Exhibit 10.18

 

Prospect Letter Agreement

 

This prospect letter agreement (this “Letter Agreement”) is made and entered
into this [__] day of October, 2010 (the “Effective Date”), by and between
Empire Petroleum Corporation, a Delaware corporation (“Empire”), and
[________________] (“Assignee”). Empire and Assignee shall sometimes be referred
to herein individually as a “Party” and, collectively, as the “Parties.”

 

Recitals

 

A. The Gabbs Valley Prospect (the “Prospect”) covers approximately 92,825 gross
acres, with no depth limitations. A number of leases or portions of leases
making up the Prospect have been included in an oil and gas unit formed pursuant
to that certain Unit Agreement for the Development and Operation of the Paradise
Unit Area, Counties of Nye and Mineral, State of Nevada, dated April 14, 2010,
No. ANVN88316X (the “Paradise Unit Agreement”). A copy of the Paradise Unit
Agreement is attached hereto as Exhibit A. The unit formed under the Paradise
Unit Agreement is hereafter referred to as the “Paradise Unit.”

 

B. The prospect leases wholly or partially included in the Paradise Unit are
identified and described on Exhibit B attached hereto (the “Paradise Unit
Leases”).

 

C. There are additional leases included in the Prospect that are not part of the
Paradise Unit. The Prospect leases or portions of Prospect leases not included
in the Paradise Unit are identified and described on Exhibit C attached hereto
the “Non-Unit Leases” and, collectively with the Paradise Unit Leases, the
“Prospect Leases”).

 

D. Subject to the provisions of the Paradise Unit Agreement, operations for the
Paradise Unit have been and shall be conducted pursuant to the Unit Operating
Agreement attached hereto as Exhibit D (the “Paradise Unit Operating
Agreement”).

 

E. Pursuant to that certain Farmout Agreement dated June 11, 2010 attached
hereto as Exhibit E (the “Farmout Agreement”), by and between Empire and Cortez
Exploration, L.L.C. and Windmill Oil & Gas, L.L.C. (the “Cortez Group”), Empire
drilled that certain initial test well with respect to the Paradise Unit Leases
located on Lease No. N-599901, in the SE/4 of the SE/4 of the NE/4 of Section
12-T12N-R34E (the “Empire Paradise Unit No. 2-12 Well”) to a depth of
approximately 4,248 feet.

 

F. Empire owns 98% (of 8/8ths) leasehold interest, record title interest and
working interest in all of the Prospect Leases and 98% of 80% (of 8/8ths) net
revenue interest in each of the Prospect Leases, all subject to certain
reversionary interests to the Cortez Group pursuant to the Farmout Agreement.

 

G. In exchange for the payment of $[100,000] by Assignee to Empire, the Parties
have agreed that the Empire will assign to Assignee [1]% of Empire’s gross
working interest (which is [1]% of 80% (of 8/8ths) net revenue interest) in the
Paradise Unit Leases and the Empire Paradise Unit No. 2-12 Well and grant
Assignee an option to participate in the Non-Unit Leases.

 

Agreement

 

In consideration of the mutual premises and covenants contained herein, and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the Parties hereby agree as follows:

 

1. Purchase Price; Assignment of Transferred Interest. In exchange for the
payment of $[100,000] by Assignee to Empire (the “Purchase Price”), Empire shall
assign to Assignee [1]% of Empire’s gross working interest (which is [1]% of 80%
(of 8/8ths) net revenue interest) in the Paradise Unit Leases and the Empire
Paradise Unit No. 2-12 Well (the “Paradise Unit Transferred Interest”). Upon the
execution of this Letter Agreement and the payment of the Purchase Price, Empire
shall execute and deliver to Assignee assignments of the Paradise Unit
Transferred Interest in form and substance reasonably acceptable to Assignee.

 

2. Completion of Empire Paradise Unit No. 2-12 Well. Empire hereby agrees that
it will pay for the cost to deepen the Empire Paradise Unit No. 2-12 Well
another 800 to 1,000 feet. Assignee shall not have any responsibility to pay the
costs to continue drilling the Empire Paradise Unit No. 2-12 Well. Assignee
likewise shall not have any responsibility to pay the costs to complete and
equip the Empire Paradise Unit No. 2-12 Well into pipeline connections or tanks,
or to abandon the Empire Paradise Unit No. 2-12 Well should it be a dry hole, as
the case may be. As between Empire and Assignee, the manner in which to drill
and complete the Empire Paradise Unit No. 2-12 Well and the costs to be incurred
to drill and complete the Empire Paradise Unit No. 2-12 Well shall be in the
sole discretion of Empire, consistent with good oil field practice. In this
regard, Empire is not required to prepare an AFE or obtain approval of an AFE
from Assignee with respect to the drilling and completion (or abandonment) of
the Empire Paradise Unit No. 2-12 Well.

 

3. Option on Non-Unit Leases. The Parties acknowledge and agree that with
respect to the Non-Unit Leases, Empire has certain optional rights pursuant to
Section VII of the Farmout Agreement and, in the event that Empire does not
exercise such rights, Empire’s interests in the Non-Unit Leases acquired from
the Cortez Group pursuant to the Farmout Agreement are subject to a reversionary
interest to the Cortez Group (the “Cortez Group Reversionary Interest”). In the
event that Empire elects to exercise such optional rights with respect to any
Non-Unit Lease, the Parties hereby agree that Assignee shall have the right to
participate along with Empire and receive [1]% gross working interest(which is
[1]% of 80% (of 8/8ths) net revenue interest) in such Non-Unit Lease (the
“Non-Unit Lease Transferred Interest”) by paying [1]% of the rentals of such
Non-Unit Lease, which Non-Unit Lease Transferred Interest shall be subject to
the Cortez Group Reversionary Interest. Empire shall be the operator with
respect to the drilling, completion and/or abandonment of the Non-Unit Test Well
(as defined in the Farmout Agreement), if any, and all operations of the
Non-Unit Leases shall be conducted pursuant to the joint operating agreement
attached hereto as Exhibit “D”.

 

4. Representations and Warranties as to Title. Empire represents and warrants
that as of the date of this Letter Agreement its title to the Prospect Leases is
free and clear from any prior conveyance, lien or encumbrance made or suffered
by it, or by any person by, through or under it, which diminishes, limits or
burdens the rights and interests that Assignee has the right to earn under this
Letter Agreement. Empire further represents and warrants that until such time as
the Non-Unit Leases, or any of them, are assigned to Assignee under the terms of
this Letter Agreement, Empire will not make or suffer, or allow to be made or
suffered by any person by though or under it, any conveyance, lien or
encumbrance with respect to the Non-Unit Leases.

 

5. Burdens. All assignments under this Letter Agreement shall be subject to and
burdened by the terms and conditions of this Letter Agreement, the Prospect
Leases, the Paradise Unit Operating Agreement and the Paradise Unit Agreement
(or, with respect to assignments of the Non-Unit Leases, a unit agreement
substantially similar to the Paradise Unit Agreement if a unit is subsequently
formed), and a proportionate part of all landowners’ royalties, overriding
royalty interests and similar interests of record as of the date of such
assignment.

 

6. Tag Along and Drag Along Rights.

 

(a) Tag Along. For a period of [five] years from and after the Effective Date,
in the event either Party (the “Transferring Party”) desires to sell, assign,
transfer or otherwise dispose of all or any portion of its interests in the
Prospect, directly or indirectly, the Transferring Party shall promptly deliver
to the other Party (the “Non-Transferring Party”) written notice thereof, and
the Non-Transferring Party shall have the right, but not the obligation, to
elect to participate in the proposed transaction in proportion to
Non-Transferring Party’s interests in the Prospect as part of the proposed
transaction at the same terms, conditions and valuation. The notice shall
include the name of the proposed transferee, and all of the terms and conditions
of the proposed transaction. The Non-Transferring Party shall deliver to the
Transferring Party written notice of the Non-Transferring Party’s election to
participate in the proposed transaction on or before five days after the
Non-Transferring Party’s receipt of written of notice thereof from the
Transferring Party. If the Non-Transferring Party fails to deliver its election
within said time-period, the Non-Transferring Party shall be deemed conclusively
to have elected not to participate in the proposed transaction hereunder. If the
acquiring party in the proposed transaction is unwilling to acquire all of the
interests offered, the Non-Transferring Party shall have the right to
participate in the proposed transaction in the same ratio as the
Non-Transferring Party’s interest in the Prospect bears to the total interests
in the Prospect to be transferred by both the Transferring Party and the
Non-Transferring Party.

 

(b) Drag Along. If Empire receives a bona fide written offer (the “Purchase
Offer”) from a third party (the “Purchaser”) to purchase all or substantially
all of Empire’s interest in the Prospect, and the Purchase Offer is acceptable
in Empire’s sole and absolute discretion, Empire shall have the right, but not
the obligation, to cause Assignee (and their permitted assignee(s) or
successors, if any) to sell all (but not less than all) of Assignee’s interests
in the Prospect in accordance with the terms and conditions of this Section 6(b)
(the “Drag Along Right”). Empire shall elect to exercise the Drag Along Right by
written notice (the “Drag Along Notice”) delivered to Assignee on or before 30
days after receipt of the Purchase Offer. The Drag Along Notice shall include
the name of the Purchaser, the purchase price (the “Purchase Price”) and all of
the material terms and conditions of the proposed transaction. If Empire elects
to exercise the Drag Along Right, the closing of the transaction shall occur on
or before 90 days after receipt of the Drag Along Notice under the circumstances
described herein and, upon compliance with the terms and conditions thereof,
Assignee shall sell to such Purchaser all of their interest in the Prospect. The
closing of the Purchaser’s acquisition of Empire’s interest in the Prospect and
Assignee’s interest in the Prospect shall occur simultaneously and be
conditioned upon each other.

 

7. Miscellaneous.

 

(a) Successors and Assigns. This Letter Agreement shall not be assigned by any
Party without the prior written approval of the non-assigning Party, which
approval shall not be unreasonably withheld, conditioned or delayed.

 

(b) Headings. Headings used in this Letter Agreement are inserted for
convenience only and shall not affect the interpretation of any of the
provisions of this Letter Agreement.

 

(c) Relationship of Parties. This Letter Agreement does not constitute the
Parties as a partnership, mining partnership, mining partnership, joint venture,
incorporated association or any other joint relationship, it being intended that
liabilities and obligations of the Parties shall be several and not joint. Each
Party shall be responsible only for its obligations and liabilities as set out
herein and no Party shall be responsible for those of any other Party.

 

(d) Further Assurances. The Parties agree to execute such further instruments
and documents and to diligently undertake such actions as may be necessary or
appropriate in connection with the subject matter of this Letter Agreement and
to take such other action as reasonably requested by a Party to give full force
and effect to the terms and intent of this Letter Agreement.

 

(e) Entire Agreement. This Letter Agreement, including the Exhibits attached
hereto, constitutes the entire agreement and understanding of the Parties hereto
with respect to the transactions contemplated hereby, and supersedes all prior
understandings, discussions and agreements between the Parties relating to the
subject matter hereof. The Exhibits attached hereto are incorporated herein by
reference.

 

(f) Laws Governing This Agreement. This Agreement shall be governed by and
construed in accordance with the laws of the State of Nevada.

 

(g) Binding Effect. This Letter Agreement shall be binding upon and inure to the
benefit of the Parties hereto, their respective heirs, successors and assigns.

 

(h) Counterpart Execution. This Letter Agreement may be executed in any number
of counterparts, each of such shall be considered an original for all purposes.

 

(i) Notices. All notices or other communications required or permitted hereunder
shall be provided in writing and shall be delivered to the authorized
representative of the Parties set forth below, by either (i) personal delivery,
(ii) certified mail, return receipt requested, (iii) overnight delivery service,
or (iv) facsimile, as follows:

 

If to Empire:

 

Empire Petroleum Corporation

8801 South Yale, Suite 120

Tulsa, Oklahoma 74137-3575

Attn: A. E. Whitehead

Facsimile: (918) 488-1530

 

If to Assignee:

 

[________________]

[________________]

[________________]

Attn: [___________]

Facsimile: (___) [__]-[___]

 

 

Either Party may, upon written notice to the other Party, change the address and
person to whom such communications are to be directed.

 

 

IN WITNESS WHEREOF, the Parties have executed and delivered this Letter
Agreement effective as of the Effective Date.

