Exhibit
10.5

A.A.P.L. FORM 610 - 1989

MODEL FORM OPERATING AGREEMENT

 

 

OPERATING AGREEMENT

DATED

March 1, 2013,

 

OPERATOR:  EOG Resources, Inc.

CONTRACT AREA:  See Exhibits A-1 and A-2

 

COUNTY OR PARISH OF:  Walker, Grimes, Madison, Trinity, and Montgomery,
STATE OF TEXAS

 

 

 

 

COPYRIGHT 1989 - ALL RIGHTS RESERVED

AMERICAN ASSOCIATION OF PETROLEUM

LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS, 76137, APPROVED FORM.

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

COPYRIGHT 1989 - ALL RIGHTS RESERVED

AMERICAN ASSOCIATION OF PETROLEUM

LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS, 76137, APPROVED FORM.

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

 

 

 

 

 

 

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

TABLE OF CONTENTS

Article

Title

Page

ARTICLE I. DEFINITIONS            1

ARTICLE II.
EXHIBITS..................................................................................................................................................................................3 

ARTICLE III. INTERESTS OF
PARTIES...............................................................................................................................................3 

A.Interests of Parties in Costs and
Production:..................................................................................................................3 

B.Subsequently Created
Interests:...........................................................................................................................................4 

ARTICLE IV.
TITLES......................................................................................................................................................................................5 

A.Title
Examination:..........................................................................................................................................................................5 

B.Loss or Failure of
Title:...............................................................................................................................................................6 

1.Other
Losses..........................................................................................................................................................................6 

ARTICLE V.
OPERATOR..............................................................................................................................................................................6 

A.Designation and Responsibilities of
Operator:.................................................................................................................6 

B.Resignation or Removal of Operator and Selection
Successor:.............................................................................6 

1.Resignation or Removal of
Operator..........................................................................................................................6 

2.Selection of Successor
Operator..................................................................................................................................7 

3.Effective of
Bankruptcy...................................................................................................................................................7 

C.Employees and
Contractors:...................................................................................................................................................8 

D.Rights and Duties of
Operator:...............................................................................................................................................8 

1.Competitive Rates and Use of
Affiliates.................................................................................................................8 

2.Discharge of Joint Account
Obligations.....................................................................................................................8 

3.Protection from
Liens.........................................................................................................................................................8 

4.Custody of
Funds................................................................................................................................................................8 

5.Access to Contract Area and
Records.......................................................................................................................8 

6.Filing and Furnishing Governmental
Reports..........................................................................................................9 

7.Drilling and Testing
Operations.......................................................................................................................................9 

8.Cost
Estimates......................................................................................................................................................................9 

9.Insurance..................................................................................................................................................................................9 

ARTICLE VI. DRILLING AND
DEVELOPMENT.............................................................................................................................10 

A.Initial
Well:......................................................................................................................................................................................10 

B.Subsequent
Operations:...........................................................................................................................................................10 

1.Proposed
Operations........................................................................................................................................................10 

2.Operations by Less Than All
Parties.........................................................................................................................11 

3.Stand-By
Costs..................................................................................................................................................................15 

4.Deepening..............................................................................................................................................................................15 

5.Sidetracking..........................................................................................................................................................................16 

6.Order of Preference of
Operations............................................................................................................................17 

7.Conformity to Spacing
Pattern....................................................................................................................................17 

8.Paying
Wells........................................................................................................................................................................17 

C.Completion of Wells; Reworking and Plugging
Back:................................................................................................17 

1.Completion............................................................................................................................................................................17 

2.Rework, Recomplete or Plug
Back............................................................................................................................18 

D.Other
Operations:........................................................................................................................................................................19 

E.Abandonment of
Wells:............................................................................................................................................................19 

1.Abandonment of Dry
Holes..........................................................................................................................................19 

2.Abandonment of Wells That Have
Produced........................................................................................................20 

3.Abandonment of Non-Consent
Operations............................................................................................................21 

F.Termination of
Operations:......................................................................................................................................................21 

G.Taking Production in
Kind:.......................................................................................................................................................21 

ARTICLE VII. EXPENDITURES AND LIABILITY OF
PARTIES..............................................................................................22 

A.Liability of
Parties:.....................................................................................................................................................................22 

B.Liens and Security
Interests:................................................................................................................................................23 

C.Advances:......................................................................................................................................................................................25 

D.Defaults and
Remedies:..........................................................................................................................................................25 

1.Suspension of
Rights.......................................................................................................................................................25 

2.Suit for
Damages...............................................................................................................................................................26 

3.Deemed
Non-Consent.....................................................................................................................................................26 

4.Advance
Payment.............................................................................................................................................................26 

5.Costs and Attorneys’
Fees...........................................................................................................................................26 

E.Rentals, Shut-in Well Payments and Minimum
Royalties:......................................................................................27 

F.Taxes:...............................................................................................................................................................................................27 

ARTICLE VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF
INTEREST.........................................................28 

A.Surrender of
Leases:.................................................................................................................................................................28 

B.Renewal or Extension of
Leases:........................................................................................................................................29 

C.Acreage or Cash
Contributions:...........................................................................................................................................29 

