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

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

Farmout Agreement
“North Semitropic Prospect”

This Farmout Agreement (“FOA”), when accepted and agreed to by the under­signed
parties, shall set forth the terms, conditions and covenants under which Transco
Oil & Gas, Inc., here­inafter referred to as "Farmor" and those entities listed
on the signature page, hereinafter referred to collec­tively as "Farmee”, shall
pursue the exploration and development of the North Semitropic Prospect Area. In
consideration of the mutual terms and covenants provided in this FOA, Farmor and
Farmee agree as follows:

1. 
 Farmor is the owner of certain Oil & Gas Leases covering +/-2,390 net acres
located in Kern County, California and more specifically set out in the attached
Exhibit “A” and the Lease Schedule. This FOA is a binding agreement and is
entered into by the parties concurrently with the industry model form Joint
Operating Agreement (JOA), attached as Exhibit “B” and covering the operations
to be conducted on the North Semitropic Prospect. The specific intent of Farmor
in granting this Farmout Agreement is to cause the drilling of the first test
well to exploit the productive potential of two (2) specific target horizons,
the fractured Monterey Shale at +/- 10,000 ft. estimated vertical depth and the
Freeman Jewett/Vedder Sand at +/- 14,000 ft. estimated vertical depth. The
operations for drilling and testing shall be conducted as per the AFE & Drilling
Program attached to the JOA as Exhibit “H” and are subject to change by the
Operator.

2. 
 Property subject to this FOA is described on Exhibit “A” attached hereto and
hereby made apart of this FOA, as well as the Lease Schedule. Also described on
Exhibit “A” is the Area of Mutual Interest (AMI) between Farmor and Farmee. The
current Net Leasehold Acreage is +/- 2,390. The net leasehold is subject to
updates as additional leases are acquired within the AMI. Subsequent to
executing this FOA, Farmee shall be responsible for 100% of the costs to acquire
new leases within the AMI as initiated by the Operator as well as all delay
rentals.

3. 
 Farmor and Farmee agree that Farmor and/or its assignees including Farmor’s
originating geologist will collectively retain the specified 6% Overriding
Royalty Interests (ORRI) and 15% Back-In Working Interests (BIWI) as set out in
Exhibit “A”. Said ORRI and BIWI shall cover the current Leaseholds, future
Leaseholds and all Lands within the AMI as set out in the attached Exhibit “A”.
The ORRI shall be free and clear of any and all costs for lease acquisitions,
drilling, completions, operating, re-works, etc. and shall receive their
specific ORRI percentage of gross revenues based on 100% of production sales.
Farmor’s 15% WI shall have the option, on a well by well basis, to participate
on a follow up well or maintain the 15% BIWI which shall be on a per well basis
and after payout of all new lease acquisitions, hard drilling & completion costs
and well operating costs.

4. 
 Transco Oil & Gas, Inc. or its appointee shall be the initial Operator and will
deliver to the drilling partners a 77.00% Net Revenue Interest (NRI) on the
drill site acreage. Farmee collectively will earn 100% Working Interest in the
first test well Before Pay Out (BPO), to become an 85% Working Interest After
Pay Out (APO) on a per well basis. Farmee shall be responsible for 100% of the
prospect acquisition, estimated drilling, testing and completion cost for the
first test well, T.D. +/- 14,000 ft. (Monterey & FJ/Vedder test).

5. 
 Originating Geologist Fee: $10,000 on follow up wells includes updating all
geology/geophysical interpretations based on new data acquired from previous
wells. Also well site geology/geophysics during drilling and completion
operations.

6. 
 Estimated costs for the first test well.

 
Prospect Acquisition:
 
$    537,750
 
+/- $225 / acre for GG&L + OH
 
Drilling 14,000’:
 
1,500,000
* 
Variable Costs, as per current AFE.
 
Completion:
 
900,000
* 
Completion in FJ/Vedder.
         
*See attached AFEs, subject to change.
     
$ 2,937,750
   

 

 
Transco Oil & Gas, Inc. <> 7643 McLaughlin Road, # 215 <> (719) 520-3208 / (719)
635-6181 fax

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

 
7. 
 Should the +/- 14,000’ test of the FJ/Vedder result in a dry hole, the well
will be plugged back and a completion made in the fractured Monterey Shale to
+/- 10,000’. As per current AFE, the call for completion in the Monterey Shale
will be about $1,100,000 including a +/- 1,000’ horizontal leg.

8. 
 Additional Test Wells: An election (drilling commitment) for a test well to
evaluate the deep Eocene structure (+/-16,500’) must be made within 12 months
and spud no longer than 18 months from date of the FOA. Failure by Farmee to
elect and spud will result in deep rights reverting to Farmor and Farmee
retaining all rights to 100 ft. below deepest vertical drill depth.

9. 
 The designated Operator will, as soon as practical after full execution of the
Farmout Agreement covering 100% of the working interest, initiate the permitting
process and contract for a drilling rig for a mutually agreeable move in date.
The first test well shall be drilled to +/- 14,000’.

10. 
 The Prospect Acquisition fee listed above is due and payable to Farmor upon
signing of this FOA. The “Cash Calls” by Operator for the above listed Drilling
& Completion funds as per the latest AFE shall be made following full execution
of this FOA. All Cash Calls for Drilling & Completion funds and/or any cost
overruns are due within 3 days after Operator issues a Cash Call. Failure to
meet a Cash Call for funds as called for herein shall result in Farmee
forfeiting all working interest ownership and previously paid in funds to
Farmor.

This FOA may be signed in counterparts all constituting a single agreement.
Farmee and Farmor will sign this FOA and accompanying JOA (see attached)
concurrently. This FOA when signed shall become the governing agreement and will
prevail over any conflicts between this FOA and the JOA.
 

 

 
Farmor: Transco Oil & Gas, Inc.            
     
By: /s/ Larry J. Messmer                        
  
Larry J. Messmer – President                
Dated:     1 February 2008              
  7643 McLaughlin Rd., #215                    
Falcon, CO 80831                                    
(719) 520-3208 / (719) 635-6181              
   

 

                 
Farmee:
 
WI BPO
 
WI APO
 
% of Cost
 
Acquisition Cost
                 
PetroSouth Energy Corp.
 
25%
 
21.25%
 
25%
  $134,437.50 

By: /s/ Fred B. Zaziski                                         
 
      Fred B. Zaziski - Chairman                           
         Print Name & Title
 
Address:
 
  2033 State Highway 249, Ste. 200 - 113           
 
  Houston, TX 77070                                            
 
  (281) 378-1563  /  (281) 271-8600                      
               Phone & Fax

Transco Oil & Gas, Inc. <> 7643 McLaughlin Road, # 215 <> (719) 520-3208 / (719)
635-6181 fax
 

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

 
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

EXHIBIT “B” to the North Semitropic Prospect, Farmout Agreement

OPERATING AGREEMENT
THIS AGREEMENT entered into by and between Transco Oil & Gas, Inc. hereinafter
designated and referred to as "Operator", and the signatory party or parties
other than Operator, sometimes hereinafter referred to individually herein as
"Non-Operator", and collectively as "Non-Operators".

WITNESSETH:
WHEREAS, the parties to this agreement and in accordance with the Farmout
Agreement to the North Semitropic Prospect (hereinafter referred to as “FOA”) to
which this Operating Agreement is attached as Exhibit “B”, shall earn specified
Oil and Gas Interests in the land identified in Exhibit "A" to the FOA. It is
agreed that the FOA shall be the governing agreement and shale prevail in case
of any conflicts between this JOA and FOA , and the parties hereto have reached
an agreement to explore and develop these Leases and/or Oil and Gas Interests
for the production of Oil and Gas to the extent and as hereinafter provided,
NOW, THEREFORE, it is agreed to as follows:

ARTICLE I
DEFINITIONS
As used in this agreement, the following words and terms shall have the meanings
here ascribed to the
A.       The term “AFE” shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be incurred
in conducting an operation hereunder.
B.       The term “Completion” or “Complete” shall mean a single operation
intended to complete a well as a producer of Oil and Gas in one or more Zones,
including, but not limited to, the setting production casing, perforating, well
stimulation and production testing conducted in such operation.
C.       The term "Contract Area" shall mean all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement.  Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A".
D.       The term “Deepen” shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.
E.       The terms "Drilling Party" and Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conduced under
the provisions of this agreement.
F.       The term "Drilling Unit" shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority.  If a
Drilling Unit is not fixed by such rule or order, a Drilling Unit shall be the
drilling unit as established by the pattern of drilling in the Contract Area or
as fixed by express agreement of the Drilling Parties.
G.       The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.
H.       The term “Initial Well” shall mean the well required to be drilled by
the parties hereto as provided in Article VI.A.
I.        The term “Non-Consent Well” shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.
J.        The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a
party who elects not to participate in a proposed operation.
K.      The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
L.       The term "Oil and Gas Interests" or “Interests” shall mean unleased fee
and mineral interests in Oil and Gas in tracts of land lying within the Contract
Area which are owned by parties to this agreement.
M.      The terms "Oil and Gas Lease", "Lease" and "Leasehold" shall mean the
Oil and Gas leases or interests therein  covering tracts of land lying within
the Contract Area which are owned by the parties to this agreement.
N.      The term “Plug Back” shall mean a single operation whereby a deeper Zone
is abandoned in order to attempt a Completion in a shallower Zone.
O.      The term “Recompletion” or “Recomplete” shall mean an operation whereby
a Completion in one Zone is abandoned in order to attempt a Completion in a
different Zone within the existing wellbore.
P.       The term “Rework” shall mean an operation conducted in the wellbore of
a well after it is Completed to secure, restore, or improve production in a Zone
which is currently open to production in the wellbore.  Such operations include,
but are not limited to, well stimulation operations but exclude any routine
repair or maintenance work or drilling, Sidetracking, Deepening, Completing,
Recompleting, or Plugging Back of a well.
Q.      The term “Sidetrack” shall mean the directional control and intentional
deviation of a well from vertical so as to change the bottom hole location
unless done to straighten the hole or to drill around junk in the hole to
overcome other mechanical difficulties.
R.       The term “Zone” shall mean a stratum of earth containing or thought to
contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the word “person” includes natural and artificial persons,
the plural includes the singular, and the any gender includes the masculine
feminine, and neuter.

