.3   Objections to Plan 4 Section 7.4   Revised Plan 4
Section 7.5   Rejection of Plan 4 Section 7.6   Notice of Approval or
Disapproval 4 Section 7.7   Supplemental Plans 4 Section 7.8   Cessation of
Opers Under the Plan 4                                                          
            i       ROCKY MOUNTAIN UNIT OPERATING AGREEMENT Form 2 (Divided
Interest) February, 1980           ARTICLE 8-DEVELOPMENT WELLS Section 8.1  
Purpose of Procedure 4 Section 8.2   Drilling 4       A.  Approval Required 4  
    B.  Notice of Proposed Drilling 5       C.  Response to Notice 5       D. 
Notice of Election to Proceed 5       E.  Subsequent Election 5       F.  Effect
of Election 5       G.  Rights and Obligations of Drilling Party and
Non-Drilling Party 5 Section 8.3   Attempted Completion 5       A.  Notice by
Unit Operator 5       B.  Right to Attempt Completion 5       C.  Time and
Manner of Initiating Proposal 5       D.  Election 5       E.  Effect of
Election 5       F.  Rights and Obligations of Completing Party and
Non-Completing Party 5       G.  Notice Prior to Plugging 5           ARTICLE
9-EXPLORATORY WELLS Section 9.1   Purpose and Procedure 6 Section 9.2   Drilling
6       A.  Notice of Proposed Drilling 6       B.  Basis of Participation 6    
  C.  Exclusion of Land From Proposed Drilling Block 6       D.  Preliminary
Notice to Join in Drilling 6       E.  Notice of Election to Proceed 6       F. 
Subsequent Election 6       G.  Effect of Election 6       H.  Rights and
Obligations of Drilling Party and Non-Drilling Party 6 Section 9.3   Attempted
Completion 6       A.  Notice by Unit Operator 6       B.  Right to Attempt
Completion 6       C.  Time and Manner of initiating Proposal 7       D. 
Election 7       E.  Effect of Election 7       F.  Rights and Obligations of
Completing Party and Non-Completing Party 7       G.  Notice Prior to Plugging 7
          ARTICLE 10-REQUIRED WELLS Section 10.1   Definition 7 Section 10.2  
Election to Drill 7 Section 10.3   Alternatives to Drilling 7       A. 
Compensatory Royalties 7       B.  Contraction 7       C.  Termination 7 Section
10.4   Required Drilling 7       A.  Development Well 7       B.  Exploratory
Well 7           ARTICLE 11-DEEPENING, PLUGGING BACK, AND ABANDONMENT Section
11.1   Attempted Deepening or Plugging Back 8       A.  Notice by Unit Operator
8       B.  Right to Initiate Proposal 8       C.  Right to Participate 8      
D.  Time and Manner of Initiating Proposal 8       E.  Election 8       F. 
Effect of Election 8       G.  Rights and Obligations of Participating party and
Non-Participating Party 8 Section 11.2   Deepening or Plugging Back to
Participating Area 8 Section 11.3   Conflicts 8 Section 11.4   Attempted
Completion 8 Section 11.5   Abandonment of Producing Wells 9       A.  Consent
Required 9       B.  Abandonment Procedure 9           ii         ROCKY MOUNTAIN
UNIT OPERATING AGREEMENT   Form 2 (Divided Interest) February, 1980            
    C.  Rights and Obligations of Non-Abandoning Party 9       D.  Option to
Repurchase Materials 9 Section 11.6   Deepening or Plugging Back Abandoned
Producing Wells 9           ARTICLE 12-RIGHTS AND OBLIGATIONS OF DRILLING PARTY
AND NON-DRILLING PARTY Section 12.1   Use of Terms 9 Section 12.2   Scope of
Article 9 Section 12.3   Relinquishment of Interest by Non-Drilling Party 9
Section 12.4   Reversion of Relinquished Interest 10 Section 12.5   Effect of
Reversion 10 Section 12.6   Rights and Obligations of Drilling Party 10 Section
12.7   Accounting Due Non-Drilling Party 10 Section 12.8   Stand-By Rig Time 10
Section 12.9   Subsequently Created Lease Burdens 10A           ARTICLE
13-ADJUSTMENT ON ESTABLISHMENT OR CHANGE OF PARTICIPATING AREA Section 13.1  
When Adjustment Made 11 Section 13.2   Definitions 11       A.  “Usable well” 11
      B.  “Intangible value” 11       C.  “Tangible property” 11       D. 
“Value” 11 Section 13.3   Method of Adjustment on Establishment or Enlargement
11 Section 13.4   Method of Adjustment on Contraction 11 Section 13.5  
Ownership of Wells and Tangible Property 12 Section 13.6   Relinquished Interest
of Non-Drilling Parties 12           ARTICLE 14-SUPERVISION OF OERATIONS BY
PARTIES Section 14.1   Right of Supervision 13 Section 14.2   Voting Control 13
Section 14.3   Meetings 13 Section 14.4   Action Without Meeting 13 Section 14.5
  Representatives 13 Section 14.6   Audits 13 Section 14.7   Extraneous Projects
13           ARTICLE 15-UNIT OPERATOR’S POWERS AND RIGHTS Section 15.1   In
General 13 Section 15.2   Employees 13 Section 15.3   Non-Liability 13 Section
15.4   Force Majeure 13 Section 15.5   Lien 14 Section 15.6   Advances 14
Section 15.7   Use of Unit Operator’s Drilling Equipment 14 Section 15.8  
Rights as Party 14           ARTICLE 16-UNIT OPERATOR’S DUTIES Section 16.1  
Specific Duties 14       A.  Drilling of Wells 14       B.  Compliance with Laws
and Agreements 14       C.  Consultation with Parties 14       D.  Payment of
Costs 14       E.  Records       15       F.  Information       15       G. 
Access to Unit Area       15 Section 16.2   Insurance       15       A.  Unit
Operator’s       15       B.  Contractors’       15       C.  Automotive
Equipment       15 Section 16.3   Non-Discrimination       15 Section 16.4  
Drilling Contracts       15 Section 16.5   Uninsured Losses       15          
ARTICLE 17-LIMITATIONS ON UNIT OPERATOR Section 17.1   Specific Limitations 15  
        iii         ROCKY MOUNTAIN UNIT OPERATING AGREEMENT Form 2 (Divided
Interest) February, 1980                 A.  Change in Operations 15       B. 
Limit on Expenditures 15       C.  Partial Relinquishment 15       D. 
Settlement of Claims 16       E.  Determinations 16           ARTICLE 18-TITLES
Section 18.1   Representation of Ownership 16 Section 18.2   Title Papers to be
Furnished 16       A.  Lease Papers 16       B.  Title Papers for Initial Test
Well 16       C.  Title Papers for Subsequent Wells 16       D.  Title Papers on
Establishment or Enlargement of a Participating Area 16 Section 18.3   Title
Examination 16 Section 18.4   Option for Additional Title Examination 16 Section
18.5   Approval of Titles Prior to Drilling 17 Section 18.6   Approval of Titles
Prior to Inclusion of Land in a Participating Area 17 Section 18.7   Failure of
Title to Committed Working Interest 17 Section 18.8   Failure of Title to
Committed Working Interest After Approval 17 Section 18.9   Joinder by True
Owner 17 Section 18.10   Title Challenge 17           ARTICLE 19-UNLEASED
INTERESTS Section 19.1   Treated as Leased 17 Section 19.2   Execution of Lease
17           ARTICLE 20-RENTALS AND LEASE BURDENS Section 20.1   Rentals 18
Section 20.2   Lease Burdens 18 Section 20.3   Loss of Committed Working
Interest 18           ARTICLE 21-TAXES Section 21.1   Payment 18 Section 21.2  
Apportionment 18 Section 21.3   Transfer of Interests 18 Section 21.4   Notices
and Returns 18           ARTICLE 22-WITHDRAWAL OF TRACTS AND UNCOMMITTED
INTERESTS Section 22.1   Right of Withdrawal 18 Section 22.2   Non-Withdrawal 18
          ARTICLE 23-COMPENSATORY ROYALTIES Section 23.1   Notice 18 Section
23.2   Demand for Failure to Drill a Development Well 18 Section 23.3   Demand
for Failure to Drill a Well Other Than a Development Well 19           ARTICLE
24-SEPARATE MEASUREMENT AND SALVAGE Section 24.1   Separate Measurement 19
Section 24.2   Salvaged Materials 19           ARTICLE 25-ENHANCED RECOVERY AND
PRESSURE MAINTENANCE Section 25.1   Consent Required 19 Section 25.2  
Above-Ground Facilities 19           ARTICLE 26-TRANSFERS OF INTEREST Section
26.1   Sale by Unit Operator 19 Section 26.2   Assumption of Obligations 19
Section 26.3   Effective Date 19           ARTICLE 27-RELEASE FROM OBLIGATIONS
AND SURRENDER Section 27.1   Surrender or Release Within Participating Area 19
Section 27.2   Procedure on Surrender or Release Outside Participating Area 20
Section 27.3   Accrued Obligations 20                               iv        
ROCKY MOUNTAIN UNIT OPERATING AGREEMENT Form 2 (Divided Interest) February, 1980
          ARTICLE 28-LIABILITY Section 28.1   Liability 20 Section 28.2   No
Partnership Created 20 Section 28.3   Election 20           ARTICLE 29-NOTICES
Section 29.1   Giving and Receipt 20 Section 29.2   Addresses 20          
ARTICLE 30-EXECUTION Section 30.1   Counterparts 20 Section 30.2   Ratification
20 Section 30.3   Effect of Signature 21           ARTICLE 31-SUCCESSORS AND
ASSIGNS Section 31.1   Covenants 21           ARTICLE 32-HEADINGS FOR
CONVENIENCE Section 32.1   Headings 21           ARTICLE 33-RIGHT OF APPEAL
Section 33.1   Not Waived 21           ARTICLE 34-SUBSEQUENT JOINDER Section
34.1   Prior to the Commencement of Operations 21 Section 34.2   After
Commencement of Operations 21           ARTICLE 35-CARRIED INTERESTS Section
35.1   Treatment of 21           ARTICLE 36-EFFECTIVE DATE AND TERM Section 36.1
  Effective Date and Term 21 Section 36.2   Effective Termination 21          
ARTICLE 37-OTHER PROVISIONS           EXHIBITS Exhibit 1   Accounting Procedure
  Exhibit 2   Initial Test Well   Exhibit 3   Insurance   Exhibit 4  
Non-Discrimination   Exhibit 5   Oil and Gas Lease                              
            NOTE:  Attention is called to pages 1, 6, 10, 11, 13, 14, 15, 16,
and 19, which contain blanks to be filled in.                                  
                                                                               
                                                                               
                v

 
 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980

 

 

UNIT OPERATING AGREEMENT

 

GABBS VALLEY UNIT AREA

 

 

THIS AGREEMENT made as of the 5th day of August , 2010, by and among the parties
who by and among the parties who execute or ratify this Agreement or a
counterpart hereof,

 

WITNESSETH:

 

WHEREAS, the Parties have entered into that certain UNIT AGREEMENT FOR THE
DEVELOPMENT AND OPERATION OF THE GABBS VALLEY UNIT AREA, Counties of Mineral and
Nye State of Nevada , dated as of the 5th day of , 2010, and hereinafter
referred to as the “Unit Agreement”, covering the lands described in EXHIBIT B
thereto attached, which lands are referred to in the Unit Agreement and in this
Agreement as the “Unit Area”; and

 

WHEREAS, the Parties enter into this Agreement pursuant to Section 7 of the Unit
Agreement,

 

NOW, THEREFORE, in consideration of the covenants herein contained, it is agreed
as follows:

 

ARTICLE 1

DEFINITIONS

 

1.1 Definitions. The definitions contained in the Unit Agreement are adopted for
all purposes of this Agreement. In addition, each term listed below shall have
the meaning stated therefor, whenever used in this Agreement:

 

"Unit Operator" means O. F. Duffield and its successors, as the Unit Operator
designated in accordance with the Unit Agreement, acting in that capacity and
not as an owner of a Committed Working Interest.

 

"Party" means a party to this Agreement, including the Party acting as Unit
Operator when acting as an owner of a Committed Working Interest.

 

"Drilling Party", "Completing Party", and "Participating Party" all mean the
Party or Parties obligated to bear Costs incurred in the Drilling, Completing,
or Deepening or Plugging Back, respectively, of a well at the commencement of
such operation.

 

"Non-Drilling Party", "Non-Completing Party", and "Non-Participating Party" all
mean the Party or Parties who had the optional right to participate in the
Drilling, Completing, or Deepening or Plugging Back, respectively, of a well and
who elected not to participate therein.

 

"Committed Working Interest" means a working interest which is shown on Exhibit
B to the Unit Agreement as owned by a Party and which is committed to the Unit
Agreement. Whenever reference is made to a Party "in" or "within" the Unit Area,
a participating area, or other area designated pursuant to this Agreement, such
reference shall mean a Party owning a Committed Working Interest in lands within
such area.

 

"Acreage Basis", when used to describe the basis of participation by the Parties
within the Unit Area, a participating area. or other area designated pursuant to
this Agreement in voting, Costs, or Production, means participation by each such
Party in the proportion that the acreage of its Committed Working Interests in
such area bears to the total acreage of the Committed Working Interests of all
such Parties therein. For the purposes of this definition, (a) the acreage of
the Committed Working Interest in a tract within the Unit Area shall be the
acreage of such tract as set forth in Exhibit B to the Unit Agreement, and (b)
if there are two or more undivided Committed Working Interests in a tract, there
shall be apportioned to each such Committed Working Interest that proportion of
the acreage of the tract that such Committed Working Interest bears to the
entire Committed Working Interest in the tract.

 

"Production" means all unitized substances produced and saved from the Unit Area
except so much thereof as is used in the conduct of operations under the Unit
Agreement and this Agreement.

 

"Costs" means all costs and expenses incurred in the development and operation
of the Unit Area pursuant to this Agreement or the Unit Agreement and all other
expenses that are herein made chargeable as Costs, determined in accordance with
the Accounting Procedure attached hereto as Exhibit 1, which shall govern in all
matters covered thereby, except that in the event of an inconsistency between
said Accounting Procedure and this Agreement, this Agreement shall control.

 

"Lease Burdens" means the royalty reserved to the lessor in an oil and gas
lease, an overriding royalty, a production payment, and any similar burden, but
does not include a carried working interest, a net profits interest, or any
other interest which is payable out of profits.

 

"Drill" means to perform all operations reasonably necessary and incident to the
drilling of a well to its projected depth, including preparation of roads and
drill site, testing, and logging, but excluding Completion operations.

 

"Complete" means to perform all operations reasonably necessary and incident to
the completion of a well, commencing with the running and setting of the
production pipe and, if productive of unitized substances, equipping through the
wellhead connections, or plugging and abandoning, if dry.

 

"Equip" means to perform all operations reasonably necessary and incident to the
equipping of a well for production beyond the wellhead connections.

1

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 2 Revised 1985)

 

 

"Deepen" or "Plug Back" means to perform all operations reasonably necessary and
incident to Drilling a well below its original projected depth or plugging back
a well to a depth above its original projected depth, testing, and logging, but
excluding Completing and Equipping operations.

 

"Initial Test Well" means the test well or wells provided for in Section 9 of
the Unit Agreement and in Exhibit 2 attached hereto.

 

"Subsequent Test Well" means a test well Drilled after the Drilling of the
Initial Test Well and before discovery of unitized substances in Paying
Quantities in the Unit Area.

 

"Development Well" means a well Drilled within a participating area and
projected to the pool or zone for which the participating area was established.

 

“Exploratory Well" means a well (other than a Development Well) Drilled after
discovery of unitized substances in Paying Quantities in the Unit Area.

 

"Approval of the Parties" or "Direction of the Parties" means an approval,
authorization, or direction which receives the affirmative vote of the Parties
entitled to vote on the giving of such Approval or Direction, as specified in
Section 14.2.

 

"Salvage Value" of a well means the value of the materials and equipment in or
appurtenant to the well, determined in accordance with Exhibit 1, less the
reasonably estimated Costs of salvaging the same and plugging and abandoning the
well.

 

"Appropriate Agency" means the agency designated in the applicable Federal
Regulations, including any person acting under the authority thereof.

 

"Paying Quantities" means paying quantities as defined in Section 9 of the Unit
Agreement.

 

Other Definitions:

 

ARTICLE 2

EXHIBITS

 

2.1 Exhibits. The following Exhibits are incorporated herein by reference:

 

Exhibit 1. Accounting Procedure.

Exhibit 2. Initial Test Well.

Exhibit 3. Insurance.

Exhibit 4. Non-Discrimination.

Exhibit 5. Oil and Gas Lease.

 

In the event of a conflict or inconsistency between the provisions of an Exhibit
and the provisions of this Agreement, the provisions of this Agreement shall
control.

 

ARTICLE 3

INITIAL TEST WELL

 

3.1 Location. Unit Operator shall begin to Drill the Initial Test Well within
the time required by Section 9 of the Unit Agreement, or any extension thereof,
at the location specified in Exhibit 2.

 

3.2 Costs of Drilling. Subject to the investment adjustment provisions of
Article 13, the Costs of Drilling the Initial Test Well shall be shared by the
Parties in the manner and in the proportions specified in Exhibit 2.

 

ARTICLE 4

SUBSEQUENT TEST WELLS

 

4.1 Right to Drill. The Drilling of any Subsequent Test Well shall be upon such
terms and conditions as may be agreed to by the Parties; provided, however, that
in the absence of agreement, such well may be Drilled under the provisions of
Article 9.

 

ARTICLE 5

ESTABLISHMENT, REVISION, AND CONSOLIDATION OF PARTICIPATING AREAS

 

5.1 Proposal. Unit Operator shall initiate each proposal for the establishment
or revision of a participating area by submitting the proposal in writing to
each Party at least twenty (20) days before filing the same with the Appropriate
Agency. The date of proposed filing must be shown in the proposal. If, within
the 20-day period above provided, the proposal receives the Approval of the
Parties within the proposed participating area or no written objections are
received, then such proposal shall be filed on the date specified.

 

5.2 Objections to Proposal. Prior to the proposed filing date any Party may
submit to all other Parties written objections to such proposal. If, despite
such objections, the proposal receives the Approval of the Parties within the
proposed participating area, then the Party making the objections may renew the
same before the Appropriate Agency.

 

5.3 Revised Proposal. If the proposal does not receive the Approval of the
Parties within the proposed participating area, and Unit Operator receives
written objections thereto, then Unit Operator shall submit to the Parties a
revised proposal, taking into account the objections made to the first proposal.
If no proposal receives the Approval of the Parties within sixty (60)

 

2

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 3 Revised 1985)

 

days from submission of the first proposal, then Unit Operator shall file with
the Appropriate Agency a proposal reflecting as nearly as practicable the
various views expressed by the Parties.

 

5.4 Rejection of Proposal. If a proposal filed by Unit Operator as above
provided is rejected by the Appropriate Agency, Unit Operator shall initiate a
new proposal in the same manner as provided in Section 5.1, and the procedure
with respect thereto shall be the same as in the case of an initial proposal.

 

5.5 Consolidation. Two or more participating areas may be combined as provided
in the Unit Agreement.

 

ARTICLE 6

APPORTIONMENT OF COSTS AND OWNERSHIP AND DISPOSITION OF PRODUCTION AND PROPERTY

 

6.1 Apportionment and Ownership Within Participating Area. Except as otherwise
provided in Articles 8, 9, 11, and 12:

 

A. Costs. All Costs incurred in the development and operation of a participating
area for or in connection with production of unitized substances from any pool
or zone for which such participating area is established shall be borne by the
Parties within such participating area on an Acreage Basis, determined as of the
time such Costs are incurred.

 

B. Production. All Production from a participating area shall be allocated on an
Acreage Basis to the tracts of unitized land within such participating area.
That portion of such Production which is allocated to any such tract shall be
owned by the Party or Parties having Committed Working Interest or Interests
therein in the same manner and subject to the same conditions as if actually
produced from such tract through a well thereon and as if this Agreement and the
Unit Agreement had not been executed.

 

C. Property. All materials, equipment, and other property, whether real or
personal, the cost of which is chargeable as Costs and which have been acquired
in connection with the development or operation of a participating area, shall
be owned by the Parties within such participating area on an Acreage Basis.

 

6.2 Ownership and Costs Outside Participating Area. If a well Drilled (including
the Deepening or Plugging Back thereof) within a Drilling Block established
under the provisions of either Article 9 or Article 10 is completed as a
producer but not included within a participating area, then the following
provisions shall be applicable:

 

A. When All Drilling Block Parties Participate. If all Parties within the
Drilling Block shall have elected to participate in Drilling and Completing such
well, then said well, the Production therefrom, and the materials and equipment
therein or appurtenant thereto shall be owned by such Parties; and all Costs
incurred in the operation of such well and all Lease Burdens payable in respect
of Production from such well shall be borne and paid by said Parties.
Apportionment among said Parties of ownership, Costs, and Lease Burdens shall be
in the same proportions in which Costs incurred in Drilling the well were borne.

 

B. When Less Than All Drilling Block Parties Participate. If any Party within
the Drilling Block shall have elected not to participate in Drilling or
Completing such well, then the provisions of Article 12 shall be applicable
thereto; and the relinquished interest of the Non-Drilling Party shall revert to
it in the same manner and under the same conditions as provided in Section 12.4
with respect to a well which results in the establishment or enlargement of a
participating area, except that the proceeds or market value to be used in
determining when such reversion shall occur shall be the proceeds or market
value (after making the deductions provided for in Section 12.4) of that portion
of the Production obtained from the well which, had the Non-Drilling Party
elected to participate in the Drilling or Completing thereof, would have been
allocable, on an Acreage Basis within the Drilling Block, to the Non-Drilling
Party. Upon reversion of the relinquished interest of the Non-Drilling Party in
such well, the provisions of Section 12.5 shall become applicable.