 

 

Empire Petroleum Corporation

 

By: /s/ Albert E. Whitehead

Albert E. Whitehead

President and Chief Executive Officer

 

 

 

[Assignee]

 

 

By: ___________________________________

 

Name: _________________________________

 

Title: __________________________________

 

 

 
 

EXHIBIT “A”

 

UNIT AGREEMENT

 

FOR THE DEVELOPMENT AND OPERATION

 

OF THE

 

PARADISE UNIT AREA

 

COUNTIES OF NYE AND MINERAL

 

STATE OF NEVADA

 

     

 

TABLE OF CONTENTS

 

 

SECTION     PAGE             Preliminary Recitals 1         1.   Enabling Act
and Regulations 1 2.   Unit Area 2 3.   Unitized Land and Unitized Substances 3
4.   Unit Operator 3 5.   Resignation or Removal of Unit Operator 3 6.  
Successor Unit Operator 4 7.   Accounting Provisions and Unit Operating
Agreement 5 8.   Rights and Obligations of Unit Operator 5 9.   Drilling to
Discovery 5 10.   Plan of Further Development and Operation 6 11.  
Participation after Discovery 7 12.   Allocation of Production 8 13.  
Development or Operation of Non-Participating Land Formations 9 14.   Royalty
Settlement 9 15.   Rental Settlement 10 16.   Conservation 10 17.   Drainage 10
18.   Lease and Contracts Conformed or Extended 11 19.   Covenants Run with Land
12 20.   Effective Date and Term 12 21.   Rate of Prospecting, Develop-0ment,
and Production 13 22.   Appearances 13 23.   Notices 13 24.   No Waiver of
Certain Rights 14 25.   Unavoidable Delay 14 26.   Nondiscrimination 14 27.  
Loss of Title 14 28.   Non-Joinder and Subsequent Joinder 14 29.   Counterparts
15 30.   Special Surface Stipulations 15 31.   Surrender 15 32.   Taxes 16 33.  
No Partnership 16

 

Exhibit “A” – Plat of Unit Area

 

Exhibit “B” – Schedule showing percentage and kind of ownership

 

 

 

 

