Exhibit 10.4

 

PURCHASE OPTION AGREEMENT

 

This Purchase Option Agreement dated December 14, 2007 is between Rock Energy
Partners, LP, Santa Maria Pacific, LLC, Gitte-Ten, LLC, NW Casmalia Properties,
LLC, Phoenix Energy, LLC, and Orcutt Properties, LLC.

 

R E C I T A L S:

 

WHEREAS, the parties have entered into the Base Agreement;

 

WHEREAS, the Base Agreement provides for entry into this Agreement by the
parties; and

 

NOW, THEREFORE, in good and valuable consideration, the parties agree as
follows:

 

ARTICLE I

 

DEFINITIONS

 

The definitions of the terms contained in the Base Agreement are incorporated
herein. All terms defined in the Base Agreement will have the same meaning when
employed in this Agreement. The following additional terms as used in this
Agreement shall have the meanings indicated below unless the context otherwise
requires:

 

1.1           “Base Agreement” shall mean the Base Agreement dated December 1,
2007 executed by REP and the SMP Parties, together with all exhibits and
schedules attached thereto and referenced therein and any and all properly
executed amendments thereto that expressly provide that they are to supplement,
amend or revise said Based Agreement.

 

1.2           “Business Day” shall mean a day other than a Saturday, a Sunday,
or any federal holiday.

 

1.3           “Closing” shall mean the occurrence of the events necessary to
consummate a sale to REP pursuant to this Agreement.

 

1.4           “Closing Date” shall mean the date specified as such in each
notice of intent to exercise an option described in Article III, Article IV and
Article V of this Agreement.

 

1.5           “Consent Leases” shall mean the Leases described in Exhibit A.

 

1.6           “Default” shall mean the occurrence of any conditions, events or
acts which would constitute an Event of Default or which with the giving of
notice or lapse of time or both would, unless cured or waived, become an Event
of Default.

 

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1.7           “Development/Earn in Agreement” shall mean the agreement dated
December 14, 2007 between Rock Energy Partners, LP, Santa Maria Pacific, LLC,
Gitte-Ten, LLC, NW Casmalia Properties, LLC, Phoenix Energy, LLC, and Orcutt
Properties, LLC.

 

1.8           “Event of Default” shall mean the occurrence of any conditions,
events or acts described in Section 9.1.

 

1.9           “NW Casmalia Option A Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the NW Casmalia Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the NW Casmalia Property Rights.

 

1.10         “NW Casmalia Option B Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the NW Casmalia Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the NW Casmalia Property Rights.

 

1.11         “NW Casmalia Option C Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the NW Casmalia Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the NW Casmalia Property Rights.

 

1.12         “Option A” shall mean the option granted pursuant to Article III of
this Agreement which is subject to the terms and conditions of this Agreement.

 

1.13         “Option A Exercise Period” shall mean the period from the Closing
Date with respect to the Development/Earn In Agreement Option II until the
earlier of (i) 3:00 p.m., Pacific Standard Time, on June 30, 2008, or
(ii) occurrence of an Event of Default.

 

1.14         “Option A Interests” shall mean the Orcutt GTL Option A Interests,
Orcutt OPL Option A Interests, Orcutt PEL Option A Interests and NW Casmalia
Option A Interests.

 

1.15         “Option B” shall mean the option granted pursuant to Article IV of
this Agreement which is subject to the terms and conditions of this Agreement.

 

1.16         “Option B Exercise Period” shall mean from the Closing Date with
respect to Option A until the earlier of (i) 3:00 p.m., Pacific Standard Time,
on September 30, 2008, or (ii) occurrence of an Event of Default.

 

1.17         “Option B Interests” shall mean the Orcutt GTL Option B Interests,
Orcutt OPL Option B Interests, Orcutt PEL Option B Interests and NW Casmalia
Option B Interests.

 

1.18         “Option C” shall mean the option granted pursuant to Artcile IV of
this Agreement which is subject to the terms and conditions of this Agreement.

 

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1.19         “Option C Exercise Period” shall mean from the Closing Date with
respect to Option B until the earlier of (i) 3:00 p.m., Pacific Standard Time,
on December 31, 2008, or (ii) occurrence of an Event of Default.

 

1.20         “Option C Interests” shall mean the Orcutt GTL Option C Interests,
Orcutt OPL Option C Interests, Orcutt PEL Option C Interests and NW Casmalia
Option C Interests.

 

1.21         “Orcutt GTL Option A Interests” shall mean (i) a 3.69637% BPO
Working Interest and a 3.32673% APO Working Interest in the Orcutt GTL Leases,
other than the Shell Lease, and (ii) a 3.33333% BPO Working Interest and a
2.99997% APO Working Interest in the Orcutt GTL Property Rights, all of which
are subject to and burdened by the GTL Adjustment ORRI.

 

1.22         “Orcutt GTL Option B Interests” shall mean (i) a 3.69637% BPO
Working Interest and a 3.32673% APO Working Interest in the Orcutt GTL Leases,
other than the Shell Lease, and (ii) a 3.33333% BPO Working Interest and a
2.99997% APO Working Interest in the Orcutt GTL Property Rights, all of which
are subject to and burdened by the GTL Adjustment ORRI.