 

6.3 Cost Liability of Subsequently Created Interests. Anything herein to the
contrary not withstanding, if, subsequent to the date of this Agreement, any
Party shall create an overriding royalty, production payment, net proceeds
interest, carried interest, or any other interest out of its Committed Working
Interest (hereinafter called "Subsequently Created Interest"), such Subsequently
Created Interest shall be made expressly subject to the terms and provisions of
this Section 6.3 and of Section 12.9. If the Party which created such
Subsequently Created Interest fails to pay, when due, its share of Costs and the
proceeds from its share of Production are insufficient to cover such Costs, then
the Subsequently Created Interest shall be chargeable with a pro rata share of
such Costs as if such Subsequently Created Interest were a Committed Working
Interest; and Unit Operator shall have the right to enforce against such
Subsequently Created Interest the lien and all other rights granted in Section
15.5 for the purpose of collecting Costs chargeable to the Subsequently Created
Interest.

 

6.4 Taking in Kind. Each Party shall currently, as produced, take in kind or
separately dispose of its share of Production and pay Unit Operator for any
extra expenditure necessitated thereby. Except as otherwise provided in Section
15.5, each Party shall be entitled to receive directly all proceeds from the
sale of its share of Production. Unit Operator shall timely make all permitted
governmental filings relative to the price to be charged for gas; however, Unit
Operator shall not be liable if, through mistake or oversight, it should fail to
make any such filing or should make erroneous filings.

 

6.5 Failure to Take in Kind. Should any Party fail to take in kind or separately
dispose of its share of Production, the Party acting as Unit Operator shall have
the right, revocable at will by the Party owning such share, to purchase such
share for its own account at not less than the market price

 

3

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 4 Revised 1985)

 

receives for its own share of Production; provided that all such sales shall be
only for such reasonable periods of time as are consistent with the minimum
needs of the industry under the circumstances, but not to exceed one (1) year.
Notwithstanding the foregoing, Unit Operator shall not sell or commit any
Party's share of gas Production to a sale without first giving such Party not
less than ninety (90) days written notice.

 

6.6 Surplus Materials and Equipment. Materials and equipment owned by the
Parties or by any of them pursuant to this Agreement may be classified as
surplus by Unit Operator when deemed bv it to be no longer needed in operations
hereunder, by giving to each Party owning an interest therein notice thereof.
Such surplus materials and equipment shall be disposed of as follows:

 

A. Each Party owning an interest therein shall have the right to take in kind
its share of surplus tubular goods and other surplus items which are susceptible
of division in kind, by notice given to Unit Operator within thirty (30) days
after classification thereof as surplus, except that such right shall not apply
to junk or to any item (other than tubular goods) having a replacement cost of
less than Seven Thousand Five Hundred Dollars ($7,500.00).

 

B. Surplus materials and equipP1ent not divided in kind, other than junk and any
item (other than tubular goods) having a replacement cost of less than Seven
Thousand Five Hundred Dollars ($7,500.00), shall be sold to the highest bidder
or bidders.

 

C. Surplus materials and equipment not disposed of in accordance with the
preceding provisions of this Section shall be disposed of as provided in Exhibit
1.

 

ARTICLE 7

PLANS OF DEVELOPMENT

 

7.1 Submittal of Plans. Each plan for the development and operation of the Unit
Area shall be submitted by Unit Operator to the Appropriate Agency in accordance
with the Unit Agreement and the further provisions of this Article.

 

7.2 Proposal. Unit Operator shall initiate each proposed plan by submitting the
same in writing to each Party at least thirty (30) days before filing the same
with the Appropriate Agency. If, within the 30-day period above provided, such
plan receives the Approval of the Parties or no written objections are received,
then such plan shall be filed.

 

7.3 Objections to Plan. Within the 30-day period above provided, any Party may
submit to Unit Operator written objections to such plan. If, despite such
objections, the plan receives the Approval of the Parties, then the Party making
the objections may renew the same before the Appropriate Agency.

 

7.4 Revised Plan. If such plan does not receive the Approval of the Parties, and
Unit Operator receives written objections thereto, then Unit Operator shall
submit to the Parties a revised plan, taking into account the objections made to
the first plan. If no plan receives the Approval of the Parties within sixty
(60) days from submission of the first plan, then Unit Operator shall file with
the Appropriate Agency a plan reflecting as nearly as practicable the various
views expressed by the Parties.

 

7.5 Rejection of Plan. If a plan filed by Unit Operator as above provided is
rejected by the Appropriate Agency, Unit Operator shall initiate a new plan in
the same manner as provided in Section. 7.2, and the procedure with respect
thereto shall be the same as in the case of an initial plan.

 

7.6 Notice of Approval or Disapproval. If and when a plan has been approved or
disapproved by the Appropriate Agency, Unit Operator shall give prompt notice
thereof to each Party.

 

7.7 Supplemental Plans. If any Party or Parties shall have elected to proceed
with a ·Drilling, Deepening, or Plugging Back operation in accordance with the
provisions of this Agreement, and such operation is not provided for in the then
current plan of development approved by the Appropriate Agency, Unit Operator
shall either (a) submit to the Appropriate Agency for approval a supplemental
plan providing for the conduct of such operation or (b) request the Appropriate
Agency to consent to such operation, if such consent is sufficient.

 

7.8 Cessation of Operations Under the Plan. If any plan approved by the
Appropriate Agency provides for the cessation of any Drilling or other operation
therein provided for on the happening of a contingency and such contingency
occurs, Unit Operator shall promptly cease such Drilling or other operation and
shall not incur any additional Costs in connection therewith unless and until
such Drilling or other operation is again authorized, in accordance with this
Agreement, by the Parties chargeable with such Costs and the Appropriate Agency.

 

ARTICLE 8

DEVELOPMENT WELLS

 

8.1 Purpose and Procedure. It is the purpose of this Article to set forth the
procedure for Drilling and Completing a Development Well.

 

8.2 Drilling. The Drilling of a Development Well shall be pursuant to the
procedure herein set forth.

 

A. Approval Required. The Drilling of a Development Well shall be subject to
such Drilling receiving the Approval of the Parties, unless the Drilling of the
proposed well is necessary to prevent the loss of a Committed Working Interest
in the tract of land on which the proposed well is to be Drilled. Vote by any
Party in favor of the Drilling of any such well shall not, however, be deemed an
election by such Party to participate in the Costs thereof but shall mean only
that such Party

 

4

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

considers the Drilling of the well to be consistent with the efficient and
economic development of the participating area involved and has no objection to
the Drilling thereof.

 

B. Notice of Proposed Drilling. Subject to the provisions of Subdivision A of
this Section 8.2, any Party within a participating area may propose the Drilling
of a Development Well therein by giving to each of the other Parties within the
participating area notice, specifying the location, depth, and estimated cost of
the proposed well, which location shall conform to any applicable spacing
pattern then existing or an approved exception thereto.

 

C. Response to Notice. Within thirty (30) days after receipt of such notice,
each Party within such participating area shall advise all other Parties therein
whether or not it wishes to participate in Drilling the proposed well. If any
Party fails to give such advice within said 30-day period, it shall be deemed to
have elected not to participate in Drilling the proposed well. If all Parties
within such participating area advise that they wish to participate in Drilling
the proposed well, then Unit Operator shall Drill the well for the account of
all such Parties.

 

D. Notice of Election to Proceed. Unless all Parties within the participating
area agree to participate in Drilling such well, then, within fifteen (15) days
after expiration of the 30-day period specified in Subdivision C of this Section
8.2, each Party within the participating area then desiring to have the proposed
well Drilled shall give to all other Parties therein notice of its election to
proceed with the Drilling of said well. Failure to give such notice shall be
deemed an election not to participate in Drilling the well.

 

E. Subsequent Election. If election to Drill the proposed well is made, any
Party within the participating area who had not previously elected to
participate therein may do so by notice given to Unit Operator at any time
before the well is spudded, in which event such Party shall be included in the
Drilling Party. However, such Party shall be bound by any and all Directions and
Approvals theretofore given by the Drilling Party concerning the Drilling of the
well.

 

F. Effect of Election. If one or more, but not all, of the Parties within the
participating area elect to proceed with the Drilling of the well, Unit Operator
shall Drill the well for the account of such Party or Parties, who shall
constitute the Drilling Party, on an Acreage Basis among them selves, or on such
other basis as said Parties may specify.

 

G. Rights and Obligations of Drilling Party and Non-Drilling Party. Whenever a
Development Well is Drilled otherwise than for the account of all Parties within
the participating area involved, the provisions of Article 12 shall be
applicable to such operation.

 

8.3 Attempted Completion. The attempted Completion of Development Wells Drilled
to their projected depths shall be governed by the following provisions:

 

A. Notice by Unit Operator. After a Development Well has reached its projected
depth and been tested, logged, and logs furnished to each Drilling Party, but
before production pipe has been set, Unit Operator shall give notice thereof to
each Drilling Party.

 

B. Right to Attempt Completion. Each Drilling Party shall have the right to
initiate a proposal to attempt the Completion of such well and also shall be
entitled to participate in the Completion attempt.

 

C. Time and Manner of Initiating Proposal. A period of twenty-four (24) hours
(exclusive of Saturdays, Sundays, and holidays) from and after receipt of the
notice given pursuant to Subdivision A of this Section 8.3 shall be allowed
within which a Party entitled to do so may initiate a proposal to Complete. Any
such proposal shall be initiated by giving notice thereof to Unit Operator and
to each Drilling Party. If no such proposal is initiated within said period and
no other proposal is initiated pursuant to Article 11, Unit Operator shall plug
and abandon the well for the account of the Drilling Party.

 

D. Election. If a proposal to Complete is initiated, each Drilling Party shall
have a period of twenty-four (24) hours (exclusive of Saturdays, Sundays, and
holidays) from and after receipt of such proposal within which to notify Unit
Operator whether or not it elects to participate in the Completion attempt. The
failure of a Party to signify its election within said 24-hour period shall be
deemed an election not to participate in the Completion attempt.

 

E. Effect of Election. The Party or Parties electing to participate in an
attempt to Complete a well as above provided shall constitute the Completing
Party for such operation. Each Party who was entitled to make such election but
failed to do so as above provided shall be a Non-Completing Party with respect
to such operation. Such operation shall be conducted by Unit Operator for the
account of the Party or Parties constituting the Completing Party, on an Acreage
Basis among themselves, or on such other basis as the Completing Party may
specify. Such operation, if successful, shall include Equipping the well for
production.

 

F. Rights and Obligations of Completing Party and Non-Completing Party. Upon the
commencement of a Completion operation otherwise than for the account of all
Drilling Parties, the provisions of Article 12 shall be applicable to such
operation.

 

G. Notice Prior to Plugging. Before plugging and abandoning any Development Well
which was Drilled to its projected depth and not completed as a producer of
unitized substances, Unit Operator shall give the notice specified in Section
11.1 A, unless every Party entitled to the notice has consented to the plugging
and abandonment of such well, in which event Unit Operator shall plug and
abandon the well for the account of the Completing Party. Upon the giving of
such notice, the provisions of Article 11 shall apply.

 

5

 

ROCKY MOUNTAIN U JIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980 (Page 6 Revised 1985)

 

 

ARTICLE 9

EXPLORATORY WELLS

 

9.1 Purpose and Procedure. It is the purpose of this Article to set forth the
procedure for Drilling and Completing an Exploratory Well.

 

9.2 Drilling. The Drilling of an Exploratory Well shall be pursuant to the
procedure herein set forth.

 

A. Notice of Proposed Drilling. Any Party desiring the Drilling of an
Exploratory Well on land in which it owns a Committed Working Interest shall
designate an area, herein called a Drilling Block, not to exceed 960 acres,
which, on the basis of available geological information, will, in its judgment,
be proved productive by the Drilling of such well. Unit Operator and each Party
within the Drilling Block shall be furnished with a plat and description of the
area so designated, together with notice of the location, objective formation,
estimated depth, and estimated cost of the proposed well. The location of the
proposed we II shall conform to any applicable spacing pattern then existing or
an approved exception thereto. The Drilling Block shall include no land in an
established participating area for the objective formation for the well to be
Drilled thereon nor any land included in a proposal therefor filed with the
Appropriate Agency nor any land within an active, previously designated Drilling
Block for such formation. The Drilling Block shall be considered active for
ninety (90) days after the designation thereof and, if the actual Drilling of a
well is commenced thereon within such period, until either:

 

(1) the Completion of the well, if it is completed otherwise than as a producer
of unitized substances in Paying Quantities, either at its original projected
depth or, if Deepening or Plugging Back operations are conducted, at any other
projected depth; or

 

(2) the filing with the Appropriate Agency of a proposal for the establishment
or revision of a participating area if the Completion of the well results in the
filing of such proposal.

 

B. Basis of Participation. Each Party within the Drilling Block shall be
entitled to participate in the Costs of Drilling the proposed well on an Acreage
Basis but shall be required to do so only if it notifies the other Parties
within the Drilling Block of its willingness so to participate, as hereinafter
in this Article 9 provided.

 

C. Exclusion of Land From Proposed Drilling Block. Within thirty (30) days after
receipt of such notice, any part of the land included in the proposed Drilling
Block may be excluded therefrom at the Direction of the Parties therein. In such
event the proposed Drilling Block, as reduced by the exclusion of such land,
shall be established as the Drilling Block. In the absence of any such
Direction, then, at the expiration of said 30-day period, the proposed Drilling
Block shall be established as the Drilling Block.

 

D. Preliminary Notice to Join in Drilling. Within ten (10) days after the
establishment of the Drilling Block, each Party within such Drilling Block shall
advise all other Parties therein whether or not it wishes to participate in
Drilling the proposed well. If any Party fails to give such advice within said
10-day period, it shall be deemed to have elected not to participate in Drilling
the proposed well. If all Parties within the Drilling Block advise that they
wish to participate in Drilling the proposed well, then Unit Operator shall
Drill the well for the account of all such Parties.

 

E. Notice of Election to Proceed. Unless all Parties within the Drilling Block
agree to participate in Drilling such well, then, within fifteen (15) days after
expiration of the 10-day period specified in Subdivision D of this Section 9.2,
each Party within the Drilling Block then desiring to have the proposed well
Drilled shall give to all other Parties therein notice of its election to
proceed with the Drilling of said well. Failure to give such notice shall be
deemed an election not to participate in Drilling the well.

 

F. Subsequent Election. If election to Drill the proposed well is made, any
Party within the Drilling Block who had not previously elected to participate
therein may do so by notice given to all other Parties within the Drilling Block
at any time before the well is spudded, in which event such Party shall be
included in the Drilling Party. However, such Party shall be bound by any and
all Directions and Approvals theretofore given by the Drilling Party concerning
the Drilling of the well.

 

G. Effect of Election. If one or more, but not all, of the Parties within the
Drilling Block elect to proceed with the Drilling of the well, Unit Operator
shall Drill the well for the account of such Party or Parties, who shall
constitute the Drilling Party, on an Acreage Basis among themselves, or on such
other basis as said Parties may specify.

 

H. Rights and Obligations of Drilling Party and Non-Drilling Party. Whenever an
Exploratory Well is Drilled otherwise than for the account of all Parties within
the Drilling Block involved, the provisions of Article 12 shall be applicable to
such operation.

 

9.3 Attempted Completion. The attempted Completion of Exploratory Wells Drilled
to their projected depths shall be governed by the following provisions:

 

A. Notice by Unit Operator. After an Exploratory Well has reached its projected
depth and has been tested, logged, and logs furnished to each Drilling Party,
but before production pipe has been set, Unit Operator shall give notice thereof
to each Drilling Party.

 

B. Right to Attempt Completion. Each Drilling Party shall have the right to
initiate a proposal to attempt the Completion of such well and also shall be
entitled to participate in the Completion attempt.

 

6

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980 (Page 7 Revised 1985)

 

 

C. Time and Manner of Initiating Proposal. A period of twenty-four (24) hours
(exclusive of Saturdays, Sundays, and holidays) from and after receipt of the
notice given pursuant to Subdivision A of this Section 9.3 shall be allowed
within which a Party entitled to do so may initiate a proposal to Complete. Any
such proposal shall be initiated by giving notice thereof to Unit Operator and
to each Drilling Party. If no such proposal is initiated within said period and
no other proposal is initiated pursuant to Article 11, Unit Operator shall plug
and abandon the well for the account of the Drilling Party.

 

D. Election. If a proposal to Complete is initiated, each Party entitled to
participate in the Completion attempt shall have a period of twenty-four (24)
hours (exclusive of Saturdays, Sundays, and holidays) from and after receipt of
such proposal within which to notify Unit Operator whether or not it elects to
participate in the Completion attempt. The failure of a Party to signify its
election within said 24-hour period shall be deemed an election not to
participate in the Completion attempt.

 

E. Effect of Election. The Party or Parties electing to participate in an
attempt to Complete a well as above provided shall constitute the Completing
Party for such operation. Each Party who was entitled to make such election but
failed to do so as above provided shall be a Non-Completing Party with respect
to such operation. Such operation shall be conducted by Unit Operator for the
account of the Party or Parties constituting the Completing Party, on an Acreage
Basis among themselves, or on such other basis as the Completing Party may
specify. Such operation, if successful, shall include Equipping the well for
production.

 

F. Rights and Obligations of Completing Party and Non-Completing Party. Upon the
commencement of a Completion operation otherwise than for the account of all
Drilling Parties, the provisions of Article 12 shall be applicable to such
operation.

 

G. Notice Prior to Plugging. Before plugging and abandoning any Exploratory Well
which was Drilled to its projected depth and not completed as a producer of
unitized substances, Unit Operator shall give the notice specified in Section
11.1 A, unless every Party entitled to the notice has consented to the plugging
and abandonment of such well, in which event Unit Operator shall plug and
abandon the well for the account of the Completing Party. Upon the giving of
such notice, the provisions of Article 11 shall apply.

 

ARTICLE 10

REQUIRED WELLS

 

10.1 Definition. For the purpose of this Article, a well shall be deemed a
Required Well if the Drilling thereof is required by a final order of the
Appropriate Agency. Such an order shall be deemed final upon expiration of the
time allowed for appeal therefrom without the commencement of appropriate appeal
proceedings or, if such proceedings are commenced within said time, upon the
final disposition of the appeal. Whenever Unit Operator receives any such order,
it shall promptly mail a copy thereof to each Party. If any such order is
appealed, the Party appealing shall give prompt notice thereof to Unit Operator
and to each of the other Parties, and, upon final disposition of the appeal,
Unit Operator shall give each Party prompt notice of the result thereof.

 

10.2 Election to Drill. Any Party desiring to Drill, or to participate in the
Drilling of, a Required Well shall give to Unit Operator notice thereof within
thirty (30) days after the order requiring such well becomes final or within
such lesser time as may be required to insure compliance with such order. If
such notice is given within said period, Unit Operator shall Drill the Required
Well for the account of the Party or Parties giving such notice; provided,
however, if the Required Well is a Development Well, it shall not be Drilled
unless it receives the Approval of the Parties within the participating area
involved. All rights and obligations with respect to the ownership of such well,
the operating rights therein, the Production therefrom, and the bearing of Costs
incurred therein shall be the same as if the well had been Drilled under Article
8, if the same is a Development Well, or under Article 9, if the same is an
Exploratory Well or a Subsequent Test Well.

 

10.3 Alternatives to Drilling. If no Party elects to Drill a Required Well
within the period allowed for such election, and if any of the following
alternatives is available, the first such alternative which is available shall
be followed:

 

A. Compensatory Royalties. If compensatory royalties may be paid in lieu of
Drilling the well and if payment thereof receives, within said period, the
Approval of the Parties who would be chargeable with the Costs incurred in
Drilling the well if the well were Drilled as provided in Section 10.4, Unit
Operator shall pay such compensatory royalties for the account of said Parties;
or

 

B. Contraction. If the Drilling of the well may be avoided, without other
penalty, by contraction of the Unit Area, Unit Operator shall make a reasonable
effort to effect such contraction; or

 

C. Termination. If the Required Well is a Subsequent Test Well, the Parties
shall join in termination of the Unit Agreement in accordance with its
provisions.

 

10.4 Required Drilling. If none of the foregoing alternatives is available, Unit
Operator shall Drill the Required Well under whichever of the following
provisions is applicable:

 

A. Development Well. If the Required Well is a Development Well, it shall be
Drilled by Unit Operator for the account of all Parties within the participating
area in which the well is Drilled; or

 

B. Exploratory Well. If the Required Well is an Exploratory Well, the Drilling
Block for such well shall consist of all forty (40) acre subdivisions and lots
of the Public Land Survey of which more than one-half of the surface area is
within a distance of 2,640 feet from the proposed bottom hole location of such
well, but excluding therefrom all lands within any participating area
theretofore

 

7

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 8 Revised 1985)

 

established for the pool or zone to which the well is to be Drilled. Unit
Operator shall Drill such well for the account of all the Parties owning
Committed Working Interests within the Drilling Block, on an Acreage Basis among
themselves; and no such Party shall have the right to elect not to participate
in the Drilling of said well.

