Exhibit 10.1 [f8k_start011915.htm]

ASSIGNMENT OF OPTION TO EXERCISE OIL, GAS AND MINERAL LEASE

 

 

STATE OF TEXAS

 

COUNTY OF MATAGORDA

 

KNOW ALL MEN BY THESE PRESENTS, that XXI OIL & GAS, L.L.C., a Louisiana Limited
Liability Company, whose address is 1212 Gudalupe Street, Suite 606, Austin,
Texas 78701, (hereinafter sometimes referred to as "ASSIGNOR") for and in
consideration of One Hundred and No/100 Dollars ($100.00) and Other Valuable
Consideration does hereby bargain, sell, assign, convey and deliver to START
SCIENTIFIC, INC. a Delaware Corporation, whose address is 2003 My Anns Hill, San
Antonio, Texas (hereinafter referred to as "ASSIGNEE") ASSIGNOR'S Option to
Exercise Oil, Gas, And Mineral Lease, set out and attached hereto, marked
Exhibit "A" which Exhibit is made a part hereof for all purposes (hereinafter
referred to as "OPTION"),

 

TO HAVE AND TO HOLD said OPTION unto the said ASSIGNEE, subject to the terms and
conditions hereafter set forth in said OPTION.

 

In the event the Leases cover less than the full mineral interest in the lands
described therein, or any portion thereof, then the OPTION herein conveyed shall
be proportionately reduced and shall be payable to ASSIGNEE in the proportion
that mineral ownership of the Lessors in the land from which production is
obtained bears to the full mineral ownership in said land.

 

ASSIGNOR shall retain an overriding royalty interest of 1.25%. The overriding
royalty herein assigned shall attach to any amendment, extension or renewal of
any of said Leases, or any Leases covering an adverse interest in the lands
covered by any of said Leases, or any new Leases acquired by ASSIGNEE affecting
the lands covered thereby within two (2) years from the expiration of each of
said Leases.

 

All provisions contained herein shall be binding on all successors and/or
assigns of ASSIGNEE and ASSIGNOR.

 

If ASSIGNEE exercises said OPTION, ASSIGNOR shall receive Fifty Thousand and
No/100 Dollars (50,000.00) from ASSIGNEE upon such exercise.

 

This Assignment is made without warranty of any kind, either express or implied.

 

 

 

 

IN WITNESS WHEREOF this Assignment is executed the 13th day of January, 2015 in
the presence of the undersigned witnesses and notary public but is effective the
1st day of January, 2015.

 

XXI OIL & GAS, L.L.C.

 

 

By____________________________

S. Foster Hagen, Managing Member

 

 

 

 

 

 

 

 

 

 

 

 

 

STATE OF TEXAS {}

COUNTY OF TRAVIS {}

 

On this ___ day of January 2015, before me personally appeared S. Foster Hagen
to me personally known, who, being by me duly sworn, did say that he is the
Managing Member of XXI OIL & GAS, L.L.C. and that said instrument was signed in
behalf of said limited liability corporation by authority of its Board of
Directors and S. Foster Hagan acknowledged said instrument to be the free act
and deed of said limited liability corporation.

 

 

__________________________

Notary Public

Notary Public

STATE OF TEXAS

 

 

 

OPTION TO EXERCISE OIL, GAS AND MINERAL LEASE

 

 

STATE OF TEXAS

COUNTY OF MATAGORDA

 

 

THIS AGREEMENT, entered into this the 5th day of May, 2014, by and between the
City of Palacios, a municipal corporation located in Matagorda County, Texas
(hereinafter called "Grantor") and XXI Oil & Gas, LLC (a Louisiana LLC) whose
address is 1212 Guadalupe Street, Suite 606., Austin, Texas 78701, (hereinafter
called "Grantee").

 

WHEREAS, Grantor represents that Grantor has the legal right to execute an Oil,
Gas and Mineral Lease on the following described land in Matagorda County,
Texas, towit:

 

Tract 1:

 

Fifteen hundred (1531.4569) acres of land, more or less, out of Sections 11, 12,
16 and 17, of the Texas Rice Development Company Subdivision of lands in the J.
Smith Survey (A-379), the Lewis Goodwin Survey (A-162), and the Thomas Dasher
Survey (A-146), the D.O. Collinsworth Survey (A-129); being the same lands
described in conveyances from the United States of America to the City of
Palacios, Texas, recorded in Volume 179, Pages 523 to 530, and in Volume 197,
Pages 55 to 62, of the Deed Records of Matagorda County, Texas, to which
instruments reference is hereby had and made for all purposes, and being also
known as the Municipal Airport of the City of Palacios all in Matagorda County,
Texas.

 

Tract 2:

 

Being 241.8 acres of land, more or less, out of Fractional Section 1, Section 2,
and Fractional Section 3 of the Texas Rice Development Subdivision of Thomas
Dasher Survey, Abstract 146, and the Lewis Goodwin Survey Abstract 162, both
being in Matagorda County, Texas.

 

The acreage comprising Tract 2 is divided as follows:

 

City Streets   201 acres  Alleys   26 acres  Dump Grounds   10 acres  Sewer
Plant   5.8 acres 

 

 

 

WHEREAS, Grantee, under the terms and provisions hereinafter set out, desires to
secure an exclusive option to acquire an Oil, Gas and Mineral lease on all of
said lands in which Grantor has good title and the executor rights;

 

Grantor, for the sum of TEN THOUSAND DOLLARS ($10,000.00) and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, does hereby grant and convey unto Grantee, for a period of one
hundred-eighty (180) days from the date first above mentioned, the exclusive
right and privilege of acquiring an Oil, Gas and Mineral Lease on the lands
above described, together with all rights and privileges necessary, useful,
and/or convenient in connection therewith. Said lease shall be in the form as
the lease described on Exhibit "A". Grantee shall have said one hundred-eighty
(180) days from the date this lease option is signed to seek out joint venture
partners to drill a proposed well up to a depth of 18,000 feet subsurface and to
have its agents examine title. Grantor's title and leasing rights shall be
subject to approval by Grantee and, if Grantee elects to exercise this lease
option, the cash consideration below shall be due and payable on or before the
end of such one hundred-eight (180) day period. In the event Grantor owns an
abstract of title, Grantor agrees to supply Grantee a copy of said abstract.
This option may be exercised, at Grantee's discretion, at any time prior to the
expiration of this agreement, by giving written notice to Grantor. Said lease
shall become effective on the date Grantee elects to exercise this option.

 

Upon receipt of said notice, Grantor shall execute and deliver unto Grantee an
executed Oil, Gas and Mineral Lease as described in Exhibit A (the "Lease") in
favor of Grantee. Grantee shall pay to Grantor a cash consideration of ONE
HUNDRED THOUSAND ($100,000.00), subject to the terms and conditions of the
Lease, simultaneously with the delivery of the executed Lease.

 

Any notice given to either party must be in writing and sent to the above
address of each party. All of the covenants, obligations, and considerations of
this OPTION TO EXERCISE OIL, GAS AND MINERAL LEASE shall extend to and be
binding upon the parties hereto, their heirs, successors, assigns, and
successive assigns with the prior written consent of Grantor. Upon assignment of
this instrument, Grantee is released from all responsibilities and Grantee's
successor or assigns shall assume all liabilities.

 

 

 

 

IN WITNESS WHEREOF, this instrument is executed on the date first above written.

 

 

 

 

GRANTOR:

 

THE CITY OF PALACIOS

 

 

By:______________________________

John C. Sardelich, Mayor

 

Attest:

 

____________________________

David Kocurek, City Manager

 

 

 

 

GRANTEE:

 

XXI OIL & GAS, LLC

 

 

By: ____________________________

S. Foster Hagen, Member

 

 

THE STATE OF TEXAS

COUNTY OF MATAGORDA

 

The foregoing instrument was acknowledged by John C. Sardelich, Mayor of the
City of Palacios on ____________________, 2014.

 

 

______________________________

Notary Public

Notary Public State of Texas

My Commission Expires

 

 

 

THE STATE OF TEXAS

COUNTY OF MATAGORDA

 

The foregoing instrument was acknowledged on ______________________, 2014, by S.
Foster Hagen, the Manager of XXI Oil & Gas, LLC, a Louisiana LLC, on behalf of
said LLC.

 

 

________________________________

Notary Public for the State of Texas

 

Notary Public State of Texas

My Commission Expires

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EXHIBIT "A"

OIL AND GAS LEASE

 

THIS OIL AND GAS LEASE made and entered into this _____________________ day
of____________, 2014 by and between the City of Palacios, a municipal
corporation located in Matagorda County, Texas herein collectively referred to
as "Lessor", and _______________, whose address is
__________________________herein referred to as "Lessee";

 

WITNESSETH:

 

DEFINITIONS: The parties hereto agree that for purposes of the Lease, the
following definitions shall be applicable:

 

a. "production", "production in paying quantities", "production in commercial
quantities", "production in paying or commercial quantities" or words of similar
import shall have the same meaning for purposes of the Lease, namely production
in quantities sufficient to yield a return to the holders of the working
interest excluding severance taxes, in excess of operating and equipping
expenses and costs including such overhead and depreciation of assets which are
directly attributable to the Lease (which along with any other costs and
expenses are legally recognized by law in Texas as chargeable against revenues
for purposes of determining whether production is in paying quantities), even
though drilling costs may never be recouped by working interest owners. The
review period for purposes of determining whether production is in paying or
commercial quantities shall not exceed one hundred twenty (120) consecutive
days. There shall be no review period where production ceases. Production in
less than paying or commercial quantities shall never be considered as
production for purposes of the Lease.

 

b. "oil and/or gas" shall have the meanings or definitions derived from the
statutes, laws and court precedent of Texas, as such definitions or meanings may
change from time to time.

 

c. "operations for drilling", "drilling operations", "commencement of
operations", "commence operations", "commence drilling operations", "commences
drilling operations", "commencement of a well", "actual drilling operations" or
words of similar import shall have the same meaning, being the actual entry of
the rotating drillbit of a drilling rig, capable of achieving the total depth
permitted and approved by the Railroad Commission of Texas, into the soil of
Leased Premises and the timely prosecution of such actual drilling operations in
good faith and with reasonable diligence, without cessation of more than thirty
(30) days, to the completion of same as a dry hole or commercial well.

 

d. "operations for reworking", "reworking operations", "commencement of
reworking operations", "commence reworking operations", "commences reworking
operations", "actual reworking operations", "recompletions operations",
"recomplete" or words of similar import shall have the same meaning, being the
actual re-entry into an existing wellbore with a drilling or workover rig
capable of re-entering and reworking or recompleting such well and the timely
prosecution of such actual reworking or recompleting operations in good faith
and with reasonable diligence

 

 

and without cessation of more than thirty (30) days, toward the re-establishment
of commercial production of oil or gas from such previously producing zone or
zones or toward the establishment of commercial production of oil or gas from a
previously uncompleted or unproduced zone or zones in such well.