i

1 UNIT AGREEMENT 2   3 FOR THE DEVELOPMENT AND OPERATION 4   5 OF THE 6   7  
PARADISE UNIT AREA 8   9    COUNTIES OF NYE AND MINERAL 10   11   STATE OF
NEVADA 12   13     NO.______________    14   15   16   17 THIS AGREEMENT,
entered into as of the 22nd day of January, 2010, by and between the 18 parties
subscribing, ratifying, or consenting hereto, and herein referred to as the
"parties hereto," 19   20 WITNESSETH: 21   22 WHEREAS, the parties hereto are
the owners of working, royalty, or other oil and gas 23  interests in the unit
area subject to this agreement; and 24   25 WHEREAS, the Mineral Leasing Act of
February 25, 1920, 41 Stat. 437, as amended, 30 26 U. S.C. Sec. 181 et seq.,
authorizes Federal lessees and their representatives to unite with each other,
27 or jointly or separately with others, in collectively adopting and operating 
under a unit plan of 28 development or operation of any oil and gas pool, field,
or like area, or any part thereof for the 29 purpose  of  more  properly 
conserving  the  natural  resources  thereof  whenever  determined  and 30
certified by the Secretary of the Interior to be necessary or advisable in the
public interest; and 31   32 WHEREAS, the parties hereto hold sufficient
interests in the Paradise Unit Area covering 33 the land hereinafter described
to give reasonably effective control of operations therein; and 34   35 WHEREAS,
it is the purpose of the parties hereto to conserve natural resources, prevent
36 waste, and secure other benefits obtainable through development and operation
of the area subject to 37 this agreement under the terms, conditions, and
limitations herein set forth; 38   39 NOW, THEREFORE, in consideration of the
premises and the promises herein contained, 40 the parties hereto commit to this
agreement their respective interests in the below-defined unit area 41 and agree
severally among themselves as follows: 42   43 1.  ENABLING ACT AND
REGULATIONS.  The Mineral Leasing Act of February 25, 44 1920,  as  amended,
supra,  and  all  valid pertinent regulations including operating  and unit plan
45 regulations, heretofore issued thereunder or valid, pertinent and reasonable
regulations hereafter 46 issued thereunder are accepted and made a part of this
agreement as to Federal lands, provided such     1 regulations are not
inconsistent with the terms ofthis agreement; and as to non-Federal lands, the
oil 2 and gas operating regulations  in  effect  as  of  the  effective date
hereof  governing drilling and 3 producing operations, not inconsistent with the
terms hereof or the laws of the State in which the 4 non-Federal land is
located, are hereby accepted and made a part of this agreement. 5   6 2.  UNIT
AREA.  The area specified on the map attached hereto, marked Exhibit "A," is 7
hereby designated and recognized as constituting the unit area, containing
40,073.39 acres, more or 8 less. 9   10 Exhibit "A" shows, in addition to the
boundary of the unit area, the boundaries and identity 11 of tracts and leases
in said area to the extent known to the Unit Operator.  Exhibit "B" attached 12
hereto is a schedule showing to the extent known to the Unit Operator, the
acreage, percentage, and 13 kind of ownership of oil and gas interests in all
lands in the unit area.  However, nothing herein or in 14 Exhibits "A" or "B"
shall be construed as a representation by any party hereto as to the ownership
of 15 any interest other than such interest or interests as are shown in the
Exhibits as owned by such party. 16 Exhibits "A" and "B" shall be revised by the
Unit Operator whenever changes in the unit area or in 17 the ownership interests
in the individual tracts render such revision necessary, or when requested by 18
the Authorized Officer, hereinafter referred to as "AO" and not less than four
copies of the revised 19 Exhibits shall be filed with the proper Bureau of Land
Management office. 20   21 The above-described unit area shall when practicable
be expanded to include therein any 22 additional lands or shall be contracted to
exclude lands whenever such expansion or contraction is 23 deemed  to be
necessary or  advisable to confonn  with the purposes of  this  agreement.  
Such 24 expansion or contraction shall be effected in the following manner: 25  
26 (a) Unit Operator, on its own motion (after preliminary concurrence by the
AO), or on 27 demand of the AO, shall prepare a notice of proposed expansion or
contraction describing the 28 contemplated  changes in  the  boundaries of  the 
unit area, the  reasons  therefor,  any  plans for 29 additional drilling, and
the proposed effective date of the expansion or contraction, preferably the 30
first day of a month subsequent to the date of notice. 31   32 (b) Said notice
shall be delivered to the proper Bureau of Land Management office, and 33 copies
thereof mailed to the last known address of each working interest owner, lessee
and lessor 34 whose interests are affected, advising that 30 days will be
allowed for submission  to the Unit 35 Operator of any objections. 36   37 (c)
Upon expiration of the 30-day period provided in the preceding item (b) hereof,
Unit 38 Operator shall file with the AO evidence of mailing of the notice of
expansion or contraction and a 39 copy  of  any objections  thereto  which 
have  been  filed  with  Unit  Operator,  together  with an 40 application in
triplicate, for approval of such expansion or contraction and with appropriate
joinders. 41   42 (d) After due consideration of all pertinent infonnation, the
expansion or contraction shall, 43 upon approval by the AO, become effective as
of the date prescribed in the notice thereof or such 44 other appropriate date.
45   46 2     1 (e) All legal subdivisions of lands (i.e., 40 acres by
Government survey or its nearest lot or 2 tract equivalent; in instances of
irregular surveys, unusually large lots or tracts shall be considered in 3
multiples of 40 acres or the nearest aliquot equivalent thereof), no parts of
which are in or entitled to 4 be in a participating area on or before the fifth
anniversary of the effective date of the first initial 5 participating area
established under this unit agreement, shall be eliminated automatically from
this 6 agreement, effective as of said fifth anniversary, and such lands shall
no longer be a part of the unit 7 area and shall no longer be subject to this
agreement, unless diligent drilling operations are in 8 progress on unitized
lands not entitled to participation on said fifth anniversary, in which event
all 9 such  lands  shall  remain  subject  hereto  for  so  long  as such 
drilling  operations  are  continued 10 diligently, with not more than 90 days'
time elapsing between the completion of one such well and 11 the commencement of
the next such well.   All legal subdivisions of lands not entitled to be in a 12
participating area  within  10  years after  the  effective date of  the  first 
initial  participating area 13 approved under this agreement shall be
automatically eliminated from this agreement as of said 14 tenth 
anniversary.    The  Unit  Operator  shall,  within  90  days  after  the 
effective  date  of  any 15 elimination hereunder, describe the area so
eliminated to the satisfaction of the AO and promptly 16 notify all parties in
interest.   All lands reasonably proved productive of unitized substances in 17
paying quantities  by diligent  drilling  operations  after the aforesaid 5-year
period  shall  become 18 participating in the same manner as during said first
5-year period.  However, when such diligent 19 drilling operations cease, all
non-participating lands not then entitled to be in a participating area 20 shall
be automatically eliminated effective as of the 91st day thereafter. 21   22 Any
expansion of the unit area pursuant to this section which embraces lands
theretofore 23 eliminated pursuant  to  this  subsection  2(e)  shall  not be 
considered  automatic  commitment or 24 recommitment of such lands.  If
conditions warrant extension of the 10-year period specified in this 25
subsection, a single extension of not to exceed 2 years may be accomplished by
consent of the 26 owners of 90% of the working interest in the current
non-participating unitized lands and the owners 27 of 60% of the basic royalty
interests (exclusive of the basic royalty interests of the United States) in 28
non-participating unitized lands with approval of the AO, provided such
extension application is 29 submitted not later than 60 days prior to the
expiration of said 10-year period. 30   31   32 3.   UNITIZED LAND  AND UNITIZED
SUBSTANCES.     All land now or hereafter 33 committed to this agreement shall
constitute land referred to herein as "unitized  land" or "land 34 subject to
this agreement". All oil and gas in any and all formations of the unitized land
are unitized 35 under the terms of this agreement and herein are called
"unitized substances". 36   37 4. UNIT OPERATOR. Cortez Exploration LLC is
hereby designated as Unit Operator and 38 by signature hereto as Unit Operator
agrees and consents to accept the duties and obligations of Unit 39 Operator for
the discovery, development, and production of unitized substances as herein
provided. 40 Whenever reference is made herein to the Unit Operator, such
reference means the Unit Operator 41 acting in that capacity and not as an owner
of interest in unitized substances, and the term "working 42 interest owner"
when used herein shall include or refer to Unit Operator as the owner of a
working 43  interest only when such an interest is owned by it. 44   45 5.
RESIGNATION OR REMOVAL OF UNIT OPERATOR. Unit Operator shall have 46 the right
to resign at any time prior to the establishment of a participating area or
areas hereunder,   3     1 but such resignation shall not become effective so as
to release Unit Operator from the duties and 2 obligations of Unit Operator and
terminate Unit Operator's rights as such for a period of 6 months 3 after notice
of intention to resign has been served by Unit Operator on all working interest
owners 4 and the AO and until all wells then drilled hereunder are placed in a
satisfactory condition for 5 suspension or abandonment, whichever is required by
the AO, unless a new Unit Operator shall 6 have been selected and approved and
shall have taken over and assumed the duties and obligations 7 of Unit Operator
prior to the expiration of said period. 8   9 Unit Operator shall have the right
to resign in like manner and subject to like limitations as 10 above provided at
any time after a participating area established hereunder is in existence, but
in all 11 instances of resignation or removal, until a successor Unit Operator
is selected and approved as 12 hereinafter provided, the working interest owners
shall be jointly responsible for performance of the 13 duties of Unit Operator,
and shall not later than 30 days before such resignation or removal becomes 14
effective appoint a common agent to represent them in any action to be taken
hereunder. 15   16 The resignation of Unit Operator shall not release Unit
Operator from any liability for any 17 default by it hereunder occurring prior
to the effective date of its resignation. 18   19 The  Unit  Operator  may, 
upon  default  or  failure  in  the  performance  of  its  duties  or 20
obligations hereunder, be subject to removal by the same percentage vote of the
owners of working 21 interests as herein provided for the selection  of  a new
Unit Operator.   Such  removal shall be 22 effective upon notice thereof to the
AO. 23   24 The resignation or removal of Unit Operator under this agreement
shall not terminate its 25 right, title, or interest as the owner of a working
interest or other interest in unitized substances, but 26 upon the resignation
or removal of Unit Operator becoming effective, such Unit Operator shall 27
deliver possession of all wells, equipment, materials, and appurtenances used in
conducting the unit 28 operations to the new duly qualified successor Unit
Operator or to the common agent, if no such 29 new Unit Operator is selected, to
be used for the purpose of conducting unit operations hereunder. 30 Nothing 
herein  shall  be  construed  as  authorizing  removal  of  any  material, 
equipment,  or 31 appurtenances needed for the preservation of any wells. 32  
33 6. SUCCESSOR UNIT OPERATOR. Whenever the Unit Operator shall tender his or
its 34 resignation as Unit Operator or shall be removed as hereinabove provided,
or a change of Unit 35 Operator is negotiated by the working interest owners,
the owners of the working interests according 36 to their respective acreage
interests in all unitized land shall, pursuant to the Approval of the Parties 37
requirements of the unit operating agreement, select a successor Unit Operator. 
Such selection shall 38 not become effective until: 39   40 (a)  a Unit Operator
so selected shall accept in writing the duties and responsibilities of Unit 41
Operator, and 42   43 (b)  the selection shall have been approved by the AO. 44
  45 If no successor Unit Operator is selected and qualified as herein provided,
the AO at his 46 election may declare this unit agreement terminated.   4     1
  2 7. ACCOUNTING PROVISIONS AND UNIT OPERATING AGREEMENT. If the 3 Unit
Operator is not  the sole owner of working interests, costs and  expenses
incurred by Unit 4 Operator in conducting unit operations hereunder shall be
paid and apportioned among and borne by 5 the owners of working interests, all
in accordance with the agreement or agreements entered into by 6 and between the
Unit Operator and the owners of working interests, whether one or more,
separately 7 or collectively. Any agreement or agreements entered into between
the working interest owners and 8 the Unit Operator as provided in this section,
whether one or more, are herein referred to as the "unit 9 operating
agreement".   Such unit operating agreement shall also provide the manner in
which the 10 working interest owners  shall be entitled to receive their
respective proportionate and allocated 11 share of the benefits accruing  hereto
in conformity with their underlying operating agreements, 12 leases, or  other 
independent  contracts,  and such  other  rights  and  obligations  as  between 
Unit 13 Operator and the working interest owners as may be agreed upon by Unit
Operator and the working 14 interest owners; however, no such unit operating
agreement shall be deemed either to modify any of 15 the terms and conditions 
of this unit agreement or to relieve the Unit Operator of any right or 16
obligation established  under  this  unit  agreement, and  in  case  of  any 
inconsistency  or  conflict 17 between this agreement and the unit operating
agreement, this agreement shall govern.  Two copies 18 of any unit operating
agreement executed pursuant to this section shall be filed in the proper Bureau
19 of Land Management office, prior to approval of this unit agreement. 20   21
8. RIGHTS AND OBLIGATIONS OF UNIT OPERATOR. Except as otherwise 22 specifically
provided herein, the exclusive right, privilege, and duty of exercising any and
all rights 23 of the parties hereto which  are necessary or convenient for
prospecting for, producing, storing, 24 allocating, and distributing the
unitized substances are hereby delegated to and shall be exercised by 25 the
Unit Operator as herein provided.  Acceptable evidence of title to said rights
shall be deposited 26 with  Unit  Operator  and,  together  with  this 
agreement,  shall  constitute  and  define  the  rights, 27 privileges, and
obligations of Unit Operator. Nothing herein, however, shall be construed to
transfer 28 title  to  any land  or  to  any  lease  or  operating  agreement,
it  being  understood  that  under  this 29 agreement the Unit Operator, in its
capacity as Unit Operator, shall exercise the rights of possession 30 and use
vested in the parties hereto only for the purposes herein specified. 31   32 9.
DRILLING TO DISCOVERY. Within 6 months after the effective date hereof, the 33
Unit Operator shall commence to drill an adequate test well at a location
approved by the AO, 34 unless on such effective  date  a well  is being drilled
in conformity with  the terms hereof, and 35 thereafter continue such drilling
diligently until 500 feet below the top of the Triassic formation has 36 been
tested or until at a lesser depth unitized substances shall be discovered which
can be produced 37 in  paying quantities  (to-wit:  quantities  sufficient to 
repay the costs of drilling, completing and 38 producing operations, with a
reasonable profit) or the Unit Operator shall at any time establish to the 39
satisfaction of the AO that further drilling of said well would be unwarranted
or impracticable, 40 provided, however, that Unit Operator shall not in any
event be required to drill said well to a depth 41 in excess of 6,000 feet. 
Until the discovery of unitized substances capable of being produced in 42
paying quantities, the Unit Operator shall continue drilling one well at a time,
allowing not more 43 than 6 months between the completion of one well and the
commencement of drilling operations for 44 the  next  well,  until  a  well 
capable  of  producing  unitized  substances  in  paying  quantities  is 45
completed to the satisfaction of the AO or until it is reasonably proved that
the unitized land is 46 incapable of producing unitized substances in paying
quantities in the formations drilled hereunder.   5     1 Nothing in this
section shall be deemed to limit the right of the Unit Operator to resign as
provided 2 in Section 5 hereof, or as requiring Unit Operator to commence or
continue any drilling during the 3 period pending such resignation becoming
effective in order to comply with the requirements of this 4 section. 5   6 The
AO may modify any of the drilling requirements of this section by granting
reasonable 7 extensions of time when, in his opinion, such action is warranted.
8   9 Until the establishment of a participating area, the failure to commence a
well subsequent to 10 the drilling of the initial obligation well, or in the
case of multiple well requirements, if specified, 11 subsequent to the drilling
of those multiple wells, as provided for in this (these) section(s), within 12
the time allowed including any extension of time granted by the AO, shall cause
this agreement to 13 terminate automatically.    Upon  failure  to  continue 
drilling  diligently  any  well  other  than  the 14 obligation well(s)
commenced hereunder, the AO may, after 15 days notice to the Unit Operator, 15
declare this unit agreement terminated.   Failure to commence drilling the
initial obligation well, or 16 the first of multiple  obligation  wells,  on 
time and  to drill  it diligently  shall  result in the unit 17 agreement
approval being declared invalid ab initio by the AO. In the case of multiple
well 18 requirements, failure to commence drilling the required multiple wells
beyond the first well, and to 19 drill them diligently, may result in the unit
agreement approval being declared invalid ab initio by 20 the AO. 21   22 10.
PLAN OF FURTHER  DEVELOPMENT AND OPERATION.   Within 6 months 23 after
completion of a well capable of producing unitized substances in paying
quantities, Operator 24 shall submit for the approval of the AO an acceptable
plan of development and operation for the 25 unitized land which, when approved
by the AO, shall constitute the further drilling and development 26 obligations
of the Unit Operator under this agreement for the period specified therein. 
Thereafter, 27 from time to time before the expiration of any existing plan, the
Unit Operator shall submit for the 28 approval of the AO a plan for an
additional specified period for the development and operation of 29 the unitized
land.  Subsequent plans should normally be filed on a calendar year basis not
later than 30 March 1 each year.  Any proposed modification or addition to the
existing plan should be filed as a 31 supplement to the plan. 32   33 Any plan
submitted pursuant to this section shall provide for the timely exploration of
the 34 unitized area, and for the diligent drilling necessary for determination
of the area or areas capable of 35 producing unitized substances in paying
quantities in each and every productive formation.   This 36 plan shall be as
complete  and  adequate  as  the AO may determine  to  be  necessary for timely
37 development and proper conservation of the oil and gas resources of the
unitized area and shall: 38   39 (a)  specify the number and locations of any
wells to be drilled and the proposed order and 40 time for such drilling; and 41
  42 (b)  provide a summary of operations and production for the previous year.
43   44 Plans shall be modified or supplemented when necessary to meet changed
conditions or to 45 protect the  interests of  all  parties to  this 
agreement.   Reasonable diligence shall   be  exercised in 46 complying with the
obligations of the approved plan of development and operation.  The AO is   6  
  1 authorized to grant a reasonable extension of the 6 month period herein
prescribed for submission of 2 an initial plan of development  and operation
where such action is justified  because of unusual 3 conditions or
circumstances. 4   5 After completion of a well capable of producing unitized
substances in paying quantities, no 6 further wells, except such as may be
necessary to afford protection against operations not under this 7 agreement
and  such  as  may  be  specifically  approved  by  the  AO,  shall  be 
drilled  except  in 8 accordance with an approved plan of development and
operation. 9   10 11. PARTICIPATION  AFTER DISCOVERY. Upon completion  of a well
capable of 11 producing unitized substances in paying quantities, or as soon
thereafter as required by the AO, the 12 Unit Operator shall submit for approval
by the AO, a schedule, based on subdivisions of the public- 13 land survey or
aliquot parts thereof, of all land then regarded as reasonably proved to be
productive 14 of unitized substances in paying quantities.   These lands shall
constitute a participating area on 15 approval of the AO, effective as of the
date of completion of such well or the effective date of this 16 unit agreement,
whichever is later.   The acreages of both Federal and non-Federal lands shall
be 17 based upon appropriate computations from the courses and distances shown
on the last approved 18 public-land survey as of the effective date of each
initial participating area.  The schedule shall also 19 set forth the percentage
of unitized substances to be allocated, as provided in Section 12, to each 20
committed  tract  in  the  participating  area  so  established,  and  shall 
govern  the  allocation  of 21 production commencing with the effective date of
the participating area.   A different participating 22 area shall be established
for each separate pool or deposit of unitized substances or for any group 23
thereof which is produced as a single pool or zone, and any two or more
participating areas so 24 established may be combined into one, on approval of
the AO.  When production from two or more 25 participating areas is subsequently
found to be from a common pool or deposit, the participating 26 areas shall be
combined into one, effective as of such appropriate date as may be approved or
27 prescribed by the AO.  The participating area or areas so established shall
be revised from time to 28 time, subject to the approval of the AO, to include
additional lands then regarded as reasonably 29 proved to be productive of
unitized substances in paying quantities or which are necessary for unit 30
operations, or to exclude lands then regarded as reasonably proved not to be
productive of unitized 31 substances  in  paying  quantities,  and  the 
schedule  of  allocation  percentages  shall  be  revised 32 accordingly.   The 
effective date  of  any revision shall be the first  of  the  month in which the
33 knowledge or information is obtained on which such revision is predicated;
provided, however, that 34 a more appropriate effective date may be used if
justified by Unit Operator and approved by the AO. 35 No  land  shall be 
excluded  from  a  participating area  on  account  of  depletion  of  its 
unitized 36 substances, except that any participating area established under the
provisions of this unit agreement 37 shall terminate automatically whenever all
completions in the formation on which the participating 38 area is based are
abandoned. 39   40 It is the intent of this section that a participating area
shall represent the area known or 41 reasonably proved  to  be  productive  of 
unitized  substances  in  paying  quantities  or  which are 42 necessary for
unit operations; but, regardless of any revision of the participating area,
nothing herein 43 contained shall be construed as requiring any retroactive
adjustment for production obtained prior to 44 the effective date of the
revision of the participating area. 45   46     7     1 In the absence of
agreement at any time between the Unit Operator and the AO as to the 2 proper
definition or redefinition of a participating area, or until a participating
area has, or areas 3 have, been established, the portion of all payments
affected thereby shall, except royalty due the 4 United States, be impounded in
a manner mutually acceptable to the owners of committed working 5 interests. 
Royalties due the United States shall be determined by the AO and the amount
thereof 6 shall be deposited, as directed by the AO, until a participating area
is finally approved and then 7 adjusted in accordance with a determination of
the sum due as Federal royalty on the basis of such 8 approved participating
area. 9   10 Whenever it is determined, subject to the approval of the AO, that
a well drilled under this 11 agreement is not capable of production of unitized
substances in paying quantities and inclusion in a 12 participating area of the
land on which it is situated is unwarranted, production from such well shall, 13
for the purposes of settlement among all parties other than working interest
owners, be allocated to 14 the land on which the well is located, unless such
land is already within the participating area 15 established for the pool or
deposit from which such production is obtained.  Settlement for working 16
interest benefits from such a nonpaying unit well shall be made as provided in
the unit operating 17 agreement. 18   19 12.  ALLOCATION  OF  PRODUCTION.   
All  unitized  substances  produced  from  a 20 participating area established
under this agreement, except any part thereof used in conformity with 21 good
operating practices within the unitized area for drilling, operating and other
production or 22 development purposes, for repressuring or recycling in
accordance with a plan of development and 23 operations that has been approved
by the AO, or unavoidably lost, shall be deemed to be produced 24 equally on an
acreage basis from the several tracts of unitized land and unleased Federal
land, if any, 25 included in the participating area established  for such
production.    Each  such  tract shall have 26 allocated to it such percentage
of said production as the number of acres of such tract included in 27 said
participating area bears to the total acres of unitized land and unleased
Federal land, if any, 28 included in said participating area.   There shall be
allocated to the working interest owner(s) of 29 each tract of unitized land in
said participating area, in addition, such percentage of the production 30
attributable to the unleased Federal land within the participating area as the
number of acres of such 31 unitized tract included in said participating area
bears to the total acres of unitized land in said 32 participating area, for the
payment of  the compensatory royalty specified  in Section 17 of this 33
agreement.  Allocation of production hereunder for purposes other than for
settlement of the royalty, 34 overriding  royalty, or payment  out of production
obligations of  the respective working interest 35 owners, including
compensatory royalty obligations under Section 17, shall be prescribed as set 36
forth in the unit operating agreement or as otherwise mutually agreed by the
affected parties. It is 37 hereby agreed that production of unitized substances
from a participating area shall be allocated as 38 provided herein, regardless
of whether any wells are drilled on any particular part or tract of the 39
participating area.   If any gas produced  from one participating area is used
for repressuring or 40 recycling purposes in another participating area, the
first gas withdrawn from the latter participating 41 area for sale during the
life of this agreement, shall be considered to be the gas so transferred, until
42 an amount equal to that transferred shall be so produced for sale and such
