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Exhibit 10.1

 
Allied Energy, Inc.
Petroleum, West Virginia
Phone 304-628-3672
 

 
May 18, 2010
 

 
Allan Millmaker
Alamo Energy Corporation
10497 Town & Country Way, Ste. 820
Houston, Texas 77024
 
Re:           Participation Agreement
Re-entry, Valentine #1 Well
Ritchie County, West Virginia
 
Dear Allan:
 
When properly executed by you, this Participation Agreement will evidence the
agreement made and entered into between Allied Energy, Inc., hereinafter
referred to as “ALLIED”, and Alamo Energy Corporation, hereinafter referred to
as “Participant”, setting forth the terms and conditions under which ALLIED has
agreed to sell and assign to Participant, subject to the burdens and
reservations outlined in Paragraphs I and VI herein below, an undivided fifty
percent (50%) working interest in the leasehold estate as described in Exhibit
“A” attached hereto (the “Lease”) and made a part hereof; and a working interest
and net revenue interest in the Valentine #1 well (“Prospect”), that is located
in Ritchie County, West Virginia.  An Area of Mutual Interest (“Prospect AMI”)
is created hereby between the parties and is limited to a half mile radius from
the Lease boundaries.  All exhibits attached hereto shall be made a part hereof
for all purposes.
 
I.           Participant Interest Acquisition:  Enclosed herewith, ALLIED has
submitted an Authority For Expenditure (“AFE”) detailing the costs for re-entry,
drilling, re-completion, and equipping for production (“Drilling and Completion
Costs”) attributed to this Prospect in the amount of $153,500.  Participant
shall pay to ALLIED (the “Operator”) by wire transfer in immediately available
funds upon execution of this Agreement and the AFE by Participant the total
Drilling and Completion Costs of $153,500 to earn in the Prospect and Lease a
before Payout working interest of seventy percent (70%) and net revenue interest
of 59.08 (70% x 84.4%) and an after Payout working interest of fifty percent
(50%) and net revenue interest of 42.2% (50% x 84.4%).  Payout shall be defined
as that point of time when Participant recovers from monies paid to Participant
attributable to its before Payout net revenue interest, less state and local
taxes, one hundred and ten percent (110%) of the Drilling and Completion Costs
paid by Participant plus Participant’s 70% share of the costs of operating the
Prospect.
 
All other costs after those costs covered by the AFE shall be borne
proportionately by ALLIED and Participant in accordance with the Model Form
Joint Operating Agreement and COPAS attached hereto as Exhibit “B” (the “JOA”).
During the periods prior to and after Payout each party shall be responsible for
their appropriate working interest percentage of operating costs payable for the
Valentine #1 well pursuant to the JOA.
 
 
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II.           Initial Well:  ALLIED and Participant have agreed to re-enter the
Valentine #1, to a depth of approximately 3,000 feet or to a depth that will
adequately test the Gordon, Guatz, Berea, Kenner/Injun, and Maxon formations; at
a legal location within the boundaries of the Lease in Ritchie County, West
Virginia, in accordance with the terms and conditions herein (“Initial Well”).
 
Operator hereby agrees to commence, or cause to be commenced, operations for the
Initial Well as soon as practical after all funds have been received but no
later than thirty (30) days after execution of this Agreement; and once
operations are commenced, to prosecute the same with due diligence and in a good
and workmanlike manner to a depth as the joint owners may deem necessary to
adequately test the previously mentioned formations as shown in the well log of
the Valentine #1 well provided to the Participant.  Such well shall be evaluated
in accordance with reasonable and prudent Operator standards.  Operator will
manage all engineering services, including drilling and work over rigs, logging,
cementing, perforating and any testing of the Initial Well and any Subsequent
Wells drilled on the Lease and included within the Prospect AMI.
 
III.           Substitute Well:  If, in the drilling of the Initial Well
provided for above, or any substitute therefore, Operator shall encounter
conditions, substances or mechanical failure or difficulty which renders further
drilling operations impracticable or unreasonably hazardous in the judgment of
the joint owners, then Operator shall have the right but not the obligation to
abandon such operations and commence the drilling of a substitute well (the
“Substitute Well”) at a mutually acceptable location on or before ninety (90)
days from such abandonment and upon the commencement of such Substitute Well,
said operations, for all purposes hereunder, shall be considered as a
replacement of the drilling operations of the Initial Well.  Furthermore,
Operator’s failure to reach total depth in the Initial Well or Substitute Well
shall not result in damages to Operator or Operator’s agents.
 
IV.           Well Information:  Operator shall furnish daily reports by
telephone, fax or e-mail covering the preceding twenty-four (24) hours, advising
of the shows of oil and/or gas encountered and the results of all testing and
completion operations. ALLIED shall furnish Participant with sufficient notice
prior to the running of any logs, or tests so that Participant and/or its agents
may be present for such operations, if Participant so desires.  Additionally,
Operator shall furnish Participant one (1) copy of all logs, and one (1) copy of
test results, test charts, and West Virginia Department of Mines Oil and Gas
Division forms and reports filed in connection with the drilling and completion
or plugging and abandonment of the Initial Well or Substitute Well drilled on
the Lease and included within the Prospect AMI.
 
V.           Operating Agreement:  Except as otherwise set forth herein, the
rights and obligations agreed to by ALLIED and Participant and all operations
shall be governed and controlled by the AAPL FORM 610-1989 MODEL FORM OPERATING
AGREEMENT attached as Exhibit “B” in which ALLIED is to be designated as the
Operator. Notwithstanding anything to the contrary in the JOA, the Operator
shall market and sell the oil and gas production from the Initial Well or
Substitute Well on a best price/best terms basis on behalf of itself and the
Participant.  Operator on behalf of the Participant shall be responsible for the
payment of all royalties, overriding royalties, and other burdens due on the
Participant’s share of the oil and gas production from the such wells. In the
event a conflict or ambiguity should develop between the terms and conditions of
such JOA and this Agreement, then the terms and conditions of this Agreement
shall prevail and control.
 
 
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VI.           Assignment:  Simultaneously with the Participant paying the
Drilling and Completion Costs of the Initial Well, ALLIED shall assign to
Participant with warranty of title by, through and under ALLIED only; fifty
percent (50%) of the undivided interest in the Lease with all rights acquired
within the AMI, to all depths.  Participant will be delivered a 84.4 percent
(84.4%) net revenue interest in the unit, proportionately reduced to the actual
interest acquired.
 
VII.           Land and Legal:  Any additional run sheets, title opinions,
leases, brokerage fees, and outside attorney’s fees incurred and required to
secure clear title prior to the drilling of the Initial Well and any Subsequent
Well(s), and any costs associated with the preparation of any Division Order
Title Opinion shall be billed to the joint account.
 
VIII.           Notices:  All notices, reports and other communications required
or necessary by the terms of this Agreement shall be deemed served and addressed
if sent by regular mail, overnight express mail, fax, delivery in person or
courier service at the addresses stated herein below.  Either party may change
addresses by giving prior written notice to the other.  Until further notice,
the addresses of the parties to this Agreement are as follows:
 
Allied Energy, Inc.
Jon M. MaKeever
P.O. Box 3005
Saratoga, California 95070
Phone:  (310) 710-1976
WV Office:  (304) 628-3672
E-mail:  jmm@alliedenergywv.com
 
Alamo Energy Corporation
Allan Millmaker, CEO
10497 Town & Country Way, Ste. 820
Houston, Texas 77024
Phone:  (832) 200-4832
Fax:  (713) 464-8381
E-mail:  allan@alamoenergycorp.com
 
IX.           Options:  Participant shall have the option to participate in the
re-entry of two additional wells owned by ALLIED.  Participant and ALLIED agree
that, as of the execution of this Agreement, the two wells to be re-entered are
expected to be the WVIC-4 and the Connor #1.  Participant and ALLIED also
anticipate that a cost for re-entry and completion of each such well shall be
the same dollar amount as for the Valentine #1.  Upon Participant’s receipt from
ALLIED of an AFE indicating the costs for re-entry and completion of a possible
well, together with geologic, geophysical and engineering information
satisfactory to Participant, Participant shall have thirty (30) days to execute
such AFE and forward funds to ALLIED for the costs of the AFE.  Payment of such
costs by Participant shall earn before payout and after payout working interest
and net revenue interests in the proposed well and associated leasehold
identical to those earned in the Valentine #1 well.  If Participant elects not
to execute an AFE for a re-entry, ALLIED shall be free to market such operation
to any third party and Participant shall have no further claim to earn any
working interest in such re-entry.  Operations under an executed AFE by
Participant shall be in accordance with the terms and conditions of this
Agreement and the JOA which is attached to this Agreement as Exhibit “B”.
 
 
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X.           Miscellaneous Provisions:
 
1.           Participant acknowledges that any and all interest in the Lease,
the re-entry well or any Subsequent Well(s) acquired by it hereunder is taken
subject to the terms, conditions, reservations, exceptions and provisions of the
following:
 
a.           The Oil, Gas and Mineral Lease (the “Lease”) described in Exhibit
“A” attached hereto, as well as any amendments, extensions or renewals thereto;
 
2.           Participant specifically assumes its proportionate share of the
risk of description, title, and the condition of the Lease.
 
This Participation Agreement shall be considered effective upon the execution by
both parties of this instrument.  Upon the execution of this Agreement,
Participant will be deemed to have assumed and agreed to bear its proportionate
share of the duties and obligations set forth in the Operating Agreement.
 
Except for the tax partnership attached hereto as Exhibit “C” which shall be
binding on the parties, this Agreement shall not create any mining partnership,
commercial partnership, or other partnership, relationship or joint venture, and
the responsibilities of each of the parties hereto shall be several and not
joint.
 
This Agreement is entered into in the State of Texas, and all matters relating
to the validity, construction, interpretation and performance hereunder shall be
determined in accordance with the laws of the State of Texas.  Venue for any
cause of action of whatsoever nature arising hereunder is hereby fixed in Harris
County, Texas.
 
The provisions hereof shall extend to and be binding upon the parties hereto,
their respective successors and assigns, and any transfer or assignment of the
interests hereunder shall be expressly subject to the terms and provisions of
this Agreement.
 
 
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If this Agreement correctly states your understanding of our agreement, please
signify your acceptance and approval by executing and returning one (1) original
signature page of this Participation Agreement to ALLIED.
 
Sincerely,
 
ALLIED ENERGY, INC.
 
By:           /s/ Jon M. McKeever      
Jon M. McKeever President
 
ACCEPTED AND AGREED TO THIS
 
18TH DAY OF May, 2010.
 
ALAMO ENERGY CORPORATION
 
By:           /s/ Allan Millmaker          
Allan Millmaker, CEO
 
 
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EXHIBIT “A”
 
To that certain Participating Agreement, by and between ALLIED (“Operator”) and
Alamo Energy, Inc., (“Non-Operator”), covering lands identified as the Valentine
#1 re-entry, Ritchie County, WV.
 
1.           Description of Lands Subject to this Agreement:  Those certain
lands identified below.
 
2.           Restrictions, if any, as to Depths, Formations or Substances:  All
depths down to the top of the Marcellus Shale.
 
3.           Parties to Agreement with addresses and telephone numbers for
notice purposes:
 

 
PARTIES
WORKING INTEREST
 
Purchased
BPO W.I.
APO W.I.
BPO Net R.I.
APO NR.I.
Alamo Energy Corporation
10497 Town & Country Way, Ste. 820
Houston, Texas 77024
Phone:  (821-200-4832
Fax:  (713) 464-8381
E-mail:  allan@alamoenergycorp.com
50%
70%
50%
59.08%
42.2%
Allied Energy, Inc.
Jon M. MaKeever
P.O. Box 3005
Saratoga, California 95070
Phone:  (310) 710-1976
WV Office:  (304) 628-36762
E-mail:  jmm@alliedenergywv.com
50%
30%
50%
25.32%
42.2%
           
Total
100.00%
100.00%
100.00%
84.4%
84.4%

 
4.           Oil and Gas Leases and/or Oil and Gas Interests subject to this
Agreement:
 

 
LEASE
DATE
GROSS ACRES
BOOK
PAGE
LEASE
Florence Valentine
 
111.5
                 

 

 
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EXHIBIT "B"

 
A.A.P.L. FORM 610--19891

MODEL FORM OPERATING AGREEMENT

OPERATING AGREEMENT

DATED May 18, 2010,

 
 
 
OPERATOR
Allied Energy, Inc.
       
CONTRACT AREA
Florence Valentine Lease
                         

COUNTY OF RITCHIE, STATE OF WEST VIRGINIA

COPYRIGHT 1989--ALL RIGHTS RESERVED

AMERICAN ASSOCIATION OF PROFESSIONAL LANDMEN, 4100 FOSSIL CREEK BLVD. FORT
WORTH, TEXAS, 76137, APPROVED FORM.

A.A.P.L. NO. 610--1989

TABLE OF CONTENTS

 
 
Article
   I.  Definitions.
  II.  Exhibits.
 III.  Interests of Parties.
       A.  Oil and Gas Interests.
       B.  Interests of Parties in Costs and Productions.
       C.  Subsequently Created Interests.
  IV.  Titles.
       A.  Title Examination.
       B.  Loss or Failure of Title.
           1.    Failure of Title.
           2.    Loss by Non-Payment or Erroneous Payment of Amount Due.
           3.    Other Losses.
           4.    Curing Title.
 
 
 
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   V.  Operator.
       A.  Designation and Responsibilities of Operator.
       B.  Resignation or Removal of Operator and Selection of Successor.
           1.    Resignation or Removal of Operator.
           2.    Selection of Successor Operator.
           3.    Effect of Bankruptcy.
       C.  Employees and Contractors.
       D.  Rights and Duties of Operator.
           1.    Competitive Rates and Use of Affiliates.
           2.    Discharge of Joint Account Obligations.
           3.    Protection from Liens.
           4.    Custody of Funds.
           5.    Access to Contract Area and Records.
           6.    Filing and Furnishing Governmental Reports.
           7.    Drilling and Testing Operations.
           8.    Cost Estimates.
           9.    Insurance.
  VI.  Drilling and Development.
       A.  Initial Well.
       B.  Subsequent Operations.
           1.    Proposed Operations.
           2.    Operations by Less Than All Parties.
           3.    Stand-By Costs.
           4.    Deepening.
           5.    Sidetracking.
           6.    Order of Preference of Operations.
           7.    Conformity to Spacing Pattern.
           8.    Paying Wells.
       C.  Completion of Wells; Reworking and Plugging Back.
           1.    Completion.
           2.    Rework, Recomplete or Plug Back.
       D.  Other Operations.
       E.  Abandonment of Wells.
           1.    Abandonment of Dry Holes.
           2.    Abandonment of Wells That Have Produced.
           3.    Abandonment of Non-Consent Operations.
       F.  Termination of Operations.
       G.  Taking Production in Kind.
           (Option 1) Gas Balancing Agreement.
           (Option 2) No Gas Balancing Agreement.

