6972
       
PROD 88
       
(1994-7/01)
  PAID UP OIL AND GAS LEASE    

THIS LEASE AGREEMENT is made as of the 28th day of May, 2004, between Texas Lime
Company, 15865 FM 1434, Cleburne, Texas 76033, as Lessor, and EOG Resources,
Inc., P. O. Box 2267, Midland, Texas 79702, as Lessee. All printed portions of
this lease were prepared by the party hereinabove named as Lessee, but all other
provisions (including the completion of blank spaces) were prepared jointly by
Lessor and Lessee.

1. Description. In consideration of a cash bonus in hand paid and the covenants
herein contained, Lessor hereby grants, leases and lets exclusively to Lessee
the following described land, hereinafter called leased premises:

See Exhibit A , attached hereto, for detailed description.

See Exhibit B, attached hereto, for additional provisions.

In the County of Johnson , State of Texas , containing 3453.624 gross acres,
more or less for the purpose of exploring for, developing, producing and
marketing oil and gas, along with all hydrocarbon and nonhydrocarbon substances
produced in association therewith. The term “gas” as used herein includes
helium, carbon dioxide, gaseous sulfur compounds, coalbed methane and other
commercial gases, as well as normal hydrocarbon gases. For the purpose of
determining the amount of any payments based on acreage hereunder, the number of
gross acres above specified shall be deemed correct, whether actually more or
less.

2. Term of Lease. This lease, which is a “paid-up” lease requiring no rentals,
shall be in force for a primary term of eighteen (18) months from the date
hereof, and for as long thereafter as oil or gas or other substances covered
hereby are produced in paying quantities from the leased premises or from lands
pooled therewith or this lease is otherwise maintained in effect pursuant to the
provisions hereof.

3. Royalty Payment. Royalties on oil, gas and other substances produced and
saved hereunder shall be paid by Lessee to Lessor as follows: (a) For oil and
other liquid hydrocarbons separated at Lessee’s separator facilities, the
royalty shall be one-fifth ( 1/5th ) of such production, to be delivered at
Lessee’s option to Lessor at the wellhead or to Lessor’s credit at the oil
purchaser’s transportation facilities, provided that Lessee shall have the
continuing right to sell such production to itself or an affiliate at the
wellhead market price then prevailing in the same field (or if there is no such
price then prevailing in the same field, then in the nearest field in which
there is such a prevailing price) for production of similar grade and gravity;
(b) for gas (including casinghead gas) and all other substances covered hereby,
Lessee shall have the continuing right to sell such production to itself or an
affiliate; and (c) in calculating royalties on production hereunder, Lessee may
only deduct Lessor’s proportionate part of any ad valorem, production and excise
taxes.

4. Shut-in Payment. All shut-in royalty payments under this lease shall be paid
or tendered directly to Lessor at the above address, or its successors,
regardless of changes in the ownership of said land. All payments or tenders may
be made in currency, or by check or by draft and such payments or tenders to
Lessor by deposit in the U.S. Mails in a stamped envelope addressed to the
Lessor at the last address known to Lessee shall constitute proper payment.

5. Operations. If Lessee drills a well which is incapable of producing in paying
quantities (hereinafter called “dry hole”) on the leased premises (or Producing
Unit, if appropriate) or lands pooled therewith, or if all production (whether
or not in paying quantities) permanently ceases from any cause, including a
revision of unit boundaries pursuant to the provisions of Paragraph 6 or the
action of any governmental authority, then in the event this lease is not
otherwise being maintained in force it shall nevertheless remain in force if
Lessee commences operations for reworking an existing well or for drilling an
additional well or for otherwise obtaining or restoring production on the leased
premises (or Producing Unit, if appropriate) or lands pooled therewith within
90 days after completion of operations on such dry hole or within 90 days after
such cessation of all production. If at the end of the primary term, or at any
time thereafter, this lease is not otherwise being maintained in force but
Lessee is then engaged in drilling, reworking or any other operations reasonably
calculated to obtain or restore production therefrom, this lease shall remain in
force so long as any one or more of such operations are prosecuted with no
interruption of more than 90 consecutive days, and if any such operations result
in the production of oil or gas or other substances covered hereby, as long
thereafter as there is production in paying quantities from the leased premises
or lands pooled therewith. After completion of a well capable of producing in
paying quantities hereunder, Lessee shall drill such additional wells on the
leased premises (or Producing Unit, if appropriate) or lands pooled therewith as
a reasonably prudent operator would drill under the same or similar
circumstances to (a) develop the leased premises (or Producing Unit, if
appropriate) as to reservoirs then capable of producing in paying quantities on
the leased premises (or Producing Unit, if appropriate) or land pooled
therewith, or (b) protect the leased premises (or Producing Unit, if
appropriate) from uncompensated drainage by any well or wells located on other
lands not pooled therewith.

6. Pooling. Lessee shall have the right but not the obligation to pool all or
any part of the leased premises or interest therein with any other lands or
interests, as to any or all depths or zones, and as to any or all substances
covered by this lease, either before or after the commencement of drilling or
production, whenever Lessee deems it necessary or proper to do so in order to
prudently develop or operate the leased premises, whether or not similar pooling
authority exists with respect to such other lands or interests. The creation of
a unit by such pooling shall be based on the following criteria (hereinafter
called “pooling criteria”): A unit for an oil well (other than a horizontal
completion) shall not exceed 40 acres plus a maximum acreage tolerance of 10%,
provided that a larger unit may be formed for an oil well or gas well or
horizontal completion to conform to any well spacing or density pattern that may
be prescribed or permitted by any governmental authority having jurisdiction to
do so. For the purpose of the forgoing, the terms “oil well” and “gas well”
shall have the meanings prescribed by applicable law or the appropriate
governmental authority, or, if no definition is so prescribed, “oil well” means
a well with an initial gas-oil ratio of less than 100,000 cubic feet per barrel
and “gas well” means a well with an initial gas-oil ratio of 100,000 cubic feet
or more per barrel, based on a 24-hour production test conducted under normal
producing conditions using standard lease separator facilities or equivalent
testing equipment; and the term “horizontal completion” means an oil or gas well
in which the horizontal component of the gross completion interval in the
reservoir exceeds the vertical component thereof. In exercising its pooling
rights hereunder, Lessee shall file of record a written declaration describing
the unit and stating the effective date of pooling.