gas shall be allocated to 43 the participating area from which initially
produced as such area was defined at the time that such 44 transferred gas was
finally produced and sold. 45   46     8     1 13. DEVELOPMENT OR OPERATION OF
NON-PARTICIPATING LAND OR 2 FORMATIONS.  Any operator may, with the approval of
the AO, at such party's sole risk, cost, 3 and expense, drill a well on the
unitized land to test any formation provided the well is outside any 4
participating area established for that formation, unless within 90 days of
receipt of notice from said 5 party of his intention to drill the well, the Unit
Operator elects and commences to drill the well in a 6 like manner as other
wells are drilled by the Unit Operator under this agreement. 7   8 If any well
drilled under this section by a non-unit operator results in production of
unitized 9 substances in paying quantities such that the land upon which it is
situated may properly be included 10 in a participating area, such participating
area shall be established or enlarged as provided in this 11 agreement and the
well shall thereafter be operated by the Unit Operator in accordance with the 12
terms of this agreement and the unit operating agreement. 13    14 If any well
drilled under this section by a non-unit operator obtains production in
quantities 15 insufficient to justify the inclusion of the land upon which such
well is situated in a participating 16 area, such  well  may  be operated  and
produced  by the party drilling  the  same,  subject  to the 17 conservation
requirements of this agreement.  The royalties in amount or value of production
from 18 any such well shall be paid as specified in the underlying lease and
agreements affected. 19   20 14. ROYALTY SETTLEMENT. The United States and any
State and any royalty owner 21 who is entitled to take in kind a share of the
substances now unitized hereunder shall hereafter be 22 entitled to the right to
take in kind its share of the unitized substances, and Unit Operator, or the 23
non-unit operator in the case of the operation of a well by a non-unit operator
as herein provided for 24 in special cases, shall make deliveries of such
royalty share taken in kind in conformity with the 25 applicable contracts,
laws, and regulations. Settlement for royalty interest not taken in kind shall
be 26 made by an operator responsible therefor under existing contracts, laws
and regulations, or by the 27 Unit Operator on or before the last day of each
month for unitized substances produced during the 28 preceding calendar month;
provided, however, that nothing in this section shall operate to relieve 29 the
responsible parties of any land from their respective lease obligations for the
payment of any 30 royalties due under their leases. 31   32 If gas obtained from
lands not subject to this agreement is introduced into any participating 33 area
hereunder, for use in repressuring, stimulation of production, or increasing
ultimate recovery, in 34 conformity with a plan of development and operation
approved by the AO, a like amount of gas, 35 after settlement as herein provided
for any gas transferred from any other participating area and with 36
appropriate deduction for loss from any cause, may be withdrawn from the
formation into which the 37 gas is introduced, royalty free as to dry gas, but
not as to any products which may be extracted 38 therefrom; provided that such
withdrawal shall be at such time as may be provided in the approved 39 plan of
development and operation or as may otherwise be consented to by the AO as
conforming to 40 good petroleum engineering practice; and provided further, that
such right of withdrawal shall 41 terminate on the termination of this unit
agreement. 42   43 Royalty due the United States shall be computed as provided
in 30 CFR Group 200 and paid 44 in value or delivered in kind as to all unitized
substances on the basis of the amounts thereof 45 allocated to unitized Federal
land as provided in Section 12 at the rates specified in the respective 46
Federal leases, or at such other rate or rates as may be authorized by law or
regulation and approved   9     1 by the AO; provided, that for leases on which
the royalty rate depends on the daily average 2 production per well, said
average production shall be determined in accordance with the operating 3
regulations as though each participating area were a single consolidated lease.
4   5 15. RENTAL SETTLEMENT.   Rental or minimum royalties due on leases
committed 6 hereto shall  be  paid by  the  appropriate parties under existing 
contracts,  laws, and regulations, 7 provided that nothing herein contained
shall operate to relieve the responsible parties of the land 8 from their
respective obligations for the payment of any rental or minimum royalty due
under their 9 leases.  Rental or minimum royalty for lands of the United States
subject to this agreement shall be 10 paid at the rate specified  in  the
respective leases from the United States  unless such rental or 11 minimum
royalty is waived, suspended, or reduced by law or by approval of the Secretary
or his 12 duly authorized representative.
13                                                                       14 With
respect to any lease on non-Federal land containing provisions which would
terminate 15 such lease unless drilling operations are commenced upon the land
covered thereby within the time 16 therein specified or rentals are paid for the
privilege of deferring such drilling operations, the rentals 17 required thereby
shall, notwithstanding any other provision of this agreement, be deemed to
accrue 18 and become payable during the term thereof as extended by this
agreement and until the required 19 drilling operations are commenced upon the
land covered thereby, or until some portion of such 20 land is included within a
participating area. 21   22 16. CONSERVATION.   Operations hereunder and
production of unitized substances shall 23 be conducted to provide for the most
economical and efficient recovery of said substances without 24 waste, as
defined by or pursuant to State or Federal law or regulation. 25   26 17.
DRAINAGE. 27   28 (a)  The Unit Operator shall take such measures as the AO
deems appropriate and adequate 29 to prevent drainage of unitized substances
from unitized land by wells on land not subject to this 30 agreement, which
shall include the drilling of protective wells and which may include the payment
31 of a fair and reasonable compensatory royalty, as determined by the AO. 32  
33 (b)   Whenever a participating area approved under Section 11 of this
agreement contains 34 unleased Federal lands, the value of 12-112 percent of the
production that would be allocated to such 35 Federal lands under Section 12 of
this agreement, if such lands were leased, committed and entitled 36 to
participation, shall be payable as compensatory royalties to the Federal
Government.  Parties to 37 this agreement holding working interests in committed
leases within the applicable participating 38 area shall be responsible  for
such compensatory royalty payment on the volume of production 39 reallocated
from the unleased Federal lands to their unitized tracts under Section 12.  The
value of 40 such production subject to the payment of said royalties shall be
determined pursuant to 30 CFR 41 Part 206.  Payment of compensatory royalties on
the production reallocated from unleased Federal 42 land to the committed tracts
within the participating area shall fulfill the Federal royalty obligation 43
for such production, and said production shall be subject to no further Federal
royalty assessment 44 under Section 14 of this agreement.  Payment of
compensatory royalties as provided herein shall 45 accrue from the date the
committed tracts in the participating area that includes unleased Federal 46
land receive a production allocati :m, and shall be due and payable monthly by
the last day of the   10     1 calendar month next following the calendar month
of actual production. If leased Federal lands 2 receiving a  production 
allocation  from  the  participating  area  become  unleased,  compensatory 3
royalties shall accrue from the date the Federal lands become unleased.  
Payment due under this 4 provision shall  end  when  the  unleased Federal tract
is leased or  when  production of  unitized 5 substances ceases within the
participating area and the participating area is terminated, whichever 6 occurs
first. 7   8 18.  LEASES  AND  CONTRACTS  CONFORMED  AND  EXTENDED.    The 
terms, 9 conditions, and provisions  of  all  leases, subleases, and other 
contracts  relating  to exploration, 10 drilling, development, or operation for
oil or gas on lands committed to this agreement are hereby 11 expressly modified
and amended to the extent necessary to make the same conform to the provisions
12 hereof, but otherwise to remain in full force and effect; and the parties
hereto hereby consent that the 13 Secretary shall  and  by  his  approval 
hereof, or  by the  approval  hereof  by his duly authorized 14 representative,
does  hereby  establish,  alter,  change,  or  revoke  the  drilling, 
producing,  rental, 15 minimum royalty, and royalty requirements of Federal
leases committed hereto and the regulations 16 in respect thereto to conform
said requirements to the provisions of this agreement, and, without 17 limiting
the generality of the foregoing, all leases, subleases, and contracts are
particularly modified 18 in accordance with the following: 19   20 (a) The
development and operation oflands subject to this agreement under the terms
hereof 21 shall be deemed full performance of all obligations for development
and operation with respect to 22 each and every separately owned tract subject
to this agreement, regardless of whether there is any 23 development of any
particular tract of this unit area. 24   25 (b)  Drilling and producing
operations performed hereunder upon any tract of unitized lands 26 will be
accepted and deemed to be performed upon and for the benefit of each and every
tract of 27 unitized land, and no lease shall be deemed to expire by reason of
failure to drill or produce wells 28 situated on the land therein embraced. 29  
30 (c) Suspension of drilling or producing operations on all unitized lands
pursuant to direction 31 or consent of the AO shall be deemed to constitute such
suspension pursuant to such direction or 32 consent as to each and every tract
of unitized land. A suspension of drilling or producing operations 33 limited to
specified lands shall be applicable only to such lands. 34   35 (d)   Each
lease, sublease or contract relating to the exploration, drilling, development,
or 36 operation for oil or gas of lands other than those of the United States
committed to this agreement 37 which, by its terms might expire prior to the
termination of this agreement, is hereby extended 38 beyond any such term so
provided therein so that it shall be continued in full force and effect for and
39 during the term of this agreement. 40   41 (e)  Any Federal lease committed
hereto shall continue in force beyond the term so provided 42 therein or by law
as to the land committed so long as such lease remains subject hereto, provided
43 that production of unitized substances in paying quantities is established
under this unit agreement 44 prior to the expiration date of the term of such
lease, or in the event actual drilling operations are 45 commenced on unitized
land, in accordance with provisions of this agreement, prior to the end of 46
the primary term of such lease and are being diligently prosecuted at that time,
such lease shall be   11     1 extended for two years, and so long thereafter as
oil or gas is produced in paying quantities in 2 accordance with the provisions
of the Mineral Leasing Act, as amended. 3   4 (f)    Each  sublease  or 
contract  relating  to  the  operation  and  development  of  unitized 5
substances from lands of the United States committed to this agreement, which by
its terms would 6 expire prior to the time at which the underlying lease, as
extended by the immediately preceding 7 paragraph, will expire, is hereby
extended beyond any such term so provided therein so that it shall 8 be
continued in full force and effect for and during the term of the underlying
lease as such term is 9 herein extended. 10   11 (g)  The segregation of any
Federal lease committed to this agreement is governed by the 12 following
provision in the fourth paragraph of Sec. 17(m) of the Mineral Leasing Act, as
amended 13 by the Act of September 2, 1960, (74 Stat. 781-784) (30 U.S.C. 226
(m)): "Any (Federal) lease 14 heretofore or hereafter committed to any such
(unit) plan embracing lands that are in part within and 15 in part outside of
the area covered by any such plan shall be segregated into separate leases as to
the 16 lands committed and the lands not committed as of the effective date of
unitization: Provided, 17 however, that any such lease as to the non-unitized
portion shall continue in force and effect for the 18 term thereof but for not
less than two years from the date of such segregation and so long thereafter 19
as oil or gas is produced in paying quantities."  If the public interest
requirement is not satisfied, the 20 segregation of a lease and/or extension of
a lease pursuant to 43 CFR 3107.3-2 and 43 CFR 3107.4, 21 respectively, shall
not be effective. 22   23 (h)   Any lease, other than a Federal lease, having
only a portion of its lands committed 24 hereto shall be segregated as to the
portion committed and the portion not committed, and the 25 provisions of such
lease shall apply separately to such segregated portions commencing as of the 26
effective date hereof. In the event any such lease provides for a lump-sum
rental payment, such 27 payment shall be prorated between the portions so
segregated in proportion to the acreage of the 28 respective tracts. 29   30 19.
COVENANTS RUN WITH LAND.  The covenants herein shall be construed to be 31
covenants running  with  the  land  with  respect to  the  interests  of  the 
parties  hereto  and  their 32 successors in interest until  this agreement
terminates, and any grant, transfer or conveyance of 33 interest in land or
leases subject hereto shall be and hereby is conditioned upon the assumption of
all 34 privileges and obligations hereunder by the grantee, transferee, or other
successor in interest.  No 35 assignment or transfer of  any working interest
royalty, or other interest subject hereto shall be 36 binding upon Unit Operator
until the first day of the calendar month after Unit Operator is furnished 37
with the original, photostatic, or certified copy of the instrument of transfer.
38   39 20.  EFFECTIVE  DATE  AND  TERM.    This  agreement shall  become 
effective upon 40 approval of the AO and shall automatically terminate five (5)
years from said effective date unless: 41   42 (a) upon application by the Unit
Operator such date of expiration is extended by the AO, or 43   44 (b)  it is
reasonably determined prior to the expiration of the fixed term or any extension
45 thereof that the unitized land is incapable of production of unitized
substances in paying quantities 46 in the formations tested hereunder, and after
notice of intention to terminate this agreement on such   12     1 ground is
given by the Unit Operator to all parties in interest at their last known
addresses, this 2 agreement is terminated with approval of the AO, or 3   4
(c)   a  valuable discovery of  unitized substances in paying quantities  has
been made or 5 accepted on unitized land  during said initial term or any
extension thereof, in which event this 6 agreement shall remain in effect for
such term and so long thereafter as unitized substances can be 7 produced in
quantities sufficient to pay for the cost of producing same from wells on
unitized land 8 within any participating area established hereunder. Should
production cease and diligent drilling or 9 reworking operations to restore
production or new production are not in progress within 60 days and 10
production  is  not restored  or  should  new  production not  be obtained  in 
paying  quantities  on 11 committed lands within this unit area, this agreement
will automatically terminate effective the last 12 day of the month in which the
last unitized production occurred, or
13                                                                                   
14 (d)  it is voluntarily terminated as provided in this agreement.  Except as
noted herein this 15 agreement may be terminated at any time prior to the
discovery of unitized substances which can be 16 produced in paying quantities
by not less than 75 per centum, on an acreage basis, of the working 17 interest
owners signatory hereto, with the approval of the AO.  The Unit Operator shall
give notice 18 of any such approval to all parties hereto.   If the public
interest requirement is not satisfied, the 19 approval of this unit by the AO
shall be invalid. 20   21 21. RATE OF PROSPECTING, DEVELOPMENT, AND PRODUCTION. 
The AO is 22 hereby vested with authority to alter or modify from time to time,
in his discretion, the quantity and 23 rate of production under this agreement 
when such quantity and rate are not fixed pursuant to 24 Federal or State law,
or  do  not conform to any Statewide voluntary conservation  or allocation 25
program which is established, recognized, and generally adhered to by the
majority of operators in 26 such State.  The above authority is hereby limited
to alteration or modifications which are in the 27 public interest.  The public
interest to be served and the purpose thereof, must be stated in the order 28 of
alteration or modification.  Without regard to the foregoing, the AO is also
hereby vested with 29 authority to  alter or  modify  from  time  to  time, in
his discretion,  the  rate  of  prospecting and 30 development and the quantity
and rate of production under this agreement when such alteration or 31
modification is in the interest of attaining the conservation objectives stated
in this agreement and is 32 not in violation of any applicable Federal or State
law. 33   34 Powers in this section vested in the AO shall only be exercised
after notice to Unit Operator 35 and opportunity for hearing to be held not less
than 15 days from notice. 36   37 22. APPEARANCES.  The Unit Operator shall,
after notice to other parties affected, have 38 the right to appear for and on
behalf of any and all interests affected hereby before the Department 39 of the
Interior and to appeal from orders issued under the regulations of said
Department, or to apply 40 for relief from any of said  regulations, or in any
proceedings relative to operations  before the 41 Department, or any other
legally constituted authority; provided, however, that any other interested 42
party shall also have the right at its own expense to be heard in any such
proceeding. 43   44 23.  NOTICES.  All  notices,  demands,  or statements
required hereunder  to  be given or 45 rendered to the parties hereto shall be
in writing and shall be personally delivered to the party or 46     13     1
parties,  or sent by postpaid  registered  or certified  mail, to the last
known  address  of the party or 2 parties. 3   4 24. NO WAIVER OF CERTAIN
RIGHTS.  Nothing herein contained  in this agreement 5 shall be construed  as a
waiver  by any party hereto of the right to assert any legal or constitutional 6
right or defense as to the validity or invalidity  of any law of the State where
the unitized  lands are 7 located, or of the United States, or regulations 
issued thereunder in any way affecting such party, or 8 as a waiver by any such
party of any right beyond his or its authority to waive. 9   10 25. UNAVOIDABLE
DELAY.   All obligations  under  this  agreement  requiring  the Unit 11
Operator  to commence  or continue  drilling,  or to operate on, or produce 
unitized  substances  from 12 any of the lands covered by this agreement,  shall
be suspended while the Unit Operator, despite the 13 exercise of due care and
diligence,  is prevented  from complying with such obligations,  in whole or 14
in part, by strikes, acts of God, Federal, State, or municipal law or agencies, 
unavoidable accidents, 15 uncontrollable  delays in transportation, inability 
to obtain  necessary  materials  or equipment  in the 16 open market, or other
matters beyond the reasonable control of the Unit Operator  whether similar to
17 matters herein enumerated or not. 18   19 26. NONDISCRIMINATION. In
connection with the performance of work under this 20 agreement,  the Unit
Operator  agrees  to comply  with  all the provisions  of Section  202 (1) to
(7) 21 inclusive of Executive Order 11246 (30 F.R. 12319), as amended, which are
hereby incorporated by 22 reference in this agreement. 23   24 27. LOSS OF
TITLE. In the event title to any tract of unitized land shall fail and the true
25 owner cannot be induced to join in this unit agreement, such tract shall be
automatically  regarded as 26 not committed  hereto, and there shall be such
readjustment  of future costs and benefits as may be 27 required on account of
the loss of such title. In the event of a dispute as to title to any royalty, 28
working  interest, or other interest  subject  thereto,  payment or delivery  on
account  thereof may be 29 withheld  without liability for interest until the
dispute is finally settled; provided,  that, as to Federal 30 lands or leases,
no payments  of funds due the United States shall be withheld,  but such funds
shall 31 be deposited  as directed  by the AO, to be held as unearned money
pending  final settlement  of the 32 title dispute, and then applied as earned
or returned in accordance with such final settlement. 33   34 Unit Operator as
such is relieved from any responsibility for any defect or failure of any title
35 hereunder. 36   37 28. NON-JOINDER AND SUBSEQUENT JOINDER.   If the  owner 
of any substantial 38 interest in a tract within the unit area fails or refuses
to subscribe  or consent  to this agreement, the 39 owner  of the working
interest  in that tract may withdraw  the tract from this agreement  by written
40 notice delivered to the proper Bureau of Land Management office and the Unit
Operator prior to the 41 approval  of this agreement  by the AO.   Any oil or
gas interests  in lands within  the unit area not 42 committed  hereto prior to
final approval may thereafter be committed hereto by the owner or owners 43
thereof subscribing or consenting  to this agreement, and, if the interest is a
working interest, by the 44 owner  of  such  interest  also  subscribing  to 
the  unit  operating  agreement.    After  operations  are 45 commenced 
hereunder,  the right of subsequent  joinder,  as provided  in this section,  by
a working 46 interest owner is subject to such requirements  or approval(s),  if
any, pertaining  to such joinder, as   14     1 may be provided for in the unit
operating agreement. After final approval hereof, joinder by a non- 2 working
interest owner must be consented to in writing by the working interest owner
committed 3 hereto and responsible for the payment of any benefits that may
accrue hereunder in behalf of such 4 non-working interest.  A non-working
interest may not be committed to this unit agreement unless 5 the corresponding
working interest is committed hereto.  Joinder to the unit agreement by a
working 6 interest owner, at any time,  must  be accompanied  by appropriate
joinder  to the  unit operating 7 agreement, in order for the interest to be
regarded as committed to this agreement.  Except as may 8 otherwise herein be
provided, subsequent joinders to this agreement shall be effective as of the
date 9 of the filing with the AO of duly executed counterparts of all or any
papers necessary to establish 10 effective commitment of any interest and/or
tract to this agreement. 11   12 29. COUNTERPARTS.  This agreement may be
executed in any number of counterparts, 13 no one of which needs to be executed
by all parties, or may be ratified or consented to by separate 14 instrument in
writing specifically referring hereto and shall be binding upon all those
parties who 15 have executed such a counterpart, ratification, or consent hereto
with the same force and effect as if 16 all such parties had signed the same
document, and regardless of whether or not it is executed by all 17 other
parties owning or claiming an interest in the lands within the above-described
unit area. 18   19 30. SPECIAL SURFACE STIPULATIONS.   Nothing in this agreement
shall modify the 20 special Federal lease stipulations attached to the
individual Federal oil and gas leases. 21   22 31. SURRENDER.  Nothing in this
Agreement shall prohibit the exercise by any working 23 interest owner of the
right to surrender vested in such party by any lease, sublease, or operating 24
agreement as to all or any part of the lands covered thereby, provided that each
party who will or 25 might acquire such working interest by such surrender or by
forfeiture as hereafter set forth, is 26 bound by the terms of this Agreement.
27   28 If as a result of any surrender, the working interest rights as to such
lands become vested in 29 any party other than the fee owner of the Unitized
Substances, said party may forfeit such rights and 30 further benefits from
operations hereunder as to said land to the party next in the chain of title who
31 shall be and become the owner of such working interest. 32   33 If as the
result of any such surrender of forfeiture working interest rights become vested
in 34 the fee owner of the Unitized Substances, such owner may: 35   36 (a) 
Accept  those working  interest  rights subject to  this Agreement  and the Unit
37 Operating Agreement; or 38   39 (b) Lease the portion of such land as is
included in a participating area established 40 hereunder subject to this
Agreement and the Unit Operating Agreement; or 41   42 (c) Provide for the
independent operation of any part of such land that is not then 43 included
within a participating area established hereunder. 44   45 If  the  fee  owner
of  the  Unitized Substances  does   not  accept the  working  interest rights
46 subject to this Agreement and the Unit Operating Agreement or lease such
lands as above provided   15     1 within 6 months after the surrendered or
forfeited, working interest rights become vested in the fee 2 owner; the
benefits and obligations of operations accruing to such lands under this
Agreement be 3 shared by the remaining owners of the unitized working interests
in accordance with their respective 4 working interest ownerships, and such
owners of working interests shall compensate the fee owner 5 of Unitized
Substances in such lands by paying sums equal to the rentals, minimum royalties,
and 6 royalties applicable to such lands under the lease in effect when the
lands were unitized. 7   8 An appropriate accounting  and settlement shall  be
made for all benefits accruing to or 9 payments and expenditures made or
incurred on behalf of such surrendered or forfeited working 10 interests
subsequent to the date of surrender of forfeiture, and payment of any moneys
found to be 11 owing by such an accounting shall be made as between the parties
within 30 days. 12   13 The exercise of any right vested in a working interest
owner to reassign such working 14 interest to the party from whom obtained shall
be subject to the same conditions as set forth in this 15 section in regard to
the exercise of a right to surrender. 16   17 32. TAXES.   The working interest
owners shall render and pay for their account and the 18 account of the royalty
owners all valid taxes on or measured by the Unitized Substances in and 19 under
or that may be produced, gathered and sold from the land covered by this
Agreement after its 20 effective date, or upon the proceeds derived therefrom. 
The working interest owners on each tract 21 shall and may charge the proper
proportion of said taxes to royalty owners having interests in said 22 tract,
and may currently  retain  and  deduct a sufficient  amount of  the  Unitized 
Substances or 23 derivative products, or net proceeds thereof, from the
allocated share of each royalty owner to secure 24 reimbursement for the taxes
so paid.  No such taxes shall be charged to the United States or the 25 State of
Nevada or to any lessor who has a contract with his lessee which requires the
lessee to pay 26 such taxes. 27   28 33. NO PARTNERSHIP. It is expressly agreed
that the relation of the parties hereto is that 29 of independent contractors
and nothing contained in this Agreement, expressed or implied, nor any 30
operations  conducted  hereunder,  shall  create  or  be  deemed  to  have 
created  a  partnership  or 31 association between the parties hereto or any of
them. 32   33   34   35   36   37   38   39 * * * The balance of this page is
left blank intentionally* * * 40   41   42   43   44   45   46     16