 

e. "operations", "other operations" or words of similar import shall be defined
as all other lease operations which may be conducted by Lessee under the Lease
except those defined in c. and d. above. "Operations" and "other operations" as
defined in this subparagraph e. shall never be the basis for perpetuation of the
Lease.

 

f.. "completed", or "completion" shall have the same meaning and the date a well
is completed shall be on (1) the date of the potential test conducted for
Railroad Commission purposes or (2) thirty (30) days after the drilling rig is
removed from over the bore hole of such well, or (3) the date a well is
abandoned as a dry hole, whichever happens sooner.

 

g. "shut-in": A well shall be considered and defined as "shut-in" on the earlier
of the following dates: (1) the date of the potential test conducted for
Railroad Commission purposes; (2) thirty (30) days after the drilling rig is
released; or (3) the day that a commercial well ceases actual production. No
well shall be considered as "shut-in" for purposes of payment of shut-in royalty
unless the well is actually capable of production in paying or commercial
quantities, without any repairs or additional equipment, either in the well or
downstream from the well, including equipment needed to make the production
therefrom marketable.

 

h. Standard of Conduct: The standard of conduct of Lessee in performing all
expressed as well as implied obligations, covenants and conditions imposed upon
Lessee arising out of this Lease, shall be that of utmost good faith and fair
dealing. Further, Lessee agrees to comply with all local, state and federal
laws, rules and regulations.

 

1. GRANTING CLAUSE. Lessor, in consideration of One Hundred Thousand Dollars
($100,000.00) in hand paid, of the royalties herein provided, and of the
agreements of Lessee herein contained, hereby grants, leases and lets, subject
to the hereinafter stated provisions, exclusively unto Lessee for the purpose of
investigating, exploring, prospecting, drilling and mining for and producing oil
and gas, laying pipe lines and building tanks thereon to produce, save, take
care of, treat, transport, store and own said products, the following described
land situated in Matagorda County, Texas, to-wit:

 

Tract 1:

 

Fifteen hundred (1531.4569) acres of land, more or less, out of Sections 11, 12,
16 and 17, of the Texas Rice Development Company Subdivision of lands in the J.
Smith Survey (A-379), the Lewis Goodwin Survey (A-162), and the Thomas Dasher
Survey (A-146), the D.O. Collinsworth Survey (A-129); being the same lands
described in conveyances from the United States of America to the City of
Palacios, Texas, recorded in Volume 179, Pages 523 to 530, and in Volume 197,
Pages 55 to 62, of the Deed

 

 

 

Records of Matagorda County, Texas, to which instruments reference is hereby had
and made for all purposes, and being also known as the Municipal Airport of the
City of Palacios all in Matagorda County, Texas.

 

Tract 2:

 

Being 241.8 acres of land, more or less, out of Fractional Section 1, Section 2,
and Fractional Section 3 of the Texas Rice Development Subdivision of Thomas
Dasher Survey, Abstract 146, and the Lewis Goodwin Survey Abstract 162, both
being in Matagorda County, Texas.

 

The acreage comprising Tract 2 is divided as follows:

 

City Streets   201 acres  Alleys   26 acres         Dump Grounds   10 acres 
Sewer Plant   5.8 acres 

 

No drilling, reworking or other operations may be conducted on the surface of
Tract 2 without Lessor's express written permission. Lessee may utilize the
subsurface of land comprising Tract 2 for horizontal or directional drilling, so
long as the well bore is not less than 1,500 feet below the surface of any lands
comprising Tract 2.

 

All of said land is sometimes herein referred to as the "Leased Premises."

 

2. PRIMARY TERM. Subject to the other provisions herein contained, this Lease
shall be for a term of five (5) years from this date (called "primary term") and
so long thereafter as oil or gas is produced in paying quantities hereunder from
said land, or as long as continuous drilling or reworking operations are being
conducted on said land, all as more particularly herein provided. If drilling
operations have not commenced before the third anniversary from the Lease
execution date, this Lease shall terminate unless Lessee, on or before such
anniversary date, pays to Lessor the sum of Seventy-Five Thousand Dollars
($75,000.00) In like manner, and upon like payments on or before each succeeding
anniversary date, subject to the other terms and provisions hereof, this Lease
may be maintained through the remainder of the primary term.

 

3. RESERVATIONS: There is EXCEPTED from the Lease and Lessor reserves unto
Lessor and Lessor's successors and assigns the following:

 

a. Lessor reserves all minerals except oil, gas and other liquid and gaseous
hydrocarbons and sulphur that are necessarily produced with such oil or gas;

 

b. Lessor reserves equal and concurrent rights of occupancy, use and possession
of the surface estate by (1) Lessor, and (2) Lessor's other mineral, surface,
grazing and recreational lessees or assignees, together with the right of
ingress to and egress from the Leased Premises for all purposes including
exploring,

 

 

 

developing and operating the Leased Premises for oil, gas and other minerals of
whatever nature which are not covered by the Lease or which may hereafter be
released from the Lease and equal and concurrent rights to complete water source
wells on the Leased Premises and in any reservoir not productive of oil or gas
for the purpose of obtaining water for domestic and agricultural use and
consumption and for the exploration, development and operation of Lessor's
reserved rights; provided, however, Lessor agrees not to use the surface of the
Leased Premises affected hereby in any manner that will interfere unduly with
any of Lessee's rights in exploring, developing, producing, treating,
processing, transporting, marketing and caring for oil, gas and other
hydrocarbons under the Leased Premises. As between mineral, surface, grazing and
recreational lessees, Lessee shall have the prior right of access to the surface
but Lessee agrees to reasonably accommodate such lessees' concurrent use of said
surface. Lessee shall have no right to use the surface of any of the lands
comprising Tract 2.

 

c. All rights granted to Lessee in the Lease shall be limited to the lands and
depths described and covered by the Lease together with Lessor's ingress to and
egress to and from Leased Premises and shall not extend to and Lessor expressly
reserves all rights, privileges and usage which relate to lands not described
herein or which may be released herefrom. Specifically, but not by way of
limitation, Lessee is prohibited from utilizing any right or privilege granted
under the Lease for use or benefit of or as a convenience in operating on lands
not covered by the Lease, whether such other lands are owned by Lessor or third
parties, unless such right is granted in writing by Lessor.

 

d. Lessor reserves unto itself and its successors, assignees, contractors,
agents and lessees the concurrent right to use any access to and from the above
lands and to conduct operations on the surface of the above land in order to
explore for, drill to, produce, develop, transport, store, treat and market oil,
gas and other minerals from (1) depths not covered hereby from time to time; (2)
other lands of Lessor or anyone or more of Lessor; and (3) other lands not owned
by Lessor, and to drill through said above described property and depths held
under the Lease from time to time in order to explore for, develop, produce and
market oil, gas or other minerals from below the above property or from any
other lands of Lessor or from any other lands not owned by Lessor. In this
regard, it is agreed that surface use shall be such that will not interfere
unduly with Lessee's operations but Lessee agrees to cooperate with any other
operator in regard to surface operations.

 

e. In regard to geophysical and/or geologic surveys by seismograph, core tests
or other magnetic tests conducted on Leased Premises, Lessor shall be paid
$15.00 for each acre (or fraction thereof) of survey conducted.

 

f. Lessee may not grant permission for seismographic or other "shooting
operations" on the Leased Premises to others nor may others who do not own any
legal or equitable interest in the Lease participate in the costs of such
seismic operations in exchange for such data, as Lessee may only conduct or
cause to be conducted such operations for its own use. Lessee may grant such
permission in each instance where Lessee participates with others or is in a
joint venture with others in conducting such seismic survey. However, Lessor
reserves the right to grant

 

 

 

permission to others to conduct such operations in which event Lessee shall
receive from such seismic operator a copy of data obtained.

 

g. Notwithstanding any other provisions contained in this Lease, it is
understood and agreed that this Lease shall not cover geothermal resources.

 

4. ROYALTIES. The royalties to be paid by Lessee are as follows. In each of the
following subparagraphs, the "royalty fraction" is eighteen and three quarters
percent (18.75%):

 

a. On oil, the royalty fraction of that produced and saved from said land, same
to be delivered at the wells or to the credit of Lessor in the pipe line to
which the wells may be connected.

 

b. On gas, including casinghead gas and all gaseous substances produced from
said land and sold or used off the premises except in the manufacture of
gasoline or other products therefrom, the market value of the royalty fraction
of the gas sold or used, such market value to be based on the highest market
price paid or offered for gas of comparable quality at the point of sale or use
and when run, or the gross price paid or offered to the producer, whichever is
the greater. Lessor's royalty shall never bear any portion of the expense of
transportation, treatment, processing, dehydration, compression or other similar
charges.

 

c. On distillate, condensate and other products separated or extracted by use of
oil and gas separators of conventional type or other equipment at least as
efficient from gas, including casinghead gas or other gaseous substances
produced from said land, the market value at the point of sale of the royalty
fraction of the distillate, condensate and other products so separated and
extracted, it being understood and agreed that said gas, before being sold or
used, will be run through such separators or other equipment unless (1) the same
is processed in an absorption or extraction plant, or (2) the liquid hydrocarbon
content of said gas is so small as to make the installation and operation of
separators or other comparable equipment unprofitable, or (3) the pressure of
said gas is such that running the same through separators or other comparable
equipment will so reduce the pressure that Lessee will be unable to sell and
deliver the separated gas against existing gathering system or pipe line
pressures.

 

d. In the event that any gas, including casinghead gas, from said land shall be
processed in an absorption or extraction plant owned or operated in whole or in
part by Lessee or any assignee of Lessee, or any affiliated, parent, or
subsidiary company of either of them (it being understood and agreed that
nothing herein contained shall require Lessee or any assignee to so process such
gas unless a reasonable and prudent operator, acting in accordance with the
standard of conduct required herein, would do so) then in lieu of the royalties
herein above provided on gas and the products extracted therefrom Lessor shall
be paid as royalties on such gas and products therefrom the following:

 

i. On distillate, condensate and other products, which are condensed and/or
extracted from the gas by running such gas through

 

 

 

an adequate conventional type oil and gas separator on the Leased Premises the
royalty fraction of the market value at the point of sale of the products which
are so recovered.

 

ii. On products extracted from the gas in the absorption or extraction plant,
but excluding products which are recovered by means described in the preceding
subparagraph, the royalty fraction of the market value of the products so
extracted and recovered, the market value to be determined at the point of sale.

 

e. In the event such absorption or extraction plant is operated by parties other
than Lessee or any assignee of Lessee or affiliated, parent or subsidiary
company of either of them, then the royalties to be paid on such gas, including
casinghead gas so processed, shall be the royalty fraction of the market value
at the point of sale of such gas or of the amount realized by Lessee from the
sale thereof, whichever is the greater. The market value for such gas shall be
based on the highest market price paid or offered for gas of comparable quality
at the point of sale and when run, or the gross price paid or offered to the
producer, whichever is the greater.