 

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In the event a unit is formed hereunder before the unit well is drilled and
completed, so that the applicable pooling criteria are not yet known, the unit
shall be based on the pooling criteria Lessee expects in good faith to apply
upon completion of the well; provided that within a reasonable time after
completion of the well, the unit shall be revised if necessary to conform to the
pooling criteria that actually exist. Pooling in one or more instances shall not
exhaust Lessee’s pooling rights hereunder, and Lessee shall have the recurring
right but not the obligation to revise any unit formed hereunder by expansion or
contraction or both, either before or after commencement of production, in order
to conform to the well spacing or density pattern prescribed or permitted by the
governmental authority having jurisdiction, or to conform to any productive
acreage determination made by such governmental authority. To revise a unit
hereunder, Lessee shall file of record a written declaration describing the
revised unit and stating the effective date of revision. To the extent any
portion of the leased premises is included in or excluded from the unit by
virtue of such revision, the proportion of unit production on which royalties
are payable hereunder shall thereafter be adjusted accordingly. In the absence
of production in paying quantities from a unit, or upon permanent cessation
thereof, Lessee may terminate the unit by filing of record a written declaration
describing the unit and stating the date of termination. Pooling hereunder shall
not constitute a cross-conveyance of interests.

7. Payment Reductions. If Lessor owns less than the full mineral estate in all
or any part of the leased premises, the royalties and shut-in royalties payable
hereunder for any well on any part of the leased premises or lands pooled
therewith shall be reduced to the proportion that Lessor’s interest in such part
of the leased premises bears to the full mineral estate in such part of the
leased premises. To the extent any royalty or other payment attributable to the
mineral estate covered by this lease is payable to someone other than Lessor,
such royalty or other payment shall be deducted from the corresponding amount
otherwise payable to Lessor hereunder.

8. Ownership Changes. The interest of either Lessor or Lessee hereunder may be
assigned, devised or otherwise transferred in whole or in part, by area and/or
by depth or zone, and the rights and obligations of the parties hereunder shall
extend to their respective heirs, devisees. executors, administrators,
successors and assigns. No change in Lessor’s ownership shall have the effect of
reducing the rights or enlarging the obligations of Lessee hereunder, and no
change in ownership shall be binding on Lessee until 60 days after Lessee has
been furnished the original or duly authenticated copies of the documents
establishing such change of ownership to the satisfaction of Lessee or until
Lessor has satisfied the notification requirements contained in Lessee’s
division order. In the event of the death of any person entitled to shut-in
royalties hereunder, Lessee may pay or tender such shut-in royalties to the
credit of decedent or decedent’s estate at the address designated above. If at
any time two or more persons are entitled to shut-in royalties hereunder. Lessee
may pay or tender such shut-in royalties to such persons, either jointly, or
separately in proportion to the interest which each owns. If Lessee transfers a
full or undivided interest in all or any portion of the area covered by this
lease, the obligation to pay or tender shut-in royalties hereunder shall be
divided between Lessee and the transferee in proportion to the net acreage
interest in this lease then held by each.

9. Release of Lease. Lessee may, at any time and from time to time, deliver to
Lessor or file of record a written release of this lease as to a full or
undivided interest in all or any portion of the area covered by this lease or
any depths or zones thereunder, and shall thereupon be relieved of all
obligations thereafter arising with respect to the interest so released. If
Lessee releases less than all of the interest or area covered hereby, Lessee’s
obligation to pay or tender shut-in royalties shall be proportionately reduced
in accordance with the net acreage interest retained hereunder.

10. Ancillary Rights. In exploring for developing, producing and marketing oil,
gas and other substances covered hereby on the leased premises or lands pooled
or unitized therewith, in primary and/or enhanced recovery, Lessee shall have
the right of ingress and egress along with the right to conduct such operations
on the leased premises as may be reasonably necessary for such purposes,
including but not limited to geophysical operations, the drilling of wells, and
the construction and use of roads, canals, pipelines, tanks, water wells,
disposal wells, injection wells, pits, electric and telephone lines, power
stations, and other facilities deemed necessary by Lessee to discover, produce,
store, treat and/or transport production. Lessee may use in such operations,
free of cost, any oil, gas, or water on the leased premises, except water from
Lessor’s wells or ponds. When requested by Lessor in writing, Lessee shall bury
its pipelines below ordinary plow depth on cultivated lands. No well shall be
located less than 200 feet from any house or barn now on the leased premises or
other lands of Lessor used by Lessee hereunder, without Lessor’s consent, and
Lessee shall pay for damage caused by its operations to buildings and other
improvements now on the leased premises or such other lands, and to commercial
timber and growing crops thereon. Lessee shall have the right at any time to
remove its fixtures, equipment and materials, including well casing, from the
leased premises or such other lands during the term of this lease or within a
reasonable time thereafter.

11. Regulation and Delay. Lessee’s obligations under this lease, whether express
or implied, shall be subject to all applicable laws, rules, regulations and
orders of any governmental authority having jurisdiction, including restrictions
on the drilling and production of wells, and regulation of the price or
transportation of oil, gas and other substances covered hereby. When drilling,
reworking, production or other operations are prevented or delayed by such laws,
rules, regulations or orders, or by inability to obtain necessary permits,
water, electricity, fuel, access or easements, or by fire, flood, adverse
weather conditions, war, sabotage, rebellion, insurrection, riot, strike or
labor disputes, or by inability to obtain a satisfactory market for production
or failure of purchasers or carriers to take or transport such production, or by
any other cause not reasonably within Lessee’s control, this lease shall not
terminate because of such prevention or delay, and, at Lessee’s option, the
period of such prevention or delay shall be added to the term hereof. Lessee
shall not be liable for breach of any provisions or implied covenants of this
lease when drilling, production or other operations are so prevented or delayed.

12. Breach or Default. No litigation shall be initiated by Lessor for damages,
forfeiture or cancellation with respect to any breach or default by Lessee
hereunder, for a period of at least 90 days after Lessor has given Lessee
written notice fully describing the breach or default, and then only if Lessee
fails to remedy the breach or default within such period. In the event the
matter is litigated and there is a final judicial determination that a breach or
default has occurred, this lease shall not be forfeited or cancelled in whole or
in part unless Lessee is given a reasonable time after said judicial
determination to remedy the breach or default and Lessee fails to do so.

13. Warranty of Title. Lessor agrees that Lessee at Lessee’s option may pay and
discharge any taxes, mortgages or liens existing, levied or assessed on or
against the leased premises. If Lessee exercises such option, Lessee shall be
subrogated to the rights of the party to whom payment is made, and, in addition
to its other rights, may reimburse itself out of any royalties or shut-in
royalties otherwise payable to Lessor hereunder. In the event Lessee is made
aware of any claim inconsistent with Lessor’s title, Lessee may suspend the
payment of royalties and shut-in royalties hereunder, without interest, until
Lessee has been furnished satisfactory evidence that such claim has been
resolved.

