MODEL FORM OPERATING AGREEMENT

OPERATING AGREEMENT

   
DATED
March 1, 2011  
   
OPERATOR
SUCCESS OIL CO. (OPERATOR), INC.
   
CONTRACT AREA     
AS DESCRIBED ON EXHIBIT “A” ATTACHED HERETO.
 
J.B. Tubb/Crawar Field North Forty Acres R.R.C. #33611and The Highland
Production Company (Crawar) #2 well-bore, API No. 42-475-33611, located on the
J.B. Tubb Lease in W ½ of the NW ¼ of Sec. 18, Block B-20, Public School Lands,
Ward County, Texas at 1787 FNL and 853 FWL being on the South Forty (40) acres
of the J. B. Tubb Lease, Ward County, Texas.
   
COUNTY OR PARISH OF    
Ward, STATE OF TEXAS

COPYRIGHT 1989 - ALL RIGHTS RESERVED AMERICAN
ASSOCIATION OF PETROLEUM LANDMEN, 4100 FOSSIL
CREEK BLVD. FORT WORTH, TEXAS, 76137, APPROVED FORM.
 
 
 

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

 
 
TABLE OF CONTENTS

     
Article
         
I.
DEFINITIONS
1
II.
EXHIBITS
2
III.
INTERESTS OF PARTIES
2
 
A.  OIL AND GAS INTERESTS:
2
 
B.  INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
2
 
C.  SUBSEQUENTLY CREATED INTERESTS:
3
IV.
TITLES
3
 
A.  TITLE EXAMINATION:
   
B.
         
A.  DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
3
 
B.  RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
3
 
1. Resignation or Removal of Operator
4
 
2. Selection of Successor Operator
4
 
3. Effect of Bankruptcy
4
 
C.  EMPLOYEES AND CONTRACTORS:
4
 
D.  RIGHTS AND DUTIES OF OPERATOR:
4
 
1. Competitive Rates and Use of Affiliates
4
 
2. Discharge of Joint Account Obligations
5
 
3. Protection from Liens
5
 
4. Custody of Funds
5
 
5. Access to Contract Area and Records
5
 
6. Filing and Furnishing Governmental Reports
5
 
7. Drilling and Testing Operations
5
 
8. Cost Estimates
5
 
9. Insurance
5
VI.  
DRILLING AND DEVELOPMENT
6
 
A.  INITIAL WELL:
6
 
B.  SUBSEQUENT OPERATIONS:
6
 
1. Proposed Operations
6
 
2. Operations by Less Than All Parties
6
 
3. Stand-By Costs
8
 
4. Deepening
8
 
5. Sidetracking
9
 
6. Order of Preference of Operations
9
 
7. Conformity to Spacing Pattern
9
 
8. Paying Wells
9
 
C.  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:
   
1. Completion
9
 
2. Rework, Recomplete or Plug Back
9
 
D.  OTHER OPERATIONS:
10
 
E.  ABANDONMENT OF WELLS:
10
 
1. Abandonment of Dry Holes
10
 
2. Abandonment of Wells That Have Produced
10

 
 

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

 

 
3. Abandonment of Non-Consent Operations
11
 
F.  TERMINATION OF OPERATIONS:
11
 
G.  TAKING PRODUCTION IN KIND:
11
 
(Option 1) Gas Balancing Agreement
11
 
(Option 2) No Gas Balancing Agreement
11
VII.
EXPENDITURES AND LIABILITY OF PARTIES
12
 
A.  LIABILITY OF PARTIES:
12
 
B.  LIENS AND SECURITY INTERESTS:
13
 
C.  ADVANCES:
13
 
D.  DEFAULTS AND REMEDIES:
13
 
1. Suspension of Rights
13
 
2. Suit for Damages
13
 
3. Deemed Non-Consent
13
 
4. Advance Payment
13
 
5. Costs and Attorneys’ Fees
14
 
E.  RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
14
 
F.  TAXES:
14
VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
14
 
A.  SURRENDER OF LEASES:
14
 
B.  RENEWAL OR EXTENSION OF LEASES:
15
 
C.  ACREAGE OR CASH CONTRIBUTIONS:
15
 
D.  ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:
15
 
F:
 
IX.
         
X.
CLAIMS AND LAWSUITS
16
XI.
FORCE MAJEURE
16
XII.
NOTICES
16
XIII
TERM OF AGREEMENT
17
XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
17
 
A. LAWS, REGULATIONS AND ORDERS
17
 
B. GOVERNING LAW:
17
 
C. REGULATORY AGENCIES
17
XV.
MISCELLANEOUS
18
 
A. EXECUTION.
18
 
B. SUCCESSORS AND ASSIGNS
18
 
C. COUNTERPARTS.
18
 
D. SEVERABILITY
18
XVI.
OTHER PROVISIONS
18

 
 

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

 
 
OPERATING AGREEMENT

     THIS AGREEMENT, entered into by and between SUCCESS OIL CO. (OPERATOR),
INC. hereinafter designated and referred to as “Operator,” and Energy Producers,
Inc., hereinafter referred to as “Non-Operator,”

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:

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

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

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

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

     E. The terms “Drilling Party” and “Consenting Party” shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.
    
     F. The term “Drilling Unit” shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority. If a
Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
unless fixed by express agreement of the Drilling Parties.

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

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

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

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

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

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

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

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

     0. 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.

 
1

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

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

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

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

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

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.(none)

B. Exhibit “B,” Form of Lease.(mineral rights interest)
x
C. Exhibit “C,” Accounting Procedure.

D. Exhibit “D,” Insurance.(Liability Policy with clean up addendum)

E. Exhibit “E,” Gas Balancing Agreement.(none)

F. Exhibit “F,” Non-Discrimination and Certification of Non-Segregated
Facilities. (none)

G. Exhibit “G,” Tax Partnership.(none)

H. Other:(none)

     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.   OIL AND GAS INTERESTS:

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

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

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.

 
2

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

 
C.   SUBSEQUENTLY CREATED INTERESTS:

     If any party has contributed hereto a Lease or Interest that is burdened
with an assignment of production given as security for the payment of money, or
if, after the date of this agreement, any party creates an overriding royalty,
production payment, net profits interest, assignment of production or other
burden payable out of production attributable to its working interest
hereunder,such burden shall be deemed a “Subsequently Created Interest.”
Further, if any party has contributed hereto a Lease or Interest burdened with
an overriding royalty, production payment, net profits 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 therefore. Further, if the Burdened
Party fails to pay, when due, its share of expenses chargeable hereunder, all
provisions of Article VI1.B. shall be enforceable against the Subsequently
Created Interest in the same manner as they are enforceable against the working
interest of the Burdened Party. If the Burdened Party is required under this
agreement to assign or relinquish to any other party, or parties, all or a
portion of its working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or production free
and clear of said Subsequently Created Interest, and the Burdened Party shall
indemnify, defend and hold harmless said other party, or parties, from any and
all claims and demands for payment asserted by owners of the Subsequently
Created Interest.

ARTICLE IV.
TITLES

A.   TITLE EXAMINATION:

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

     Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any other
orders necessary or appropriate to the conduct of operations hereunder. This
shall not prevent any party from appearing on its own behalf at such hearings.
Costs incurred by Operator, including fees paid to outside attorneys, which are
associated with hearings before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement, shall
be direct charges to the joint account and shall not be covered by the
administrative overhead charges as provided in Exhibit “C.”

Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.

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

B.   LOSS OR FAILURE of TITLE:

     3. Other Losses: All losses of Leases or Interests committed to this
agreement, shall be joint losses and shall be borne by all parties in proportion
to their interests shown on Exhibit “A.” This shall include but not be limited
to the loss of any Lease or Interest through failure to develop or because
express or implied covenants have not been performed (other than performance
which requires only the payment of money), and the loss of any Lease by
expiration 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.
 
 
3

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

 
ARTICLE V.
OPERATOR

A.   DESIGNATION AND RESPONSIBILITIES OF OPERATOR:

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

B.   RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:

     1. Resignation or Removal of Operator: Operator may resign at any time by
giving written notice thereof to Non-Operators. If Operator terminates its legal
existence, 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 one (1) or more Non-Operators owning a majority interest
based on ownership as shown on Exhibit “A” remaining after excluding the voting
interest of Operator; such vote shall not be deemed effective until a written
notice has been delivered to the Operator by a Non-Operator detailing the
alleged default and Operator has failed to cure the default within thirty (30)
days from its receipt of the notice or, if the default concerns an operation
then being conducted, within forty-eight (48) hours of its receipt of the
notice. For purposes hereof, “good cause” shall mean not only gross negligence
or willful misconduct but also the material breach of or inability to meet the
standards of operation contained in Article V.A. or material failure or
inability to perform its obligations under this agreement.

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

     2. Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of one (1) or more parties owning a majority interest based on
ownership as shown on Exhibit “A”: provided, however, if an Operator which has
been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or parties owning a majority interest based on ownership as shown
on Exhibit “A” remaining after excluding the voting interest of the Operator
that was removed or resigned. The former Operator shall promptly deliver to the
successor Operator all records and data relating to the operations conducted by
the former Operator to the extent such records and data are not already in the
possession of the successor operator. Any cost of obtaining or copying the
former Operator’s records and data shall be charged to the joint account.

     3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any action
by Non Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of one (1) or more
parties owning a majority interest based on ownership as shown on Exhibit “A.”
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit “A.”