D.Assignment; Maintenance of Uniform
Interest:............................................................................................................30 

E.Waiver of Rights to
Partition:...............................................................................................................................................31 

ARTICLE IX. INTERNAL REVENUE CODE
ELECTION............................................................................................................31 

ARTICLE X. CLAIMS AND
LAWSUITS...............................................................................................................................................31 

ARTICLE XI. FORCE
MAJEURE...........................................................................................................................................................32 

ARTICLE XII.
NOTICES.............................................................................................................................................................................32 

ARTICLE XIII. TERM OF
AGREEMENT.............................................................................................................................................33 

ARTICLE XIV. COMPLIANCE WITH LAWS AND
REGULATIONS........................................................................................33 

A.Laws, Regulations and
Orders:.............................................................................................................................................33 

B.Governing
Law:............................................................................................................................................................................33 

C.Regulatory
Agencies:................................................................................................................................................................34 

ARTICLE XV.
MISCELLANEOUS...........................................................................................................................................................34 

A.Execution:.......................................................................................................................................................................................34 

B.Successors and
Assigns:........................................................................................................................................................35 

C.Counterparts:................................................................................................................................................................................35 

D.Severability:..................................................................................................................................................................................35 

 

 

ARTICLE XVI. OTHER
PROVISIONS.................................................................................................................................................35 

A.Conflicts:........................................................................................................................................................................................35 

B.Additional
Testing:.......................................................................................................................................................................35 

C.Substitute
Well:............................................................................................................................................................................35 

D.Metering
Production:..................................................................................................................................................................36 

E.Agreement Subject to Applicable Laws and
Reporting:.............................................................................................36 

F.Confidentiality:.............................................................................................................................................................................36 

G.Payment of Royalties and
Taxes:......................................................................................................................................37 

H.Liabilities:........................................................................................................................................................................................37 

I.Operations Sequence
Priority:..............................................................................................................................................38 

J.Subsequent
Operations:...........................................................................................................................................................38 

K.Covenants:....................................................................................................................................................................................39 

L.Information:...................................................................................................................................................................................39 

M.Federal and State
Reporting:.................................................................................................................................................39 

N.Operator As Disbursing
Agent:.............................................................................................................................................39 

O.Waiver:............................................................................................................................................................................................40 

P.Horizontal
Wells:..........................................................................................................................................................................40 

Q.Information to
Operator:..........................................................................................................................................................40 

R.Marketing of
Production:..........................................................................................................................................................40 

S.Indemnity:......................................................................................................................................................................................41 

T.Amendments:................................................................................................................................................................................41 

U.Proposed Non-Operator
Operations:..................................................................................................................................41 

 

 

 

 

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

OPERATING AGREEMENT

THIS AGREEMENT, entered into by and between EOG Resources, 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:

ARTICLE I.

DEFINITIONS

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

            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.

            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, performing,
well stimulation and production testing conducted in such operation.

            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.”

            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. 

            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.

            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.

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

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

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

            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.

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

            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.

            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.

            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.

            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.

            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.

            The term “Rework” shall mean an operation conducted in the wellbore
of a well after it is Completed in 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.

            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 drill around junk in the hole to
overcome other mechanical difficulties.

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

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.

            

B.

Exhibit “B,” Form of Lease

     X    

C.

Exhibit “C,” Accounting Procedure

     X    

D.

Exhibit “D,” Insurance

     X    

E.

Exhibit “E,” Gas Balancing Agreement

     X    

F.

Exhibit “F,” Non-Discrimination and Certification of Non-Segregated Facilities

           

G.

Exhibit “G,” Tax Partnership

     X    

H.

Other Model Form Recording Supplement to Operating Agreement and Financing
Statement

 

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.

ARTICLE III.

INTERESTS OF PARTIES

A.

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.

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

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, each party shall pay or deliver,
or cause to be paid or delivered, all burdens on its share of the production
from the Contract Area up to, but not in excess of, ___________________ 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
access or 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 as 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.

B.

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 interests, 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

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

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
arties, 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.

C.

TITLES

D.

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 opinion is 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
communication 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

            -  5  -

 

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

approved by the examining attorney or title has been accepted by all of the
Drilling Parties in such well.

E.

Loss or Failure of Title:

Other Losses

.    All losses of Leases or Interests committed to this agreement, other than
those set forth in Articles IV.B.1. and IV.B.2. above, 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.

F.

OPERATOR

G.

Designation and Responsibilities of Operator:

EOG Resources, 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.

H.

Resignation or Removal of Operator and Selection Successor:

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

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

meet the standards of operation contained in Article V.A. or material failure or
inability to perform in 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.

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.

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

I.

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.

J.

Rights and Duties of Operator:

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 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.

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 the 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.

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.

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.

Access to Contract Area and Records

.  Operator shall, except as otherwise provided herein, permit each Consenting
Party or its duly authorized representative, at the Consenting Party’s sole risk
and cost, full and free access at all reasonable times to all operations

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

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 and such Consenting
Party has paid for its proportionate share thereof.  Operator will furnish to
each Consenting Party 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
Consenting Party 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.”

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.

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.

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.

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. 

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

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 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.

(d)

DRILLING AND DEVELOPMENT

K.