IN WITNESS WHEREOF, this lease is executed to be effective as of the date first
written above, but upon execution shall be binding on the signatory and the
signatory’s heirs, devisees, executors, administrators, successors and assigns,
whether or not this lease has been executed by all parties hereinabove named as
Lessor.

     
LESSOR (WHETHER ONE OR MORE)
  TAX ID
 
   
TEXAS LIME COMPANY
   
 
   

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Timothy W. Byrne, President,
   

 

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ACKNOWLEDGEMENTS

         
STATE OF TEXAS
  §    

  §    
COUNTY OF                    
  §    

    This instrument was acknowledged before me on this                     day
of May, 2004, by Timothy W. Byrne, as President of Texas Lime Company.

         
My Commission Expires:
 

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      Notary Public

 

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EXHIBIT “A”

Attached to that certain Oil and Gas Lease dated May 28, 2004 by and between
Texas Lime Company, as Lessor, and EOG Resources, Inc., as Lessee

DESCRIPTION OF THE LEASED PREMISES

TRACT 1. 1.574 acres of land, more or less, out of the J.W. O’Neal Survey,
A-667, Johnson County, Texas, and being the same land described in a Deed dated
April 8, 1978 from Leonard B. Lewis, et ux to Texas Lime Company and recorded in
Volume 755 at Page 358 of the Deed Records of Johnson County, Texas.

TRACT 2. 100.195 acres of land, more or less, out of the J.M. Bright Survey,
A-41, John O’Neal Survey, A-667, Edward Spears Survey, A-795, and John Cameron
Survey, A-952, Johnson County, Texas, and being the same land described in a
Deed dated April 8, 1971 from A.D. Holland, et ux to Texas Lime Company and
recorded in Volume 549 at Page 742 of the Deed Records of Johnson County, Texas.

TRACT 3. 129.38 acres of land, more or less, out of the E. Spear Survey, A-795,
John M. Bright Survey, A-41, J.J. Allen Survey, A-1224, and John O’Neal Survey,
A-667, Johnson County, Texas, and being the same land described in a Deed dated
June 24, 1997 from Hidden Springs Ranch and Land Company to Texas Lime Company
and recorded in Volume 2093 at Page 324 of the Deed Records of Johnson County,
Texas.

TRACT 4. 255.8 acres of land, more or less, out of the Nathaniel Dabney Survey,
A-211, Levi fowler survey, A-286, and H.H. Wilbanks Survey, A-905, Johnson
County, Texas, and being the same land described in a Deed dated December 3,
1976 from Lola Irene Aguilar and Anthony E. Aguilar, Jr. to Texas Lime Company
and recorded in Volume 707 at Page 912 of the Deed Records of Johnson County,
Texas.

TRACT 5. 371.485 acres of land, more or less, out of the J.W. O’Neal Survey,
A-667, Edward Spear Survey, A-795, J.J. Allen Survey, A-1224, S.T. Moore Survey,
A-611, and the S.P.R.R. Co. Survey, A-815, Johnson County, Texas, and being the
same land described in a Deed dated June 25, 1990 from Carl E. Chafin, et ux to
Texas Lime Company and recorded in Volume 1495 at Page 262 of the Deed Records
of Johnson County, Texas.

TRACT 6. 458.6 acres of land, more or less, out of the Mrs. F.B. Purtell Survey,
A-1141, W.E. Rogers Survey, A-1142 and John Cameron Survey, A-952, Johnson
County, Texas, and being the same land described in a Warranty Deed dated
September 10, 1956 from A.D. Holland et ux, to Texas Lime Company and recorded
in Volume 411 at Page 70 of the Deed Records of Johnson County, Texas.

TRACT 7. 482 acres of land, more or less, out of the W.W. Atchison Survey,
A-1048, the Decatur Daniels Survey, A-200, and the W.A. Mynatt Survey, A-639
Johnson County, Texas, and being the same land described in a Deed dated
January 28, 1999 from Lola Irene Aguilar and Anthony E. Aguilar, Jr. to Texas
Lime Company and recorded in Volume 2289 at Page 130 of the Deed Records of
Johnson County, Texas.

TRACT 8. 560 acres of land, more or less, out of the Decatur Daniels Survey,
A-200, and E.G. Lynch Survey, A-1165, Johnson County, Texas, and being the same
land described in a Mineral Deed dated January 1, 1966 from Tres Company to
Texas Lime Company and recorded in Volume 493 at Page 517 of the Deed Records of
Johnson County, Texas.

TRACT 9. 94.59 acres of land, more or less, out of the Santos Coy Survey, A-126,
Johnson County, Texas, and being the same land described as the “First Tract” in
a Warranty Deed dated December 3, 1976 from R.E. Roberts, et ux to Texas Lime
Company and recorded in Volume 707 at Page 908 of the Deed records of Johnson
County, Texas, LESS AND EXCEPT that land described in a Deed dated February 25,
1990 from Texas Lime Company to Curtis D. Rives, et ux and recorded in Volume
1489 at Page 188 of the Deed Records of Johnson County, Texas..

TRACT 10. 1000.00 acres, more or less, out of the B. Caine Survey A-147, J.
Cameron A-952, N. Dabney A-218, A. J. Farris A-1217, Levi Fowler A-286, J. D.
Houchin A-430, W. F. Lafon A-530, E. G. Lynch A-1165, C. U. Phillips A-1170, W.
E. Rogers A-1142, J. M. Rush A-947, A. C. Sullivan A-1192, or T. J. Lynch
A-1186, A. G. Wilbanks A-1095, A. M. Wilbanks A-1093 and being the same land
described in a Warranty Deed dated December 8, 1972, by and between Clyde
McClung et ux to Texas Lime Company and recorded in Volume 593, Page 748 of the
Deed Records of Johnson County, Texas.

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EXHIBIT “B”

Attached to that certain Oil and Gas Lease dated May 28, 2004 by and between
Texas Lime Company, as Lessor, and EOG Resources, Inc., as Lessee

THE FOLLOWING PROVISIONS SHALL SUPPLEMENT THE PRINTED PROVISIONS OF THE LEASE;
AND, IN THE EVENT OF ANY CONFLICT BETWEEN THE FOLLOWING SUPPLEMENTAL PROVISIONS,
AND THE PROVISIONS OF THE PRINTED LEASE, THESE SUPPLEMENTAL PROVISIONS SHALL
PREVAIL AND CONTROL.