C.   EMPLOYEES AND CONTRACTORS:

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

 D. RIGHTS AND DUTIES OF OPERATOR:

     1. Competitive Rates and Use of Affiliates: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall not
exceed the prevailing rates in the area and the rate of such charges shall be
agreed upon by the parties in writing before drilling operations are commenced,
and such work shall be performed by Operator under the same terms and conditions
as are customary and usual in the area in contracts of independent contractors
who are doing work of a similar nature. All work performed or materials supplied
by affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.
 
 
4

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

 

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

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

     4. Custody of Funds: Operator shall hold for the account of the
Non-Operators any funds of the Non-Operators advanced or paid to the Operator,
either for the conduct of operations hereunder or as a result of the sale of
production from the Contract Area, and such funds shall remain the funds of the
Non-Operators on whose account they are advanced or paid until used for their
intended purpose or otherwise delivered to the Non-Operators or applied toward
the payment of debts as provided in Article VI1.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.

     5. Access to Contract Area and Records: Operator shall, except as otherwise
provided herein, permit each Non-Operator or its duly authorized representative,
at the Non-Operator’s sole risk and cost, full and free access at all reasonable
times to all operations of every kind and character being conducted for the
joint account on the Contract Area and to the records of operations conducted
thereon or production therefrom, including Operator’s books and records relating
thereto. Such access rights shall not be exercised in a manner interfering with
Operator’s conduct of an operation hereunder and shall not obligate Operator to
furnish any geologic or geophysical data of an interpretive nature unless the
cost of preparation of such interpretive data was charged to the joint account.
Operator will furnish to each Non-Operator upon request copies of any and all
reports and information obtained by Operator in connection with production and
related items, including, without limitation, meter and chart reports,
production purchaser statements, run tickets and monthly gauge reports, but
excluding purchase contracts and pricing information to the extent not
applicable to the production of the Non-Operator seeking the information. Any
audit of Operator’s records relating to amounts expended and the appropriateness
of such expenditures shall be conducted in accordance with the audit protocol
specified in Exhibit “C.”

     6. Filing and Furnishing Governmental Reports: Operator will file, and
furnish copies to each requesting Non-Operator not in default of its payment
obligations, all operational notices, reports or applications required to be
filed by local, State, Federal or Indian agencies or authorities having
jurisdiction over operations hereunder. Each Non-Operator shall provide to
Operator on a timely basis all information necessary to Operator to make such
filings.

     7. Drilling and Testing Operations: The following provisions shall apply to
each well drilled hereunder, including but not limited to the Initial Well:

(a) Operator will promptly advise Non-Operators of the date on which the well is
spudded, or the date on which drilling operations are commenced.

(b) Operator will send to Non-Operators such reports, test results and notices
regarding the progress of operations on the well as the Non-Operators shall
reasonably request, including, but not limited to,daily drilling reports,
completion reports, and well logs.

(c) Operator shall adequately test all Zones encountered which may reasonably be
expected to be capable of producing Oil and Gas in paying quantities as a result
of examination of the electric log or any other logs or cores or tests conducted
hereunder.

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

     9. Insurance: At all times while operations are conducted hereunder,
Operator shall comply with the workers compensation law of the state where the
operations are being conducted. Operator shall also carry or provide insurance
for the benefit of the joint account of the parties as outlined in Exhibit “D”
attached hereto and made a part hereof. Operator shall require all contractors
engaged in work on or for the Contract Area to comply with the workers
compensation law of the state where the operations are being conducted and to
maintain such other insurance as Operator may require.

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

 
5

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

 
 
ARTICLE VI.
DRILLING AND DEVELOPMENT

A.  SUBSEQUENT OPERATIONS:

     1.    Proposed Operations: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party should
desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a
well no longer capable of producing in paying quantities in which such party has
not otherwise relinquished its interest in the proposed objective Zone under
this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest in
such objective Zone  under this agreement and to all other parties in the case
of a proposal for Sidetracking or Deepening, specifying the work to be
performed, the location,proposed depth, objective Zone and the estimated cost of
the operation. The parties to whom such a notice is delivered shall have thirty
(30) days after receipt of the notice within which to notify the party proposing
to do the work whether they elect to participate in the cost of the proposed
operation. If a drilling rig is on location, notice of a proposal to Rework,
Sidetrack, Recomplete, Plug Back or Deepen may be given by telephone and the
response period shall be limited to forty-eight (48) hours. Failure of a party
to whom such notice is delivered to reply within the period above fixed shall
constitute an election by that party not to participate in the cost of the
proposed operation. Any proposal by a party to conduct an operation conflicting
with the operation initially proposed shall be delivered to all parties within
the time and in the manner provided in Article VI.B.6.

     If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced within the time
period hereafter set forth, and Operator shall, no later than ninety (90) days
after expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the 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.

     2.   Operations by Less Than All Parties: See also Article XVI, G, Other
Provisions.

     (a) Determination of Participation. If any party to whom such notice is
delivered as provided in Article VI.B.1 or V1.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, the Consenting Parties
shall either: (i) request Operator to perform the work required by such proposed
operation for the account of the Consenting Parties, or (ii) designate one of
the Consenting Parties as Operator to perform such work. The rights and duties
granted to and imposed upon the Operator under this agreement are granted to and
imposed upon the party designated as Operator for an operation in which the
original Operator is a Non-Consenting Party. Consenting Parties, when conducting
operations on the Contract Area pursuant to this Article VI.B.2., shall comply
with all terms and conditions of this agreement.

     If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise all Parties of the total interest of the parties approving such operation
and its recommendation as to whether the Consenting Parties should proceed with
the operation as proposed. Each Consenting Party, within forty-eight (48) hours
after delivery of such notice, shall advise the proposing party of its desire to
(i) limit participation to such party’s interest as shown on Exhibit “A” or (ii)
carry only its proportionate part (determined by dividing such party’s interest
in the Contract Area by the interests of all Consenting Parties in the Contract
Area) of Non-Consenting Parties’ interests, or (iii) carry its proportionate
part (determined as provided in (ii)) of Non-Consenting Parties’ interests
together with all or a portion of its proportionate part of any Non-Consenting
Parties’ interests that any Consenting Party did not elect to take. Any interest
of Non-Consenting Parties that is not carried by a Consenting Party shall be
deemed to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours. 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 V1.B.l., subject to the same extension right as
provided therein.
 
 
6

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

 

     (b) Relinquishment of Interest for Non-Participation. The entire cost and
risk of conducting such operations shall be borne by the Consenting Parties in
the proportions they have elected to bear same under the terms of the preceding
paragraph. Consenting Parties shall keep the leasehold estates involved in such
operations free and clear of all liens and encumbrances of every kind created by
or arising from the operations of the Consenting Parties. If such an operation
results in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the
Consenting Parties shall plug and abandon the well and restore the surface
location at their sole cost, risk and expense; provided, however, that those
Non-Consenting Parties that participated in the drilling, Deepening or
Sidetracking of the well shall remain liable for, and shall pay, their
proportionate shares of the cost of plugging and abandoning the well and
restoring the surface location insofar only as those costs were not increased by
the subsequent operations of the Consenting Parties. If any well drilled,
Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip the well
to produce at their sole cost and risk, and the well shall then be turned over
to Operator (if the Operator did not conduct the operation) and shall be
operated by it at the expense and for the account of the Consenting Parties.
Upon commencement of operations for the drilling, Reworking,
Sidetracking,Recompleting, Deepening or Plugging Back of any such well by
Consenting Parties in accordance with the provisions of this Article, each
Non-Consenting Party shall be deemed to have relinquished to Consenting Parties,
and the Consenting Parties shall own and be entitled to receive, in proportion
to their respective interests, all of such Non-Consenting Party’s interest in
the well and share of production therefrom or, in the case of a Reworking,
Sidetracking, Deepening, Recompleting or Plugging Back, or a Completion pursuant
to Article V1.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) 100% of each such Non-Consenting Party’s share of the cost of any newly
acquired surface equipment beyond the wellhead connections (including but not
limited to stock tanks, separators, treaters, pumping equipment and piping),plus
100% of each such Non-Consenting Party’s share of the cost of operation of the
well commencing with first production and continuing until each such
Non-Consenting Party’s relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party’s
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from the
beginning of the operations; and

     (ii) 500% of (a) that portion of the costs and expenses of drilling,
Reworking, Sidetracking, Deepening, Plugging Back, testing, Completing, and
Recompleting, after deducting any cash contributions received under Article
VIII.C., and of (b) that portion of the cost of newly acquired equipment in the
well (to and including the wellhead connections), which would have been
chargeable to such Non-Consenting Party if it had participated therein.

     Notwithstanding anything to the contrary in this Article VI.B., if the well
does not reach the deepest objective Zone described in the notice proposing the
well for reasons other than the encountering of granite or practically
impenetrable substance or other condition in the hole rendering further
operations impracticable, Operator shall give notice thereof to each
Non-Consenting Party who submitted or voted for an alternative proposal under
Article VI.B.6. to drill the well to a shallower Zone than the deepest objective
Zone proposed in the notice under which the well was drilled, and each such
Non-Consenting Party shall have the option to participate in the initial
proposed Completion of the well by paying its share of the cost of drilling the
well to its actual depth, calculated in the manner provided in Article VI.B.4.
 
     (a). If any such Non-Consenting Party does not elect to participate in the
first Completion proposed for such well, the relinquishment provisions of this
Article VI.B.2.

     (b) shall apply to such party’s interest. SEE ARTICLE XVI, SECTIONS A AND
G, OTHER PROVISIONS.