 

1.23         “Orcutt GTL Option C Interests” shall mean (i) a 3.69637% BPO
Working Interest and a 3.32673% APO Working Interest in the Orcutt GTL Leases,
other than the Shell Lease, and (ii) a 3.33333% BPO Working Interest and a
2.99997% APO Working Interest in the Orcutt GTL Property Rights, all of which
are subject to and burdened by the GTL Adjustment ORRI.

 

1.24         “Orcutt OPL Option A Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the Orcutt OPL Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the Orcutt OPL Property Rights.

 

1.25         “Orcutt OPL Option B Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the Orcutt OPL Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the Orcutt OPL Property Rights.

 

1.26         “Orcutt OPL Option C Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the Orcutt OPL Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the Orcutt OPL Property Rights.

 

1.27         “Orcutt PEL Option A Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the Orcutt PEL Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the Orcutt PEL Property Rights.

 

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1.28         “Orcutt PEL Option B Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the Orcutt PEL Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the Orcutt PEL Property Rights.

 

1.29         “Orcutt PEL Option C Interests” shall mean (i) a 3.33333% BPO
Working Interest and a 2.99997% APO Working Interest in the Orcutt PEL Leases,
and (ii) a 3.33333% BPO Working Interest and a 2.99997% APO Working Interest in
the Orcutt PEL Property Rights.

 

1.30         “REP Reaffirmation and Release” shall mean the instrument in the
form of Exhibit B.

 

1.31         “SMP Parties Reaffirmation and Release” shall mean the instrument
in the form of Exhibit C.

 

ARTICLE II

 

Option Price

 

2.1           Contemporaneously with the execution of this Agreement, as the
purchase price for Option A, Option B and Option C, REP has delivered to SMP, as
agent for itself and the remaining SMP Parties, REP’s check in the amount of ONE
HUNDRED AND NO/100 Dollars (U.S. $100.00) (the “Independent Consideration”),
which is in addition to and independent of any other consideration provided
hereunder. The Independent Consideration is non-refundable and shall be retained
by Seller under all circumstances.

 

2.2           The SMP Parties acknowledge the receipt of the Independent
Consideration and acknowledge the sufficiency of the Independent Consideration
as the purchase price for Option A, Option B and Option C to solely support this
Agreement.

 

ARTICLE III

 

Option A

 

3.1           Grant of Option. Subject to the strict adherence to the terms and
conditions contained in this Agreement, the SMP Parties hereby grant to REP the
option to acquire an assignment of the (i) Orcutt GTL Option A Interests,
(ii) Orcutt PEL Option A Interests, (iii) Orcutt OPL Option A Interests and
(iv) NW Casmalia Option A Interests (excluding the Consent Leases if consent to
assign is not obtained), prior to expiration of the Option A Exercise Period.

 

3.2           Notice of Intent to Exercise. REP must deliver to the SMP Parties
written notice by REP of its intent to exercise Option A. The notice must be
signed by REP and delivered to the SMP Parties no later than three (3) Business
Days prior to the earlier of (i) the Closing Date, and (ii) expiration of the
Option A Exercise Period. The notice must specify a Closing Date that

 

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is prior to expiration of the Option A Exercise Period. Delivery of such notice
is a pre-condition to exercise of Option A.

 

3.3           Closing. A Closing will be scheduled for the Closing Date
specified in the notice of intent to exercise pursuant to Section 3.2.

 

3.4           Exercise of Option. To exercise the option granted pursuant to
this Article, REP must at the Closing deliver to the SMP Parties the following:

 

a.                                       by transfer of immediately available
funds to an account designated by the SMP Parties, the sum of Eight Million
Three Hundred Thirty-Three Thousand Three Hundred Thirty-Three and 00/100
Dollars ($8,333,333.00) on or before the Closing Date; and

 

b.                                      a duly executed REP Reaffirmation and
Release.

 

Provided that REP timely satisfies its requirements to exercise Option A the SMP
Parties shall at the Closing deliver to REP the following:

 

a.                                       an assignment of the Orcutt GTL Option
A Interests duly executed by GTL or its assignee;

 

b.                                      an assignment of the Orcutt PEL Option A
Interests duly executed by PEL or its assignee;

 

c.                                       an assignment of the Orcutt OPL Option
A Interests duly executed by OPL or its assignee;

 

d.                                      an assignment of the NW Casmalia Option
A Interests (excluding the Consent Leases if consent to assign is not obtained
prior to Closing) duly executed by NWCL or its assignee; and

 

e.                                       a duly executed SMP Parties
Reaffirmation and Release dated as of the Closing Date.

 

3.5           Effect of Failure to Timely Exercise Option A. As provided in
Article IX, failure to timely satisfy all of its requirements to exercise Option
A shall constitute an Event of Default.

 

3.6           Effective Date of Assignment. The Effective Date of the
assignments of the (i) Orcutt GTL Option A Interests, (ii) Orcutt PEL Option A
Interests, (iii) Orcutt OPL Option A Interests, and (iv) NW Casmalia Option A
Interests, shall be July 1, 2008.

 

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ARTICLE IV

 

Option B

 

4.1           Grant of Option. Subject to the strict adherence to the terms and
conditions contained in this Agreement, the SMP Parties hereby grant to REP the
option to acquire an assignment of the (i) Orcutt GTL Option B Interests,
(ii) Orcutt PEL Option B Interests, (iii) Orcutt OPL Option B Interests, and
(iv) NW Casmalia Option B Interests (excluding the Consent Leases if consent to
assign is not obtained), prior to expiration of the Option B Exercise Period.