 
 
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 VII.  Expenditures and Liability of Parties.
       A.  Liability of Parties.
       B.  Liens and Security Interests.
       C.  Advances.
       D.  Defaults and Remedies.
           1.    Suspension of Rights.
           2.    Suit for Damages.
           3.    Deemed Non-Consent.
           4.    Advance Payment.
           5.    Costs and Attorneys' Fees.
       E.  Rentals, Shut-In Well Payments and Minimum Royalties.
       F.  Taxes.
VIII.  Acquisition, Maintenance or Transfer of Interest.
       A.  Surrender of Leases.
       B.  Renewal or Extension of Leases.
       C.  Acreage or Cash Contributions.
       D.  Assignment; Maintenance of Uniform Interest.
       E.  Waiver of Rights to Partition.
       F.  Preferential Right to Purchase.
  IX.  Internal Revenue Code Election.
   X.  Claims and Lawsuits.
  XI.  Force Majeure.
 XII.  Notices.
XIII.  Term of Agreement.
 XIV.  Compliance With Laws and Regulations.
       A.  Laws, Regulations and Orders.
       B.  Governing Law.
       C.  Regulatory Agencies.
  XV.  Miscellaneous.
       A.  Execution.
       B.  Successors and Assigns.
       C.  Counterparts.
       D.  Severability.
 XVI.  Other Provisions.
 
 

OPERATING AGREEMENT

THIS AGREEMENT, entered into by and between Allied Energy, Inc., hereinafter
designated and referred to as "Operator," and the signatory party or parties
other than Operator, sometimes hereinafter referred to individually as "Non-
Operator," and collectively as "Non-Operators."

WITNESSETH:

WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or
Oil and Gas Interests in the land identified in Exhibit "A," and the parties
hereto have reached an agreement to explore and develop these Leases and/or Oil
and Gas Interests for the production of Oil and Gas to the extent and as
hereinafter provided,

NOW, THEREFORE, it is agreed as follows:
 
 
 
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ARTICLE I.

DEFINITIONS

As used in this agreement, the following words and terms shall have the meanings
here ascribed to them:

A. The term "AFE" shall mean an Authority for Expenditure prepared by a party to
this agreement for the purpose of estimating the costs to be incurred in
conducting an operation hereunder.

B. The term "Completion" or "Complete" shall mean a single operation intended to
complete a well as a producer of Oil and Gas in one or more Zones, including,
but not limited to, the setting of production casing, perforating, well
stimulation and production testing conducted in such operation.

C. The term "Contract Area" shall mean all of the lands, Oil and Gas Leases
and/or Oil and Gas Interests intended to be developed and operated for Oil and
Gas purposes under this agreement. Such lands, Oil and Gas Leases and Oil and
Gas Interests are described in Exhibit "A."

D. The term "Deepen" shall mean a single operation whereby a well is drilled to
an objective Zone below the deepest Zone in which the well was previously
drilled, or below the deepest Zone proposed in the associated AFE, whichever is
the lesser.

E. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.

F. The term "Drilling Unit" shall mean the area fixed for the drilling of one
well by order or rule of any state or federal body having authority. If a
Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
unless fixed by express agreement of the Drilling Parties.

G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas Interest
on which a proposed well is to be located.

H. The term "Initial Well" shall mean the well required to be drilled by the
parties hereto as provided in Article VI.A.

I. The term "Non-Consent Well" shall mean a well in which less than all parties
have conducted an operation as provided in Article VI.B.2.

J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party
who elects not to participate in a proposed operation.

K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas condensate,
and/or all other liquid or gaseous hydrocarbons and other marketable substances
produced therewith, unless an intent to limit the inclusiveness of this term is
specifically stated.

L. The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and
mineral interests in Oil and Gas in tracts of land lying within the Contract
Area which are owned by parties to this agreement.

M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the oil and
gas leases or interests therein covering tracts of land lying within the
Contract Area which are owned by the parties to this agreement.

N. The term "Plug Back" shall mean a single operation whereby a deeper Zone is
abandoned in order to attempt a Completion in a shallower Zone.

O. The term "Recompletion" or "Recomplete" shall mean an operation whereby a
Completion in one Zone is abandoned in order to attempt a Completion in a
different Zone within the existing wellbore.

P. The term "Rework" shall mean an operation conducted in the wellbore of a well
after it is Completed to secure, restore, or improve production in a Zone which
is currently open to production in the wellbore. Such operations include, but
are not limited to, well stimulation operations but exclude any routine repair
or maintenance work or drilling, Sidetracking, Deepening, Completing,
Recompleting, or Plugging Back of a well.

Q. The term "Sidetrack" shall mean the directional control and intentional
deviation of a well from vertical so as to change the bottom hole location
unless done to straighten the hole or to drill around junk in the hole to
overcome other mechanical difficulties.

R. The term "Zone" shall mean a stratum of earth containing or thought to
contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.

Unless the context otherwise clearly indicates, words used in the singular
include the plural, the word "person" includes natural and artificial persons,
the plural includes the singular, and any gender includes the masculine,
feminine, and neuter.

 
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  ARTICLE II.

EXHIBITS

The following exhibits, as indicated below and attached hereto, are incorporated
in and made a part hereof:

 
 
___X____ A. Exhibit "A," shall include the following information:

 
 
(1) Description of lands subject to this agreement,

 
 
(2) Restrictions, if any, as to depths, formations, or substances,

 
 
(3) Parties to agreement with addresses and telephone numbers for notice
purposes,

 
 
(4) Percentages or fractional interests of parties to this agreement,

 
 
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement,

 
 
(6) Burdens on production.

 
 
___X____ C. Exhibit "C," Accounting Procedure.

 
 
___X____ D. Exhibit "D," Insurance.

 
 
.

 
 
___X____ G. Exhibit "G," Tax Partnership.

 
 
_______ H. Other: _____________________________________________________________

 
 
If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.

 

 
 
   
 
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ARTICLE III.

INTERESTS OF PARTIES

A. Oil and Gas Interests:

If any party owns an Oil and Gas Interest in the Contract Area, that Interest
shall be treated for all purposes of this agreement and during the term hereof
as if it were covered by the form of Oil and Gas Lease as mutually agreed among
the parties and the owner thereof shall be deemed to own both royalty interest
in such lease and the interest of the lessee thereunder.

B. Interests of Parties in Costs and Production:

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

Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas
Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, Operator on behalf of all
parties shall pay or deliver, or cause to be paid or delivered, all burdens on
the production from the Contract Area up to, but not in excess of, 15.6% and
shall indemnify, defend and hold the other parties free from any liability
therefor. Except as otherwise expressly provided in this agreement, if any party
has contributed hereto any Lease or Interest which is burdened with any royalty,
overriding royalty, production payment or other burden on production in excess
of the amounts stipulated above, such party so burdened shall assume and alone
bear all such excess obligations and shall indemnify, defend and hold the other
parties hereto harmless from any and all claims attributable to such excess
burden. However, so long as the Drilling Unit for the productive Zone(s) is
identical with the Contract Area, each party shall pay or deliver, or cause to
be paid or delivered, all burdens on production from the Contract Area due under
the terms of the Oil and Gas Lease(s) which such party has contributed to this
agreement, and shall indemnify, defend and hold the other parties free from any
liability therefor.

No party shall ever be responsible, on a price basis higher than the price
received by such party, to any other party's lessor or royalty owner, and if
such other party's lessor or royalty owner should demand and receive settlement
on a higher price basis, the party contributing the affected Lease shall bear
the additional royalty burden attributable to such higher price.

Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.

C. Subsequently Created Interests:

If any party has contributed hereto a Lease or Interest that is burdened with an
assignment of production given as security for the payment of money, or if,
after the date of this agreement, any party creates an overriding royalty,
production payment, net profits interest, assignment of production or other
burden payable out of production attributable to its working interest hereunder,
such burden shall be deemed a "Subsequently Created Interest." Further, if any
party has contributed hereto a Lease or Interest burdened with an overriding
royalty, production payment, net profits interest, or other burden payable out
of production created prior to the date of this agreement, and such burden is
not shown on Exhibit "A," such burden also shall be deemed a Subsequently
Created Interest to the extent such burden causes the burdens on such party's
Lease or Interest to exceed the amount stipulated in Article III.B. above.

The party whose interest is burdened with the Subsequently Created
Interest  (the "Burdened Party") shall assume and alone bear, pay and discharge
the Subsequently Created Interest and shall indemnify, defend and hold harmless
the other parties from and against any liability therefor. Further, if the
Burdened Party fails to pay, when due, its share of expenses chargeable
hereunder, all provisions of Article VII.B. shall be enforceable against the
Subsequently Created Interest in the same manner as they are enforceable against
the working interest of the Burdened Party. If the Burdened Party is required
under this agreement to assign or relinquish to any other party, or parties, all
or a portion of its working interest and/or the production attributable thereto,
said other party, or parties, shall receive said assignment and/or production
free and clear of said Subsequently Created Interest, and the Burdened Party
shall indemnify, defend and hold harmless said other party, or parties, from any
and all claims and demands for payment asserted by owners of the Subsequently
Created Interest.

 
   
 
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ARTICLE IV.

TITLES

A. Title Examination:

Title examination shall be made on the Drillsite of any proposed well prior to
commencement of drilling operations and, if a majority in interest of the
Drilling Parties so request or Operator so elects, title examination shall be
made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of the
well. The opinion will include the ownership of the working interest, minerals,
royalty, overriding royalty and production payments under the applicable Leases.
Each party contributing Leases and/or Oil and Gas Interests to be included in
the Drillsite or Drilling Unit, if appropriate, shall furnish to Operator all
abstracts (including federal lease status reports), title opinions, title papers
and curative material in its possession free of charge. All such information not
in the possession of or made available to Operator by the parties, but necessary
for the examination of the title, shall be obtained by Operator. Operator shall
cause title to be examined by attorneys on its staff or by outside attorneys.
Copies of all title opinions shall be furnished to each Drilling Party. Costs
incurred by Operator in procuring abstracts, fees paid outside attorneys for
title examination (including preliminary, supplemental, shut-in royalty opinions
and division order title opinions) and other direct charges as provided in
Exhibit "C" shall be borne by the Drilling Parties in the proportion that the
interest of each Drilling Party bears to the total interest of all Drilling
Parties as such interests appear in Exhibit "A."  Operator shall make no charge
for services rendered by its staff attorneys or other personnel in the
performance of the above functions.

Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any other
orders necessary or appropriate to the conduct of operations hereunder. This
shall not prevent any party from appearing on its own behalf at such hearings.
Costs incurred by Operator, including fees paid to outside attorneys, which are
associated with hearings before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement, shall
be direct charges to the joint account and shall not be covered by the
administrative overhead charges as provided in Exhibit "C" Operator shall make
no charge for services rendered by its staff attorneys or other personnel in the
performance of the above functions.

No well shall be drilled on the Contract Area until after (1) the title to the
Drillsite or Drilling Unit, if appropriate, has been examined as above provided,
and (2) the title has been approved by the examining attorney or title has been
accepted by all of the Drilling Parties in such well.

B. Loss or Failure of Title:

3. Losses:  All losses of Leases or Interests committed to this agreement shall
be joint losses and shall be borne by all parties in proportion to their
interests shown on Exhibit "A." This shall include but not be limited to the
loss of any Lease or Interest through failure to develop or because express or
implied covenants have not been performed (other than performance which requires
only the payment of money), and the loss of any Lease by expiration at the end
of its primary term if it is not renewed or extended. There shall be no
readjustment of interests in the remaining portion of the Contract Area on
account of any joint loss.

 
 
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ARTICLE V.

OPERATOR

A. Designation and Responsibilities of Operator:

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

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

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

Subject to Article VII.D.1., such resignation or removal shall not become
effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator.

2. Selection of Successor Operator:  Upon the resignation or removal of Operator
under any provision of this agreement, a successor Operator shall be selected by
the parties. The successor Operator shall be selected from the parties owning an
interest in the Contract Area at the time such successor Operator is selected.
The successor Operator shall be selected by the affirmative vote of two (2) or
more parties owning a majority interest based on ownership as shown on Exhibit
"A"; provided, however, if an Operator which has been removed or is deemed to
have resigned fails to vote or votes only to succeed itself, the successor
Operator shall be selected by the affirmative vote of the party or parties
owning a majority interest based on ownership as shown on Exhibit "A" remaining
after excluding the voting interest of the Operator that was removed or
resigned. The former Operator shall promptly deliver to the successor Operator
all records and data relating to the operations conducted by the former Operator
to the extent such records and data are not already in the possession of the
successor operator. Any cost of obtaining or copying the former Operator's
records and data shall be charged to the joint account.

3. Effect of Bankruptcy:  If Operator becomes insolvent, bankrupt or is placed
in receivership, it shall be deemed to have resigned without any action by
Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all Non-
Operators and Operator shall comprise an interim operating committee to serve
until Operator has elected to reject or assume this agreement pursuant to the
Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit "A."

 
 
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C. Employees and Contractors:

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

D. Rights and Duties of Operator:

1. Competitive Rates and Use of Affiliates:  All wells drilled on the Contract
Area shall be drilled on a competitive contract basis at the usual rates
prevailing in the area. If it so desires, Operator may employ its own tools and
equipment in the drilling of wells, but its charges therefor shall not exceed
the prevailing rates in the area and the rate of such charges shall be agreed
upon by the parties in writing before drilling operations are commenced, and
such work shall be performed by Operator under the same terms and conditions as
are customary and usual in the area in contracts of independent contractors who
are doing work of a similar nature. All work performed or materials supplied by
affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.

2. Discharge of Joint Account Obligations:  Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expenses
incurred in the development and operation of the Contract Area pursuant to this
agreement and shall charge each of the parties hereto with their respective
proportionate shares upon the expense basis provided in Exhibit "C."  Operator
shall keep an accurate record of the joint account hereunder, showing expenses
incurred and charges and credits made and received.