 

f. In the event gas produced from the Leased Premises is sold to a third party
for processing in a plant irrespective of the location of such plant under a
contract calling for the participation by Lessee in plant products and residue
gas, then in lieu of the royalty thereon provided for above, the royalty to be
paid on such gas shall be the royalty fraction of the benefits accruing to
Lessee under such contract.

 

g. On residue gas (that remaining after having been processed for the liquid
hydrocarbons therein contained) sold or used, the market value at the point of
sale of the royalty fraction of such residue gas sold or used.

 

h. The recovery of products covered by this Lease shall be calculated by the
making of periodical tests in accordance with modern and sound engineering
practices prevailing in the industry at the time of the test.

 

i Lessor, its agents and representatives, shall have the right to witness any
testing or gauging of oil, gas, condensate or distillate on the Leased Premises
or on land pooled therewith, and Lessee, upon request, shall furnish to Lessor
copies of all run tickets as soon as the run is made.

 

j. Lessor's royalty must never bear or be chargeable with, either directly or
indirectly, any part of the costs or expenses of production, gathering,
dehydration, compression, transportation, manufacturing, processing, treating or
marketing depreciation of any plant or other facility or facilities or equipment
for processing or treating or marketing depreciation of any plant or other
facility or facilities or equipment for processing or treating of the oil or gas
produced from the Leased Premises or lands pooled therewith. Lessee further
acknowledges that Lessor is a state agency and Lessor's royalty interest is not
subject to severance taxes. The amount of royalties due and owing to Lessor
under this Lease must not in any event be reduced by severance taxes. If Lessee
(or purchaser contracted by Lessee to purchase the production) fails to comply
with the terms of this paragraph and

 

 

 

does, in fact, deduct costs or expenses from the value of Lessors production,
Lessee must reimburse Lessor as follows: (i) the full amount of such deductions
made from the date first deducted; (ii) interest on such amount at an annual
percentage rate equal to the maximum contract rate allowed by law, or 12
percent, whichever is lesser, compounded monthly; and (iii) a penalty in the
amount of the greater of $25 or 5% of the amount owed. All payments due under
this paragraph are due immediately on receipt of an invoice from Lessor.

 

k. In the event there is a shut-in gas well or wells on this Lease, Lessee may
pay as royalty at monthly intervals One Thousand and no/100 Dollars ($1,000.00)
per well per month, and if such payment is made or tendered, it will be
considered that gas is being produced from the land covered by this Lease during
any period for which such payment is made. Such payments may be paid or tendered
to Lessor or to the credit of Lessor in Commercial State Bank, El Campo, Texas,
(which bank and its successors are Lessor's agent and shall continue as the
depository for all such payments regardless of changes in ownership of said land
or said royalties). In the event Lessee elects to maintain this Lease in force
and effect by the payment of shut-in royalty as herein provided, then the first
of such payments shall be made within sixty (60) days following the shutting-in
of such well, and such payment will maintain this Lease in force and effect from
the date such well was shut-in and for a period of thirty (30) days following
the date of such payment notwithstanding the expiration of the primary term.
Thereafter, this Lease may be continued in force and effect by such payments by
successive monthly payments made in advance by Lessee. The right to continue
this Lease in force and effect by the payment of shut-in gas well royalty as
above provided shall be a continuing right throughout the life of the Lease and
Lessee may avail itself of such right at any time and from time to time when
there is a shut-in gas well on the Leased Premises, or land pooled therewith. If
at any time during which such well(s) are shut-in gas should be produced, sold
and delivered in paying quantities from a well situated within 934 feet of the
Leased Premises, or in any case where drainage is occurring, the right to
further extend this Lease by shut-in royalty payments ceases. If Lessee fails to
pay any shut-in royalty as provided, and this Lease is not otherwise being
maintained in force and effect, this Lease automatically terminates. This Lease
may not be maintained by shut-in payments for more than twenty-four (24) months
in the aggregate.

 

5. MINIMUM ROYALTIES. If, at the expiration of the primary term of this and on
each anniversary thereafter, the payments made to Lessor for royalties or
shut-in royalties have amounted to less than Fifty and No/100 ($50.00) per acre
for each acre then subject to the Lease, then a minimum royalty payment equal to
the difference between Fifty and No/100 ($50.00) per acre for each acre then
subject to the Lease and the amounts actually paid to Lessor during such period
shall be paid to Lessor within thirty (30) days after such anniversary date.
Drilling operations shall not extend the time for computation or payment of
minimum royalty under the terms of this paragraph. No tender or payment of
minimum royalty as herein provided shall ever perpetuate the Lease or be
construed as constructive production in paying or commercial quantities.

 

6. ACCOUNTING FOR ROYALTY PAYMENTS. Lessee shall be required on a monthly basis,
to account to Lessor separately for each well on the Leased Premises or land
pooled therewith based upon the volume of production at each well head, with a
statement reflecting the gross production of each well, the gross price per unit
of

 

 

 

production (gas being expressed in thousand cubic feet and oil being expressed
in barrels of 42 gallons), the royalty interest in such production and the
amount owed and paid to such royalty interest owner. In addition, Lessee shall
comply with the Royalty Reporting Standards as set forth in Chapter 91, Natural
Resources Code, Subchapter L. Further, it is expressly provided that the Lessee
shall be liable to Lessor for the royalty on any oil, gas and all other
hydrocarbons and sulphur and other minerals produced with oil or gas which may
be lost or wasted due to leakage, fire, blowout or other reasons which are the
result of the Lessee's negligence or the negligence of its agents, independent
contractors, contractors, subcontractors, employees, assigns or any other party
connected with operations on the Lease Premises under the direction of or at the
request of the Lessee.

 

7. TAKING IN KIND. Lessor shall always have the right, upon reasonable written
notice to Lessee, to take Lessor's royalty share of the gas in kind, in which
event Lessor shall comply with all applicable laws, orders, rules and
regulations of the Railroad Commission of Texas or other governmental authority
having jurisdiction thereof and applicable thereto; and provided that such
operation shall be at Lessor's sole cost and expense and any additional expenses
incurred by Lessee in delivering Lessor's royalty share of the gas in kind shall
be repaid by Lessor; and provided further that Lessor agrees to indemnify and
hold Lessee harmless from and against any and all claims resulting from or
arising out of such operations by Lessor, and all costs and expense incurred by
Lessee by reason of any such claim or claims. If Lessor elects to take its
royalty share of gas in kind, and markets such gas separately from Lessee,
Lessor and Lessee shall enter into an appropriate gas balancing agreement using
the AAPL form then currently in use.

 

8. TIME FOR PAYMENT OF ROYALTIES. All royalties due hereunder shall be paid
within thirty (30) days of Lessee's receipt of the proceeds of sale of all
hydrocarbons produced and sold from the Leased Premises, but in no event beyond
the time permitted by Tex. Nat. Res. Code sec. 91.402. If not timely paid,
interest on all overdue payments shall accrue at the highest rate permitted by
any applicable statute, rule or regulation. If Lessee should fail to pay any
amount required under this Lease within the time period specified in this Lease
or required by law, whichever is less, Lessor shall give Lessee written notice
by certified mail addressed to Lessee of such default in such payment and Lessee
shall have thirty (30) days including Saturdays, Sundays and holidays after
receipt of such notice to pay to Lessor such amount then due and owing plus
interest on such past due amount as above provided. If full payment (including
interest) has not been received by Lessor within the thirty (30) day period
after notice, this Lease will terminate; provided, however, that if Lessee shall
asset by written notice to Lessor within the thirty (30) day period that a good
faith, bona fide dispute exists as to the entitlement of Lessor to payment of
such amount, based on a written opinion of an attorney who is licensed to
practice in Texas and certified as a specialist in oil, gas and mineral law by
the Texas Board of Legal Specialization, which written opinion, setting forth
the factual and legal bases for the alleged bona fide dispute, is included with
Lessee's notice, Lessee may then satisfy its obligations to pay such disputed
amount hereunder and avoid termination of this Lease by paying such disputed
amount to a trustee acceptable to both parties, which trustee shall retain and
invest such disputed amount in an interest-bearing account approved by Lessor
pending resolution of such dispute with the interest to

 

 

 

belong to the rightful owner of such amount. If Lessor and Lessee cannot agree
on a trustee to hold and invest the disputed amount within fifteen (15) days
after Lessee's notice, or if such dispute has not been settled and resolved
within ninety (90) days after Lessee's notice, then Lessee, upon request by
Lessor, shall at its expense institute an interpleader action, joining all
claimants to the disputed royalties, and tender the disputed amount plus any
interest accrued thereon into a court of competent jurisdiction to be held and
invested under the direction of the court. No attorney's fees or costs shall be
charged by Lessee against the royalties so interpleaded. If Lessee has timely
paid over the disputed amount and the accrued interest thereon to the trustee or
has timely interpleaded the disputed amount and the accrued interest thereon,
Lessor may not terminate the Lease by reason of such non-payment. In any dispute
involving this Lease, including but not limited to any dispute as to whether
this Lease has terminated in whole or in part, Lessor shall be entitled to
recover from Lessee reasonable and necessary attorney's fees and court costs.

 

9. POOLING. No potion of Tract 1 shall ever be pooled without Lessor's express
written consent, which may be withheld by Lessor for any reason. Lessee, at its
option, is hereby given the right and power to pool or combine all or any potion
of Tract 2 as to oil and gas, or either of them, with other land, lease or
leases in the immediate vicinity thereof to the extent hereinafter stipulated,
when in Lessee's judgment it is necessary or advisable to do so in order
properly to explore, or to develop and operate said Leased Premises in
compliance with the spacing rules of the Railroad Commission of Texas, or other
lawful authority, or when to do so would, in the judgment of Lessee, promote the
conservation of oil and gas in and under and that may be produced from said
premises. Units pooled for oil hereunder shall not exceed 40 acres each in area,
and units pooled for gas hereunder shall not exceed in area:

 

a. 80 acres each affecting rights from the surface of the ground down through
5,000 feet; and

 

b. 160 acres each affecting rights below 5,000 feet.