ARTICLE II
EXHIBITS
The following exhibits, as indicated below and attached hereto, are incorporated
in and made a part hereof:
  :
See Exhibit “A” attached to the FOA on North Semitropic Prospect
(1)      Description of lands subject to this agreement,
(2)      Restrictions, if any, as to depths, formations, or substances,
(3)      Parties to agreement with addresses and telephone numbers for notice
purposes,
(4)      Percentages or fractional interests of parties to this agreement,

 
1

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

________  B.
Exhibit "B", Form of Lease.

      X         C.
Exhibit "C", Accounting Procedure.

      X         D.
Exhibit "D", Insurance.

________  E.
Exhibit "E", Gas Balancing Agreement.

      X         F.
Exhibit "F", Non-Discrimination and Certification of Non-Segregated Facilities.

________  G.
Exhibit "G", Tax Partnership.

      X         H.
Other:    Authority for Expenditure (AFE) & Drilling
Program.                             

If any provision of any exhibit, is inconsistent with any provision contained in
the body of this agreement and/or the FOA, the provisions of the FOA shall
prevail.

ARTICLE III
INTERESTS OF PARTIES
A.
Oil and Gas Interests:

Transco Oil & Gas, Inc. (Farmor) is the owner of the Oil & Gas Interests under
certain leases of record.

B.
Interests of Parties in Costs and Production:

In accordance with and subject to the FOA, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be paid for and
working interest ownership earned, by the parties as their interests are set
forth in Exhibit "A" to the FOA.  In the same manner, the parties shall also own
a working interest in all production of Oil and Gas from the Contract Area
subject, however, to the payment of royalties and other burdens on production as
described hereafter.

C.
Subsequently Created Interests: Shall not apply.

ARTICLE IV
TITLES
A.        Title Examination:
Title examination shall be made on the Drill site of any proposed well prior to
commencement of drilling operations. No well shall be drilled on the Contract
Area until after (1) the title to the drill site has been examined as above
provided,     and (2) the title has been approved by the examining attorney on
behalf of the Drilling Parties in such well.

B.        Loss or Failure of Title:
1.  Failure of Title:  Should any Oil and Gas Interest or Oil and Gas Lease be
lost through failure of title, which loss results in a
reduction  of  interest  from  that  shown  on  Exhibit  "A",  this agreement,
nevertheless, shall continue in force as to all remaining Oil and Gas Leases and
Interests, and, the loss of title shall be jointly born as to working interest
ownership set out on Exhibit “A”.

2.  Loss  by  Non-Payment  or  Erroneous  Payment  of  Amount  Due:  If, through
mistake or oversight, any rental, shut-in well
payment,  minimum  royalty  or  royalty  payment,  or other payment necessary to
maintain all or a portion of an Oil and Gas Lease or Interest is not paid or is
erroneously paid,  and as a result a Lease or Interest terminates, there shall
be no monetary liability against the party who failed to make such payment.
3.  Other  Losses:   All  losses of Leases or Interests committed to this
agreement,  shall  be  joint  losses  and shall be borne by all parties in
proportion to their interests shown on Exhibit “A”.  This shall include but not
be limited to the loss of any Lease or Interest through failure to develop or
because express or implied covenants have not been performed (other than
performance which requires only the payment of money), and the loss of any Lease
by expiration of its primary terms if it is not renewed or extended.  There
shall be  no  readjustment  of  interests  in  the  remaining  portion  of  the
Contract Area on account of any joint loss.

ARTICLE V
OPERATOR
A.         Designation and Responsibilities of Operator:
___________________________________________________ shall be the Operator of the
Contract Area, and shall conduct and direct and have full control of all
operations on the Contract Area as permitted and required by, and within the
limits of this agreement. In its performance of services hereunder for the
Non-Operators, Operator shall be an independent contractor not subject to the
control or direction of the Non-Operators except as to the type of operation to
be undertaken in accordance with the election procedures contained in this
agreement.  Operator shall not be deemed, or hold itself out as, the agent of
the Non-Operators with authority to bind them to any obligation or liability
assumed or incurred by Operator as to any third party. Operator shall conduct
its activities under this agreement as a reasonable prudent operator, in a good
and workmanlike manner, with due diligence and dispatch, in accordance with good
oilfield practice, and in compliance with applicable law and regulation, but in
no event shall it have any liability as Operator to the other parties for losses
sustained or liabilities incurred except such as may result from gross
negligence or willful misconduct.

B.
Resignation  or  Removal  of  Operator  and  Selection  of  Successor:

1.  Resignation or Removal of Operator: Operator may resign at any time by
giving written notice thereof to Non-Operators.    If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area, or
is no longer capable of serving as Operator, Operator shall be deemed to have
resigned without any action by Non-Operators, except the selection of a
successor.  Operator may be removed only for good cause by the affirmative vote
of Non-Operators owning a majority interest based on ownership as shown on
Exhibit “A” remaining after excluding the voting interest of Operator; such vote
shall not be deemed effective until a written notice has been delivered to the
Operator by a Non-Operator detailing the alleged default and Operator has failed
to cure the default within thirty (30) days from its receipt of the notice or,
if the default concerns an operation then being conducted, within forty-eight
(48) hours of its receipt of the notice.  For purposes hereof, “good cause”
shall mean not only gross negligence or willful misconduct but also the material
breach of or inability to meet the standards of operation contained in Article
V.A. or material failure or inability to perform its obligations under this
agreement.

 
2

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

Subject to Article VII.D.1., such resignation or removal shall not become
effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date.   Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator.  A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not  be the basis for removal
of Operator.
2.    Selection  of  Successor  Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a
successor  Operator  shall  be  selected  by the parties.  The successor
Operator shall be selected from the parties owning an interest in the Contract
Area at the time such successor Operator is selected.  The successor Operator
shall be selected by  the affirmative vote of two (2) or more parties owning a
majority interest based on ownership as shown on Exhibit "A";  provided,
however, if an Operator which has been removed or is deemed to have resigned
fails to vote or votes only to succeed itself, the  successor  Operator  shall
be selected by the affirmative vote of two (2) or  more parties owning a
majority interest based on ownership as shown on Exhibit "A" remaining after
excluding the voting interest of the Operator that was removed or
resigned.   The former Operator shall promptly deliver to the successor Operator
all records and data relating to the operations conducted by the former Operator
to the extent such records and data are not already in the possession of the
successor Operator.  Any cost of obtaining or copying the former Operator’s
records and data shall be charged to the joint account.
3.    Effect of Bankruptcy:  If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any action
by Non-Operators, except the selection of a successor.  If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court,  all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor.  During the period of time the operating committee
controls operations, all actions shall require he approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit
“A”.  In the event there are only two (2) parties to this agreement, during the
period of time the operating committee controls operations, a third party
acceptable to Operator, Non-Operator and the federal bankruptcy court shall be
selected as a member of the operating committee, and all actions shall require
the approval of two (2) members of the operating committee without regard for
their interest in the Contract Area based on Exhibit “A”.

C.         Employees and Contractors:
The number of employees or contractors used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees or
contractors shall be the employees  or contractors of Operator.

D.        Rights and Duties of Operator:
1.  Competitive Rates and Use of Affiliates:  All wells drilled on the Contract
Area shall be drilled on a competitive contract basis at the usual rates
prevailing in the area.  If it so desires, Operator may employ its own tools and
equipment in the drilling of wells, but its charges therefore shall not exceed
the prevailing rates in the area and the rate of such charges shall be agreed
upon by the parties in writing before drilling operations are commenced, and
such work shall be performed by Operator under the same terms and conditions as
are customary and usual in the area in contracts of independent contractors who
are doing work of similar nature.  All work performed or materials supplied by
affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.
2.  Discharge of Joint Account Obligations:  Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expenses
incurred in the development and operations of the Contract Area pursuant to this
agreement and shall charge each of the parties hereto with their respective
proportionate shares upon the expense basis provided in Exhibit “C.”  Operator
shall keep an accurate record of the joint account hereunder, showing expenses
incurred and charges and credits made and received.
3.  Protection from Liens:  Operator shall pay, or cause to be paid, as and when
they become due and payable, all accounts of contractors and suppliers and wages
and salaries for services rendered or performed, and for materials supplied on,
to or in respect of the Contract Area or any operations for the joint account
thereof, and shall keep the Contract Area free from liens and encumbrances
resulting therefrom except for those resulting from a bona fide dispute as to
services rendered or materials supplied.
4.  Custody of Funds:  Operator shall hold for the account of the Non-Operators
any funds of the Non-Operators advanced or paid to the Operator, either for the
conduct of operations hereunder or as a result of the sale of production from
the Contract Area, and such funds shall remain the funds of the Non-Operators on
whose account they are advanced or paid until used for their intended purpose or
otherwise delivered to the Non-Operators or applied toward the payment of debts
as provided in Article VII.B.  Nothing in this paragraph shall be construed to
establish a fiduciary relationship between Operator and Non-Operators for any
purpose other than to account for Non-Operator funds as herein specifically
provided.  Nothing in this paragraph shall require the maintenance by Operator
of separate accounts for the funds of Non-Operators unless the parties otherwise
specifically agree.
5.  Access to Contract Area and Records:  Operator shall, except as otherwise
provided herein, permit each Non-Operator or its duly authorized representative,
at the Non-Operator’s sole risk and cost, full and free access at all reasonable
times to all operations of every kind and character being conducted for the
joint account on the Contract Area and to the records of operations conducted
thereon or production therefrom, including Operator’s books and records relating
thereto.  Such access rights shall not be exercised in a manner interfering with
Operator’s conduct of an operation hereunder and shall no obligate Operator to
furnish any geologic or geophysical data of an interpretive nature unless the
cost of preparation of such interpretive data was charged to the joint
account.  Operator will furnish to each Non-Operator upon request copies of any
and all reports and information obtained by operator in connection with
production and related items, including, without limitation, meter and chart
reports, production purchaser statements, run tickets and monthly gauge reports,
but excluding purchase contracts and pricing information to the extent not
applicable to the production of the Non-Operator seeking the information.  Any
audit of Operator’s records relating to amounts expended and the appropriateness
of such expenditures shall be conducted in accordance with the audit protocol
specified in Exhibit “C”.