Initial Well:

On or before the ______ day of ___________________, _____, Operator shall
commence the drilling of the Initial Well at the following location:

TO BE DETERMINED

 

 

 

and shall thereafter continue the drilling of the well with due diligence to

 

 

The drilling of the Initial Well and the participation therein by all parties is
obligatory, subject to Article VI.C.1. as to participation in Completion
operations and Article VI.F. as to termination of operations and Article XI as
to occurrence of force majeure.

L.

Subsequent Operations:

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 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 

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

and the response period shall be limited to forty-eight (48) hours, exclusive of
Saturday, Sunday and legal holidays.  Failure of a party to whom such notice is
delivered to reply within the period above fixed shall constitute an election by
that party not to participate in the cost of the proposed operation.  Any
proposal by a party to conduct an operation conflicting with the operation
initially proposed shall be delivered to all parties within the time and in the
manner provided in Article VI.B.6.

If all parties to whom such notice is delivered elect to participate in such a
proposed operation, the prices 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 forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
thereafter complete it with due diligence at the risk and expense of the parties
participating therein; provided, however, said commencement date may be extended
upon written notice of same by Operator to the other parties, for a period of up
to thirty (30) additional days if, in the sole opinion of Operator, such
additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights-of-way) or appropriate drilling
equipment, or to complete title examination or curative matter required for
title approval or acceptance.  If the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein or in the force majeure provisions of Article XI) and if any
party hereto still desires to conduct said operation, written notice proposing
same must be resubmitted to the other parties in accordance herewith as if no
prior proposal had been made. Those parties that did not participate in the
drilling of a well for which a  proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed Deepening
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.

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 forty-eight (48) 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) designated 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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            A.A.P.L. FORM 610 - 1989 - MODEL FORM OPERATING AGREEMENT

If less than all parties approve any proposed operation, the proposing party,
immediately after the expiration of the applicable notice period, shall advise
all Parties of the total interest of the parties approving such operation and
its recommendation as to whether the Consenting Parties should proceed with the
operation as proposed.  Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday, and legal holidays) after delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party’s interest as shown on Exhibit “A” or (ii) any 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 forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays).   The proposing party, at its election,
may withdraw such proposal if there is less than 100% participation and shall
notify all parties of such decision within ten (10) days, or within twenty-four
(24) hours if a drilling rig is on location, following 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 crated by
or arising from the operations of the Consenting Parties. If such an operation
results in a dry hole, then subject to Article 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 for 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,

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

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)

400% 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)

400% 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-Consulting Party who submitted or voted for an alternative proposal under
Article VI.B.6 to drill the well to a shallower Zone that the deepest objective
Zone proposed in the notice under which the well was drilled, and each such
Non-Consenting Party shall have the option to participate in the initial
proposed Completion of the well by paying its share of the cost of drilling the
well to its actual depth, calculated in the manner provided in Article
VI.B.4.(a).  If any such Non-Consenting Party does not elect to participate in
the first Completion proposed for such well, the relinquishment provisions of
this Article VI.B.2.(b) shall apply to such party’s interest.

(c)

Reworking, Recompleting or Plugging Back.  As 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, in 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 income.  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

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

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 400%
of that portion of the costs of the Reworking, Recompleting or Plugging Back
operations which would have been chargeable to such Non-Consenting Party had it
participated therein.  If such a Reworking, Recompleting or Plugging Back
operation is proposed during such recoupment period, the provisions of this
Article VI.B. shall be applicable as between said Consenting Parties in said
well.

(d)

Recoupment Matters.  During the period of time Consenting Parties are entitled
to receive Non-Consenting Party’s share of production, or the proceeds
therefrom, Consenting Parties shall be responsible for the payment of all ad
valorem, production, severance, excise, gathering and other taxes, and all
royalty, overriding royalty and other burdens applicable to Non-Consenting
Party’s share of production not excepted by Article III.C.

In the case of any Reworking, Sidetracking, Plugging Back, Recompletion 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 which 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

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

participated in the drilling, Sidetracking, Reworking, Deepening, Recompleting
or Plugging Back of said well.  Thereafter, such Non-Consenting Party shall be
charged with an 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.

Stand-By Costs

.  When a well which has been drilled or Deepened has reached its authorized
depth and all tests have been completion 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.  Standby 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 in the proportion of 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.

Deepening

.  If less than all parties elect to participate in a drilling, Sidetracking, or
Deepening operation proposed pursuant to Article VI.B.1., the interest
relinquished by the Non-Consenting Parties to the Consenting Parties under
Article VI.B.2. shall relate only and be limited to the lesser of (i) the total
depth actually drilled or (ii) the objective depth or Zone of which the parties
were given notice under Article VI.B.1.(“Initial Objective”).  Such well shall
not be Deepened beyond the Initial Objective without first complying with this
Article to afford the Non-Consenting Parties the opportunity to participate in
the Deepening operation.