3. Protection from Liens:  Operator shall pay, or cause to be paid, as and when
they become due and payable, all accounts of contractors and suppliers and wages
and salaries for services rendered or performed, and for materials supplied on,
to or in respect of the Contract Area or any operations for the joint account
thereof, and shall keep the Contract Area free from liens and encumbrances
resulting therefrom except for those resulting from a bona fide dispute as to
services rendered or materials supplied.

4. Custody of Funds:  Operator shall hold for the account of the Non-Operators
any funds of the Non-Operators advanced or paid to the Operator, either for the
conduct of operations hereunder or as a result of the sale of production from
the Contract Area, and such funds shall remain the funds of the Non-Operators on
whose account they are advanced or paid until used for their intended purpose or
otherwise delivered to the Non-Operators or applied toward the payment of debts
as provided in Article VII.B. Nothing in this paragraph shall be construed to
establish a fiduciary relationship between Operator and Non- Operators for any
purpose other than to account for Non-Operator funds as herein specifically
provided. Nothing in this paragraph shall require the maintenance by Operator of
separate accounts for the funds of Non-Operators unless the parties otherwise
specifically agree.

5. Access to Contract Area and Records:  Operator shall, except as otherwise
provided herein, permit each Non-Operator or its duly authorized representative,
at the Non-Operator's sole risk and cost, full and free access at all reasonable
times to all operations of every kind and character being conducted for the
joint account on the Contract Area and to the records of operations conducted
thereon or production therefrom, including Operator's books and records relating
thereto. Such access rights shall not be exercised in a manner interfering with
Operator's conduct of an operation hereunder and shall not obligate Operator to
furnish any geologic or geophysical data of an interpretive nature unless the
cost of preparation of such interpretive data was charged to the joint account.
Operator will furnish to each Non-Operator upon request copies of any and all
reports and information obtained by Operator in connection with production and
related items, including, without limitation, meter and chart reports,
production purchaser statements, run tickets and monthly gauge reports, but
excluding purchase contracts and pricing information to the extent not
applicable to the production of the Non-Operator seeking the information. Any
audit of Operator's records relating to amounts expended and the appropriateness
of such expenditures shall be conducted in accordance with the audit protocol
specified in Exhibit "C."
 
 
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6. Filing and Furnishing Governmental Reports:  Operator will file, and upon
written request promptly furnish copies to each requesting Non-Operator not in
default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.

7. Drilling and Testing Operations:  The following provisions shall apply to
each well drilled hereunder, including but not limited to the Initial Well:
(a) Operator will promptly advise Non-Operators of the date on which the well is
spudded, or the date on which drilling operations are commenced.
(b) Operator will send to Non-Operators such reports, test results and notices
regarding the progress of operations on the well as the Non-Operators shall
reasonably request, including, but not limited to, daily drilling reports,
completion reports, and well logs.
(c) Operator shall adequately test all Zones encountered which may reasonably be
expected to be capable of producing Oil and Gas in paying quantities as a result
of examination of the electric log or any other logs or cores or tests conducted
hereunder.

8. Cost Estimates.  Upon request of any Consenting Party, Operator shall furnish
estimates of current and cumulative costs incurred for the joint account at
reasonable intervals during the conduct of any operation pursuant to this
agreement. Operator shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.

9. Insurance:  At all times while operations are conducted hereunder, Operator
shall comply with the workers compensation law of the state where the operations
are being conducted; provided, however, that Operator may be a self- insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit "C."  Operator
shall also carry or provide insurance for the benefit of the joint account of
the parties as outlined in Exhibit "D" attached hereto and made a part hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workers compensation law of the state where the
operations are being conducted and to maintain such other insurance as Operator
may require.

In the event automobile liability insurance is specified in said Exhibit "D," or
subsequently receives the approval of the parties, no direct charge shall be
made by Operator for premiums paid for such insurance for Operator's automotive
equipment.

 
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ARTICLE VI.

DRILLING AND DEVELOPMENT

A. Initial Well:

B. Subsequent Operations:

1. Proposed Operations:  If any party hereto should desire to drill any well on
the Contract Area other than the Initial Well, or if any party should desire to
Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a well no
longer capable of producing in paying quantities in which such party has not
otherwise relinquished its interest in the proposed objective Zone under this
agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or
Plug Back such a well shall give written notice of the proposed operation to the
parties who have not otherwise relinquished their interest in such objective
Zone under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing to do the work
whether they elect to participate in the cost of the proposed operation. If a
drilling rig is on location, notice of a proposal to Rework, Sidetrack,
Recomplete, Plug Back or Deepen may be given by telephone and the response
period shall be limited to seventy-two (72) hours, exclusive of Saturday, Sunday
and legal holidays. Failure of a party to whom such notice is delivered to reply
within the period above fixed shall constitute an election by that party not to
participate in the cost of the proposed operation. Any proposal by a party to
conduct an operation conflicting with the operation initially proposed shall be
delivered to all parties within the time and in the manner provided in Article
VI.B.6.

If all parties to whom such notice is delivered elect to participate in such a
proposed operation, the parties shall be contractually committed to participate
therein provided such operations are commenced within the time period hereafter
set forth, and Operator shall, no later than ninety (90) days after expiration
of the notice period of thirty (30) days (or as promptly as practicable after
the expiration of the seventy-two (72) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
thereafter complete it with due diligence at the risk and expense of the parties
participating therein; provided, however, said commencement date may be extended
upon written notice of same by Operator to the other parties, for a period of up
to thirty (30) additional days if, in the sole opinion of Operator, such
additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights- of-way) or appropriate drilling
equipment, or to complete title examination or curative matter required for
title approval or acceptance. If the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein or in the force majeure provisions of Article XI) and if any
party hereto still desires to conduct said operation, written notice proposing
same must be resubmitted to the other parties in accordance herewith as if no
prior proposal had been made. Those parties that did not participate in the
drilling of a well for which a proposal to Deepen or Sidetrack is made hereunder
shall, if such parties desire to participate in the proposed Deepening or
Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.

2. Operations by Less Than All Parties:
(a) Determination of Participation.  If any party to whom such notice is
delivered as provided in Article VI.B.1. or VI.C.1. (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the seventy-two (72) hour
period when a drilling rig is on location, as the case may be) actually commence
the proposed operation and complete it with due diligence. Operator shall
perform all work for the account of the Consenting Parties; provided, however,
if no drilling rig or other equipment is on location, and if Operator is a
Non-Consenting Party, the Consenting Parties shall either: (i) request Operator
to perform the work required by such proposed operation for the account of the
Consenting Parties, or (ii) designate one of the Consenting Parties as Operator
to perform such work. The rights and duties granted to and imposed upon the
Operator under this agreement are granted to and imposed upon the party
designated as Operator for an operation in which the original Operator is a
Non-Consenting Party. Consenting Parties, when conducting operations on the
Contract Area pursuant to this Article VI.B.2., shall comply with all terms and
conditions of this agreement.
 
 
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If less than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the applicable notice period, shall advise
all Parties of the total interest of the parties approving such operation and
its recommendation as to whether the Consenting Parties should proceed with the
operation as proposed. Each Consenting Party, within seventy-two (72) hours
(exclusive of Saturday, Sunday and legal holidays) after delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party's interest as shown on Exhibit "A" or (ii) carry
only its proportionate part (determined by dividing such party's interest in the
Contract Area by the interests of all Consenting Parties in the Contract Area)
of Non-Consenting Parties' interests, or (iii) carry its proportionate part
(determined as provided in (ii)) of Non-Consenting Parties' interests together
with all or a portion of its proportionate part of any Non-Consenting Parties'
interests that any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of seventy-two (72) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election, may
withdraw such proposal if there is less than 100% participation and shall notify
all parties of such decision within ten (10) days, or within seventy-two (72)
hours if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained, the
proposing party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as Operator shall
commence such operation within the period provided in Article VI.B.1., subject
to the same extension right as provided therein. (b) Relinquishment of Interest
for Non-Participation.  The entire cost and risk of conducting such operations
shall be borne by the Consenting Parties in the proportions they have elected to
bear same under the terms of the preceding paragraph. Consenting Parties shall
keep the leasehold estates involved in such operations free and clear of all
liens and encumbrances of every kind created by or arising from the operations
of the Consenting Parties. If such an operation results in a dry hole, then
subject to Articles VI.B.6. and VI.E.3., the Consenting Parties shall plug and
abandon the well and restore the surface location at their sole cost, risk and
expense; provided, however, that those Non-Consenting Parties that participated
in the drilling, Deepening or Sidetracking of the well shall remain liable for,
and shall pay, their proportionate shares of the cost of plugging and abandoning
the well and restoring the surface location insofar only as those costs were not
increased by the subsequent operations of the Consenting Parties. If any well
drilled, Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip the well
to produce at their sole cost and risk, and the well shall then be turned over
to Operator (if the Operator did not conduct the operation) and shall be
operated by it at the expense and for the account of the Consenting Parties.
Upon commencement of operations for the drilling, Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non-Consenting Party's interest in the well and share of
production therefrom or, in the case of a Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back, or a Completion pursuant to Article VI.C.1.
Option No. 2, all of such Non-Consenting Party's interest in the production
obtained from the operation in which the Non-Consenting Party did not elect to
participate. Such relinquishment shall be effective until the proceeds of the
sale of such share, calculated at the well, or market value thereof if such
share is not sold (after deducting applicable ad valorem, production, severance,
and excise taxes, royalty, overriding royalty and other interests not excepted
by Article III.C. payable out of or measured by the production from such well
accruing with respect to such interest until it reverts), shall equal the total
of the following:
(i) 300% of each such Non-Consenting Party's share of the cost of any newly
acquired surface equipment beyond the wellhead connections (including but not
limited to stock tanks, separators, treaters, pumping equipment and piping),
plus 100% of each such Non-Consenting Party's share of the cost of operation of
the well commencing with first production and continuing until each such
Non-Consenting Party's relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party's
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from the
beginning of the operations; and
(ii) 300% of (a) that portion of the costs and expenses of drilling, Reworking,
Sidetracking, Deepening, Plugging Back, testing, Completing, and Recompleting,
after deducting any cash contributions received under Article VIII.C., and of
(b) that portion of the cost of newly acquired equipment in the well (to and
including the wellhead connections), which would have been chargeable to such
Non-Consenting Party if it had participated therein.
Notwithstanding anything to the contrary in this Article VI.B., if the well does
not reach the deepest objective Zone described in the notice proposing the well
for reasons other than the encountering of granite or practically impenetrable
substance or other condition in the hole rendering further operations
impracticable, Operator shall give notice thereof to each Non- Consenting Party
who submitted or voted for an alternative proposal under Article VI.B.6. to
drill the well to a shallower Zone than the deepest objective Zone proposed in
the notice under which the well was drilled, and each such Non-Consenting Party
shall have the option to participate in the initial proposed Completion of the
well by paying its share of the cost of drilling the well to its actual depth,
calculated in the manner provided in Article VI.B.4.(a). If any such
Non-Consenting Party does not elect to participate in the first Completion
proposed for such well, the relinquishment provisions of this Article VI.B.2.(b)
shall apply to such party's interest.
(c) Reworking, Recompleting or Plugging Back.  An election not to participate in
the drilling, Sidetracking or Deepening of a well shall be deemed an election
not to participate in any Reworking or Plugging Back operation proposed in such
a well, or portion thereof, to which the initial non-consent election applied
that is conducted at any time prior to full recovery by the Consenting Parties
of the Non-Consenting Party's recoupment amount. Similarly, an election not to
participate in the Completing or Recompleting of a well shall be deemed an
election not to participate in any Reworking operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party's recoupment amount. Any such Reworking, Recompleting or
Plugging Back operation conducted during the recoupment period shall be deemed
part of the cost of operation of said well and there shall be added to the sums
to be recouped by the Consenting Parties 300% of that portion of the costs of
the Reworking, Recompleting or Plugging Back operation which would have been
chargeable to such Non-Consenting Party had it participated therein. If such a
Reworking, Recompleting or Plugging Back operation is proposed during such
recoupment period, the provisions of this Article VI.B. shall be applicable as
between said Consenting Parties in said well.
 
 
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(d) Recoupment Matters.  During the period of time Consenting Parties are
entitled to receive Non-Consenting Party's share of production, or the proceeds
therefrom, Consenting Parties shall be responsible for the payment of all ad
valorem, production, severance, excise, gathering and other taxes, and all
royalty, overriding royalty and other burdens applicable to Non-Consenting
Party's share of production not excepted by Article III.C.
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or
Deepening operation, the Consenting Parties shall be permitted to use, free of
cost, all casing, tubing and other equipment in the well, but the ownership of
all such equipment shall remain unchanged; and upon abandonment of a well after
such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening, the
Consenting Parties shall account for all such equipment to the owners thereof,
with each party receiving its proportionate part in kind or in value, less cost
of salvage.
Within ninety (90) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well's
working interest production during the preceding month. In determining the
quantity of Oil and Gas produced during any month, Consenting Parties shall use
industry accepted methods such as but not limited to metering or periodic well
tests. Any amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by a
Non-Consenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it as of 7:00 a.m. on
the day following the day on which such recoupment occurs, and, from and after
such reversion, such Non-Consenting Party shall own the same interest in such
well, the material and equipment in or pertaining thereto, and the production
therefrom as such Non-Consenting Party would have been entitled to had it
participated in the drilling, Sidetracking, Reworking, Deepening, Recompleting
or Plugging Back of said well. Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and
Exhibit "C" attached hereto.

3. Stand-By Costs:  When a well which has been drilled or Deepened has reached
its authorized depth and all tests have been completed and the results thereof
furnished to the parties, or when operations on the well have been otherwise
terminated pursuant to Article VI.F., stand-by costs incurred pending response
to a party's notice proposing a Reworking, Sidetracking, Deepening,
Recompleting, Plugging Back or Completing operation in such a well (including
the period required under Article VI.B.6. to resolve competing proposals) shall
be charged and borne as part of the drilling or Deepening operation just
completed. Stand-by costs subsequent to all parties responding, or expiration of
the response time permitted, whichever first occurs, and prior to agreement as
to the participating interests of all Consenting Parties pursuant to the terms
of the second grammatical paragraph of Article VI.B.2.(a), shall be charged to
and borne as part of the proposed operation, but if the proposal is subsequently
withdrawn because of insufficient participation, such stand-by costs shall be
allocated between the Consenting Parties in the proportion each Consenting
Party's interest as shown on Exhibit "A" bears to the total interest as shown on
Exhibit "A" of all Consenting Parties.