 
3

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

6.  Filing and Furnishing Governmental Reports:  Operator will file, and upon
written request promptly furnish copies to each requesting Non-Operator not in
default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder.  Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.
7.  Drilling and Testing Operations: The following provisions shall apply to
each well drilled hereunder, including but not limited to the Initial Well:
 (a) Operator will promptly advise Non-Operators of the date on which the well
is spudded, or the date on which drilling operations are commenced.
 (b) Operator shall send to Non-Operators such reports, test results and notices
regarding the progress of operations on the well as the Non-Operators shall
reasonably request, including, but not limited to, daily drilling reports,
completion reports, and well logs.
 (c)  Operator shall adequately test all Zones encountered which may reasonably
be expected to be capable of producing Oil and Gas in paying quantities as a
result of examination of the electric log or any other logs or cores or tests
conducted hereunder.
8.  Cost Estimates:  Upon request of any Consenting Party, Operator shall
furnish estimates of current and cumulative costs incurred for the joint account
at reasonable intervals during the conduct of any operations pursuant to this
agreement.  Operator shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.
9.  Insurance:  At all times while operations are conducted hereunder, Operator
shall comply with the workers compensation law of the state where the operations
are being conducted; provided, however, that Operator may be a self-insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit “C”.  Operator
shall also carry or provide insurance for the benefit to the joint account of
the parties as outlined in Exhibit “D” attached hereto and made a part
hereof.  Operator shall require all contractors engaged in work on or for the
Contract Area to comply with the workers compensation law of the state where the
operations are being conducted and to maintain such other insurance as operator
may require.
In the event automobile liability insurance is specified in said Exhibit “D”, or
subsequently receives the approval of the parties,  no direct charge shall be
made by Operator for premiums paid for such insurance for Operator’s automotive
equipment.

ARTICLE VI
DRILLING AND DEVELOPMENT
A.         Initial Well: Subject to the FOA, Operator shall commence the
drilling (“Commence the drilling” is defined as, starting the drilling process
by obtaining and/or completing one or more of the following: permits, drill site
location, roads, sumps, cellar, rat & mouse hole and setting conductor pipe) of
the Initial Well at the following location: TBD in T26S, R23E in Kern County,
California. Exact coordinates to be established by survey, and shall thereafter
continue the drilling of the well with due diligence to a depth sufficient to
test the Vedder Sand seismic anomaly at +/- 14,000 feet or to a lesser depth
should impenetrable formations, hole conditions or mechanical problems be
encountered that would render further drilling impractical in keeping with good
oilfield practice. The drilling of the Initial Well and the participation
therein by all parties is obligatory, subject to Article VI.C.1. as to
participation in Completion operations and Article VI.F. as to termination of
operations and Article XI as to occurrence of force majeure.

B.         Subsequent Operations: Shall be conducted subject to the FOA and only
within those earned depths of operation.
1.  Proposed  Operations:  If any party hereto should desire to drill any well
on the Contract other than the Initial Well, or if any party should desire to
Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a well no
longer capable of producing in paying quantities in which such party has not
otherwise relinquished its interest in the proposed objective Zone under this
agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or
Plug Back such a well shall give written notice of  the proposed operation to
the parties who have not otherwise relinquished their interest in such objective
Zone under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation.  The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing to do the work
whether they elect to participate in the cost of the proposed operation.  If a
drilling rig is on location, notice of a proposal to Rework, Sidetrack,
Recomplete, Plug Back or Deepen may be given by telephone and the response
period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday
and legal holidays.  Failure of a party to whom such notice is delivered to
reply within the period above fixed shall constitute an election by that party
not to participate in the cost of the proposed operation.  Any proposal by a
party to conduct an operation conflicting with the operation initially proposed
shall be delivered to all parties within the time and in the manner provided in
Article VI.B.6.
If all parties to whom such notice is delivered elect to participate in such a
proposed operation, the parties shall be contractually committed to participate
therein provided such operations are commenced with the time period hereafter
set forth, Operator shall, no later than ninety (90) days after expiration of
the notice period of thirty (30) days (or as promptly as possible after the
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
thereafter complete it with due diligence at the risk and expense of the parties
participating therein; provided, however, said commencement date may be extended
upon written notice of same by Operator to the other parties, for a period of up
to thirty (30) additional days if, in the sole opinion of Operator, such
additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights-of-way) or appropriate drilling
equipment, or to complete title examination or curative matter required for
title approval or acceptance.  If the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein or in the force majeure provisions of Article XI) and if any
party hereto still desires to conduct said operation, written notice proposing
same must be resubmitted to the other parties in accordance herewith as if no
prior proposal had been made.  Those parties that did not participate in the
drilling of a well for which a proposal to Deepen or Sidetrack is made hereunder
shall, if such parties desire to participate in the proposed Deepening of
Sidetracking operations, reimburse the Drilling Parties in accordance with
Article VI.B.4 in the event of a Deepening operation and in accordance with
Article VIB.5 in the event of a Sidetracking operation.

 
4

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

2.  Operations by Less than All Parties:
    (a) Determination of Participation.  If any party to whom such notice is
delivered as provided in Article VI.B.1 or VI.C.1 (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as possible after the expiration of the forty-eight (48) hours
period when a drilling rig is on location, as the case may be) actually commence
the proposed operation and complete it with due diligence.  Operator shall
perform all work for the account of the Consenting Parties; provided, however,
if no drilling rig or other equipment is on location, and if Operator is  a
Non-Consenting Party, the Consenting Parties shall either: (i) request Operator
to perform the work required by such proposed operation for the account of the
Consenting Parties, or (ii) designate one of the Consenting Parties as Operator
to perform such work.  The rights and duties granted to and imposed upon the
Operator under this agreement are granted to and imposed upon the party
designated as Operator for an operation in which the original Operator is a
Non-Consenting Party.  Consenting Parties, when conducting operations on the
Contract Area pursuant to this Article VI.B.2., shall comply with all terms and
conditions of this agreement.
If less than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the applicable notice period, shall advise
all Parties of the total interest of the parties approving such operation and
its recommendation as to whether the Consenting Parties should proceed with the
operation as proposed.  Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party's interest as shown on Exhibit "A" or (ii) carry
only its proportionate part (determined by dividing such party’s interest in the
Contract Area by the interests of all Consenting Parties in the Contract Area)
of Non-Consenting Parties' interests, or (iii) carry its proportionate part
(determined as provided in (ii)) of Non-Consenting Parties interest together
will all or a portion of its proportionate part of any Non-Consenting Parties’
interests that any Consenting Party did not elect to take.  Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal.  Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays).  The proposing party, at its election, may
withdraw such proposal if there is less than 100% participation and shall notify
all parties of such decision within ten (10) days or within twenty-four (24)
hours if a drilling rig is on location, following the expiration of the
applicable response period.  If 100% subscription to the proposed operation is
obtained, the proposing party shall promptly notify the Consenting Parties of
their proportionate interest in the operation and the party serving as Operator
shall commence such operation within the period provided in Article VI.B1.,
subject to the same extension right as provided therein.
    (b) Relinquishment of Interest for Non-Participation.  The entire cost and
risk of conducting such operations shall be borne by the Consenting Parties in
the proportions they have elected to bear same under the terms of the preceding
paragraph.  Consenting Parties shall keep the leasehold estates involved in such
operations free and clear of all liens and encumbrances of every kind created by
or arising from the operations of the Consenting Parties.  If such an operation
results in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the
Consenting Parties shall plug and abandon the well and restore the surface
location at their sole cost, risk and expense; provided, however, that those
Non-Consenting Parties that participated in the drilling, Deepening or
Sidetracking of the well shall remain liable for, and shall pay, their
proportionate shares of the cost of plugging and abandoning the well and
restoring the surface location insofar only as those costs were not increased by
the subsequent operations of the Consenting Parties.    If any well drilled,
Reworked, Sidetracked, Deepened, Recompleted, or Plugged Back under the
provisions of this Article results in a well capable producing Oil and/or Gas in
paying quantities, the Consenting Parties shall Complete and equip the well to
produce at their sole cost and risk, and the well shall then be turned over to
Operator (if the Operator did not conduct the operation) and shall be operated
by it at the expense and for the account of the Consenting Parties.  Upon
commencement of operations for the drilling, Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non-Consenting Party's interest in the well and share of
production therefrom, or in the case of a Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back, or a Completion pursuant to Article VI.C.1.
Option No. 2, all of such Non-Consenting Party’s interest in the production
obtained from the operation in which the Non-Consenting Party did not elect to
participate.  Such relinquishment shall be effective until the proceeds of the
sale of such share, calculated at the well, or market value thereof if such
share is not sold (after deducting applicable ad valorem, production, severance
and excise taxes, royalty, overriding royalty and other interests not excepted
by Article III.C. payable out of or measured by the production from such well
accruing with respect to such interest until it reverts), shall equal the total
of the following:
(i)  300 % of each such Non-Consenting Party’s share of the cost of any newly
acquired surface equipment beyond the wellhead connections (including but not
limited to stock tanks, separators, treaters, pumping equipment and piping),
plus 100% of each such Non-Consenting Party’s share of the cost of operation of
the well commencing with first production and continuing until each such
Non-Consenting Party’s relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party’s
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from the
beginning of the operations; and
(ii)  500 % of (a) that portion of the costs and expenses of drilling,
Reworking, Sidetracking, Deepening, Plugging Back, testing, Completing, and
Recompleting, after deducting any cash contributions received under Article
VIII.C., and of (b) that portion of the cost of newly acquired equipment in the
well (to and including the wellhead connections),  which would have been
chargeable to such Non-Consenting Party if it had participated therein.
Notwithstanding anything to the contrary in this Article VI.B., if the well does
not reach the deepest objective Zone described in the notice proposing the well
for reasons other than the encountering of granite or practically impenetrable
substance or other condition in the hole rendering further operations
impracticable, Operator shall give notice thereof to each Non-Consenting Party
who submitted or voted for an alternative proposal under Article VI.B.6. to
drill the well to a shallower Zone that the deepest objective Zone proposed in
the notice under which the well was drilled, and each such Non-Consenting Party
shall have the option to participate in the initial proposed Completion of the
well by paying its share of the cost of drilling the well to its actual depth,
calculated in the manner provided in Article VI.B.4 (a).  If any such
Non-Consenting Party does not elect to participate in the first Completion
proposed for such well, the relinquishment provisions of this Article VI.B.2 (b)
shall apply to such party’s interest.