In the event any Consenting Party desires to drill or Deepen a Non-Consent Well
to a depth below the Initial Objective, such party shall give notice thereof,
complying with the requirements of Article VI.B.1., to all parties (including
Non-Consenting Parties).  Thereupon, Articles VI.B.1. and 2. Shall apply and all
parties receiving such notice shall have the right to participate or not
participate in the Deepening of such well pursuant to said Articles VI.B.1. and
2.  If a Deepening operation is approved pursuant to such provisions, and if any
Non-Consenting Party elects to participate in the Deepening operation, such
Non-Consenting Party shall pay or make reimbursement (as the case may be) of the
following costs and expenses.

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

(e)

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.

(f)

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 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.

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 as
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:

(g)

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.

(h)

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

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

the depth at which the Sidetracking operation is initiated shall be determined
in accordance with the provisions of Exhibit “C”.

Order of Preference of Operations

.  Except as otherwise specifically provided in this agreement, if any party
desires to propose the conduct of an operation that conflicts with a proposal
that has been made by a party under this Article VI, such party shall have
fifteen (15) days from delivery of the initial proposal, in the case of a
proposal to drill a well or to perform an operation on a well where no drilling
rig is on location, or twenty-four (24) hours, exclusive of Saturday, Sunday and
legal holidays, from delivery of the initial proposal, if a drilling rig is on
location for the well on which such operation is to be conducted, to deliver to
all parties entitled to participate in the proposed operation such party’s
alternative proposal, such alternate proposal to contain the same information
required to be included in the initial proposal.  Each party receiving such
proposals shall elect by delivery of notice to Operator within five (5) days
after expiration of the proposal period, or within twenty-four (24) hours
(exclusive of Saturday, Sunday and legal holidays) if a drilling rig is on
location for the well that is the subject of the proposals, to participate in
one of the competing proposals.  Any party not electing within the time required
shall be deemed not to have voted.  The proposal receiving the vote of parties
owning the largest aggregate percentage interest of the parties voting shall
have priority over all other competing proposals, in the case of a tie vote, the
initial proposal shall prevail.  Operator shall deliver notice of such result to
all parties entitled to participate in the operation within five (5) days after
expiration of the election period (or within twenty-four (24) hours, exclusive
of Saturday, Sunday and legal holidays, if a drilling rig is on location).  Each
party shall then have two (2) days (or twenty-four (24) hours if a rig is on
location) from receipt of such notice to elect by delivery of notice to Operator
to participate in such operation or to relinquish interest in the affected well
pursuant to the provisions of Article VI.B.2. failure by a party to deliver
notice within such period shall be deemed an election not to participate in the
prevailing proposal.

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 or
the party proposing such well has obtained an exception or permit for same from
the regulatory agency having jurisdiction herein.

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.

M.

Completion of Wells; Reworking and Plugging Back:

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:

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

   √                     Option No. 1:  All necessary expenditures for the
drilling, Deepening or Sidetracking, testing, Completing and equipping of the
well, including necessary tankage and/or surface facilities for which horizontal
wells for which no pilot hole has been proposed prior to drilling.

   √             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 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 forty-eight (48) 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 proposed 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 operator 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
provision 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 Recompletion 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. 

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

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

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.

N.

Other Operations:

Operator shall not undertake any single project reasonably estimated to require
an expenditure in excess of Fifty Thousand Dollars ($50,000.00) 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 uses, Operator shall furnish
any Non-Operator so requesting an information copy thereof for any single
project costing in excess of Ten Thousand Dollars ($10,000.00).  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 hereof
Operator secures the written consent of any party or parties owning at least51%
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.

O.

Abandonment of Wells:

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
forty-eight (48) 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

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

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 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.

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 after
delivery of notice of proposed abandonment shall be deemed an election to
consent to the proposal.  If within sixty (50) 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 and 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 to the

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

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.

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 cost for such well
as provided in Article VI.B.2.(b).

P.

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 65% 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.

Q.

Taking Production in Kind:

   √               Option No. 1:  Gas Balancing Agreement Attached

Each party shall 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
test.  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

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

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 or Gas produced from
the Contract Area, Operator shall have the right, subject to the revocation it
will by the party owning it, but not the obligation, to purchase such Oil 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 at
any time its right to take in kind, or separately dispose of, its share of all
Oil or Gas not previously delivered to a purchaser.  Any purchase or sale by
Operator of any other party’s share of Oil 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 to
obtain a price equal to that received under any existing market.  The sale or
delivery by Operator of a non-taking party’s share of Oil or Gas 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
shall be made by Operator without first giving the non-taking party at least ten
(10) days written notice of such intended purchase and the price to be paid or
the pricing basis to be used.

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.

In the event one or more parties’ separate disposition of its share of the Gas
causes split-stream deliveries to separate pipelines and/or deliveries which on
a day-to-day basis for any reason are not exactly equal to a party’s respective
proportionate share of total Gas sales to be allocated to it, the balancing or
accounting between the parties shall be in accordance with any Gas balancing
agreement between the parties hereto, whether such an agreement is attached as
Exhibit “E” or is a separate agreement.  Operator shall give notice to all
parties of the first sales of Gas from any well under this agreement.

R.

EXPENDITURES AND LIABILITY OF PARTIES

S.

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

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

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. 

T.

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 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 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 connection 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 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

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

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 or after such interest is acquired.