In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive up
to five (5) additional days after expiration of the forty-eight hour response
period specified in Article VI.B.1. within which to respond by paying for all
stand-by costs and other costs incurred during such extended response period;
Operator may require such party to pay the estimated stand-by time in advance as
a condition to extending the response period. If more than one party elects to
take such additional time to respond to the notice, standby costs shall be
allocated between the parties taking additional time to respond on a day-to-day
basis in the proportion each electing party's interest as shown on Exhibit "A"
bears to the total interest as shown on Exhibit "A" of all the electing parties.

4. Deepening:  If less than all the parties elect to participate in a drilling,
Sidetracking, or Deepening operation proposed pursuant to Article VI.B.1., the
interest relinquished by the Non-Consenting Parties to the Consenting Parties
under Article VI.B.2. shall relate only and be limited to the lesser of (i) the
total depth actually drilled or (ii) the objective depth or Zone of which the
parties were given notice under Article VI.B.1. ("Initial Objective"). Such well
shall not be Deepened beyond the Initial Objective without first complying with
this Article to afford the Non-Consenting Parties the opportunity to participate
in the Deepening operation.
 
 
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In the event any Consenting Party desires to drill or Deepen a Non-Consent Well
to a depth below the Initial Objective, such party shall give notice thereof,
complying with the requirements of Article VI.B.1., to all parties (including
Non-Consenting Parties). Thereupon, Articles VI.B.1. and 2. shall apply and all
parties receiving such notice shall have the right to participate or not
participate in the Deepening of such well pursuant to said Articles VI.B.1. and
2. If a Deepening operation is approved pursuant to such provisions, and if any
Non-Consenting Party elects to participate in the Deepening operation, such
Non-Consenting party shall pay or make reimbursement (as the case may be) of the
following costs and expenses:
(a) If the proposal to Deepen is made prior to the Completion of such well as a
well capable of producing in paying quantities, such Non-Consenting Party shall
pay (or reimburse Consenting Parties for, as the case may be) that share of
costs and expenses incurred in connection with the drilling of said well from
the surface to the Initial Objective which Non-Consenting Party would have paid
had such Non-Consenting Party agreed to participate therein, plus the
Non-Consenting Party's share of the cost of Deepening and of participating in
any further operations on the well in accordance with the other provisions of
this Agreement; provided, however, all costs for testing and Completion or
attempted Completion of the well incurred by Consenting Parties prior to the
point of actual operations to Deepen beyond the Initial Objective shall be for
the sole account of Consenting Parties.
(b) If the proposal is made for a Non-Consent Well that has been previously
Completed as a well capable of producing in paying quantities, but is no longer
capable of producing in paying quantities, such Non-Consenting Party shall pay
(or reimburse Consenting Parties for, as the case may be) its proportionate
share of all costs of drilling, Completing, and equipping said well from the
surface to the Initial Objective, calculated in the manner provided in paragraph
(a) above, less those costs recouped by the Consenting Parties from the sale of
production from the well. The Non-Consenting Party shall also pay its
proportionate share of all costs of re-entering said well. The Non- Consenting
Parties' proportionate part (based on the percentage of such well Non-Consenting
Party would have owned had it previously participated in such Non-Consent Well)
of the costs of salvable materials and equipment remaining in the hole and
salvable surface equipment used in connection with such well shall be determined
in accordance with Exhibit "C."  If the Consenting Parties have recouped the
cost of drilling, Completing, and equipping the well at the time such Deepening
operation is conducted, then a Non-Consenting Party may participate in the
Deepening of the well with no payment for costs incurred prior to re-entering
the well for Deepening.

The foregoing shall not imply a right of any Consenting Party to propose any
Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.

5. Sidetracking:  Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore at
the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:
(a) If the proposal is for Sidetracking an existing dry hole, reimbursement
shall be on the basis of the actual costs incurred in the initial drilling of
the well down to the depth at which the Sidetracking operation is initiated.
(b) If the proposal is for Sidetracking a well which has previously produced,
reimbursement shall be on the basis of such party's proportionate share of
drilling and equipping costs incurred in the initial drilling of the well down
to the depth at which the Sidetracking operation is conducted, calculated in the
manner described in Article VI.B.4(b) above. Such party's proportionate share of
the cost of the well's salvable materials and equipment down to the depth at
which the Sidetracking operation is initiated shall be determined in accordance
with the provisions of Exhibit "C."
     
6. Order of Preference of Operations.  Except as otherwise specifically provided
in this agreement, if any party desires to propose the conduct of an operation
that conflicts with a proposal that has been made by a party under this Article
VI, such party shall have fifteen (15) days from delivery of the initial
proposal, in the case of a proposal to drill a well or to perform an operation
on a well where no drilling rig is on location, or seventy-two (72) hours,
exclusive of Saturday, Sunday and legal holidays, from delivery of the initial
proposal, if a drilling rig is on location for the well on which such operation
is to be conducted, to deliver to all parties entitled to participate in the
proposed operation such party's alternative proposal, such alternate proposal to
contain the same information required to be included in the initial proposal.
Each party receiving such proposals shall elect by delivery of notice to
Operator within five (5) days after expiration of the proposal period, or within
seventy-two (72) hours (exclusive of Saturday, Sunday and legal holidays) if a
drilling rig is on location for the well that is the subject of the proposals,
to participate in one of the competing proposals. Any party not electing within
the time required shall be deemed not to have voted. The proposal receiving the
vote of parties owning the largest aggregate percentage interest of the parties
voting shall have priority over all other competing proposals; in the case of a
tie vote, the initial proposal shall prevail. Operator shall deliver notice of
such result to all parties entitled to participate in the operation within five
(5) days after expiration of the election period (or within seventy-two (72)
hours, exclusive of Saturday, Sunday and legal holidays, if a drilling rig is on
location). Each party shall then have two (2) days (or seventy-two (72) hours if
a rig is on location) from receipt of such notice to elect by delivery of notice
to Operator to participate in such operation or to relinquish interest in the
affected well pursuant to the provisions of Article VI.B.2.; failure by a party
to deliver notice within such period shall be deemed an election not to
participate in the prevailing proposal.

7. Conformity to Spacing Pattern.  Notwithstanding the provisions of this
Article VI.B.2., it is agreed that no wells shall be proposed to be drilled to
or Completed in or produced from a Zone from which a well located elsewhere on
the Contract Area is producing, unless such well conforms to the then-existing
well spacing pattern for such Zone.
 
8. Paying Wells.  No party shall conduct any Reworking, Deepening, Plugging
Back, Completion, Recompletion, or Sidetracking operation under this agreement
with respect to any well then capable of producing in paying quantities except
with the consent of all parties that have not relinquished interests in the well
at the time of such operation.

 
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C. Completion of Wells; Reworking and Plugging Back:

1. Completion:  Without the consent of all parties, no well shall be drilled,
Deepened or Sidetracked, except any well drilled, Deepened or Sidetracked
pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the
drilling, Deepening or Sidetracking shall include:

 
 
[X] Option No. 2:  All necessary expenditures for the drilling, Deepening or
Sidetracking and testing of the well. When such well has reached its authorized
depth, and all logs, cores and other tests have been completed, and the results
thereof furnished to the parties, Operator shall give immediate notice to the
Non-Operators having the right to participate in a Completion attempt whether or
not Operator recommends attempting to Complete the well, together with
Operator's AFE for Completion costs if not previously provided. The parties
receiving such notice shall have seventy-two (72) hours (exclusive of Saturday,
Sunday and legal holidays) in which to elect by delivery of notice to Operator
to participate in a recommended Completion attempt or to make a Completion
proposal with an accompanying AFE. Operator shall deliver any such Completion
proposal, or any Completion proposal conflicting with Operator's proposal, to
the other parties entitled to participate in such Completion in accordance with
the procedures specified in Article VI.B.6. Election to participate in a
Completion attempt shall include consent to all necessary expenditures for the
Completing and equipping of such well, including necessary tankage and/or
surface facilities but excluding any stimulation operation not contained on the
Completion AFE. Failure of any party receiving such notice to reply within the
period above fixed shall constitute an election by that party not to participate
in the cost of the Completion attempt; provided, that Article VI.B.6. shall
control in the case of conflicting Completion proposals. If one or more, but
less than all of the parties, elect to attempt a Completion, the provisions of
Article VI.B.2. hereof (the phrase "Reworking, Sidetracking, Deepening,
Recompleting or Plugging Back" as contained in Article VI.B.2. shall be deemed
to include "Completing") shall apply to the operations thereafter conducted by
less than all parties; provided, however, that Article VI.B.2. shall apply
separately to each separate Completion or Recompletion attempt undertaken
hereunder, and an election to become a Non-Consenting Party as to one Completion
or Recompletion attempt shall not prevent a party from becoming a Consenting
Party in subsequent Completion or Recompletion attempts regardless whether the
Consenting Parties as to earlier Completions or Recompletions have recouped
their costs pursuant to Article VI.B.2.; provided further, that any recoupment
of costs by a Consenting Party shall be made solely from the production
attributable to the Zone in which the Completion attempt is made. Election by a
previous Non-Consenting Party to participate in a subsequent Completion or
Recompletion attempt shall require such party to pay its proportionate share of
the cost of salvable materials and equipment installed in the well pursuant to
the previous Completion or Recompletion attempt, insofar and only insofar as
such materials and equipment benefit the Zone in which such party participates
in a Completion attempt.

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

D. Other Operations:

Operator shall not undertake any single project reasonably estimated to require
an expenditure in excess of Twenty-five Thousand Dollars ($25,000.00) except in
connection with the drilling, Sidetracking, Reworking, Deepening, Completing,
Recompleting or Plugging Back of a well that has been previously authorized by
or pursuant to this agreement; provided, however, that, in case of explosion,
fire, flood or other sudden emergency, whether of the same or different nature,
Operator may take such steps and incur such expenses as in its opinion are
required to deal with the emergency to safeguard life and property but Operator,
as promptly as possible, shall report the emergency to the other parties. If
Operator prepares an AFE for its own use, Operator shall furnish any Non-
Operator so requesting an information copy thereof for any single project
costing in excess of  Twenty-five Thousand Dollars ($25,000.00). Any party who
has not relinquished its interest in a well shall have the right to propose that
Operator perform repair work or undertake the installation of artificial lift
equipment or ancillary production facilities such as salt water disposal wells
or to conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed
exclusively by those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein. If within thirty (30) days thereof
Operator secures the written consent of any party or parties owning at least 51%
of the interests of the parties entitled to participate in such operation, each
party having the right to participate in such project shall be bound by the
terms of such proposal and shall be obligated to pay its proportionate share of
the costs of the proposed project as if it had consented to such project
pursuant to the terms of the proposal.
 
 
 
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E. Abandonment of Wells:

1. Abandonment of Dry Holes:  Except for any well drilled or Deepened pursuant
to Article VI.B.2., any well which has been drilled or Deepened under the terms
of this agreement and is proposed to be completed as a dry hole shall not be
plugged and abandoned without the consent of all parties. Should Operator, after
diligent effort, be unable to contact any party, or should any party fail to
reply within seventy-two (72) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice of the proposal to plug and abandon such
well, such party shall be deemed to have consented to the proposed abandonment.
All such wells shall be plugged and abandoned in accordance with applicable
regulations and at the cost, risk and expense of the parties who participated in
the cost of drilling or Deepening such well. Any party who objects to plugging
and abandoning such well by notice delivered to Operator within forty- eight
(48) hours (exclusive of Saturday, Sunday and legal holidays) after delivery of
notice of the proposed plugging shall take over the well as of the end of such
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of Article VI.B.; failure of such party
to provide proof reasonably satisfactory to Operator of its financial capability
to conduct such operations or to take over the well within such period or
thereafter to conduct operations on such well or plug and abandon such well
shall entitle Operator to retain or take possession of the well and plug and
abandon the well. The party taking over the well shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations conducted on such well except for the costs
of plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.

2. Abandonment of Wells That Have Produced:  Except for any well in which a
Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto. Failure of a party to
reply within sixty (60) days of delivery of notice of proposed abandonment shall
be deemed an election to consent to the proposal. If, within sixty (60) days
after delivery of notice of the proposed abandonment of any well, all parties do
not agree to the abandonment of such well, those wishing to continue its
operation from the Zone then open to production shall be obligated to take over
the well as of the expiration of the applicable notice period and shall
indemnify Operator (if Operator is an abandoning party) and the other abandoning
parties against liability for any further operations on the well conducted by
such parties. Failure of such party or parties to provide proof reasonably
satisfactory to Operator of their financial capability to conduct such
operations or to take over the well within the required period or thereafter to
conduct operations on such well shall entitle Operator to retain or take
possession of such well and plug and abandon the well.

Parties taking over a well as provided herein shall tender to each of the other
parties its proportionate share of the value of the well's salvable material and
equipment, determined in accordance with the provisions of Exhibit "C," less the
estimated cost of salvaging and the estimated cost of plugging and abandoning
and restoring the surface; provided, however, that in the event the estimated
plugging and abandoning and surface restoration costs and the estimated cost of
salvaging are higher than the value of the well's salvable material and
equipment, each of the abandoning parties shall tender to the parties continuing
operations their proportionate shares of the estimated excess cost. Each
abandoning party shall assign to the non-abandoning parties, without warranty,
express or implied, as to title or as to quantity, or fitness for use of the
equipment and material, all of its interest in the wellbore of the well and
related equipment, together with its interest in the Leasehold insofar and only
insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes an Oil and Gas Interest, such party shall execute and
deliver to the non-abandoning party or parties an oil and gas lease, limited to
the wellbore and the Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit "B."  The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract Area.

Thereafter, abandoning parties shall have no further responsibility, liability,
or interest in the operation of or production from the well in the Zone then
open other than the royalties retained in any lease made under the terms of this
Article. Upon request, Operator shall continue to operate the assigned well for
the account of the non-abandoning parties at the rates and charges contemplated
by this agreement, plus any additional cost and charges which may arise as the
result of the separate ownership of the assigned well. Upon proposed abandonment
of the producing Zone assigned or leased, the assignor or lessor shall then have
the option to repurchase its prior interest in the well (using the same
valuation formula) and participate in further operations therein subject to the
provisions hereof.