 

Lessee under the provisions hereof may pool or combine all or any potion of
Tract 2 as to oil in any one or more strata and as to gas in any one or more
strata. The units formed by pooling as to any stratum or strata need not conform
in size or area with the unit or units into which the Lease is pooled or
combined as to any other stratum or strata, and oil units need not conform as to
area with gas units. The pooling in one or more instances shall not exhaust the
rights of the Lessee hereunder to pool all or any potion of Tract 2 into other
units. Lessee shall file for record in the appropriate records of the county in
which the Leased Premises are situated an instrument describing and designating
the pooled acreage as a pooled unit, and in addition thereto shall furnish
Lessor promptly with an executed copy of such instrument. Lessee may at its
election exercise its pooling option before or after commencing operations for
or completing an oil or gas well on the Leased Premises, and the pooled unit may
include, but it is not required to include, land or leases upon which a well
capable of producing oil or gas in paying quantities has theretofore been
completed or upon which operations for the drilling of a well for oil or gas
have theretofore been commenced. Operations for drilling on or production of oil
or gas from any part of the pooled unit which includes all or a portion of the
land covered by this Lease, regardless of whether such operations for

 

 

 

drilling were commenced or such production was secured before or after the
execution of this instrument or the instrument designating the pooled unit,
shall be considered as operations for drilling on or production of oil or gas
from land covered by this Lease and included in the unit whether or not the well
or wells be located on the premises covered by this Lease, and the entire
acreage constituting such unit or units, as to oil and gas, or either of them,
as herein provided, shall be treated for all purposes, except the payment of
royalties on production from the pooled unit, as if the same were included in
Tract 2 of this Lease. For the purpose of computing the royalties to which
owners of royalties and payments out of production and each of them shall be
entitled on production of oil and gas, or either of them, from the pooled unit,
there shall be allocated to the land covered by this Lease and included in said
unit a pro rata portion of the oil and gas, or either of them, produced from the
pooled unit after deducting that used for operations on the pooled unit. Such
allocation shall be on an acreage basis - that is to say, there shall be
allocated to the acreage covered by this Lease and included in the pooled unit
that pro rata portion of the oil and gas, or either of them, produced from the
pooled unit which the number of surface acres covered by this Lease and included
in the pooled unit bears to the total number of surface acres included in the
pooled unit. Royalties hereunder shall be computed on the potion of such
production, whether it be oil and gas, or either of them, so allocated to the
land covered by this Lease and included in the unit, just as though such
production were from such land. The production from an oil well will be
considered as production from the Lease or oil pooled unit from which it is
producing and not as production from a gas pooled unit; and production from a
gas well will be considered as production from the Lease or gas pooled unit from
which it is producing and not from an oil pooled unit. Operations on or
production from a unit shall maintain this Lease only as to the acreage and
depths actually included in such unit. Lessee's pooling authority terminates
upon the expiration or termination (in whole or in pat) of this Lease, and, at
Lessor's election (which may be made at any time within one [1] year after a
determination that the Lease has terminated or expired, in whole or in pat), any
portion of the Leased Premises as to which this Lease has expired or terminated,
which has been included in a unit, shall no longer be subject to such unit. Any
pooled unit designated by Lessee in accordance with the terms hereof may be
dissolved by Lessee by instrument filed for record in the appropriate records of
the county in which the Leased Premises are situated at any time after the
completion of a dry hole or the cessation of production on said unit. Lessee is
denied the right to seek or consent to the forced pooling of any part of the
Leased Premises under the Mineral Interest Pooling Act or other pooling statutes
of Texas without Lessor's express written consent.

 

The formation of any unit hereunder shall not have the effect of exchanging,
transferring, or cross-conveying any interest under this Lease (including,
without limitation, any shut-in royalty which may become payable under this
Lease) between parties owning interests in land covered by this Lease and
parties owning interests in land not covered by this Lease, or between owners of
Separate Tracts covered by this Lease, or between owners of undivided interests
or NP Interest in any tract covered by this Lease. A unit established hereunder
shall be valid and effective for all purposes of this Lease even though there
may be mineral, royalty, or leasehold interests in lands within the unit which
are not effectively pooled or unitized; provided, however, that Lessor's
royalties shall never be reduced by or charged with any non-pooled
non-participating royalty or non-participating mineral interest ("NP Interest"),
due to Lessee's failure to secure the permission of any such interest owners to
the pooling

 

 

 

of any such interest hereunder; provided further that Lessee shall use its best
efforts to secure the consent of any NP Interest owner in to pooling of Separate
Tracts covered by this Lease prior to the drilling of any well thereon, but if
Lessee is not successful in securing the consent to such pooling, any such
unpooled NP Interest may not be deducted from Lessor's royalty. If this Lease
now or hereafter covers Separate Tracts, no pooling, unitization or
communitization as between such separate tracts is intended or shall be implied
or result therefrom, nor from the inclusion of the pooling authority granted
hereby, nor for any other reason. No offer to pool any such NP Interest is
extended to any owner thereof, nor shall any such offer be implied from the fact
that this Lease covers Separate Tracts, nor shall any pooling be effected
otherwise than by Lessee's express written exercise of the pooling authority
granted hereby. Lessee shall nevertheless have the right to pool or unitize such
Separate Tracts, with consequent allocation of production as herein provided, by
filing a written designation to that effect, as provided below. Lessor and
Lessee expressly disavow the holding in London v. Merriman, 756 S.W.2d 736 (Tex.
App. - Corpus Christi 1988, writ denied), and the ratification of this Lease by
the owner of any NP Interest shall apply only to each Separate Tract in which
such owner owns such interest, and shall not affect any pooling with the balance
of the Leased Premises. Pooling hereunder, if effected as a result of Lessee's
exercise of the pooling authority granted hereby, shall not result in any
cross-conveyance of interests among the owners of NP Interests and Lessor. As
used herein, "Separate Tracts" means tracts with royalty ownership differing,
now or hereafter, either as to parties or amounts, from that as to any other
part of the leased premises. Lessee agrees to exercise its pooling authority in
such a manner as to minimize Lessor's exposure to NP Interests. Upon termination
of this Lease, in whole or in part, Lessee's pooling authority as to the
terminated acreage shall cease, and any purported pooling of such terminated
potion shall likewise cease. The provisions of this paragraph are not intended
to deny to the owner of any NP Interest the right to share in production from
any properly formed pooled unit which is authorized by this Lease, provided that
such owner ratifies this Lease or the unit or otherwise consents to pooling of
such interest upon terms substantially identical to the terms hereof. Lessor may
withhold its consent to any pooled unit if Lessee fails to secure from the owner
of any such NP Interest such ratification or consent to pooling.

 

10. DRY HOLES. If prior to discovery and production of oil or gas on said land
or on acreage pooled therewith, Lessee should drill a dry hole or holes thereon,
or if after discovery and production of oil or gas the production thereof should
cease from any cause, this Lease shall not terminate if Lessee commences
operations for drilling or reworking within ninety (90) days thereafter. If at
any time subsequent to ninety (90) days prior to the beginning of the last year
of the primary term and prior to the discovery of oil or gas on said land, or on
acreage pooled therewith, Lessee should drill a dry hole thereon, no operations
are necessary in order to keep the Lease in force during the remainder of the
primary term. If at the expiration of the primary term oil or gas is not being
produced on said land, or on acreage pooled therewith, but Lessee is then
engaged in drilling or reworking operations thereon or shall have completed a
dry hole thereon within ninety (90) days prior to the end of the primary term,
the Lease shall remain in force so long as operations on said well or for
drilling or reworking of any additional well are prosecuted with no cessation of
more than sixty (60) consecutive days, and if they result in the production of
oil or gas, so long thereafter as oil or gas is produced from said land or
acreage pooled therewith.

 

 

 

 

11. RETAINED ACREAGE AND DEPTHS; RELEASES.

 

a. At the expiration of the primary term of the Lease or at the end of the
extended period provided below, the Lease shall terminate SAVE and EXCEPT for
(i) forty (40) acres of land surrounding each commercial oil well; (ii) eighty
(80) acres of land surrounding each commercial gas well producing or capable of
producing gas in paying or commercial quantities from the surface to 5,000 feet
and (iii) one hundred sixty (160) acres of land surrounding each commercial gas
well producing or capable of producing gas in paying or commercial quantities
from below 5,000 feet; the point of production for purposes of determining the
amount of acreage which Lessee may allocate to each well shall be the deepest
producing or producible perforation as it may vary from time to time and on a
retained tract by retained tract basis; and further SAVE AND EXCEPT the rights
granted by the Lease in and to the oil and gas and constituent substances in and
under each such retained tract from the surface of the ground to a depth of 100
feet below the stratigraphic equivalent of the deepest zone or horizon which
reasonably appears to be productive of oil or gas from the well as depicted on
the electric log of such well, on a well-by-well basis; however, at the
expiration of one (1) year after the expiration of the primary term or one (1)
year after the extended period provided below, Lessee may only retain rights
under each such retained tract from the surface to 100' below stratigraphic
equivalent of the then-deepest producing perforation, together with acreage
around such wellbore that corresponds with the formula set forth above. On each
occasion that a well is (a) recompleted at different depths and/or (b)
recompleted as an oil well after previously completed as a gas well, the acreage
and depths which may be retained around such well shall vary and be adjusted
according to the formula set forth above. In the event the Railroad Commission
of Texas (or other governmental authority having jurisdiction) requires, as
opposed to permits, pursuant to Special Field Rules, the allocation of larger or
smaller tracts of land or units to any such producing well in order to obtain
the maximum production allowable, then the Lease shall continue in force and
effect as to the amount of acreage surrounding each well required to obtain such
full allocation. If after the primary term, Lessee has perpetuated the Lease or
pat thereof with a well or wells producing or shut-in on proration units
required by Railroad Commission pursuant to Special Field Rules and the size of
such proration unit(s) around wells is reduced by Railroad Commission or other
regulatory rule, then Lessee shall have ninety (90) days after receipt of notice
of such Railroad Commission rule within which to commence drilling or
recompletion operations on any of the then-retained tracts which were being held
by the prior and larger proration units and if such well is timely commenced and
operations are prosecuted on such well or for the drilling of additional wells
on such prior and larger proration unit without cessation of more than ninety
(90) consecutive days, the acreage held within the prior and larger proration
unit shall be perpetuated during such operations and for ninety (90) consecutive
days thereafter but upon cessation of drilling operations for more than ninety
(90) consecutive days, then the Lease shall terminate except for the acreage
allocated around each then producing or shut-in well in accordance with the
smaller proration units prescribed or required by the Railroad Commission or
other regulatory authority pursuant to Special Field Rules. Lessee shall, within
thirty (30) days after the expiration of the Lease or pats hereof, file of
record in the office of the County Clerk of Matagorda County, Texas, an
instrument releasing the Lease insofar as the Lease has terminated, specifically
describing by metes and bounds the retained tracts surrounding each producing
well and the depth which may be retained by Lessee thereunder. If requested by
Lessor, Lessee shall, prior to recording

 

 

 

such release, deliver to Lessor a plat depicting the location of each retained
tract along with the log of each well within a retained tract and proof of the
depth claimed by Lessee to be retained within each tract. Lessee agrees to keep
such log confidential. Upon satisfying Lessor that Lessee has complied with this
Paragraph 12, Lessee shall record said release or releases. Each such tract
shall be in the form of a square with the well located thereon in the center of
said tract. However, if, because of the Lease boundaries, it is impossible to
designate a square around such well then Lessee may designate a rectangle the
length of which shall not exceed twice its width, with the well legally located
with respect to the boundaries thereof.

 

b. If, on the dates the partial releases called for herein become effective,
Lessee is then engaged in the actual drilling of a well in search of oil or gas
on the land covered hereby or has drilled a well thereon within a period of
ninety (90) days prior to the expiration of such period, then the provisions of
this paragraph shall not be applicable until such time as the Lessee allows a
period of ninety (90) consecutive days to elapse between the completion of
drilling operations on a well and the actual commencement of drilling operations
on subsequent wells on the lands covered hereby.