 

4.2           Notice of Intent to Exercise. REP must deliver to the SMP Parties
written notice by REP of its intent to exercise Option B. The notice must be
signed by REP and delivered to the SMP Parties no later than three (3) Business
Days prior to the earlier of (i) the intended Closing Date, and (ii) expiration
of the Option B Exercise Period. The notice must specify a Closing Date that is
prior to expiration of the Option B Exercise Period. Delivery of such notice is
a pre-condition to exercise of Option B.

 

4.3           Closing. A Closing will be scheduled for the Closing Date
specified in the notice of intent to exercise pursuant to Section 4.2.

 

4.4           Exercise of Option. To exercise the option granted pursuant to
this Article, REP must at the Closing deliver to the SMP Parties the following:

 

a.                                       by transfer of immediately available
funds to an account designated by the SMP Parties, the sum of Eight Million
Three Hundred Thirty-Three Thousand Three Hundred Thirty-Three and 00/100
Dollars ($8,333,333.00) on or before the Closing Date; and

 

b.                                      the duly executed REP Reaffirmation and
Release.

 

Provided that REP timely satisfies its requirements to exercise Option B, the
SMP Parties shall at the Closing deliver to REP the following:

 

a.                                       an assignment of the Orcutt GTL Option
B Interests duly executed by GTL or its assignee;

 

b.                                      an assignment of the Orcutt PEL Option B
Interests duly executed by PEL or its assignee;

 

c.                                       an assignment of the Orcutt OPL Option
B Interests duly executed by OPL or its assignee;

 

d.                                      an assignment of the NW Casmalia Option
B Interests (excluding the Consent Leases if consent to assign is not obtained
prior to Closing) duly executed by NWCP or its assignee; and

 

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e.                                       a duly executed SMP Parties
Reaffirmation and Release

 

4.5           Effective Date of Assignment. The effective date of the
assignments of the (i) Orcutt GTL Option B Interests, (ii) Orcutt PEL Option B
Interests, (iii) Orcutt OPL Option B Interest, and (iv) NW Casmalia Option B
Interests, shall be October 1, 2008.

 

ARTICLE V

 

Option C

 

5.1           Grant of Option. Subject to the strict adherence to the terms and
conditions contained in this Agreement, the SMP Parties hereby grant to REP the
option to acquire an assignment of the (i) Orcutt GTL Option C Interests,
(ii) Orcutt PEL Option C Interests, (iii) Orcutt OPL Option C Interests, and
(iv) NW Casmalia Option C Interests (excluding the Consent Leases if consent to
assign is not obtained), prior to expiration of the Option C Exercise Period.

 

5.2           Notice of Intent to Exercise. REP must deliver to the SMP Parties
written notice by REP of its intent to exercise Option C. The notice must be
signed by REP and delivered to the SMP Parties no later than three (3) Business
Days prior to the earlier of (i) the intended exercise date, and (ii) expiration
of the Option C Exercise Period. The notice must specify a Closing Date that is
prior to expiration of the Option C Exercise Period. Delivery of such notice is
a pre-condition to exercise of Option C.

 

5.3           Closing. A Closing will be scheduled for the date specified in the
notice of intent to exercise pursuant to Section 5.2.

 

5.4           Exercise of Option. To exercise the option granted pursuant to
this Article, REP must at the Closing deliver to the SMP Parties the following:

 

a.                                       by transfer of immediately available
funds to an account designated by the SMP Parties, the sum of Eight Million
Three Hundred Thirty-Three Thousand Three Hundred Thirty-Three and 00/100
Dollars ($8,333,333.00); and

 

b.                                      the duly executed REP Reaffirmation and
Release.

 

Provided that REP timely satisfies the requirements to exercise Option C, the
SMP Parties shall at the Closing deliver to REP the following:

 

a.                                       an assignment of the Orcutt GTL Option
C Interests duly executed by GTL or its assignee;

 

b.                                      an assignment of the Orcutt PEL Option C
Interests duly executed by PEL or its assignee;

 

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c.                                       an assignment of the Orcutt OPL Option
C Interests duly executed by OPL or its assignee;

 

d.                                      an assignment of the NW Casmalia Option
C Interests (excluding the Consent Leases if consent to assign is not obtained
prior to Closing) duly executed by NWCP or its assignee; and

 

e.                                       a duly executed SMP Parties
Reaffirmation and Release.

 

5.5           Effect of Failure to Timely Exercise Option C. As provided in
Article IX, failure to timely satisfy all of its requirements to exercise Option
C shall constitute an Event of Default.

 

5.6           Effective Date of Assignment. The effective date of the
assignments of the (i) Orcutt GTL Option C Interests, (ii) Orcutt PEL Option C
Interests, (iii) Orcutt OPL Option C Interests, and (iv) NW Casmalia Option C
Interests, shall be January 1, 2009.

 

ARTICLE VI

 

Access to Information and Due Diligence

 

6.1           Record Review. To allow REP (i) to confirm the SMP Parties’ title,
and (ii) to conduct additional due diligence with respect to the Orcutt Property
and the NW Casmalia Property (following the exercise of Option A), the SMP
Parties shall prior to expiration of the Option B Exercise Period, give REP
access during normal business hours to all contract land and lease and
operational records; to the extent such data and records are in the SMP Parties’
possession and relate to the property. The Confidentiality Agreement will
continue in force and effect.