 

ARTICLE 11

DEEPENING, PLUGGING BACK, AND ABANDONMENT

 

11.1 Attempted Deepening or Plugging Back. The attempted Deepening or Plugging
Back of wells not completed as producers of unitized substances at their
original projected depths shall be governed by the following provisions of this
Section 11.1 and by the provisions of Section 11.2, unless every Party entitled
to the notice provided for in Subdivision A of this Section 11.1 has consented
to the plugging and abandonment of such well:

 

A. Notice by Unit Operator. Before abandoning any well which has been Drilled to
its original projected depth but not completed as a producer of unitized
substances, Unit Operator shall give notice of its intention to plug and abandon
such well to each Drilling Party and Non-Drilling Party.

 

B. Right to Initiate Proposal. Each Party who participated in the Drilling of a
well concerning which notice is g1ven in accordance with Subdivision A of this
Section 11.1 and any other Party owning a Committed Working Interest in the
tract of land on which the well is located may initiate a proposal to attempt to
Deepen or Plug Back such well; provided, however, if the well was Drilled as a
Development Well, a proposal to Deepen or Plug Back may be initiated only by a
Party owning a Committed Working Interest in the tract of land on which the well
is located.

 

C. Right to Participate. In order to be entitled to participate in a Deepening
or Plugging Back operation, a Party must have the right to initiate the same or
must own a Committed Working Interest in the Drilling Block theretofore
established for Drilling the well involved; if no Drilling Block was theretofore
established for Drilling such well, the Drilling Block for such Deepening or
Plugging Back operation shall be established automatically in accordance with
the provisions of Subdivision B of Section 10.4, which shall be applicable
hereto.

 

D. Time and Manner of Initiating Proposal. A period of twenty-four (24) hours
(exclusive of Saturdays, Sundays, and holidays) from and after receipt of the
notice given pursuant to Subdivision A of this Section 11.1 shall be allowed
within which a Party entitled to do so may initiate a proposal to Deepen or Plug
Back. Any such proposal shall be initiated by giving notice thereof to Unit
Operator and to each Party entitled to participate in the proposed operation. If
no such proposal is initiated within said period, Unit Operator shall plug and
abandon the well for the account of the Completing Party if a Completion attempt
was made or, if not, then for the account of the Drilling Party.

 

E. Election. If a proposal to Deepen or Plug Back a well is initiated, each
Party entitled to participate in the operation proposed shall have a period of
forty-eight (48) hours (exclusive of Saturdays, Sundays, and holidays) from and
after receipt of such proposal within which to notify Unit Operator whether or
not it elects to participate in the proposed operation. The failure of a Party
to signify its election within said 48-hour period shall be deemed an election
not to participate in the proposed operation.

 

F. Effect of Election. The Party or Parties electing to participate in an
operation to Deepen or Plug Back a well as above provided shall constitute the
Participating Party for such operation. Each Party who was entitled to make such
election but failed to do so as above provided shall be a Non-Participating
Party with respect to such operation. Such operation shall be conducted by Unit
Operator for the account of the Party or Parties constituting the Participating
Party, on an Acreage Basis among themselves, subject, however, to the provisions
of Section 11.2 and Section 11.3. If the Party or Parties making such election
do not proceed with the operation, the Costs incurred in plugging and abandoning
the well shall be charged and borne as part of the Costs incurred in Drilling
the well.

 

G. Rights and Obligations of Participating Party and Non-Participating Party.
Upon the commencement of a Deepening or Plugging Back operation otherwise than
for the account of all Parties entitled to participate therein, the provisions
of Article 12 shall be applicable to such operation.

 

11.2 Deepening or Plugging Back to Participating Area. If a well within the
surface boundaries of a participating area is to be Deepened or Plugged Back to
the pool or zone for which such participating area was established, such
operation, including the Completion of such well, may be conducted only if it
receives the Approval of the Parties within such participating area, and only
upon such terms and conditions as may be specified in such Approval, and upon
such further terms and conditions as may be agreed to by the Parties owning
interests in the well immediately prior to the commencement of any such
Deepening or Plugging Back operation.

 

11.3 Conflicts. If conflicting elections to attempt to Deepen or Plug Back are
made in accordance with the provisions of this Article 11, preference shall be
given first to Deepening. However, if a Deepening attempt does not result in
completion of the well as a producer of unitized substances, Unit Operator shall
again give notice in accordance with Subdivision A of Section 11.1 before
plugging and abandoning the well.

 

11.4 Attempted Completion. Except as otherwise provided in Section 11.2, the
attempted Completion of a well Deepened or Plugged Back to the depth projected
for such Deepening or Plugging Back operation shall be governed by the
provisions of Section 9.3, unless every Participating Party has

 

8

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 9 Revised 1985)

 

consented to the plugging and abandonment of such well, in which event Unit
Operator shall plug and abandon the well for the account of the Participating
Party.

 

11.5 Abandonment of Producing Wells. A well completed as a producer of unitized
substances within a participating area shall be abandoned for plugging if and
when abandonment thereof receives the Approval of the Parties within such
participating area, subject, however, to the provisions of Section 11.6. The
abandonment of a well completed as a producer but not included in a
participating area shall be governed by the following provisions:

 

A. Consent Required. Such well shall not be abandoned for production from the
pool or zone in which it is Completed, except with the consent of all Parties
then owning the well.

 

B. Abandonment Procedure. If the abandonment of such well receives the Approval
of the Parties who own the well but is not consented to by all such Parties,
Unit Operator shall give notice thereof to each Party, if any, then having an
interest in the well who did not join in such Approval. Any such non-joining
Party who objects to abandonment of the well (herein called Non-Abandoning
Party) may give notice thereof to all other Parties (herein called Abandoning
Parties) then having interests in the well, provided such no lice is given
within thirty (30) days after receipt of the notice given by Unit Operator. If
such objection is so made, the Non-Abandoning Party or Parties shall forthwith
pay to the Abandoning Parties their respective shares of the Salvage Value of
the well. Upon the making of such payment, the Abandoning Parties shall be
deemed to have relinquished to the Non-Abandoning Party or Parties all their
operating rights and working interest in the well, but only with respect to the
pool or zone in which it is then Completed, and all their interest in the
materials and equipment in or pertaining to the well. If there is more than one
Non-Abandoning Party, the interests so relinquished shall be owned by the
Non-Abandoning Parties in the proportions which their respective interests in
the well bear to the total of their interests therein immediately prior to such
relinquishment.

 

C. Rights and Obligations of Non-Abandoning Party. After the relinquishment
above provided for, such well shall be operated by Unit Operator for the account
of the Non-Abandoning Party or Parties, who shall own all Production therefrom
and shall bear all Costs, Lease Burdens, and other burdens thereafter incurred
in operating the well and plugging it when abandoned (unless the well is taken
over for Deepening or Plugging Back as hereinafter provided) and also the Costs
of any additional tankage, flow lines, or other facilities needed to measure
separately the unitized substances produced from the well. Costs shall include
an overhead charge computed at the highest per well rate applicable to the
operation of a single producing well in accordance with Exhibit 1, if such rate
is provided.

 

D. Option to Repurchase Materials. If a well taken over by the Non-Abandoning
Party or Parties as above provided is abandoned for plugging within six (6)
months after relinquishment by the Abandoning Parties of their interests
therein, each Abandoning Party shall have the right at its option to repurchase
that portion of the materials and equipment salvaged from the well which is
equal to the interest relinquished by it to the Non-Abandoning Party or Parties,
at the value previously fixed therefor. Said option may be exercised only by
notice given to Unit Operator and to the Non-Abandoning Party or Parties within
fifteen (15) days after receipt of the notice given by Unit Operator pursuant to
Section 11.6.

 

11.6 Deepening or Plugging Back Abandoned Producing Wells. Before plugging any
well authorized for abandonment pursuant to Section 11.5, Unit Operator shall
give notice to the Party or Parties owning Committed Working Interests in the
tract of land upon which the well is located, which Parties, for the further
purposes of this Section 11.6, shall constitute the Parties entitled to initiate
and participate in a proposed Deepening or Plugging Back operation. Within ten
(10) days after receipt of said notice, any such Party desiring the Deepening or
Plugging Back of such well shall give notice thereof to Unit Operator and to
each Party entitled to participate in the proposed operation; and all the
provisions of Subdivisions E, F, and G of Section 11.1 shall apply in the same
manner as if the proposed Deepening or Plugging Back were a proposal for the
Drilling of an Exploratory Well, subject, however, to the provisions of Section
11.2 and Section 11.3. If no Party gives notice of desire to Deepen or Plug Back
such well within said period often ( 10) day. or if such notice is given but no
party elects to proceed with the Deepening or Plugging Back of the well within
the time specified therefor, Unit Operator shall plug and abandon the well for
the account of the Party or Parties owning the well.

 

ARTICLE 12

RIGHTS AND OBLIGATIONS OF DRILLING PARTY AND NON-DRILLING PARTY

 

12.1 Use of Terms. As used in this Article, the terms "Drilling Party" and
"Non-Drilling Party" are to be understood as including "Completing Party" and
"Non-Completing Party" and "Participating Party" and "Non-Participating Party",
respectively, as such terms are used in Articles 8, 9, and 11.

 

12.2 Scope of Article. The rights and obligations of the Drilling Party and
Non-Drilling Party with respect to any Drilling, Deepening, Plugging Back, or
Completion operation conducted otherwise than for the account of all Parties
entitled to participate therein shall be governed by the succeeding provisions
of this Article 12.

 

12.3 Relinquishment of Interest by Non-Drilling Party. When any Drilling,
Deepening, Plugging Back, or Completion operation is conducted otherwise than
for the account of all Parties entitled to participate therein, each
Non-Drilling Party, upon the commencement of such operation, shall be deemed to
have relinquished to the Drilling Party, and the Drilling Party shall own, all
such Non-

 

9

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)'

February, 1980 (Page 10 Revised 1985)

 

Drilling Party's operating rights and working interest in and to the well with
respect to which such operation was conducted. In the case of a Deepening or
Plugging Back operation, if a Non-Drilling Party in such operation owned an
interest in the well immediately prior to the Deepening or Plugging Back, then
the Drilling Party for that operation shall pay to such Non-Drilling Party its
share of the Salvage Value of the well, such payment to be made at the time the
well is taken over by the Drilling Party for Deepening or Plugging Back.

 

12.4 Reversion of Relinquished Interest. If, as a result of any Drilling,
Deepening, Plugging Back, or Completion operation conducted otherwise than for
the account of all Parties entitled to participate therein, a well is completed
as a producer of unitized substances and is a Development Well or results in the
establishment or enlargement of a participating area to include such well and
if, by reason thereof, there is included in such participating area any land
within the Drilling Block in which a Non-Drilling Party owns a Committed Working
Interest, then the operating rights and working interest relinquished by such
Non-Drilling Party shall revert to it at such time as the proceeds or market
value of that portion of the Production obtained from the well after such
relinquishment which is allocated to all the acreage of such Non-Drilling Party
in the participating area involved (after deducting from such proceeds or market
value all Lease Burden and all taxes upon or measured by Production that are
payable up to such time on said portion of the Production from such well) shall
equal the total of the following:

 

A. 100% of that portion of the Costs incurred in Equipping the well and in
operating the well after such relinquishment, and up to such time, that would
have been charged to such Non-Drilling Party had the well been Drilled,
Deepened, Plugged Back, or Completed and Equipped for the account of all Parties
entitled to participate therein.

 

B. 300% of that portion of the Costs incurred in Drilling, Deepening, Plugging
Back, or Completing the well that would have been charged to such Non-Drilling
Party had the well been Drilled, Deepened, Plugged back, or Completed and
Equipped for the account of all Parties entitled to participate therein.

 

However, if a Deepening or Plugging Back operation is involved, then (1) any
payment made to such Non-Drilling Party as its share of the Salvage Value of the
well in accordance with Section 12.3 shall be added to and deemed part of the
Costs incurred in operating the well, for the purposes of Subdivision A above,
and (2) if such Non-Drilling Party did not participate in the initial Drilling
of the well, but the Drilling Party did participate therein, and if the interest
relinquished by such Non-Drilling Party upon the initial Drilling of the well
had not reverted to it before such Deepening or Plugging Back, then, for the
purposes of Subdivision B above, (i) where a Plugging Back is involved, there
shall be added to and deemed part of the Costs incurred in such Plugging Back
the then unrecovered portion of the Costs incurred in the initial Drilling of
the well down to the pool or zone in which such well is completed as a producer
of unitized substances as a result of such Plugging Back, and (ii) where a
Deepening is involved, there shall be added to and deemed part of the Costs
incurred in such Deepening the then unrecovered portion of the Costs incurred in
the initial Drilling of the well.

 

12.5 Effect of Reversion. From and after reversion to a Non-Drilling Party of
its relinquished interest in a well, such Non-Drilling Party shall share, on an
Acreage Basis, in the ownership of the well, the operating rights and working
interests therein, the materials and equipment in or pertaining to the well, the
Production therefrom, and the Costs of operating the well.

 

12.6 Rights and Obligations of Drilling Party. The Drilling Party for whom a
well is Drilled, Deepened, Plugged Back, or Completed shall pay and bear all
Costs incurred therein and shall own the well and the materials and equipment in
the well or pertaining thereto, subject to reversion to each Non-Drilling Party
of its relinquished interest in the well. If the well is a Development Well or
results in the establishment or enlargement of a participating area to include
the well, then, until reversion to a Non-Drilling Party of its relinquished
interest, the Drilling Party shall own that portion of the Production obtained
from the well after such relinquishment which is allocated to all the acreage of
such Non-Drilling Party in the participating area involved and shall pay and
bear (a) that portion of the Costs incurred in operating the well that otherwise
would be chargeable to such Non-Drilling Party and (b) all Lease Burdens that
are payable with respect to that portion of the Production from such well which
is allocated to the acreage of such Non-Drilling Party. If the Drilling Party
includes two or more Parties, the burdens imposed upon and the benefits accruing
to the Drilling Party shall be shared by such Parties on an Acreage Basis among
themselves.

 

12.7 Accounting Due Non-Drilling Party. In the event a relinquishment of
interest by a Non Drilling Party occurs pursuant to any provision of this
Agreement with respect to any well and Production is had from such well, Unit
Operator shall furnish each Non-Drilling Party, upon its request, all
information referred to in Subdivision F of Section 16.1 and, in addition, the
following:

 

A. an itemized statement of the Costs of the operation in which the Non-Drilling
Party did not participate; and

 

B. until reversion occurs, a monthly itemized statement of the Costs incurred in
operating said well, the quantity of Production obtained therefrom, the proceeds
received from the sale of such Production, and the Lease Burdens paid with
respect thereto.

 

12.8 Stand-By Rig Time. Stand-by time for the rig on a well for the period of
time allowed for the initiation of a proposal and for the response thereto shall
be charged and borne as part of the Costs incurred in the operation just
completed. Stand-by time subsequent to said period of time shall be charged to
and borne as Costs incurred in the proposed operation, unless no Party elected
to participate therein.

 

10

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 10A Revised 1985)

 

12.9 Subsequently Created Lease Burdens. Anything herein to the contrary
notwithstanding, if, subsequent to the date of this Agreement, any Party shall
create an overriding royalty, production payment, net proceeds interest, carried
interest. or any other interest out of its Committed Working Interest and at any
time become a Non-Drilling Party with respect to any operation conducted under
this Agreement, then the Drilling Party entitled to receive the share of
Production to which the Non-Drilling Party would otherwise be entitled shall
receive the same free and clear of any such burden, and the Non-Drilling Party
who created such burden shall hold the Drilling Party harmless with respect
thereto.

 

l0A (The next page is 11)

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

ARTICLE 13

ADJUSTMENT ON ESTABLISHMENT OR CHANGE OF PARTICIPATING AREA

 

13.1 When Adjustment l\lade. Whenever, in accordance with the Unit Agreement, a
participating area IS established, or revised by contraction or enlargement, and
whenever two or more participating areas are combined (the participating area
resulting from such establishment, revision, or combination being hereinafter
referred to as a "resulting area"), an adjustment shall be made in accordance
with the succeeding provisions of this Article 13, as of the date on which the
establishment revision or combination that creates such resulting area becomes
effective, such date being hereinafter referred to as the "effective date" of
such resulting area. For the purposes of this Article 13, all Costs of a usable
well shall be deemed to have been incurred on the date the well was Completed.

 

13.2 Definitions. As used in this Article 13:

 

A. "Usable well" within a resulting area means a well which is either (1)
completed in and capable of producing unitized substances from a pool or zone
for which the resulting area was created or (2) used as a disposal well,
injection well, or otherwise in connection with the production of unitized
substances from such resulting area.

 

B. "Intangible value" of a usable well within a resulting area means the amount
of those Costs incurred in Drilling, Completing, and Equipping such well, down
to the deepest pool or zone for which such resulting area was created, which
contribute to the production of unitized substances therefrom and which are
properly classified as intangible costs in conformity with accounting practices
generally accepted in the industry, reduced at the following rates for each
month during any part of which such well was operated prior to the effective
date of such resulting area:

 

(1) .5 % per month for a cumulative total of 60 months, and

 

(2) NONE% per month for each month in excess of said cumulative total.

 

C. "Tangible property" serving a resulting area means any kind of tangible
property (whether or not in or pertaining to a well) which has been acquired for
use in or in connection with the production of unitized substances from such
resulting area or any portion thereof, and the cost of which has been charged as
Costs pursuant to this Agreement.

 

D. "Value" of tangible property means the amount of Costs incurred in the
construction or installation thereof (except installation costs properly
classified as part of the intangible costs incurred in connection with a well),
reduced, in the case of tangible property which is generally regarded as
depreciable, at the rate of .50 % per month for each month during any part of
which such well has been operated prior to the effective date of such resulting
area.

 

13.3 Method of Adjustment on Establishment or Enlargement. As promptly as
reasonably possible after the effective date of a resulting area created by the
establishment or enlargement of a participating area, and as of such effective
date, an adjustment shall be made in accordance with the following provisions,
except to the extent otherwise specified in Section 13.6:

A. The intangible value of each usable well within such resulting area on the
effective date thereof shall be credited to the Party or Parties owning such
well immediately prior to such effective date, in proportion to their respective
interests in such well immediately prior to such effective date. The total
amount so credited as the intangible value of usable wells shall be charged to
all Parties within the resulting area on an Acreage Basis.

 

B. The value of each item of tangible property serving the resulting area on the
effective date thereof shall be credited to the Party or Parties owning such
item immediately prior to such effective date, in proportion to their respective
interests in such item immediately prior to such effective date. The total
amount so credited as the value of the tangible property shall be charged to all
Parties within the resulting area on an Acreage Basis.

 

C. If a resulting area, on the effective date thereof, is served by any tangible
property or usable well which also serves another participating area or other
participating areas, the value of such tangible property and usable well
(including the intangible value thereof shall be determined in accordance with
Subdivision D of Section 13.2, and such value shall be fairly apportioned
between such resulting area and such other participating area or areas, provided
that such apportionment receives the Approval of the Parties in each
participating area concerned. That portion of the value of such tangible
property and usable well (including the intangible value thereof) which is so
apportioned to the resulting area shall be included in the adjustment made as of
the effective date of such resulting area in the same manner as is the value of
tangible property serving only the resulting area.

 

D. The credits and charges above provided for shall be made by Unit Operator in
such manner that an adjustment shall be made for the intangible value of usable
wells separate and apart from an adjustment for the value of tangible property.
On each such adjustment, each Party who is charged an amount in excess of the
amount credited to it shall pay to Unit Operator the amount of such excess,
which shall be considered as Costs chargeable to such Party for all purposes of
this Agreement; and such amount, when received by Unit Operator, shall be
distributed or credited to the Parties who, in such adjustment, are credited
with amounts in excess of the amounts charged to them respectively.

 

13.4 Method of Adjustment on Contraction. As promptly as reasonably possible
after the effective date of a contraction of a participating area, an adjustment
shall be made with each Party owning a

 

11

 

ROCKY MOUNTAIN UNIT OPERATINGAGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

Committed Working Interest in land excluded from the participating area by such
contraction (such Committed Working Interest being hereinafter in this Section
referred to as "excluded interest") in accordance with the following provisions:

 

A. An adjustment for intangibles shall be made in accordance with Subdivision B
of this Section 13.4, and a separate adjustment for tangibles shall be made in
accordance with Subdivision C of this Section 13.4.

 

B. Such Party shall be credited with the sum of (1) the total amount theretofore
charged against such Party with respect to its excluded interest, pursuant to
the provisions of Exhibit 1, as intangible Costs incurred in the development and
operation of the participating area prior to the effective date of such
contraction, plus (2) the total amount charged against such Party with respect
to such excluded interest as intangible value of usable wells in any previous
adjustment or adjustments made upon the establishment or revision of such
participating area. Such Party shall be charged with the sum of (1) the market
value of that portion of the Production from such participating area which,
prior to the effective date of such contraction, was delivered to such Party
with respect to such excluded interest, less the amount of Lease Burdens and
taxes paid or payable on said portion, plus (2) the total amount credited to
such Party with respect to such excluded interest as intangible value of usable
wells in any previous adjustment or adjustments made upon the establishment or
revision of such participating area. Any difference between the amount of said
credit and the amount of said charge shall be adjusted as hereinafter provided.