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

 
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F. Termination of Operations:

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

G. Taking Production in Kind:
.

 
 
[X] Option No. 2:  No Gas Balancing Agreement:

 
 
Each party shall have the right to take in kind or separately dispose of its
proportionate share of all Oil and Gas produced from the Contract Area,
exclusive of production which may be used in development and producing
operations and in preparing and treating Oil and Gas for marketing purposes and
production unavoidably lost. Any extra expenditure incurred in the taking in
kind or separate disposition by any party of its proportionate share of the
production shall be borne by such party. Any party taking its share of
production in kind shall be required to pay for only its proportionate share of
such part of Operator's surface facilities which it uses.

 
 
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in production from the Contract Area, and, except
as provided in Article VII.B., shall be entitled to receive payment directly
from the purchaser thereof for its share of all production.

If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate share of the Oil and/or Gas produced
from the Contract Area, Operator shall have the right, subject to the revocation
at will by the party owning it, but not the obligation, to purchase such Oil
and/or Gas or sell it to others at any time and from time to time, for the
account of the non-taking party. Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to the owner
of said production and shall be subject always to the right of the owner of the
production upon at least ten (10) days written notice to Operator to exercise
its right to take in kind, or separately dispose of, its share of all Oil and/or
Gas not previously delivered to a purchaser; provided, however, that the
effective date of any such revocation may be deferred at Operator's election for
a period not to exceed ninety (90) days if Operator has committed such
production to a purchase contract having a term extending beyond such ten (10)
-day period. Any purchase or sale by Operator of any other party's share of Oil
and/or Gas shall be only for such reasonable periods of time as are consistent
with the minimum needs of the industry under the particular circumstances, but
in no event for a period in excess of one (1) year. Any such sale by Operator
shall be in a manner commercially reasonable under the circumstances, but
Operator shall have no duty to share any existing market or transportation
arrangement or to obtain a price or transportation fee equal to that received
under any existing market or transportation arrangement. The sale or delivery by
Operator of a non-taking party's share of production under the terms of any
existing contract of Operator shall not give the non-taking party any interest
in or make the non-taking party a party to said contract. No purchase of Oil and
Gas and no sale of Gas shall be made by Operator without first giving the
non-taking party ten days written notice of such intended purchase or sale and
the price to be paid or the pricing basis to be used. Operator shall give notice
to all parties of the first sale of Gas from any well under this Agreement.
All parties shall give timely written notice to Operator of their Gas marketing
arrangements for the following month, excluding price, and shall notify Operator
immediately in the event of a change in such arrangements. Operator shall
maintain records of all marketing arrangements, and of volumes actually sold or
transported, which records shall be made available to Non- Operators upon
reasonable request.

 
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ARTICLE VII.

EXPENDITURES AND LIABILITY OF PARTIES

A. Liability of Parties:

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

B. Liens and Security Interests:

Each party grants to the other parties hereto a lien upon any interest it now
owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in
the Contract Area, and a security interest and/or purchase money security
interest in any interest it now owns or hereafter acquires in the personal
property and fixtures on or used or obtained for use in connection therewith, to
secure performance of all of its obligations under this agreement including but
not limited to payment of expense, interest and fees, the proper disbursement of
all monies paid hereunder, the assignment or relinquishment of interest in Oil
and Gas Leases as required hereunder, and the proper performance of operations
hereunder. Such lien and security interest granted by each party hereto shall
include such party's leasehold interests, working interests, operating rights,
and royalty and overriding royalty interests in the Contract Area now owned or
hereafter acquired and in lands pooled or unitized therewith or otherwise
becoming subject to this agreement, the Oil and Gas when extracted therefrom and
equipment situated thereon or used or obtained for use in connection therewith
(including, without limitation, all wells, tools, and tubular goods), and
accounts (including, without limitation, accounts arising from gas imbalances or
from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and
general intangibles relating thereto or arising therefrom, and all proceeds and
products of the foregoing.

To perfect the lien and security agreement provided herein, each party hereto
shall execute and acknowledge the recording supplement and/or any financing
statement prepared and submitted by any party hereto in conjunction herewith or
at any time following execution hereof, and Operator is authorized to file this
agreement or the recording supplement executed herewith as a lien or mortgage in
the applicable real estate records and as a financing statement with the proper
officer under the Uniform Commercial Code in the state in which the Contract
Area is situated and such other states as Operator shall deem appropriate to
perfect the security interest granted hereunder. Any party may file this
agreement, the recording supplement executed herewith, or such other documents
as it deems necessary as a lien or mortgage in the applicable real estate
records and/or a financing statement with the proper officer under the Uniform
Commercial Code.

Each party represents and warrants to the other parties hereto that the lien and
security interest granted by such party to the other parties shall be a first
and prior lien, and each party hereby agrees to maintain the priority of said
lien and security interest against all persons acquiring an interest in Oil and
Gas Leases and Interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.
 
 
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To the extent that parties have a security interest under the Uniform Commercial
Code of the state in which the Contract Area is situated, they shall be entitled
to exercise the rights and remedies of a secured party under the Code. The
bringing of a suit and the obtaining of judgment by a party for the secured
indebtedness shall not be deemed an election of remedies or otherwise affect the
lien rights or security interest as security for the payment thereof. In
addition, upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party's
share of Oil and Gas until the amount owed by such party, plus interest as
provided in "Exhibit C," has been received, and shall have the right to offset
the amount owed against the proceeds from the sale of such defaulting party's
share of Oil and Gas. All purchasers of production may rely on a notification of
default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.

If any party fails to pay its share of cost within one hundred twenty  (120)
days after rendition of a statement therefor by Operator, the non- defaulting
parties, including Operator, shall, upon request by Operator, pay the unpaid
amount in the proportion that the interest of each such party bears to the
interest of all such parties. The amount paid by each party so paying its share
of the unpaid amount shall be secured by the liens and security rights described
in Article VII.B., and each paying party may independently pursue any remedy
available hereunder or otherwise.

If any party does not perform all of its obligations hereunder, and the failure
to perform subjects such party to foreclosure or execution proceedings pursuant
to the provisions of this agreement, to the extent allowed by governing law, the
defaulting party waives any available right of redemption from and after the
date of judgment, any required valuation or appraisement of the mortgaged or
secured property prior to sale, any available right to stay execution or to
require a marshalling of assets and any required bond in the event a receiver is
appointed. In addition, to the extent permitted by applicable law, each party
hereby grants to the other parties a power of sale as to any property that is
subject to the lien and security rights granted hereunder, such power to be
exercised in the manner provided by applicable law or otherwise in a
commercially reasonable manner and upon reasonable notice.

Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien law of any state in which the
Contract Area is situated to enforce the obligations of each party hereunder.
Without limiting the generality of the foregoing, to the extent permitted by
applicable law, Non-Operators agree that Operator may invoke or utilize the
mechanics' or materialmen's lien law of the state in which the Contract Area is
situated in order to secure the payment to Operator of any sum due hereunder for
services performed or materials supplied by Operator.

C. Advances:

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

D. Defaults and Remedies:

If any party fails to discharge any financial obligation under this agreement,
including without limitation the failure to make any advance under the preceding
Article VII.C. or any other provision of this agreement, within the period
required for such payment hereunder, then in addition to the remedies provided
in Article VII.B. or elsewhere in this agreement, the remedies specified below
shall be applicable. For purposes of this Article VII.D., all notices and
elections shall be delivered only by Operator, except that Operator shall
deliver any such notice and election requested by a non- defaulting
Non-Operator, and when Operator is the party in default, the applicable notices
and elections can be delivered by any Non-Operator. Election of any one or more
of the following remedies shall not preclude the subsequent use of any other
remedy specified below or otherwise available to a non- defaulting party.
 
 
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1. Suspension of Rights:  Any party may deliver to the party in default a Notice
of Default, which shall specify the default, specify the action to be taken to
cure the default, and specify that failure to take such action will result in
the exercise of one or more of the remedies provided in this Article. If the
default is not cured within thirty (30) days of the delivery of such Notice of
Default, all of the rights of the defaulting party granted by this agreement may
upon notice be suspended until the default is cured, without prejudice to the
right of the non-defaulting party or parties to continue to enforce the
obligations of the defaulting party previously accrued or thereafter accruing
under this agreement. If Operator is the party in default, the Non-Operators
shall have in addition the right, by vote of Non-Operators owning a majority in
interest in the Contract Area after excluding the voting interest of Operator,
to appoint a new Operator effective immediately. The rights of a defaulting
party that may be suspended hereunder at the election of the non-defaulting
parties shall include, without limitation, the right to receive information as
to any operation conducted hereunder during the period of such default, the
right to elect to participate in an operation proposed under Article VI.B. of
this agreement, the right to participate in an operation being conducted under
this agreement even if the party has previously elected to participate in such
operation, and the right to receive proceeds of production from any well subject
to this agreement.

2. Suit for Damages:  Non-defaulting parties or Operator for the benefit of
non-defaulting parties may sue (at joint account expense) to collect the amounts
in default, plus interest accruing on the amounts recovered from the date of
default until the date of collection at the rate specified in Exhibit "C"
attached hereto. Nothing herein shall prevent any party from suing any
defaulting party to collect consequential damages accruing to such party as a
result of the default.

3. Deemed Non-Consent:  The non-defaulting party may deliver a written Notice of
Non-Consent Election to the defaulting party at any time after the expiration of
the thirty-day cure period following delivery of the Notice of Default, in which
event if the billing is for the drilling of a new well or the Plugging Back,
Sidetracking, Reworking or Deepening of a well which is to be or has been
plugged as a dry hole, or for the Completion or Recompletion of any well, the
defaulting party will be conclusively deemed to have elected not to participate
in the operation and to be a Non-Consenting Party with respect thereto under
Article VI.B. or VI.C., as the case may be, to the extent of the costs unpaid by
such party, notwithstanding any election to participate theretofore made. If
election is made to proceed under this provision, then the non-defaulting
parties may not elect to sue for the unpaid amount pursuant to Article VII.D.2.

Until the delivery of such Notice of Non-Consent Election to the defaulting
party, such party shall have the right to cure its default by paying its unpaid
share of costs plus interest at the rate set forth in Exhibit "C," provided,
however, such payment shall not prejudice the rights of the non-defaulting
parties to pursue remedies for damages incurred by the non-defaulting parties as
a result of the default. Any interest relinquished pursuant to this Article
VII.D.3. shall be offered to the non-defaulting parties in proportion to their
interests, and the non-defaulting parties electing to participate in the
ownership of such interest shall be required to contribute their shares of the
defaulted amount upon their election to participate therein.

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

5. Costs and Attorneys' Fees.  In the event any party is required to bring legal
proceedings to enforce any financial obligation of a party hereunder, the
prevailing party in such action shall be entitled to recover all court costs,
costs of collection, and a reasonable attorney's fee, which the lien provided
for herein shall also secure.

 
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E. Rentals, Shut-in Well Payments and Minimum Royalties:

Rentals, shut-in well payments and minimum royalties which may be required under
the terms of any lease shall be paid by paid by Operator and billed to the joint
account.. Any party may request, and shall be entitled to receive, proper
evidence of all such payments. In the event of failure to make proper payment of
any rental, shut-in well payment or minimum royalty through mistake or oversight
where such payment is required to continue the lease in force, any loss which
results from such non-payment shall be borne in accordance with the provisions
of Article IV.B.2.

Operator shall notify Non-Operators of the anticipated completion of a shut-in
well, or the shutting in or return to production of a producing well, at least
five (5) days (excluding Saturday, Sunday and legal holidays) prior to taking
such action, or at the earliest opportunity permitted by circumstances, but
assumes no liability for failure to do so. In the event of failure by Operator
to so notify Non-Operators, the loss of any lease contributed hereto by Non-
Operators for failure to make timely payments of any shut-in well payment shall
be borne jointly by the parties hereto under the provisions of Article IV.B.3.

F. Taxes:

Beginning with the first calendar year after the effective date hereof, Operator
shall render for ad valorem taxation all property subject to this agreement
which by law should be rendered for such taxes, and it shall pay all such taxes
assessed thereon before they become delinquent. Prior to the rendition date,
each Non-Operator shall furnish Operator information as to burdens (to include,
but not be limited to, royalties, overriding royalties and production payments)
on Leases and Oil and Gas Interests contributed by such Non-Operator. If the
assessed valuation of any Lease is reduced by reason of its being subject to
outstanding excess royalties, overriding royalties or production payments, the
reduction in ad valorem taxes resulting therefrom shall inure to the benefit of
the owner or owners of such Lease, and Operator shall adjust the charge to such
owner or owners so as to reflect the benefit of such reduction. If the ad
valorem taxes are based in whole or in part upon separate valuations of each
party's working interest, then notwithstanding anything to the contrary herein,
charges to the joint account shall be made and paid by the parties hereto in
accordance with the tax value generated by each party's working interest.
Operator shall bill the other parties for their proportionate shares of all tax
payments in the manner provided in Exhibit "C."

If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C."

Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of Oil and Gas produced under the terms of this
agreement.
 
 
 
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ARTICLE VIII.

ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A. Surrender of Leases:

The Leases covered by this agreement, insofar as they embrace acreage in the
Contract Area, shall not be surrendered in whole or in part unless all parties
consent thereto.

However, should any party desire to surrender its interest in any Lease or in
any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice. If all parties do not agree or consent thereto, the party desiring to
surrender shall assign, without express or implied warranty of title, all of its
interest in such Lease, or portion thereof, and any well, material and equipment
which may be located thereon and any rights in production thereafter secured, to
the parties not consenting to such surrender. If the interest of the assigning
party is or includes an Oil and Gas Interest, the assigning party shall execute
and deliver to the party or parties not consenting to such surrender an oil and
gas lease covering such Oil and Gas Interest for a term of one (1) year and so
long thereafter as Oil and/or Gas is produced from the land covered thereby,
such lease to be on the form attached hereto as Exhibit "B." Upon such
assignment or lease, the assigning party shall be relieved from all obligations
thereafter accruing, but not theretofore accrued, with respect to the interest
assigned or leased and the operation of any well attributable thereto, and the
assigning party shall have no further interest in the assigned or leased
premises and its equipment and production other than the royalties retained in
any lease made under the terms of this Article. The party assignee or lessee
shall pay to the party assignor or lessor the reasonable salvage value of the
latter's interest in any well's salvable materials and equipment attributable to
the assigned or leased acreage. The value of all salvable materials and
equipment shall be determined in accordance with the provisions of Exhibit "C,"
less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface. If such value is less than such costs,
then the party assignor or lessor shall pay to the party assignee or lessee the
amount of such deficit. If the assignment or lease is in favor of more than one
party, the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties. If the
interest of the parties to whom the assignment is to be made varies according to
depth, then the interest assigned shall similarly reflect such variances.