 

6.2           Physical Inspection. The SMP Parties (upon delivery by REP of its
paid up insurance policy covering liability for the matters listed below) will
permit REP, at its sole risk and expense, to conduct reasonable inspections of
the Orcutt Property and the NW Casmalia Property at times approved by the SMP
Parties. REP shall repair any damage to the properties resulting from its
inspection and shall indemnify, defend and hold the SMP Parties harmless from
and against any and all Claims arising from REP inspecting and observing the
properties, including, without limitation, (a) Claims for personal injuries to
or death of employees of REP, its contractors, agents, consultants and
representatives, and damage to the property of REP or others acting on behalf of
REP, regardless of whether such Claims arise out of or result in whole or in
part, from the condition of the properties or the SMP Parties’ (or its
employees’, agents’, contractors’, successors’ or assigns’) sole or concurrent
negligence, strict liability or fault, and (b) Claims for personal injuries to
or death of employees of the SMP Parties or third parties, and damage to the
property of the SMP Parties or third parties, to the extent caused by the
negligence, gross negligence or willful misconduct of REP.

 

6.3           Non-Extension. The Option A Exercise Period , the Option B
Exercise Period and the Option C Exercise Period will not be extended for any
reason including REP’s inability

 

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to conduct additional inspections and review so long as such inability is not
the result, directly or indirectly, of the failure by the SMP Parties to perform
their obligations under this Agreement.

 

ARTICLE VII

 

Treatment of Option Exercise Payments

 

Each option exercise payment shall be the cash purchase price for the acquired
interest. The option exercise payments provided for in this Agreement shall be
the property of the SMP Parties upon receipt. REP shall have no right to or
interest in any option exercise payment. The restriction on application of funds
contained in the Development/Earn in Agreement is not applicable to the option
exercise payments made hereunder.

 

ARTICLE VIII

 

Incorporation of Base Agreement
Representations, Disclaimers, Warranties and Indemnities

 

REP and the SMP Parties ratify, confirm and adopt with respect to the Option A
Interests, the Option B Interests and the Option C Interests all statements,
terms, provisions, covenants, representations, disclaimers, warranties and
indemnities made in the Base Agreement with the same force and effect as if set
out in this Agreement in full.

 

ARTICLE IX

 

Defaults

 

9.1           Events of Default. The occurrence of any one or more of the
following events shall constitute an Event of Default hereunder.

 

9.1.1        The failure of REP to timely satisfy the requirements to exercise
any of the following options:  (i) Development/Earn-In Agreement Option I,
(ii) Development/Earn-In Agreement Option II, (iii) Option A, (iv) Option B, or
(v) Option C;

 

9.1.2        The failure, refusal or neglect of REP to properly observe, perform
or comply with any covenant, agreement or obligation contained in this
Agreement, the Base Agreement or Operating Agreements and the continuation of
such failure, refusal or neglect for fifteen (15) days after written notice
thereof has been given to REP by an SMP Party.

 

9.1.3        Any representation, warranty or statement made by REP in this
Agreement or the Base Agreement shall prove to have been incorrect in any
material respect when made or deemed to have been made and is not cured by REP
within ten (10) days after written notice thereof has been given to REP by an
SMP Party.

 

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9.1.4        The filing or commencement by REP of a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect, or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, or REP shall consent to any such relief or to the appointment of
or taking possession by any such official in an involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to pay its debt as they become
due, or shall take any corporate action to authorize any of the foregoing.

 

9.1.5        The filing or commencement of an involuntary case or other
proceeding against REP seeking liquidation, reorganization or other relief with
respect to it or its debts under any bankruptcy, insolvency or other similar law
now or hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial part of
its property, and such involuntary case or other proceeding shall remain
undismissed and unstayed for a period of ninety (90) days; or an order for
relief shall be entered against REP under the federal bankruptcy laws as now or
hereafter in effect.

 

9.2           Termination Consequences. Upon the occurrence of an Event of
Default hereunder all options granted pursuant to this Agreement as to which a
Closing has not occurred shall terminate.

 

ARTICLE X

 

Notices

 

Article XII of the Base Agreement is incorporated herein and made applicable
hereto.

 

ARTICLE XI

 

Miscellaneous

 

11.1         Incorporation. Article XIII of the Base Agreement is incorporated
herein and made applicable hereto.

 

11.2         Non-Exclusion. The express incorporation of specific provisions of
the Base Agreement herein shall not limit the extent to which this Agreement and
the assignments made hereunder are controlled by the Base Agreement.

 

11.3         Lease Exclusion Payment. In the event that consents to assignment
of interests in the Consent Leases are not obtained prior to a Closing, NWCL
shall within seven (7) days of the Closing with respect to each option pay to
REP the sum of Nine Hundred Sixty-Three and 33/100 Dollars ($963.33).

 

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IN WITNESS WHEREOF, the authorized representatives of the parties executing this
Agreement on the dates stated below.

 

 

ROCK ENERGY PARTNERS, L.P.