 
 

 

1 IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed 2 and have set opposite their respective names the date of execution. 3
    4     5 UNIT OPERATOR  AND WORKING INTEREST OWNER 6     7     8 CORTEZ
EXPLORATION,  LLC 9     10     11     12   By:  /s/Otto F. Duffield 13   Otto F.
Duffield 14     15     16 Address:       16786 Kincheloe  Road   17
                     Siloam Springs, Arkansas
72761                                           Date of Execution 18     19  
February 4, 2010 20     21     22 STATE OF  OKLAHOMA         )   23 ) ss.   24
COUNTY OF TULSA )   25     26 The foregoing instrument  was acknowledged before
me by OTTO F. DUFFIELD 27     28   as MANAGER 29     30 of Cortez Exploration, 
LLC.   31     32 This 4TH day of FEBRUARY , 2010.   33     34 WITNESS my hand
and official seal.   35     36 My Commission Expires:   37     38 DECEMBER 4,
2010     /s/ Gale L. Staton 39   Notary Public 40     41 UNIT OPERATOR SIGNATURE
PAGE FOR THE   42 PARADISE UNIT AGREEMENT   43 NYE AND MINERAL COUNTIES, NEVADA
  44     45     46       17          

 

 
 

 

EXHIBIT “B”                           NUMBER SERIAL NO. BASIC LESSEE          
TRACT DESCRIPTION OF & EXPIRATION ROYALTY OF   OVERRIDING   WORKING   NO. OF
LAND ACRES DATE OF LEASE AND % RECORD AND % ROYALTY AND % INTEREST AND %        
              1 T12N-R34E  MOM 3,840.56 N-59901 U.S.A.-ALL (12.5% ROYALTY)
Cortez Exploration LLC 85.50% O. F. Duffield 2.50% Cortez Exploration LLC 85.50%
  Sec. 1: Lots 1, 2, 3, 4, S/2N/2,       Empire Petroleum Corporation 10.00%
Frances A. Duffield Johnson 1.00% Empire Petroleum Corporation 10.00%   S/2
(All)   EFFECTIVE   Windmill Oil & Gas LLC 2.50% Valorie S. Duffield Reynolds
1.00% Windmill Oil & Gas LLC 2.50%   Sec.  12: All   9/1/1995   Punto De Luz,
LLC 2.00% James P. Duffield 1.00% Punto De. Luz, LLC 2.00%   Sec. 13:  All      
TOTAL 100.00% Otto F. Duffield II 1.00% TOTAL 100.00%   Sec. 24: All   Expires  
    Alfred H. Pekarek 1.00%       Sec. 25:  All   11/28/2010* *Extended by the
termination of     TOTAL 7.50%       Sec. 36: All     the Cobble Cuesta Unit
Agreement                                 2 T13N-R35E  MDM 1,440.00 N-60807
U.S.A.-ALL (12.5% ROYALTY) Cortez Exploration LLC 85.50% O. F. Duffield 1.50%
Cortez Exploration LLC 85.50%   Sec. 10:  All       Empire Petroleum Corporation
10.00% Frances A. Duffield Johnson 1.00% Empire Petroleum Corporation 10.00%  
Sec. 11:  All   Effective   Windmill Oil & Gas LLC 2.50% Valorie S. Duffield
Reynolds 1.00% Windmill Oil & Gas LLC 2.50%   Sec. 16:  NW/4   6/1/1997   Punto
De Luz, LLC 2.00% James P. Duffield 1.00% Punto De. Luz, LLC 2.00%          
TOTAL 100.00% Otto F. Duffield II 1.00% TOTAL 100.00%       Expires       Alfred
H. Pekarek 1.00%           11/28/2010* *Extended by the termination of     Shawn
L. Messinger 0.50%             the Cobble Cuesta Unit Agreement   Elizabeth M.
Murphy 0.50%                   TOTAL 7.50%                           3
 T12N-R34E MDM  7,040.17 N-60812 U.S.A.-ALL (12.5% ROYALTY) Cortez Exploration
LLC 85.50% O. F. Duffield 2.50% Cortez Exploration LLC 85.50%   2  Lots 1, 2,
S/2NE/4,       Empire Petroleum Corporation 10.00% Frances A. Duffield Johnson
1.00% Empire Petroleum Corporation 10.00%   SE/4        Effective   Windmill Oil
& Gas LLC 2.50% Valorie S. Duffield Reynolds 1.00% Windmill Oil & Gas LLC 2.50%
  Sec.  10:  E/2   6/1/1996   Punto De Luz, LLC 2.00% James P. Duffield 1.00%
Punto De. Luz, LLC 2.00%   Sec.   11:  All       TOTAL 100.00% Otto F. Duffield
II 1.00% TOTAL 100.00%   Sec.  14: 
All                                                             Expires
*Extended by the termination of     Alfred H. Pekarek 1.00%       Sec.  15:  All
  11/2/2010* the Cobble Cuesta Unit Agreement   TOTAL 7.50%       Sec.  21:  All
                    Sec. 22:  All                     Sec. 23:  All            
        Sec. 26:  All                     Sec. 27:  All                     Sec.
28:  NE/4, NE/4NW/4,                     S/2SW/4,  E/2SE/4                    
Sec. 33:  E/2NE/4,  NW/4                     Sec. 34:  All                    
Sec. 35:  All                                         4   T13N-R35E  MDM  960.00
N-60815 U.SA- All  (12.5% royalty) Cortez Exploration LLC 85.50% O. F. Duffield
2.50% Cortez Exploration LLC 85.50%   Sec.  17  All       Empire Petroleum
Corporation 10.00% Frances A. Duffield Johnson 1.00% Empire Petroleum
Corporation 10.00%   Sec.  19  E/2   Effective   Windmill  Oil & Gas LLC 2.50%
Valorie S. Duffield Reynolds 1.00% Windmill Oil & Gas LLC 2.50%       6/1/1996  
Punta De Luz, LLC 2.00% James P. Duffield 1.00% Punto De. Luz, LLC 2.00%        
  TOTAL 100.00% Otto F. Duffield II 1.00% TOTAL 100.00%       Expires •Extended
by the termination of     Alfred H. Pekarek 1.00%           11-28-2010. the
Cobble Cuesta Unit Agreement     TOTAL 7.50%                           5
T13N-R35E  MDM 2,560.00 N-60816 U.SA- All  (12.5% royalty) Cortez Exploration
LLC 85.50% O. F. Duffield 2.50% Cortez Exploration LLC 85.50%   Sec. 2:  All    
  Empire Petroleum Corporation 10.00% Frances A. Duffield Johnson 1.00% Empire
Petroleum Corporation 10.00%   Sec. 3:  All   Effective   Windmill  Oil & Gas
LLC 2.50% Valorie S. Duffield Reynolds 1.00% Windmill Oil & Gas LLC 2.50%   Sec.
4:  All   6/1/1996   Punta De Luz, LLC 2.00% James P. Duffield 1.00% Punto De.
Luz, LLC 2.00%   Sec. 9:  All       TOTAL 100.00% Otto F. Duffield II 1.00%
TOTAL 100.00%       Expires •Extended by the termination of     Alfred H.
Pekarek 1.00%           11-28-2010. the Cobble Cuesta Unit Agreement     TOTAL
7.50%                           6 T12N-R35E  MOM 1,908.16 N-60885 U.SA- All 
(12.5% royalty) Cortez Exploration LLC 85.50% O. F. Duffield 2.50% Cortez
Exploration LLC 85.50%   Sec. 29  All       Empire Petroleum Corporation 10.00%
Frances A. Duffield Johnson 1.00% Empire Petroleum Corporation 10.00%   Sec. 30 
Lots 1, 2, 3, 4, E/2,   Effective   Windmill  Oil & Gas LLC 2.50% Valorie S.
Duffield Reynolds 1.00% Windmill Oil & Gas LLC 2.50%   E/2W/2  (All)   9/1/1995
  Punta De Luz, LLC 2.00% James P. Duffield 1.00% Punto De. Luz, LLC 2.00%  
Sec  31  Lots 1, 2, 3, 4, E/2,       TOTAL 100.00% Otto F. Duffield II 1.00%
TOTAL 100.00%   E/2W/2   (All)   Expires •Extended by the termination of    
Alfred H. Pekarek 1.00%           11/28/2010* the Cobble Cuesta Unit Agreement  
  TOTAL 7.50%                           7 T12N-R34E  MOM 319.43 N-82193 U.SA-
All  (12.5% royalty) Cortez Exploration LLC 100.00% Alfred H. Pekarek 1.00%
Coretez Exploration LLC 100.00%   Sec    2  Lots 3, 4, S/2NW/4,                
    SW/4   Effective                     9/1/2006                              
            Expires                     8/31/2016                              
      8 T13N-R34E  MOM 1,284.00 N-82185 U.SA- All  (12.5% royalty) Cortez
Exploration LLC 98.00% Alfred H. Pekarek 1.00% Coretez Exploration LLC 98.00%  
Sec  25  All (Protracted)       Punto De Luz 2.00%     Punto De Luz 2.00%   Sec.
36  All (Protracted)   Effective   TOTAL 100.00%     TOTAL 100.00%      
9/1/2006                                           Expires                    
8/31/2016                                     9 T13N-R35E  MOM 640.00 N-82186
U.SA- All  (12.5% royalty) Cortez Exploration LLC 98.00% Alfred H. Pekarek 1.00%
Coretez Exploration LLC 98.00%   Sec     8. All (Protracted)       Punto De Luz
2.00%     Punto De Luz 2.00%       Effective   TOTAL 100.00%     TOTAL 100.00%  
    9/1/2006                                           Expires                  
  8/31/2016                                     10  T13N-R35E  MOM 220.00
N-82187 U.SA- All  (12.5% royalty) Cortez Exploration LLC 98.00% Alfred H.
Pekarek 1.00% Coretez Exploration LLC 98.00%   Sec.  19. W/2 (Protracted)      
Punto De Luz 2.00%     Punto De Luz 2.00%       Effective   TOTAL 100.00%    
TOTAL 100.00%       9/1/2006                                           Expires  
                  8/31/2016                                     11 T12N-R35E 
MOM 2,538.67 N-85867 U.SA- All  (12.5% royalty) Empire Petroleum Corporation
100.00% Alfred H. Pekarek 1.00% Empire Petroleum Corporation 100.00%   Sec    5 
Lots 1, 2, 3, 4, S/2N/2,                     S/2 (All)   Effective              
  Sec    6  Lots 1, 2, 3, 4, 5, 6, 7,   11/1/2008                 S/2NE/4,
SE/4NW/4                     E/2SW/4, SE/4 (All)   Expires                
Sec     7  Lots 1, 2, 3, 4, E/2W/2, 10/31/2018                 E/2 (All)        
            Sec     8  All                                         12 T12N-R35E 
MOM 2,544.24 N-85871 U.SA- All  (12.5% royalty) Empire Petroleum Corporation
100.00% Alfred H. Pekarek 1.00% Empire Petroleum Corporation 100.00%   Sec   17.
All                     Sec   18  Lots 1, 2, 3, 4, E/2,   Effective            
    E/2W/2 (All)   11/1/2008                 Sec. 19:  Lots 1,2,3,4, E/2,      
              E/2W/2 (All)   Expires                 Sec  20  All   10/31/2018  
                                  13 T13N-R35E  MOM 2,400.00 N-85873 U.SA- All 
(12.5% royalty) Empire Petroleum Corporation 100.00% Alfred H. Pekarek 1.00%
Empire Petroleum Corporation 100.00%   Sec. 16  E/2, SW/4,  (Protracted)        
          Sec. 20  All (Protracted)   Effective                 Sec.  21:  All
(Protracted)   11/1/2008                 Sec.  22: All (Protracted)            
            Expires                     10/31/2018                              
      14 T13N-R35E MOM 2,461.00 N-85876 U.SA- All  (12.5% royalty) Empire
Petroleum Corporation 100.00% Alfred H. Pekarek 1.00% Empire Petroleum
Corporation 100.00%   Sec  29  All (Protracted)                     Sec. 30  All
(Protracted)   Effective                 Sec  31  All (Protracted)   11/1/2008  
              Sec  32  All (Protracted)                         Expires        
            10/31/2018                                     15 T12N-R35E  MOM
1,280.00 N-86963 U.SA- All  (12.5% royalty) James Henry Henderson 100.00% NONE  
James Henry Henderson 100.00%   Sec    9  All                     Sec   10  All
  Effective                     12/1/2009                                      
    Expires                     11/30/2019                                    
16 T12N-R35E  MOM 1,280.00 N-86965 U.SA- All  (12.5% royalty) James Henry
Henderson 100.00% NONE   James Henry Henderson 100.00%   Sec   16  All          
          Sec  21  All   Effective                     12/1/2009                
                          Expires                     11/30/2019                
                    17 T12N-R35E  MOM 1,277.16 N-86972 U.SA- All  (12.5%
royalty) Nancy Fagen 100.00% NONE   Nancy Fagen 100.00%   Sec.   3  Lots 1, 2,
3, 4, S/2N/2,                     S/2 (All)   Effective                 Sec.  
4  Lots 1, 2, 3, 4, S/2N/2,   11/1/2009                 S/2 (All)              
          Expires                     10/31/2019                                
    18 T13N-R35E  MOM 1,920.00 N-86998 U.SA- All  (12.5% royalty) Cortez
Exploration LLC 100.00% NONE   Cortez Exploration LLC 100.00%   Sec.  14  All
(Protracted)                     Sec   15  All (Protracted)   Effective        
        Sec  23  All (Protracted)   11/1/2009                                  
        Expires                     10/31/2019                                  
  19 T13N-R35E MOM 1,280.00 N-86999 U.SA- All  (12.5% royalty) Cortez
Exploration LLC 100.00% NONE   Cortez Exploration LLC 100.00%   Sec  26  All
(Protracted)                     Sec.  35  All (Protracted)   Effective        
            11/1/2009                                           Expires        
            10/31/2019                                     20 T13N-R35E  MOM
2,560.00 N-87000 U.SA- All  (12.5% royalty) Cortez Exploration LLC 100.00% NONE
  Cortez Exploration LLC 100.00%   Sec  27  All (Protracted)                    
Sec  28  All (Protracted)   Effective                 Sec  33  All (Protracted)
  11/1/2009                 Sec  34  All (Protracted)                        
Expires                     10/31/2019                                     21
T12N-R34E MOM 320.00 Unleased U.SA- All  (12.5% royalty) Unleased 100.00% NONE  
Unleased 100.00%   Sec.  10  W/2                                                
                                    21 FEDERAL  TRACTS TOTALING   40,073.39
ACRES OR   100% OF UNIT AREA                                                    
                    21 TRACTS TOTALING   40073.39 ACRES IN   UNIT AREA          
                                                              NOTE: PENDING
ASSIGNMENTS ON TRACTS 1-20  WILL  RESULT IN AN OWNERSHIP OF:   EMPIRE PETROLEUM
CORPORATION, 57%;  CORTEZ EXPLORATION LLC,  38.5%; WINDMILL OIL & GAS LLC,
2.5%,  AND,  