 
5

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

(c)  Reworking, Recompleting or Plugging Back.  An election not to participate
in the drilling, Sidetracking or Deepening of a well shall be deemed an election
not to participate in any Reworking or Plugging Back operation proposed in such
a well, or portion thereof, to which the initial non-consent election applied
that is conducted at any time prior to full recovery by the Consenting Parties
of the Non-Consenting Party’s recoupment amount.  Similarly, an election not to
participate in the Completing or Recompleting of a well shall be deemed an
election not to participate in any Reworking operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party’s recoupment amount.  Any such Reworking, Recompleting or
Plugging Back operation conducted during the recoupment period shall be deemed
part of the cost of operations of said well and there shall be added to the sums
to be recouped by the Consenting Parties 150% of that portion of the costs of
the Reworking, Recompleting or Plugging Back operation which would have been
chargeable to such Non-Consenting Party had it participated therein.  If such a
Reworking, Recompleting or Plugging Back operation is proposed during such
recoupment period, the provisions of this Article VI.B. shall be applicable as
between said Consenting Parties in said well.
(d)  Recoupment Matters.  During the period of time Consenting Parties are
entitled to receive Non-Consenting Party’s share of production or the proceeds
therefrom, Consenting Parties shall be responsible for the payment of all ad
valorem, production, severance, excise, gathering and other taxes, and all
royalty, overriding royalty and other burdens applicable to Non-Consenting
party’s share of production not excepted by Article III.C.
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or
Deepening operation, the Consenting Parties shall be permitted to use, free of
cost, all casing, tubing and other equipment in the well, but the ownership of
all such equipment shall remain unchanged; and upon abandonment of a well after
such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening, the
Consenting Parties shall account for all such equipment to the owners thereof,
with each party receiving its proportionate part in kind or in value, less cost
of salvage.
Within ninety (90) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings.  Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well’s
working interest production during the preceding month.  In determining the
quantity of Oil and Gas produced during any month, Consenting Parties shall use
industry accepted methods such as but not limited to metering or periodic well
tests.  Any amount realized from the sale or other disposition of equipment
newly acquired in connection with any such operation which would have been owned
by a Non-Consenting Party had it participated therein shall be credited against
the total unreturned costs of the work done and the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it as of 7:00 a.m. on
the day following the day on which such recoupment occurs, and, from and after
such reversion, such Non-Consenting Party shall own the same interest in such
well, the material and equipment in or pertaining thereto, and the production
therefrom as such Non-Consenting Party would have been entitled to had it
participated in the drilling, Sidetracking, Reworking, Deepening, Recompleting
or Plugging Back of said well.  Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and
Exhibit “C” attached hereto.
3.  Stand-By Costs:  When a well which has been drilled or Deepened has reached
its authorized depth and all tests have been completed, and the results thereof
furnished to the parties, or when operations on the well have been otherwise
terminated pursuant to Article VI.F., stand-by costs incurred pending response
to a party's notice proposing a Reworking, Sidetracking, Deepening, Recompleting
or Plugging Back or Completing operation in such a well (including the period
required under Article VI.B.6. to resolve competing proposals) shall be charged
and borne as part of the drilling or Deepening operation just
completed.  Stand-by costs subsequent to all parties responding, or expiration
of the response time permitted, whichever first occurs, and prior to agreement
as to the participating interests of all Consenting Parties pursuant to the
terms of the second grammatical paragraph of Article VI.B.2 (a), shall be
charged to and borne as part of the proposed operation, but if the proposal is
subsequently withdrawn because of insufficient participation, such stand-by
costs shall be allocated between the Consenting Parties in the proportion each
Consenting Party's interest as shown on Exhibit "A" bears to the total interest
as shown on Exhibit "A" of all Consenting Parties.
In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive up
to five (5) additional days after expiration of the forty-eight hour response
period specified in Article VI.B.1. within which to respond by paying for all
stand-by costs and other costs incurred during such extended response period;
Operator may require such party to pay the estimated stand-by time in advance as
a condition to extending the response period.  If more than one party elects to
take such additional time to respond to the notice, standby costs shall be
allocated between the parties taking additional time to respond on a day-to-day
basis in the proportion each electing party’s interest as shown on Exhibit “A”
bears to the total interest as shown on Exhibit “A” of all the electing parties.
4.  Deepening: If less than all parties elect to participate in a drilling,
Sidetracking, or Deepening operation proposed pursuant to Article VI.B.1., the
interest relinquished by the Non-Consenting Parties to the Consenting Parties
under Article VI.B.2. shall relate only and be limited to the lesser of (i) the
total depth actually drilled or (ii) the objective depth or Zone of which the
parties were given notice under Article VI.B.1. (Initial Objective”).  Such well
shall not be Deepened beyond the Initial Objective without first complying with
this Article to afford the Non-Consenting Parties the opportunity to participate
in the Deepening operation.
In the event any Consenting Party desires to drill or Deepen a Non-Consent Well
to a depth below the Initial Objective, such party shall give notice thereof,
complying with the requirements of Article VI.B.1., to all parties (including
Non-Consenting Parties).  Thereupon, Articles VI.B.1. and 2. shall apply and all
parties receiving such notice shall have the right to participate or not
participate in the Deepening of such well pursuant to said Articles VI.B.1 and
2.   If a Deepening operation is approved pursuant to such provisions, and if
any Non-Consenting Party elects to participate in the Deepening operation, such
Non-Consenting party shall pay or make reimbursement (as the case may be) of the
following costs and expenses:

 
6

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

 (a)  If the proposal to Deepen is made prior to the Completion of such well as
a well capable of producing in paying quantities, such Non-Consenting Party
shall pay (or reimburse Consenting Parties for, as the case may be) that share
of costs and expenses incurred in connection with the drilling of said well from
the surface to the Initial Objective which Non-Consenting Party would have paid
had such Non-Consenting Party agreed to participate therein, plus the
Non-Consenting Party’s share of the cost of Deepening and of participating in
any further operations on the well in accordance with the other provisions of
this Agreement; provided, however, all costs for testing and Completion or
attempted Completion of the well incurred by Consenting Parties prior to the
point of actual operations to Deepen beyond the Initial Objective shall be for
the sole account of Consenting Parties.
(b)  If the proposal is made for a Non-Consent Well that has been previously
Completed as a well capable of producing in paying quantities, but is no longer
capable of producing in paying quantities, such Non-Consenting Party shall pay
(or reimburse Consenting Parties for, as the case may be) its proportionate
share of all costs of drilling, Completing, and equipping said well from the
surface to the Initial Objective, calculated in the manner provided in paragraph
(a) above, less those costs recouped by the Consenting Parties from the sale of
production from the well.  The Non-Consenting Party shall also pay its
proportionate share of all costs of re-entering said well.  The Non-Consenting
Parties’ proportionate party (based on the percentage of such well
Non-Consenting Party would have owned had it previously participated in such
Non-Consent Well) of the costs of savable materials and equipment remaining in
the hole and salvable surface equipment used in connection with such well shall
be determined in accordance with Exhibit “C”.  If the Consenting parties have
recouped the cost of drilling, Completing, and equipping the well at the time
such Deepening operations is conducted, then a Non-Consenting Party may
participate in the Deepening of the well with no payments for costs incurred
prior to re-entering the well for Deepening.
The foregoing shall not imply a right of any Consenting Party to propose any
Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.
5.  Sidetracking:  Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore at
the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:
(a)  If the proposal is for Sidetracking an existing dry hole, reimbursement
shall be on the basis of the actual costs incurred in the initial drilling of
the well down to the depth at which the Sidetracking operation is initiated.
(b)  If the proposal is for Sidetracking a well which has previously produced,
reimbursement shall be on the basis of such party’s proportionate share of
drilling and equipping costs incurred in the initial drilling of the well down
to the depth at which the Sidetracking operation is conducted, calculated in the
manner described in Article VI.B.4(b) above.  Such party’s proportionate share
of the cost of the well’s salvable materials and equipment down to the depth at
which the Sidetracking operation is initiated shall be determined in accordance
with the provisions of Exhibit “C”.
6.  Order of Preference of Operations.  Except as otherwise specifically
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, exclusive of Saturday, Sunday and legal holidays, from delivery of the
initial proposal, if a drilling rig is on location for the well on which such
operation is to be conducted, to deliver to all parties entitled to participate
in the proposed operation such party’s alternative proposal, such alternate
proposal to contain the same information required to be included in the initial
proposal.  Each party receiving such proposals shall elect by delivery of notice
to Operator within five (5) days after expiration of the proposal period, or
within twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays)
if a drilling rig is on location for the well that is the subject of the
proposals, to participate in one of the competing proposals.  Any party not
electing within the time required shall be deemed not to have voted.  The
proposal receiving the vote of parties owning the largest aggregate percentage
interest of the parties voting shall have priority over all other competing
proposals; in the case of a tie vote, the
initial proposal shall prevail.  Operator shall deliver notice of such result to
all parties entitled to participate in the operation within five (5) days after
expiration of the election period (or within twenty-four (24) hours, exclusive
of Saturday, Sunday and legal holidays, if a rig is on location ).  Each party
shall then have two (2) days (or twenty-four (24) hours if a rig is on location)
from receipt of such notice to elect by delivery of notice to Operator to
participate in such operation or to relinquish interest in the affected well
pursuant to the provisions of Article VI.B.2; failure by a party to deliver
notice within such period shall be deemed an election not to participate in the
prevailing proposal.
7.  Conformity to Spacing Pattern.  Notwithstanding the provisions of this
Article VI.B.2., it is agreed that no wells shall be proposed to be drilled to
or Completed in or produced from a Zone from which a well located elsewhere on
the Contract Area is producing, unless such well  conforms to the then-existing
well spacing patter for such Zone.
8.  Paying Wells.  No party shall conduct any Reworking, Deepening, Plugging
Back, Completion, Recompletion, or Sidetracking operation under this agreement
with respect to any well then capable of producing in paying quantities except
with the consent of all parties that have not relinquished interests in the well
at the time of such operation.