     (c) Reworking, Recompleting or Plugging Back. An election not to
participate in the drilling, Sidetracking or Deepening of a well shall be deemed
an election not to participate in any Reworking or Plugging Back operation
proposed in such a well, or portion thereof, to which the initial non-consent
election applied that is conducted at any time prior to full recovery by the
Consenting Parties of the Non-Consenting Party’s recoupment amount. Similarly,
an election not to participate in the Completing or Recompleting of a well shall
be deemed an election not to participate in any Reworking operation proposed in
such a well, or portion thereof, to which the initial non-consent election
applied that is conducted at any time prior to full recovery by the Consenting
Parties of the Non-Consenting Party’s recoupment amount. Any such Reworking,
Recompleting or Plugging Back operation conducted during the recoupment period
shall be deemed part of the cost of operation of said well and there shall be
added to the sums to be recouped by the Consenting Parties 500% of that portion
of the costs of the Reworking, Recompleting or Plugging Back operation which
would have been chargeable to such Non-Consenting Party had it participated
therein. If such a Reworking, Recompleting or Plugging Back operation is
proposed during such recoupment period, the provisions of this Article VI.B.
shall be applicable as between said Consenting Parties in said well. SEE ALSO
ARTICLE XVI.H. OTHER PROVISIONS.

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

     In the case of any Reworking. Sidetracking, Plugging Back, Recompleting or
Deepening operation, the Consenting Parties shall be permitted to use, free of
cost, all casing, tubing and other equipment in the well, but the ownership of
all such equipment shall remain unchanged; and upon abandonment of a well after
such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening, the
Consenting Parties shall account for all such equipment to the owners thereof,
with each party receiving its proportionate part in kind or in value, less cost
of salvage.

 
7

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

 
 
     Within ninety (90) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Semi-annually 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 of 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 am. on
the first day of the next month following the day on which such recoupment
occurs, and, from and after such reversion, such Non-Consenting Party shall own
the same interest in such well, the material and equipment in or pertaining
thereto, and the production therefrom as such Non-Consenting Party would have
been entitled to had it participated in the drilling, Sidetracking, Reworking,
Deepening, Recompleting or Plugging Back of said well. Thereafter, such
Non-Consenting Party shall be charged with and shall pay its proportionate part
of the further costs of the operation of said well in accordance with the terms
of this agreement and Exhibit “C” attached hereto.

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

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

     4. Deepening: If less than all parties elect to participate in a drilling,
Sidetracking, or Deepening operation proposed pursuant to Article V1.B.1 ., the
interest relinquished by the Non-Consenting Parties to the Consenting Parties
under Article VI.8.2. 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.l., to all parties
(including Non-Consenting Parties). Thereupon, Articles VI.B.l. 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 V1.B.
1. and 2. If a Deepening operation is approved pursuant to such provisions, and
if any Non-Consenting Party elects to participate in the Deepening operation,
such Non-Consenting party shall pay or make reimbursement (as the case may be)of
the following costs and expenses.

     (a) If the proposal to Deepen is made prior to the Completion of such well
as a well capable of producing in paying quantities, such Non-Consenting Party
shall pay (or reimburse Consenting Parties for, as the case may be) that share
of costs and expenses incurred in connection with the drilling of said well from
the surface to the Initial Objective which Non-Consenting Party would have paid
had such Non-Consenting Party agreed to participate therein, plus the
Non-Consenting Party’s share of the cost of Deepening and of participating in
any further operations on the well in accordance with the other provisions of
this Agreement; provided, however, all costs for testing and Completion or
attempted Completion of the well incurred by Consenting Parties prior to the
point of actual operations to Deepen beyond the Initial Objective shall be for
the sole account of Consenting Parties.

 
8

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

 
 
     (b) If the proposal is made for a Non-Consent Well that has been previously
Completed as a well capable of producing in paying quantities, but is no longer
capable of producing in paying quantities, such Non-Consenting Party shall pay
or reimburse Consenting Parties for, as the case may be) its proportionate share
of all costs of drilling, Completing, and equipping said well from the surface
to the Initial Objective, calculated in the manner provided in paragraph (a)
above, less those costs recouped by the Consenting Parties from the sale of
production from the well. The Non-Consenting Party shall also pay its
proportionate share of all costs of re-entering said well. The Non-Consenting
Parties’ proportionate part (based on the percentage of such well Non-Consenting
Party would have owned had it previously participated in such Non-Consent Well)
of the costs of salvable materials and equipment remaining in the hole and
salvable surface equipment used in connection with such well shall be determined
in accordance with Exhibit “C.” If the Consenting Parties have recouped the cost
of drilling, Completing, and equipping the well at the time such Deepening
operation is conducted, then a Non-Consenting Party may participate in the
Deepening of the well with no payment for costs incurred prior to re-entering
the well for Deepening.

     The foregoing shall not imply a right of any Consenting Party to propose
any Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article V1.F.
     
     5. Sidetracking: Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore at
the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:

          (a) If the proposal is for Sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the initial
drilling of the well down to the depth at which the Sidetracking operation is
initiated.

          (b) If the proposal is for Sidetracking a well which has previously
produced, reimbursement shall be on the basis of such party’s proportionate
share of drilling and equipping costs incurred in the initial drilling of the
well down to the depth at which the Sidetracking operation is conducted,
calculated in the manner described in Article VI.B.4(b) above. Such party’s
proportionate share of the cost of the well’s salvable materials and equipment
down to the depth at which the Sidetracking operation is initiated shall be
determined in accordance with the provisions of Exhibit “C.”

     6. Order of Preference of Operations. Except as otherwise specifically
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four
(24)hours, 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 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, 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. SEE ALSO ARTICLE XVI.

D.    OTHER PROVISIONS.

     7. Conformity to Spacing Pattern. Notwithstanding the provisions of this
Article VI.B.2, it is agreed that no wells shall be proposed to be drilled to or
Completed in or produced from a Zone from which a well located elsewhere on the
Contract Area is producing, unless such well conforms to the then-existing well
spacing pattern for such Zone.

     8. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging
Back, Completion, Recompletion, or Sidetracking operation under this agreement
with respect to any well then capable of producing in paying quantities except
with the consent of all parties that have not relinquished interests in the well
at the time of such operation. See also Article XVI.J. Provisions.

C.   COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:

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

x  Option No. 1: All necessary expenditures for the drilling, Deepening or
Sidetracking, testing, Completing and equipping of the well, including necessary
tankage and/or surface facilities.

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

 
9

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

 
 
D.   OTHER OPERATIONS:

     Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of TWENTY FIVE THOUSAND Dollars ($25,000)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.
Operator shall prepare an AFE for its own use. Operator shall furnish any
Non-Operator an information copy thereof for any single project costing in
excess of TWENTY FIVE THOUSAND Dollars ($25,000). 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 V1.D. (except in connection with an operation required to be proposed
under Articles V1.B.1. or V1.C.1. Option No. 2, which shall be governed
exclusively by those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein. If within thirty (30) days thereof
Operator secures the written consent of any one (1) or more parties owning at
least 50% of the interests of the parties entitled to participate in such
operation, each party having the right to participate in such project shall be
bound by the terms of such proposal and shall be obligated to pay its
proportionate share of the costs of the proposed project as if it had consented
to such project pursuant to the terms of the proposal.

E.   ABANDONMENT OF WELLS:

     1. Abandonment of Dry Holes: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be 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 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 perator within forty-eight (48) hours after delivery of notice of
the proposed plugging shall take over the well as of the end of such forty-eight
(48) hour notice period and conduct further operations in search of Oil and/or
Gas subject to the provisions of Article VI.B.; failure of such party to provide
proof reasonably satisfactory to Operator of its financial capability to conduct
such operations or to take over the well within such period or thereafter to
conduct operations on such well or plug and abandon such well shall entitle
Operator to retain or take possession of the well and plug and abandon the well.
The party taking over the well shall indemnify Operator (if Operator is an
abandoning party) and the other abandoning parties against liability for any
further operations conducted on such well except for the costs of plugging and
abandoning the well and restoring the surface, for which the abandoning parties
shall remain proportionately liable.

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

     Parties taking over a well as provided herein shall tender to each of the
other parties its proportionate share of the value of the well’s salvable
material and equipment, determined in accordance with the provisions of Exhibit
“C,” less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface; provided, however, that in the event the
estimated plugging and abandoning and surface restoration costs and the
estimated cost of salvaging are higher than the value of the well’s salvable
material and equipment, each of the abandoning parties shall tender to the
parties continuing operations their proportionate shares of the estimated excess
cost. Each abandoning party shall assign to the non-abandoning parties, without
warranty, express or implied, as to title or as to quantity, or fitness for use
of the equipment and material, all of its interest in the wellbore of the well
and related equipment, together with its interest in the Leasehold insofar and
only insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes 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 of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract Area.

 
10

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

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

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

F.   TERMINATION OF OPERATIONS:

     Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not be
terminated without consent of parties bearing 75% 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.I., and the
provisions of Article V.I.B. or VI.E. shall thereafter apply to such
operation,as appropriate.

G.   TAKING PRODUCTION IN KIND:

x  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 lost. Any extra expenditure incurred in the taking in
kind or separate disposition by any party of its proportionate share of the
production shall be borne by such party. Any party taking its share of
production in kind shall be required to pay for only its     proportionate share
of such part of Operator’s surface facilities which it uses.

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

          If any party fails to make the arrangements necessary to take in kind
or separately dispose of its proportionate share of the Oil produced from the
Contract Area, Operator shall have the right, subject to the revocation at will
by the party owning it, but not the obligation, to purchase such Oil 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 not previously delivered
to a purchaser. Any purchase or sale by Operator of any other party’s share of
Oil 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 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 (1O) 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 al1 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.