 

 

 

By:

4R Oil & Gas, LLC, its General Partner

 

 

 

 

 

By:

/s/ Rocky V. Emery

 

 

Name:

Rocky V. Emery

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

 

 

SANTA MARIA PACIFIC, LLC

 

 

 

 

 

By:

/s/ David Pratt

 

 

Name:

David Pratt

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

 

 

 

GITTE-TEN, LLC

 

 

 

 

 

By:

/s/ David Pratt

 

 

Name:

David Pratt

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

 

 

NW CASMALIA PROPERTIES, LLC

 

 

 

 

 

By:

/s/ David Pratt

 

 

Name:

David Pratt

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

 

 

PHOENIX ENERGY, LLC

 

 

 

 

 

By:

/s/ David Pratt

 

 

Name:

David Pratt

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

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ORCUTT PROPERTIES, LLC

 

 

 

 

 

By:

/s/ David Pratt

 

 

Name:

David Pratt

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

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DEVELOPMENT/EARN IN AGREEMENT

 

This Development/Earn In Agreement dated December 14, 2007 is between Rock
Energy Partners, LP, Santa Maria Pacific, LLC, Gitte-Ten, LLC, NW Casmalia
Properties, LLC, Phoenix Energy, LLC, and Orcutt Properties, LLC.

 

R E C I T A L S:

 

WHEREAS, the parties have entered into the Base Agreement;

 

WHEREAS, the Base Agreement provides for entry into this Development Agreement
by the parties; and

 

NOW, THEREFORE, in good and valuable consideration, the parties agree as
follows:

 

ARTICLE I

 

DEFINITIONS

 

The definitions of the terms contained in the Base Agreement are incorporated
herein.  Unless otherwise defined in this Development Agreement, all terms
defined in the Base Agreement will have the same meaning when employed in this
Development Agreement.  The following additional terms as used in this
Development Agreement shall have the meanings indicated below unless the context
otherwise requires:

 

1.1                                 “Approved Orcutt Development Operations”
shall mean Approved Development Operations relating to the Orcutt Leases.

 

1.2                                 “Base Agreement” shall mean the Base
Agreement dated December 1, 2007 executed by REP and the SMP Parties, together
with all exhibits and schedules attached thereto and referenced therein and any
and all properly executed amendments thereto that expressly provide that they
are to supplement, amend or revise said Agreement.

 

1.3                                 “Business Day” shall mean a day other than a
Saturday, a Sunday, or any federal holiday.

 

1.4                                 “Closing” shall mean the occurrence of the
events necessary to consummate a sale to REP pursuant to this Development
Agreement.

 

1.5                                 “Closing Date” shall mean the date specified
as such in each notice of intent to exercise an option described in Articles III
and IV of this Development Agreement.

 

1.6                                 “Consent Leases” shall mean the Leases
described in Exhibit C.

 

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1.7                                 “Default” shall mean the occurrence of any
conditions, events or acts which would constitute an Event of Default or which
with the giving of notice or lapse of time or both would, unless cured or
waived, become an Event of Default.

 

1.8                                 “Development Agreement” shall mean this
Development/Earn-In Agreement together with all exhibits and schedules attached
hereto and referenced herein and any and all properly executed amendments hereto
that expressly provide that they are to supplement, amend or revise this
Development/Earn-In Agreement.

 

1.9                                 “Event of Default” shall mean the occurrence
of any conditions, events or acts described in Section 8.1.

 

1.10                           “NW Casmalia Option II Interests” shall mean
(i) a 10% BPO Working Interest and a 9% APO Working Interest in the NW Casmalia
Lease, and (ii) a 10% BPO Working Interest and a 9% APO Working Interest in the
NW Casmalia Property Rights.

 

1.11                           “Option I” shall mean the option granted pursuant
to Article III of this Development Agreement which is subject to the terms and
conditions of this Development Agreement.

 

1.12                           “Option I Exercise Period” shall mean the period
from the date of this Development Agreement until the earlier of (i) 3:00 p.m.,
Pacific Standard Time, on February 15, 2008, or (ii) occurrence of an Event of
Default.

 

1.13                           “Option I Interest” shall mean the Orcutt GTL
Option I Interests, Orcutt OPL Option I Interests and Orcutt PEL Option I
Interests.

 

1.14                           “Option II” shall mean the option granted
pursuant to Article IV of this Development Agreement which is subject to the
terms and conditions of this Development Agreement.

 

1.15                           “Option II Interest” shall mean the Orcutt GTL
Option II Interests, Orcutt OPL Option II Interests, Orcutt PEL Option II
Interests and Option II NW Casmalia Interests.

 

1.16                           “Option II Exercise Period” shall mean from the
Closing Date with respect to Option II until the earlier of (i) 3:00 p.m.,
Pacific Standard Time, on April 15, 2008, or (ii) occurrence of an Event of
Default.

 

1.17                           “Orcutt GTL Option I Interests” shall mean (i) a
1.85188% BPO Working Interest and a 1.66669% APO Working Interest in the Orcutt
GTL Leases, other than the Shell Lease, and (ii) a 1.67% BPO Working Interest
and a 1.503% APO Working Interest in the Orcutt GTL Property Rights, all of
which are subject to and burdened by the GTL Adjustment ORRI.

 

1.18                           “Orcutt GTL Option II Interests” shall mean (i) a
5.54455% BPO Working Interest and a 4.99010% APO Working Interest in the Orcutt
GTL Leases, other than the Shell

 

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Lease, and (ii) a 5% BPO Working Interest and a 4.5% APO Working Interest in the
Orcutt GTL Property Rights, all of which are subject to and burdened by the GTL
Adjustment ORRI.