C.  Completion of Wells; Reworking and Plugging Back:
1.  Completion:  Without the consent of all parties, no well shall be drilled,
Deepened or Sidetracked, except any well drilled, Deepened or Sidetracked
pursuant to the provisions of Article VI.B.2 of this agreement.  Consent to the
drilling, Deepening or Sidetracking shall include:
 
x
Option No. 1:  All necessary expenditures for the Drilling, Deepening or
Sidetracking, testing, Completing and equipping of the well, including necessary
tankage and/or surface facilities.

2.  Rework, Recomplete or Plug Back:  No well shall be Reworked, Recompleted or
Plugged Back except a well Reworked, Recompleted, or Plugged Back pursuant to
the provisions of Article VI.B.2 of this agreement.  Consent to the Reworking,
Recompleting or Plugging Back of a well shall include all necessary expenditures
in conducting such operations and Completing and equipping of said well,
including necessary tankage and/or surface facilities.

 
7

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

D.  Other Operations:
Operator shall not undertake any single project reasonably estimated to require
an expenditure in excess of            Thirty Thousand             Dollars ($
30,000.00) except in connection with the drilling, Sidetracking, Reworking,
Deepening, Completing, Recompleting or Plugging Back of a well that has been
previously authorized by or pursuant to this agreement; provided, however, that,
in case of explosion, fire, flood or other sudden emergency, whether of the same
or different nature, Operator may take such steps and incur such expenses as in
its opinion are required to deal with the emergency to safeguard life and
property but Operator, as promptly as possible, shall report the  emergency to
the other parties.  If Operator prepares an AFE for its own use, Operator shall
furnish any Non-Operator so requesting an information copy thereof for any
single project costing in excess of        Thirty Thousand         Dollars ( $
30,000.00).  Any party who has not relinquished its interest in a well shall
have the right to propose that Operator perform repair work or undertake the
installation of artificial lift equipment or ancillary production facilities
such as salt water disposal wells or to conduct additional work with respect to
a well drilled hereunder or other similar project (but not including the
installation of gathering liens or other transportation or marketing facilities,
the installation of which shall be governed by separate agreement between the
parties) reasonably estimated to require an expenditure in excess of the amount
first set forth above in this Article VI.D. (except in connection with an
operation required to be proposed under Articles VI.B.1. or VI.C.1. Option No.
2, which shall be governed exclusively by those Articles).  Operator shall
deliver such proposal to all parties entitled to participate therein.  If within
thirty (30) days thereof Operator secures the written consent of any party or
parties owning at least     51    % of the interests of the parties entitled to
participate in such operation, each party having the right to participate in
such project shall be bound by the terms of such proposal and shall be obligated
to pay its proportionate share of the costs of the proposed project as if it had
consented to such project pursuant to the terms of the proposal..

E.  Abandonment of Wells:
1..  Abandonment of Dry Holes:  Except for any well drilled or Deepened pursuant
to Article VI.B.2., any well which has been drilled or Deepened under the terms
of this agreement and is proposed to be abandoned as a dry hole shall not be
plugged and abandoned without the consent of all parties.  Should Operator,
after diligent effort, be unable to contact any party, or should any party fail
to reply within  twenty four (24) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice via either phone, fax or courier of the
proposal to plug and abandon such well, such party shall be deemed to have
consented to the proposed abandonment.  All such wells shall be plugged and
abandoned in accordance with applicable regulations and at the cost, risk and
expense of the parties who participated in the cost of drilling or Deepening
such well.  Any party who objects to plugging and abandoning such well by notice
delivered to Operator within  twenty four (24) hours (exclusive of Saturday,
Sunday and legal holidays) after delivery of notice of the proposed plugging
shall take over the well as of the end of  such  twenty four (24) hour notice
period and conduct further operations in search of Oil and/or Gas subject to the
provisions of Article VI.B.; failure of such party to provide proof reasonably
satisfactory to Operator of its financial capability to conduct such operations
or to take over the well within such period or thereafter to conduct operations
on such well or plug and abandon such well shall entitle Operator to retain or
take possession of the well and plug and abandon the well.  The party taking
over the well shall indemnify Operator (if Operator is an abandoning party) and
the other abandoning parties against liability for any further operations
conducted on such well except for the costs of plugging and abandoning the well
and restoring the surface, for which the abandoning parties shall remain
proportionately liable.
2.   Abandonment of Wells That Have Produced:  Except for any well in which a
Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties.  If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto.  Failure of a party to
reply within thirty (30) days of delivery of notice via fax, mail or courier of
proposed abandonment shall be deemed an election to consent to the
proposal.  If, within thirty (30) days after delivery of notice of the proposed
abandonment of any well, all parties do not agree to the abandonment of such
well, those wishing to continue its operation from the Zone then open to
production shall be obligated to take over the well as of the expiration of the
applicable notice period and shall indemnify Operator (if Operator is an
abandoning party) and the other abandoning parties against liability for any
future operations on the well conducted by such parties.  Failure of such party
or parties to provide proof reasonably satisfactory to Operator of their
financial capability to conduct such operations or to take over the well within
the required period or thereafter to conduct operations on such well shall
entitle Operator to retain or take possession of such well and plug and abandon
the well.
Parties taking over a well as provided herein shall tender to each of the other
parties its proportionate share of the value of the well’s salvable material and
equipment, determined in accordance with the provisions of Exhibit “C,” less the
estimated cost of salvaging and the estimated cost of plugging and abandoning
and restoring the surface; provided, however, that in the event the estimated
plugging and abandoning and surface restoration costs and the estimated cost of
salvaging are higher than the value of the well’s salvable material and
equipment, each of the abandoning parties shall tender to the parties continuing
operations their proportionate shares of the estimated excess cost.  Each
abandoning party shall assign to the non-abandoning parties, without warranty,
express or implied, as to title or as to quantity, or fitness for use of the
equipment and material, all of its interest in the wellbore of the well and
related equipment, together with its interest in the Leasehold insofar and only
insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production.  If the interest of the abandoning
party is or includes and Oil and Gas Interest, such party shall execute and
deliver to the non-abandoning party or parties and oil and gas lease, limited to
the wellbore and the Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit “B”.  The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located.  The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees.  There shall be no
readjustment of interests in the remaining portions of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility, liability,
or interest in the operation of or production from the well in the Zone then
open other than the royalties retained in any lease made under the terms of this
Article.  Upon request, Operator shall continue to operate the assigned well for
the account of the non-abandoning parties at the rates and charges contemplated
by this agreement, plus any additional cost and charges which may arise as the
result of the separate ownership of the assigned. Well.  Upon proposed
abandonment of the producing Zone assigned or leased, the assignor or lessor
shall then have the option to repurchase its prior interest in the well (using
the same valuation formula) and participate in further operations therein
subject to the provisions hereof.

 
8

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

3.  Abandonment of Non-Consent Operations:  The provisions of Article VI.E.1 or
VI.E.2 above shall be applicable as between Consenting Parties in the event of
the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article IV.E.; and
provided further, that Non-Consenting Parties who own an interest in a portion
of the well shall pay their proportionate share of abandonment and surface
restoration costs for such well as provided in Article VI.B.2.(b).

F. Termination of Operations:
Upon commencement of an operation for the drilling, reworking, Sidetracking,
Plugging Back, Deepening, testing, Completion or plugging of a well, including
but not limited to the Initial Well, such operation shall not be terminated
without consent of parties bearing         51     % of the costs of such
operation; provided, however, that in the event granite or other practically
impenetrable substance or condition in the hole is encountered which renders
further operations impractical, Operator may discontinue operations and give
notice of such condition in the manner provide in Article VI.B.1, and the
provisions of Article VI.B. or VI.E. shall thereafter apply to such operation,
as appropriate.

ARATICLE VII
EXPENDITURES AND LIABILITY OF PARTIES
A.
Liability of Parties:

The liability of the parties shall be several, not joint or collective.  Each
party shall be responsible only for its obligations, and shall be liable only
for its proportionate share of the costs of developing and operating the
Contract Area.  Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder.  It is not
the intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership, joint venture, agency relationship or
association, or to render the parties liable as partners, co-venturers, or
principals.  In their relations with each other under this agreement, the
parties shall not be considered fiduciaries or to have established a
confidential relationship but rather shall be free to act on an arm’s-length
basis in accordance with their own respective self-interest, subject, however,
to the obligation of the parties to ace in good faith in their dealings with
each other with respect to activities hereunder.