 
11

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

 
 
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES

A.   LIABILITY OF PARTIES:

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

B.   LIENS AND SECURITY INTERESTS:

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

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

     Each party represents and warrants to the other parties hereto that the
lien and security interest granted by such party to the other parties shall be a
first and prior lien, and each party hereby agrees to maintain the priority of
said lien and security interest against all persons acquiring an interest in Oil
and Gas Leases and interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.

     To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they shall
be entitled to exercise the rights and remedies of a secured party under the
Code. The bringing of a suit and the obtaining of judgment by a party for the
secured indebtedness shall not be deemed an election of remedies or otherwise
affect the lien rights or security interest as security for the payment thereof.
In addition, upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party’s
share of Oil and Gas until the amount owed by such party, plus interest as
provided in “Exhibit C,” has been received, and shall have the right to offset
the amount owed against the proceeds from the sale of such defaulting party’s
share of Oil and Gas. All purchasers of production may rely on a notification of
default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.

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

     If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution proceedings
pursuant to the provisions of this agreement, to the extent allowed by governing
law, the defaulting party waives any available right of redemption from and
after the date of judgment, any required valuation or appraisement of the
mortgaged or secured property prior to sale, any available right to stay
execution or to require a 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.
 
 
12

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

 

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

C.   ADVANCES:

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

D.   DEFAULTS AND REMEDIES:

     If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the remedies
provided in Article VII.B. or elsewhere in this agreement, the remedies
specified below shall be applicable. For purposes of this Article VII.D., all
notices and elections shall be delivered only by Operator, except that Operator
shall deliver any such notice and election requested by a non-defaulting
Non-Operator, and when Operator is the party in default, the applicable notices
and elections can be delivered by any Non-Operator. Election of any one or more
of the following remedies shall not preclude the subsequent use of any other
remedy specified below or otherwise available to a non-defaulting party.

     1. Suspension of Rights: Any party may deliver to the party in default a
Notice of Default, which shall specify the default, specify the action to be
taken to cure the default, and specify that failure to take such action will
result in the exercise of one or more of the remedies provided in this Article.
If the default is not cured within thirty (30) days of the delivery of such
Notice of Default, all of the rights of the defaulting party granted by this
agreement may upon notice be suspended until the default is cured, without
prejudice to the right of the non-defaulting party or parties to continue to
enforce the obligations of the defaulting party previously accrued or thereafter
accruing under this agreement. If Operator is the party in default, the
Non-Operators shall have in addition the right, by vote of Non-Operators owning
a majority in interest in the Contract Area after excluding the voting interest
of Operator, to appoint a new Operator effective immediately. The rights of a
defaulting party that may be suspended hereunder at the election of the
non-defaulting parties shall include, without limitation, the right to receive
information as to any operation conducted hereunder during the period of such
default, the right to elect to participate in an operation proposed under
Article VI.B. of this agreement, the right to participate in an operation being
conducted under this agreement even if the party has previously elected to
participate in such operation, and the right to receive proceeds of production
from any well subject to this agreement.

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

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

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

     4. Advance Payment: If a default is not cured within thirty (30) days of
the delivery of a Notice of Default, Operator, or Non-Operators if Operator is
the defaulting party, may thereafter require advance payment 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 VI.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.
 
 
13

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

 

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

E.   RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:

     Rentals, shut-in well payments and minimum royalties which may be required
under the terms of any lease shall be paid by the 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 prior to taking such action, or at the earliest opportunity
permitted by circumstances, but assumes no liability for failure to do so. In
the event of failure by Operator to so notify Non-Operators, the loss of any
lease contributed hereto by Non-Operators for failure to make timely payments of
any shut-in well payment shall be borne jointly by the parties hereto under the
provisions of Article IV.B.3.

F.   TAXES:

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

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

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

ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

A.   SURRENDER OF LEASES:

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

     However, should any party desire to surrender its interest in any Lease or
in any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice. If all parties do not agree or consent thereto, the party desiring to
surrender shall assign, without express or implied warranty of title, all of its
interest in such Lease, or portion thereof, and any well, material and equipment
which may be located thereon and any rights in production thereafter secured, to
the parties not consenting to such surrender. If the interest of the assigning
party is or includes an Oil and Gas Interest, the assigning party shall execute
and deliver to the party or parties not consenting to such surrender an oil and
gas lease covering such Oil and Gas Interest for a term of one (I) 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.
 
 
14

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

 

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

B.   RENEWAL OR EXTENSION OF LEASES:

     If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)days
following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interest
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
base taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.

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

C.   ACREAGE OR CASH CONTRIBUTIONS:

     While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party to
whom the contribution is made shall promptly tender an assignment of the
acreage, without warranty of title, to the Drilling Parties in the proportions
said Drilling Parties shared the cost of drilling the well. Such acreage shall
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 Contract Area.

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

D.   ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

     Every sale, encumbrance, transfer or other disposition made by any party
shall be made expressly subject to this agreement and shall be made without
prejudice to the right of the other parties, and any transferee of an ownership
interest in any Oil and Gas Lease or Interest shall be deemed a party to this
agreement as to the interest conveyed from and after the effective date of the
transfer of ownership; provided, however, that the other parties shall not be
required to recognize any such sale, encumbrance, transfer or other disposition
for any purpose hereunder until thirty (30) days after they have received a copy
of the instrument of transfer or other satisfactory evidence thereof in writing
from the transferor or transferee. No assignment or other disposition of
interest by a party shall relieve such party of obligations previously incurred
by such party hereunder with respect to the interest transferred, including
without limitation the obligation of a party to pay all costs attributable to an
operation conducted hereunder in which such party has agreed to participate
prior to making such assignment, and the lien and security interest granted by
Article VII.B. shall continue to burden the interest transferred to secure
payment of any such obligations.
 
 
15

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

 

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

E.   WAIVER OF RIGHTS TO PARTITION:

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

F.   PREFERENTIAL RIGHT TO PURCHASE:

ARTICLE IX.

ARTICLE X.
CLAIMS AND LAWSUITS

     Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed TWENTY FIVE
THOUSAND($25,000) 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. All costs and expenses
of handling, settling, or otherwise discharging such claim or suit shall be at
the joint expense of the parties participating in the operation from which the
claim or suit arises. If a claim is made against any party or if any party is
sued on account of any matter arising from operations hereunder over which such
individual has no control because of the rights given Operator by this
agreement, such party shall immediately notify all other parties, and the claim
or suit shall be treated as any other claim or suit involving operations
hereunder.

ARTICLE XI.
FORCE MAJEURE

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

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

ARTICLE XII.
NOTICES

     All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
in writing and delivered in person or by United States mail, courier service,
telegram, telex, telecopier or any other form of facsimile, postage or charges
prepaid, and addressed to such parties at the addresses listed on Exhibit “A.”
All telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is received.
“Receipt” for purposes of this agreement with respect to written notice
delivered hereunder shall be actual delivery of the notice to the address of the
party to be notified specified in accordance with this agreement, or to the
telecopy, facsimile or telex machine of such party. The second or any responsive
notice shall be deemed delivered when deposited in the United States mail or at
the office of the courier or telegraph service, or upon transmittal by telex.
telecopy or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or 48 hours, such response
shall be given orally or by telephone, telex, telecopy or other facsimile within
such period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties. If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 or 48 hours, the
notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice.
 
 
16

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

 

ARTICLE XIII.
TERM OF AGREEMENT

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

x  Option No. 1: So long as any of the Oil and Gas Leases subject to this
    agreement remain or are continued in force as to any part of the Contract
Area, whether by production, extension, renewal or otherwise, unless modified,
and mutually agreed in writing, and signed by each of the parties hereto.
Further, i) in the event that the working interests in the J.B. Tubb, including
leases and equipment are sold by the current non operator (owner of interests),
the operator has the right not to operate for the then new interest owner or
owners, based on his sole judgment, and at his election to do so.

     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.

ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS

A.   LAWS, REGULATIONS AND ORDERS:

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

B.   GOVERNING LAW:

     THIS AGREEMENT AND ALL MATTERS PERTAINING HERETO, INCLUDING BUT NOT LIMITED
TO MATTERS OF PERFORMANCE, 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.

C.   REGULATORY AGENCIES:

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

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

 
17

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

 
 
ARTICLE XV.
MISCELLANEOUS

A.   EXECUTION:

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

B.   SUCCESSORS AND ASSIGNS:

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

C.   COUNTERPARTS:

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

D.   SEVERABILITY:

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

ARTICLE XVI.
OTHER PROVISIONS

     A. MODIFICATION OF ARTICLE VI.B.2 ON PAGE 6 HEREOF. EACH NON-OPERATING
PARTY SHALL PAY TO THE OPERATOR THEIR PROPORTIONATE PART OF THE AFE COST OF
DRILLING OR RE-ENTERING THE INITIAL WELL; THEREAFTER, EACH CONSENTING PARTY
SHALL PAY TO THE OPERATOR SUCH CONSENTING PARTY’S PROPORTIONATE PART OF THE AFE
COST OF DRILLING OR RE-ENTERING EACH WELL IN THE CONTRACT AREA, AND OPERATOR
SHALL NOT BE OBLIGATED TO COMMENCE OPERATIONS ON ANY WELL UNTIL OPERATOR HAS
RECEIVED 100% OF SAID ESTIMATED COSTS. OPERATOR SHALL PROMPTLY AFTER ALL WORK ON
EACH WELL IS COMPLETED AND ALL COSTS PAID, REFUND TO EACH CONSENTING PARTY ITS
PROPORTIONATE SHARE OF THE PREPAID COSTS NOT EXPENDED IN THE DRILLING OR
RE-ENTRY OF A WELL.