 

1.19                           “Orcutt OPL Option I Interests” shall mean (i) a
1.67% BPO Working Interest and a 1.503% APO Working Interest in the Orcutt OPL
Leases, and (ii) a 1.67% BPO Working Interest and a 1.503% APO Working Interest
in the Orcutt OPL Property Rights.

 

1.20                           “Orcutt OPL Option II Interests” shall mean (i) a
5% BPO Working Interest and a 4.5% APO Working Interest in the Orcutt OPL
Leases, and (ii) a 5% BPO Working Interest and a 4.5% APO Working Interest in
the Orcutt OPL Property Rights.

 

1.21                           “Orcutt PEL Option I Interests” shall mean (i) a
1.67% BPO Working Interest and a 1.503% APO Working Interest in the Orcutt PEL
Leases, and (ii) a 1.67% BPO Working Interest and a 1.503% APO Working Interest
in the Orcutt PEL Property Rights.

 

1.22                           “Orcutt PEL Option II Interests” shall mean (i) a
5% BPO Working Interest and a 4.5% APO Working Interest in the Orcutt PEL
Leases, and (ii) a 5% BPO Working Interest and a 4.5% APO Working Interest in
the Orcutt PEL Property Rights.

 

1.23                           “Purchase Option Agreement” shall mean an
agreement by that title dated December 14, 2007 between REP, Santa Maria
Pacific, LLC, Gitte-Ten, LLC, NW Casmalia Properties, LLC, Phoenix Energy, LLC,
and Orcutt Properties, LLC.

 

1.24                           “REP Reaffirmation and Release” shall mean the
instrument in the form of Exhibit A.

 

1.25                           “SMP Parties Reaffirmation and Release” shall
mean the instrument in the form of Exhibit B.

 

Any terms defined in other provisions of this Development Agreement shall have
the meanings set out therein unless the context requires otherwise.

 

ARTICLE II

 

Option Price

 

2.1                                 Contemporaneously with the execution of this
Development Agreement, as the purchase price for Option I and Option II, REP has
delivered to SMP, as agent for itself and the remaining SMP Parties, REP’s check
in the amount of ONE HUNDRED AND NO/100 Dollars (U.S. $100.00) (the “Independent
Consideration”), which is in addition to and independent of any other
consideration provided hereunder.  The Independent Consideration is
non-refundable and shall be retained by Seller under all circumstances.

 

2.2                                 The SMP Parties acknowledge the receipt of
the Independent Consideration and acknowledge the sufficiency of the Independent
Consideration as the purchase price for Option I and Option II and to solely
support this Agreement.

 

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ARTICLE III

 

Option I

 

3.1                                 Grant of Option.  Subject to the strict
adherence to the terms and conditions contained in this Development Agreement,
the SMP Parties hereby grant to REP the option to acquire an assignment of the
(i) Orcutt GTL Option I Interests, (ii) Orcutt PEL Option I Interests, and
(iii) Orcutt OPL Option I Interests, prior to expiration of the Option I
Exercise Period.

 

3.2                                 Notice of Intent to Exercise.  REP must
deliver to the SMP Parties written notice by REP of its intent to exercise
Option I.  The notice must be signed by REP and delivered to the SMP Parties no
later than three (3) Business Days prior to the earlier of (i) the Closing Date,
and (ii) expiration of the Option I Exercise Period.  The notice must specify a
Closing Date that is prior to expiration of the Option I Exercise Period. 
Delivery of such notice is a pre-condition to exercise of Option I.

 

3.3                                 Closing.  A Closing will be scheduled for
the Closing Date specified in the notice of intent to exercise pursuant to
Section 3.2.

 

3.4                                 Exercise of Option.  To exercise the option
granted pursuant to this Article, REP must at the Closing deliver to the SMP
Parties the following:

 

a.                                       by transfer of immediately available
funds to an account designated by the SMP Parties, the sum of Two Million Five
Hundred Thousand and 00/100 Dollars ($2,500,000.00) on or before the Closing
Date; and

 

b.                                      a duly executed REP Reaffirmation and
Release.

 

Provided that REP timely satisfies its requirements to exercise Option I, the
SMP Parties shall at the Closing deliver to REP the following:

 

a.                                       an assignment of the Orcutt GTL Option
I Interests duly executed by GTL or its assignee;

 

b.                                      an assignment of the Orcutt PEL Option I
Interests duly executed by PEL or its assignee;

 

c.                                       an assignment of the Orcutt OPL Option
I Interests duly executed by OPL or its assignee; and

 

d.                                      a duly executed SMP Parties
Reaffirmation and Release dated as of the Closing Date.

 

3.5                                 Effect of Failure to Timely Exercise Option
I.  As provided in Article VIII, failure to timely satisfy all of its
requirement to exercise Option I shall constitute an Event of Default.

 

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3.6                                 Effective Date of Assignment.  The Effective
Date of the assignments of the (i) Orcutt GTL Option I Interests, (ii) Orcutt
PEL Option I Interests, and (iii) Orcutt OPL Option I Interests, shall be
February 1, 2008.

 

ARTICLE IV

 

Option II

 

4.1                                 Grant of Option.  Subject to the strict
adherence to the terms and conditions contained in this Development Agreement,
the SMP Parties hereby grant to REP the option to acquire an assignment of the
(i) Orcutt GTL Option II Interests, (ii) Orcutt PEL Option II Interests,
(iii) Orcutt OPL Option II Interests, and (iv) NW Casmalia Option II Interests
(excluding the Consent Leases if consent to assign is not obtained), prior to
expiration of the Option II Exercise Period.