 

C. Such Party shall be credited with the sum of (1) the total amount theretofore
charged against such Party with respect to its excluded interest, pursuant to
the provisions of Exhibit 1, as Costs other than intangible Costs incurred in
the development and operation of the participating area prior to the effective
date of such contraction, plus (2) the total amount charged against such Party
with respect to its excluded interest as value of tangible property in any
previous adjustment or adjustments made upon the establishment or revision of
such participating area, plus (3) the excess, if any, of the credit provided for
in Subdivision B of this Section 13.4 over the charge provided for in said
Subdivision B. Such Party shall be charged with the sum of(l) the excess, if
any, of the charge provided for in said Subdivision B over the credit therein
provided for, plus (2) the total amount credited to such Party with respect to
its excluded interest as value of tangible property in any previous adjustment
or adjustments made upon the establishment or revision of such participating
area.

 

D. If the charge provided for in Subdivision C of this Section 13.4 is equal to
or greater than the credit therein provided for, no adjustment shall be made
with such Party. However, if the credit provided for in said Subdivision C is in
excess of the charge therein provided for, such excess shall be charged on an
Acreage Basis against Parties who remain in the participating area after such
contraction and shall be paid by said Parties to Unit Operator upon receipt of
invoices therefor. Such payments, when received by Unit Operator, shall be paid
by it to the Party owning such excluded interest.

 

13.5 Ownership of Wells and Tangible Property. From and after the effective date
of a resulting area, all usable wells within such resulting area and all
tangible property serving such resulting area shall be owned by the Parties
within such area on an Acreage Basis, except that (a) in the case of tangible
property serving a participating area or participating areas in addition to the
resulting area, only that undivided interest therein which is proportionate to
that portion of the value thereof which is included in the adjustment provided
for shall be owned by the Parties within the resulting area on an Acreage Basis,
and (b) if a Party within the resulting area was a Non-Drilling Party for a well
which is a usable well within such resulting area on the effective date thereof,
and if the relinquished interest of such Non-Drilling Party in such well has not
reverted to it prior to such effective date, the Drilling Party for such well
shall own the interest therein that would otherwise be owned by such
Non-Drilling Party until reversion to such Non-Drilling Party of its
relinquished interest in such well.

 

13.6 Relinquished Interest of Non-Drilling Parties. If the interest relinquished
by a Non-Drilling Party in a well which is a usable well within a resulting area
on the effective date thereof has not reverted to it prior to such effective
date, then insofar, but only insofar, as they relate to such well, the
adjustments provided !'or in Section 13.3 shall be subject to the following
provisions, wherein the sum of the intangible value of such well, plus the value
of the tangible property in or pertaining thereto, is referred to as the "value"
of such well:

 

A. The Drilling Party for such well shall be charged with that part of the value
of the well that would otherwise be chargeable to such Non-Drilling Party with
respect to (1) such Non-Drilling Party's Committed Working Interest or Interests
in the participating area in which the well was Drilled, as such participating
area existed when the Drilling of the well was commenced, if the well was
Drilled as a Development Well, or (2) the Committed Working Interest or
Interests of such Non-Drilling Party which entitled it to participate in the
Drilling, Deepening, Plugging Back, or Completion of the well, if it was
Drilled, Deepened, Plugged Back, or Completed otherwise than as a Development
Well. However, such Non-Drilling Party shall be charged with such part, if any,
of the value of such well as is chargeable to it, in accordance with
Subdivisions A and B of Section 13.3, with respect to its Committed Working
Interests other than those referred to in ( 1) and (2) above.

 

B. If that part of the value of such well which would have been credited to such
Non-Drilling Party if the well had been Drilled, Deepened, Plugged Back, or
Completed for the account of all Parties entitled to participate therein exceeds
the amount provided in Subdivison A of this Section.

 

13.6 to be charged against the Drilling Party, such excess shall be applied
against the reimbursement

 

12

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

to which the Drilling Party is entitled out of Production that would otherwise
accrue to such Non-Drilling Party. Any balance of such excess over the amount
necessary to complete such reimbursement shall be credited to such Non-Drilling
Party.

 

ARTICLE 14

SUPERVISION OF OPERATIONS BY PARTIES

 

14.1 Right of Supervision. Each operation conducted by Unit Operator under this
Agreement or the Unit Agreement shall be subject to supervision and control in
accordance with the succeeding provisions of this Article 14 by the Parties who
are chargeable with the Costs thereof.

 

14.2 Voting Control. In the supervision of an operation conducted by Unit
Operator, the Parties chargeable with the Costs of such operation shall have the
right to vote in proportion to their respective obligations for such Costs. The
Parties having the right to vote on any other matter shall vote thereon on an
Acreage Basis. Except as provided for in the Unit Agreement and except as
otherwise specified in this Agreement (particular reference being made to
Section 25.1, Section 27.1, and that portion of Section 11.5 relating to
abandonment of producing wells outside of a participating area), the affirmative
vote of IMAGE OMITTEDParties having 65 % or more of the voting power on any
matter which is proper for action by them shall be binding upon all Parties
entitled to vote thereon; provided, however, if one Party voting in the
affirmative has 65 % or more but less than 75 % of the voting power, the
affirmative vote of such Party shall not be binding upon the Parties entitled to
vote thereon unless its vote is supported by the affirmative vote of at least
one additional Party; and provided further, that if one Party voting in the
negative or failing to vote has more than 35 % but less than 50% of the voting
power, the affirmative vote of the Parties having a majority of the voting power
shall be binding upon all Parties entitled to vote unless there is a negative
vote of at least one additional Party. In the event only two Parties are
entitled to vote, the vote of the one with the greater interest shall prevail.
If only one Party is entitled to vote, such Party's vote shall control. A Party
failing to vote shall not be deemed to have voted either in the affirmative or
in the negative. Any Approval or Direction provided for in this Agreement which
receives the affirmative vote above specified shall be deemed given by and shall
be binding upon all Parties entitled to vote thereon, except where the vote of a
larger percentage is specifically required.

 
 

14.3 Meetings. Any matter which is proper for consideration by the Parties, or
any of them, may be considered at a meeting held for that purpose. A meeting may
be called by Unit Operator at any time, and a meeting shall be called by Unit
Operator upon written request of any Party having voting power on any matter to
be considered at the meeting. At least ten (10) days in advance of each meeting,
Unit Operator shall give each Party entitled to vote thereat notice of the time,
place, and purpose of the meeting. Unit Operator's representative shall be the
Chairman of such meeting.

 

14.4 Action Without Meeting. In lieu of calling a meeting, Unit Operator may
submit any matter which is proper for consideration by the Parties, or any of
them, by giving to each such Party notice, describing in adequate detail the
matter so submitted. Each Party entitled to vote on any matter so submitted
shall communicate its vote thereon to Unit Operator within such period as may be
designated in the notice given by Unit Operator (which period shall be not less
than ten (10) nor more than thirty (30) days); provided, however, if, within ten
(10) days after submission of such matter, request is made for a meeting in
accordance with Section 14.3, such matter shall be considered only at a meeting
called for that purpose. If a meeting is not required, then, at the expiration
of the period designated in the notice given by it, Unit Operator shall give to
each Party entitled to vote thereon notice, stating the tabulation and result of
the vote.

 

14.5 Representatives. Promptly after execution of this Agreement, each Party, by
notice to all other Parties, shall designate a representative authorized to vote
for such Party and may designate an alternate authorized to vote for such Party
in the absence of its representative. Any such designation of a representative
or alternate representative may be revoked at any time by notice given to all
other Parties, provided such notice designates a new representative or alternate
representative, as the case may be.

 

14.6 Audits. Audits may be made of Unit Operator's records and books of account
pertaining to operations hereunder, as provided in Exhibit 1.

 

14.7 Extraneous Projects. Nothing contained in this Agreement shall be deemed to
authorize the Parties, by vote or otherwise, to act upon any matter or to
authorize any expenditure unless such matter or expenditure relates to the
conduct of operations authorized by the Unit Agreement or this Agreement.

 

ARTICLE 15

UNIT OPERATOR'S POWERS AND RIGHTS

 

15.1 In General. Subject to the limitations set forth in this Agreement, all
operations authorized by the Unit Agreement and this Agreement shall be managed
and conducted by Unit Operator. Unit Operator shall have exclusive custody of
all materials, equipment, and any other property used in connection with any
operation within the Unit Area.

 

15.2 Employees. All individuals employed by Unit Operator in the conduct of
operations hereunder shall be the employees of Unit Operator alone; and their
working hours, rates of compensation, and all other matters relating to their
employment shall be determined solely by Unit Operator.

 

15.3 Non-Liability. Unit Operator shall not be liable to any Party for anything
done or omitted to be done by it in the conduct of operations hereunder, except
in case of bad faith.

 

15.4 Force Majeure. The obligations of Unit Operator hereunder shall be
suspended to the extent

 

13

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

that, and only so long as, performance thereof is prevented by fire, action of
the elements, strikes or other differences with workmen, acts of civil or
military authorities, acts of the public enemy, restrictions or restraints
imposed by law or by regulation or order of governmental authority, whether
Federal, State, or local, inability to obtain necessary rights of access, or any
other cause reasonably beyond the control of Unit Operator, whether or not
similar to any cause above enumerated. Whenever performance of its obligations
is prevented by any such cause, Unit Operator shall give notice thereof to the
Parties as promptly as is reasonably practicable.

 

15.5 Lien. Each of the Parties hereby grants to Unit Operator a lien upon its
Committed Working Interests, its interest in all jointly owned materials,
equipment, and other property, and its interest in all Production, as security
for payment of Costs chargeable to it, together with any interest payable
thereon. In addition to Unit Operator's rights under the foregoing lien, and as
a secured party, Unit Operator shall be entitled to the benefit of any statutory
operator's lien provided for in the jurisdiction in which the Unit Area is
located. Unit Operator may, but need not, bring an action at law or in equity to
enforce collection of such indebtedness, with or without foreclosure of such
lien, and, in addition, shall have all rights provided under the terms of the
Uniform Commercial Code or of any other law. In addition to the foregoing, and
not in limitation thereof, upon default by any Party in the payment of Costs
chargeable to it, Unit Operator shall have the right to collect and receive
proceeds from the purchaser of such Party's share of Production, up to the
amount owing by such Party, plus interest at the rate of * % per annum until
paid. Each such purchaser shall be entitled to rely upon Unit Operator's
statement concerning the existence and amount of any such default. None of the
remedies or rights specified above shall be deemed exclusive, and the exercise
of any such remedy or right shall not be deemed an election of remedies and
shall not affect enforceability of the foregoing lien or security interest.

 

15.6 Advances. Unit Operator, at its election, shall have the right from time to
time to demand and receive from the Parties chargeable therewith payment in
advance of their respective shares of the estimated amount of Costs to be
incurred during any month, which right may be exercised only by submission to
each such Party of a properly itemized statement of such estimated Costs,
together with an invoice for its share thereof. Each such statement and invoice
for the payment in advance of estimated Costs for any month shall be submitted
on or about the twentieth (20th) day of the next preceding month. The amount of
each such invoice shall be payable within fifteen (15) days after receipt
thereof and thereafter shall bear interest at the rate of * % per annum until
paid. Proper adjustment shall be made monthly between such advances and Costs,
to the end that each Party shall bear and pay its proportionate share of Costs
incurred and no more. Unit Operator may request advance payment or security for
the total estimated Costs to be incurred in a particular Drilling, Deepening,
Plugging Back, or Completing operation and, notwithstanding any other provisions
of this Agreement, shall not be obligated to commence such operation unless and
until such advance payment is made or Unit Operator is furnished security
acceptable to it for such payment by the Party or Parties chargeable therewith.

 

15.7 Use of Unit Operator's Drilling Equipment. Any Drilling, Deepening, or
Plugging Back operation conducted hereunder may be conducted by Unit Operator
with its own tools and equipment, provided that the rates to be charged and the
applicable terms and conditions are set forth in a form of drilling contract
which receives the Approval of the Party or Parties chargeable with the Costs of
such operation, except that in any case where Unit Operator alone constitutes
the Drilling Party, such form shall receive the Approval of the Parties within
the participating area or other designated area for such well prior to the
commencement of such operation.

 

15.8 Rights as Party. As an owner of a Committed Working Interest, the Party
acting as Unit Operator shall have the same rights and obligations hereunder as
if it were not Unit Operator. In each instance where this Agreement requires or
permits a Party to give notice, consent, or approval to Unit Operator, such
notice, consent, or approval shall be deemed properly given by the Party acting
as Unit Operator if and when given to all other Parties entitled to give or
receive such notice, consent, or approval. *2% above prime rate as set by the
Chase Manhattan Bank of New York City, New York

 

ARTICLE 16

UNIT OPERATOR'S DUTIES

 

16.1 Specific Duties. In the conduct of operations hereunder, Unit Operator
shall:

 

A. Drilling of Wells. Drill, Deepen, Plug Back, or Complete a well or wells only
in accordance with the provisions of this Agreement.

 

B. Compliance with Laws and Agreements. Comply with the provisions of the Unit
Agreement, all applicable Jaws and governmental regulations (whether Federal,
State, or local), and Directions of the Parties pursuant to this Agreement. In
case of conflict between such Directions and the provisions of the Unit
Agreement or such laws or regulations, the provisions of the Unit Agreement or
such laws or regulations shall govern.

 

C. Consultation with Parties. Consult freely with the Parties within the area
affected by any operation hereunder and keep them advised of all matters arising
in operations hereunder which Unit Operator deems important, in the exercise of
its best judgment.

 

D. Payment of Costs. Pay all costs incurred in operations hereunder promptly as
and when due and payable and keep the Committed Working Interests and all
property used in connection with operations under this Agreement free from liens
which may be claimed for the payment of such Costs, except any such lien which
it disputes, in which event Unit Operator may contest the disputed lien upon
giving notice thereof to the Parties affected thereby.

 

14

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

 

E. Records. Keep full and accurate records of all Costs incurred and of all
controllable materials and equipment, which records, and receipts and vouchers
in support thereof, shall be available for inspection by authorized employees or
agents of the Parties at reasonable intervals during usual business hours at the
office of Unit Operator.

 

F. Information. Furnish promptly to each Party chargeable with Costs of the
operation Involved and to each additional Party who makes timely written request
therefor (1) copies of Unit Operator's authorizations for expenditures or
itemizations of estimated expenditures in excess of Twenty –Five Thousand
Dollars ($25,000), (2) copies of all drilling reports, well logs, and State and
Federal reports, (3) samples of cores and cuttings taken from wells Drilled
hereunder, to be delivered at the well in containers furnished by the Party
requesting same, and (4) such other and additional information or reports as may
be required by Direction of the Parties within the area aff'ected. If multiple
copies of any such materials are requested by any Party, Unit Operator may
charge the cost thereof directly to the requesting Party.

 

G. Access to Unit Area. Permit each Party, through its authorized employees or
agents, but at such Party's sole risk and expense, to have access to the Unit
Area at all times and to the derrick floor of each well Drilled or being Drilled
hereunder, for the purpose of observing operations conducted hereunder and
inspecting materials, equipment, or other property used in connection with
operations under this Agreement and to have access at reasonable times to
information and data in the possession of Unit Operator concerning Unit
operations.

 

16.2 Insurance.

 

A. Unit Operator's. Unit Operator shall comply with the Workmen's Compensation
Law of the State in which the Unit Area is located. Unit Operator shall also
maintain in force at all times with respect to operations hereunder such other
insurance, if any, as may be required by law. In addition, Unit Operator shall
maintain such other insurance, if any, as is described in Exhibit 3 or as
receives the Approval of the Parties from time to time. Unit Operator shall
carry no other insurance for the benefit of the Parties, except as above
specified. Upon request of any Party, Unit Operator shall furnish evidence of
insurance carried by it with respect to operations hereunder.

 

B. Contractors'. Unit Operator shall require all contractors engaged in
operations under this Agreement to comply with the Workmen's Compensation Law of
the State in which the Unit Area is located and to maintain such other insurance
as may be required by Direction of the Parties.

 

C. Automotive Equipment. In the event Automobile Public Liability insurance is
specified in Exhibit 3 or subsequently receives the Approval of the Parties, no
direct charge shall be made by Unit Operator for premiums paid for such
insurance for Unit Operator's fully owned automotive equipment.

 

16.3 Non-Discrimination. In connection with the performance of work under this
Agreement, Unit Operator agrees to comply with the provisions of Exhibit 4. Unit
Operator agrees to insert non-discrimination provisions in all subcontracts
hereunder, as required by law or regulation.

 

16.4 Drilling Contracts. Each Drilling, Deepening, Plugging Back, or Completing
operation con· ducted hereunder, and not performed by Unit Operator with its own
tools and equipment in accordance with Section 15. 7, shall be performed by a
reputable drilling contractor having suitable equipment and personnel, under
written contract between Unit Operator and the contractor, at the most favorable
rates and on the most favorable terms and conditions bid, if bids were obtained,
but otherwise at rates and on terms and conditions receiving the Approval of the
Parties.

 

16.5 Uninsured Losses. Any and all payments made by Unit Operator in the
settlement or discharge of any liability to third persons (whether or not
reduced to judgment) arising out of an operation conducted hereunder and not
covered by insurance herein provided for shall be charged as Costs and borne by
the Party or Parties for whose account such operation was conducted.

 

ARTICLE 17

LIMITATIONS ON UNIT OPERATOR

 

17.1 Specific Limitations. In the conduct of operations hereunder, Unit Operator
shall not, without first obtaining the Approval of the Parties:

 

A. Change in Operations. Make any substantial change in the basic method of
operation of any well, except in the case of an emergency.

 

B. Limit on Expenditures. Undertake any project reasonably estimated to require
an expenditure in excess of Twenty Five Thousand Dollars($25,000); provided,
however, that (1) Unit Operator is authorized to make all usual and customary
operating expenditures that are required in the normal course of producing
operations, (2) whenever Unit Operator is authorized to conduct a Drilling,
Completing, or Deepening or Plugging Back operation, or to undertake any other
project, in accordance with this Agreement, Unit Operator shall be authorized to
make all reasonable and necessary expenditures in connection therewith, and (3)
in case of emergency, Unit Operator may make such immediate expenditures as may
be necessary for the protection of life or property, but notice of such
emergency shall be given to all Parties as promptly as reasonably possible.

 

C. Partial Relinquishment. Make any partial relinquishment of its rights as Unit
Operator, appoint any sub-operator, or execute any Designation of Agent.

 

15

 

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 16 Revised 1985)

 

D. Settlement of Claims. Pay in excess Ten Thousand Dollars ($10,000) in
settlement of any claim (other than Workman’s Compensation Claims) for injury to
or death of persons or for loss of or damage to property.

 

E. Determinations. Make any of the determinations provided in the Unit Agreement
to be made by Unit Operator, except as otherwise specified in this Agreement.

 

 

ARTICLE 18

TITLES

 

18.1 Representation of Ownership. Each Party represents to all other Parties
that, to the best of its knowledge and belief, 1ts ownership of Committed
Working Interests in the Unit Area is that set out in Exhibit B to the Unit
Agreement. If it develops that any such ownership is incorrectly stated, the
rights and responsibilities of the Parties shall be governed by the provisions
of this Article 18, but such erroneous statement shall not be a cau3e for
canceling or terminating this Agreement.

 

18.2 Title Papers to be Furnished.

 

A. Lease Papers. Each Party, after executing this Agreement, shall upon request
promptly furnish Unit Operator with copies of all leases, assignments, options,
and other contracts which it has in its possession relating to its Committed
Working Interests.

 

B. Title Papers for Initial Test Well. Promptly after the effective date of this
Agreement each Party within the area described as the Title Examination Area in
Exhibit 2 shall, at its own expense but without responsibility for the accuracy
thereof, furnish Unit Operator with the following title materials relating to
all lands within such area in which it owns Committed Working Interests:

 

(1) Abstracts of title based upon the County records, certified to the current
date;

 

(2) All lease papers, or copies thereof, mentioned in Subdivision A of this
Section 18.2 which the Party has in its possession and which have not been
previously furnished to Unit Operator;

 

(3) Copies of any title opinions which the Party has in its possession;

 

(4) If Federal lands are involved, status reports of current date, setting forth
the entries found in the BLM State Office for such lands, and also certified
copies of the Serial Registers for the Federal leases involved;

 

(5) If State lands are involved, status reports of current date, setting forth
the entries found in the State records for such lands; and

 

(6) If Indian lands are involved, status reports of current date, setting forth
the entries found in the Bureau of Indian Affairs Agency Realty Office having
jurisdiction over such lands and in the Bureau of Indian Affairs Land Titles and
Records Office having jurisdiction over such lands.

 

C. Title Papers for Subsequent Wells. Any Party who proposes the Drilling of a
Subsequent Test Well or Exploratory Well shall, at the time of giving notice for
such proposed well, designate a title examination area not exceeding 2,560 acres
and not including any lands within a participating area. When the Drilling of a
Development Well receives the Approval of the Parties within the participating
area in which it is to be Drilled, a title examination area covering lands
outside any participating area may be designated by the Approval of such
Parties. Each Party within any such title examination area shall, at its own
expense and upon request, furnish Unit Operator with the title materials listed
in Subdivision B of this Section 18.2 not previously furnished, relating to all
lands within such area in which it owns Committed Working Interests.

 

D. Title Papers on Establishment or Enlargement of a Participating Area. Upon
the establishment or the enlargement of a participating area, each Party shall
promptly furnish Unit Operator all the title materials listed in Subdivision B
of this Section 18.2 not previously furnished, relating to all its Committed
Working Interests in the lands lying within such participating area as
established or enlarged.