To the extent that parties have a security interest under the Uniform Commercial
Code of the state in which the Contract Area is situated, they shall be entitled
to exercise the rights and remedies of a secured party under the Code.  The
bringing of a suit and the obtaining of judgment by a party for the secured
indebtedness shall not be deemed an election of remedies or otherwise affect the
lien rights or security interest as security for 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 in foreclosure or executed 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 party prior to sale, any available right to stay execution or to require
a marshaling 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 agrees 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.

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

U.

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.

V.

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.

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.

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

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.

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 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 the 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 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.

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 the
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.

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

W.

Rentals, Shut-in Well Payments and Minimum Royalties:

Rentals, shut-in well payments and minimum royalties which may be required under
the terms of any lease shall be paid by the party or parties who subjected such
lease to this agreement at its or their expense.  In the event two or more
parties own and have contributed interests in the same lease to this agreement,
such parties may designate one of such parties to make said payments for and on
behalf of all such parties.  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.

X.

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 off 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”.

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

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.

Y.

ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

Z.

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

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

terms and provisions of this agreement but shall be deemed subject to an
Operating Agreement in the form of this agreement.

AA.

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.

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.

BB.

Acreage or Cash Contributions:

While this agreement is in force, if any party contracts for a contribution of
cash towards the drilling of a well or, any other operation on the Contract
Area, such contribution

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

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 for 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 well
drilled inside the Contract Area.

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

CC.

Assignment; Maintenance of Uniform Interest:

For the purpose of maintaining uniformity of ownership in the Contract Area in
the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production
covered by this agreement no party shall sell, encumber, transfer or make other
disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests
embraced within the Contract Area or in wells, equipment and production unless
such disposition covers either:

1.            the entire interest of the party in all Oil and Gas Leases, Oil
and Gas Interests, wells, equipment and production; or

 

2.            an equal undivided percent of the party’s present interest in all
Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production in
the Contract Area.

 

Every 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

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

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.

DD.

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.

EE.

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.

FF.

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
_______________________ Dollars ($___________) 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.

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

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.

GG.

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.

HH.

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

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

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.

II.

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.

   √               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.

JJ.

COMPLIANCE WITH LAWS AND REGULATIONS

KK.

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.

LL.

Governing Law:

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

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

MM.

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 offering 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.

NN.

MISCELLANEOUS

OO.

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.

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

PP.

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.

QQ.

Counterparts:

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

RR.

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.

SS.

OTHER PROVISIONS

TT.

Conflicts:

In the event of a conflict between the provisions of this Article XVI, and other
provisions of the Operating Agreement, the provisions of this Article XVI shall
govern and control.  Further, this Operating Agreement (including this Article
XVI) is subject to the terms and provisions of that certain Joint Exploration
and Development Agreement dated effective March 1, 2013, by and among EOG
Resources, Inc., ZaZa Energy Corporation and ZaZa Energy, LLC (“JEDA”), and in
the event of a conflict between the provisions of this Operating Agreement
(including this Article XVI) and the JEDA, to which this Operating Agreement is
attached as an exhibit, the JEDA shall govern and control.

UU.

Additional Testing:

Any party desiring to perform additional logging, coring, or other testing
(other than logging, coring or testing that has been approved previously) may do
so at its sole cost, risk and expense.  In such event the party or parties
undertaking such additional testing shall be responsible for any damage to the
hole or reservoir resulting from such testing.  The parties not participating in
such additional testing shall not be entitled to the logs and other data
resulting from such tests, but shall not suffer any other penalty.

VV.

Substitute Well:

Should there be a completion attempt of any Test Well and should the Consenting
Parties agree to abandon the completion attempt due to, but not limited to, the
inability to set production casing and successfully secure same, mechanical
problems that may arise, such as collapsed pipe or tubing, unrecoverable junk in
the hole that would prohibit the well being

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

successfully completed for production, and should the well thereafter be plugged
and abandoned, then in that event, only those Consenting Parties to the
completion attempt of the Test Well shall have the right and election to consent
to drilling of a substitute well at a legal location as near as practical to the
location of the Test Well.  If said substitute well is AFE’d for a depth that is
greater than 200 feet below the stratigraphic equivalent of the geological
formation of the Test Well for which the substitute well is proposed, or if said
substitute well is AFE’d as a horizontal well (if the Test Well was a vertical
well) or as a vertical well (if the Test Well was a horizontal well) or if the
azimuth of the horizontal well bore of the Test Well is changed more than twenty
degrees in the substitute well proposal and AFE, then all parties have the right
to participate in the substitute well in accordance with the appropriate well
proposal provisions of this Operating Agreement or the Agreement to which this
Operating Agreement is attached.

WW.

Metering Production:

If a diversity of the working interest ownership in production from a lease
subject to this Operating Agreement occurs as a result of operations by less
than all parties pursuant to any provision(s) of this Operating Agreement, it is
agreed that the oil and/or gas, and other liquid hydrocarbons produced from the
well or wells completed by the consenting party or parties shall be separately
measured by standard metering equipment to be properly testing periodically for
accuracy.  The setting of a separate tank battery will not be required unless
the purchaser of the production or governmental regulatory body having
jurisdiction will not approve metering for separately measuring the
production.  Subject to the provision of Article VI.G., in the event any party
hereto enters into a gas sales contract for the sale of their share of gas
produced from the Contract Area (“Contracting Party”), any of the other parties
hereto may, at its option, accept and ratify such gas sales contract as
additional Contracting Party.