B.
Liens and Payment Defaults:

Each party grants to the other parties hereto a lien upon any interest it now
owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in
the Contract Area, and a security interest and/or purchase money security
interest in any interest it now owns or hereafter acquires in the personal
property and fixtures on or used or obtained for use in connection therewith, to
secure performance of all of its obligations under this agreement including but
not limited to payment of expense, interest and fees, the proper disbursement of
all monies paid hereunder, the assignment or relinquishment of interest in Oil
and Gas Leases as required hereunder, and the proper performance of operations
hereunder.  Such lien and security interest granted by each party hereto shall
include such party’s leasehold interests, working interests, operating rights,
and royalty and overriding royalty interests in the Contract Area now owned or
hereafter acquired and in lands pooled or unitized therewith or otherwise
becoming subject to this agreement, the Oil and Gas when extracted therefrom and
equipment situated thereon or used or obtained for use in connection therewith
(including, without limitation, all wells, tools, and tubular goods), and
accounts (including, without limitation, accounts arising from gas imbalances or
from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and
general intangibles relating thereto or arising therefrom and all proceeds and
products of the foregoing.
To perfect the lien and security agreement provided herein, each party hereto
shall execute and acknowledge the recording supplement and/or any financing
statement prepared and submitted by any party hereto in conjunction herewith or
at any time following execution hereof, and Operator is authorized to file this
agreement or the recording supplement executed herewith as a lien or mortgage in
the applicable real estate records and as a financing statement with the proper
officer under the Uniform Commercial Code in the state in which the Contract
Area is situated and such other states as Operator shall deem appropriate to
perfect the security interest granted hereunder.  Any party may file this
agreement, the recording supplement executed herewith, or such other documents
as it deems necessary as a lien or mortgage in the applicable real estate
records and/or a financing statement with the proper officer under the Uniform
Commercial Code.
Each party represents and warrants to the other parties hereto that the lien and
security interest granted by such party to the other parties shall be a first
and prior line, and each party hereby agrees to maintain the priority of said
lien and security interest against all persons acquiring an interest in Oil and
Gas Leases and Interests covered by this agreement by, through or under such
party.  All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.
To the extent that parties have a security interest under the Uniform Commercial
Code of the state in which the Contract Area is situated, they shall be entitled
to exercise the rights and remedies of a secured party under the Code.  The
bringing of a suit and the obtaining of judgment by a party for the secured
indebtedness shall not be deemed an election of remedies or otherwise affect the
lien rights or security interest as security for payment thereof.  In addition,
upon default by any party in the payment of its share of expenses, interests or
fees, or upon the improper use of funds by the Operator, the other parties shall
have the right, without prejudice to other rights or remedies, to collect from
the purchaser the proceeds from the sale of such defaulting party’s share of Oil
and Gas until the amount owed by such party, plus interest as provided in
“Exhibit C,” has been received, and shall have the right to offset the amount
owed against the proceeds from the sale of such defaulting party’s share of Oil
and Gas.  All purchasers of production may rely on a notification of default
from the non-defaulting party or parties stating the amount due as a result of
the default, and all parties waive any recourse available against purchasers for
releasing production proceeds as provided in this paragraph.

 
9

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

If any party fails to pay its share of cost within one hundred twenty (120) days
after rendition of a statement therefor by Operator, the non-defaulting parties,
including Operator, shall, upon request by Operator, pay the unpaid amount in
the proportion that the interest of each such party bears to the interest of all
such parties. The amount paid by each party so paying its share of the unpaid
amount shall be secured by the liens and security rights described in Article
VII.B., and each paying party may independently pursue any remedy available
hereunder or otherwise.
If any party does not perform all of its obligations hereunder, and the failure
to perform subjects such party to foreclosure or execution proceedings pursuant
to the provisions of this agreement, to the extent allowed by governing law, the
defaulting party waives any available right of redemption from and after the
date of judgment, any required valuation or appraisement of the mortgaged or
secured property prior to sale, any available right to stay execution or to
require a marshalling of assets and any required bond in the event a receiver is
appointed.  In addition, to the extent permitted by applicable law, each party
hereby grants to the other parties a power of sale as to any property that is
subject to the lien and security rights granted hereunder, such power to be
exercised in the manner provided by applicable law or otherwise in a
commercially reasonable manner and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien law of any state in which the
Contract Area is situated to enforce the obligations of each party
hereunder.  Without limiting the generality of the foregoing, to the extent
permitted by applicable law, Non-Operators agree that Operator may invoke or
utilize the mechanics’ or materialmen’s lien law of the state in which the
Contract Area is situated in order to secure the payment to Operator of any sum
due hereunder for services performed or materials supplied Operator.

C.  Advances:
Operator, at its election, shall have the right from time to time to demand and
receive from one or more of the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of such
estimated expense, together with an invoice for its share thereof.  Each such
statement and invoice for the payment in advance of estimated expense shall be
submitted on or before the 20th day of the next preceding month.  Each party
shall pay to Operator its proportionate share of such estimate within fifteen
(15) days after such estimate and invoice is received.  If any party fails to
pay its share of said estimate within said time, the amount due shall bear
interest as provided in Exhibit "C" until paid.  Proper adjustment shall be made
monthly between advances and actual expense to the end that each party shall
bear and pay its proportionate share of actual expenses incurred, and no more.

D.  Defaults and Remedies:
If any party fails to discharge any financial obligation under this agreement,
including without limitation the failure to make any advance under the preceding
Article VII.C. or any other provisions of this agreement, within the period
required for such payment hereunder, then in addition to the remedies provided
in Article VII.B. or elsewhere in this agreement, the remedies specified below
shall be applicable.  For purposes of this Article VII.C., all notices and
elections shall be delivered  only by Operator, except that Operator shall
deliver any such notice and election requested by a non-defaulting Non-Operator,
and when Operator is the party in default, the applicable notices and elections
can be delivered by any Non-Operator.  Election of any one or more of the
following remedies shall not preclude the subsequent use of any other remedy
specified below or otherwise available to a non-defaulting party.
1.  Suspension of Rights:  Any party may deliver to the party in default a
Notice of Default, which shall specify the default, specify the action to be
taken to cure the default, and specify that failure to take such action will
result in the exercise of one or more of the remedies provided in this
Article.  If the default is not cured within thirty (30) days of the delivery of
such Notice of Default, all of the rights of the defaulting party granted by
this agreement may upon notice be suspended until the default is cured, without
prejudice to the right of the non-defaulting party or parties to continue to
enforce the obligations of the defaulting party previously accrued or thereafter
accruing under this agreement.  If Operator is the party in default, the
Non-Operators shall have in addition the right, by vote of Non-Operators owning
a majority in interest in the Contract Area after excluding the voting interest
of Operator, to appoint a new Operator effective immediately.  The rights of a
defaulting party that may be suspended hereunder at the election of the
non-defaulting parties shall include, without limitation, the right to receive
information as to any proposed operation conducted hereunder during the period
of such default, the right to elect to participate in an operation proposed
under Article VI.B. of this agreement, the right to participate in an operation
being conducted under this agreement even if the party has previously elected to
participate in such operation, and the right to receive proceeds of production
from any well subject to this agreement.
2.  Suit for Damages:  Non-defaulting parties or Operator for the benefit of
non-defaulting parties may sue  (at joint account expense) to collect the
amounts in default, plus interest accruing on the amounts recovered from the
date of default until the date of collection at the rate specified in Exhibit
“C” attached hereto.  Nothing herein shall prevent any party from suing any
defaulting party to collect consequential damages accruing to such party as a
result of the default.
3.  Deemed Non-Consent:  The non-defaulting party may deliver a written Notice
of Non-Consent Election to the defaulting party at any time after the expiration
of the thirty-day cure period following delivery of the Notice of Default, in
which event if the billing is for the drilling of a new well or the Plugging
Back, Sidetracking, Reworking or Deepening of a well which is to be or has been
plugged as a dry hole, or for the Completion or Recompletion of any well, the
defaulting party will be conclusively deemed to have elected not to participate
in the operation and to be a Non-Consenting Party with respect thereto under
Article VI.B. or VI.C., as the case may be, to the extent of the costs unpaid by
such party, notwithstanding any election to participate theretofore made.  If
election is made to proceed under this provision, then the non-defaulting
parties may not elect to sue for the unpaid amount pursuant to Article VII.D.2.
Until the delivery of such Notice of Non-Consent Election to the defaulting
party, such party shall have the right to cure its default by paying its unpaid
share of costs plus interest at the rate set forth in Exhibit “C,” provided,
however, such payment shall not prejudice the rights of the non-defaulting
parties to pursue remedies for damages incurred by the non-defaulting parties as
a result of the default.  Any interest relinquished pursuant to this Article
VII.D.3. shall be offered to the non-defaulting parties in proportion to their
interest, and the non-defaulting parties electing to participate in the
ownership of such interest shall be required to contribute their shares of the
defaulted amount upon their election to participate therein.

 
10

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

4.  Advance Payment:  If a default is not cured within thirty (30) days of the
delivery of a Notice of Default, Operator, or Non-Operators if Operator is the
defaulting party, may thereafter require advance payment from the defaulting
party or such defaulting party’s anticipated share of any item of expense for
which Operator, or Non-Operators, as the case may be, would be entitled to
reimbursement under any provision of this agreement, whether or not such expense
was the subject of the previous default.  Such right includes, but is not
limited to, the right to require advance payment for the estimated costs of
drilling a well or Completion of a well as to which an election to participate
in drilling or Completion has been made.  If the defaulting party fails to pay
the required advance payment, the non-defaulting parties may pursue any of the
remedies provided in this Article VII.D. or any other default remedy provided
elsewhere in this agreement.  Any excess of funds advanced remaining when the
operation is completed and all costs have been paid shall be promptly returned
to the advancing party.
5.  Costs and Attorney’s Fees:  In the event any party is required to bring
legal proceedings to enforce any financial obligation of a party hereunder, the
prevailing party in such action shall be entitled to recover all court costs,
costs of collection, and reasonable attorney’s fee, which the lien provided for
herein shall also secure.

E.  Rentals, Shut-in Well Payments and Minimum Royalties:
Rentals, shut-in well payments and minimum royalties which may be required under
the terms of any lease shall be paid by the  Operator who subjected such lease
to this agreement at its or their expense  Any party may request, and shall be
entitled to receive, proper evidence of all such payments.  In the event of
failure to make proper payment of any rental, shut-in well payment or minimum
royalty through mistake or oversight where such payment is required to continue
the lease in force, any loss which results from such non-payment shall be borne
in accordance with the pro-visions of Article IV.B.2.
Operator shall notify Non-Operator of the anticipated completion of a shut-in
well, or the shutting in or return to production of a producing well, at least
five (5) days (excluding Saturday, Sunday and legal holidays) prior to taking
such action, or at the earliest opportunity permitted by circumstances, but
assumes no liability for failure to do so.  In the event of failure by Operator
to so notify Non-Operator, the loss of any lease contributed hereto by
Non-Operators for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.3.