     B. IF ANY PARTY HERETO SHOULD SUBSEQUENTLY CREATE AN OVERRIDING ROYALTY,
PRODUCTION PAYMENT OR OTHER BURDEN AGAINST ITS WORKING INTEREST PRODUCTION AND,
IF ANY OTHER PARTY OR PARTIES SHOULD CONDUCT NON-CONSENT OPERATIONS PURSUANT TO
THIS AGREEMENT, AND AS A RESULT, BECOME ENTITLED TO RECEIVE THE WORKING INTEREST
PRODUCTION OTHERWISE BELONGING TO THE NON-PARTICIPATING PARTY, THE PARTY OR
PARTIES ENTITLED TO RECEIVE THE WORKING INTEREST PRODUCTION OF THE
NON-PARTICIPATING PARTY SHALL RECEIVE SUCH PRODUCTION FREE AND CLEAR OF BURDENS
AGAINST SUCH PRODUCTION WHICH MAY HAVE BEEN CREATED SUBSEQUENT TO THIS

AGREEMENT THE NON-PARTICIPATING PARTY CREATING SUCH SUBSEQUENT BURDEN SHALL HOLD
THE PARTICIPATING PARTY OR PARTIES HARMLESS WITH RESPECT TO THE RECEIPT OF SUCH
WORKING INTEREST PRODUCTION.

     C. NO PARTY SHALL DISTRIBUTE ANY INFORMATION OR PHOTOGRAPHS TO THE PRESS OR
OTHER MEDIA WITHOUT THE APPROVAL OF ALL THE CONSENTING PARTIES, EXCEPT AS
REQUIRED BY LAW OR REGULATION. WHEN ALL CONSENTING PARTIES HAVE REVIEWED SUCH
MATERIAL, AND ALL CONSENTING PARTIES HAVE APPROVED THE ISSUANCE OF THE MATERIAL,
THE COMPANY PROPOSING THE RELEASE OF THE INFORMATION SHALL HAVE THE PRINCIPAL
RESPONSIBILITY FOR ITS ISSUANCE. THE ONLY OTHER EXCEPTION TO THE FOREGOING SHALL
BE THAT IN THE EVENT OF AN EMERGENCY INVOLVING EXTENSIVE PROPERTY DAMAGE,
OPERATIONS FAILURE, LOSS OF HUMAN LIFE OR OTHER CLEAR EMERGENCY, THE OPERATOR IS
AUTHORIZED TO FURNISH SUCH MINIMUM STRICTLY FACTUAL INFORMATION AS SHALL BE
NECESSARY TO SATISFY THE LEGITIMATE PUBLIC INTEREST ON THE PART OF THE PRESS AND
DULY CONSTITUTED AUTHORITIES. IF TIME DOES NOT PERMIT THE OBTAINING OF PRIOR
APPROVAL BY THE CONSENTING PARTIES SUCH PARTY SHALL THEREUPON PROMPTLY ADVISE
THE OTHER PARTIES OF THE INFORMATION SO FURNISHED.

     D. Notwithstanding other provisions of this Agreement, it is agreed that
where a well which has been authorized under the terms of this Agreement by all
parties, shall have been drilled to the objective depth or the objective
formation, whichever is deepest, and Operator has completed such tests,
including, without limitation, any production tests, which Operator reasonably
deems necessary for the proper evaluation of the formation and has furnished
such results to the parties, and the parties cannot agree on the sequence and
timing of further operations regarding said well, the following elections shall
control in the order enumerated hereafter: (1) an election to attempt to
complete at either the objective depth or the objective formation; (2) an
election to plug back, set casing and attempt to complete said well; (3) an
election to deepen said well; and (4) an election to plug and abandon said well.
 
 
18

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

 

If there are conflicting recommendations for further operations, the sequence of
precedence for a further operation are listed herein in this Article XVI(D). At
any time a well is deepened as provided herein, upon total depth being reached
in such deepening operation and following testing to such an extent as shall be
deemed prudent by Operator, the provisions above pertaining to further
operations shall be applicable insofar as such further operations pertain to
items (l), (3) and (4).

It is provided, however, that if at the time said participating parties are
considering any of the above elections the hole is in such condition that a
prudent operator would not conduct the operations contemplated, then such
election shall be eliminated from the priorities set forth herein.

     E. Billing Additional Interest. Notwithstanding the provisions of this
Agreement and the Accounting Procedure attached as Exhibit “C”, the parties to
this Agreement specifically agree that in no event during the term of this
contract shall Operator be required to make more than one billing for the entire
interest credited to each party on Exhibit “A”. It is further understood and
agreed that if a party sells or otherwise disposes all of its interest as set
forth on Exhibit “A”, whether to one or several assignees, Operator shall
continue to issue statements and billings to the selling party for the interest
conveyed until such time as the selling party has designated one assignee to
receive billing for the entire interest credited to selling party on Exhibit
“A”.

     The selling party shall promptly furnish to Operator the following:

          1. Written notice of the conveyance and copies of the Assignments;

          2. The name of the Assignee to be billed in which it consents to
receive statements and billings for the entire interest credited to selling
party on Exhibit “A”.

     F. Consent to Abandonment and Surrender. If the Operator desires to abandon
any well or to surrender any lease, Operator shall notify the other parties
hereto of its intention and if any party receiving such notice shall fail to
reply in writing within thirty (30) days of the date of such notice, such party
shall be deemed to have consented to such abandonment or surrender and the
Operator shall have the authority to abandon any such well as provided in
Article VI.E.2, hereof as if each party had consented to such abandonment or as
the case may be, to surrender such lease pursuant to the terms of Article VIII,
A. hereof as if such party had consented to such surrender.

     G. “In or Out” Non-Consent Election as to Certain Proposed Operations.

     An election by any party not to participate in the completion of the first
well drilled in any section of land covered by this Agreement, or an election
not to participate in additional drilling on a Section is an election out of the
well in question and all remaining undeveloped lands in the section. This shall
apply to any and all sections of land shown on Exhibit “A” and to any lands
which may be added to this Agreement by amendment. This penalty shall not apply
to any re-working, re-drilling, plugging back or deepening of a well. Such
operations shall be governed by Article VI.B.2. of this Agreement.

     H. Notwithstanding any contrary provision in Article VI should one (1) or
more working interest owners owning a majority in interest desire to recomplete
an additional interval within a producing formation, or to recomplete an
additional formation not producing at the time of the recompletion attempt but
which can be commingled with an existing producing formation, the parties
desiring to attempt such recompletion shall give the other parties written
notice of the proposed operation, specifying the work to be done, the objective
formation or interval to be recompleted and the estimated cost of the operation.
The parties receiving such notice shall have thirty (30) days after receipt of
such notice within which to notify the party wishing to recomplete whether they
elect to participate in the cost of the proposed operation. Failure to make an
election will constitute an election not to participate in the proposed
operation. Should a party elect not to participate in such operation, such party
shall be treated as a Non-Consenting Party under Article VI of this Agreement
and the consenting parties shall proceed as specified in Article VI. If any
party elects not to participate in such operation and the operation results in
the establishment of production the Operator shall allocate all production from
the well between intervals that were producing prior to the recompletion and the
newly completed interval based on the following formula:

*    If oil and gas interests within the Area of Mutual Interest (AMI) as
outlined in red on Figure No. 1 attached to this Operating Agreement and not
presently shown on Exhibit “A”, is purchased and an election to not participate
in the purchase of the land is made by any party, such an election to be out of
any drilling within the purchased lands.

     a)   Denominator: sum a) daily production from producing interval
immediately prior to the commencement of the recompletion attempt and b) daily
production from new producing interval immediately prior to being commingled
with the interval that was producing prior to the recompletion attempt.

     b)   Numerator for interval producing prior to the recompletion attempt:
daily production of this interval immediately prior to recompletion work.
decimal interest is = b divided by a (b/a).

I. You acknowledge that you are aware of the tax consequences and risk factors
associated with this investment. If you invest in this prospect, there is no
assurance that the wells drilled will obtain production and will allow the
recovery of all or any part of the investment incurred in obtaining such
production. Because of the speculative nature of oil and gas exploration and
development in general, it is understood that Success Oil Co. (OPERATOR), Inc.
makes no guarantee that any well will be profitable, and if profitable, and if
profitable, the amount of such profits.
 
 
19

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

 
 
     IN WITNESS WHEREOF, this agreement shall be effective as of the 1stday of
March, 2011.

ATTEST OR WITNESS:
   
OPERATOR
             
SUCCESS OIL CO. (OPERATOR), INC.
         
March 1, 2011
 
By:
/s/ Jeru Morgan
       
Jeru Morgan
       
President
           
Tax ID or S.S. No.
   
74-2620415
 

     
NON-OPERATORS
             
Energy Producers, Inc.
         
March 1, 2011
 
By:
/s/ Dennis Alexander
       
Dennis Alexander
       
CEO
           
Tax ID or S.S. No.
   
48-1273037
 

 
20

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

 

EXHIBIT “A”

ATTACHED TO AND MADE A PART OF THAT CERTAIN JOINT OPERATING AGREEMENT DATED
MARCH 1,, 2011 BETWEEN SUCCESS OIL CO. (OPERATOR), INC. AND ENERGY PRODUCERS,
INC.

I.
LEGAL DESCRIPTION:

Please refer to Exhibit “A” separately attached but made a part of hereto.

*Approximately 75% W.I. of the acreage in this section has been acquired by
Energy Producers, Inc. as of this date (March 1, 2011).