 

4.2                                 Notice of Intent to Exercise.  REP must
deliver to the SMP Parties written notice by REP of its intent to exercise
Option II.  The notice must be signed by REP and delivered to the SMP Parties no
later than three (3) Business Days prior to the earlier of (i) the intended
Closing Date, and (ii) expiration of the Option II Exercise Period.  The notice
must specify a Closing Date that is prior to expiration of the Option II
Exercise Period.  Delivery of such notice is a pre-condition to exercise of
Option I.

 

4.3                                 Closing.  A Closing will be scheduled for
the Closing Date specified in the notice of intent to exercise pursuant to
Section 4.2.

 

4.4                                 Exercise of Option.  To exercise the option
granted pursuant to this Article, REP must at the Closing deliver to the SMP
Parties the following:

 

a.                                       by transfer of immediately available
funds to an account designated by the SMP Parties, the sum of Six Million Seven
Hundred Twenty Thousand and 00/100 Dollars ($6,720,000.00) on or before the
Closing Date;

 

b.                                      the duly executed REP Reaffirmation and
Release; and

 

c.                                       the duly executed NW Casmalia Operating
Agreement.

 

Provided that REP timely satisfies the requirements to exercise Option II, the
SMP Parties shall at the Closing deliver to REP the following:

 

a.                                       an assignment of the Orcutt GTL Option
II Interests duly executed by GTL or its assignee;

 

b.                                      an assignment of the Orcutt PEL Option
II Interests duly executed by PEL or its assignee;

 

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c.                                       an assignment of the Orcutt OPL Option
II Interests duly executed by OPL or its assignee;

 

d.                                      an assignment of the NW Casmalia Option
II Interests (excluding the Consent Leases if consent to assign is not obtained
prior to Closing) duly executed by NWCP or its assignee; and

 

e.                                       a duly executed SMP Parties
Reaffirmation and Release.

 

4.5                                 Effect of Failure to Timely Exercise Option
II.  As provided in Article VIII failure to timely satisfy all of its
requirements to exercise Option II shall constitute an Event of Default.

 

4.6                                 Effective Date of Assignment. The effective
date of the assignments of the (i) Orcutt GTL Option II Interests, (ii) Orcutt
PEL Option II Interests, (iii) Orcutt OPL Option II Interests, and (iv) NW
Casmalia Option II Interests, shall be April 1, 2008.

 

ARTICLE V

 

Access to Information and Due Diligence

 

5.1                                 Record Review.  To allow REP (i) to confirm
the SMP Parties’ title, and (ii) to conduct additional due diligence with
respect to the Orcutt Property and (following the exercise of Option I), the NW
Casmalia Property, the SMP Parties shall prior to expiration of the Option II
Exercise Period, give REP access during normal business hours to all contract
land and lease and operational records; to the extent such data and records are
in the SMP Parties’ possession and relate to the property.  The Confidentiality
Agreement will continue in force and effect.

 

5.2                                 Physical Inspection.  The SMP Parties will
(upon delivery by REP of its paid up insurance policy covering liability for the
matters listed below) permit REP, at its sole risk and expense, to conduct
reasonable inspections of the Orcutt Property and, following exercise of Option
I, the NW Casmalia Property, at times approved by the SMP Parties.  REP shall
repair any damage to the properties resulting from its inspection and shall
indemnify, defend and hold the SMP Parties harmless from and against any and all
Claims arising from REP inspecting and observing the properties, including,
without limitation, (a) Claims for personal injuries to or death of employees of
REP, its contractors, agents, consultants and representatives, and damage to the
property of REP or others acting on behalf of REP, regardless of whether such
Claims arise out of or result in whole or in part, from the condition of the
properties or the SMP Parties’ (or its employees’, agents’, contractors’,
successors’ or assigns’) sole or concurrent negligence, strict liability or
fault, and (b) Claims for personal injuries to or death of employees of the SMP
Parties or third parties, and damage to the property of the SMP Parties or third
parties, to the extent caused by the negligence, gross negligence or willful
misconduct of REP.

 

5.3                                 Environmental Inspection.  Prior to
expiration of the Option I Exercise Period, REP shall have the right, at its
sole cost, to perform and environmental assessment of the Orcutt Property and,
following exercise of Option I, the NW Casmalia Property.  Unless otherwise
agreed by the SMP Parties, the environmental assessment shall consist of (i) a
review of all

 

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contracts, records and data (other than related to the Excluded Properties)
relating to environmental matters, including without limitation, all
environmental reports and site assessments to the extent such contracts, records
and data are in the SMP Parties’ possession and government environmental
records, and (ii) a site visit to visually inspect the property.

 

5.4                                 Non-Extension.  The Option I Exercise Period
and the Option II Exercise Period will not be extended for any reason including
REP’s inability to conduct additional inspections and review so long as such
inability is not the result, directly or indirectly, of the failure by the SMP
Parties to perform their obligations under this Agreement.

 

ARTICLE VI

 

Application of Option Exercise Payments

 

6.1                                 Ownership of Funds.  The option exercise
payments provided for in this Development Agreement shall be the property of the
applicable SMP Party immediately upon receipt.  REP shall have no right to or
interest in any option exercise payment.