F.  Taxes:
Beginning with the first calendar year after the effective date hereof, Operator
shall render for ad valorem taxation all property subject to this agreement
which by law should be rendered for such taxes, and it shall pay all such taxes
assessed thereon before they become delinquent.  Prior to the rendition date,
each Non-Operator shall furnish Operator information as to burdens (to include,
but not be limited to, royalties, overriding royalties and production payments)
on Lases and Oil and Gas Interests contributed by such Non-Operator.  If the
assessed valuation of any Lease is reduced by reason of its being subject to
outstanding excess royalties, overriding royalties or production payments, the
reduction in ad valorem taxes resulting therefrom shall inure to the benefit of
the owner or owners of such Lease, and Operator shall adjust the charge to such
owner or owners so as to reflect the benefit of such reduction.  If the ad
valorem taxes are based in whole or in party upon separate valuations of each
party's working interest, then notwithstanding anything to the contrary herein,
charges to the joint account shall be made and paid by the parties hereto in
accordance with the tax value generated by each party's working
interest.  Operator shall bill the other parties for their proportionate share
of all tax payments in the manner provided in Exhibit "C".
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination.   During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty.  When such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C".
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of oil and/or gas produced under the terms of
this agreement.

ARTICLE VIII
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A.  Surrender of Leases:
The leases covered by this agreement, insofar as they embrace acreage in the
Contract Area, shall not be surrendered in whole or in part unless all parties
consent thereto.
However, should any party desire to surrender its interest in any Lease or in
any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after deliver of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto.  Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice.  If all parties do not agree or consent thereto, the party desiring to
surrender shall assign, without express or implied warranty of title, all of its
interest in such Lease, or portion thereof, and any well, material and equipment
which may be located thereon and any rights in production thereafter secured, to
the parties not consenting to such surrender.  If the interest of the assigning
party is or includes an Oil and Gas Interest, the assigning party shall execute
and deliver to the party or parties not consenting to such surrender an oil and
gas Lease covering such Oil and Gas Interest for a term of one (1) year and so
long thereafter as Oil and/or Gas is produced from the land covered thereby,
such lease to be on the form attached hereto as Exhibit "B".  Upon such
assignment or lease, the assigning party shall be relieved from all obligations
thereafter accruing, but not theretofore accrued, with respect to the interest
assigned or leased and the operation of any well attributable thereto, and the
assigning party shall have not further interest in the assigned or leased
premises and its equipment and production other than the royalties retained in
any lease made under the terms of this Article.  The party assignee or lessee
shall pay to the party assignor or lessor the reasonable salvage value of the
latter's interest in any well’s salvable materials and equipment attributable to
the assigned or leased acreage. The value of all salvable materials and
equipment shall be determined in accordance with the provisions of Exhibit "C",
less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface. If such value is less than such costs,
then the party assignor or lessor shall pay to the party assignee or lessee the
amount of such deficit.  If the assignment or lease is in favor of more than one
party, the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties.  If the
interest of the parties to whom the assignment is to be made varies according to
depth, then the interest assigned shall similarly reflect such variances.
Any assignment, lease or surrender made under this provision shall not reduce or
change the assignor's, lessor's or surrendering party's interest as it was
immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed to be subject to an Operating Agreement in
the form of this agreement.

 
11

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

B.  Renewal or Extension of Leases:
If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease.  The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interests
held at that time by the parties in the Contract Area.  Each party who
participates in the purchase of a renewal or replacement Lease shall be given
assignment of its proportionate interest therein by the acquiring party.
If some, but less than all, of the parties elect to participate in the purchase
of a renewal or replacement Lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal or replacement Lease.  The acquisition of a
renewal or replacement Lease by any or all of the parties hereto shall not cause
a readjustment of the interests of the parties stated in Exhibit “A”, but any
renewal or replacement Lease in which less than all parties elect to participate
shall not be subject to this agreement but shall be deemed subject to a separate
Operating Agreement in the form of this agreement.
If the interests of the parties in the Contract Area vary according to depth,
then their right to participate proportionately in renewal or replacement Leases
and their right to receive an assignment of interest shall also reflect such
depth variances.
The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by the expiring Lease or cover
only a portion of its area or an interest therein.  Any renewal or replacement
Lease taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.
The provisions of this Article shall also applicable to extensions of Oil and
Gas Leases.

C.  Acreage or Cash Contributions:
While this agreement is in force, if any party contracts for a contribution of
cash towards the drilling of a well or any other operation on the Contract Area,
such contribution shall be paid to the party who conducted the drilling or other
operation and shall be applied by it against the cost of such drilling or other
operation.  If the contribution be in the form of acreage, the party to whom the
contribution is made shall promptly tender an assignment of the acreage, without
warranty of title, to the Drilling Parties in the proportions said Drilling
Parties shared the cost of drilling the well.  Such acreage shall be come a
separate Contract Area and, to the extent possible, be governed by provisions
identical to this agreement.  Each party shall promptly notify all other parties
of any acreage or cash contributions it may obtain in support of any well or any
other operation on the Contract Area.  The above provisions shall also be
applicable to optional rights to earn acreage outside the Contract Area which
are in support of a well drilled inside the Contract Area.
If any party contracts for any consideration relating to disposition of such
party's share of substances produced hereunder, such consideration shall not be
deemed a contribution as contemplated in this Article VIII.C.

D.  Assignment; Maintenance of Uniform Interest:
For the purpose of maintaining uniformity of ownership in the Contract Area in
the Oil and Gas Leases, Oil and Gas Interests , wells, equipment and production
covered by this agreement no party shall sell, encumber, transfer or make other
disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests
embraced within the Contract Area and in wells, equipment and production unless
such disposition covers either:
1.  the entire interest of the party in all Oil and Gas Leases, Oil and Gas
Interests, wells, equipment and production; or
2.  an equal undivided percent of the party’s present interest in all Oil and
Gas Leases, Oil and Gas Interests, wells, equipment and production in the
Contract Area.
Every such sale, encumbrance, transfer or other disposition made by any party
shall be made expressly subject to this agreement and shall be made without
prejudice to the right of the other parties and any transferee of an ownership
interest in an Oil and Gas Lease or Interest shall be deemed a party to this
agreement as to the interest conveyed from and after the effective date of the
transfer of ownership; provided, however, that the other parties shall not be
required to recognize any such sale, encumbrance, transfer or other disposition
for any purpose hereunder until thirty (30) days after they have received a copy
of the instrument of transfer or other satisfactory evidence thereof in writing
from the transferor or transferee.  No assignment or other disposition of
interest by a party shall relieve such party of obligations previously incurred
by such party hereunder with respect to the interest transferred, including
without limitation the obligation of a party to pay all costs attributable to an
operation conducted hereunder in which such party has agreed to participate
prior to making such assignment, and the lien and security interest granted by
Article VII.B. shall continue to burden the interest transferred to secure
payment of any such obligations.
If, at any time the interest of any party is divided among and owned by four or
more co-owners, Operator, at its discretion, may require such co-owners to
appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the Oil and Gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.

E.  Waiver of Rights to Partition:
If permitted by the laws of the state or states in which the property covered
hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.

 
12

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

F.  Preferential Right to Purchase:
x (Optional: Check if applicable.)
Should any party desire to sell all or any part of its interests under this
agreement, or its rights and interests in the Contract Area, it shall promptly
give written notice to the other parties, with full information concerning its
proposed disposition, which shall include the name and address of the
prospective transferee (who must be ready, willing and able to purchase), the
purchase price, a legal description sufficient to identify the property, and all
other terms of the offer.  The other parties shall then have an optional prior
right, for a period of ten (10) days after the notice is delivered, to purchase
for the stated consideration on the same terms and conditions the interest which
the other party proposes to sell; and, if this optional right is exercised, the
purchasing parties shall share the purchased interest in the proportions that
the interest of each bears to the total interest of all purchasing
parties.  However, there shall be no preferential right to purchase in those
cases where any party wishes to mortgage its interests, or to transfer title to
its interests to its mortgagee in lieu of or pursuant to foreclosure of a
mortgage of its interests, or to dispose of its interests by merger,
reorganization, consolidation, or by sale of all or substantially all of its Oil
and Gas assets to  any party, or by transfer of its interests to a subsidiary or
parent company or to a subsidiary of a parent company, or to any company in
which any one party owns a majority of the stock.

ARTICLE IX
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations hereunder
are regarded as a partnership, and if the parties have not otherwise agreed to
form a tax partnership pursuant to Exhibit “G” or other agreement between them,
each party thereby affected elects to be excluded from the application of all of
the provisions of Subchapter "K", Chapter 1, Subtitle "A", of the Internal
Revenue Code of 1986, as amended (“Code”), as permitted and authorized by
Section 761 of the Code and the regulations promulgated thereunder.  Operator is
authorized and directed to execute on behalf of each party hereby affected such
evidence of this election as may be required by the Secretary of the Treasury of
the United States or the Federal Internal Revenue Service, including
specifically, but not by way of limitation, all of the returns, statements, and
the data required by Treasury Regulations 1.761.  Should there be any
requirement that each party hereby affected give further evidence of this
election, each such party shall execute such documents and furnish such other
evidence as may be required by the Federal Internal Revenue Service or as may be
necessary to evidence this election.  No such party shall give any notices or
take any other action inconsistent with the election made hereby.  If any
present or future income tax laws of the state or states in which the Contract
Area is located or any future income tax laws of the United States contain
provisions similar to those in Subchapter "K", Chapter 1, Subtitle "A", of the
Code, under which an election similar to that provided in Section 761 of the
Code is permitted, each party hereby affected shall make such election as may be
permitted or required by such laws.  In making the foregoing election, each such
party states that the income derived by such party from operations hereunder can
be adequately determined without the computation of partnership taxable income.

ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed      Thirty
Thousand       Dollars ($30,000.00) and if the payment is in complete settlement
of such claim or suit.  If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator.  All costs
and expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises.  If a claim is made against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given Operator by
this agreement, such party shall immediately notify all other parties, and the
claim or suit shall be treated as any other claim or suit involving operations
hereunder.

ARTICLE XI
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to carry
out its obligations under this agreement, other than the obligation to indemnify
or make money payments or furnish security, that party shall give to all other
parties prompt written notice of the force majeure with reasonably full
particulars concerning it; thereupon, the obligation of the party giving the
notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure.  The term
“force majeure,” as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightening, fire, storm, flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.
The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable.  The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.