A.   GAS ROYALTY.

1.   As to all gas sold by Lessee to an unaffiliated entity, the royalties
payable to Lessor for gas, including casinghead gas or other gaseous substances
produced and saved from the leased premises and sold on or off the leased
premises, shall be one-fifth (1/5th) of the proceeds realized by Lessee from the
sale thereof. Upon request, Lessee shall make available for Lessor’s review a
copy of any gas contract entered into between Lessee and such unaffiliated
entity for gas sold from the leased premises, and Lessor shall not disclose the
terms of such contract to any party (except its agents, accountants, or
attorneys for review and analysis thereof for the sole benefit of Lessor)
without the prior written consent of Lessee.   2.   Where the Lessee or an
entity affiliated with Lessee is the purchaser of the gas, including casinghead
gas or other gaseous substances produced and saved from the leased premises and
sold on or off the leased premises, the royalties payable to Lessor shall be
one-fifth (1/5th) of the greater of (i) the highest price obtainable (described
below) or (ii) the net proceeds received by Lessee from such affiliated entity.
Such highest price obtainable may not be less than any relevant market value
index prices for the month of production as set forth in Published Indices. For
purposes of this lease, “Published Indices” must be industry recognized
published price references, unaffiliated with Lessee, which reflect the market
value for natural gas produced in Johnson County, Texas. Examples of such
publications include Natural Gas Week, Inside F.E.R.C.’s Gas Market Report and
Natural Gas Intelligence Gas Price Index and other current or future publication
satisfying the Published Indices criteria. However, if a Published Indices is
not available, the highest price obtainable may not be less than the proceeds
received by any affiliate of Lessee for the sale of such production (or products
therefrom) without any deductions for the costs further described in Section
(A)(3) below.   3.   Lessor’s royalty interest shall be free of costs and
expenses, directly or indirectly, for exploration, drilling, development,
treating, processing, delivery, and production, including gathering dehydration,
storage, separation by mechanical means and product stabilization, and free of
all marketing costs, including without limitation any costs incurred by Lessee
to negotiate and enter into sales contracts for any production or any
commissions related thereto (“Marketing Costs”) and depreciation of any plant or
other facilities or equipment for processing or treating said oil or gas
produced from the leased premises. It is intended that the terms of this section
or paragraph of this Lease be controlling and is intended among other things to
avoid the court’s holding on the language addressed in Heritage Resources, Inc.
vs. NationsBank, cited at 939 S.W.2d 118 (Tex. 1996), and not merely surplusage.

B.   TAKING PRODUCTION IN-KIND OR OTHERWISE.

1.   Lessor may take its royalty gas, or any portion thereof as designated by
Lessor, in kind upon giving Lessee 30 day written notice of its intention to do
so.   2.   In the event Lessor elects to take its royalty gas in-kind, Lessee
shall deliver said gas to the Lessor, in pipeline quality, free of costs and
expenses for exploration, drilling, development, treating, processing, delivery,
Marketing Costs, and production including, gathering, dehydration, storage,
separation by mechanical means and product stabilization incurred prior to
connection into Lessor’s pipeline after the Lone Star metering station. The gas
production taken in-kind by Lessor shall be connected at the appropriate
pressure and shall be metered by Lessee at the Lone Star metering station.   3.
  If Lessor desires more gas than its royalty share to be used solely for
Lessor’s operations on the property described on Exhibit A, Lessor and Lessee
agree that Lessor may also purchase additional gas upon giving Lessee 30-days
written notice of its intention to do so. The purchase price shall be the
weighted average price for such month received in Section A(1) above or if no
unaffiliated sales are made, the weighted average comparable sales price for
such month in Johnson County. The gas production taken by

 

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EXHIBIT “B”

(Continued)
Page 2 of 9

    Lessor hereby shall be connected at the appropriate pressure and shall be
metered by Lessee at the Lone Star metering station.

C.   OIL AND GAS ONLY.       Notwithstanding anything herein to the contrary,
this Lease covers only oil and gas, including other liquid and gaseous
hydrocarbons, as well as such other minerals or substances as may be produced
incidental to and as a part of or mixed with oil, gas and other liquid or
gaseous hydrocarbons, but this lease does not cover gravel, uranium, fissionable
materials, coal, limestone, lignite or any hard minerals or substances of any
type which shall be produced from the leased premises separate and apart from,
or independently of, oil, gas or other liquid and gaseous hydrocarbons.   D.  
[Intentionally omitted]   E.   CONTINUOUS DEVELOPMENT AND RETAINED ACREAGE.    
  Notwithstanding anything herein to the contrary, at the expiration of the
primary term hereof, this Lease shall remain in effect as to all of the leased
premises for so long as Lessee is then engaged to continuously develop the
leased premises allowing no more than 90 days to elapse from the date the
drilling rig is released from one well until the commencement of actual
operations for the drilling of another well on the leased premises (“Continuous
Development Period”). Upon the expiration of the primary term (if Lessee elects
not to continuously develop) or the Continuous Development Period, this Lease
shall terminate as to all lands (i) not then included within a Producing Unit
and (ii) for each Producing Unit, all depths at and below the base of the
producing formation in any well drilled in each Producing Unit. Producing Unit
is defined as follows:

1.   Land herein leased, or lands upon which the leased premises or a portion
thereof is pooled or unitized, but only in spacing units which do not exceed:

a.   for Horizontal Wells, 160 acres plus a 10% tolerance (for purposes hereof,
a “Horizontal Well” shall be defined as an oil or gas well in which the
Horizontal Displacement of the gross completion Interval exceeds a minimum of 50
feet in length. “Horizontal Drainhole Displacement” shall be the distance from
the penetration point of the correlative interval to the terminus of the
wellbore); and   b.   for all wells other than Horizontal Wells, 40 acres plus
10% tolerance for an oil or gas well.

    Such acreage shall be as nearly a rectangle for Horizontal Wells and a
square for all other wells as is practical with the configuration of the outer
boundaries of the leased premises. Such rectangle and square shall have all
sides an equal distance on all sides from the horizontal leg of the Horizontal
Well and the well bore for all other wells.   2.   Upon Lessor’s request after
the expiration of the primary term (if Lessee elects not to continuously
develop) or the Continuous Development Period, Lessee shall execute and record a
partial release containing a satisfactory legal description of the acreage not
retained hereunder.