 

PUNTO DE LUZ, LLC, 2%

 

 

 

 

 

 

 

 

 

 

 
 

EXHIBIT “C”

 

NON-UNIT ACREAGE

 

LEASE SERIAL   EFFECTIVE           NUMBER   DATE   ACREAGE   DESCRIPTION        
          N-60885   9/1/1995   4,480.00   Twp: 12N     Rge: 35E     Meridian: 
MDM     State:  Nevada     County:  Nye               Section 13: All          
    Section 23:  All               Section 24: W/2               Section 26: 
NW/4               Section 27:  All               Section 28:  All              
Section 32:  All               Section 33:  All               Section 34:  NW/4
                  N-60812   6/1/1996   2,844.99   Twp: 11N     Rge: 34E    
Meridian:  MDM     State:  Nevada     County:  Nye & Mineral              
Section 1:  Lots 3-4, S/2NW/4, SW/4               Section 2:  Lots 1-4, S/2N/2,
S/2               Section 3:  Lots 1-4, S/2N/2, S/2               Section 4: 
Lots 1-4, S/2N/2, S/2                                   N-60816   6/1/1996  
3,520.00   Twp: 13N     Rge: 35E     Meridian:  MDM     State:  Nevada    
County:  Nye               Section 1:  All               Section 12:  All      
        Section 13:  E/2                               Twp: 13N     Rge: 36E    
Meridian:  MDM     State:  Nevada     County:  Nye               Section 18: 
All               Section 19:  All               Section 29:  All              
    N-60792   6/1/1996   5,461.37   Twp: 12N     Rge: 36E     Meridian:  MDM    
State:  Nevada     County:  Nye               Section 4:  Lots 1-4, S/2N/2, S/2
              Section 5:  Lots 1 & 2, S/2NE/4, E/2SE/4               Section 6: 
Lots 1-7, SW/4NE/4, SE/4NW/4, E/2SW/4               Section 7:  Lots 1-4,
E/2W/2, SW/4NE/4, SE/4               Section 8:  S/2S/2, N/2SE/4              
Section 17:  All               Section 18:  Lots 1-4, E/2W/2, E/2              
Section 19:  Lots 1-4, E/2W/2, E/2               Section 20:  N/2NE/4, NW/4    
          Section 30:  Lots 1-4, E/2W/2, E/2               Section 31:  Lots
1-4, E/2W/2, E/2                   N-60791   9/1/1996   3,200.00   Twp: 12N  
  Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye              
Section 24:  E/2               Section 25:  ALL               Section 26:  SW/4,
E/2               Section 34:  SW/4, E/2               Section 35:  All        
      Section 36:  All                   N-60793   6/1/1997   1,920.00   Twp:
13N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye        
      Section 30:  All               Section 31:  All               Section 32: 
All                   N-60808   6/1/1997   2,553.43   Twp: 11N     Rge: 35E    
Meridian:  MDM     State:  Nevada     County:  Nye               Section 1: 
Lots 1-4, S/2N/2, S/2               Section 2:  Lots 1-4, S/2N/2, S/2          
    Section 3:  Lots 1-4, S/2N/2, S/2                               Twp: 11N    
Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye              
Section 6:  Lots 1-7, S/2NE/4, SE/4NW/4, E/2SW/4, SE/4                   N-60807
  6/1/1997   320.00   Twp: 13N     Rge: 35E     Meridian:  MDM     State: 
Nevada     County:  Nye               Section 13:  W/2                          
        N-60806   6/1/1997   2,235.70   Twp: 11N     Rge: 34E     Meridian: 
MDM     State:  Nevada     County:  Nye               Section 1:  Lots 1 & 2,
S/2NE/4, SE/4 (E/2)                               Twp: 11N     Rge: 35E    
Meridian:  MDM     State:  Nevada     County:  Nye               Section 4: 
Lots 1-4, S/2N/2, S/2               Section 5:  Lots 1-4, S/2N/2, S/2          
    Section 6:  Lots 1-7, S/2NE/4, SE/4NW/4, E/2SW/4, SE/4                  
N-82180   9/1/2006   1,274.33   Twp: 11N     Rge: 34E     Meridian:  MDM    
State:  Nevada     County:  Mineral               Section 5:  Lots 1-4          
    Section 5:  S/2N/2, S/2               Section 6:  Lots 1-7              
Section 6:  S/2NE/4, SE/4NW/4, E/2SW/4, SE/4                   N-82181  
9/1/2006   2,560.00   Twp: 11N     Rge: 34E     Meridian:  MDM     State: 
Nevada     County:  Mineral               Section 9:    All              
Section 10:  All               Section 15:  All               Section 16:  All  
                N-82182   9/1/2006   2,560.00   Twp: 11N     Rge: 34E    
Meridian:  MDM     State:  Nevada     County:  Mineral               Section
11:  All               Section 12:  All               Section 13:  All          
    Section 14:  All                   N-82183   9/1/2006   1,279.04   Twp:
12N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Nye        
      Section 3:  Lots 1-4               Section 3:  S/2N/2, S/2              
Section 4:  Lots 1-4               Section 4:  S/2N/2, S/2                      
            N-82184   9/1/2006   680.00   Twp: 12N     Rge: 34E     Meridian: 
MDM     State:  Nevada     County:  Mineral               Section 28:  W/2NW/4,
SE/4NW/4, N/2SW/4, W/2SE/4               Section 33:  W/2NE/4, S/2              
    N-82185   9/1/2006   643.00   Twp: 13N     Rge: 34E     Meridian:  MDM    
State:  Nevada     County:  Nye               Section 24:  Prot All            
      N-82186   9/1/2006   1,715.00   Twp: 13N     Rge: 35E     Meridian: 
MDM     State:  Nevada     County:  Nye               Section 5:  Prot All      
        Section 6:  Prot All               Section 7:  Prot All                
  N-82187   9/1/2006   540.00   Twp: 13N     Rge: 35E     Meridian:  MDM    
State:  Nevada     County:  Nye               Section 18:  Prot All            
      N-82188   9/1/2006   1,916.92   Twp: 11N     Rge: 36E     Meridian: 
MDM     State:  Nevada     County:  Nye               Section 4:  Lots 1, 3-12  
            Section 4:  S/2N/2, S/2               Section 5:  Lots 1-4          
    Section 5:  S/2N/2, S/2               Section 7:  Lots 1-4              
Section 7:  E/2, E/2W/2                   N-82189   9/1/2006   2,476.04   Twp:
11N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye        
      Section 8:    All               Section 9:    All               Section
17:  All               Section 18:  Lots 1-4               Section 18:  NE/4,
E/2W/2, E/2SE/4                   N-82190   9/1/2006   640.00   Twp: 11N    
Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye              
Section 16:  All                   N-82191   9/1/2006   1,119.60   Twp: 12N    
Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye              
Section 5:  Lots 3-4               Section 5:  S/2NW/4, SW/4, W/2SE/4          
    Section 6:  SE/4NE/4, SE/4               Section 7:  N/2NE/4, SE/4NE/4      
        Section 8:  N/2, N/2SW/4                   N-82192   9/1/2006   1,280.00
  Twp: 12N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye  
            Section 9:    All               Section 16:  All                  
N-82446   10/1/2006   2,000.00   Twp: 12N     Rge: 36E     Meridian:  MDM    
State:  Nevada     County:  Nye               Section 20:  S/2NE/4, S/2        
      Section 21:  All               Section 28:  W/2NE/4, NW/4, W/2SW/4        
      Section 29:  All                   N-82194   9/1/2006   730.00   Twp:
12N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye        
      Section 32:  N/2, SW/4, W/2SE/4, SE/4SE/4               Section 32: 
W/2NE/4, SE/4               Section 33:  S/2SW/4               Section 33: 
W/2NE/4SW/4, SE/4NE/4SW/4                   N-82195   9/1/2006   2,560.00   Twp:
13N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye        
      Section 4:    Prot All               Section 9:    Prot All              
Section 16:  Prot All               Section 17:  Prot All                  
N-82196   9/1/2006   2,560.00   Twp: 13N     Rge: 36E     Meridian:  MDM    
State:  Nevada     County:  Nye               Section 5:  Prot All              
Section 6:  Prot All               Section 7:  Prot All               Section
8:  Prot All                   N-82197   9/1/2006   1,920.00   Twp: 13N     Rge:
36E     Meridian:  MDM     State:  Nevada     County:  Nye               Section
21:  Prot All (Excl Me Patent)               Section 28:  Prot All (Excl Me
Patent)               Section 33:  Prot All (Excl Me Patent)                  
N-86998   11/01/2009   640.00   Twp: 13N     Rge: 35E     Meridian:  MDM    
State:  Nevada     County:  Nye               Section 24:   Prot All            
      N-86999   11/01/2009   1,280.00   Twp: 13N     Rge: 35E     Meridian: 
MDM     State:  Nevada     County:  Nye               Section 25:   Prot All    
          Section 36:   Prot All                                                
                  TOTAL NON-UNIT ACREAGE      