ARTICLE XII
NOTICES
All notices authorized or required between the parties by any of the provisions
of this agreement, unless otherwise specifically provided, shall be in writing
and delivered in person or by United States mail, courier service, telegram,
telex, telecopier or any other form of facsimile, postage or charges prepaid,
and addressed to such parties at the addresses listed on Exhibit "A". All
telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice.  The originating notice given under
any provision hereof shall be deemed delivered only when received by the party
to whom such notice is directed, and the time for such party to deliver any
notice in response thereto shall run from the date the originating notice is
received.  “Receipt” for purposes of this agreement with respect to written
notice delivered hereunder shall be actual deliver of the notice to the address
of the party to be notified specified in accordance with this agreement, or to
the telecopy, facsimile or telex machine of such party.  The second or any
responsive notice shall be deemed delivered when deposited in the United States
mail or at the office of the courier or telegraph service, or upon transmittal
be telex, telecopy or facsimile, or when personally delivered to the party to be
notified, provided, that when response is required within 24 or 48 hours, such
response shall be given orally or by telephone, telex, telecopy or other
facsimile within such period.  Each party shall have the right to change its
address at any time, and from time to time, by giving written notice thereof to
all other parties.  If a party is not available to receive notice orally or by
telephone when a party attempts to deliver a notice required to be delivered
within 24 or 48 hours, the notice may be delivered in writing by any other
method specified herein and shall be deemed delivered in the same manner
provided above for any responsive notice.

 
13

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

ARTICLE XIII
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.
 
x
Option No. 1:  So long as any of the Oil and Gas Leases subject to this
agreement remain or are continued in force as to any part of the Contract Area,
whether by production, extension, renewal or otherwise.

The termination of this agreement shall not relieve any party hereto from any
expense, liability or other obligation or any remedy therefore which has accrued
or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all obligations
hereunder, in the event a memorandum of this Operating Agreement has been filed
of record, Operator is authorized to file of record in all necessary recording
offices a notice of termination, and each party hereto agrees to execute such a
notice of termination as to Operator’s interest, upon request of Operator, if
Operator has satisfied all its financial obligations.

ARTICLE XIV
COMPLIANCE WITH LAWS AND REGULATIONS
A.  Laws, Regulations and Orders:
This agreement shall be subject to the conservation laws of the state in which
the Contract Area is located, to the valid rules, regulations, and orders of any
duly constituted regulatory body of said state; and to all other applicable
federal, state, and local laws, ordinances, rules, regulations, and orders.
B.  Governing Law:
This agreement and all matters pertaining hereto, including, but not limited to,
matters of performance, non-performance, breach, remedies, procedures, rights,
duties and interpretation or construction, shall be governed and determined by
the law of the state in which the Contract Area is located.  .
C.  Regulatory Agencies:
Nothing herein contained shall grant, or be construed to grant, Operator the
right or authority to waive or release any rights, privileges, or obligations
which Non-Operators may have under federal or state laws or under rules,
regulations or orders promulgated under such laws in reference to oil, gas and
mineral operations, including the location, operation, or production of wells,
on tracts offset-ting or adjacent to the Contract Area.
With respect to operations hereunder, Non-Operators agree to release Operator
from any and all losses, damages, injuries, claims and causes of action arising
out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or Federal Energy Regulatory Commission or predecessor or
successor agencies to the extent such interpretation or application was made in
good faith and does not constitute gross negligence.  Each Non-Operator further
agrees to reimburse Operator for such Non-Operator's share of production or any
refund, fine, levy or other governmental sanction that Operator may be required
to pay as a result of such an incorrect interpretation or application, together
with interest and penalties thereon owning by Operator as a result of such
incorrect interpretation or application.

ARTICLE XV
MISCELLANEOUS
A.  Execution:
This agreement shall be binding upon each Non-Operator when this agreement or a
counterpart thereof has been executed by such Non-Operator and Operator
notwithstanding that this agreement is not then or thereafter executed by all of
the parties to which it is tendered or which are listed on Exhibit “A” as owning
an interest in the Contract Area oR which own, in fact, an interest in the
Contract Area.  Operator may, however, by written notice to all Non-Operators
who have become bound by this agreement as aforesaid, given at any time prior to
the actual spud date of the Initial Well but in no event later than five days
prior to the date specified in Article VI.A. for commencement of the Initial
Well, terminate this agreement if Operator is its sole discretion determines
that there is insufficient participation to justify commencement of drilling
operations.  In the event of such termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination.  In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
“A” as having a current working interest in such well, Operator shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.

B.  Successors and Assigns:
This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Contract Area.

C.  Counterparts:
This instrument may be executed in any number of counterparts, each of which
shall be considered an original for all purposes.

 
14

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

D.  Severability:
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws, this agreement shall not be
severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.

ARTICLE XVI
OTHER PROVISIONS

 
A.  ASSIGNMENTS:

 
A sale or assignment of interest by any party will not relieve or release such
party of its obligations hereunder. Further, the assigning party shall be and
remain liable for the obligations incurred by its assignee unless and until said
assignee has been approved in writing by the other parties hereto, which
approval shall not be unreasonably withheld. However, no approval shall be given
unless and until all monies due and accounts payable accruing out of the
development and operation of the lease(s) subject hereto shall have been paid in
foil by the party assigning its interest and the Operator has been furnished
with a certified copy of the recorded instrument evidencing the sale or
assignment.
 
B.  REAL COVENANT:
 
The terms, covenants and conditions of this Agreement shall be covenants running
with the leasehold estates covered therein, and with each transfer or assignment
of said lands or leasehold estates. Each party making an assignment or transfer
of lands or leasehold estates covered hereby shall state in such assignment or
transfer that it is subject to all of the terms, covenants and conditions hereof
and shall promptly give notice to the Operator of any such assignment or
transfer.
 
C.  ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS:
 
Operator shall pay or deliver, or cause to be paid or delivered for the account
of the parties on jointly owned leases, and who are not taking their production
in kind, all royalties and other burdens to the extent shown on Exhibit "A". If
the interest of any party in any oil and gas lease covered by this Agreement is
subject to any royalty, production payment, or other charge over and above those
shown on Exhibit "A", such party shall assume and alone bear all such
obligations and shall account for or cause to be accounted for, such interest to
the owners thereof. Operator shall not be liable for failure to pay any
royalties or other burdens, or because of erroneous payments, unless such
failure or error results from gross negligence or willful misconduct.

 
No party shall ever be responsible, on any price basis higher than the price
received by such party, to any other party s lessor or royalty owner; and if
such other party s lessor or royalty owner would demand and receive settlements
on a higher price basis, the party contributing such lease shall alone bear the
royalty burden insofar as such higher price is concerned.

 
The party taking its production in kind ("taking party") shall pay or cause to
be paid or delivered all royalties and other burdens due on its share of
production and shall hold the other parties free from any liability therefore.
However, said taking party shall not be liable for failure to pay any royalties
or other burdened, or because of erroneous payments, unless such failure or
error results from gross negligence or willful misconduct.

 
D.  CASH CALL

 
In addition to the rights granted Operator under Article VII.C., Operator shall
have the right to issue a Cash Call in any well proposed under the terms of
Article VLB. The Cash Call shall be in the form of an invoice, due and payable
upon receipt by Non-Operator, and shall include a copy of the Cost Estimate from
which said Cash Call is being made. The amount of the Cash Call shall be
determined by the "dry hole" cost set forth in the Cost Estimate and each
Non-Operator shall be invoiced for his proportionate working interest shall of
that cost. All Cash Call monies must be received prior to the commencement of
drilling operations for the well. Failure to pay the Cash Call prior to
commencement of drilling operations may be considered, at the sold discretion of
the Operator, as an election not to participate in the drilling of the well,
notwithstanding any previous consent received pursuant to Article VLB., and the
Non-Operator's interest shall be governed by the terms of Article XV.G and
Article VI.B.2.

 
E.  AREA OF MUTUAL INTEREST

 
An Area of Mutual Interest (AMI) is hereby established covering the lands as set
out on Exhibit "A", Article I to this Agreement. The AMI shall remain in full
force and effect for and during the term of this Agreement in accordance with
the provisions of Article XIII hereof.   Each of the parties hereto represents
that, as of the effective date hereof, it is not a party to another agreement
creating an area of mutual interest conflicting with the one hereby established.

(i) A party's AMI interest shall be that party's interest as defined in Article
IV of Exhibit "A", in the Contract Area at the time of acquisition of the
Acquired Interest. AS to each Acquired Interest each Non-Acquiring Party shall
have the option, but not the obligation, to elect to participate in such
acquisition hi an amount equal to such party s AMI Interest divided by the AMI
Interest of all parties so electing to participate or may elect to limit
participation in such acquisition to its applicable percentage set forth in
Article IV of Exhibit "A" hereto by paying a like percentage of the acquisition
costs of such Acquired Interest.

 
(ii) All parties electing to participate in an Acquired Interest shall notify
the Acquiring Party of such election within fifteen (15) days (forty-eight
hours, excluding Saturdays, Sundays and holidays if a drilling rig, completion
rig or workover rig is the operating within the AMI which effects the Acquired
Interest) after receipt of notice from the Acquiring Party. Failure of a party
having the right to participate to timely elect shall be deemed an election by
such party not to participate in such Acquired Interest. All parties electing to
participate hi an Acquired Interest shall promptly remit such party's share of
the costs of acquisition to the Acquiring Party within ten (10) days after
receipt of any invoice from the Acquiring Party, and such participating party
shall assume its proportionate share of all obligations relating to the Acquired
Interest. Each of the participating parties agrees to execute and deliver all
such assignments, conveyances and other such documents as may be necessary to
vest title to the Acquired Interest in the parties entitled to participate
therein.

(See Next Page for Signatures)

 
15

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

 

A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT – 1989

 
 

 

IN WITNESS WHEREOF, this agreement shall be effective as of       1st         
day of       February       , 2008 .

OPERATOR

Transco Oil and Gas, Inc.
 
By:
Larry J. Messmer, President
                       
NON-OPERATORS
               
Petrosouth Energy Corp.
 
By:
Fred B. Zaziski, Chairman
                 
By:
                   
By:
                   
By:
 

16

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