    From and after the end of the primary term (if Lessee elects not to
continuously develop) or the Continuous Development Period, it shall be
considered that each Producing Unit retained hereunder is subject to a separate
lease, on the terms and provisions contained in this lease, so that production,
operations and/or payments on one Producing Unit will not maintain this lease in
force as to any other Producing Unit. Notwithstanding anything herein to the
contrary, Lessee shall have the continuing duty to develop and explore the
leased premises and Producing Units as would a prudent operator.   F.   SHUT-IN
LIMITATION.       If at the end of the primary term (if Lessee elects not to
continuously develop) or the Continuous Development Period, or any time
thereafter one or more wells on the leased premises (or Producing Unit, if
applicable) or lands pooled therewith are capable of producing oil or gas or
other substances covered hereby in paying quantities, but

 

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EXHIBIT “B”

(Continued)
Page 3 of 9

(a) such well or wells are either shut in or production therefrom is not being
sold by Lessee, and

(b) if other wells within 1 mile from the boundary of the leased premises
described on Exhibit A are also shut in or with no production sales (if there
are other wells in such section),

    then such well or wells shall nevertheless be deemed to be producing in
paying quantities for the purpose of maintaining this lease. If for a period of
90 consecutive days such well or wells are shut in or production therefrom is
not being sold by Lessee, then Lessee shall pay an aggregate shut-in royalty of
two dollars ($2.00) per acre then covered by this lease, such payment to be made
to Lessor, on or before the end of said 90-day period to cover that individual
shut-in period up to a one-year period as limited by the terms of this section;
provided that if this lease is otherwise being maintained by operations, or if
production is being sold by Lessee from another well or wells on the leased
premises (or Producing Unit, if appropriate) or lands pooled therewith, no
shut-in royalty shall be due until the end of the 90-day period next following
cessation of such operations or production. This lease may not be maintained in
force and effect solely under this provision (for shut-in wells and production
not being sold) (i) for a period in excess of one (1) consecutive year at a
time, and (ii) no more than three hundred and sixty-five (365) days over any
five (5) year period. Unless the lease is maintained by some other provision of
this lease upon expiration of such one (1) year period, or in excess of such
three hundred and sixty-five (365) days above, this lease shall terminate.
Lessee’s failure to properly pay shut-in royalty shall terminate this lease.  
G.   POOLING.       A unit for a gas well shall not exceed 40 acres plus a
maximum acreage tolerance of 10% or a horizontal completion shall not exceed 160
acres plus a maximum acreage tolerance of 10% subject to the allowable exception
for larger units set forth in Paragraph 6 of the lease. Production, drilling or
reworking operations anywhere on a unit which includes all or any part of the
leased premises shall be treated as if it were production, drilling or reworking
operations on the leased premises (or Producing Unit, if appropriate) included
in such unit, except that the production on which Lessor’s royalty is calculated
shall be that proportion of the total unit production which the net acreage
(productive or surface, as consistent with any agreement or regulations) covered
by this lease and included in the unit bears to the total gross acreage
(productive or surface, as consistent with any agreement or regulations) in the
unit, but only to the extent such proportion of unit production is sold by
Lessee.   H.   ENVIRONMENTAL ISSUES.       Lessee shall use a high degree of
care and all reasonable safeguards to prevent contamination or pollution of any
environmental medium, including soil, surface waters, storm water, groundwater,
sediments, and surface or subsurface strata, ambient air or any other
environmental medium in, on, or under, or about the leased premises, by any
waste, pollutant, or contaminant including, without limitation, sediment in
storm water and materials tracked onto public roadways. Lessee shall not bring
or permit to remain on the premises any explosives, toxic materials, or
substances regulated as hazardous wastes, hazardous materials, hazardous
substances, or toxic substances under any federal, state, or local law or
regulation (“Hazardous Materials”), except products commonly used in connection
with oil and gas exploration and development operations and stored in the usual
manner and quantities. Lessee’s obligations under this lease, whether express or
implied, shall be subject to all applicable laws, rules, regulations and orders
of any governmental authority having jurisdiction including, without limitation,
regulation of discharges of pollutants or contaminants to air, land, and water,
including the discharge of storm water from Lessee’s land disturbance activities
and operations hereunder. Lessee shall clean up, remove, remedy and repair any
soil or ground water contamination and damage caused by the presence or release
of any Hazardous Materials in, on, under, or about the leased premises related
to Lessee’s operations on the leased premises. The obligations of Lessee
hereunder shall survive the expiration or earlier termination, for any reason,
of this Lease.

 

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EXHIBIT “B”

(Continued)
Page 4 of 9

I.   SURFACE AND MINERAL OPERATIONS.       Lessee agrees to conduct its
operations hereunder in such a manner as to least interfere with Lessor’s
present and future mining operations or any future use of the property by
Lessor. The exact location of each drill site, access road, pipeline, pits, tank
battery, electric line and poles, any other equipment or property and
alterations to the leased premises must receive the prior written consent of
Lessor.

1.   Locations of Drillsites

a.   Lessee recognizes that the leased premises are mined by Lessor to extract
the Edwards Limestone formation and the surface availability will be restricted
by future activities of Lessor. Lessee hereby agrees, by execution of this
lease, that Lessor has the dominant estate over the estate granted Lessee in
this lease. Any development activities or other activities conducted pursuant to
this lease, unless expressly allowed by this lease, will be subordinate to the
dominant estate of Lessor.   b.   Lessee shall confine its drilling and
production operations to areas where Edwards Limestone formation has been mined
out or areas which Edwards Limestone formation is not present. Drilling
locations will not be within 200 feet of an active quarry face.   c.   The prior
written consent of Lessor is required for the drilling path of any well
directionally drilled except such consent is not required for any extension of
horizontal drilling from the bottom hole location in horizontal wells drilled
consistent with now current industry practice.

2.   Roads

a.   With respect to each road used for activities under this Lease, Lessee
shall, at its sole cost and expense, construct and maintain an all weather road
(which road shall have as its base crushed limestone or asphalt and shall be
constructed so that rainwater drains off the surface of the road and does not
collect or puddle on said road). The location of any road must be approved by
Lessor, such approval shall not be unreasonably withheld. Lessor may require
that culverts meeting Lessor’s specifications be installed at all crossings of
low places. Additionally, Lessor may require that ditches, canals, and/or other
methods concerning drainage meeting Lessor’s specifications be constructed on
the leased premises in order to properly protect and maintain drainage of the
leased premises. As required by Lessor, Lessee is to place adequate drain tile
where all roadway crossings used by Lessee in its operations impede the drainage
of the leased premises and the adequacy of such drain tile installations is to
be determined by Lessor or its duly authorized representative, and all such
drain tile shall remain in place as the property of Lessor at the termination of
this Lease, unless otherwise directed by Lessor.   b.   All presently existing
roads which are used by Lessee in connection with its operations shall be
maintained by Lessee during its use thereof, and at the conclusion of Lessee’s
operations, these said roads shall be left by Lessee in a useful condition,
equal or superior to their condition at the present time. Lessee shall promptly
repair all damages to said roads which are caused by Lessee’s operations.