XX.

Agreement Subject to Applicable Laws and Reporting:

This Operating Agreement and the respective rights and obligations of the
parties hereunder shall be subject to all applicable federal, state, local or
governmental laws, rules, regulations and orders, and in the event this
Agreement or any provision(s) hereof is, or the operations contemplated hereby
are found to be inconsistent with or contrary to any such law, rule, regulation
or order, the latter shall be deemed to control and this Operating Agreement
shall be regarded as modified accordingly and, as so modified, to continue in
full force and effect.

Operator shall act as the representative of all parties hereto in all hearings
and proceedings before administration bodies concerning the Contract Area and
all reasonable costs and expenses incurred by Operator (excluding its staff
attorneys) directly or by retention of outside personnel in participation in
such hearings or proceedings shall be proper direct charges against the joint
account; provided, however, that nothing herein contained shall prohibit any of
the parties other than Operator from participating in any such hearing or
proceedings in his or its behalf and at his or its own cost and expense.

YY.

Confidentiality:

Except as otherwise specifically provided herein, during the term of this
Operating Agreement, all geophysical, geological and engineering information
acquired

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

hereunder shall be the property of the parties hereto as herein provided, and
the parties agree, and do hereby bind themselves, their successors and assigns,
to accept and keep such information confidential and for the exclusive use of
the parties concerned for the term hereof.  Except as otherwise specifically
provided herein, well information shall be the sole and confidential property of
the parties participating in the cost of the well, but such information may be
disclosed to a non-drilling party to this Operating Agreement if a drilling
party is so obligated.  Notwithstanding any other provision of this Operating
Agreement, any party may disclose information, without the consent of the other
parties, (1) to governmental agencies when required by such agency, (2) to
reputable financial institutions in connection with a bona fide financial
transaction, (3) to bona fide consultants and accredited engineering firms for
the purpose of evaluation on a confidential basis, (4) to reputable financially
responsible third parties with whom a party is engaged in a bona fide effort to
sell all or part of its interest in the Contract Area or this Operating
Agreement, and (5) third parties with whom a party is engaged in a bona fide
effort to effect a merger or consolidation or which third party proposes to
acquire all of the controlling part of the stock in a party hereto or to
purchase substantially all of the assets of a party hereto or affiliates of
parties hereto; provided that any third party who is permitted access to
confidential data pursuant to this Paragraph shall agree in writing not to
communicate such information to anyone and to make no use of such information
adverse to the parties hereto within the area covered by such information during
the period of time such information remains confidential hereunder; and,
provided further that the party disclosing the confidential data shall indemnify
and hold the other parties hereto harmless against losses resulting from its
disclosure to non-governmental third parties.

ZZ.

Payment of Royalties and Taxes:

If Operator purchases a Non-Operator’s share of production or if Operator sells
production for the account of a non-taking party under Article VI.G. or a
marketing agreement, all royalties, overriding royalties, other production
burdens, and tax assessments (including severance taxes) shall be paid by
Operator from the sale proceeds due to the Non- Operator; provided, however,
that if a party exercises its right to take production in kind under the
provisions of this Operating Agreement, such party shall pay or deliver or cause
to be paid or delivered all royalties, overriding royalties, or other payments
due on its share of production so taken, and shall hold the other parties free
from any liability therefore.  Payment by Operator of any such royalties,
overriding royalties, other production burdens, and tax assessments (including
severance taxes), or other amounts on behalf of such Non-Operator, is intended
as an administrative convenience only and each party shall remain responsible
for its proportionate part of such payment made by the Operator.  Operator shall
have no liability to third parties for improper calculation or untimely payments
of such amounts provided Operator acts in good faith.  Operator and Non-Operator
agree that the making of such payments by Operator does not constitute an
assignment to or assumption by Operator of any of Non-Operator’s obligations to
third parties, is not intended for the benefit of such third parties, and shall
not create any rights in such third parties. 

AAA.

Liabilities:

Operator shall use reasonable efforts to comply with all rules and governmental
regulations but, notwithstanding any rule or regulation making the Operator
responsible for

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

compliance with said rules and regulations, the liability therefore shall be
borne by the parties hereto in proportion to their interests including, without
limitation, any repayments required by any such governmental agency.  In the
event Operator (1) agrees in writing to hold division orders and to disburse
proceeds from oil or gas sales including the payment of royalty interests and/or
(2) accepts, holds, disburses or otherwise handles any funds on behalf of
Non-Operators then each Non-Operator, as to its interest, indemnifies Operator
without limitation in connection therewith provided that there is an absence of
fraud, intentional misrepresentation, gross negligence or acts of willful
misconduct by Operator.  NO PARTY SHALL BE LIABLE TO ANY OTHER PARTY TO THIS
OPERATING AGREEMENT FOR LOST PROFITS OR ANY OTHER INCIDENTAL, CONSEQUENTIAL,
SPECIAL, EXEMPLARY OR PUNITIVE LOSSES OR DAMAGES (WHETHER IN TORT, CONTRACT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS OPERATING AGREEMENT REGARDLESS OF
THE NEGLIGENCE (SOLE OR CONCURRENT) OR OTHER FAULT OF A PARTY.