 

18.3 Title Examination. Promptly after all title materials delivered pursuant to
Section 18.2 have been received, Unit Operator shall deliver the same to an
attorney or attorneys approved by the Parties within the title examination area.
Unit Operator shall arrange to have said materials examined promptly by such
attorney or attorneys and shall distribute copies of title opinions to all
Parties within the title examination area as soon as they are received. Each
Party shall be responsible, at its expense, for curing its own titles. After a
reasonable time, not exceeding thirty (30) days, has been allowed for any
necessary curative work, Unit Operator shall submit to each Party written
recommendations for approval or disapproval of the title to each Committed
Working Interest involved, and thereafter the Parties shall advise Unit Operator
in writing, within fifteen (15) days after receipt of such recommendations, of
approval or disapproval of titles. Unless otherwise agreed, the cost of all
title examinations made under this Section 18.3 shall be charged as part of the
Costs of Drilling the well for which such title examination was made.

 

18.4 Option for Additional Title Examination. Any Party who furnishes materials
for title examination pursuant to Section 18.2 shall have the right to examine
all materials furnished Unit Operator. If such additional, independent title
examination is elected, it shall be at the sole cost and expense of the Party
electing to perform the same; and such Party shall bear any expense which may be
necessary to reproduce title materials for its use, if required. Whether or not
such additional title examination is elected, each Party shall have the right to
approve or disapprove titles according to the provisions of this Article 18

 

16

 
 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

 

18.5 Approval of Titles Prior to Drilling. Where the Committed Working Interests
within a title examination area are owned by more than one Party, no Drilling
shall be conducted in such area until t1tles to the Comm1tted Working Interests
therein have received the Approval of the Parties as hereinafter m th1s Section
prov1ded. If a Drilling Block has been designated for the Drilling of a well,
such well shall not be Drilled until titles to the Committed Working Interests
within the title examination area established for such well have received the
Approval of the Parties within the Drilling Block in which such wells to be
Drilled. Approval of title to lands within a Drilling Block shall be binding
upon all Parties owning Committed Working Interests within such Drilling Block.
If lands outside a participating area are included in the title examination area
for a Development Well, such well shall not be Drilled until t1tles to the
Committed Working Interests within such title examination area have received the
Approval of the Parties therein. In the event Approval of the Parties is not
obtained as in this Section 18.5 provided, the Drilling Party (whether one or
more) may proceed with the Drilling of the well, but sa1d Drilling Party (a)
shall, by so proceeding, assume all risk attending the failure to obtain such
approval to the s me extent as if approval of titles to all lands within the
Drilling Block (if one has been established) or within the title examination
area (in all other instances) had been obtained, and (b) shall also be deemed to
have g1ven its approval to the titles to all lands within the Drilling Block (if
one has been established) or within the title examination area (in all other
instances).

 

18.6 Approval of Titles Prior to Inclusion of Land in a Participating Area.
Where the Committed Working Interests within a participating area are owned by
more than one Party, no Committed Working Interest shall be included within said
participating area or be entitled to participate in the Production of unitized
substances from said participating area until title to such Committed Working
Interest has received the Approval of the Parties within said participating
area. Approval of titles to lands within a participating area shall be binding
upon all Parties within such participating area and all Parties coming within
such participating area upon any enlargement thereof.

 

18.7 Failure of Title to Committed Working Interest Before Approval. If title to
a Committed Working Interest shall fail in whole or in part prior to receiving
the Approval of the Parties, the Parties who improperly claimed said interest
shall sustain the entire loss occasioned by such failure of title and do hereby
expressly relieve and indemnify Unit Operator and all other Parties from and
against any and all liability on account thereof.

 

18.8 Failure of Title to Committed Working Interest After Approval. If title to
a Committed Working Interest which has received the Approval of the Parties
under Section 18.5 fails in whole or in part at a time when the tract affected
thereby is within an active Drilling Block or within a Drilling Block upon which
a well has been completed otherwise than as a producer of unitized substances in
Paying Quantities, or if title to a Committed Working Interest which has
received the Approval of the Parties under Section 18.6 fails in whole or in
part at a time when the tract affected thereby is within a participating area,
then:

 

A. the loss, the cost of litigation, and any ensuing liability shall be borne by
the Parties having interests in the affected participating area or Drilling
Block (including the Party whose Committed Working Interest has been lost and
including the acreage of such Committed Working Interest);

 

B. there shall be relinquished to the Party whose Committed Working Interest has
been lost such proportionate part of each of the 0ther Committed Working
Interests in the lands within such affected participating area or Drilling
Block, subject to a like proportion of their respective Lease Burdens, as may be
necessary to make the loss of such Committed Working Interest a joint loss of
the Parties within such participating area or Drilling Block; and

 

C the relinquished portions of said Committed Working Interests (subject to
their proportionate part of the Lease Burdens attributable thereto) shall be
deemed owned by the Party receiving same.

 

18.9 Joinder by True Owner. If title to a Committed Working Interest fails in
whole or in part, such Committed Working Interest shall no longer be subject to
this Agreement or the Unit Agreement. The true owner of a Committed Working
Interest, title to which has failed, may join in this Agreement or enter into a
separate Operating Agreement with the Parties to this Agreement upon such terms
and conditions as receive the Approval of the Parties within the Unit Area and
subject to any valid claims by the true owner.

 

18.10 Title Challenge. In the event of any suit or action challenging the title
of any Party to any of the oil and gas rights committed by said Party to this
Agreement and to the Unit Agreement, the Party served will immediately notify
the other Parties, and the Party whose title has been challenged shall forthwith
take over and be in charge of the conduct of the litigation and shall bear the
entire cost of such litigation, unless the title has previously received the
Approval of the Parties, in which event the provisions of Section 18.8 shall
apply.

 

ARTICLE 19

UNLEASED INTERESTS

 

19.1 Treated as Leased. If a Party owns in fee all or any part of the oil and
gas rights in any tract within the Unit Area which is not subject to any oil and
gas lease or other contract in the nature thereof, such Party shall be deemed to
own a Committed Working Interest in such tract and also a royalty interest
therein in the same manner as if such Party's oil and gas rights in such tract
were covered by the form of oil and gas lease attached as Exhibit 5.

 

 

19.2 Execution of Lease. In any provision of this Agreement where reference is
made to an assignment or conveyance by any Party of its Committed Working
Interest to any other Party. each such reference as to any Party owning an
unleased interest shall be interpreted to mean that such Party shall

 

 

17

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

execute an oil and gas lease to such other Party in the form of Exhibit 5, which
shall satisfy the requirement for an assignment or conveyance of a Committed
Working Interest.

 

ARTICLE 20

RENTALS AND LEASE BURDENS

 

20.1 Rentals. Each Party shall be obligated to pay any and all rentals and other
sums (other than Lease Burdens) payable upon or with respect to its Committed
Working Interests, subject, however, to the right of each Party to surrender any
of its Committed Working Interests in accordance with Article 27. Upon request,
each Party shall furnish to Unit Operator satisfactory evidence of the making of
such payments. However, no Party shall be liable to any other Party for
unintentional failure to make any such payment, provided it has acted in good
faith.

 

20.2 Lease Burdens. Each Party entitled to receive a share of Production shall
be obligated for any and all payments, whether in cash or in kind, accruing to
any and all Lease Burdens, net profits interests, carried interests, and any
similar interest payable with respect to such share or the proceeds thereof;
provided, however, at any time any such Party entitled to receive Production is
not taking in kind or separately disposing of its share, that portion of such
Production or the proceeds thereof (at the option of such Party) accruing to
such Lease Burdens shall, upon request, be distributed to such Party.

 

20.3 Loss of Committed Working Interest. If a Committed Working Interest is lost
through failure to make any payment above provided to be made by the Party
owning the same, such loss shall be borne entirely by such Party; provided,
however, if the Committed Working Interest so lost covers land within a
participating area, the provisions of Section 18.8 shall apply.

 

ARTICLE 21

TAXES

 

21.1 Payment. Any and all ad valorem and severance taxes payable upon Committed
Working Interests (and upon Lease Burdens which are not payable by the owners
thereof) or upon materials, equipment, or other property acquired and held by
Unit Operator hereunder, and any and all taxes (other than income taxes) upon or
measured by unitized substances produced from the Unit Area which are not
payable by the purchaser or purchasers thereof or by the owner of Lease Burdens
shall be paid by Unit Operator as and when due and payable.

 

21.2 Apportionment. Taxes upon materials, equipment, and other property acquired
and held by Unit Operator hereunder shall be charged to and borne by the Parties
owning the same in proportion to their respective interests therein. All taxes
paid by Unit Operator upon or measured by the value of Production shall be
charged to and borne by the Parties owning the same in the same proportions as
the assessed values of their respective portions of such Production bear to the
whole thereof. All other taxes paid by Unit Operator shall be charged to and
borne by the Parties in proportion to their ownership in the Committed Working
Interests or unitized substances (as the case may be) upon which or with respect
to which such taxes are paid. All reimbursements from owners of Lease Burdens,
whether obtained in cash or by deduction from Lease Burdens, on account of any
taxes paid for such owners shall be paid or credited to the Parties in the same
proportions as such taxes were charged to such Parties.

 

21.3 Transfer of Interests. In the event of a transfer by one Party to another
under the provisions of this Agreement of any Committed Working Interest or of
any other interest in any well or in the materials and equipment in any well, or
in the event of the reversion of any relinquished interest as in this Agreement
provided, the taxes above mentioned assessed against the transferred or reverted
interest for the taxable period in which such transfer or reversion occurs shall
be apportioned among said Parties so that each shall bear the percentage of such
taxes which is proportionate to that portion of the taxable period during which
it owned such interest.

 

21.4 Notices and Returns. Each Party shall promptly furnish Unit Operator with
copies of notices, assessments, levies, or tax statements received by it
pertaining to the taxes to be paid by Unit Operator. Unit Operator shall make
such returns, reports, and statements as may be required by law in connection
with any taxes above provided to be paid by it and shall furnish copies to the
Parties upon request. It shall notify the Parties of any tax which it does not
propose to pay before such tax becomes delinquent.

 

ARTICLE 22

WITHDRAWAL OF TRACTS AND UNCOMMITTED INTERESTS

 

22.1 Right of Withdrawal. If the owner of any substantial interest in a tract
within the Unit Area fails or refuses to join in the Unit Agreement, then such
tract may be withdrawn from the Unit Agreement, as provided in the Unit
Agreement.

 

22.2 Non·Withdrawal. Should the Party or Parties having the right under the Unit
Agreement to withdraw a tract from the Unit Agreement fail to exercise such
right, then all payments and liabilities accruing to the owners of uncommitted
interests in such tract shall be paid and borne by such Party or Parties.

 

ARTICLE 23

COMPENSATORY ROYALTIES

 

23.1 Notice. Whenever demand is made in accordance with the Unit Agreement for
the payment of compensatory royalties, Unit Operator shall give notice thereof
to each Party affected by the demand.

 

23.2 Demand for Failure to Drill a Development Well. If the demand for
compensatory royalties results from the failure to have Drilled a Development
Well and such well is not Drilled, then Unit

 

18

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

Operator shall pay such compensatory royalties. Such payment shall be charged as
Costs incurred in operations within the participating area involved.

 

23.3 Demand for Failure to Drill a Well Other Than a Development Well. If the
demand for compensatory royalties results from the failure to have Drilled a
well other than a Development Well and such well is not Drilled, then Unit
Operator shall pay such compensatory royalties. Such payment shall be chargeable
to and borne by the Parties who would be obligated to bear the Costs of such
well if the well were Drilled as a Required Well under Subdivision B of Section
10.4.

 

ARTICLE 24

SEPARATE MEASUREMENT AND SALVAGE

 

24.1 Separate Measurement. If a well completed as a producer of unitized
substances is in or becomes included in a participating area but is not owned on
an Acreage Basis by all the Parties within such participating area and if,
within thirty (30) days after request therefor by any interested Party, a method
of measuring the Production from such well without the necessity of additional
facilities does not receive the Approval of the Parties, then Unit Operator
shall install such additional tankage, flow lines, or other facilities for
separate measurement of the unitized substances produced from such well as Unit
Operator may deem suitable. The Costs of such facilities for separate
measurement shall be charged to and borne by the Drilling Party for such well
and treated as Costs incurred in operating such well, notwithstanding any other
provisions of this Agreement.

 

24.2 Salvaged Materials. If any materials or equipment are salvaged from a well
completed as a producer after being Drilled, Deepened, Plugged Back, or
Completed otherwise than for the account of all the Parties entitled to
participate therein before reversion to the Non-Drilling Party of its
relinquished interest in the well, the proceeds derived from the sale thereof
or, if not sold, the Salvage Value thereof, shall be treated in the same manner
as proceeds of Production from such well for the purpose of determining
reversion to the Non-Drilling Party of its relinquished interest in such well.

 

ARTICLE 25

ENHANCED RECOVERY AND PRESSURE MAINTENANCE

 

25.1 Consent Required. Unit Operator shall not undertake any program of enhanced
recovery or pressure maintenance involving injection of gas, water, or other
substance by any method, whether now known or hereafter devised, without first
obtaining the consent of Parties owning, on an Acreage Basis, not less than 90 %
of the Committed Working Interests in the participating area affected by any
such program. After the Parties have voted to undertake a program of enhanced
recovery or pressure maintenance in accordance with this Section 25.1, the
conduct of such program shall be subject to supervision by the Parties as set
forth in Article 14.

 

25.2 Above-Ground Facilities. This Agreement shall not be deemed to require any
Party to participate in the construction or operation of any gasoline plant,
sulphur recovery plant, dewaxing plant, or other above-ground facilities to
process or otherwise treat Production, other than such facilities as may be
required for treating Production in ordinary lease operations and such
facilities as may be required in the conduct of operations authorized under
Section 25.1.

 

ARTICLE 26

TRANSFERS OF INTEREST

 

26.1 Sale by Unit Operator. If Unit Operator sells all its Committed Working
Interests, it shall resign and a new Unit Operator shall be selected as provided
in the Unit Agreement.

 

26.2 Assumption of Obligations. No transfer of any Committed Working Interest
shall be effective unless the same is made expressly subject to the Unit
Agreement and this Agreement and the transferee agrees in writing to assume and
perform all obligations of the transferor under the Unit Agreement and this
Agreement insofar as they relate to the interest assigned, except that such
assumption of obligations shall not be required in case of a transfer by
mortgage or deed of trust as security for indebtedness.

 

26.3 Effective Date. A transfer of Committed Working Interests shall not be
effective as among the Parties until the first day of the month next following
the delivery to Unit Operator of the original or a certified copy of the
instrument of transfer conforming to the requirements of Section 26.2. In no
event shall a transfer of Committed Working Interests relieve the transferring
Party of any obligations accrued under this Agreement prior to said effective
date, for which purpose any obligation assumed by the transferor to participate
in the Drilling, Deepening, Plugging Back, or Completing of a well prior to such
effective date shall be deemed an accrued obligation.

 

ARTICLE 27

RELEASE FROM OBLIGATIONS AND SURRENDER

 

27.1 Surrender or Release Within Participating Area. A Committed Working
Interest in land within a participating area shall not be surrendered except
with the consent of all Parties within such participating area. However, a Party
who owns a Committed Working Interest in land within a participating area and
who is not at the time committed to participate in the Drilling, Deepening,
Plugging Back, or Completing of a well within such participating area may be
relieved of further obligations with respect to such participating area, as then
constituted, by executing and delivering to Unit Operator an assignment
conveying to all other Parties within such participating area all Commit ted
Working Interests owned by such Party in lands within the participating area,
together with the

 

19

 

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

entire interest of such Party in any and 21l wells, materials, equipment, and
other property within or pertaining to such participating area.

 

27.2 Procedure on Surrender or Release Outside Participating Area. Whenever a
Party or Parties owning 100% of the Committed Working Interest in any tract
which is not within any participating area desire to surrender said 100%
interest, such Party or Parties shall give to all other Parties notice thereof,
describing such Committed Working Interest. The Parties receiving such notice,
or any of them, shall have the right at their option to take from the Party or
Parties desiring to surrender an assignment of such Committed Working Interest
by giving the Party or Parties desiring to surrender notice of election so to do
within thirty (30) days after receipt of notice of the desire to surrender. If
such election is made as above provided, the Party or Parties taking the
assignment (which shall be taken by them in proportion to the acreage of their
respective Committed Working Interests among themselves in the Unit Area) shall
pay the assigning Party or Parties for its or their share of the Salvage Value
of all wells, if any, in which the assigning Party or Parties own an interest
and which are located on the land covered by such Committed Working Interest,
which payment shall be made upon receipt of the assignment. If no Party elects
to take such assignment within said thirty (30) day period, then the Party or
Parties owning such Committed Working Interest may surrender the same, if
surrender thereof can be made in accordance with the Unit Agreement. Whenever a
Party owning less than 100% of the Committed Working Interest in any tract
desires to surrender its interest therein, such interest may be acquired by the
other Party or Parties owning Committed Working Interests in said tract without
notice being given to any other Parties owning interests within the Unit Area.
In the event the other Party or Parties owning Committed Working Interests in
the tract to be surrendered do not desire to acquire such interest, the interest
shall be treated as a 100% interest.

 

27.3 Accrued Obligations. A Party making an assignment or surrender in
accordance with Section 27.1 or Section 27.2 shall not be relieved of its
liability for any obligation accrued under this Agreement at the time the
assignment or surrender is made or of the obligation to bear its share of the
Costs incurred in any Drilling, Deepening, Plugging Back, or Completing
operation in which such Party had elected to participate prior to the making of
such assignment or surrender, except to the extent that the Party or Parties
receiving such assignment shall assume, with the Approval of the Parties, any
and all obligations of the assigning Party under this Agreement and under the
Unit Agreement.

 

ARTICLE 28

LIABILITY

 

28.1 Liability. The liability of the Parties hereunder shall be several and not
joint or collective. Each Party shall be responsible only for its obligations as
herein set out.

 

28.2 No Partnership Created. It is not the intention of the Parties to create,
nor shall this Agreement or the Unit Agreement be construed as creating, a
mining or other partnership or association between the Parties or as rendering
them liable as partners or associates.

 

28.3 Election. Each of the Parties hereby elects, under the authority of Section
761(a) of the Internal Revenue Code of 18 86 to be excluded from the application
of all the provisions of Subchapter K of Chapter 1 of Subtitle A of the Internal
Revenue Code of 1986. In making this election, each Party states that income
derived by it from operations under this Agreement can be adequately determined
without computation of partnership taxable income. If the income tax laws of the
State or States in which the Unit Area is located contain, or hereafter contain,
provisions similar to those contained in the Subchapter of the Internal Revenue
Code of 1986 above referred to under which a similar election is permitted, each
of the Parties agrees that such election shall be exercised; and should the
income tax laws of such State or States require evidence of such election, Unit
Operator is authorized and directed to execute the same on behalf of each Party.
Beginning with the first taxable year of operation under this Agreement, each
Party agrees that the deemed election provided by Federal Regulations Section
1.761-2(b)(2)(ii) will apply, and no Party will file an application under
Federal Regulations Section 1.761·2(b)(3)(i) to revoke said election. *See Page
22.

 

ARTICLE 29

NOTICES

 

29.1 Giving and Receipt. Whenever a rig is on location, every notice and every
response shall be by telephone, to be confirmed promptly in writing. In all
other instances, any notice, response, consent, advice, or statement herein
provided or permitted to be given shall be in writing and shall be deemed given
only when received by the Party to whom the same is directed.

 

29.2 Addresses. For the foregoing purposes, each Party's address and telephone
number shall be deemed to be the address and telephone number set forth under or
opposite its signature hereto, unless and until such Party specifies another
address or telephone number by not less than ten (10) days' prior notice to all
other Parties.

 

ARTICLE 30

EXECUTION

 

30.1 Counterparts. This Agreement may be executed in counterparts, and all such
counterparts taken together shall be deemed to constitute one and the same
instrument.

 

30.2 Ratification. This Agreement may be executed by the execution and delivery
of a good and sufficient instrument of ratification, adopting and entering into
this Agreement. Such ratification shall have the same effect as if the Party
executing it had executed this Agreement or a counterpart hereof.

 

 

20

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

30.3 Effect of Signature. When this Agreement is executed by two Parties,
execution by each shall be deemed consideration for execution by the other, and
each Party theretofore or thereafter executing this Agreement shall thereupon
become and remain bound hereby until the termination of this Agreement. However,
if the Unit Agreement does not become effective within twelve (12) months from
and after the date of this Agreement, then, at the expiration of said period,
this Agreement shall terminate.

 

ARTICLE 31

SUCCESSORS AND ASSIGNS

 

31.1 Covenants. This Agreement shall be binding upon and shall inure to the
benefit of all Parties signing the same, their heirs, devisees, personal
representatives, successors and assigns, and their successors in interest,
whether or not it is signed by all the Parties listed below. The terms hereof
shall constitute covenants running with the lands and the Committed Working
Interests of the Parties.

 

ARTICLE 32

HEADINGS FOR CONVENIENCE

 

32.1 Headings. The Table of Contents and the headings used in this Agreement are
inserted for convenience only and shall be disregarded in construing this
Agreement.

 

ARTICLE 33

RIGHT OF APPEAL

 

33.1 Not Waived. Nothing contained in this Agreement shall be deemed to
constitute a waiver by any Party of any right it would otherwise have to contest
the validity of any law or any order or regulation of governmental authority
(whether Federal, State, or local) relating to or affecting the conduct of
operations within the Unit Area or to appeal from any such order.

 

ARTICLE 34

SUBSEQUENT JOINDER

 

34.1 Prior to the Commencement of Operations. Prior to the commencement of
operations under the Unit Agreement, all owners of working interests in the Unit
Area who have joined the Unit Agreement shall be privileged to execute or ratify
this Agreement.