II.
LEASEHOLD INTEREST OF PARTIES TO THIS AGREEMENT:

                             
BPO
      
APO
 
.56.250000
     
Energy Producers, Inc.
    .56.250000              
6564 Smoke Tree Lane
                   
Town of Paradise Valley, Arizona 85253
               

III.
The office address of Success Oil Co. (OPERATOR), Inc. is:

8306 Wilshire Blvd. #566
Beverly Hills, Ca. 90211

 
21

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

 
 
EXHIBIT A-1
Attached to and made a part of that certain Joint Operating Agreement dated
March 1, 2011 Between Success Oil Co. (OPERATOR), Inc. and Energy Producers,
Inc. (Non-Operator)
 
 
22

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

 
 
EXHIBIT "C”

Attached to and made a part of THAT CERTAIN JOINT OPERATING AGREEMENT DATED
March 1, 2011, BY AND BETWEEN SUCCESS OIL CO., INC. (“OPERATOR”), AND ENERGY
PRODUCERS, INC. (“NON OPERATOR”).

ACCOUNTING PROCEDURE

JOINT OPERATIONS

I. GENERAL PROVISIONS

1.
DEFINITIONS

"Joint Property" shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached.

"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.

"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared by
the Parties.

"Operator" shall mean the party designated to conduct the Joint Operations.

"Non-Operators" shall mean the Parties to this agreement other than the
Operator.

"Parties" shall mean Operator and Non-Operators.

"First Level Supervisors" shall mean those employees whose primary function in
Joint Operations is the direct supervision of other employees and/or contract
labor directly employed on the Joint Property in a field operating capacity.

"Technical Employees" shall mean those employees having special and specific
engineering, geological or other professional skills, and whose primary function
in Joint Operations is the handling of specific operating conditions and
problems for the benefit of the Joint Property.

"Personal Expenses" shall mean travel and other reasonable reimbursable expenses
of Operator's employees.

"Material" shall mean personal property, equipment or supplies acquired or held
for use on the Joint Property.

"Controllable Material" shall mean Material which at the time is so classified
in the Material Classification Manual as most recently recommended by the
Council or Petroleum Accountants Societies.

2.
STATEMENT AND BILLINGS

Operator shall bill Non-Operators on or before the last day of each month for
their proportionate share of the Joint Account for the preceding month. Such
bills will be accompanied by statements which identify the authority for
expenditure, lease or facility, and all charges and credits summarized by
appropriate classifications of investment and expense except that items of
Controllable Material and unusual charges and credits shall be separately
identified and fully described in detail.

3.
ADVANCES AND PAYMENTS BY NON-OPERATORS

A.  Unless otherwise provided for in the agreement, the Operator may require the
Non-Operators to advance their share of estimated cash outlay for the succeeding
month's operation within fifteen (15) days after receipt of the billing or by
the first day of the month for which the advance is required, whichever is
later. Operator shall adjust each monthly billing to reflect advances received
from the Non-Operators.

B.  Each Non-Operator shall pay its proportion of all bills within fifteen (15)
days after receipt. If payment is not made within such time, the unpaid balance
shall bear interest monthly at the prime rate in effect at an ANNUAL RATE OF
TWELVE PERCENT on the first day of the month in which delinquency occurs plus 1%
or the maximum contract rate permitted by the applicable usury laws in the state
in which the Joint Property is located, whichever is the lesser, plus attorney's
fees, court costs, and other costs in connection with the collection of unpaid
amounts.

4.
ADJUSTMENTS

Payment of any such bills shall not prejudice the right of any Non-Operator to
protest or question the correctness thereof; provided, however, all bills and
statements rendered to Non-Operators by Operator during any calendar year shall
conclusively be presumed to be true and correct after twenty-four (24) months
following the end of any such calendar year, unless within the said twenty-four
(24) month period a Non-Operator takes written exception thereto and makes claim
on Operator for adjustment. No adjustment favorable to Operator shall be made
unless it is made within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical inventory of
Controllable Material as provided for in Section V.
 
 
23

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

 

COPYRIGHT (C) 1985 BY THE COUNCIL OF PETROLEUM ACCOUNTANTS SOCIETIES.

5.
AUDITS

A.  A Non-Operator, upon notice in writing to Operator and all other
Non-Operators, shall have the right to audit Operator's accounts and records
relating to the Joint Account for any calendar year within the twenty-four (24)
month period following the end of such calendar year; provided, however, the
making of an audit shall not extend the time for the taking of written exception
to and the adjustments of accounts as provided for in Paragraph 4 of this
Section I. Where there are two or more Non-Operators, the Non-Operators shall
make every reasonable effort to conduct a joint audit in a manner which will
result in a minimum of inconvenience to the Operator. Operator shall bear no
portion of the Non-Operators' audit cost incurred under this paragraph less
agreed to by the Operator. The audits shall not be conducted more than once each
year without prior approval of Operator, except upon the resignation or removal
of the Operator, and shall be made at the expense of those Non-Operators
approving such audit.

B.  The Operator shall reply in writing to an audit report within 180 days after
receipt of such report.

6.
APPROVAL BY NON-OPERATORS

Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if the
agreement to which this Accounting Procedure is attached contains no contrary
provisions in regard thereto, Operator shall notify all Non-Operators of the
Operator's proposal, and the agreement or approval of a majority in interest of
the Non-Operators shall be controlling on all Non-Operators.

II. DIRECT CHARGES

Operator shall charge the Joint Account with the following items:

1.
ECOLOGICAL AND ENVIRONMENTAL

Costs incurred for the benefit of the Joint Property as a result of governmental
or regulatory requirements to satisfy environmental considerations applicable to
the Joint Operations. Such costs may include surveys of an ecological or
archaeological nature and pollution control procedures as required by applicable
laws and regulations.

2.
RENTALS AND ROYAL TIES

Lease rentals and royalties paid by Operator for the Joint Operations.

3.
LABOR

 
A.
(1)

Salaries and wages of Operator's field employees directly employed on the Joint
Property in the conduct of Joint Operations.

 
(2)
Salaries of First level Supervisors in the field.

 
(3)
Salaries and wages of Technical Employees directly employed on the Joint
Property if such charges are excluded from the overhead rates.

 
(4)
Salaries and wages of Technical Employees either temporarily or permanently
assigned to and directly employed in the operation or the Joint Property if such
charges are excluded from the overhead rates.

 
(5)
COMPENSATION FOR ALL FIELD ENGINEERING AND FIELD SUPERVISION SERVICES FURNISHED
BY OFFICERS OR EMPLOYEES OF OPERATOR WILL BE CHARGED AT THE FOLLOWING RATES:
ENGINEERING-$750/DAY + EXPENSES; FIELD SUPERVISOR-$750/DAY + EXPENSES WHEN
DIRECTLY EMPLOYED FOR THE JOINT PROPERTY IN CONDUCT OF JOINT OPERATIONS.

 
(6)
ALL FEES AND CHARGES FOR OUTSIDE PROFESSIONAL SERVICES (INCLUDING BUT NOT
LIMITED TO LEGAL, ENGINEERING AND GEOLOGICAL SERVICES FURNISHED BY OUTSIDE
PROFESSIONALS AND CONSULTANTS FOR SERVICES PERFORMED FOR THE BENEFIT OF THE
JOINT PROPERTY).

 
B.
Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs chargeable to
the Joint Account under Paragraphs 3A and 3B of this Section II.

 
C.
Personal Expenses of those employees whose salaries and wages are chargeable to
the Joint Account under Paragraphs 3A and 3B of this Section 11.

 
24

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

 

4.
MATERIAL

Material purchased or furnished by Operator for use on the Joint Property as
provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and is
reasonably practical and consistent with efficient and economical operations.
The accumulation of surplus stocks shall be avoided.

5.
TRANSPORTATION

Transportation of employees and Material necessary for the Joint Operations but
subject to the following limitations:

 
A.
If Material is moved to the Joint Property from the Operator's warehouse or
other properties, no charge shall be made to the Joint Account for a distance
greater than the distance from the nearest reliable supply store where like
material is normally available or railway receiving point nearest the Joint
Property unless agreed to by the Parties.

 
B.
If surplus Material is moved to Operator's warehouse or other storage point, no
charge shall be made to the Joint Account for a distance greater than the
distance to the nearest reliable supply store where like material is normally
available, or railway receiving point nearest the Joint Property unless agreed
to by the Parties. No charge shall be made to the Joint Account for moving
Material to other properties belonging to Operator unless agreed to by the
Parties.

 
C.
In the application of subparagraphs A and B above, the option to equalize or
charge actual trucking cost is available when the actual charge is $400 or less
excluding accessorial charges. The $400 will be adjusted to the amount most
recently recommended by the Council of Petroleum Accountants Societies.

6.
SERVICES

The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and Paragraph i,
ii, and iii, of Section 111. The cost of professional consultant services and
contract services of technical personnel directly engaged on the Joint Property
if such charges are excluded from the overhead rates. The cost of professional
consultant services or contract services of technical personnel not directly
engaged on the Joint Property shall not be charged to the Joint Account unless
previously agreed to by the Parties. NO COST OF OUTSIDE PROFESSIONAL CONSULTANT
OR CONTRACT SERVICES ARE COVERED IN THE OVERHEAD RATES.

7.
EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR

 
A.
Operator shall charge the Joint Account for use of Operator owned equipment and
facilities at rates commensurate with costs of ownership and operation. Such
rates shall include costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross investment less
accumulated depreciation not to exceed TWELVE percent (12%) per annum. Such
rates shall not exceed average commercial

 
B.
In lieu of charges in Paragraph 8A above, Operator may elect to use average
commercial rates prevailing in the immediate area of the Joint Property less 20%
published by the Petroleum Motor Transport Association. ALL TRANSPORTATION OF
EMPLOYEES BY AUTOMOBILE SHALL BE REIMBURSED ON A MILEAGE BASIS OF $0.82 PER MILE
SUBJECT TO ESCALATION UNDER ARTICLE III PARAGRAPH (3) HEREOF.