 

c. At such time as a partial termination of the Lease occurs under the
provisions of this paragraph, each retained tract shall be considered as a
separately leased tract, in the same manner as if Lessor had executed separate
and distinct leases covering each such retained tract. Notwithstanding a partial
termination of the Lease under the above provisions, it is agreed that Lessee
may continue to use the same ingress and egress over those lands partially
released or as to which this Lease has terminated, so as to enable Lessee to
develop and operate the retained tracts. Further, it shall not be necessary for
Lessee to remove or relocate any pipelines, tank batteries or other surface
equipment or installations from any potions of the Lease which have terminated
for so long as same continue to be used for the development of and operations on
such retained tracts.

 

d. The formula set forth in subparagraph a above for retained tracts shall not
be construed as an agreement or stipulation on the part of Lessor that such
drilling constitutes reasonable development of the Leased Premises. Lessee
agrees to drill such additional well or wells on each retained tract, (or such
potion or potions thereof as may be in force and effect from time to time) as
may be necessary to reasonably develop the same for the production of oil and/or
gas.

 

e. Upon expiration or termination of this Lease for any reason as to all or any
potion of the land herein described, Lessee shall be obligated at its expense
promptly to prepare, execute and file, in the public record in the county in
which such land or portion thereof is located, an appropriate release instrument
covering all or such potion of said land, and to forward a copy of same as so
recorded to Lessor.

 

f.. Lessee may at any time or times execute and deliver to Lessor and place of
record a release or releases covering any potion or potions of the above
described premises and thereby surrender this Lease as to such potion or potions
and be relieved of all obligations as to the acreage surrendered, except for
obligations which have accrued as of the date of the delivery and recording of
such release, and thereafter the rentals payable hereunder shall be reduced in
the proportion that the acreage covered hereby is reduced by said release or
releases.

 

 

 

 

12. ASSIGNMENTS.

 

a. Lessee shall not assign or in any manner transfer the Lease or any of its
rights hereunder without the prior written consent of Lessor, which consent may
not be unreasonably denied if the proposed lessee is financially responsible and
experienced in oil and gas operations and production (a "Qualified Transferee").
Consent by Lessor to one or more assignments or transfers shall not operate as a
waiver of Lessor's rights as to any subsequent assignments or transfers. In the
event that Lessee shall request Lessor's prior written consent to any assignment
or transfer of the Lease, Lessee shall submit to Lessor fully executed copies of
any proposed assignment or transfer together with information to establish that
the proposed assignee is a Qualified Transferee.

 

b. In the event of an assignment or partial assignment of the Lease with consent
of Lessor first obtained in writing, it is agreed that the provisions hereof,
both express and implied, shall be considered as covenants running with the land
and binding upon any assignee or sub-lessee of Lessee, and shall extend to its
permitted and consented to heirs, successors and assigns. Any attempted
assignment or partial assignment of the Lease without the written consent of
Lessor as provided in subparagraph a. shall be null and void. In no event may
any assignment of the Lease ever operate to reduce or extinguish obligations of
Lessee which accrued prior to such assignment or partial assignment.

 

c. Lessor may fully assign or transfer any of its rights hereunder but in such
event, it is agreed that any such change, transfer or division of Lessor's
rights hereunder shall not operate to enlarge the obligations or diminish the
rights of Lessee. No sale or assignment by Lessor shall be binding on Lessee
unless Lessee shall be furnished with a true and correct copy of the recorded
instrument evidencing same.

 

d. It is agreed that the term "assignment" shall extend to any transfer of Lease
rights, in whole or in part, conditional or unconditional, whether labeled as a
farmout, assignment, transfer, or some other label involving a transfer or
permit of any or all of Lessee's rights hereunder to a third person, including
Lessee's designation as operator.

 

13. NO WARRANTY OF TITLE. This Lease is made without warranty of title express
or implied. It is agreed, however, that if this Lease covers less than the full
mineral interest in the lands described herein, then royalties, except the
shut-in gas royalty provided for herein, to be paid to Lessor by Lessee shall be
that proportion that the mineral interest in said land covered by this Lease
bears to the entire and undivided mineral fee interest in said land.

 

14. FORCE MAJEURE. Should Lessee be prevented from complying with any express or
implied covenant of the Lease, from conducting drilling or reworking operations
hereon or from producing oil or gas herefrom by reason of or by operation of
force majeure, any federal or state law or any order, rule or regulation of
governmental authority, then while so prevented, Lessee's obligation to comply
with such covenants shall be suspended and Lessee shall not be liable in damages
for failure to

 

 

 

comply therewith and the Lease, as to the acreage and depths then covered
thereby, shall be extended while and so long as Lessee is prevented by any such
cause from conducting drilling or reworking operations on or producing oil and
gas from the Leased Premises and the time while Lessee is so prevented shall not
be counted against Lessee. In the event Lessee intends to claim any rights under
this paragraph, Lessee shall advise Lessor in writing within a period of fifteen
(15) days after the date Lessee claims any obligation hereunder is suspended,
setting forth in reasonable detail all facts that Lessee relies upon to utilize
the provisions of this paragraph. No suspension of the operations under this
paragraph shall be effective for more than one hundred twenty (120) days unless
Lessee shall pay or tender to Lessor or to Lessor's credit in Lessor's
designated depository, on or before the expiration of such one hundred twenty
(120) day period and monthly thereafter during the period such suspension is
claimed, a sum of money equal to one-twelfth (1/12 ) of $500.00 per acre times
the number of acres then covered by the Lease. Lessee may, if desired, make an
annual force majeure payment of $500.00 per acre to Lessor or the depository
named above for each acre subject to the Lease at the time of such payment and
thus be entitled to perpetuate the Lease for a consecutive twelve (12) month
period during such force majeure suspension, in lieu of monthly force majeure
payments. If Lessee elects to make such annual payments and during such twelve
(12) month period, the suspension is lifted and Lessee resumes production, no
refund of any such force majeure payment will be due. Notwithstanding anything
above stated to the contrary, if Lessee is prevented from complying with the
Lease because of Lessee's intentional or negligent acts or omissions then this
provision shall not be available to Lessee to perpetuate the Lease or suspend
Lessee's obligations. Lessee shall at all times act with all due diligence and
dispatch to remove any force majeure. Nothing in this paragraph shall excuse the
Lessee's performance of any covenant or agreement requiring the payment of
money.

 

15. INFORMATION TO LESSOR.

 

a. Lessee agrees to give Lessor notice prior to the commencement of any
drilling, reworking, completion, pipeline and seismic operations on the Leased
Premises, the approximate date of commencement of such operations and the
approximate location of the same and the objective depths of any proposed well,
such notice to be given within a reasonable time prior to the commencement of
such operations. During Lessee's regular office hours, Lessor shall have
reasonable access to and/or may request that Lessee provide Lessor with copies
of all information concerning the drilling, deepening, plugging back, coring,
testing and completing or recompleting of any and all wells on the Leased
Premises, and the marketing of production therefrom, including but not limited
to, all daily drilling repots telecopied or emailed to Lessor daily, all
driller's logs, all well logs and surveys, production chats and records, and
volumes of constituents of oil or gas, copies of analysis of core tests and
wireline tests and Lessor shall be entitled to view and copy seismic data
including digital tapes, reproducible mylar seismic sections and appropriate
shot point maps for all data recorded on the Lease, the seismic sections to be
in a final processing form that is standard in the industry, migrated and
unmigrated sections will be full fold coverage and will show a conventional
title block describing field and processing parameters. Further, Lessee shall
provide Lessor with all information concerning the production and marketing of
oil and gas from the Leased Premises, along with copies of all forms filed with
the Railroad Commission of Texas or any other governmental authority

 

 

 

having jurisdiction over Lessee's operations on the Lease; all information
relating to the costs incurred in drilling, completing, testing and reworking of
wells; provided Lessor agrees to keep confidential all non-public information
obtained under the terms of this paragraph and will not divulge such non-public
information to parties other than Lessor's attorneys, geologists, petroleum
engineers, accountants, financial consultants, guardians or other personnel or
legal representatives, for six (6) months after Lessor receives same or until
such information is generally available to the public, whichever happens sooner.

 

b. Upon written request by Lessor to Lessee, Lessee agrees to make available to
Lessor at Lessee's premises sufficient data and information for Lessor to make
an independent calculation of reserve estimates under the Lease. All information
provided to Lessor in this regard shall be without warranty and not more than
once a year.

 

c. Lessee, its successors and assigns, agree and obligate themselves to furnish
to Lessor (1) all abstracts of title, runsheets, title opinions and documents
pertaining to title examinations, if any, and (2) copies of all land surveys
made of the Leased Premises or pats thereof.

 

d. Lessee shall be obligated to apprise Lessor of any developments in the area
of the Leased Premises which affect or potentially Lessor's interests, including
but not limited to activities on adjacent or nearby land by Lessee or others, of
which Lessee or its employees have or obtain knowledge, which cause drainage
from the Leased Premises, damage to any reservoir underlying the Leased
Premises, violate any conservation rules, regulations or statutes affecting any
such reservoir, or result in litigation between Lessee and any other party
affecting the Leased Premises or operations thereon. Lessee shall give notice to
Lessor of the making and progress of any claim Lessee has or may asset against
any party arising in whole or in part from production from or operations on the
Leased Premises or land in the vicinity thereof, including the recovery,
compromise settlement of each claim. Lessor shall not be bound to conduct any
investigation into such matters and may rely upon Lessee's obligation to provide
information to Lessor as to such matters.

 

Lessee agrees to give notice to Lessor in the event Lessee decides to bring a
regulatory proceeding, claim or lawsuit against a third party who is draining,
damaging, overproducing, unlawfully depleting, or otherwise damaging any
reservoir underlying the Leased Premises, in a timely fashion so that Lessor may
asset Lessor's own claim or lawsuit in a court of appropriate jurisdiction, or
before a regulatory agency. Lessee shall give such notice to Lessor within sixty
(60) days of the date that Lessee decides to asset such claim or lawsuit. In the
event Lessee shall file a lawsuit and recover damages by virtue thereof or
otherwise receives a sum of money from any third party on account of drainage,
damaging, overproducing, unlawfully depleting or otherwise damaging any
reservoir underlying the Leased Premises, by compromise settlement agreement,
alternative dispute resolution or otherwise, then the Lessee will always be
deemed to be also representing the Royalty Share of the Lessor and any recovery
by or payment to Lessee representing damage to the reservoir or any Oil and Gas
well or any productive Oil and Gas sand or zone underlying the Leased Premises
shall be shared pro rata with Lessor. Nothing

 

 

 

herein shall preclude Lessor from bringing Lessor's own action but Lessor should
never be required to bring any such action, and Lessee shall always be deemed to
be representing the Lessor's Royalty and/or overriding Royalty Share and shall
pay same to Lessor from recoveries or payments to Lessor by virtue or on account
of the foregoing recovery, if any. If Lessee does not succeed in securing a
recovery from such third party, Lessee shall not be responsible to Lessor for
failure to succeed in securing any recovery thereon. The provisions of this
Paragraph 5 shall not be deemed to create a fiduciary relationship of Lessee to
Lessor or an obligation of Lessee to act as agent of Lessor with respect to the
matters set forth in this Paragraph 5. Lessee has an affirmative duty to
disclose all relevant information coming to Lessee's attention concerning the
Leased Premises and the production of oil and gas therefrom, as well as any
litigation or regulatory proceedings in any way related to same.