34.2 After Commencement of Operations. After commencement of operations under
the Unit Agreement, any working interest in land within the Unit Area which is
not then committed hereto may be committed to this Agreement and to the Unit
Agreement upon such reasonable terms and conditions as may receive the Approval
of the Parties.

 

ARTICLE 35

CARRIED INTERESTS

 

35.1 Treatment of. If any working interest shown on Exhibit B to the Unit
Agreement and committed thereto is a carried working interest, such interest
shall, if the carrying Party executes this Agreement, be deemed to be, for the
purpose of this Agreement, a Committed Working Interest owned by the carrying
Party.

 

ARTICLE 36

EFFECTIVE DATE AND TERM

 

36.1 Effective Date and Term. This Agreement shall become effective upon the
effective date of the Unit Agreement, shall continue in effect during the term
of the Unit Agreement, and shall terminate concurrently therewith.

 

36.2 Effect of Termination. Termination of this Agreement shall not relieve any
Party of its obligations then accrued hereunder. Notwithstanding termination of
this Agreement, the provisions hereof relating to the charging and payment of
Costs and the disposition of materials and equipment shall continue in force
until all materials and equipment owned by the Parties have been disposed of and
until final accounting between Unit Operator and the Parties has been made.
Termination of this Agreement shall automatically terminate all rights and
interests acquired by virtue of this Agreement in lands within the Unit Area,
except such transfers of Committed Working Interests as have been evidenced by
formal written instruments of transfer.

 

21

 

ARTICLE 37

OTHER PROVISIONS

 

 

37.1 PAYMENT OF TAXES RELATING TO PRODUCTION.

 

A. At and during such time, or times, as Non-Operator is exercising the right to
take in kind or separately dispose of its proportionate part of the production
as set forth in Paragraph 6.4 hereof, Non-Operator shall pay, or arrange for the
payment of, all production, severance, gathering, sales or similar taxes imposed
upon such part.

 

B. At and during such time, or times, as Unit Operator is selling Non-Operator's
proportionate part of the production, as set forth m Paragraph 6.5 hereof, Unit
Operator shall pay, or arrange for the payment of, all production, severance,
gathering, sales or similar taxes imposed upon such part.

 

37.2 NON-CONSENT INVESTMENT ADJUSTMENT. Notwithstanding any provision in this
Agreement to the contrary, no Party shall be liable, without its consent, for
any investment adjustment charge under the provisions of Section 13.3D or 13.4D,
which charge is in excess of the Party's credits under Article 13. In the event
of the establishment, enlargement or contraction of a Participating Area, the
provisions of Article 12, and other provisions related thereto, shall be
applicable to any investment adjustment to the same extent that these provisions
are applicable to a well drilled otherwise than for the account of all Parties
entitled to participate therein. Any Party subject to such charge may elect not
to pay it in cash. If, within 30 days after proposal for establishment,
enlargement or con traction of a Participating Area has been submitted by Unit
Operator in writing to the Working Interest Owners involved, a Party elects not
to participate in the investment adjustment applicable to the establishment,
enlargement or contraction, that Party shall be a Non-Drilling Party, and shall
be deemed, as of the effective date of the resulting area in connection with
which such charge is made, to have relinquished the interest for which such
charge is made to the Party, or Parties, who would otherwise be entitled to
receive a credit under Section 13.3D or Section 13.4D, which latter Party, or
Parties, shall be the Drilling Party with respect to this relinquished interest.
The Drilling Party shall own the relinquished interest until it reverts to
Non-Drilling Party pursuant to Article 12, except that it is specifically
understood that the Article 12.4B percentage for exercise of the Non-Drilling
Option applicable to establishment, enlargement or contraction of the
Participating Area be 300%.

 

28.3 TAX ELECTION. (Continued) This election by the Parities to be excluded from
the application of all of the provisions of Subchapter K does not apply in any
way to any subsequent agreements between the Parties, or with third parties,
concerning the sharing of costs for the drilling of any wells in the Unit Area.
The Parties reserve the right to decide with each such subsequent agreement
whether they elect to be excluded from the application of Subchapter K.

 

22

 
 

 

IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
and have set opposite their respective names the date of execution.          
UNIT OPERATOR  AND WORKING INTEREST OWNER           O. F. DUFFIELD          
By:  /s/O. F. Duffield   O. F. Duffield     Address:       16786 Kincheloe  Road
                       Siloam Springs, Arkansas
72761                                           Date of Execution       August
5, 2004         STATE OF  OKLAHOMA         )   ) ss.   COUNTY OF TULSA )      
The foregoing instrument was acknowledged before me by O. F. DUFFIELD ,    
                                                                                       
 as MANAGER     of Cortez Exploration,  LLC.       This 5TH day of AUGUST ,
2004.       WITNESS my hand and official seal.       My Commission Expires:    
      DECEMBER 4, 2010   /s/ Gale L. Staton   Notary Public     UNIT OPERATOR
SIGNATURE PAGE FOR THE   PARADISE UNIT AGREEMENT   NYE AND MINERAL COUNTIES,
NEVADA        

 

 

 

 

 