3.   Surface Equipment and Fixtures

a.   Lessee will not erect any permanent above ground buildings such as plants,
stations or houses without obtaining prior written permission from Lessor.   b.
  Tank batteries, compressors, separators, dehydrators and other equipment shall
be located only on drill sites. Lessee shall not place such compressors,
separators, dehydrators, or other equipment on the leased premises without the
express written consent of Lessor in its sole discretion. In the event Lessor
permits the use of such items on the leased premises, such items shall be
located at a location approved by Lessor. Lessor may refuse to approve said
location because of the proximity of such compressors or pumping units to the
edge of the leased premises or the potential exists to disturb neighboring
landowners. Lessee, as owner and operator of the exploration and production
activities on the premises contemplated by this lease, shall be solely
responsible for obtaining all required authorizations for such items. Lessee
shall provide Lessor the opportunity to review the related applications or
registrations prior to submitting them to any regulatory agency, and shall
provide Lessor a copy of all authorizations issued therefor.

 

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EXHIBIT “B”

(Continued)
Page 5 of 9

c.   All equipment, fixtures, appliances and facilities used by or for Lessee in
the drilling of and/or production from wells or in connection with any other
activities permitted under the provisions hereof shall be removed as soon as
practicable after the completion or abandonment of the particular well, and the
area upon which said equipment, appliances and fixtures were located or were
erected shall be left in as nearly as practicable the same condition as said
area was in prior to the erection of said rig and equipment, and the leased
premises shall, in any case, be restored as near as reasonably practicable. so
as to be fully useful for residential, commercial, industrial, agricultural and
grazing purposes to at least the extent that such lands and the surface thereof
could have been used for such purposes without added cost to Lessor as of the
date of this Lease.

4.   Pits & Produced Water

a.   Upon the digging of any pits and where feasible and practical, top soil
shall remain separate from the subsoil. Upon the covering of any pits, subsoil
shall be used first and then the separated topsoil shall be spread evenly on top
of the subsoil. Upon completion of drilling operations on each location, all
mud, drilling fluids, chemicals, liquid waste and other liquids shall be removed
from the leased premises by vacuum truck or other means. Lessee, shall fill and
level all pits and/or excavations made by it or them in connection with
operations hereunder after termination of use thereof.   b.   Also, it is
expressly agreed and provided that if any salt water or other deleterious
substances shall come from or in any manner be extracted or produced from any
well as the result of any drilling operations hereunder, Lessee, shall not
permit same to flow on and over Lessor’s land, but shall confine same in lined
and water-tight pits or excavations adjacent to the drilling site.   c.   Lessee
shall not allow any water produced or used in the operations of this lease to
drain off of the property, be released on the property in any way which would be
in violation of any environmental laws or other laws or materially impact the
value of such property. Any water released contrary to these provisions must be
remediated and contained by Lessee and the leased premises must be restored by
Lessee to its condition before such release. The obligations of Lessee hereunder
shall survive the expiration or earlier termination, for any reason, of this
lease.

5.   Clean up and Damages

a.   Lessee shall be liable for all damage caused by Lessee’s (or its agents or
contractors) actions or omissions on the leased premises or operations relating
to this Lease to any and all of the property of Lessor, including, but not
limited to roads, fences, berms, bridges, erosion control devices, active quarry
faces, livestock, growing crops, buildings and ground surfaces, and should such
damage occur, Lessee agrees to either repair the same or to pay Lessor the cost
and amount of such damage within thirty (30) days after written notice of the
occurrence of such damage.   b.   Lessee agrees and obligates itself to conduct
its operations upon the leased premises as a reasonable and prudent operator.
All property used by Lessee shall be maintained in good order and appearance by
painting, clearing and removing brush, trash, and scrap from the area at
Lessee’s cost, and Lessee taking such other actions as are necessary to maintain
said property in clean and neat appearance. In the event Lessee receives written
notice from Lessor that Lessee has failed to maintain any portion of the leased
premises that is the obligation of Lessee, and Lessee does not remedy the matter
within thirty (30) days of receipt by Lessee of said written notice, then in
addition to all other rights and remedies available to Lessor, Lessor shall have
the right to perform such maintenance at Lessee’s expense, and Lessee shall
repay upon demand all amounts so incurred by Lessor. All roads constructed by
Lessee shall be maintained by Lessee at Lessee’s sole cost and expense.   c.  
All trash, debris and drilling mud from Lessee’s operations shall be removed
from the leased premises.   d.   Lessee has the right at any time during this
lease or within 60 (days) after the expiration, termination or release of this
Lease, or any part thereof, to remove, as applicable, all of its recoverable
casing (except water well casing), machinery and fixtures unless specifically
indicated otherwise herein including without limitation gates or road tiles. If
Lessee fails to remove its property within the 60-day period, title to it shall
become vested automatically in Lessor, free of all liens, or Lessor may remove
such items at

 

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EXHIBIT “B”

(Continued)
Page 6 of 9

    Lessee’s expense, at the sole option of Lessor. Lessee agrees to pay such
charges within five (5) days of presentment by Lessor.

6.   Relocation of Pipelines

a.   Upon request of Lessor, Lessee agrees to relocate or cause any pipeline to
be relocated at any time and from time to time to any other location or
locations on the leased premises as specified by the Lessor provided said
pipeline, as relocated, will connect with the wells or facilities as to which
Lessee shall have perpetuated its right of ingress and egress pursuant to the
terms and conditions hereof. Lessee agrees to relocate said pipeline and all
improvements of Lessee thereon, including, without limitation, roads and fences,
if any, of Lessee thereon as soon as reasonably possible and in any event within
thirty (30) days after delivery of such written notice by or on behalf of Lessor
to Lessee. The relocation set forth in Section 6(a) shall be at Lessor’s sole
cost and expense if such pipeline is being relocated from a location previously
approved by Lessor as required under this Lease.   b.   Additionally, upon
request of Lessor in writing, Lessee at Lessee’s expense shall promptly
relocate, bury and case all pipelines to the extent required in order to permit
Lessor to comply with all applicable laws and all rules and regulations or
governmental authorities having or asserting jurisdiction or concerning Lessor’s
development of the surface or hard minerals of the leased premises.