 

56,909.42

                      TOTAL UNIT ACREAGE      

 

35,916.23

                                  PARADISE UNIT ACREAGE TOTAL                  
            EMPIRE, ET AL 35,916,23             JAMES HENDERSON 2,560.00        
    NANCY FAGEN 1,277.16             UNLEASED 320.00                            
TOTAL UNIT ACREAGE 40,073.39                

 

 
 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

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

 

 

 

EXHIBIT "D"

 

UNIT OPERATING AGREEMENT

PARADISE UNIT AREA

COUNTIES OF MINERAL AND NYE

STATE OF NEVADA

 

 

 

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

 
 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980

 

 

UNIT OPERATING AGREEMENT

 

PARADISE UNIT AREA

 

 

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

 

WITNESSETH:

 

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

 

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

 

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

 

ARTICLE 1

DEFINITIONS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

1

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 2 Revised 1985)

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Other Definitions:

 

ARTICLE 2

EXHIBITS

 

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

 

Exhibit 1. Accounting Procedure.

Exhibit 2. Initial Test Well.

Exhibit 3. Insurance.

Exhibit 4. Non-Discrimination.

Exhibit 5. Oil and Gas Lease.

 

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

 

ARTICLE 3

INITIAL TEST WELL

 

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

 

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

 

ARTICLE 4

SUBSEQUENT TEST WELLS

 

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

 

ARTICLE 5

ESTABLISHMENT, REVISION, AND CONSOLIDATION OF PARTICIPATING AREAS

 

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

 

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

 

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

 

2

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 3 Revised 1985)

 

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

 

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

 

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

 

ARTICLE 6

APPORTIONMENT OF COSTS AND OWNERSHIP AND DISPOSITION OF PRODUCTION AND PROPERTY

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

3

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 4 Revised 1985)

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 7

PLANS OF DEVELOPMENT

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 8

DEVELOPMENT WELLS

 

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

 

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

 

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

 

4

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

5

 

ROCKY MOUNTAIN U JIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980 (Page 6 Revised 1985)

 

 

ARTICLE 9

EXPLORATORY WELLS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

6

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980 (Page 7 Revised 1985)

 

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 10

REQUIRED WELLS

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

7

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 8 Revised 1985)

 

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

 

ARTICLE 11

DEEPENING, PLUGGING BACK, AND ABANDONMENT

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

8

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 9 Revised 1985)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 12

RIGHTS AND OBLIGATIONS OF DRILLING PARTY AND NON-DRILLING PARTY

 

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

 

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

 

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

 

9

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)'

February, 1980 (Page 10 Revised 1985)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

10

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 1 OA Revised 1985)

 

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

 

l0A (The next page is 11)

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

ARTICLE 13

ADJUSTMENT ON ESTABLISHMENT OR CHANGE OF PARTICIPATING AREA

 

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

 

13.2 Definitions. As used in this Article 13:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

 

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

 

11

 

ROCKY MOUNTAIN UNIT OPERATINGAGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

12

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

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

 

ARTICLE 14

SUPERVISION OF OPERATIONS BY PARTIES

 

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

 

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

 
 

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

 

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

 

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

 

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

 

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

 

ARTICLE 15

UNIT OPERATOR'S POWERS AND RIGHTS

 

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

 

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

 

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

 

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

 

13

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 16

UNIT OPERATOR'S DUTIES

 

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

 

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

 

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

 

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

 

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

 

14

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

 

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

 

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

 

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

 

16.2 Insurance.

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 17

LIMITATIONS ON UNIT OPERATOR

 

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

 

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

 

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

 

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

 

15

 

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 16 Revised 1985)

 

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

 

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

 

 

ARTICLE 18

TITLES

 

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

 

18.2 Title Papers to be Furnished.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

16

 
 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ARTICLE 19

UNLEASED INTERESTS

 

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

 

 

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

 

 

17

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

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

 

ARTICLE 20

RENTALS AND LEASE BURDENS

 

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

 

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

 

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

 

ARTICLE 21

TAXES

 

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

 

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

 

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

 

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

 

ARTICLE 22

WITHDRAWAL OF TRACTS AND UNCOMMITTED INTERESTS

 

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

 

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

 

ARTICLE 23

COMPENSATORY ROYALTIES

 

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

 

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

 

18

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

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

 

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

 

ARTICLE 24

SEPARATE MEASUREMENT AND SALVAGE

 

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

 

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

 

ARTICLE 25

ENHANCED RECOVERY AND PRESSURE MAINTENANCE

 

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

 

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

 

ARTICLE 26

TRANSFERS OF INTEREST

 

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

 

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

 

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

 

ARTICLE 27

RELEASE FROM OBLIGATIONS AND SURRENDER

 

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

 

19

 

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

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

 

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

 

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

 

ARTICLE 28

LIABILITY

 

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

 

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

 

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

 

ARTICLE 29

NOTICES

 

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

 

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

 

ARTICLE 30

EXECUTION

 

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

 

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

 

 

20

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

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

 

ARTICLE 31

SUCCESSORS AND ASSIGNS

 

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

 

ARTICLE 32

HEADINGS FOR CONVENIENCE

 

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

 

ARTICLE 33

RIGHT OF APPEAL

 

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

 

ARTICLE 34

SUBSEQUENT JOINDER

 

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

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

 

ARTICLE 35

CARRIED INTERESTS

 

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

 

ARTICLE 36

EFFECTIVE DATE AND TERM

 

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

 

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

 

21

 

ARTICLE 37

OTHER PROVISIONS

 

 

37.1 PAYMENT OF TAXES RELATING TO PRODUCTION.

 

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

 

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

 

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

 

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

 

22

 
 

 

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

 

 

 

 

 

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

 

 

EXHIBIT "2"

 

 

Initial Test Well

 

Attached to and made a part of the

Unit Operating Agreement for the

Paradise Unit Area

Mineral and Nye Counties, Nevada

 

 

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

 

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

 

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

 

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

 

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

 

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

 
 

EXHIBIT "3"

 

 

Attached to and made a part of the

Unit Operating Agreement for the

Paradise Unit Area

Mineral and Nye Counties. Nevada

 

 

INSURANCE

 

 

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

 

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

 

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

 

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

 

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

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

 

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

 

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

 

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

EXHIBIT "4"

 

Attached to and made a part of the

Unit Operating Agreement for the

Paradise Unit Area

Mineral and Nye Counties, Nevada

 

EXECUTIVE ORDER NO. 11246 AND EXECUTIVE ORDER NO. 11598

PROVISIONS OF SECTION 202 OF EXECUTIVE ORDER NO. 11246

 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

 

No. 950CP-I Rev.

 

FORM 88 UNIT-WYO.-COLO

 

OIL AND GAS LEASE

 

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

 

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

 

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

 

EXHIBIT “5”

 

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

acres more or less.

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

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

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

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

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

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

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

Bank at

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

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

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

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

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

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

                       

 

 ACKNOWLEGDEMENT

 

STATE OF         }ss. County of    

 

 

On this day of , 19 , before me personally appeared

 

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

 

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

 

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

 

 

My Commission Expires             Notary Public

 

 

ACKNOWLEDGMENT-MAN AND WIFE

 

STATE OF         }ss. County of    

 

On this day of , 19 , before me personally appeared

 

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

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

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

 

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

 

 

 

My Commission Expires             Notary Public

 

 
 

EXHIBIT “E”

 

 

 

 

 

FARMOUT AGREEMENT

 

THIS Farmout Agreement ("Agreement") is made and entered into this 11th day of
June,

2010, by and between EMPIRE PETROLEUM CORPORATION (hereinafter referred to as
"Empire"), as party of the first part, and CORTEZ EXPLORATION, L.L.C. and
WINDMILL OIL & GAS, L.L.C., as parties of the second part. Hereafter, Cortez
Exploration, L.L.C. will sometimes be referred to as "Cortez" and Windmill Oil &
Gas, L.L.C. will sometimes be referred to as "Windmill". On some occasions,
Cortez and Windmill will be collectively referred to as the "Cortez Group".

 

RECITALS

 

1. The Gabbs Valley Prospect ("Prospect") covers approximately 92,825 gross
acres, with no depth limitations, in Nye and Mineral Counties, Nevada, which
acreage is owned by the parties to this Agreement.

 

2. A number of leases or portions of leases making up the Prospect have been
included in an oil and gas unit formed pursuant to that certain agreement titled
"Unit Agreement for the Development and Operation of the Paradise Unit Area
Counties of Nye and Mineral, State of Nevada", dated April 14, 2010, No.
ANVN88316X (hereinafter, the "Paradise Unit Agreement"). A copy of the Paradise
Unit Agreement is attached hereto as Exhibit "A". The unit formed under the
Paradise Unit Agreement is hereafter referred to as the "Paradise Unit".
Prospect leases wholly or partially included in the Paradise Unit are identified
and described on Exhibit "B" attached to this Agreement, and are hereafter
referred to as the "Paradise Unit Leases".

 

3. There are additional leases included in the Prospect that are not part of the
Paradise Unit. Prospect leases or portions of Prospect leases not included in
the Paradise Unit are identified and described on Exhibit "C" attached to this
Agreement, and are hereafter referred to as the "Non-Unit Leases".

 

4. The Cortez Group owns 41% (of 8/8ths) leasehold interest, record title
interest and working interest in all of the Prospect Leases and 41% of 80% (of
8/8ths) net revenue interest in each of the Prospect Leases free and clear of
other burdens, liens and encumbrances. Empire desires to acquire by farmout an
additional working interest in the Paradise Unit Leases.

  

 

5. The Cortez Group and Empire have agreed, at the request of Empire, that the

Cortez Group will assign to Empire the Cortez Group's 41% gross working interest
(which is

41% of 8/8 net revenue interest) in all of the "Prospect" Leases concurrently
with the fully

execution of this Agreement. At this time, the Cortez Group's ownership in the
Prospect Leases

is as follows:

 

Cortez Exploration, L.L.C. Windmill Oil & Gas, L.L.C.

38.5%

2.5%

 
 

Empire will earn a working interest in the Paradise Unit Leases, owned by the
Cortez Group only, by payment of 100% of the lease rentals on the Paradise Unit
Leases coming due subsequent to June 1, 2010, within the terms of this
Agreement, and after Empire drills the Paradise Unit No. 2-12 Well, and
otherwise performs in accordance with the terms and provisions as set forth
below.

 

6. Concurrently with the execution of this Agreement, Cortez Exploration, L.L.C.
will execute an agency agreement or any other required documents so as to make
Empire the designated "Unit Operator", to be effective with commencement of
drilling operations on the Paradise Unit No. 2-12 Well.

 

I. PAYMENT OF RENTALS AS TO PARADISE UNIT LEASES

 

A. As a part of this Agreement, Empire has paid tl-e Paradise Unit lease rentals
which became due in June of 2010. In addition thereto, during the time that
Empire holds the Cortez Group working interest in the Paradise Leases, which is
a 41% of 8/8ths gross working interest and a 41% of 80% net revenue interest,
Empire shall pay the 41% of rentals due under the Paradise Unit Leases on behalf
of the Cortez Group. At such time as Empire has reassigned to the Cortez Group a
collective 20.5% (of 8/8ths) working interest in the Paradise Unit Leases,
Empire shall pay 77.5% of the rentals due under the Paradise Unit Leases and the
Cortez Group and Punto De Luz shall pay the remaining portion of such rentals.

 

II. EARNING OBLIGATIONS FOR PARADISE UNIT LEASES

 

A. Assignment to Empire.

 

Upon the full execution of this Agreement, the Cortez Group shall, at the
request of Empire, execute and deliver to Empire assignments of all of the
Cortez Group's working interest and the agreed upon corresponding net revenue
interest in the Prospect Leases.

 

B. Obligation To Drill The Paradise Unit No. 2-12 Well.

 

The initial test well with respect to the Paradise Unit Leases will be known as
the "Empire Paradise Unit No. 2-12 Well". The Empire Paradise Unit No. 2-12 Well
shall be located in the Paradise Unit, on Lease No. N-599901, in the SE/4 of the
SE/4 of the NE/4 of Section 12-T12N-R34E, and shall be drilled to the lesser of
(i) 6,000 feet below the surface, (ii)

500 feet into the Triassic formation, or (iii) any lesser depth where oil and/or
gas is found in

commercial quantities. Empire shall commence the drilling of the Empire Paradise
Unit No. 2-

12 Well on or before the 15th day of August, 2010, or at such other time as may
be agreed upon by the Cortez Group in writing. Empire shall earn the working
interest in the Paradise Unit Leases contemplated in this Agreement when either
(a) Empire has completed and equipped the Empire Paradise Unit No. 2-12 Well
into pipeline connections or tanks, should such well produce oil and/or gas, or
(b) Empire has properly plugged and abandoned such well in accordance with the
rules and regulations of the BLM, should such well be a dry hole.