    COPAS 1984 ONSHORE     Recommended by the Council     of Petroleum
Accountants     Societies EXHIBIT "1"           Attached to and made a part of
the Unit Operating Agreement for the Gabbs Valley Unit Area, Mineral and Nye
Counties, Nevada                               ACCOUNTING PROCEDURE   JOINT
OPERATIONS       I.  GENERAL PROVISIONS       1   Definitions          
"Joint    Property"    shall    mean    the    real    and    personal   
property    subject    to    the    agreement     to  which    this   
Accounting    Procedure      is attached.     "Joint      Operations"     
shall      mean      all      operations      necessary      or     proper     
for     the      development,    operation,      protection      and    
maintenance of the Joint Property.     "Joint    Account"     shall     mean   
 the     account     showing     the     charges     paid     and    
credits     received     in    the    conduct     of    the    Joint    
Operations and which are to be shared by the Parties.     "Operator" shall mean
the party designated  to conduct the Joint Operations.      ''Non-Operators"
shall mean the Parties to this agreement other than the Operator.     "Parties"
shall mean Operator and Non-Operators     "First      Level     Supervisors"    
shall      mean      those      employees      whose      primary     
function      in     Joint     Operations      is     the     direct    
supervision     of     other     employees      andlor     contract    
labor     directly     employed     on     the     Joint     Property    
in            field     operating      capacity.     "Technical     
Employees"      shall      mean      those      employees      having     
special      and      specific      engineering,      geological      or     
other     professional     skills,    and     whose    primary     function   
in    Joint     Operations     is    the    handling     of    specific   
operating     conditions     and     problems for the benefit of the Joint
Property.     "Personal Expenses'' shall mean travel and other reasonable
reimbursable expenses of Operator's employees.     "Material" shall mean
personal property, equipment  or supplies acquired or held for use on the Joint
Property.     "Controllable    Material''     shall    mean      1aterial 
which    at    the    time    is    so    classified     in    the    Material 
  Classification     Manual    as     most recently recommended  by the Council
or Petroleum Accountants Societies.       2   Statement and Billings          
Operator    shall    bill    Non-Operators     on    or    before    the   
last    day    of    each    month    for    their    proportionate     share   
of    the    Joint     Account     for     the     preceding      month.    
Such     bills     will     be     accompanied      by     statements     
which     identify     the     authority     for     expenditure,      lease    
or     facility,     and     all     charges     and     credits    
summarized     by    appropriate     classifications     of     investment    
and     expense     except     that     items     of    Controllable    
Material     and     unusual     charges     and     credits     shall     be   
separately     identified     and     fully described in detail.       3  
Advances and Payments by Non-Operators           A.        Unless    
otherwise     provided     for     in    the     agreement,     the    
Operator     may     require     the    Non-Operators    to    advance     their
    share    of    estimated     cash    outlay     for    the    succeeding    
month's    operation     within     fifteen    (15)    days    after   
receipt    of    the     billing    or   by   the    first   day   of   the  
month    for   which    the   advance    is   required,    whichever    is  
later.   Operator    shall   adjust     each monthly billing to reflect
advances  received from the Non-Operators.           B.       Each  
Non-Operator    shall    pay    its   proportion    of   all   bills   
within    fifteen   (15)   days   after   receipt.    If   payment    is   not  
made     Within such time, the unpaid balance shall bear interest monthly at the
prime rate in effect at Chase Manhattan Bank, New York, New York     the        
first         day         of         the         month         in       
which         delinquency         occurs         plus                  
2%                     the     maximum   contract    rate    permitted     by   
the    applicable     usury    laws    in    the    state    in    which   
the    Joint    Property    is    located,     whichever    is   the   
lesser,    plus    attorney's    fees,   court    costs.    and    other   
costs    in   connection    with   the    collection    of    unpaid     amounts
      4   Adjustments           Payment    of   any   such    bills    shall   
not    prejudice   the    right of   any   Non-Operator to   protest    or  
question    the   correctness    thereof.     provided,     however,     all    
bills     and     statements      rendered  to     Non-Operators      by    
Operator     during     any     calendar     year     shall     conclusively   
be    presumed     to    be    true    and    correct    after  twenty-four   
(24)    months    following    the    end    of    any    such    calendar    
year,     unless     within     the     said     twenty-four     (24)   
month     period     a    Non-Operator     takes     written    exception    
thereto    and     makes     claim   on    Operator    for   adjustment      
No   adjustment    favorable   to   Operator    shall    be   made    unless   
it     is   made    withm   the    same     prescribed     period      The   
provisions     of    th1s    paragraph     shall    not    prevent    
adjustments     resulting     fi"om     a    physical    inventory    of    
Controllable Material as provided for in Section  V.           COPYRIGHT© 1985
by the Council of Petroleum  Accountants Societies.                 -1-        
                    COPAS 1984 ONSHORE     Recommended by the Council     of
Petroleum Accountants     Societies       5   Audits           A.      A  
Non-Operator,    upon     notice     in      writing    to    Operator    
and     all    other    Non-Operators,    shall    have     the    right    
to    audit     Operator's      accounts      and      records     
relating      to     the     Joint      Account      for     any    
calendar      year     wllhln     the     twenty-four     (24)    month   
period    following    the  end     of     such     calendar    year;    
provided,    however,    the     making    of     an     audit     shall     not
    extend     the      time      for     the      taking  of     written      
exception     to     and      the      adjustments    of     accounts    as    
provided     for  in     Paragraph     4        of     this    Section  1.   
Where     there   are    two  or  more  Non-Operators,     the     
Non-Operators    shall      make     every    reasonable     effort    to   
conduct     a    Joint     audit    in    a    manner     which    Will      
result     in      a    minimum    of    inconvenience     to      the     
Operator.        Operator       shall     bear    no     portion      of     
the      Non-Operators'      audit      cost      incurred      under      this
    paragraph      unless     agreed     to     by     the     Operator.     
The     audits     shall     not     be     conducted     than    once  each    
year     Without    prior     approval     of    Operator,     except    
upon    the     resignation     or    removal    of    the     Operator,    
and      shall   be    made     at the expense of those Non-Operators  approvmg 
such audit.           B.      The Operator shall reply in writing to an audit
report within 180 days after receipt of such report       6   Approval By
Non-Operators           Where    an    approval    or    other    agreement   
of    the    Parties    or    Non-Operators     is    expressly    required    
under    other    sections    of    th1s     Accounting       Procedure      
and       if      the       agreement       to       which      this      
Accounting       Procedure       is      attached       contains       no    
contrary      provisions               regard      thereto,      Operator    
shall      notify     all     Non-Operators      of     the     Operator's    
proposal,     and     the     agreement or approval  of a majority in interest
of the Non-Operators shall be controlling on all Non-Operators       II.  DIRECT
CHARGES       Operator shall charge the Joint Account With the following items:
      1   Ecological and  Environmental           Costs    incurred     for   
the    benefit     of    the    Joint     Property    as    a    result    of   
governmental     or    regulatory     requirements     to    satisfy    
environmental     considerations    applicable      to     the     Joint    
Operations       Such     costs     may     include     surveys    of    an    
ecological     or     archaeological  nature and pollution control procedures as
required by applicable laws and regulations.       2   Rentals and Royalties    
      Lease rentals and royalties paid by Operator  for the Joint Operations.  
    3   Labor           A.      ( 1)    Salaries     and     wages    of   
Operator's     field    employees    directly     employed     on    the   
Joint    Property     in    the    conduct     of                         Joint
Operations                     (2)     Salaries of First level Supervisors  in
the field.                     (3)     Salaries      and     wages     of    
Technical      Employees     directly     employed  the    Joint    
Property     if      such     charges     are                         excluded
from the overhead rates                     (4)     Salaries  and  wages  of 
Technical  Employees      either      temporarily      or      permanently     
assigned     to     and      directly                         employed  in the
operation or the Joint Property if such charges are excluded from the overhead
rates.           B.     Operator's      cost      of     holiday,     
vacation,     sickness      and     disability    benefits      and   
 other      customary      allowances      paid     to             
employees     whose     salaries     and    wages    are    chargeable     to   
the    Joint    Account     under    Paragraph     3A     of    this   
Section    II              Such    costs    under    this    Paragraph    3B   
may    be    charged    on    a    "when    and    as    paid    basis"    or  
by    "percentage    assessment"              on  the  amount  of  salaries 
and  wages  chargeable  to  the  Joint  Account  under  Paragraph  3A  of  this 
Section  II.  If              percentage assessment  is  used, the rate shall be
based on the Operator's cost experience.           C.      Expenditures      
or      contributions      made      pursuant       to      assessments      
1mposed      by      governmental       authority     which      are    
         applicable  to Operator's costs chargeable  to the Joint Account under
Paragraphs 3A and 3B of this Section II.           D.     Personal     
Expenses      of     those     employees      whose     salaries      and    
wages     are     chargeable      to     the     Joint     Account     under    
         Paragraphs 3A and 3B of this Section II.       4   Employee Benefits  
        Operator's      current      costs      or     established     
plans      for     employees'     group      life     insurance,     
hospitalization,      pension,     retirement.     stock    purchase.   
thrift.     bonus,    and    other    benefit    plans    of   a    like  
nature.    applicable    to   Operator's    labor   cost    chargeable    to  
the     Joint    Account    under     Paragraphs    3A    and    3B    of   
this   Section    II   shall    be    Operator's      actual    cost    not  
to    exceed    the    percent     most recently recommended  by the Council  of
Petroleum Accountants  Societies                 -2-                            
      COPAS 1984 ONSHORE     Recommended by the Council     of Petroleum
Accountants     Societies       5   Material           Material purchased or
furnished by Operator for use on the Joint Property as provided under Section
IV.  Only such     Material    shall      be     purchased    for     or    
transferred    to     the     Joint      Property    as     may      be    
required     for    Immediate    use     and      is     reasonably   
practical    and     consistent    with   efficient    and     economical   
operations.       The     accumulation    of     surplus    stocks    shall    
be     avoided.       6   Transportation           Transportation of employees
and  Material necessary for the Joint  Operations but subject to the following
limitations:           A.      If   Material     is    moved   to    the   
Joint    Property    from    the    Operator's    warehouse    or    other   
properties,    no    charge    shall    be               made    to   the   
Joint    Account    for   a    distance    greater    than    the   distance  
from   the    nearest    reliable    supply    store    where   like    
          material is normally available or railway receiving point nearest the
Joint Property unless agreed to by the Parties           B.      If  
surplus     Material  is      moved     to    Operator's    warehouse    or   
other    storage    point,    no    charge    shall    be    made    to   
the    Joint              Account    for    a    distance    greater    than   
the    distance   to    the    nearest    reliable    supply    store   
where    like    material    is   normally              available,    or   
railway     rece1vmg   point    nearest    the    Joint    Property    unless   
agreed    to    by    the    Parties.    No     charge    shall    be    
         made    to    the    Joint    Account    for    moving   Material   
to    other    properties   belonging    to    Operator,    unless    agreed   
to    by    the              Parties.           C.     In     the    
application     of    subparagraphs      A      and    B    above.     the   
option     to    equalize     or    charge     actual    trucking     cost    
is              avallable    when    the    actual    charge    is     $400   
or    less   excluding    accessorial    charges.    The    $400    will   
be    adjusted    to    the              amount most recently recommended by the
Council of Petroleum Accountants Societies       7   Services           The   
cost    of    contract    services,   equipment   and    utilities    provided 
by    outside    sources,    except    services   excluded  by    Paragraph    
10    of    Section    II  and    Paragraph    i,    ii,     and    III,   
of    Section   III.  The    cost    of    professional    consultant   
services  and  contract     services    of    technical     personnel    
directly    engaged    on    the    Joint Property    if    such    charges   
are    excluded     from the overhead     rates.    The    cost    of   
professional    consultant     services   or    contract    services    of   
technical    personnel    not    directly    engaged    on    the     Joint
Property shall not be charged to the Joint Account unless previously agreed to
by the Parties       8   Equipment and  Facilities  Furnished By Operator      
    A.         Operator    shall    charge    the    Joint    Account    for   
use    of    Operator    owned    equipment   and    facilities    at   
rates    commensurate                  with     costs     of     ownership    
and     operation.      Such     rates     shall     include     costs    
of     maintenance.     repairs,     other     operating                 
expense,      insurance,      taxes,      depreciation,      and    
interest     on     gross     investment      less     accumulated 
    depreciation     not     to     exceed twelve percent ( 12 %) per annum Such
rates shall not exceed average commercial                  rates currently
prevailing in the immediate area of the Joint Property           B.        
In    lieu    of    charges    1n     Paragraph    8A    above.    Operator   
rnay   elect    to    use    average    commercial    rates    prevailmg 
  in     the                 immediate     area     of    the    Joint    
Property     less    20%.  For automotive equipment, Operator may elect to use
rates                 published by the Petroleum Motor Transport Assoc1ation.  
    9   Damages  and  Losses to Joint  Property           All    costs    or   
expenses    necessary     for    the    repa1r   or    replacement    of   
Joint    Property    made    necessary    because    of    damages    or    
losses     incurred     by     fire,     flood,      storm,     theft,    
accident,              other     cause,     except     those     resulting    
from     Operator's      gross     negligence     or     willful   
misconduct.     Operator     shall     furnish    Non-Operator    written    
notice     of    damages     or     losses    incurred     as     soon as
practicable after a report thereof has been received by Operator       10  
Legal  Expense           Expense     of     handling,      investigating     
and     settling     litigation    or     claims,    discharging     of    
liens,     payment      of    Judgment      and     amounts     paid     for   
settlement     of    claims    incurred     in    or    resulting     from   
operations     under    the    agreement     or    necessary      to    
protect    or    recover    the    Joint    Property,    except    that    no   
charge    for    services    of   Operator's    legal   staff    or    fees  
or    expense    of     outside   attorneys    shall    be    made    unless   
previously    agreed    to    by    the    Parties.   All    other    legal  
expense    is   considered    to    be     covered    by    the   overhead   
provisions    of   Section    III  unless     otherwise    agreed    to   by  
the    Parties,    except    as   provided    in    Section     I,  Paragraph 3.
      11   Taxes           All   taxes    of   every    kind   and    nature  
assessed    or   levied   upon   or   in   connection    with   the   Joint   
Property.   the   operation    thereof,     or    the    production  
therefrom,    and    which     taxes    have    been    paid    by    the   
Operator    for     the    benefit    of    the    Parties.    If   the    ad  
  valorem     taxes     are     based      in     whole     or     in    
    part     upon     separate      valuations     of     each     party's    
working     interest,     then     notwithstanding     anything    to    the   
contrary    herein,    charges    to    the    Joint    Account    shall   
be    made    and    paid    by   the    Parties     hereto in accordance  with
the tax value generated  by each party's working interest.                 - 3-
                      COPAS 1984 ONSHORE     Recommended by the Council     of
Petroleum Accountants     Societies       12   Insurance           Net   
premiums    paid   for   insurance    requ1red     to    be    earned    for   
the     Joint     Operations    for    the     protection     of    the    
Parties.    In    the     event    Joint     Operations     are
    conducted     in     a     state      in      which    Operator     may    
act     as     self-insurer     for     Worker's    Compensation     and/or   
Employers   Liability    under    the     respective    state's    laws.    
Operator   may,     at    its      election,    include    the     risk    
under      its    self     insurance program and  in that  event,  Operator
shall  include a charge at Operator's cost  not to exceed manual rates.       13
  Abandonment and Reclamation           Costs    incurred     for    
abandonment     of      the      Joint       Property,     Including    
costs       required       by    governmental     or      other      regulatory·
    authority.       14   Communications           Cost      of     
acquiring,     leasing,     installing,    operating,    repairing     and     
maintaining     communication     systems,     Including     radio      and    
microwave    facilities    directly    serving    the     Joint     
Property.          In     the     event      communication    facilities/
systems    serving    the     Joint     Property are Operator Owned,  charges to
the Joint  Account shall  be made  as provided  in Paragraph 8 of this Section
II.       15   Other Expenditures           Any   other     expenditure   not   
covered   or    dealt     With    in   the    foregoing   provisions   of   
this    Section   II,   or    in   Section   III  and    which     is    of   
direct   benefit     to   the    Joint     Property   and    is     incurred  
by    the    Operator   in    the    necessary   and    proper   conduct   of   
the    Joint     Operations.           III.   OVERHEAD       1   Overhead-
Drilling and Producing Operations           i.        As       compensation     
for       administrative,      supervision,    office     services     and      
warehousing     costs.      Operator      shall       charge              
drilling and  producing operations on either:           ( X ) Fixed Rate Basis,
Paragraph 1A, or               (       ) Percentage Basis, Paragraph 1B        
           Unless      otherwise    agreed    to     by    the     Parties,   
such     charge    shall     be     in     lieu     of     costs     and    
expenses    of    all     offices   and              salaries  or      wages    
plus      applicable     burdens    and      expenses    of      all     
personnel,    except     those      directly    chargeable     under    
         Paragraph    3A,      Section    II.         The     cost     and    
expense    of     services    from     outside     sources    in    
connection    with     matters   of              taxation,    traffic,   
accounting    or     matters    before    or     involving    governmental   
agencies      shall     be     considered     as     included    in             
the    overhead    rates     provided    for    in    the    above   selected   
Paragraph   of    this     Section   III  unless   such     cost     and    
expense   are     agreed to by the Parties as a direct charge to the Joint
Account.           ii.      The       salaries,     wages     and      
Personal     Expenses     of      Technical     Employees     and/or    
the      cost      of      professional    consultant              services 
and  contract services of technical personnel directly employed on the  Joint 
Property                    (  X   ) shall   be covered by the Overhead rates,
or              (       ) shall  not be covered by the  overhead rates          
iii      The      salaries,    wages    and      Personal     Expenses    
of     Technical    Employees    and/or    costs      of     professional    
consultant     services              and     contract    services      of    
technical    personnel    either    temporarily    or     permanently   
assigned    to     and     directly    employed     in              the
operation  of the  Joint  Property.                    (        ) shall  be
covered by the overhead rates, or              (   X   ) shall  not be covered
by the  overhead rates           A.                  0verhead- Fixed Rate  Bass
                   (1)        Operator shall  charge the Joint  Account at the 
following rates  per  well  per month:           Drilling well Rate $ 6,500.00  
                               (Prorated for  less than  a full  month)        
  Producing Well Rate $ 650.00                    (2)       Application of
Overhead- Fixed  Rate  Basis shall  be  as  follows:           (a) Drilling Well
Rate           (1) Charges for drilling wells shall begin on the date the well
is spudded and terminate on the date    
                                           the     drilling   rig,    
completion    rig,     or      other  units     used     in    completion  
of     the    well      is     released,    whichever                       -4-
                COPAS 1984 ONSHORE     Recommended by the Council     of
Petroleum Accountants     Societies          
                                         is      later,    except     that   
no    charge     sha ll    be    made    during     suspensron     of   
drilling     or    completion     operations    
                                        for  fifteen  (15)  or  more 
consecutive calendar days                                         (2)    
Charges      for     wells     undergoing      any     type     of    
workover     or     recompletion      for            period       of     
live      (5)                                             consecutive   work   
days      or     more      shall      be     made      at     the     
drilling    well      rate.      Such      charges    shall      be    
                                        applied     for     the     period    
from     date     workover     operations,   with      rig     or     other     
units      used      in     workover                                            
commence    through    date      of     rig     or     other      unit     
release,    except    that     no     charge    shall      be     made     
during                                             suspension of operations for 
fifteen  ( 15) or more  consecutive calendar days.                              
(b)     Producing  Well Rates                                        (1)    
An    active   well    either     produced    or     Injected      into    
for    any     portion    of    the     month     shall     be    considered   
as                                            a one-well charge for the entire
month.                                        (2)     Each  active    
completion    in              multi-completed      well    which     
production     is    not      commingled     down    
                                       hole        shall      be     
considered    as     a     one-well    charge     providing     each completion
is considered a separate                                            well by the 
governing regulatory authority                                        (3)     
An       inactive       gas       well      shut    in      because     of     
overproduction     or      failure     of      purchaser     to      take      
the                                             production    shall      be    
considered    as     a     one-well    charge    providing    the     gas    
well      is    directly     connected     to    
                                        a permanent sales outlet.          
                             (4)      A      one-well    charge    shall     
be      made       for     the      month       in       which      plugging    
and      abandonment     operations                                           
are     completed             any      well.       This      one-well    
charge     shall      be      made      whether    or     not      the     
well     has                                             produced except when 
drilling well  rate applies.           (5) All other inactive wells (including
but not limited to inactive wells covered by unit allowable, lease    
                                        allowable, transferred allowable, etc.) 
shall  not qualify for an overhead charge.                    (3)      The    
well     rates      shall     be     adjusted    as     of     the     first    
day     of     April      each     year     following    the     effective   
date     of    the                         agreement    to     which   
this      Accounting    Procedure    is       attached         The    
adjustment    shall      be     computed    by     multiplying     the rate
currently in use by the percentage increase or decrease in the average weekly
earnings of Crude                         Petroleum    and     Gas    
Production    Workers    for     the     last     calendar    year    
compared    to     the     calendar    year     preceding    as    
                    shown    by     the     index      of     average  
weekly    earnings    of     Crude    Petroleum    and     Gas     Production   
workers    as     published                         by     the     United     
States    Department    of     Labor.      Bureau      of     Labor     
Statistics,      or     the     equivalent    Canadian    index      as    
                    published    by    Statistics    Canada,    as    
applicable.    the      adjusted    rates     shall      be     the    
rates     currently    in     use,     plus     or                         minus
the  computed adjustment.           B.        Overhead- Percentage Basis        
  (1) Operator shall charge the Joint Account at the following rates:          
                       (a)      Development                            
                            Percent (                                         
0/o) of the cost of development of the Joint Property exclusive of costs    
                                 provided  under  Paragraph 10 of Sect1on  II
and all salvage credits.                                 (b)      Operating    
                                                    Percent (
                                     %) of the cost of operating the Joint
Property exclusive of costs provided                                    
under    Paragraphs    2     and      10   of     Section    II,    all    
salvage    credits,    the     value     of     inJected      substances   
purchased                                     for      secondary    recovery   
and    all      taxes       and     assessments     which      are    
levied,     assessed     and      paid     upon      the    
                                mineral interest in and  to the Joint  Property.
                      (2)      Application of Overhead- Percentage Basis  shall 
be as  follows:                                  For      the      purpose 
of      determining     charges   on   a    percentage   basis   under  
Paragraph   1B    of   this   Section    III,                           
development  shall  include  all  costs  in connection  with drilling, 
re-drilling,  deepening,  or  any  remedial                           
operations   on    any     or     all    wells     involving    the     use    
of    drilling    rig     and     crew     capable   of    drilling   to   
the     producing                            interval      on       the      
Joint        Property;      also.       preliminary      expenditures     
necessary      in    preparation      for      drilling      and    
                       expenditures     incurred   in   abandoning    when   
the      well      is   not      completed     as    a     producer. 
   and      orig1nal      cost      of                           
construction     or     installation    of      fixed       assets,     the     
expansion     of      fixed     assets     and      any       other     
project       clearly                            discernible   as     a   
fixed    asset,    except    Major    Construction   as     defined    in   
Paragraph    2    of    this     Section    III.      All    other    
                       costs shall  be considered as operating.       2  
Overhead-Major  Construction           To     compensate    Operator    for    
Overhead    costs      incurred    in      the     construction    and    
installation    of     fixed   assets,    the     expansion    of     fixed    
assets,   and     any     other     project    clearly     discernible     
fixed     asset     required     for    the     development    and   
operation    of    the     Joint      Property.    Operator    shall     
either     negotiate    a     rate     prior    to     the     beginning   
of     construction,    or     shall     charge    the     Joint                
- 5-                 COPAS 1984 ONSHORE     Recommended by the Council     of
Petroleum Accountants     Societies           Account for overhead based on the
following rates for any Major Construction project in excess of $ 25,000        
  A.         5          % of first $100,000 or total cost if less, plus     B.
        3          % of costs in excess of $100.000 but less than $1.000.000,
plus     C.        2         % of costs in excess of $1.000,000.          
Total   cost   shall   mean    the   gross    cost   of   any    one  
project.     For   the   purpose    of   this   paragraph,    the   component   
parts   of   a   single     project    shall    not     be    treated   
separately    and     the     cost     of     drilling   and    workover   
wells     and     artificial     lift     equipment    shall     be    
excluded.       3   Catastrophe  Overhead           To    compensate    
Operator     for    overhead     costs    incurred    in      the    event   
of    expenditures    resulting     from    a    single    occurrence    due    
to    oil     spill.     blowout,     explosion,     fire,     storm,    
hurricane.      or    other     catastrophes     as    agreed     to    by   
the    Parties,    which     necessary      to     restore      the    
Joint      Property      to      the     equivalent      condition     
that      existed      prior      to      the     event     causing      the    
expenditures,   Operator     shall    either    negotiate    a    rate   
prior    to    charging    the    Joint    Account    or    shall    charge   
the    Joint    Account     for overhead  based on the following rates:        
  A.          5          % of total costs through $100,000; plus     B.        
 3         % of total costs in excess of $100,000 but less than $1 ,000,000;
plus     C.         2           % of total costs in excess of $1.000,000.      
    Expenditures subject to the overheads above will not be reduced by insurance
recoveries, and no other overhead     provisions of this Section III shall
apply.       4   Amendment  of Rates           The overhead rates provided for
in this Section III may be amended from time to time only by mutual agreement  
  between the Parties hereto if, in practice, the rates are found to be
insufficient or excessive.           IV.              PRICING OF JOINT ACCOUNT
MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS           Operator     Is   
responsible     for    Joint    Account     Material    and    shall    make   
proper    and    tImely   charges     and     credits     for     all    
material     movements    affecting    the   Joint     Property.     
Operator      shall      provide      all     Material      for    use on 
the     Joint      Property:     however,      at     Operator's   option,    
such     Material   may     be     supplied    by    the  Non-Operator.   
Operator   shall     make     timely     disposition   of  idle     and/or    
surplus  Materia,   such     disposal      being     made     either    
through     sale     to     Operator   or   Non-Operator,      division    
in     kind,    sale     to     outsiders.      Operator   may    purchase,  
but   shall   be   under   no    obligation   to   purchase,     interest    
of    Non-Operators   in   surplus     condition     A or B Material.      The
disposal of surplus  Controllable  Material  not purchased  by the Operator
shall be agreed to by the Parties.       1   Purchases           Material    
purchased     shall    be    charged     at    the    price     paid    by   
Operator    after    deduction     of    all    discounts     received    
In     case    of     Material    found    to    be    defective    or   
returned    to    vendor    for   any    other    reasons,    credit    shall   
be    passed    to   the    Joint    Account     when adjustment  has been
received  by the Operator.       2   Transfers and Dispositions          
Material     furnished    to    the    Joint    Property    and    Material   
transferred     from    the    Joint    Property    or    disposed    of   by  
the    Operator,     unless otherwise agreed to by the Parties, shall  be priced
on the following  basis exclusive  of cash discounts:           A.     New
Material  (Condition A)                   (1)   Tubular Goods Other than Line
Pipe                           (a)     Tubular     goods,     sized     2    
3/8     inches     OD     and     larger,     except     line    pipe.   
shall    be     priced    at       Eastern     mill    
                          published     carload     base     prices    
effective    as    of    date    of    movement     plus    transportation   
cost    using    the    80,000                               pound     
carload      weight      basis      to      the      railway    receiving     
point      nearest      the     Joint      Property      for     which    
                          published    rail    rates    for   tubular   
goods    exist.      If  the    80,000    pound    rail    rate    is     not  
offered,    the    70.000    pound                               or   
90,000     pound     rail    rate    may    be    used.    Freight  charges   
for    tubing     will    be   calculated    from    Lorain,    Ohio    
                          and casing  from Youngstown, Ohio.          
                (b)     For   grades    which    are    special    to   one   
mill    only,   prices    shall    be   computed    at   the    mill   base  
of   that   mill   plus                               transportation    cost    
from    that      mill    to     the     railway      receiving    point    
nearest     the    Joint     Property   as      provided     above in Paragraph
2 A (1)(a). For transportation cost from points other than Eastern mills, the
30,000                                                           -6-          
COPAS 1984 ONSHORE     Recommended by the Council     of Petroleum Accountants  
  Societies                                     pound Oil  Field  Haulers
Association  Interstate truck  rate shall  be used.                         
(c)      Special    end      finish      tubular    goods    shall      be    
priced    at     the     lowest    published    out-of-stock    price,   
f.o.b.       Houston,                              Texas,     plus      
transportation     cost,       using      Oil      Field      Haulers    
Association     Interstate    30.000     pound       truck      rate,    
                         to the railway receiving point  nearest the Joint 
Property nearest the Joint  Property.                        (d)      
Macaroni   tubing   (size   less     than     2    3/8    inch     OD) 
shall     be    priced    at    the     lowest     published   out-of-stock 
prices                             f.o.b    the      supplier    plus     
transportation    costs,     using      the      Oil     Field     Haulers   
Association    interstate     truck      rate                            per
weight  of tubing transferred,  to the railway  receiving point nearest the
Joint Property.               (2)     Line  Pipe                        (a)     
Line     pipe     movements    (except    size     24     inch     OD    
and     larger   with     walls   3/4   inch     and     over)     30,000  
pounds   or                            more    shall    be     priced    
under    provisions     of     tubular    goods    pricing    in     
Paragraph    A.(1)(a)     as     provided    above.                           
Freight  charges shall  be calculated from  Lorain, Ohio.                       
(b)     Line     Pipe     movements    (except    size     24     inch    OD) 
and     larger   with    walls    3/4   inch     and     over)   less   
than     30,000                            pounds    shall      be     priced   
at     Eastern    mill      published    carload    base      prices   
effective      as     of     date      of   shipment.                           
plus      20     percent,    plus      transportation    costs      based     
on     freight     rates    as     set     forth     under      provisions   
of     tubular                            goods    pricing     in    
Paragraph    A (1)(a)    as     provided    above     Freight    charges   
shall      be     calculated    from      Lorain,                           
Ohio.                        (c)      Line      pipe      24      inch     
OD      and      Over      and      3/4   inch      wall      and     
larger      shall      be     priced    f.o.b     the    point  of    
                       manufacture     at      current     new      
published     prices     plus       transportation     cost       to     
the      railway     receiving      point                            nearest
the  Joint  Property.                        (d)      Line     pipe,    
including    fabricated    line     pipe,     drive   pipe     and         
conduit    not     listed     on     published    price    lists     shall    
                        be     priced    at     quoted    prices    plus     
freight     to     the     railway    receiving    point      nearest    the    
Joint      Property    or     at                             prices agreed to 
by the  Parties.           (3) Other Material shall be priced at the current new
price, in effect at date of movement. as listed by a reliable                 
supply    store    nearest    the     Joint      Property,    or     point  
  of     manufacture,    plus     transportation    costs,    if    
applicable,    to     the                  railway  receiving point  nearest the
Joint Property.              (4)      Unused     new      Material,    
except    tubular    goods,    moved    from      the      Joint     
Property    shall    be     priced      at     the      current    
              new     price,    in     effect    on     date     of    
movement,    as     listed     by     a    reliable    supply    store  
nearest   the     Joint     Property,                   point      of    
manufacture,    plus      transportation    costs,    if    applicable,   
to     the      railway    receiving    point      nearest    the     Joint    
Property. Unused new tubulars will be priced as provided above in Paragraph 2.A
(I) and (2).                 B.    Good used Materia1  (Condition B)          
              Material in sound and  serviceable condition and  suitable for
reuse  without reconditioning·                         (1)     Material moved to
the Joint Property                                   At seventy-five percent
(75%) of current new  price,  as determined by Paragraph  A.          
             (2)      Material used  on and  moved from  the Joint  Property    
                              (a)      At     seventy-five    percent   
(75%)    of     current    new     price,    as     determined    by    
Paragraph     A.     If    Material    was    
                                   originally charged to the Joint  Account as
new Material or                                   (b)      At      sixty-five   
percent     (65%)    of     current    new      price,    as     determined   
by     Paragraph       A.    If    Material     was    
                                   originally charged to the Joint  Account as 
used  Material.                         (3)      Material  not  used  on and 
moved from  the Joint  Property:           At seventy-five percent (75%) of
current new price as determined by Paragraph A.                         The 
cost  of reconditioning, if any, shall  be absorbed by  the  transferring
property.           C. Other Used Material                          (1)    
Condition C                                    Material    wh1ch     is      
not     in     sound    and      serviceable  condition    and      not    
suitable    for     its     original    function     until    
                         after       reconditioning     shall       be     
priced     at      fifty      percent     (50%' )     of      current    
new      price         determined     by                             
Paragraph     A.      The      cost      of     reconditioning    shall     
be     charged    to     the      receiving    property,     provided     
Condition                              C  value plus  cost  of reconditioning
does  not exceed Condition  B value.                             -7-          
COPAS 1984 ONSHORE     Recommended by the Council     of Petroleum Accountants  
  Societies                          (2)      Condition D    
                          Material,    excluding     junk,     no    longer   
suitable     for    its   original     purpose,     but     usable     for   
some    other    purpose                               shall     be    
priced     on     a    basis    commensurate      with    its    use.   
Operator     may    dispose     of    Condition     D    Material    
                          under procedures  normally used by Operator  without 
prior approval of   Non Operators.                                     (a)     
Casing,   tubing,   or    drill   pipe     used     as     line    pipe    
shall     be    priced    as    Grade   A    and     B    seamless   line   
pipe                                         of     comparable    size     
and     weight .           Used    casing,    tubing    or     drill    pipe   
utilized    as     line     pipe      shall      be    
                                    priced at used line pipe prices.          
                        (b)      Casing,     tubing    or      drill     
pipe      used       as      higher      pressure    service      lines     
than      standard     line      pipe,      e. g.    
                                   power     oil      lines,      shall     
be     priced     under     normal     pricing    procedures     for    
casing,     tubing,   or     drill     pipe.    
                                   Upset  tubular goods shall  be priced on a
non  upset  basis.                         (3)      Condition  E          
                         Junk        shall       be       priced      at      
prevailing     prices.      Operator     may       dispose       of     
Condition     E      Material      under                              procedures
normally utilized by Operator without prior approval of Non-Operators.          
                         D.     Obsolete Material                          
                   Material  which  is   serviceable  and   usable   for    
its     original    function    but     condition    and/or    value     of    
such     Material                                        is   not  equivalent  
to    that   which   would   justify   a    price   as    provided   above  
may   be    specially   priced   as  agreed  to  by    
                                   the      Parties.     Such   price   should  
result  in    the    Joint   Account     being   charged  with   the   value 
of  the service                                        rendered by such 
Material.                                   E.        Pricing Conditions        
                                     (1)     Loading  or   unloading  costs  
may   be  charged  to   the   Joint   Account  at   the  rate  of 
twenty-five    cents      (25¢)            
                                     per      hundred     weight on   all  
tublar      goods     movements,      in    lieu     of      actual      
loading    or   unloading    costs    
                                             sustained  at  the  stocking   
point.    The   above   rate   shall   be  adjusted  as  of   the   first  day 
of  April  each     year                                                 
following    January  1,   1985   by   the    same    percentage    increase   
or   decrease    used   to   adjust   overhead    rates      in    
                                             Section  III,     Paragraph    
1.A.(3)     Each  year,  the   rate  calculated  shall   be  rounded  to  the 
nearest  cent   and                                                  shall  
be   the   rate   in  effect   until   the   first   day   of    April   next  
year.     Such   rate  shall  be  published  each  year    
                                             by the  Council of Petroleum
Accountants Societies.                                             (2)     
Material     involving  erection   costs   shall    be    charged   at  
applicable   percentage    of    the   current  knocked-down    
                                             price  of new  Material.       3  
Premium Prices           Whenever   Material   is    not     readily   
obtainable    at    published    or     listed     prices     because    of   
national    emergencies.   strikes    or    other     unusual    causes   
over    which    the     Operator    has     no     control,    the    
Operator    may     charge    the     Joint      Account    for     the    
required     Marerial   at    the     Operator's   actual   cost     incurred   
in    providing   such     Material,   in    making   it    suitable   for   
use,     and     in    moving    it     to     the     Joint    Property;   
provided    notice   in    writing    is     furnished    to    Non-Operators  
of     the     proposed    charge    prior    to     billing    
Non-Operators    for     such    Material.        Each  Non-Operator   
shall     have     the     right,      by     so     electing    and  
notifying    Operator  within     ten    days    after     receiving   notice 
from    Operator,   to    furnish    in    kind    all    or    part    of   
his   share   of  such Material   suitable     for    use     and  acceptable to
Operator.       4   Warranty of Material Furnished By Operator          
Operator   does     not     warrant    the     Material    furnished.       
In    case     of    defective    Material,   credit    shall     not    be   
passed   to  the   Joint     Account until adjustment has  been  received by
Operator from the manufacturers or their  agents.                 V. 
INVENTORIES           The  Operator shall  maintain detailed records of
Controllable Material.       1   Periodic  Inventories, Notice and 
Representation           At     reasonable    intervals,    inventories   
shall      be     taken      by   Operator    of     the     Joint     
Account    Controllable  Material     Written    notice     of    intention  
to    take     inventory   shall     be    given     by   Operator   at   
least    thirty   (30)   days    before   any     inventory   is   to    begin 
so  that     Non-Operators    may      be      represented     when      
any      Inventory    is    taken.        Failure     of     Non-Operators   
to    be    represented   at   an     inventory shall  bind  Non-Operators to
accept the  inventory taken  by Operator.       2   Reconciliation and 
Adjustment of Inventories           Adjustments    to     the     Joint   
Account    resulting      from     the     reconciliation    of    a    
physical    inventory    shall     be     made  within six        months   
following    the     taking     of     the     inventory.     Inventory    
adjustments     shall     be     made     by   Operator   to    the    
Joint     Account    for                 -8-                 COPAS 1984 ONSHORE
    Recommended by the Council     of Petroleum Accountants     Societies      
    overages and shortages.  but, Operator shall be held accountable only for
shortages due to lack of reasonable diligence.       3   Special  Inventories  
        Special    inventories     may      be    taken     whenever   there 
is   any   sale,   change  of  interest,    or    change  of  Operator  in 
the    Joint     Property.    It   shall    be    the    duty   of    the   
party    selling    to    notify   all   other    Parties   as    quickly   
as    possible    after   the    transfer    of     interest    takes   
place    In  such  cases,    both  the  seller  and  the  purchaser  shall   be 
governed  by  such  inventory.  In cases     involving a change of Operator, 
all Parties shall be governed by such inventory.       4   Expense  of
Conducting Inventories           A.      The    expense     of    conducting    
periodic     inventories    shall    not    be    charged    to    the   
Joint    Account    unless    agreed    to    by     the               Parties.
          B.      The  expense  of  conducting  special   inventories   shall 
be   charged   to  the  Parties  requesting   such  inventories,   except   
inventories               required due to change of Operator shall be charged to
the Joint Account.                 -9-

 

 

EXHIBIT "2"

 

 

Initial Test Well

 

Attached to and made a part of the

Unit Operating Agreement for the

Gabbs Valley Unit Area

Mineral and Nye Counties, Nevada

 

 

1.. LOCATION: The initial test well shall be drilled at a location selected by
Unit Operator and approved by the Authorized Office of the Bureau of Land
Management.