 

Lessee's failure to disclose any such information, whether or not such
information is or may be otherwise available to Lessor, unless such information
is actually known by Lessor (the burden of proof being on Lessee as to such
issue), shall bar the assertion by Lessee of the defense of the statute of
limitations in any action between Lessor and Lessee arising out of this Lease.

 

16. SURFACE/SUBSURFACE PROTECTION CLAUSES. As a part of the consideration for
the Lease, Lessor and Lessee agree as follows:

 

a. Roads and Gates: Lessee agrees to use existing gates and roadways to enter
and leave the Leased Premises, where available. Lessee and all persons entering
or leaving the Leased Premises in connection with Lessee's operations hereunder
shall keep all outside and interior gates along the route or routes designated
for such use securely closed except immediately before and immediately after
each such separate use. Lessee may, during the term of the Lease place separate
locks on any perimeter access gate. If requested by Lessor, Lessee agrees to
place a guard or representative at the entrance to the Leased Premises during
drilling and completion operations. In connection with any roads which Lessee
desires to build, Lessee agrees to consult with Lessor as to the location of
such roads and to accommodate Lessor in selecting reasonable access and will
construct such diversion terraces along any new roads as may be reasonably
necessary to reduce soil erosion. Lessee shall be required to install cattle
guards and, at Lessor's option, pipe gates to the side of such cattle guards at
each fence crossing.

 

b. Maintenance and Repairs: Lessee will maintain approaches, gates, fences,
cattle guards, roadways and other improvements used or damaged in connection
with Lessee's operations in a good state of repair and will promptly cause to be
repaired and restored any damage to the surface or improvements of the Leased
Premises occasioned by or resulting from Lessee's operations. In regard to
maintenance of roads used by Lessee or its employees, contractors and invitees,
Lessee shall repair damaged or deteriorating potions of roads within a
reasonable time not to exceed thirty (30) days after notice by Lessor of the
need for such repair. Materials used to repair road damage shall be either
caliche, gravel or other materials selected by Lessor except dirt fill.

 

c. Speed Limit. All times that Lessee's, or Lessee's agent's, contractor's or
representative's vehicles are on the Leased Premises, such vehicles shall not
exceed a speed of twenty (20) miles per hour.

 

 

 

d. Fences. Lessee shall consult with Lessor prior to cutting any fence. If
Lessee desires to cut a boundary fence, Lessee must obtain permission from
Lessor and the adjoining landowner prior to cutting any fence. Should it be
necessary to cut any fence or fences on the Leased Premises for the purposes of
passage and Lessee obtains permission from Lessor (and as to boundary fences,
from the adjoining landowner) then in such event, Lessee is permitted to cut
such fence provided that prior to cutting such fences there shall be installed
six (6) 10-foot posts with not less than 8-inch tops, each buried five (5) feet
into the ground with three (3) posts on each side of the proposed cut. The posts
are to be properly braced with horizontal braces and wired so that when the
fence is cut, there will be no slackening of the wires. After any fences are
cut, a metal gate shall immediately be placed in the fence which, if requested
by Lessor, shall be locked with a key to be furnished to Lessor.

 

e. Drill site Locations. This Lease prohibits lessee from using the surface of
the land for drilling, production, or other operations on streets, alleys, or a
public square. No well may be drilled on the site of the municipal airport
without prior approval of the City of Palacios as to the proposed site, and no
drilling operation shall interfere or obstruct the use of any airport
facilities. Lessee understands that any proposed use of the airport may also
require approval from the Federal Aviation Administration. In regard to the
construction of drill site locations, first Lessee agrees to remove and stack to
one side of the location, the first 8 inches of top soil from the location.
Lessee shall bio-remediate all pits containing oil-based mud before closure
(bio-remediation generally includes cultivation of the soil and addition of
supplements and nutrients such as fertilizer to promote the bio-degrading of
hydrocarbons). Lessee shall restore all pits containing water-based materials
according to Texas Railroad Commission standards. If a drillsite is in a
watershed or near a water source and there is a likelihood that reserve pit
materials could be washed by rainwater into such water source, then upon
completion of such drilling operations, Lessee agrees to remove oil-based
residue from such pit or site. Lessee shall line all pits containing oil-based
muds or petroleum waste materials with a non-permeable liner prior to use and
remove such materials and liner when drilling is completed. Each drillsite,
including slush pits, tanks, separators, treaters and any and all other
pertinent well and lease equipment above the surface, will be enclosed and kept
enclosed with a wire mesh or bullwire fence capable of turning livestock,
promptly after completion of any drilling operations and such fence shall be
maintained by Lessee for so long as such equipment remains on Leased Premises or
during the period of production resulting from such operations. No drilling
operation, pipeline construction, seismic lines or operations of any nature
shall be conducted within 500 feet of any houses, barns, water wells or
permanent improvements, without prior notice to and consent of the owner of said
improvements.

 

f.. Drillsite Restoration. Within sixty (60) days after completion or
abandonment of any well drilled on the Leased Premises, Lessee will remove all
caliche from the drillsite except a minimum amount around the wellbore of a
commercial well necessary for maintaining and operating such well; return the
top soil, which was previously removed and stacked, uniformly over the drillsite
location and will clean up the well site and remove from the Leased Premises any
and all oil and/or gas waste materials, oil spills, junk materials, pieces of
iron, pipes, steel and other debris

 

 

 

and foreign materials and will level all mounds, fill all pits and other
excavations and will remove all deleterious materials and substances that might
cause injury to person or livestock and generally restore such location to its
original condition, except for the minimum amount of surface needed to service a
commercial well. If requested by Lessor, Lessee agrees to fertilize and
neutralize the disturbed surface and plant the disturbed area with the type,
quantity and quality of grass designated by Lessor and the State Soil
Conservation Service.

 

g. Surface Restoration. Lessee will restore the surface of the Leased Premises
used by Lessee or its agents, contractors and employees, to as near its original
condition as is reasonably practicable after the completion, of each operation
conducted hereunder including the removal of all caliche except the minimum
amount necessary for operations and root plow and seed such areas with the kind,
quality and quantity of grass designated by Lessor and further agrees to
fertilize and neutralize the affected areas.

 

h. Trash. Lessee will use every effort to prevent fires on the Leased Premises
and will use every effort to prevent papers, boxes, sacks and containers and
waste materials of any kind from coming on the Leased Premises and littering the
Leased Premises. Under no circumstances will Lessee be allowed to bury any
trash, debris or foreign material of any nature on any of Lessor's lands.

 

i. Surface Facilities. Prior to erecting any storage tanks, pipelines,
compressor stations or other usual lease facilities which may be needed by
Lessee for producing oil and gas and operating the Lease, Lessee shall advise
Lessor of Lessee's intentions. Lessor and Lessee will then mutually select the
site or sites for locating such equipment and pipelines, taking into
consideration the operations of Lessor and Lessee's needs in conducting its
operations under the terms of the Lease in a reasonable manner. Lessee is
prohibited from constructing an oil or gas refinery or a plant for cleaning up
gas or removing H2S on the Leased Premises without first obtaining a separate
written lease agreement with Lessor. The location of separators, dehydrators and
compressors shall not be considered as plants.

 

j. Hunting and Fishing Prohibited. A condition to the granting of the Lease is
that no employee representative or contractor of Lessee or any other person
allowed to come upon said land by Lessee, shall be permitted to hunt, fish,
swim, camp or picnic on said land and no dog, gun, firearm, fishing equipment or
other sporting paraphernalia of any type will be permitted on the Leased
Premises. Lessee agrees that Lessor or his agents, employees, contractors or any
law enforcement officer or official may stop and search any vehicle coming onto
or leaving the Leased Premises under authority granted under the Lease and may
search any building, fixture or container placed on the Leased Premises in order
to enforce all provisions of the Lease. If any of Lessee's agents, contractors,
representatives or employees violates this provision, Lessor may give notice
thereof to Lessee and, if Lessee does not voluntarily remove or exclude such
offender, Lessor shall have the right to eject such party from the Leased
Premises and thereafter prohibit such party from entering upon the Leased
Premises.

 

 

 

 

k.. Removal of Equipment. Except as otherwise provided for herein, Lessee shall
have the right, at any time within one hundred twenty (120) days after
abandonment or cessation of use, to remove any property and fixtures placed on
the Leased Premises and if Lessee fails to remove such property and fixtures
within said one hundred twenty (120) days, such property and fixtures shall be
deemed to have been abandoned by Lessee and Lessor shall have the option but not
the obligation to either take possession thereof and dispose of the same as
Lessor sees fit or require Lessee to remove same and if Lessor removes same,
Lessee shall be liable for all costs incurred by such party in removing same,
provided, however, (a) Lessee shall not be relieved of any liability resulting
from any operations on the Leased Premises including the duty to plug any well
so abandoned, and (b) if any well is capable of being used for production of oil
or gas, same shall not be plugged and abandoned until thirty (30) days after
Lessor has been notified of Lessee's intention to plug and abandon same, and
Lessor may elect, with respect to such well, to take over such well for its own
use.

 

l. Contamination. Lessee will use every effort to prevent the escape of
saltwater or other noxious materials and will not permit the same to run into
any surface water tank, water well, creek, ravine, or upon or over the Leased
Premises, nor to penetrate, seep, flow or be injected into any subsurface fresh
water stratum, but will be contained and disposed of in keeping with applicable
governmental rules and regulations.

 

m. Water Wells. Each water well drilled on the Leased Premises by Lessee
together with all equipment in or on said well shall become the property of
Lessor upon the full development of the Lease or upon release of undeveloped
acreage as called for in Paragraph 12 above, whichever happens sooner. Lessor
shall have the concurrent right to use water therefrom during the term of the
Lease, so long as such use does not interfere with Lessee's operations.

 

n. Damage to Property. Lessee agrees to pay Lessor for actual damages resulting
to the surface of the Leased Premises, ranch roadways used by Lessee, fences,
gates, cattle guards, houses, barns, windmills, tanks and other structures,
trees, grass, crops, cattle and livestock caused by Lessee's operations or
occasioned by reason of such operations or such damages as Lessor may incur by
reason of Lessee's failure to comply with the terms of the Lease. Except as
otherwise provided herein, compensation for all damages to property shall be
based on the market value thereof or the prevailing rates for similar damages in
the area at the time, whichever is greater.