Any assignment, lease or surrender made under this provision shall not reduce or
change the assignor's, lessor's or surrendering party's interest as it was
immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to an Operating Agreement in the
form of this agreement.

B. Renewal or Extension of Leases:

If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interests
held at that time by the parties in the Contract Area. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring party.

If some, but less than all, of the parties elect to participate in the purchase
of a renewal or replacement Lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal or replacement Lease. The acquisition of a
renewal or replacement Lease by any or all of the parties hereto shall not cause
a readjustment of the interests of the parties stated in Exhibit "A," but any
renewal or replacement Lease in which less than all parties elect to participate
shall not be subject to this agreement but shall be deemed subject to a separate
Operating Agreement in the form of this agreement.

If the interests of the parties in the Contract Area vary according to depth,
then their right to participate proportionately in renewal or replacement Leases
and their right to receive an assignment of interest shall also reflect such
depth variances.
 
 
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The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by the expiring Lease or cover
only a portion of its area or an interest therein. Any renewal or replacement
Lease taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective, but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.

The provisions in this Article shall also be applicable to extensions of Oil and
Gas Leases.

C. Acreage or Cash Contributions:

While this agreement is in force, any contribution of cash towards the drilling
of a well or any other operation on the Contract Area shall be paid to the party
who conducted the drilling or other operation and shall be applied by it against
the cost of such drilling or other operation. If the contribution be in the form
of acreage, the party to whom the contribution is made shall promptly tender an
assignment of the acreage, without warranty of title, to the Drilling Parties in
the proportions said Drilling Parties shared the cost of drilling the well. Such
acreage shall become a separate Contract Area and, to the extent possible, be
governed by provisions identical to this agreement. Each party shall promptly
notify all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage outside
the Contract Area which are in support of wells drilled inside the Contract
Area.

If any party contracts for any consideration relating to disposition of such
party's share of substances produced hereunder, such consideration shall not be
deemed a contribution as contemplated in this Article VIII.C.

D. Assignment; Maintenance of Uniform Interest:

Every sale, encumbrance, transfer or other disposition made by any party shall
be made expressly subject to this agreement and shall be made without prejudice
to the right of the other parties, and any transferee of an ownership interest
in any Oil and Gas Lease or Interest shall be deemed a party to this agreement
as to the interest conveyed from and after the effective date of the transfer of
ownership; provided, however, that the other parties shall not be required to
recognize any such sale, encumbrance, transfer or other disposition for any
purpose hereunder until thirty (30) days after they have received a copy of the
instrument of transfer or other satisfactory evidence thereof in writing from
the transferor or transferee. No assignment or other disposition of interest by
a party shall relieve such party of obligations previously incurred by such
party hereunder with respect to the interest transferred, including without
limitation the obligation of a party to pay all costs attributable to an
operation conducted hereunder in which such party has agreed to participate
prior to making such assignment, and the lien and security interest granted by
Article VII.B. shall continue to burden the interest transferred to secure
payment of any such obligations.

If, at any time the interest of any party is divided among and owned by four or
more co-owners, Operator, at its discretion, may require such co-owners to
appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the Oil and Gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.

E. Waiver of Rights to Partition:

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

 
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ARTICLE IX.

INTERNAL REVENUE CODE ELECTION

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

ARTICLE X.

CLAIMS AND LAWSUITS

Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed Twenty-five
Thousand Dollars ($25,000.00) and if the payment is in complete settlement of
such claim or suit. If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises. If a claim is made against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given Operator by
this agreement, such party shall immediately notify all other parties, and the
claim or suit shall be treated as any other claim or suit involving operations
hereunder.

ARTICLE XI.

FORCE MAJEURE

If any party is rendered unable, wholly or in part, by force majeure to carry
out its obligations under this agreement, other than the obligation to indemnify
or make money payments or furnish security, that party shall give to all other
parties prompt written notice of the force majeure with reasonably full
particulars concerning it; thereupon, the obligations of the party giving the
notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The term
"force majeure," as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightning, fire, storm, flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.

The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.

 
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ARTICLE XII.

NOTICES

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

ARTICLE XIII.

TERM OF AGREEMENT

This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.

 
 
[X] Option No. 1:  So long as any of the Oil and Gas Leases subject to this
agreement remain or are continued in force as to any part of the Contract Area,
whether by production, extension, renewal or otherwise.

The termination of this agreement shall not relieve any party hereto from any
expense, liability or other obligation or any remedy therefor which has accrued
or attached prior to the date of such termination.

Upon termination of this agreement and the satisfaction of all obligations
hereunder, in the event a memorandum of this Operating Agreement has been filed
of record, Operator is authorized to file of record in all necessary recording
offices a notice of termination, and each party hereto agrees to execute such a
notice of termination as to Operator's interest, upon request of Operator, if
Operator has satisfied all its financial obligations.

 
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ARTICLE XIV.

COMPLIANCE WITH LAWS AND REGULATIONS

A. Laws, Regulations and Orders:

This agreement shall be subject to the applicable laws of the state in which the
Contract Area is located, to the valid rules, regulations, and orders of any
duly constituted regulatory body of said state; and to all other applicable
federal, state, and local laws, ordinances, rules, regulations and orders.

B. Governing Law:

This agreement and all matters pertaining hereto, including but not limited to
matters of performance, nonperformance, breach, remedies, procedures, rights,
duties, and interpretation or construction, shall be governed and determined by
the law of the state in which the Contract Area is located.

C. Regulatory Agencies:

Nothing herein contained shall grant, or be construed to grant, Operator the
right or authority to waive or release any rights, privileges, or obligations
which Non-Operators may have under federal or state laws or under rules,
regulations or orders promulgated under such laws in reference to oil, gas and
mineral operations, including the location, operation, or production of wells,
on tracts offsetting or adjacent to the Contract Area.

With respect to the operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or Federal Energy Regulatory Commission or predecessor or
successor agencies to the extent such interpretation or application was made in
good faith and does not constitute gross negligence. Each Non-Operator further
agrees to reimburse Operator for such Non-Operator's share of production or any
refund, fine, levy or other governmental sanction that Operator may be required
to pay as a result of such an incorrect interpretation or application, together
with interest and penalties thereon owing by Operator as a result of such
incorrect interpretation or application.

 
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ARTICLE XV.

MISCELLANEOUS

A. Execution:

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

B. Successors and Assigns:

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

C. Counterparts:

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

D. Severability:

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

 
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ARTICLE XVI.

OTHER PROVISIONS

IN WITNESS WHEREOF, this agreement shall be effective as of the _______ day
of  May, 2010.

ATTEST OR WITNESS:
 
OPERATOR

   
Allied Energy, Inc.
   
By
 /s/ Jon M. McKeever       Jon M. McKeever       
Type or print name
 
 
           Title
 
       Date
 
      Tax ID or S.S. No.    

 
                                       NON-OPERATORS
 

   
Alamo Energy Corporation
   
By
 /s/ Allan Millmaker       Allan Millmaker       
Type or print name
 
 
           Title
 
       Date
 
      Tax ID or S.S. No.    

 

   
 
   
By
               
Type or print name
 
 
           Title
 
       Date
 
      Tax ID or S.S. No.    

 

   
 
   
By
               
Type or print name
 
 
           Title
 
       Date
 
      Tax ID or S.S. No.    

 
 
 

 
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ACKNOWLEDGMENTS

Individual acknowledgment:

  STATE OF   )       )   ss.   County of   )        

  This instrument was acknowledged before me on     by    .

 (Seal, if any)                  Title (and rank)                  My Commission
expires:                        

 
 

Acknowledgment in representative capacity:

  STATE OF   )       )   ss.   County of   )        

  This instrument was acknowledged before me on     by    

 (Seal, if any)                  Title (and rank)                  My Commission
expires:                        

 
 
 
 
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EXHIBIT “A”
 
To that certain Operating Agreement, by and between Allied Energy, Inc.
(“Operator”) and Alamo Energy Corp., (“Non-Operator”), covering lands identified
as the Valentine #1 re-entry, Ritchie County, WV.
 
1.           Description of Lands Subject to this Agreement:  Those certain
lands identified below.
 
2.           Restrictions, if any, as to Depths, Formations or Substances:  All
depths to the top of the Marcellus Shale.
 
3.           Parties to Agreement with addresses and telephone numbers for
notice purposes:
 

 
 
PARTIES
WORKING INTEREST
 
Purchased
BPO W.I.
APO W.I.
BPO Net R.I.
APO NR.I.
Alamo Energy Corporation
10497 Town & Country Way, Ste. 820
Houston, Texas 77024
Phone:  (821-200-4832
Fax:  (713) 464-8381
E-mail:  allan@alamoenergycorp.com
50%
70%
50%
59.08%
42.2%
Allied Energy, Inc.
Jon M. MaKeever
P.O. Box 3005
Saratoga, California 95070
Phone:  (310) 710-1976
WV Office:  (304) 628-36762
E-mail:  jmm@alliedenergywv.com
50%
30%
50%
25.32%
42.2%
           
Total
100.00%
100.00%
100.00%
84.4%
84.4%

 
4.           Oil and Gas Leases and/or Oil and Gas Interests subject to this
Agreement:
 

 
 
LEASE
DATE
GROSS ACRES
BOOK
PAGE
LEASE
Florence Valentine
 
111.5
                 

 

 
 
 
36

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EXHIBIT ‘D’
to Joint Operating Agreement

Attached to and made part of that certain Operating Agreement dated
_________________, between Allied Energy, Inc., as Operator, and Alamo Energy
Corporation, as Non-Operator.

INSURANCE PROVISIONS

Pursuant to Article V, Paragraph D(9) of the Joint Operating Agreement, Operator
shall provide the followinginsurance for the benefit and protection of the joint
account:

(1) Statutory Workmen's Compensation Insurance as may be required in the state
or states where
work under this agreement, or activities relative thereto, will be performed,
plus Workmen's
Compensation Insurance as may be required by Federal law, if applicable, plus
Employer's
Liability Insurance.

(2) General liability and 3rd Party property damage insurance (including “Sudden
& Accidental”
Pollution) with limits of $1,000,000 for each occurrence.

(3) Automobile liability and 3rd party property damage insurance with limits of
$1,000,000 combined single limit.

(4) Umbrella liability insurance in the amount of $5,000,000 covering liability
of the parties for loss or damage exceeding the insurance coverage specified
above or otherwise not covered by
insurance maintained by Operator or any third-party contractor.

(5) Operator’s control of well insurance in the amount of $5,000,000 Combined
Single Limit Coverage for well control and related re-drilling and
clean/pollution expenses.

All insurance coverage required hereby shall be carried at the joint expense and
for the benefit of the Operator and Non-operator. Premiums for automobile public
liability and property damage insurance on Operator's fully owned equipment
shall not be charged directly to the joint account, but will be covered by the
flat rate charged assessed for the use of such equipment. Operator will not
carry fire, windstorm or explosion insurance covering Operations or Equipment.
Contractors and subcontractors will be required to carry insurance of the same
types as hereinabove specified
and in such amount as deemed necessary by Operator. If the parties hereto or any
of them shall insure their respective risks beyond the specific limits of
insurance required hereunder to be carried by the Operator, the benefits of such
insurance shall inure to the parties procuring and maintaining the same,
respectively, and the cost of such insurance shall be borne by such parties,
respectively, without reimbursement one from the other and without entering into
any accounting hereunder.

 
 
37

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Exhibit “C”
 
Attached to and made a part of the Participation Agreement
Between Allied and the Participant, as defined therein.
 
TAX PARTNERSHIP PROVISIONS
 
(For Special Elections, See Section 9)
 

 
Table of Contents
 

   
Page
 
1
GENERAL PROVISIONS
1
         
1.1
DESIGNATION OF DOCUMENTS
1
         
1.2
RELATIONSHIP OF THE PARTIES
1
         
1.3
PRIORITY OF PROVISIONS OF THIS EXHIBIT
1
         
1.4
SURVIVORSHIP. Subject to Section 4.3
1
         
2
TAX REPORTING PARTNER AND TAX MATTERS PARTNER
1
         
2.1
TAX REPORTING PARTNER
1
         
2.2
IF SMALL PARTNERSHIP EXCEPTION FROM TEFRA NOT APPLICABLE
2
         
3
INCOME TAX COMPLIANCE AND CAPITAL ACCOUNTS
3
         
3.1
TAX RETURNS
3
         
3.2
FAIR MARKET VALUE CAPITAL ACCOUNTS
3
         
3.3
INFORMATION REQUESTS
3
         
3.4
BEST EFFORTS WITHOUT LIABILITY
4
         
4
TAX AND FMV CAPITAL ACCOUNT ELECTIONS
4
         
4.1
GENERAL ELECTIONS
4
         
4.2
DEPLETION
4
         
4.3
ELECTION OUT UNDER CODE 761(a)
4
         
4.4
CONSENT REQUIREMENTS FOR SUBSEQUENT TAX OR FMV CAPITAL ACCOUNT ELECTIONS
5
         
5
CAPITAL CONTRIBUTIONS AND FMV CAPITAL ACCOUNTS
5
         
5.1
CAPITAL CONTRIBUTIONS
5
         
5.2
FMV CAPITAL ACCOUNTS
5
         

 
 
 

 
38

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

 

6
TAX PARTNERSHIP ALLOCATIONS
6
         
6.1
FMV CAPITAL ACCOUNT ALLOCATIONS
6
         
6.2
TAX RETURN AND TAX BASIS CAPITAL ACCOUNT ALLOCATIONS
8
         
7
TERMINATION AND LIQUIDATING DISTRIBUTION
9
         
7.1
TERMINATION OF THE TAX PARTNERSHIP
9
         
7.2
BALANCING OF FMV CAPITAL ACCOUNTS
9
         
7.3
DEEMED SALE GAIN/LOSS CHARGE BACK
9
         
7.4
DEFICIT MAKE-UP OBLIGATION AND BALANCING CASH CONTRIBUTIONS
9
         
7.5
DISTRIBUTION TO BALANCE CAPITAL ACCOUNTS
10
         
7.6
FMV DETERMINATION
10
         
7.7
FINAL DISTRIBUTION
10
         
8
TRANSFERS, INDEMNIFICATION, AND CORRESPONDENCE
10
         
8.1
TRANSFER OF TAX PARTNERSHIP INTERESTS
10
         
8.2
CORRESPONDENCE
10
         
9
ELECTIONS AND CHANGES TO ABOVE PROVISIONS
11
         
9.1
DESIGNATION OF TRP
11
         
9.2
SPECIAL TAX ELECTIONS
11
 

 
39

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1. GENERAL PROVISIONS
 
1.1 DESIGNATION OF DOCUMENTS.  This exhibit is referred to in, and is part of,
that Agreement identified above and, if so provided, a part of any agreement to
which the Agreement is an exhibit. Such agreement(s) (including all exhibits
thereto, other than this exhibit) shall be hereinafter referred to as the
“Agreement;” and this exhibit is hereinafter referred to as the “Exhibit” or the
“Tax Partnership Provisions” (the “TPPs”). Except as may be otherwise provided
in this Exhibit, terms defined and used in the Agreement shall have the same
meaning when used herein.
 