 

2. DEPTH: The initial test well shall be drilled conformably w1th the terms of
Article 9 of the Paradise Unit Agreement.

 

3. COSTS: All costs and expenses incurred in connection with the initial test
well, including drilling, testing and completing into the tanks, if an oil well,
or through gas separator, if a gas producer, and plugging and abandoning, if a
dry hole, shall be borne and paid for by O. F. Duffield and such other parties
hereto as agreed to bear such costs in accordance with separate agreement among
themselves and where applicable subject to the investment adjustment provisions
of Article 13 of this Agreement. Any cash contributions received toward the
drilling of the initial test well shall belong to the parties sustaining the
risk of drilling the initial test well.

 

4. TITLE EXAMINATION AREA: The title examination area for the initial test well
shall be an area surrounding the location of such well as may be designated by
the Unit Operator.

 

5. COST OF TITLE EXAMINATION: The cost of title examination shall be charged as
a cost of drilling the initial test well.

 

6. DEEPENING, PLUGGING RACK: In the absence of any agreement to the contrary,
the attempted completion, deepening or plugging back, and abandonment of the
Initial Test Well shall be governed by the provisions of Section 9.3 to this
agreement.

 
 

EXHIBIT "3"

 

 

Attached to and made a part of the

Unit Operating Agreement for the

Gabbs Valley Unit Area

Mineral and Nye Counties. Nevada

 

 

INSURANCE

 

 

For Operations by Unit Operator: The Unit Operator shall carry for the benefit
of the joint account insurance to cover the Unit Operator's operations on the
lands covered by this Agreement as follows:

 

1. Workmens' Compensation Insurance in full compliance w1th the laws of the
applicable State in which operations are conducted.

 

2. Employer's Liability Insurance with limits of$100,000 as to any one person
and $100,000 as to any one accident.

 

3. Public Liability Insurance: Bodily Injury (other than automobile) w1th limits
of$1,000,000 as to any one person, $1,000,000 as to any one accident; and
Property Damage (other than automobile) with limits of$1,000,000 for each
accident, $1,000,000 aggregate.

 

4. Automobile Public Liability Insurance, with limits of $50,000 as to any one
person and

$50,000 as to any one accident, and Property Damage of $50,000 for each
accident; excess coverage of such limits up to $1,000,000 combined single limit.

 

Operator shall not carry physical damage insurance on Jointly-owned property, it
being understood and agreed that each party will be responsible for its own
interest in such properties and will assume its portion of any loss that occurs.
Operator shall promptly notify Non-Operator in writing of all losses involving
damage to jointly-owned property in excess of S 1,000.

 

Operator shall submit to Non-Operators certificates of insurance in evidence of
the above coverage. Such certificates shall specify that in event of
cancellation or material change in coverage at least ten days prior written
notice will be given to Non-Operators at their respective addresses.

 

Operator shall notify Non-Operators promptly in writing of any occurrences
wherein liability may exceed the limits of the insurance if covered by insurance
as set out above.

 

 

EXHIBIT "4"

 

Attached to and made a part of the

Unit Operating Agreement for the

Gabbs Valley Unit Area

Mineral and Nye Counties, Nevada

 

EXECUTIVE ORDER NO. 11246 AND EXECUTIVE ORDER NO. 11598

PROVISIONS OF SECTION 202 OF EXECUTIVE ORDER NO. 11246

 

 

(1) The contractor will not discriminate against any employee or applicant for
employment because of race, color, religion, sex or national origin. The
contractor will take affirmative action to ensure the applicants are employed
and that employees are treated during employment, without regard to their race,
color, religion, sex or national origin. Such action shall include but not be
limited to the following: Employment, upgrading, demotion, or transfer;
recruitment or recruitment advertising; layoff or termination; rates of pay or
other forms of compensation; and selection for training, including
apprenticeship. The contractor agrees to post in conspicuous places available to
employees and applicants for employment, notices to be provided by the
contracting officer setting forth the provisions of this non-discrimination
clause.

 

(2) The contractor will, in all solicitations or advertisements for employees
placed by or on behalf of the contractor, state that all qualified applicants
will receive consideration for employment without regard to race, color,
religion, sex or national origin.

 

(3) The contractor will send to each labor union or representative of workers
with which he has a collective bargaining agreement or other contract or
understanding, a notice, to be provided by the agency contracting officer,
advertising the labor union or workers' representative of the contractors'
commitments under Section 202 of Executive Order No. 11246 of September 24,
1965, and shall post copies of the notice in conspicuous places available to
employees and applicants for employment.

 

(4) The contractor will comply with all provisions of Executive Order No. 11246
of September 24, 1965, and of the rules, regulations, and relevant orders of the
Secretary of Labor.

 

(5) The contractor will furnish all information and reports required by
Executive Order No. 11246 of September 24, 1965, and by the rules, regulations,
and orders of the Secretary of Labor, or pursuant thereto, and will permit
access to his books, records, and accounts, by the contracting agency and the
Secretary of Labor for purposes of investigation to ascertain compliance with
such rules, regulations, and orders.

 

(6) In the event of the contractor's non-compliance with the non-discrimination
clauses of this contract or with any of such rules. regulations or orders, this
contract may be canceled, terminated or suspended in whole or in part and the
contractor may be declared ineligible for further Government contracts in
accordance with procedures authorized in Executive Order No. I 1246 of September
24, I 965, and such other sanctions may be imposed and remedies invoked as
provided in Executive Order No. I 1246 of September 24, I 965, or by rule,
regulation or order of the Secretary of Labor, or as otherwise provided by law.

 

(7) The contractor will include the provisions of Paragraphs (I) through (7) in
every subcontract or purchase order unless exempted by rules, regulations or
orders of the Secretary of Labor issued pursuant to Section 204 of Executive
Order No. 11246 of September 24, 1965, so that such provision will be binding
upon each subcontractor or vendor. The contractor will take such action with
respect to any subcontract or purchase order as the contracting agency may
direct as a means of enforcing such provisions including sanctions for
non-compliance; provided, however, that in the event the contractor becomes
involved in, or is threatened with litigation with a subcontractor or vendor as
a result of such direction by the contracting agency, the contractor may request
the United States to enter into such litigation to protect the interests of the
United States.

 

 

No. 950CP-I Rev.

 

FORM 88 UNIT-WYO.-COLO

 

OIL AND GAS LEASE

 

AGREEMENT, Made and entered into this day of , 20 , by and between

 

, party of the first part, hereinafter called lessor, (whether one or more) and
,party of the second part, lessee.

 

WITNESSETH: That the lessor for and in consideration of Dollars in hand paid,
receipt of which is hereby acknowledged, of the royalties herein provided, and
of the agreements of lessee herein contained, herby grants, leases and lets
exclusively unto lessee for the purpose of investigating, exploring,
prospecting, drilling and mining for the producing oil, gas, casinghead gas, and
all other minerals, laying pipe lines, building tanks, power stations, telephone
lines and other structures thereon to produce, save, take care of, treat,
transport, and own said products, and housing its employees, the following
described land in County, State of to wit:

 

EXHIBIT “5”

 

including all minerals underlying lakes, streams, roads, easements and
rights-of-way which traverse or adjoin said lands, which minerals are owned or
claimed by lessor or rights to which minerals may hereafter be established in
lessor; and also, in addition to the above-described land, all land adjoining
the same and owned or claimed by lessor and containing

acres more or less.

TO HAVE AND TO HOLD the same (subject to the other provisions herein contained)
for a term of ten years from this date (call “primary term”) and as long
thereafter as oil or gas or casinghead gas or either or any of them, is produced
therefrom; or as much longer thereafter as the lessee in good faith shall
conduct drilling operations thereon and should production result from such
operations, this lease shall remain in full force an effect as long as oil or
gas or casinghead gas, shall be produced therefrom.

In consideration of the premises it is hereby mutually agreed as follows:

1. The lessee shall deliver to the credit of the lessor as royalty, free of
cost, in the pipe line to which lessee may connect its wells the equal
one-eighth ( 1/8) part of all oil produced and saved from the leased premises,
or at the lessee's option, may pay to the lessor for such one-eight (1/8)
royalty the market price for oil of like grade and gravity prevailing in the
field where produced on the day such oil is run into the pipe line, or into
storage tanks.

2. The lessee shall pay lessor, as royalty, one-eighth ( 1/8) of the proceeds
from the sale of the gas, as such, for

gas from wells where gas only is found, and where not used or sold shall pay
Fifty Dollars ($50.00) per annum as royalty from each such well, and while such
royalty is so paid such well shall be held to be a producing well. The lessor to
have gas free of charge from any gas well on the leased premises for stoves and
inside lights in the principal dwelling house on said land by making his own
connections with the well, the use of said gas to be at the lessor's sole risk
and expense.

3. To pay lessor for gas produced from any oil well and used off the premises or
in the manufacturing of gasoline or any other product a royalty of oneeight
(1/8) of the market value, at the mouth of the well, payable monthly at the
prevailing market price.

4. If operation• for the drilling of a well for oil or gas arc not commenced on
said ian on or before one year from this date, this lease shall terminate a• to
both parties, unless the Jesse< shall. on or before one year from this date, pay
or tender to the lessor or for the lessor’s credit in

Bank at

or its successor or successors, which bank and its successors are lessor's
agents and which shall continue as the depository regardless of changes in the
ownership of the land, the sum of Dollars which shall operate as a rental and
cover the privilege of deferring the commencement of operations for the drilling
of a well one year from said date. In like manner and upon payments or tenders
the commencement of operations for the drilling of a well may be further
deferred for like periods successively during the primary term of this lease.
And it is understood and agreed that the consideration first recited herein, the
down payment, covers not only the privileges granted to the date when said
rental is payable as aforesaid, but also the lessee's option of extending that
period as aforesaid, and any and all other rights conferred. All payments or
tenders may be made by check or draft of lessee or any assignee thereof, mailed
or delivered on or before the rental paying date. Lessee may at any 1me execute
and deliver to lessor or place of record a release or releases covering any
portion or portions of the above described premises and thereby surrender this
lease as to such portion or portions and be relieved of all obligations as to
the acreage surrendered and thereafter the rentals payable hereunder shall be
reduced in the proportion that the acreage covered herein is reduced by said
release or releases. Notwithstanding the death of the lessor, or his successor
in interest, the- payment or tender of rentals in the manner provided above
shall be binding on the heirs, devisees, executors and administrators of such
persons.

5. If at any time prior to the discovery of oil or gas on this land and during
the term of this lease, the lessee shall drill a dry hole, or holes, on this
land, this lease shall not terminate, provided operations for the drilling of a
well shall be commenced by the next ensuing rental paying date, or provided the
lessee begins or resumes the payment of rentals 1n the manner and amount above
herein provided; and in this event the preceding paragraphs. hereof governing
the payment of rental and the manner and effect thereof shall continue in force.

6. If said lessor owns a less interest in the above described land than the
entire and undivided fee simple estate herein, then the royalties and rentals
herein provided for shall be paid the lessor only in the proportion which his
interest bears to the whole and undivided fee.

7. Lessee shall have the right to use, free of cost, gas, oil, and water
produced on said land for its operation thereon, except water from wells of
lessor. When requested by lessor, lessee shall bury his pipe lines below plow
depth.

No well shall be drilled nearer than 200 feet to the house or barn now on said
premises, without the written consent of the lessor. Lessee shall pay for
damages caused by its operations to growing crops on said land. Lessee shall
have the right at any time to remove all improvements, machinery. and fixtures
placed or erected by lessee on said premises, including the right to pull and
remove casings.

8. If the lessee shall commence to drill a well within the. term of this lease
or any extension thereof, the lessee shall have the right to drill such well to
completion with reasonable diligence and dispatch, and if oil or gas, or either
of them, be found in paying quantities, this lease shall continue and be in
force with the like effect as if such well had been completed within the term of
years herein first mentioned.

9. If the estate of either party hereto is assigned (and the privilege of
assigning in whole or in part is expressly allowed), the covenants hereof shall
extend to their heirs, executors, administrators. successors and assigns, but no
change o ownership in the land or in the rentals or royalties shall be binding
on the lessee until after notice to the lessee and it has been furnished with
the written transfer or assignment or a certified copy thereof, and in case
lessee assigns this lease, in whole or in part. lessee shall be relieved of all
obligations with respect to the assigned portion or portions arising subsequent
to the date of assignment.

 

10. There shall be no obligation on the put of the lessee to offset wells on
separate tracts into which the land covered by this lease may be hereafter
divided by sale, devise or otherwise, or to furnish separate measuring or
receiving tanks. It is hereby agreed that, in the event this lease shall be
assigned as to a part or as to parts of the above described lands, and the
holder or owner of any such part or parts shall fail or make default in the
payment of the proportionate part of the rent due from him or them, on an
acreage basis, such default shall not operate to defeat or affect this lease in
so far as it covers a part or part of said land upon which the said lessee or
any assignee hereof shall make due payments of said rentals.

11. If at any time there be as many as six parties (or more) entitled to receive
royalties under this lease, lessee may withhold payment thereof unless and until
all parties designate in writing in a recordable instrument to be filed with the
lessee, a Trustee to receive all royalty payments due hereunder and to execute
division and transfer orders on behalf of said parties and their respective
successors in title.

12. Lessee shall have the right to unitize, pool, or combine all or any part of
the above described ands with other. lands in the same general area by entering
1nto a cooperative or unit plan of development or operation approved by any
governmental authority and, from time to time, with like approval, to modify,
change or terminate any such plan or agreement and, in such event, the terms.
conditions and provisions of this lease shall be deemed modified to conform to
the terms, conditions, and provisions of such approved cooperative or unit plan
of development or operation and, particularly, all drilling and development
requirements of this lease, express or implied, shall be satisfied by compliance
with the drilling and development requirements of such plan or agreement, and
this lease shall not terminate or expire during the life of such plan or
agreement. In the event that said above described lands or any part thereof,
shall hereafter be operated under any such cooperative or unit plan of
development or operation whereby the production therefrom is allocated to
different portions o! the land covered by said plan, then the production
allocated to any particular tract of land shall, for the purpose of computing
the royalties to be paid hereunder to lessor, be regarded as having been
produced from the particular tract of land to which it is allocated and not to
any other tract of land; and the royalty payments. to be made hereunder to
lessor shall be based upon production only as so allocated. Lessor shall
formally express lessor's consent to any cooperative or unit plan of development
or operation adopted by lessee and approved by any governmental agency by
executing the same upon request of lessee.

13. In addition to and not in limitation of the rights granted in paragraph 12
hereof, lessee is hereby granted the right and option to consolidate, pool or
combine the lands covered by this lease. or any portion or portions thereof or
any stratum or strata thereunder, with other lands or like strata there under
for the development thereof or for the production therefrom of oil, gas,
casinghead gas or other hydrocarbons, or any or all of said products, when in
lessee's discretion and judgment it is advisable so to do for proper development
or operation of the premises, or to conform to spacing or zoning rules of any
lawful authority, such consolidation, pooling or combining to be into units of
such shape and dimensions as lessee may elect provided that all lands in any
such unit shall be contiguous (either adjoining or cornering) but for this
purpose contiguity shall not be deemed to be destroyed by reason of the
existence of a y excluded street. alley, road, railroad, canal, stream. right of
way or other similar strip or parcel of land. Any unit formed under this
paragraph for production of oil and casinghead gas shall not exceed forty-three
(43) acres in surface area, for production of dry or gas well shall not exceed
six hundred and sixty (660) acres in surface area, and for production of
condensate or distillate shall not exceed three hundred and thirty (330) acres
in surface area unless some larger unit for condensate or distillate is
permitted or prescribed by lawful authority, in which event such larger unit
shall control, provided that, if governmental survey units be irregular in size
in the area of this lease, the size of any of the units mentioned herein may be
increased to the size of the there existing governmental survey unit nearest in
size to the unit acreage prescribed herein. The right and option herein granted
to lessee may be exercised at any time or from time to time, whether before or
after production is secured and whether or not a unit may theretofore have been
created for some other product, by executing in writing an instrument
identifying and describing the unit created. and· by delivering a copy thereof
to lessor or by recording a copy thereof in the county where the land 1s
located. The lands in any such unit shall be developed or operated as one tract
and any drilling on or production from such unit, whether or not from lands
described in this lease, shall be deemed to be drilling done or production
secured on the lands subject to this lease for all purposes except for the
purpose of payment of royalty hereunder. In such event, and in lieu of the
royalties elsewhere herein specified, the lessor shall receive from production
on any such unit only such . portion of the royalty, at the rate stipulated
elsewhere herein, as lessor's acreage in the unit (or his royalty interest
therein) bears to the total acreage. Formation of any unit as herein provided
shall in no manner affect the ownership or amount of any rental which may be
payable under the terms of this lease.

14. In the interest of conservation, the protection of reservoir pressures and
recovery of the greatest ultimate

yield of oil, gas and other minerals, lessee shall have the right to combine the
leased premises with other premises

in the same general area for the purpose of operating and maintaining
repressuring and recycling facilities, and for

such purpose may locate such facilities including input wells, upon the leased
premises, and no royalties shall be

payable hereunder upon any gas used for repressuring and recycling operations
benefiting the leased premises.

15. Lessor hereby warrants and agrees to defend the title to the land herein
described and agrees that the lessee, at its option, may pay and discharge any
taxes, mortgage, or other liens existing levied, or assessed on or against the
above described lands and, in event it exercises such option, it shall he
subrogated to the rights of any holder or holders thereof and may reimburse
itself by applying to the discharge of any such mortgage, tax or other lien, any
royalty or rentals accruing hereunder.

16. All rental payments which may fall due under this lease may be made to

one of the above named lessor, in the manner herein stated.

17. If within the primary term of this lease production on the leased premises
shall cease from any cause, this lease shall not terminate provided operations
for the drilling of a well sha11 be commenced before or on the next ensuing
rental paying date: or, provided lessee begins or resumes the payment of rentals
in the manner and amount hereinbefore provided. If, after the expiration of the
primary term of this lease, production on the leased premises shall cease from
any cause, this lease shall not terminate provided lessee resumes operations for
drilling a well within sixty (60) days from such cessation, and this lease shall
remain in force during the prosecution of such operations and. if production
results therefrom, then as long as production continues.

 
 

 

18. It is agreed that this lease shall never be forfeited or cancelled for
failure to perform in whole or in part any of its implied covenants conditions
or stipulations until it shall have first been finally judicially determined
that such failure exists and after such final determination, lessee is given
reasonable time therefrom to comply with any such covenants, conditions, or
stipulations.

19. All express and implied covenants of this lease shall be subject to all
federal and state laws, executive orders, rules and regulations, and this lease
shall not be terminated, in whole or in part, nor lessee held liable in damage
for failure to comply therewith if compliance is prevented by or if such failure
is the result of any such law, order, rule or regulation, or if such compliance
is prevented by or failure is the result of inability of lessee through no fault
of its own, to obtain sufficient and satisfactory material and equipment to
justify the commencement of drilling operations or to continue production of oil
or gas from the leased premises.

20. This lease and all its terms, conditions, and stipulations shall extend to
and be binding on al1 successors of said lessor or lessee.

21. With respect to and for the purpose of this lease, lessor, and each of them
if there be more than one, hereby release and waive the right of homestead.
WHEREOF witness our hands as of the day and year first above written.

 

                       

 

 

AKNOWLEDGMENT

 

 

STATE OF         }ss. County of    

 

 

On this day of , 19 , before me personally appeared

 

to me known to be the person described in and who executed the

 

foregoing instrument and acknowledged that executed the same as free act and
deed.

 

Given under my hand and seal this day of , 19 .

 

 

My Commission Expires             Notary Public

 

 

ACKNOWLEDGMENT-MAN AND WIFE

 

STATE OF         }ss. County of    

 

On this day of , 19 , before me personally appeared

 

me known to be the person described in and who executed the

foregoing instrument and acknowledged that executed the same as free act and
deed, including the re-

lease and waiver of the right of homestead; the said wife having been by me
fully apprised of her right and the effect of signing and acknowledging the said
instrument.

 

Given under my hand and seal this day of , 19 .

 

 

 

My Commission Expires             Notary Public