 

o. Surface Site Payments. Lessee shall be obligated to pay Lessor for each
surface site used by Lessee, such as drillsites, separators, dehydrators and
compressor sites, based on the going rate being paid for such surface sites and
usage in the area at the time but in no event shall such payment be less than
$10,000.00 regardless of the actual size of the site. Drillsites shall not
exceed 3 acres.

 

p. New Road Payments. Lessee shall be required to compensate Lessor for each new
road constructed by Lessee on Lessor's lands based on the prevailing rate being
paid for new roads in the area at the time of construction of same. Lessee shall
not be allowed more surface for roads than is reasonably necessary.

 

 

 

q. Seismic and Pipeline Payments. If Lessee conducts seismic operations on the
Leased Premises or should Lessee lay flow or gathering lines to transport Leased
substances across the Leased Premises, then Lessee shall be required to
compensate Lessor therefor based on the prevailing rates being paid in the area
at the time for pipelines and to compensate Lessor for seismic lines based on
prevailing rates being paid in the area for seismic permits, provided, however
that the minimum payment for pipelines shall be $10.00/per linear foot of pipe
and for seismic lines the minimum payment shall be $3,000.00 per mile for two
(2) dimensional seismic and not less than $30.00 per acre for three (3)
dimensional seismic. Lessor shall be paid in advance the estimated compensation
for any seismic survey and upon completion of such operations, such compensation
will be adjusted to account for any variations thereto. Seismic permit
agreements must be prepared and presented to Lessor along with estimated
compensation therefor, prior to commencement of such operations. All
compensation for pipelines shall be paid to Lessor. Nothing herein shall
restrict Lessee's right to lay pipelines for transportation of lease gas or
conduct seismic operations on Leased Premises.

 

r.. Pipeline Construction. In the event a flowline or gathering line (pipeline)
is laid on the Leased Premises, Lessee expressly covenants and agrees:

 

i. to bury the pipe so that the top thereof will be at least thirty-six (36")
inches below the existing ground level contour; except and provided that, where
said line crosses any drainage ditch, creek, slough or other waterway, the same
shall be buried at the place of such crossing at least thirty-six (36") inches
below the bottom of such drainage ditch, creek, slough, or other waterway; and
further provided, that none of the facilities, valves or equipment installed or
constructed in connection with such pipeline shall extend over the surface of
the ground, except that Lessee shall place line posts or markets where said
pipeline crosses Lessor's fence lines. Lessor reserves the right to impound
water over any pipeline.

 

ii. during the period of construction of said pipeline and during the period of
any subsequent altering, repairing, replacing or removing thereof, Lessee shall
leave or arrange for reasonable crossings over and across said pipeline for any
vehicles, equipment, cattle and/or livestock of Lessor, his tenants lessees,
successors or assigns. Upon completion of construction of said pipeline, Lessee
agrees to provide a caliche base road crossing to accommodate vehicles and
equipment at all locations where the pipeline crosses existing roads.

 

iii. to stack all trees and brush which are cut from the cleared area at the
time any necessary clearing is performed, so as to leave the cleared area free
of all trees, stumps, brush and debris, except for the stacked vegetation.
Lessee agrees to limit the width of the cleared area to ten (10') feet on either
side of the pipe. All brush and other material which is stacked in the cleared
area shall be free of dirt so as to be capable of being burned completely and
that no mounds of dirt or debris shall be left on or adjacent to cleared area.
Any trees, brush or other growth damaged outside the cleared area shall be
removed.

 

 

 

 

iv. during any construction, repair, removal or other operations by Lessee on a
pipeline, all ditching or trenching shall be done in such a manner so that the
top soil will be separated from the balance of the dirt removal in making the
ditch or trench and so that any caliche or other rock will be separated from any
dirt so removed. In backfilling after any such operation, the top soil first
removed shall be used as cover soil in such a manner as to result in it being
returned to the top of the ditch as top soil and Lessee agrees to leave the
cleared area free of any unearthed rock larger than three (3) inches in
diameter.

 

v. following any such construction, repair, removal or, other operations, to
backfill (in the manner aforesaid), pack and level any such ditch or trench
opened and fill, grade and restore the surface of the cleared area as near as
practicable to its original level and contour as when entered upon and in such a
manner that surface or rain water may pass and flow undisturbed and unimpeded
from one side of the cleared area to the other side of the cleared area.

 

vi. to level and restore all ruts, mounds, ridges and depressions caused by any
pipeline operations and to return at any time and from time to time, upon
request by Lessor, to correct, level and restore to the original ground level,
any further settlement of the soil that shall occur following the previous
filling or leveling of the same. Terraces shall be constructed at such locations
along the pipeline after completion of construction as designated by Lessor to
prevent or minimize erosion.

 

vii. that, if requested by Lessor, for so long as the pipeline is used, to keep
the total cleared area free of brush by causing the cleared area to be mowed or
shredded on a yearly basis beginning the year immediately following completion
of the original pipeline.

 

viii. to remove all stakes, posts, welding rods and pats thereof, pipe coating
material, paper, rubbish and other material used in the construction, repair and
removal of the pipeline, so as to leave the entire cleared area free of
deleterious material.

 

ix. to limit the natural gas transported through such pipeline to natural gas
produced under the terms of the Lease and from the Leased Premises.

 

s. Abandonment of Wells. If available, Lessee shall provide Lessor with a copy
of the log of any abandoned well along with Lessee's opinion, without warranty,
as to where there are water-bearing sands at shallow depths on the Leased
Premises. Prior to abandoning a well and subject to approval of state regulatory
authority, Lessee agrees to give Lessor prior notice of such intended plugging
and Lessor shall have five (5) days after notice within which to elect to take
over such well for completion as a water well. If Lessor elects to take over
same and the appropriate regulatory authority has approved of same, Lessee shall
plug such well to the depth designated by Lessor and thereafter Lessor shall own
such well together with the obligation to plug the remaining, unplugged potion
of such well when Lessor abandons same. Lessor agrees to execute the appropriate
forms required by the

 

 

 

Railroad Commission of Texas and other regulatory authority in order to transfer
operations and ownership of, as well as liability for, such well to him or her.
In the event Lessor declines to take over such well, then Lessee shall promptly
plug same.

 

t. Security. In the event Lessee fails or refuses to pay Lessor or Lessor for
payment, claims, surface use or damages, as required under the Lease, within
thirty (30) days after same are due, then Lessee shall be required to provide
Lessor with security in the form of cash in the sum of $20,000.00 payable to
Lessor which sum may thereafter be applied by Lessor toward Lessee's obligations
for past unpaid, as well as future compensation for payments, claims, surface
usage and damages and on each occasion that Lessor applies all or a part of said
security deposit toward unpaid payments, claims or compensation, Lessee agrees
to restore such security deposit to $20,000.00. If Lessee fails to make such
$20,000.00 security deposit and/or maintain same, within twenty (20) days after
notice from Lessor to tender same, then the Lease shall terminate save and
except the rights which may then have been earned by Lessee under the provisions
of Paragraph 12 above and, as to those rights retained, Lessor shall have a
first lien against the leasehold interest of Lessee therein to secure Lessor in
the payment of all sums of money which may then or thereafter be owed to Lessor
under the terms of the Lease and further the Lease shall constitute a Security
Agreement sufficient to satisfy the Uniform Commercial Code of Texas to
establish a security interest in this Leasehold estate for the benefit of Lessor
to secure them in the event of default by Lessee.

 

u. Place Of Payment. All payments, compensation and damages which may be due and
payable to Lessor shall be payable to Lessor in Palacios, Matagorda County,
Texas.

 

v. Environmental. As used in the Lease, the term "Hazardous Materials" means any
substance defined or identified as a hazardous, extra hazardous or toxic
substance, waste, or material under any applicable federal, state, or local
statute or regulation. "Remedial Work" is defined as any site investigation or
monitoring, any cleanup, containment, remedial, removal, or restoration work
performed in response to any federal, state or local government authority or
private attorney general action, or pursuant to any federal, state or local
statute, rule, regulation or other laws. Lessee agrees (1) to remove from the
Leased Premises, if, as and when required by law, any Hazardous Materials placed
or released thereon by Lessee, (2) to perform remedial work where the need
therefor arises in connection with Lessee's operations or activities on the
Leased Premises, and (3) to comply in all respects with all federal, state and
local governmental laws and regulations governing operations by Lessee and
remedial work on or associated with the Leased Premises. All costs and expenses
of remedial work made necessary by Lessee's operations shall be paid by Lessee.
If Lessee shall fail to timely commence or cause to be commenced, or fail to
diligently prosecute to completion, such remedial work, then Lessor may, but
shall not be required to, cause such remedial work to be performed. Lessee
promises to notify Lessor and Lessor of any written claim or other written
action by any governmental agency or other third party involving the actual or
alleged existence of hazardous materials on the Leased Premises and to provide
Lessor and Lessor with copies of (1) any notice of any release of Hazardous
Materials given to Lessee pursuant to any law or regulation and (2) any repot of
and response to any such incident. Lessee agrees to indemnify, pay and protect,
defend and save Lessor and Lessor harmless from all claims, liabilities,

 

 

 

fees and expenses of any kind including but not limited to attorney's fees,
court costs and litigation expenses including expenses of experts, that arise
from the actual or alleged presence or release any Hazardous Material in
connection with Lessee's operations on the Leased Premises. This indemnification
shall include costs in connection with any remedial work when performed by
Lessor, Lessor or any third party in response to any federal, state or local
governmental authority, laws or regulations, due and payable upon demand
therefor by the indemnitees.

 

w. Notices. Lessee agrees to designate in writing the name of the person or
persons to be present from time to time on the Leased Premises as current
operations are being conducted, with whom Lessor may resolve any claim for use,
injury and damage to surface area or improvements on said premises occasioned by
or arising from Lessee's operations or other activity on the Leased Premises. In
regard to notice of surface use, Lessor shall be entitled to prior notice of
such operations. Either party hereto may from time to time designate in writing
a different address or agent. For all purposes other than those relating to
surface operations, Lessor shall designate such agents from time to time. Notice
to Lessee shall be at the address shown on page 1 until further notice.

 

x. No Liability. If Lessor owns no rights in the surface of the Leased Premises
or less than all surface rights, Lessor shall have no liability to any owner of
surface rights for Lessee's or its agents', servants', invitees', contractors'
or sub¬ contractors' acts or omissions, nor for any liability arising from
operations conducted by such persons on the Leased Premises, nor shall Lessor be
required to take any action to require such persons to comply with, or to
enforce, the terms of the Lease with respect to the use or restoration of the
surface or subsurface.

 

17. LESSEE'S USE OF WATER/MINERALS.

 

a. Lessee may use oil or gas produced from the Leased Premises in its
operations, but Lessor shall be paid royalty on all oil or gas produced from the
Leased Premises. No royalty shall be owed on gas used for recycling operations
until same is produced and sold or used by Lessee.

 

b. Notwithstanding the above, Lessee may recycle gas for gas lift purposes or
for injection into any oil or gas producing formation covered by this Lease
underlying the Leased Premises and no royalties shall be payable on the gas so
recycled until such time as the same may thereafter be produced and sold or used
by Lessee.