8.
DAMAGES AND LOSSES TO JOINT PROPERTY

All costs or expenses necessary for the repair or replacement of Joint Property
made necessary because of damages or losses incurred by fire, flood, storm,
theft, accident, or other cause, except those resulting from Operator's gross
negligence or willful misconduct. Operator shall furnish Non-Operator written
notice of damages or losses incurred IIS soon as practicable after a report
thereof has been received by Operator.

9.
LEGAL EXPENSE

Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgments and amounts paid for settlement of
claims incurred in or resulting from operations under the agreement or necessary
to protect or recover the Joint Property. NO LEGAL EXPENSES ARE CONSIDERED TO BE
INCLUDED IN THE OVERHEAD.

10.
TAXES

All taxes of every kind and nature assessed or levied upon or in connection with
the Joint Property, the operation thereof, or the production therefrom, and
which taxes have been paid by the Operator for the benefit of the Parties, If
the ad valorem taxes are based in whole or in part upon separate valuations of
each party's working interest, then notwithstanding anything to the contrary
herein, charges to the Joint Account shall be made and paid by the Parties
hereto in accordance with the tax value generated by each party's working
interest.

11.
INSURANCE

Net premiums paid for insurance required to be carried for the Joint Operations
for the protection of the Parties. In the event Joint Operations are conducted
in a state in which Operator may act as self-insurer for Worker's Compensation
and/or Employers Liability under the respective state's laws, Operator may, at
its election, include the risk under its self-insurance program and in that
event, Operator shall include a charge at Operator's cost not to exceed manual
rates.
 
 
25

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

 

12.
ABANDONMENT and RECLAMATION

Costs incurred for abandonment of the Joint Property, including costs required
by governmental or other regulatory authority.

13.
COMMUNICATIONS

Cost of acquiring, leasing, installing, operating, repairing and maintaining
communication systems, including radio and microwave facilities directly serving
the Joint Property. In the event communication facilities/systems serving the
Joint Property are Operator owned, charges to the Joint Account shall be made as
provided in Paragraph 8 of this Section II.

14.
OTHER EXPENDITURES

Any other expenditure not covered or dealt with in the foregoing provisions of
this Section II, or in Section III and which is of direct benefit to the Joint
Property and is incurred by the Operator in the necessary and proper conduct of
the Joint Operations.

III. OVERHEAD

1.
OVERHEAD - DRILLING AND PRODUCING OPERATIONS

 
i.
As compensation for administrative, supervision, office services and warehousing
costs, Operator shall charge drilling and producing operations on either:

x Fixed Rate Basis, Paragraph 1A, or
o Percentage Basis, Paragraph 1B

Unless otherwise agreed to by the Parties, such charge shall be in lieu of costs
and expenses of all offices and salaries or wages plus applicable burdens and
expenses of all personnel, except those directly chargeable under Paragraph 3A,
Section II. The cost and expense of services from outside sources in connection
with matters of taxation, traffic, accounting or matters before or involving
governmental agencies shall be considered as included in the overhead rates
provided for in the above selected Paragraph of this Section III unless such
cost and expense are agreed to by the Parties as a direct charge to the Joint
Account.

 
ii.
The salaries, wages and Personal Expenses of Technical Employees AND FIRST LEVEL
SUPERVISORS and/or the cost of professional consultant services and contract
services of technical personnel directly employed on the Joint Property:

o shall be covered by the overhead rates, or x shall not be covered by the
overhead rates.

 
iii.
The salaries, wages and Personal Expenses of Technical Employees AND FIRST LEVEL
SUPERVISORS and/or costs of professional consultant services and contract
services of technical personnel either temporarily or permanently assigned to
and directly employed in the operation of the Joint Property:

o  shall be covered by the overhead rates, or x shall not be covered by the
overhead rates.

A.   Overhead - Fixed Rate Basis

(1) Operator shall charge the Joint Account at the following rates per well per
month:

                             
Drilling Well Rate (For new well drilling, deepening, and or enhancement)
  $ *20,000  
(Prorated for less than a full month)
       
*(Success Oil will submit a Turn Key contract for any new drill, deepening or
enhancement programs)
       
Producing Well Rate  
  $ 500  

(2)
Application of Overhead - Fixed Rate Basis shall be as follows:

 
(a)
Drilling Well Rate

 
(1)
Charges for drilling wells shall begin on the date the well is spudded and
terminate on the date the drilling rig, completion rig, or other units used in
completion of the well is released, whichever is later, except that no charge
shall be made during suspension of drilling or completion operations for fifteen
(15) or more consecutive calendar days.

(2)  Charges for wells undergoing any type of workover or recompletion for a
period of five (5) consecutive work days or more shall be made at the drilling
well rate. Such charges shall be applied for the period from date workover
operations, with rig or other units used in workover, commence through date of
rig or other unit release, except that no charge shall be made during suspension
of operations for fifteen (15) or more consecutive calendar days.
 
 
26

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

 

(b)  Producing Well Rates

 
(1)
An active well either produced or injected into for any portion of the month
shall be considered as a one-well charge for the entire month.

 
(2)
Each active completion in a multi-completed well in which production is not
commingled down hole shall be considered as a one-well charge providing each
completion is considered a separate well by the governing regulatory authority.

 
(3)
An inactive gas well shut in because of overproduction or failure of purchaser
to take the production shall be considered as a one-well charge providing the
gas well is directly connected to a permanent sales outlet.

 
(4)
A one-well charge shall be made for the month in which plugging and abandonment
operations are completed on any well. This one-well charge shall be made whether
or not the well has produced except when drilling well rate applies.

 
(5)
All other inactive wells (including but not limited to inactive wells covered by
unit allowable, lease allowable, transferred allowable, etc.) shall not qualify
for an overhead charge.

 
(3)
The well rates shall be adjusted as of the first day of April each year
following the effective date of the agreement to which this Accounting Procedure
is attached. The adjustment shall be computed by multiplying the rate currently
in use by the percentage increase or decrease in the average weekly earnings of
Crude Petroleum and Gas Production Workers for the last calendar year compared
to the calendar year preceding as shown by the index of average weekly earnings
of Crude Petroleum and         Gas Production Workers as published by the United
States Department of Labor, Bureau of Labor Statistics, or the equivalent
Canadian index as published by Statistics Canada, as applicable. The adjusted
rates shall be the rates currently in use. plus or minus the computed
adjustment.

B.

2.   OVERHEAD - MAJOR CONSTRUCTION

To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset required for the development and
operation of the Joint Property, Operator shall either negotiate a rate prior to
the beginning of construction, or shall charge the Joint Account for overhead
based on the following rates for any Major Construction project in excess of
$50,000:

 
A.
10% of first $100,000 or total cost if less, plus

 
B.
6% of costs in excess of $100,000 but less than $1,000,000, plus

 
C.
2% of costs in excess of $1,000,000.

Total cost shall mean the gross cost of any one project. For the purpose of this
paragraph, the component parts of a single project shall not be treated
separately and the cost of drilling and workover wells and artificial lift
equipment shall be excluded.

3.   CATASTROPHE OVERHEAD

To compensate Operator for overhead costs incurred in the event of expenditures
resulting from a single occurrence due to oil spill, blowout, explosion, fire,
storm, hurricane, or other catastrophes as agreed to by the Parties, which are
necessary to restore the Joint Property to the equivalent condition that existed
prior to the event causing the expenditures. Operator shall either negotiate a
rate prior to charging the Joint Account or shall charge the Joint Account for
overhead based on the following rates:

 
A.
10% of total costs through $100,000; plus

 
B.
6% of total costs in excess of $100,000 but less than $1,000,000; plus

 
C.
1% of total costs in excess of $l,000,000.

Expenditures subject to the overheads above will not be reduced by insurance
recoveries, and no other overhead provisions of this Section III shall apply.

4.   AMENDMENT of RATES

The overhead rates provided for in this Section III may be amended from time to
time only by mutual agreement between the Parties hereto if, in practice, the
rates are found to be insufficient or excessive.

 
27

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

 
 
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS
AND DISPOSITIONS

Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator's option, such Material may be supplied by the
Non-Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.

1.    PURCHASES

Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In case of Material found to be defective
or returned to vendor for any other reasons, credit shall be passed to the Joint
Account when adjustment has been received by the Operator.

2.     TRANSFERS AND DISPOSITIONS

Material furnished to the Joint Property and Material transferred from the Joint
Property or disposed of by the Operator, unless otherwise agreed to by the
Parties, shall be priced on the following basis exclusive of cash discounts:

A.   New Material (Condition A)

(1)  Tubular Goods Other than Line Pipe

 
(a)
Tubular goods, sized 2 3/8 inches OD and larger, except line pipe, shall be
priced at Eastern mill published carload base prices effective as of date of
movement plus transportation cost using the 80,000 pound carload weight basis to
the railway receiving point nearest the Joint Property for which published rail
rates for tubular goods exist. If the 80,000 pound rail rate is not offered, the
70,000 pound or 90,000 pound rail rate may be used. Freight charges for tubing
will be calculated from Lorain, Ohio and casing from Youngstown, Ohio.

 
(b)
For grades which are special to one mill only, prices shall be computed at the
mill base of that mill plus transportation cost from that mill to the railway
receiving point nearest the Joint Property as provided above in Paragraph
2.A.(l)(a). For transportation cost from points other than Eastern mills, the
30,000 pound Oil Field Haulers Association interstate truck rate shall be used.