BBB.

Operations Sequence Priority:

It is agreed that where a well, which has been authorized under the terms of
this Operating Agreement, has been drilled to the objective depth or the
objective formation, whichever is deepest, and the parties participating in the
well cannot mutually agreed upon the sequence and timing of further operations
regarding said well, the following elections shall control in the order
enumerated hereafter: (1) an election to do additional logging, coring or
testing, (2) an election to attempt to complete the well at either the objective
depth or objective Zone or formation, (3) an election to plug back and attempt
completions in ascending order, (4) an election to sidetrack the well, (5) an
election to deepen said well in descending order and (6) plugging and abandoning
the well.  Any election required pursuant to this provision may be requested by
confirmed e‑mail and/or facsimile and any response may be given by a confirmed
e‑mail and/or facsimile.

It is provided, however, that if at the time said Consenting Parties are
considering any of the above elections as set forth in the previous paragraph,
the hole is in such a condition that the Operator would not conduct the
operations contemplated for fear of placing the hole in jeopardy or losing the
same prior to completing the well in the objective depth or objective formation,
such election shall not be given the priority hereinabove set forth.

CCC.

Subsequent Operations:

Subsequent Operations shall, in all respects, be subject to the terms and
provisions of Article VI.B. of this Operating Agreement.  Other than drilling,
an election to non-consent a proposed operation shall not serve to preclude
participation by the non-consenting party in a subsequent operation to deepen
the well, or to test and complete the well in a formation in which no previous
testing and completion attempt has been made (except in the deepened portion of
the well, if a deepening operation, and in which the non-consenting party did
not participate).  Election to participate in any subsequent operation will
carry with it the obligation for costs as set out in
Article VII.A.  Non-Operators expressly recognize that Operator shall determine,
in accordance with this Operating Agreement, the costs of all Subsequent
Operations which are proposed or performed in accordance with the provisions
hereof, and the costs so determined

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

shall be reflected on an Authority for Expenditure prepared and submitted by
Operator to Non-Operators in connection with each such Subsequent Operation.

DDD.

Covenants:

The terms, covenants and conditions of this Operating Agreement shall be
covenants running with the Contract Area and shall inure to and be binding upon
the parties hereto and their respective legal representatives, successors and
assigns.  Each party making an assignment or transfer of any lands or leasehold
estates covered hereby shall provide that such assignment or transfer is subject
to all of the terms, covenants and conditions hereof, and shall promptly give
written notice to Operator of such assignment or transfer.

EEE.

Information:

Operator shall at all times consult freely with the other parties concerning the
operations being or to be conducted within the Contract Area.

FFF.

Federal and State Reporting:

Operator hereby agrees to use reasonable efforts to comply with the rules and
regulations of all State or Federal agencies, boards, commissions or other
regulatory authorities (“Regulatory Authorities”) having jurisdiction of the
Contract Area.  To this end, it will file all documentation, reports, affidavits
and exhibits required to be filed by the Operator with any such Federal or State
regulatory authority.  The Operator shall not be liable in damages to
Non-Operators for its failure to timely or properly file any such instruments
where such failure is the result of mere nonfeasance or misfeasance or the
result of in incorrect or improper interpretation of the statutes, rules and
regulations of any regulatory authority.  As consideration for its undertaking
the acts set forth above, Operator shall be compensated for its costs in doing
such acts.

Non-Operators hereby covenant and agree to use reasonable efforts to timely
provide the Operator with all documentation, affidavits, reports or other
materials and information in their possession, or to which they are entitled,
which the Operator must have in order to perform those tasks and make the
necessary reports to the regulatory authorities.

GGG.

Operator As Disbursing Agent:

Subject to the right of each party to take in kind its share of production from
the Contract Area, any Non-Operator to this Operating Agreement may designate
the Operator to act as its/their agent to receive and disburse the proceeds
received from the sale of any oil, gas or other minerals produced from the
Contract Area.  If so requested, Operator shall remit to each Non-Operator its
proportionate share of the net proceeds within sixty days after receipt
thereof.  Operator will use reasonable efforts to make such disbursements
correctly, but will be liable for incorrect disbursement only in the event of
gross negligence or willful misconduct.  Operator shall have the right, at its
election, to cease acting as the agent of Non-Operator by providing such party
and its relevant purchaser of production with 30 days written notice of such
cessation.  Likewise, Non-Operator may terminate the authority of Operator to
act on its behalf by

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

providing Operator and the relevant purchaser of production from the Contract
Area with 30 days written notice of such termination of authority.

HHH.

Waiver:

Waiver by any party hereto of any breach by any other party hereto of any
provision of this Operating Agreement shall not be deemed a waiver of future
compliance therewith or with any other provision hereof, and each and every
provision of this Operating Agreement shall remain in full force and effect
regardless of any previous waiver.

III.