 

c. Lessee shall not have the use of water from existing tanks or water wells
located on the Leased Premises without consent of and agreed compensation to the
Lessor. Lessee shall not have the right to dispose of salt or waste water
produced or obtained from off Leased Premises. Lessee shall have the privilege
of injecting salt water produced or obtained from Leased Premises, back into
subsurface strata conditioned upon such reinjection not contaminating or
contacting fresh water bearing sands and so long as such reinjection does not
damage the production of water or gas and oil reservoirs or strata under
Lessor's lands.

 

 

 

 

18. ADDITIONAL BONUS PAYMENT. Notwithstanding anything to the contrary contained
here, should title research confirm that the total net mineral acreage in the
Leased Premises owned or held by Lessor is greater than stated in Paragraph 1,
then Lessee must: (i) promptly pay to Lessor additional bonus and previously
paid annual rentals to be calculated by multiplying the additional net mineral
acreage by the bonus and annual rental amounts initially paid for the acreage
shown in Paragraph 1; and (ii) promptly pay royalties based on the adjusted net
mineral acreage for any and all production from and after the effective date of
this Lease. Lessee must timely pay all future royalties in accordance with the
terms of this Lease based on the adjusted net mineral acreage. Lessee must pay
amounts due under this paragraph within 30 days after written demand from Lessor
or the date Lessee discovers that Lessor owns more acreage than stated in this
Lease, whichever is earlier. If such amounts are not timely paid, interest will
accrue from the date of demand or the date Lessee discovered the acreage error,
whichever is earlier, at the rate of 12 percent per annum or the maximum rate
allowed by law, whichever is lesser, and be compounded monthly.

 

19. RELEASE, INDEMNITY, AND HOLD HARMLESS. Lessee hereby releases and discharges
Lessor, its council members, officers, employees, and agents of and from all and
any actions and causes of action of every nature, or other harm, including
environmental harm, for which recovery of damages is sought, including, but not
limited to, all losses and expenses which are caused by the activities of
Lessee, its officers, employees, and agents arising out of, incidental to, or
resulting from, the operations of or for Lessee on the Leased Premises, or that
may arise out of or be occasioned by Lessee's breach of any of the terms or
provisions of this Lease, or by any other negligent or strictly liable act or
omission of Lessee. Further, Lessee hereby agrees to be liable for, exonerate,
indemnify, defend and hold harmless Lessor, its council members, trustees,
officers, employees and agents, their successors or assigns, against any and all
claims, liabilities, losses, damages, actions, personal injury (including
death), costs and expenses, or other harm for which recovery of damages is
sought, including attorney's fees and other legal expenses, including those
related to environmental hazards on the Leased Premises or in any way related to
Lessee's failure to comply with any and all environmental laws; those arising
from or in any way related to Lessee's operations or any other of Lessee's
activities on the Leased Premises; those arising from Lessee's use of the
surface of the Leased Premises; and those that may arise out of or be occasioned
by Lessee's breach of any of the terms or provisions of this Lease or any other
act or omission of Lessee, its directors, officers, employees, agents,
contractors, guests or invitees. Each assignee of this Lease, or any interest
therein, agrees to be liable for, exonerate, indemnify, defend and hold harmless
Lessor, its council members, trustees, officers, employees, and agents in the
same manner provided above in connection with the activities of Lessee, its
officers, employees, and agents as described above.

 

20. INSURANCE. During drilling operations, reworking operations and production
of oil or gas from the Leased Premises, Lessee shall carry a minimum of (a)
comprehensive general public liability insurance coverage of at least
$2,000,000.00, such insurance shall provide coverage for premises operations,
explosion and collapse hazard, underground hazard, products/completed operations
hazard, contractual insurance, broad form property damage, independent
contractors and personal injury coverage including coverage for construction,
operation and maintenance

 

 

of pipelines for gathering, transporting or storing natural gas, including but
not limited to, loss or injury resulting from Hydrogen Sulfide Gas (H2S or "Sour
Gas"); (b) Operator's Extra Expense Indemnity Insurance, with a combined single
limit of at least $2,000,000.00 including coverage for control of well,
clean-up, seepage, pollution, underground blowouts and groundwater blowouts; and
(c) Excess Umbrella Liability Policy of at least $10,000,000.00 which coverage
and exclusions shall be identical to the insurance policies required under (a)
and (b) above. Lessor shall be furnished proof of such coverage before
commencement of operations hereunder and Lessee shall furnish Lessor a
certificate of insurance providing for thirty (30) days prior written notice to
Lessor of cancellation of, or change in, coverage. To the extent allowed by law,
Lessee shall name Lessor as additional insured under all insurance policies,
which policies shall include specific endorsements providing Waiver of
Subrogation in favor of Lessor.

 

21. DEGREE OF CARE. Lessee must use the highest degree of care and all
reasonable safeguards to prevent contamination or pollution of any environmental
medium, including soil, surface waters, groundwater, sediments, and surface or
subsurface strata, ambient air or any other environmental medium in, on, or
under, the Leased Premises, by any waste, pollutant, or contaminant. Lessee must
not bring or permit to remain on the Leased Premises any asbestos containing
materials, explosives, toxic materials, or substances regulated as hazardous
wastes, hazardous materials, hazardous substances, or toxic substances under any
federal, state, or local law or regulation ("Hazardous Materials"), except
ordinary products commonly used in connection with oil and gas exploration and
development operations and stored in the usual manner and quantities. Lessee's
violation of the foregoing prohibition constitutes a material breach and default
hereunder and Lessee must indemnify, hold harmless and defend Lessor from and
against any claims, damages, penalties, liabilities, and costs (including
reasonable attorneys' fees and court costs) caused by or arising out of: (i) a
violation of the foregoing prohibition; or (ii) the presence, release, or
disposal of any Hazardous Materials on, under, or about the Leased Premises
during Lessee's occupancy or control of the Leased Premises. Lessee must clean
up, remove, remedy and repair any soil or ground water contamination and damage
caused by the presence or release of any Hazardous Materials in, on, under, or
about the Leased Premises during Lessee's occupancy of the Leased Premises in
conformance with the requirements of applicable law. Lessee must immediately
give Lessor written notice of any breach or suspected breach of this paragraph,
on learning of the presence or any release of any Hazardous Materials, or on
receiving a notice from any governmental agency pertaining to Hazardous
Materials which may affect the Leased Premises. The obligations of Lessee will
survive the expiration or earlier termination, for any reason, of this Lease.

 

22. COMPLIANCE WITH LAWS. Lessee must at all times comply with all applicable
laws, regulations, ordinances, orders, permits, licenses and any other
directives of each and every governmental agency with jurisdiction over the
Leased Premises or Lessee's activities. Lessee must also comply with all
applicable restrictive covenants pertaining to the Leased Premises. Lessee is
under an express duty and obligation to protect the interest and rights of
Lessor before state as well as federal administrative authorities and agencies
such as the Railroad Commission of Texas and the Federal Energy Regulatory
Commission. Notwithstanding such duty, Lessee and Lessor agree that Lessor or
Lessor's representative shall have the

 

 

 

concurrent right and privilege along with Lessee to pursue and/or defend against
proceedings before any administrative agency without the joinder or consent of
Lessee and Lessee agrees that Lessor shall have standing to pursue or defend any
matter before any administrative agency. Nothing herein shall in any way be
construed as diminishing Lessee's duties and obligations to protect and preserve
Lessor's rights before administrative agencies but shall be supplemental of such
duties.

 

23. TIME. Time is of the essence of the Lease. The term "days" shall be deemed
to mean calendar days. If the expiration date by which Lessee is required to
make a payment to Lessor or Lessor's Depository Bank under the terms of the
Lease falls on a weekend or on a state or federal holiday, then such expiration
date for receipt of payment shall be extended until the next Monday or
non-holiday, as applicable. Otherwise, the expiration date for performance of
any action or activity shall be on the calendar day specified, regardless of
whether such expiration date falls on a weekend or state or federal holiday.

 

24. SEVERABILITY. If any clause or provision of this Lease is illegal, invalid
or unenforceable under present or future laws effective, then it is the
intention of the parties that the remainder of this Lease will not be affected
thereby, and it is also the intention of the parties to this Lease that in lieu
of each clause or provision of this Lease that is illegal, invalid or
unenforceable, there be added as a part of this Lease a legal, valid, and
enforceable clause or provision as similar in terms to the illegal, invalid or
unenforceable clause or provision as may be possible.

 

25. VENUE. The parties agree that all disputes in any way relating to, arising
under, connected with, or incident to the Lease, shall be litigated, if at all,
exclusively in the District Court of Matagorda County, Texas, and, if necessary,
the corresponding appellate courts. The parties also agree that Texas law
exclusively shall govern all terms of the Lease, including this paragraph. The
parties expressly submit themselves to the personal jurisdiction of the State of
Texas.

 

26. COUNTERPARTS. This Lease may be executed in multiple counterparts; each of
which shall be deemed an original and all of which shall be considered as one
and the same document.

 

27. MERGER. This instrument constitutes the entire agreement between the parties
as to this Lease. All previous negotiations and communications between the
parties as to these matters are merged into this Lease.

 

28. NO THIRD-PARTY BENEFICIARIES. There are no third-party beneficiaries of this
Agreement.

 

29. HEADINGS AND TITLES. The headings and titles in this Agreement are for
guidance and convenience of reference only and do not limit or otherwise affect
or interpret the terms or provisions of this Agreement.

 

30. NOT TO BE CONSTRUED AGAINST DRAFTER All parties acknowledge that they have
read this Agreement, have had opportunity to review it with an attorney of their
choice, and have agreed to all of its terms. Under these circumstances, the

 

 

 

parties agree that the rule of construction that a contract be construed against
the drafter may not be applied in interpreting this Agreement.

 

31. LESSEE'S REPRESENTATIONS. Lessee represents that the person executing this
Lease on its behalf is authorized by its board of directors or other governing
authority to do so, that this Lease has been approved by all necessary corporate
action, and that Lessee is qualified to do business and in good standing in the
jurisdiction of its domicile and in the State of Texas.

 

IN WITNESS WHEREOF, this instrument is executed on the date first above written.

 

THE CITY OF PALACIOS

 

 

By:______________________

John C. Sardelich, Mayor

 

Attest:

 

____________________________

David Kocurek, City Manager

 

 

 

 

 

 

 

LESSEE.

 

_____________________________

 

 

 

By:____________________________

 

 

 

 

 

 

THE STATE OF TEXAS

COUNTY OF MATAGORDA

 

The foregoing instrument was acknowledged by John C. Sardelich, Mayor of the
City of

Palacios on _______________________________ 2014.

 

 

________________________________

Notary Public for the State of Texas

 

 

 

 

THE STATE OF TEXAS

COUNTY OF ______________________________

 

The foregoing instrument was acknowledged and executed on ____________, 2014, by
____________________________________-

 

 

 

________________________________

Notary Public for the State of Texas