 
(c)
Special end finish tubular goods shall be priced at the lowest published
out-of-stock price, f.o.b. Houston, Texas, plus transportation cost, using Oil
Field Haulers Association interstate 30,000 pound truck rate, to the railway
receiving point nearest the Joint Property.

 
(d)
Macaroni tubing (size less than 2 3/8 inch OD) shall be priced at the lowest
published out-of-stock prices f.o.b. the supplier plus transportation costs,
using the Oil Field Haulers Association interstate truck rate per weight of
tubing transferred, to the railway receiving point nearest the Joint Property.

(2)  Line Pipe

 
(a)
Line pipe movements (except size 24 inch OD and larger with walls 3/4 inch and
over) 30,000 pounds or more shall be priced under provisions of tubular goods
pricing in Paragraph A.(l)(a) as provided above. Freight charges shall be
calculated from Midland, Texas.

 
(b)
Line Pipe movements (except size 24 inch OD) and larger with walls 3/4 inch and
over) less than 30,000 pounds shall be priced at Eastern mill published carload
base prices effective as of date of shipment, plus 20 percent, plus
transportation costs based on freight rates as set forth under provisions of
tubular goods pricing in Paragraph A.(l)(a) as provided above. Freight charges
shall be calculated from Midland, Texas.

 
(c)
Line pipe 24 inch OD and over and 3/4 inch wall and larger shall be priced
f.o.b. the point of manufacture at current new published prices plus
transportation cost to the railway receiving point nearest the Joint Property.

 
(d)
Line pipe, including fabricated line pipe, drive pipe and conduit not listed on
published price lists shall be priced at quoted prices plus freight to the
railway receiving point nearest the Joint Property or at prices agreed to by the
Parties.

 
(3)  Other Material shall be priced at the current new price, in effect at date
of movement, as listed by a reliable supply store nearest the Joint Property, or
point of manufacture, plus transportation costs, if applicable, to the railway
receiving point nearest the Joint Property.

 
(4)
Unused new Material, except tubular goods, moved from the Joint Property shall
be priced at the current new price, in effect on date of movement, as listed by
a reliable supply store nearest the Joint Property, or point of manufacture,
plus transportation costs, if applicable, to the railway receiving point nearest
the Joint Property. Unused new tubulars will be priced as provided above in
Paragraph 2.A.(1) and (2).

 
 
28

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

 

B.  Good Used Material (Condition B)

Material in sound and serviceable condition and suitable for reuse without
reconditioning:

(1)  Material moved to the Joint Property

At seventy-five percent (75%) of current new price, as determined by Paragraph
A.

(2)  Material used on and moved from the Joint Property

 
(a)
At seventy-five percent (75%) of current new price, as determined by Paragraph
A, if Material was originally charged to the Joint Account as new Material or

 
(b)
At sixty-five percent (65%) of current new price, as determined by Paragraph A,
if Material was originally charged to the Joint Account as used Material

(3)  Material not used on and moved from the Joint Property

At seventy-five percent (75%) of current new price as determined by Paragraph A.

The cost of reconditioning, if any, shall be absorbed by the transferring
property.

C.  Other Used Material

(1)  Condition C

Material which is not in sound and serviceable condition and not suitable for
its original function until after reconditioning shall be priced at fifty
percent (50%) of current new price as determined by Paragraph A. The cost of
reconditioning shall be charged to the receiving property, provided Condition C
value plus cost of reconditioning does not exceed Condition B value.

(2)  Condition D

Material, excluding junk, no longer suitable for its original purpose, but
usable for some other purpose shall be priced on a basis commensurate with its
use. Operator may dispose of Condition D Material under procedures normally used
by Operator without prior approval of Non-Operators.

(a)  Casing, tubing, or drill pipe used as line pipe shall be priced as Grade A
and B seamless line pipe of comparable size and weight. Used casing. tubing or
drill pipe utilized as line pipe shall be priced at used line pipe prices.

(b)  Casing, tubing or drill pipe used as higher pressure service lines than
standard line pipe, e.g. power oil lines, shall be priced under normal pricing
procedures for casing, tubing, or drill pipe. Upset tubular goods shall be
priced on a non upset basis.

(3)  Condition E

Junk shall be priced at prevailing prices. Operator may dispose of Condition E
Material under procedures normally utilized by Operator without prior approval
of Non-Operators.

D.   Obsolete Material

Material which is serviceable and usable for its original function but condition
and/or value of such Material is not equivalent to that which would justify a
price as provided above may be specially priced as agreed to by the Parties.
Such price should result in the Joint Account being charged with the value of
the service rendered by such Material.

E.   Pricing Conditions

 
(1)
Loading or unloading costs may be charged to the Joint Account at the rate of
twenty-five cents (25c) per hundred weight on all tubular goods movements, in
lieu of actual loading or unloading costs sustained at the stocking point. The
above rate shall be adjusted as of the first day of April each year following
January 1, 1985 by the same percentage increase or decrease used to adjust
overhead rates in Section III, Paragraph l-A.(3). Each year, the rate calculated
shall be rounded to the nearest cent and shall be the rate in effect until the
first day of April next year. Such rate shall be published each year by the
Council of Petroleum Accountants Societies.

 
(2)
Material involving erection costs shall be charged at applicable percentage of
the current knocked-down price of new Material.

 
 
29

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

 
 
3.    PREMIUM PRICES

Whenever Material is not readily obtainable at published or listed prices
because of national emergencies. strikes or other unusual causes over which the
Operator has no control, the Operator may charge the Joint Account for the
required Material at the Operator's actual cost incurred in providing such
Material, in making it suitable for use, and in moving it to the Joint Property;
provided notice in writing is furnished to Non-Operators of the proposed charge
prior to billing Non-Operators for such Material. Each Non-Operator shall have
the right, by so electing and notifying Operator within ten days after receiving
notice from Operator, to furnish in kind all or part of his share of such
Material suitable for use and acceptable to Operator.

4.    WARRANTY OF MATERIAL FURNISHED BY OPERATOR

Operator does not warrant the Material furnished. In case of defective Material,
credit shall not be passed to the Joint Account until adjustment has been
received by Operator from the manufacturers or their agents.

V. INVENTORIES

The Operator shall maintain detailed records of Controllable Material.

1.    PERIODIC INVENTORIES, NOTICE AND REPRESENTATION

At reasonable intervals, inventories shall be taken by Operator of the Joint
Account Controllable Material. Written notice of intention to take inventory
shall be given by Operator at least thirty (30) days before any inventory is to
begin so that Non-Operators may be represented when any inventory is taken.
Failure of Non-Operators to be represented at an inventory shall bind
Non-Operators to accept the inventory taken by Operator.

2.    RECONCILIATION AND ADJUSTMENT OF INVENTORIES

RECONCILIATION OF INVENTORY WITH THE JOINT ACCOUNT SHALL BE MADE, AND A LIST OF
COVERAGES AND SHORTAGES SHALL BE FURNISHED TO THE NON-OPERATORS. INVENTORY
ADJUSTMENTS SHALL BE MADE BY OPERATOR WITH THE JOINT ACCOUNT FOR SUCH OVERAGES
AND SHORTAGES, BUT OPERATOR SHALL BE HELD ACCOUNTABLE TO NON-OPERATORS ONLY FOR
SHORTAGES DUE TO LACK OF REASONABLE DILIGENCE IN FOLLOWING USUAL OIL FIELD
PRACTICES IN THE AREA.

3.    SPECIAL INVENTORIES

Special inventories may be taken whenever there is any sale, change of interest,
or CHANGE of Operator in the Joint Property. It shall be the duty of the party
selling to notify all other Parties as quickly as possible after the transfer of
interest takes place. In such cases, both the seller and the purchaser shall be
governed by such inventory. In cases involving a change of Operator, all Parties
shall be governed by such inventory.

4.    EXPENSE OF CONDUCTING INVENTORIES

 
A.
The expense of conducting periodic inventories shall not be charged to the Joint
Account unless agreed to by the Parties.

 
B.
The expense of conducting special inventories shall be charged to the Parties
requesting such inventories, except inventories required due to change of
Operator shall be charged to the Joint Account.

EXHIBIT D

Attached to and made part of the certain Operating Agreement by and between

INSURANCE PROVISIONS

Unit Operator shall carry the following minimum amount of insurance with respect
to Unit Operations: Provided a discount operating fee is not charged to
Non-Operator. If a fee under $550 per well is charged insurance premiums will be
paid from well production & revenue as a L.O.E. (Lease Operating Expense).

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

(2)   Public liability and property damage insurance with limits of $1,000,000
for each occurrence.

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

All insurance coverage required hereby shall be carried at the joint expense and
for the benefit of the Working Interest Owners. Premiums for automobile public
liability and property damage insurance on Unit Operator's fully owned equipment
shall not be charged directly to the joint account, but will be covered by the
flat rate charged assessed for the use of such equipment. Unit Operator will not
carry fire, windstorm or explosion insurance covering Unit Operations or Unit
Equipment.

Contractors and subcontractors will be required to carry insurance of the same
types as hereinabove specified and in such amount as deemed necessary by Working
Interest Owners.
 
 
30

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

 

If the parties hereto or any of them shall insure their respective risks beyond
the specific limits of insurance required hereunder to be carried by the Unit
Operator, the benefits of such insurance shall inure to the parties procuring
and maintaining the same, respectively, and the cost of such insurance shall be
borne by such parties, respectively, without reimbursement one from the other
and without entering into any accounting hereunder.

NOTE: Instructions For Use of Gas Balancing  Agreement MUST be reviewed before
finalizing this document. Not Applicable On the J.B. Tubb

 
31

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