1.2 RELATIONSHIP OF THE PARTIES.  The Tax Partnership is by and between Allied
Energy, Inc. (“Allied”) and Alamo Energy Corp (the “Participant”) hereinafter
referred to as “Party” or “Parties.” The Parties understand and agree that the
arrangement and undertakings evidenced by the Agreement result in a partnership
for purposes of Federal income taxation and certain State income tax laws which
incorporate or follow Federal income tax principles as to tax partnerships. Such
partnership for tax purposes is hereinafter referred to as the “Tax
Partnership.” For every other purpose of the Agreement the Parties understand
and agree that their legal relationship to each other under applicable State law
with respect to all property subject to the Agreement is one of tenants in
common, or undivided interest owners, or lessee(s)-sub-lessee(s) and not a
partnership; that the liabilities of the Parties shall be several and not joint
or collective; and that each Party shall be responsible solely for its own
obligations.
 
1.3 PRIORITY OF PROVISIONS OF THIS EXHIBIT.  If there is a conflict or
inconsistency, whether direct or indirect, actual or apparent, between the terms
and conditions of this Exhibit and the terms and conditions of the Agreement, or
any other exhibit or any part thereof, the terms and conditions of this Exhibit
shall govern and control.
 
1.4 SURVIVORSHIP. Subject to Section 4.3.
 
1.4.1 Any termination of the Agreement shall not affect the continuing
application of the TPPs for the termination and liquidation.
 
1.4.2 Any termination of the Agreement shall not affect the continuing
application of the TPPs for the resolution of all matters regarding Federal and
State income reporting.
 
1.4.3 These TPPs shall inure to the benefit of, and be binding upon, the Parties
hereto and their successors and assigns.
 
1.4.4 The effective date of the Agreement shall be the effective date of these
TPPs. The Tax Partnership shall continue in full force and effect from, and
after such date, until termination and liquidation.
 
2. TAX REPORTING PARTNER AND TAX MATTERS PARTNER
 
2.1 TAX REPORTING PARTNER.  Allied shall be the “tax reporting partner” (the
“TRP”) responsible for compliance with all tax reporting obligations of the Tax
Partnership, see Section 3.1, below. In the event of any change in the TRP, the
Party serving as TRP at the beginning of a given taxable year shall continue as
TRP with respect to all matters concerning such year. Upon the request of any
Party, the TRP will cooperate with such Party in connection with any
administrative or judicial proceedings with respect to tax matters relating to
the Tax Partnership.
 
 
40

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2.2 IF SMALL PARTNERSHIP EXCEPTION FROM TEFRA NOT APPLICABLE.  If the Tax
Partnership does not qualify for the “small partnership exception” from, or if
the Tax Partnership elects (see infra Elections at Sections 4.1 and 9.2) to be
subject to, 6221 et seq., Subchapter C of Chapter 53 of Subtitle A (the “TEFRA
rules”) of the Internal Revenue Code (the “Code”) the TRP shall also be the tax
matters partner as defined in Code 6231(a) (the “TMP”) and references to the TRP
shall then include references to the TMP and vice versa.
 
The TMP, as representative of the Tax Partnership, shall be authorized to do
each and all of the following: (a) to carry out and supervise the Tax
Partnership’s response to any audit or examination by the IRS of the Tax
Partnership’s tax returns to the extent that such audit or examination relates
to possible adjustments of Tax Partnership items at the Tax Partnership level;
(b) to defend in applicable administrative and/or judicial proceedings against
any adjustments to Tax Partnership items which may be proposed by the IRS; and
(c) to retain and pay counsel to represent the Tax Partnership in connection
with any such audit, examination, or administrative or judicial proceeding. All
costs and expenses related to any such audit, examination or proceeding shall be
paid by the Tax Partnership, and each Party shall execute such documents as are
necessary or appropriate to authorize counsel retained by the TMP to represent
the Tax Partnership with respect to any and all Tax Partnership items in
connection with any such audit, examination or proceeding. In no case shall the
TMP or the Tax Partnership be liable for any additional tax payable by a Party
attributable to adjustments to Tax Partnership items resulting from any such
audit, examination or proceeding or for any costs of separate counsel retained
by any Party to represent such Party in connection with any such audit,
examination or proceeding. The TMP shall have similar authority with respect to
any audits, examinations, or administrative or judicial proceedings related to
state or local tax matters that affect Tax Partnership items at the Tax
Partnership level.
 
2.2.1 The TMP shall not be required to incur any expenses for the preparation
for, or pursuance of, administrative or judicial proceedings, unless the Parties
agree on a method for sharing such expenses.
 
2.2.2 The Parties shall furnish the TMP, within two weeks from the receipt of
the request, the information the TMP may reasonably request to comply with the
requirements on furnishing information to the Internal Revenue Service.
 
2.2.3 The TMP shall not agree to any extension of the statute of limitations for
making assessments on behalf of the Tax Partnership without first obtaining the
written consent of the other Party. The TMP shall not bind the other Party to a
settlement agreement in tax audits without obtaining the written concurrence of
the other Party.
 
2.2.4 Any Party who enters in a settlement agreement with the Secretary of the
Treasury with respect to any partnership items, as defined in Code 6231(a)(3),
shall notify the other Party of the terms within ninety (90) days from the date
of such settlement.
 
2.2.5 If any Party intends to file a notice of inconsistent treatment under Code
6222(b), such Party shall, prior to the filing of such notice, notify the TMP of
the (actual or potential) inconsistency of the Party’s intended treatment of a
partnership item with the treatment of that item by the Tax Partnership. If an
inconsistency notice is filed solely because a Party has not received a Schedule
K-1 in time for filing of its income tax return, the TMP need not be notified.
 
 
41

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2.2.6 No Party shall file pursuant to Code 6227 a request for an administrative
adjustment of partnership items (the “RFAA”) without first notifying the other
Party. If the other Party agrees with the requested adjustment, the TMP shall
file the RFAA on behalf of the Tax Partnership. If unanimous consent is not
obtained within thirty (30) days from such notice, or within the period required
to timely file the RFAA, if shorter, any Party, including the TMP, may file a
RFAA on its own behalf.
 
2.2.7 Any Party intending to file with respect to any partnership item, or any
other tax matter involving the Tax Partnership, a petition under Code 6226,
6228, or any other provision, shall notify the other Party prior to such filing
of the nature of the contemplated proceeding. In the case where the TMP is the
Party intending to file such petition, such notice shall be given within a
reasonable time to allow the other Party to participate in the choice of the
forum for such petition. If the Parties do not agree on the appropriate forum,
then the forum shall be chosen by the Party filing the petition. If a Party
intends to seek review of any court decision rendered as a result of such
proceeding, the Party shall notify the other Party prior to seeking such review.
 
3. INCOME TAX COMPLIANCE AND CAPITAL ACCOUNTS
 
3.1 TAX RETURNS.  The TRP shall prepare and file all required Federal and State
partnership income tax returns. Not less than thirty (30) days prior to the
return due date (including extensions), the TRP shall submit to each Party for
review a copy of the return as proposed.
 
3.2 FAIR MARKET VALUE CAPITAL ACCOUNTS.  The TRP shall establish and maintain
for each Party fair market value (“FMV”) capital accounts and tax basis capital
accounts in accordance with the TPPs. Upon request, the TRP shall submit to each
Party along with a copy of any proposed partnership income tax return an
accounting of such Party’s FMV capital account and tax basis capital account as
of the end of the return period.
 
3.3 INFORMATION REQUESTS.  In addition to any obligation under Section 2.2.2,
each Party agrees to furnish to the TRP not later than sixty (60) days before
the return due date (including extensions) such information relating to the
operations conducted under the Agreement as may be required for the proper
preparation of such returns. Similarly, each Party agrees to furnish timely to
the TRP, as requested, any information and data necessary for the preparation
and/or filing of other required reports and notifications, and for the
computation of the capital accounts. As provided in Code 6050K(c), a Party
transferring its interest must notify the TRP to allow compliance with Code
6050K(a) (see also Section 8.1).
 
3.4 BEST EFFORTS WITHOUT LIABILITY.  The TRP and each of the other Parties shall
use its reasonable best efforts to comply with responsibilities outlined in this
Section, and with respect to the service as TMP as outlined in Section 2.2, and
in doing so shall incur no liability to any other Party.
 
 
42

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4. TAX AND FMV CAPITAL ACCOUNT ELECTIONS
 
4.1 GENERAL ELECTIONS.  For both income tax return and capital account purposes,
the Tax Partnership shall elect:
 
(a)  
to deduct when incurred intangible drilling and development costs (“IDC”);

 
(b)  
for calculating depreciation, to use the maximum allowable accelerated tax
method and the shortest permissible tax life for depreciation, or the units of
production method, as determined by the TRP;

 
(c)  
the accrual method of accounting;

 
(d)  
to report income on a calendar year basis;

 
and the Tax Partnership shall also make any elections as specially noted in
Section 9.2, below.
 
4.2 DEPLETION.  Solely for FMV capital account purposes, depletion shall be
calculated by using simulated cost depletion within the meaning of Treas. Reg.
1.704-1(b)(2)(iv)(k)(2), unless the use of simulated percentage depletion is
elected in Section 9.2, below. The simulated cost depletion allowance shall be
determined under the principles of Code 612 and be based on the FMV capital
account basis of the Lease and the Prospect. Solely for purposes of this
calculation, remaining reserves shall be determined consistently by the TRP.
 
4.3 ELECTION OUT UNDER CODE 761(a).
 
4.3.1 The TRP shall notify all Parties of an intended election to be excluded
from the application of Subchapter K of Chapter 1 of the Code not later than
sixty (60) days prior to the filing date or the due date (including extensions)
for the Federal partnership income tax return, whichever comes earlier. Any
Party that does not consent to such election in writing shall be deemed to
object to such election. If all Parties consent, the TRP shall take all
necessary actions to effect such election and the Parties will cooperate as
needed to carry out such election. If one Party objects, the TRP shall not take
any action to effect such election. Even after an effective election-out, the
TRP’s rights and obligations, other than the relief from tax return filing
obligations of the partnership, continue.
 
4.3.2 After an election-out, to avoid an unintended impairment of the
election-out: The Parties will avoid, without prior coordination, any
operational changes which would terminate the qualification for the election-out
status; all Parties will monitor the continuing qualification of the Tax
Partnership for the election-out status and will notify the other Parties if, in
their opinion, a change in operations will jeopardize the election-out; and, all
Parties will use, unless agreed to by them otherwise, the cumulative gas
balancing method as described in Treas. Reg. 1.761-2(d)(2).
 
4.4 CONSENT REQUIREMENTS FOR SUBSEQUENT TAX OR FMV CAPITAL ACCOUNT
ELECTIONS.  Unless stipulated differently in Section 9.3, future elections, in
addition to or in amendment of those in this agreement, must be approved by the
affirmative vote of both Parties.
 
 
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5. CAPITAL CONTRIBUTIONS AND FMV CAPITAL ACCOUNTS
 
The provisions of this Section 5 and any other provisions of the TPPs relating
to the maintenance of the capital accounts are intended to comply with Treas.
Reg. 1.704-1(b) and shall be interpreted and applied in a manner consistent with
such regulations.
 
5.1 CAPITAL CONTRIBUTIONS.  The respective capital contributions of each Party
to the Tax Partnership shall be (a) each Party’s interest in the oil and gas
lease(s), including all associated lease and well equipment, committed to the
Agreement, and (b) all amounts of money paid by each Party in connection with
the acquisition, exploration, development, and operation of the lease(s), and
all other costs characterized as contributions or expenses borne by such Party
under the Agreement. Accordingly, Allied’s initial capital account shall be
credited with the FMV of the lease or leases currently owned by Allied and that
are subject to this Tax Partnership.  The Participant’s initial capital account
shall be credited with the amount of cash contributed to pay for Drilling and
Completion Costs.  The contribution of the leases and any other properties
committed to the Tax Partnership shall be made by each Party’s agreement to hold
legal title to its interest in such leases or other property as nominee of the
Tax Partnership.
 
5.2 FMV CAPITAL ACCOUNTS.  The FMV capital accounts shall be increased and
decreased as follows:
 
5.2.1 The FMV capital account of a Party shall be increased by:
 
(i)  
the amount of money and the FMV (as of the date of contribution) of any property
contributed by such Party to the Tax Partnership (net of liabilities assumed by
the Tax Partnership or to which the contributed property is subject);

 
(ii)  
that Party’s share of Tax Partnership items of income or gain, allocated in
accordance with Section 6.1; and

 
(iii)  
that Party’s share of any item described in Code 705(a)(1)(B).

 
5.2.2 The FMV capital account of a Party shall be decreased by:
 
(i)  
the amount of money and the FMV of property distributed to a Party (net of
liabilities assumed by such Party or to which the property is subject);

 
(ii)  
that Party’s share of Tax Partnership loss and deductions, or items thereof,
allocated in accordance with Section 6.1; and,

 
(iii)  
that Party’s share of any item described in Code 705(a)(2)(B) or treated as such
in Treasury Regulations under Code §704(b).