 

6.2                                 Application of Option I Exercise Payment. 
The Option I Exercise Payment received by the applicable SMP Party pursuant to
Article III shall be expended by said SMP Party in connection with Direct Cost
of Approved Orcutt Development Operations.

 

6.3                                 Application of Option II Exercise Payment. 
The Option II Exercise Payment received by the applicable SMP Parties pursuant
to Article IV shall be expended by said SMP Parties solely in connection with
Direct Cost of Approved Development Operations.

 

ARTICLE VII

 

Incorporation of Base Agreement

Representations, Indemnities, Disclaimers and Warranties

 

REP and the SMP Parties ratify, confirm and adopt with respect to the Option I
Interest and the Option II Interest all statements, terms, provisions,
covenants, representations, indemnities, disclaimers and warranties made in the
Base Agreement with the same force and effect as if set out in this Development
Agreement in full.

 

ARTICLE VIII

 

Defaults

 

8.1                                 Events of Default.  The occurrence of any
one or more of the following events shall constitute an Event of Default
hereunder.

 

8.1.1                        The failure of REP to timely satisfy the
requirements to exercise either Option I or Option II;

 

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8.1.2                        The failure, refusal or neglect of REP to properly
observe, perform or comply with any covenant, agreement or obligation contained
in the Transaction Documents and the continuation of such failure, refusal or
neglect for fifteen (15) days after written notice thereof has been given to REP
by an SMP Party.

 

8.1.3                        Any representation, warranty or statement made by
REP in this Development Agreement or the Base Agreement by REP shall prove to
have been incorrect in any material respect when made or deemed to have been
made and is not cured by REP within ten (10) days after written notice thereof
has been given to REP by an SMP Party.

 

8.1.4                        The filing or commencement by REP of a voluntary
case or other proceeding seeking liquidation, reorganization or other relief
with respect to itself or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect, or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or REP shall consent to any such relief or to
the appointment of or taking possession by any such official in an involuntary
case or other proceeding commenced against it, or shall make a general
assignment for the benefit of creditors, or shall fail generally to pay its debt
as they become due, or shall take any corporate action to authorize any of the
foregoing.

 

8.1.5                        The filing or commencement of an involuntary case
or other proceeding against REP seeking liquidation, reorganization or other
relief with respect to it or its debts under any bankruptcy, insolvency or other
similar law now or hereafter in effect or seeking the appointment of a trustee,
receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, and such involuntary case or other proceeding
shall remain undismissed and unstayed for a period of ninety (90) days; or an
order for relief shall be entered against REP under the federal bankruptcy laws
as now or hereafter in effect.

 

8.2                                 Termination Consequences.  Upon the
occurrence of an Event of Default hereunder (i) all options granted pursuant to
this Development Agreement as to which a Closing has not occurred shall
terminate, and (ii) all rights and options of REP under the Purchase Option
Agreement shall terminate.

 

ARTICLE IX

 

Notices

 

Article XII of the Base Agreement is incorporated herein and made applicable
hereto.

 

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ARTICLE X

 

Miscellaneous

 

10.1                           Article XIII of the Base Agreement is
incorporated herein and made applicable hereto.

 

10.2                           Non-Exclusion.  The express incorporation of
specific provisions of the Base Agreement herein shall not limit the extent to
which this Agreement and the assignments made hereunder are controlled by the
Base Agreement.

 

10.3                           Lease Exclusion Payment.  In the event that
consents to assignment of the interests in the Consent Leases are not obtained
prior to the Option II Closing, NWCL shall within seven (7) days of the Closing
pay to REP the sum of Two Thousand Eight Hundred Ninety and 00/100 Dollars
($2,890.00).

 

IN WITNESS WHEREOF, the authorized representatives of the parties have executed
this Development Agreement as of the date first set out above.

 

 

 

ROCK ENERGY PARTNERS, L.P.

 

 

 

 

 

By:

4R Oil & Gas, LLC, its General Partner

 

 

 

 

 

 

 

 

By:

/s/ Rocky V. Emery

 

 

 

Name:

Rocky V. Emery

 

 

 

Title:

Manager

 

 

 

Date:

12-12-07

 

 

 

 

 

 

 

 

 

SANTA MARIA PACIFIC, LLC

 

 

 

 

 

 

 

 

By:

/s/ David Pratt

 

 

 

Name:

David Pratt

 

 

 

Title:

Manager

 

 

 

Date:

12-12-07

 

 

 

 

 

 

 

 

 

GITTE-TEN, LLC

 

 

 

 

 

 

 

 

By:

/s/ David Pratt

 

 

 

Name:

David Pratt

 

 

 

Title:

Manager

 

 

 

Date:

12-12-07

 

 

9

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NW CASMALIA PROPERTIES, LLC

 

 

 

 

 

By:

/s/ David Pratt

 

 

Name:

David Pratt

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

 

 

 

 

PHOENIX ENERGY, LLC

 

 

 

 

 

By:

/s/ David Pratt

 

 

Name:

David Pratt

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

 

 

 

 

ORCUTT PROPERTIES, LLC

 

 

 

 

 

By:

/s/ David Pratt

 

 

Name:

David Pratt

 

 

Title:

Manager

 

 

Date:

12-12-07

 

 

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