Horizontal Wells:

Notwithstanding anything contained herein to the contrary, (i) the provisions of
Article VI.C.1. Option No. 1 shall apply to any “horizontal well” (hereinafter
defined) proposed hereunder, and (ii) the provisions of Article VI.C.1. Option
No. 2 shall apply to all other wells proposed hereunder that are not expressly
proposed as “horizontal wells”.  To be effective as a “horizontal well
proposal”, such proposal must include an AFE and other accompanying documents
that clearly stipulate that the well being proposed is a horizontal well.  For
purposes of this agreement, a “horizontal well” is defined a well drilled,
completed or recompleted in a manner in which the lateral or horizontal
component exceeds a minimum of one hundred feet (100’) in the objective
formation(s).  As to any possible conflicts that may arise during the completion
phase of a horizontal well, priority shall be given first to a lateral drain
hole of the authorized depth, and then to objective formations in ascending
order above the authorized depth, and then to objective formations in descending
order below the authorized depth.

JJJ.

Information to Operator:

Non-Operators hereby covenant and agree that they shall provide Operator with
all documentation, affidavits or reports within their possession as required by
Operator to perform those tasks agreed to be undertaken by Operator hereunder,
and as may be required by regulations and laws of the governmental authority
having jurisdiction over operations on the Contract Area.

KKK.

Marketing of Production:

At the written request of Non-Operator, Operator has the option, but not the
obligation, to market Non-Operator’s proportionate share of production.  In the
event Operator elects such option, Operator will market Non-Operator’s
proportionate share of production on the same price and terms that Operator
markets its own production from the Contract Area.  Such marketing will be free
of any postproduction costs except for those costs incurred on a bona-fide
arms-length transaction between Operator and a third party that is not related
to Operator or in which Operator does not own a controlling interest.  Operator
may cease marketing Non-Operator’s share of production at any time (or from
time-to-time) for any reason or no reason; provided, however, that Operator must
provide at least thirty (30) days written notice to Non-Operator.  In the event
Operator elects to market Non-Operator’s share of production, Operator will pay
Non-Operator’s royalty burdens; provided, however, that Non-Operator shall
furnish to Operator any information relevant to the payout of such royalty
burdens.

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

LLL.

Indemnity:

THE PARTIES ACKNOWLEDGE AND UNDERSTAND THAT THE PROVISIONS OF ARTICLE V. ARE
INTENDED AS AN INDEMNITY AGREEMENT THAT INDEMNIFIES THE OPERATOR FROM THE
RESULTS OF THE OPERATOR’S OWN NEGLIGENCE (WHETHER SOLE, JOINT, COMPARATIVE, OR
CONCURRENT).  THE PARTIES AGREE THAT ARTICLE V., AS SUPPLEMENTED BY THIS
ADDITIONAL PROVISION, SATISFIES THE EXPRESS NEGLIGENCE DOCTRINE AND CONSPICUOUS
REQUIREMENT UNDER TEXAS LAW.

MMM.

Amendments:

Except as otherwise expressly provide, this Agreement shall not be amended
except by written instrument expressly referring to this Agreement and executed
by the parties to such amendment.

NNN.

Proposed Non-Operator Operations:

Notwithstanding anything contrary contained in this Operating Agreement
(including without limitation Article VI) and except as to (x) an operation
which is necessary to maintain an Oil and Gas Lease within six months of its
expiry or (y) an operation to Rework, Deepen, Recomplete or Plug Back any well
that Operator has failed to Complete or found to be non-productive, or upon
which Operator has otherwise ceased continuing operations (except to the extent
that such well is reasonably required as a monitoring well), from and after the
date of this Operating Agreement, a Non-Operator shall not propose any operation
under this Operating Agreement until the earlier of: (i) Operator’s completion
and satisfaction of its Commitment Well (as defined in the JEDA) obligations for
Phases I, II and III (as each is defined in the JEDA) as provided in Section 3
to the JEDA, (ii) the expiration of the Term (as defined in the JEDA).  For
purposes of the preceding sentence, only as applied to a Commitment Well, the
term “Complete” shall have the definition given to such term in the JEDA.

END OF ARTICLE XVI

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

IN WITNESS WHEREOF, this agreement shall be effective as of the 1st day of
March, 2013, EOG Recourses, Inc., who has prepared and circulated this form for
execution, represents and warrants that the form was printed from and, with the
exception(s) listed below, is identical to the AAPL Form 610‑1989 Model Form
Operating Agreement, as published in computerized form by Forms On‑A‑Disk,
Inc.  No changes, alterations or modifications, other than those made by
strikethrough and/or insertion and that are clearly recognizable as changes in
Articles ____________________________________, have been made to the form.

ATTEST OR WITNESS:

 

 

                                                            

                                                

 

OPERATOR
EOG RESOURCES, INC.

By: /s/ Randall L. Davis                                    

            Randall L. Davis                                    
Type or print name

Title:            Division Land Manager
Date:            April 2, 2013
Tax ID or S.S. No.  47-0684736

 

NON-OPERATORS

 

 

                                                            

                                                

 

ZAZA ENERGY LLC

By: /s/ Todd A. Brooks                                    

            Todd A. Brooks                                    
Type or print name

Title:            Manager
Date:            April 2, 2013
Tax ID or S.S. No.  27-0248842

 

 

 

 

 

 

                                                            

                                                

 

                                                            

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

 

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