 
5.2.3 “FMV” when it applies to property contributed by a Party to the Tax
Partnership shall be assumed, for purposes of 5.2.1, to equal the adjusted tax
basis in the hands of the contributing Party, as defined in Code 1011, of that
property unless the Parties agree otherwise as indicated in Section 9.2.
 
5.2.4 As provided in Treas. Reg. 1.704-1(b)(2)(iv)(e), upon distribution of Tax
Partnership property to a Party the capital accounts will be adjusted to reflect
the manner in which the unrealized income, gain, loss and deduction inherent in
distributed property (not previously reflected in the capital accounts) would be
allocated among the Parties if there were a disposition of such property at its
FMV as of the time of distribution. Furthermore, if so agreed to in Section 9.2,
under the rules of Treas. Reg. 1.704-1(b)(2)(iv)(f), the FMV capital accounts
shall be revalued at certain times to reflect value changes of the Tax
Partnership property.
 
 
44

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6. TAX PARTNERSHIP ALLOCATIONS
 
6.1 FMV CAPITAL ACCOUNT ALLOCATIONS.  Each item of income, gain, loss, or
deduction shall be allocated to each Party as follows:
 
6.1.1 Actual or deemed income from the sale, exchange, distribution or other
disposition of production shall be allocated to the Party entitled to such
production or the proceeds from the sale of such production as provided in the
Agreement. The amount received from the sale of production and the amount of the
FMV of production taken in kind by the Parties are deemed to be identical;
accordingly, such items may be omitted from the adjustments made to the Parties’
FMV capital accounts.
 
6.1.2 Exploration cost, IDC, operating and maintenance cost shall be allocated
to each Party in accordance with its respective contribution, or obligation to
contribute, to such cost.
 
6.1.3 Depreciation shall be allocated to each Party in accordance with its
contribution, or obligation to contribute, to the cost of the underlying asset.
 
6.1.4 Simulated depletion shall be allocated to each Party in accordance with
its FMV capital account adjusted basis in the applicable oil and gas property of
the Tax Partnership.  Accordingly, simulated depletion with respect to the
leases currently owned by Allied and that are made subject to this Tax
Partnership shall be allocated to Allied
 
6.1.5 Simulated loss upon the sale, exchange, distribution, abandonment or other
disposition of depletable property shall be allocated to the Parties in the
ratio of their respective FMV capital account adjusted basis in the depletable
property.
 
6.1.6 Gain (or simulated gain) upon the sale, exchange, distribution, or other
disposition of depreciable or depletable property and loss upon the sale,
exchange, distribution, abandonment or other disposition of depreciable property
shall be allocated to the Parties so that the FMV capital account balances of
the Parties will most closely reflect their respective percentage or fractional
interests under the Agreement determined without regard to the TPPs.
 
6.1.7 Costs or expenses of any other kind shall be allocated to each Party in
accordance with its respective contribution, or obligation to contribute, to
such costs or expense.
 
6.1.8 Any other income item shall be allocated to the Parties in accordance with
the manner in which such income is realized by each Party.
 
6.1.9 Special Allocations.
 
6.1.9.1 Notwithstanding the other provisions of this Section 6.1, if any Party
unexpectedly receives any adjustments, allocations or distributions described in
Treas. Reg. § 1.704-1(b)(2)(ii)(d)(4), (5) or (6), which reduces the Party’s
adjusted FMV capital account balance to below zero, gross income shall be
specially allocated to such Party in an amount and manner sufficient to
eliminate, to the extent required by the Treasury Regulations, the FMV capital
account deficit of such Party as quickly as possible. For purposes of this
Section 6.1.9, a Party’s adjusted FMV capital account balance shall be the same
as the Party’s FMV capital account balance increased by the sum of (i) the
amount, if any, which the Party is unconditionally obligated to contribute to
the Tax Partnership, and (ii) the amount, if any, which the Party is deemed to
be obligated to contribute to the Tax Partnership under Treasury Regulations
under Section 704(b) of the Code.
 
 
45

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6.1.9.2 If any Party would be allocated an item of deduction or loss that would
reduce its adjusted FMV capital account balance to below zero, the Party shall
be allocated only the amount of such item that would reduce its adjusted capital
account balance to zero, and any remaining amount of such item shall be
allocated to the other Party.
 
6.1.9.3 The foregoing allocations set forth in this Section 6.1.9 (the
“Regulatory Allocations”) are intended to comply with certain requirements of
Treasury Regulations. It is the intent of the Parties that, to the extent
possible, all Regulatory Allocations shall be offset either with other
Regulatory Allocations or with special allocations of other items of income,
gain, loss or deduction pursuant to this Section. Therefore, notwithstanding any
other provisions of this Section 6 (other than the Regulatory Allocations), the
TRP shall make such offsetting special allocations of income, gain, loss or
deduction in whatever manner it determines appropriate so that, after such
offsetting allocations are made, each Party’s FMV capital account balance is, to
the extent possible, equal to the FMV capital account balance such Party would
have had if the Regulatory Allocations were not part of the TPPs and all items
were allocated pursuant to Section 6.1 without regard to the Regulatory
Allocations. The TRP shall have the discretion to administer this Section
6.1.9.3 in any reasonable manner that eliminates, to the extent reasonably
feasible, any character discrepancy between the amounts allocated under the
other Sections of this Section 6.1.9 and the corresponding amounts allocated
under this Section 6.1.9.3.
 
6.2 TAX RETURN AND TAX BASIS CAPITAL ACCOUNT ALLOCATIONS.
 
6.2.1 Unless otherwise expressly provided in this Section 6.2, the allocations
of the Tax Partnership’s items of income, gain, loss, or deduction for tax
return and tax basis capital account purposes shall follow the principles of the
allocations under Section 6.1. However, the Tax Partnership’s taxable gain or
loss on the taxable disposition of a Tax Partnership property, if any, shall be
allocated to the contributing Party to the extent of built-in gain or loss (as
defined by Treasury Regulations under Code §704(c)).
 
6.2.2 The Parties recognize that under Code 613A(c)(7)(D) the depletion
allowance is to be computed separately by each Party. For this purpose, each
Party’s share of the Tax Partnership’s adjusted tax basis in each oil and gas
property shall be equal to its contribution to the Tax Partnership’s adjusted
tax basis of such property.
 
6.2.3 Under Code 613A(c)(7)(D) gain or loss on the disposition of an oil and gas
property is to be computed separately by each Party. According to Treas. Reg.
1.704-1(b)(4)(v), the amount realized shall be allocated as follows: (i) An
amount that represents recovery of adjusted simulated depletion basis is
allocated (without being credited to the capital accounts) to the Parties in the
same proportion as the aggregate simulated depletion basis was allocated to such
Parties under Section 6.2.2; and (ii) any remaining realization is allocated in
accordance with Section 6.1.6.
 
6.2.4 Depreciation shall be allocated to each Party in accordance with its
contribution to the Tax Partnership’s adjusted tax basis of the depreciable
asset.
 
6.2.5 In accordance with Treas. Reg. 1.1245-1(e), depreciation recapture shall
be allocated, to the extent possible, between the Parties to reflect their prior
sharing of the depreciation.
 
6.2.6 In accordance with the principles of Treas. Reg. 1.1254-5, any recapture
of IDC is determined and reported by each Party separately. Similarly, any
recapture of depletion shall be computed separately by each Party, in accordance
with its depletion allowance computed pursuant to Section 6.2.2.
 
6.2.7 For Tax Partnership properties with FMV capital account values different
from their adjusted tax bases the Parties intend that the allocations described
in this Section 6.2 constitute a “reasonable method” of allocating gain or loss
under Treas. Reg. 1.704-3(a)(1).
 
6.2.8 Take-in-kind.
 
If checked “Yes” in Section 9.2, below, each Party has the right to determine
the market for its proportionate share of production. All items of income,
deductions, and credits arising from such marketing of production shall be
recognized by the Tax Partnership and shall be allocated to the Party whose
production is so marketed.
 
 
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7. TERMINATION AND LIQUIDATING DISTRIBUTION
 
7.1 TERMINATION OF THE TAX PARTNERSHIP.
 
7.1.1 Upon termination, as provided in Code 708(b)(1)(A), the business shall be
wound-up and concluded, and the assets shall be distributed to the Parties as
described below by the end of such calendar year (or, if later, within ninety
(90) days after the date of such termination). The assets shall be valued and
distributed to the Parties in the order provided in Sections 7.1.2, 7.5, and
7.7.
 
7.1.2 First, all cash representing unexpended contributions by any Party and any
property in which no interest has been earned by any other Party under the
Agreement shall be returned to the contributing Party, and the FMV capital
account balance of any such Party shall be adjusted accordingly.
 
7.2 BALANCING OF FMV CAPITAL ACCOUNTS.  Second, the FMV capital accounts of the
Parties shall be determined as described hereinafter. The TRP shall take the
actions specified under Sections 7.2 through 7.5 in order to cause the ratios of
the Parties’ FMV capital accounts to reflect as closely as possible their
interests under the Agreement. The ratio of a Party’s FMV capital account is
represented by a fraction, the numerator of which is the Party’s FMV capital
account balance and the denominator of which is the sum of all Parties’ FMV
capital account balances. This is hereafter referred to as the “balancing of the
FMV capital accounts” and, when completed, the FMV capital accounts of the
Parties shall be referred to as “balanced.”
 
7.3 DEEMED SALE GAIN/LOSS CHARGE BACK.  The FMV of all Tax Partnership
properties shall be determined and the gain or loss for each property, which
would have resulted if sold at such FMV, shall be allocated in accordance with
Sections 6.1.5 and 6.1.6.
 
7.4 DEFICIT MAKE-UP OBLIGATION AND BALANCING CASH CONTRIBUTIONS.  If a Party has
a negative FMV capital account balance, such Party shall not be obligated to
contribute to the Tax Partnership an amount of money sufficient to achieve a
zero balance FMV capital account. Any Party may contribute an amount of cash to
the Tax Partnership to facilitate the balancing of the FMV capital accounts. If
after these adjustments the FMV capital accounts are not balanced, Section 7.5
shall apply.
 
7.5 DISTRIBUTION TO BALANCE CAPITAL ACCOUNTS.
 
7.5.1 If all Parties agree, any cash or an undivided interest in certain
selected properties shall be distributed to one or more Parties as necessary for
the purpose of balancing the FMV capital accounts.
 
7.5.2 Distribution of Undivided Interests.  Unless Section 7.5.1 applies, an
undivided interest in each and every property shall be distributed to one or
more Parties in accordance with the ratios of their FMV capital accounts.
 
7.6 FMV DETERMINATION.  If a property is to be valued for purposes of balancing
the capital accounts and making a distribution under this Section 7, the Parties
must first attempt to agree on the FMV of the property; failing such an
agreement, the TRP shall cause a nationally recognized independent engineering
firm to prepare an appraisal of the FMV of such property.
 
7.7 FINAL DISTRIBUTION.  After the FMV capital accounts of the Parties have been
adjusted pursuant to Sections 7.2 to 7.5, all remaining property and interests
then held by the Tax Partnership shall be distributed to the Parties in
accordance with their positive FMV capital account balances.
 
 
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8. TRANSFERS, INDEMNIFICATION, AND CORRESPONDENCE
 
8.1 TRANSFER OF TAX PARTNERSHIP INTERESTS.  Transfers of Tax Partnership
interests shall be governed by the Agreement. A Party transferring its interest,
or any part thereof, shall notify the TRP in writing within two weeks after such
transfer.
 
8.2 CORRESPONDENCE.  All correspondence relating to the preparation and filing
of the Tax Partnership’s income tax returns and capital accounts shall be sent
to:
 
TRP:
Allied Energy, Inc.
Attn to:  Jon M. MaKeever
P.O. Box 3005
Saratoga, California 95070
Phone:  (310) 710-1976
WV Office:  (304) 628-3672
E-mail:  jmm@alliedenergywv.com
Other Parties:
Alamo Energy Corp
Attn to:  Allan Millmaker, CEO
10497 Town & Country Way, Ste. 820
Houston, Texas 77024
Phone:  (832) 200-4832
Fax:  (713) 464-8381
E-mail:  allan@alamoenergycorp.com
 

9. ELECTIONS AND CHANGES TO ABOVE PROVISIONS
 
9.1 DESIGNATION OF TRP.  Allied Energy, Inc. is designated TRP.
 
9.2 SPECIAL TAX ELECTIONS.  With respect to Section 4.1, the Parties agree as
follows:
 
(a) that the Tax Partnership shall elect to account for dispositions of
depreciable assets under the general asset method to the extent permitted by
Code 168(i)(4);
 
No
(b) that, upon the request of either Party, the Tax Partnership shall elect
under Code 754 to adjust the basis of Tax Partnership property, with the
adjustments provided in Code 734 for a distribution of property and in Code 743
for a transfer of a partnership interest. In case of distribution of property,
the TRP shall adjust all tax basis capital accounts;
 
Yes
(c) that the Tax Partnership shall elect under Code 6231 to be subject to the
TEFRA rules;
 
N/A
(d) With respect to Section 4.2, Depletion the Parties agree that the Tax
Partnership shall use simulated percentage depletion instead of simulated cost
depletion;
 
No
(e) With respect to Section 5.2.4, under the rules of Treas. Reg.
1.704-1(b)(2)(iv)(f) the Parties agree that the FMV capital accounts shall be
revalued to reflect value changes of the Tax Partnership property upon the
occurrence of the events specified in (5)(i) through (iii) of said
-1(b)(2)(iv)(f) regulations; and
 
Yes
(f) With respect to Section 6.2.8, the income attributable to take-in-kind
production will be reflected on the tax return.
 
Yes

 

 
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With respect to Section 5.2.3 the FMV for the listed property or properties are
determined as follows:
 
Property Description 
 
    FMV  
 
Florence Valentine Lease
$44,025.00
   

 

 

 

 
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IN WITNESS WHEREOF, the Parties have executed this Agreement as of the 18th day
of May, 2010.
 
ALLIED ENERGY, INC.

By:
 /s/ Jon M. McKeever   
Name:
Jon M. McKeever   
Title:
President   

 
ALAMO ENERGY CORP

By:
/s/ Allan Millmaker          
Name:
Allan Millmaker   
Title:
CEO   

                                                                      
 
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