7.   Injection wells       The leased premises shall not be used for the
injection of salt water without the expressed written permission of Lessor.   8.
  Seismic       Lessee must provide Lessor with five (5) business days notice
before any seismic or other geological or geophysical operations involving
explosives will be conducted on the leased premises. Lessor may object to and
prevent such operations if Lessor reasonably believes such explosives could
materially damage Lessor’s property or materially interfere with Lessor’s mining
operations.

J.   LIMITED WARRANTY.       Lessor hereby warrants and agrees to defend title
conveyed to Lessee hereunder, against anyone claiming by, through or under
Lessor, but not otherwise.   K.   REGULATION OR DELAY.       The provisions of
Section 11 of the lease shall apply to prevent termination of the lease only so
long as (i) Lessee’s actions are those of a reasonably prudent operator, and
(ii) such prevention or delay in no way arises from or relates to Lessee’s
financial condition or lack of financial requirements. In addition, such
avoidance of termination based upon causes of prevention or delays set forth in
Section 11 of the lease (collectively, the “Delaying Causes”) shall not be
available until Lessee provides Lessor with written notice of such Delaying
Causes. Lessee agrees to provide Lessor with written notice with five (5) days
of the date on which the Delaying Cause no longer exists.   L.   ASSIGNMENT.    
  Lessee shall not assign this Lease in whole or in part, without the prior
written consent of Lessor, which consent shall not be unreasonably withheld. It
is understood and agreed that Lessor’s rights granted herein shall not be
exhausted upon the approval of any assignment by Lessor, and the terms of this
provision, as well as the other provisions of this lease, shall apply to all
assignees of all, or part, of this lease. If Lessee transfers its interest
hereunder in whole or in part Lessee shall be relieved, upon Lessor’s written
approval of such transfer in its sole discretion, of all obligations thereafter
arising with respect to the transferred interest, and failure of the transferee
to satisfy such obligations with respect to the transferred interest shall not
affect the rights of Lessee with respect to any interest not so transferred. If
Lessor’s approval is not obtained, such transfer shall not be void but Lessee
shall remain obligated hereunder until such approval is obtained.

 

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EXHIBIT “B”

(Continued)
Page 7 of 9

M.   REPORTS AND INFORMATION.       Upon written request by Lessor, Lessee shall
deliver promptly to Lessor, without cost, to the extent that same pertains to
the leased premises or lands pooled therewith and is available to Lessee, a copy
of all geophysical and land surveys and title opinions, abstracts, daily
drilling reports, well logs or surveys, core records and analyses, production
analyses, formation test results, well completion reports, well workover
reports, gas-oil ratio reports, well history and performance reports, production
reports, sales records, applications and reports made to any governmental agency
or authority, and orders, rules or permits issued by any such agency or
authority affecting the leased premises. Lessor shall have the right to inspect
the operations of Lessee on or pertaining to the leased premises, and, upon
request, Lessor shall be furnished with copies of all run tickets, meter runs,
sales information, and such other information as may be appropriate to the
settlement of accounts between Lessor and Lessee, or to determine the respective
rights and obligations of said parties, or to enable Lessor to comply with
applicable laws, rules or regulations of governmental authorities. However,
Lessee shall not be in any manner whatsoever responsible or liable for the
contents of the title opinions, land surveys, or abstracts, or other documents
not prepared by Lessee or by an agent or contractor of Lessee. Lessor agrees to
keep all such information or data provided by Lessee confidential until the
earlier of (a) the release of such information by Lessee to the public, (b) the
release of such information into the public domain by means other than
unauthorized disclosure by Lessor or its agents, employees, representatives,
accountants, attorneys, or others hired to review or verify such information, or
(c) 5 years from the date such information was prepared; provided, however,
Lessor may share such information with its agents, employees, representatives,
accountants, lawyers, others hired to review or verify such information, any
court of law or governmental body to the extent required by same, or as
otherwise required by law, regulation or the rules of any security exchange.
Lessee shall keep records (i) to the same extent as Lessor is required to keep
records by applicable governmental law, rule, regulation, or ordinance, or
(ii) which Lessor in its reasonable judgment believes is necessary to be kept as
to the disposal and removal of any Hazardous Materials or other debris, wastes
or trash as provided in Section H of Exhibit B or in Section I.4 and 5 of
Exhibit B.   N.   REVIEW.       Lessor shall have the right to audit the
accounts and records of Lessee, its successors and assigns, relating to the
leased premises and to its operations under this lease. Such right shall be
exercised by Lessor by giving Lessee reasonable notice and such audit shall be
conducted only during normal business hours.   O.   INDEMNITY.       LESSEE
SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS LESSOR FROM AND AGAINST ANY AND ALL
LIABILITY, LIENS, DEMANDS, JUDGMENTS, SUITS, ACTIONS, FINES, PENALTIES, COSTS,
AND EXPENSES INCLUDING ATTORNEY FEES, AND CLAIMS OF ANY KIND OR CHARACTER
ARISING OUT OF, IN CONNECTION WITH, OR RELATING TO ANY OPERATION CONDUCTED BY
LESSEE, OR ITS AGENTS, CONTRACTORS, EMPLOYEES, LICENSEES OR INVITEES, ON THE
LEASED PREMISES UNDER THE TERMS OF THIS LEASE, INCLUDING, BUT NOT LIMITED TO,
FOR INJURY OR DEATH OF ANY PERSONS, DAMAGE, LOSS OR DESTRUCTION OF ANY PROPERTY,
REAL OR PERSONAL, REMEDIAL OBLIGATIONS, OR VIOLATION OF LAW, UNDER ANY THEORY OF
TORT, CONTRACT OR STRICT LIABILITY AND EXPRESSLY INCLUDING LESSOR’S OWN
NEGLIGENCE. LESSEE FURTHER COVENANTS AND AGREES TO DEFEND ANY SUITS BROUGHT
AGAINST LESSOR ON ACCOUNT OF SAID CLAIMS AND TO PAY ANY JUDGMENTS AGAINST OR
LOSSES OF LESSOR RESULTING FROM ANY SUCH SUIT OR SUITS TOGETHER WITH ALL COSTS
AND EXPENSES RELATIVE TO ANY SUCH CLAIMS, INCLUDING ATTORNEY’S FEES. LESSOR
SHALL HAVE THE RIGHT TO PARTICIPATE IN THE DEFENSE OF ANY SUIT OR CLAIM IN WHICH
IT MAY BE A PARTY WITHOUT RELIEVING LESSEE OF ITS OBLIGATIONS HEREUNDER.