 
 

C. Costs for Drilling and Completing the Empire Paradise Unit Nol. 2-12 Well.

 

The Cortez Group shall not have any responsibility to pay the costs to drill the
Empire Paradise Unit No. 2-12 Well. The Cortez Group likewise shall not have any
responsibility to pay the costs to complete and equip the Empire Paradise Unit
No. 2-12 Well into pipeline connections or tanks, or to abandon the Empire
Paradise Unit No. 2-12 Well should it be a dry hole, as the case may be. As
between Empire and the Cortez Group, the manner in which to drill and complete
the Empire Paradise Unit No. 2-12 Well and the costs to be incurred to drill and
complete the Empire Paradise Unit No. 2-12 Well shall be in the sole discretion
of Empire, consistent with good oil field practice. In this regard, Empire is
not required to prepare an AFE or obtain approval of an AFE from the Cortez
Group with respect to the drilling and completion (or abandonment) of the Empire
Paradise Unit No. 2-12 Well. All reference to the Empire Paradise Unit No. 2-12
Well in this Section II.C shall apply equally to any substitute well under
Section II.D, immediately below.

 

D. Substitute Well(s).

 

If, in Empire's opinion, the drilling or further drilling of the Empire Paradise
Unit No. 2-12 Well as set forth in Section II.B above is rendered impossible or
impractical prior to satisfying the requirements of Section II.B above, Empire
shall notify the Cortez Group of the same as provided in this Agreement. Empire
shall have the option, but not the obligation, of drilling a substitute well in
a reasonable location of Empire's choosing. If Empire chooses not to drill a
substitute well, then Empire shall promptly reassign the entirety of the
Paradise Unit Leases and corresponding net revenue interest to the Cortez Group
using BLM Form 3000-3 in recordable form so that the Cortez Group may record
such assignments in Nye and Mineral Counties, Nevada. This Agreement shall
terminate upon the transmittal of such reassignment from Empire to the Cortez
Group.

 

III. REASSIGNMENT TO CORTEZ WITH REPSECT TO THE PARADISE UNIT LEASES

 

A. Reassignment if the Empire Paradise Unit No. 2-12 Well is a Dry Hole.

 

If Empire drills the Empire Paradise Unit No. 2-12 Well to the requirements of
Section II above, but such well is a dry hole, then Empire, upon completion of
the plugging and abandonment of such well, shall reassign to the Cortez Group
20.5% (of 8/8ths) of the working interest and corresponding net revenue interest
in the Paradise Unit Leases using BLM Form

3000-3.

 

B. Reassignment if the Empire Paradise Unit No. 2-12 Well Produces in Paying

Quantities.

 

If the Empire Paradise Unit No. 2-12 Well produces hydrocarbons, Empire shall
retain all of the working interest and corresponding net revenue interest in the
NE/4 of Section

12-T12N-R34E (the "Spacing Unit") in the Paradise Unit Leases (i.e., the 41% (of
8/8ths)

working interest and corresponding net revenue interest assigned by the Cortez
Group pursuant

 
 

to Section III.A above, until the Empire Paradise Unit No. 2-12 Well reaches
Payout, as defined in Section III.D below. At such time as the Empire Paradise
Unit No. 2-12 Well reaches Payout, Empire shall reassign to the Cortez Group
20.5% (of 8/8ths) of the working interest and corresponding net revenue interest
in the Paradise Unit Leases, and Empire shall retain 77.5% (of

8/8ths) of the working interest and corresponding net revenue interest in the
Paradise Unit

Leases.

 

C. Reassignment if the Empire Paradise Unit No. 2-12 Well is Not Drilled.

 

If Empire does not drill the Empire Paradise Unit No. 2-12 Well within the time
provided in Section II.B above, then Empire, if it has received assignment,
shall promptly reassign the entirety of the Paradise Unit Leases and
corresponding net revenue interest to the Cortez Group using BLM Form 3000-3.

 

D. Definition of Payout.

 

"Payout" for this Agreement shall be on a well-by-well basis, and shall be
deemed to occur for each well when sales proceeds actually received from
production from the well, after deduction of taxes and Nevada taxes on
production, landowner's royalty and overriding royalty interest shall equal 100%
of the actual cost of drilling, testing, completing, equipping and operating the
well to the point of payout, and treating, processing, transporting and
marketing production therefrom.

 

IV. OPERATIONS WITH RESPECT TO PARADISE UNIT

 

A. Empire To Be Unit Operator.

 

The Cortez Group shall take the actions necessary so that Empire is appointed as
the replacement Unit Operator as soon as possible, or at the request of Empire.

 

B. Unit Operating Agreement.

 

Subject to all provisions of the "Paradise Unit Agreement", operations for the
Paradise Unit shall be conducted pursuant to the Unit Operating Agreement,
attached hereto as Exhibit "D", except that with respect to any inconsistencies
between this Agreement and the Unit Operating Agreement, this Agreement shall
govern. If additional Paradise Unit wells are proposed subsequent to the
drilling, completion and/or abandonment or the Empire Paradise Unit No. 2-12
Well, then such additional wells shall be drilled pursuant to the terms and
provisions of the Unit Operating Agreement.

 

V. AREA OF MUTUAL INTEREST

 

Empire and the Cortez Group hereby form an area of mutual interest ("AMI")
covering Townships 11, 12, 13 and 14 North and Ranges 34, 35 and 36 East MDM,
Nevada. This AMI shall remain in effect for five (5) years from the date of this
Agreement.

 
 

If during the five (5) year duration of such AMI any party should acquire
("Acquiring Party") any oil and gas leases, leasehold interest or mineral
interest within the AMI by any means including, but not limited to, purchase,
top lease, farmins, farmouts, farmout options, or acreage contributions, then
the Acquiring Party shall immediately notify the Non-Acquiring Parties, in
writing, of such acquisition, setting forth the nature of the interest acquired,
all terms, provisions and contracts related to the acquisition (along with
copies of all documents relating to the acquisitions or rights to earn a
leasehold or mineral interest) and the price paid therefor. The Non-Acquiring
Parties shall have a period of thirty (30) days following receipt of notice to
elect in writing, with all appropriate documentation relating to the
acquisition, to purchase at the Acquiring Party's cost and acquire its Ownership
Percentage (defined below) of such acquisition by remitting the required payment
to the Acquiring Party, during such thirty (30) day period. If the interest is
to be earned by drilling and/or shooting seismic, the Non-Acquiring Parties must
ratify all appropriate agreements within the thirty (30) days period.
Notwithstanding the preceding sentence, such thirty (30) day notice period may
be reduced due to applicable contractual obligations or limitations (e.g.,
farmout terms or lease expiration dates), in which case the Non-Acquiring
Parties may be required to respond in a shorter time period as may be reasonably
appropriate under the circumstances. In the event one or more parties receiving
an offer pursuant to this paragraph do not accept same, the Acquiring Party
shall first offer the interest not accepted by a party to the other parties on a
pro rata basis. If any of the interest that was previously turned down by a
party is available after it has been turned down by the remaining parties, the
Acquiring Party shall hold such interest free and clear of any further AMI
obligations of this Agreement. However, notwithstanding anything to the contrary
contained herein, any interest within the AMI acquired by any party as a result
of the acquisition of the stock or substantially all of the assets of another
entity or any transaction in which such interests are not of material value in
relation to the entire transaction, shall be excluded from and not subject to
this AMI.

 

The parties specifically agree that if a lease or interest covers land both
inside and outside an AMI, the Acquiring Party must offer the entire lease or
interest to the other parties and if the party elects to acquire an interest in
the lease, it must agree to proportionately acquire an interest in the entire
lease or interest even if a portion of the lease or interest lies outside the
AMI.

 

Any interest acquired within the AMI shall be subject to the provisions of the
Unit

Operating Agreement, or Joint Operating Agreement, as applicable.

 

As used herein, "Ownership Percentage" shall be the same percentage as the
parties' then-ownership in the Paradise Unit. To the extent the parties'
then-ownership in the Paradise Unit is not uniform throughout the Unit, then
Ownership Percentage shall be the average of each party's ownership interest on
an acreage basis.

 
 

VI. REPRESENTATIONS AND WARRANTIES BY THE CORTEZ GROUP; LIMITED INDEMNITY

 

A. Warranty of Title.

 

Cortez and Windmill, and each of them, represent and warrant that as of the date
of this Agreement their respective title to the Prospect Leases is free and
clear from any prior conveyance, lien or encumbrance made or suffered by them,
or by any person by, through or under them, which diminishes, limits or burdens
the rights and interests that Empire has the right to earn under this Agreement.
Cortez and Windmill, and each of them, further warrant that until such time as
the Non-Unit Leases, or any of them, are assigned to Empire under the terms of
this Agreement, neither Cortez nor Windmill will make or suffer, or allow to be
made or suffered by any person by through or under them, any conveyance, lien or
encumbrance with respect to the Non-Unit Leases.

 

B. No Third Party Acquisitions.

 

Cortez and Windmill, and each of them, represent and warrant that as of the date
of this Agreement, there are no agreements with any person not a party to this
Agreement that in any manner qualify, alter or otherwise affect the rights and
obligations of the parties under this Agreement.

 

C. Limited Indemnity.

 

Cortez shall indemnify, defend, protect and hold harmless Empire from and
against any and all loss, cost or liability with respect to any lien,
encumbrance or claim made by James S. Isern, Isern Oil Company, Inc., or either
of them, and any successors or assigns of either of them, making any claims
affecting title to either the Paradise Unit Leases or the Non Unit Leases.

 

VII. NON-PARADISE UNIT LEASES

 

A. Empire's Option With Respect to the Non-Unit Leases.

 

For a period of one (1) year from June 1, 2010, Empire shall have the optional
right to drill an additional test well on any of the Non-Unit Leases that have
not expired. In order to maintain such option, Empire must pay 100% of the
rentals that become due under each of the Non-Unit Leases. However, Empire shall
have the right to elect, on a lease-by-lease basis during this one (1) year
term, whether to release its option as to a particular Non-Unit Lease (or
Leases), while still maintaining its option to the remaining Non-Unit Leases.
Should Empire elect to release a Non-Unit Lease from the option provided in this
Agreement, Empire shall give written notice of such election to the Cortez Group
no later than thirty (30) days in advance of the date the rental is due on such
Non-Unit Lease.

 
 

B. Drilling the Non-Unit Test Well.

 

As between Empire and the Cortez Group, Empire shall have the right to select
the location for the Non-Unit Test Well. This Non-Unit Test Well shall be
drilled and earning rights achieved under the same terms and conditions as
previously set forth for the drilling of the Empire Paradise Unit No. 2-12 Well,
with Empire earning 98% of the 160 acre governmental drilling and spacing unit
surrounding the Non-Unit Test Well until payout and earning one-half (1/2) of
the Cortez Group's 41% (of 8/8ths) working interest in the remaining Non-Unit
Leases.

 

C. Reassignment of Non-Unit Leases.

 

In the event that Empire does not exercise its optional right to drill a Non
Unit Test Well within the term of this Agreement, then it shall immediately
reassign all of the Cortez Group's interest to them in their proportion of
ownership.

 

D. Operator/Joint Operating Agreement.

 

Empire shall be the Operator with respect to the drilling, completion and/or
abandonment of the optional Non-Unit Test Well and all operations for such Non
Unit Leases shall be conducted pursuant to a Joint Operating Agreement, a copy
of which is attached hereto as Exhibit "D".

 

VIII. NOTICES

 

All notices or other communications required or permitted hereunder shall be
provided in writing and shall be delivered to the authorized representatives of
Empire or the Cortez Group, as the case may be, by either (i) personal delivery,
(ii) certified mail, return receipt requested, (iii) overnight delivery service,
or (iv) facsimile, as follows:

 

To Empire:

 

Empire Petroleum Corporation

8801 South Yale, Suite 120

Tulsa, Oklahoma 74137-3575

Attn: A. E. Whitehead

Facsimile: (918) 488-1530

 

To the Cortez Group:

 

Cortez Exploration, L.L.C.

16786 Kincheloe Road

Siloam Springs, Arkansas 72761

Attn: 0. F. Duffield, Manager

Facsimile: (479) 524-6057

 
 

IX. MISCELLANEOUS PROVISIONS

 

A. Successors and Assigns.

 

This Agreement shall not be assigned by any party without the prior written
approval of the non-assigning parties, which approval shall not be unreasonably
withheld, conditioned or delayed.

 

B. Headings.

 

Headings used in this Agreement are inserted for convenience only and shall not
affect the interpretation of any of the provisions of this Agreement.

 

C. Relationship of Parties.

 

This Agreement does not constitute the parties hereto as a partnership, mining
partnership, mining partnership, joint venture, incorporated association or any
other joint relationship, it being intended that liabilities and obligations of
the parties hereunder shall be several and not joint. Each party shall be
responsible only for its obligations and liabilities as set out herein and no
party shall be responsible for those of any other party.

 

D. Further Assurances.

 

The parties agree to execute such further instruments and documents and to
diligently undertake such actions as may be necessary or appropriate in
connection with the subject matter of this Agreement and to use their best
efforts to do those things reasonably necessary to give full force and effect to
the terms and intent of this Agreement.

 

E. Entire Agreement.

 

This Agreement, including the Exhibits attached hereto, constitutes the entire
agreement and understanding of the parties hereto with respect to the
transactions contemplated hereby, and supersedes all prior understandings,
discussions and agreements between the parties relating to the subject matter
hereof.

 

F. Laws Governing This Agreement.

 

This Agreement shall be governed by and construed in accordance with the laws of
the State of Nevada.

 

G. Binding Effect.

 

This Agreement shall be binding upon and inure to the benefit of the parties
hereto, their respective heirs, successors and assigns.

H. Counterpart Execution.

 

This Agreement may be executed in any number of counterparts, each of such shall
be considered an original for all purposes.

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates
set forth below.

 

    EMPIRE PETROLEUM CORPORATION             6-11-10 By: /s/ A. E. Whitehead
(Date)   A. E. Whitehead, President                 CORTEZ EXPLORTION, L.L.C.  
          6-15-10 By: /s/  O. F. Duffield (Date)   O. F. Duffield, Manager      
          WINDMILL OIL & GAS, L.L.C.             6-11-10 By: /s/  Richard L.
Harris (Date)   Richard L. Harris, Manager