 

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EXHIBIT “B”

(Continued)
Page 8 of 9

    THE FOREGOING INDEMNITY SHALL APPLY WHETHER OR NOT ARISING OUT OF THE SOLE,
JOINT, OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF LESSOR AND SHALL
APPLY, WITHOUT LIMITATION, TO ANY LIABILITY IMPOSED UPON LESSOR AS A RESULT OF
ANY THEORY OF STRICT LIABILITY OR ANY OTHER DOCTRINE OF LAW, PROVIDED THAT THE
FOREGOING INDEMNITY SHALL NOT APPLY TO ANY COSTS, EXPENSES, LOSSES OR
LIABILITIES INCURRED BY LESSOR TO THE EXTENT PROXIMATELY CAUSED BY THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF LESSOR. THE FOREGOING INDEMNITY SHALL
SURVIVE ANY TERMINATION OF THIS LEASE AND SHALL INURE TO THE BENEFIT OF LESSOR,
ANY AFFILIATE OF LESSOR, AND ALL OF THE OFFICERS, DIRECTORS, EMPLOYEES AND
AGENTS OF LESSOR AND AFFILIATES OF LESSOR.   P.   INSURANCE.       Lessee agrees
to maintain customary forms of insurance, including without limitation,
commercial general liability ($1,000,000 each occurrence, limit $5,000,000
general aggregate), automobile liability ($1,000,000 combined single limit for
bodily injury or property damage or $100,000 bodily injury per person/$300,000
bodily injury per accident/$50,0000 property damage), and workers compensation
insurance as required by statute, and if the commercial general liability policy
contains an exclusion for pollution or other environmental exposures, Lessee
shall obtain and maintain pollution liability coverage ($1,000,000 per
occurrence, with a deductible of not more than $100,000), to cover Lessee’s
potential liability and any obligations under this lease and for any operations
conducted by Lessee, or its agents, contractors, employees, licensees or
invitees on the leased premises under the terms of this lease. Concurrently with
the execution of this Lease, Lessee shall provide Lessor with a certificate of
insurance (which may be in a short form), as appropriate, and which is in a form
satisfactory to Lessor, and any new certificates to keep Lessor’s copy current.
The insurance requirements will in no way limit Lessee’s liability under this
Lease (including liability under the indemnification provisions set forth in
paragraph O above).   Q.   DIVISION ORDERS.       Lessee’s division orders shall
only contain those terms prescribed in the form of division order for oil in the
Texas Natural Resources Code.   R.   BREACH OR DEFAULT.       1.  The remedy to
a final judicially determined breach or default includes Lessee’s payment of
Lessor’s attorney’s fees and any other costs relating to such breach or default.
In addition to any other remedy granted herein, if Lessee fails to remedy such
breach or default within the thirty (30) day period or if such breach or default
involves any environmental or regulatory issue, Lessor is hereby granted the
right to remedy such breach or default after giving five (5) days notice of such
intent. Lessee agrees to pay any and all costs and expenses incurred by Lessor
within five (5) days of Lessor’s presentation to Lessee of same. However, if
Lessee disputes such breach or default, it shall notify Lessor within the five
(5) days notice period, after which Lessor may initiate litigation. If
litigation is pursued and a final judicial determination is made in favor of
Lessor, Lessee shall be liable for any and all damages and interest on all money
expended by Lessor to remedy such breach or default (if applicable) at the
higher of simple annual rate of 18%, or the highest rate allowed pursuant to
applicable law.       2.  If Lessor has given Lessee four (4) or more notices of
breach or default within any eighteen-month period that Lessee has failed to
comply with its obligations under this lease with respect to the leased premises
or any Production Unit with respect to any matter, and Lessee has failed to
comply, then Lessor may, at its election, notify Lessee that this lease is
terminated as to the leased premises or all Production Units, effective thirty
(30) days from receipt of such notice via hand-delivery or upon the first
attempted delivery by certified mail.   S.   ANCILLARY RIGHTS.       In
exploring, developing, producing or marketing from the leased premises or lands
pooled or unitized therewith, the ancillary rights granted herein shall apply to
the entire leased premises described in Paragraph 1 above, notwithstanding any
partial release or other partial termination of this lease, but only to the
extent (1) such rights were exercised and items were in existence at the time of
such release or termination and

 

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EXHIBIT “B”

(Continued)
Page 9 of 9

    continued use is necessary to continue operations on a Producing Unit, or
(2) any other uses after such release or termination have been approved in
writing by Lessor.   T.   WORKING INTEREST.       Lessor hereby retains the
option to participate in any well drilled hereunder as a twenty percent (20%)
working interest owner. Prior to commencing each well, Lessee shall provide
Lessor with five (5) days notice in writing which includes reasonable detail to
such proposed operations and costs. Lessor may elect within said five (5) days
period to participate by telephoning Lessee at the number provided in such
notice or by sending such election to Lessee via fax or hand delivery (notice is
upon receipt by Lessee). Should Lessor elect to participate, the parties agree
to enter into the AAPL Form 610 – 1989 Model Form Operating Agreement (“JOA”)
attached hereto as Exhibit C for each well. Such JOA shall cover the entire
Producing Unit for that well, if such Producing Unit is established. If Lessor
elects not to participate in a well, Lessor shall have waived all rights to a
working interest ownership in that well and the entire Producing Unit for that
well, if such Producing Unit is established. However, Lessor’s rights to
participate shall continue as to all other wells on the leased premises.
However, Lessor shall not be responsible as a working interest owner to bear any
percentage of costs or expenses related to Lessee’s breach or default of this
lease as to any surface, environmental or regulation fees or damages hereunder.
Lessor’s working interest participation shall be without warranty of title and
should this lease be terminated or expire for any reason, Lessor shall have no
obligation under the JOA to contribute such property thereunder. This paragraph
shall control over any provision in the JOA in the event of any conflict.   U.  
TIME OF THE ESSENCE.       Time is of the essence with respect to the
performance by either party of the duties and obligations set forth herein.   V.
  HEADINGS.       Headings of sections and paragraphs are included in this
instrument for convenience of reference and shall in no way define, limit,
extend or describe the scope or intent of any provision hereof. Titles appearing
at the beginning of any of such subdivisions are for convenience only and shall
not constitute part of such subdivisions and shall be disregarded in construing
the language contained in such subdivisions.   W.   BINDING EFFECT.       All
the covenants and agreements of Lessee herein contained shall be deemed to be
covenants running with Lessee’s interest in the leased premises. All of the
provisions hereof shall inure to the benefit of Lessor and Lessee and their
respective successors and assigns and shall be binding upon Lessor and Lessee
and their respective successors and assigns.