Exhibit 10.4


 


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


 


MODEL FORM OPERATING AGREEMENT


 


 


OPERATING AGREEMENT


 


DATED


 


May 22,
2006,


         year


 


	
  OPERATOR

  	
  Evertson Operating Company, Inc.

  
	
   

  	
   

  	
   

  
	
  CONTRACT AREA

  	
  Township 155 North, Range 97 West

  	
   

  
	
   

  	
   

  	
  Sections: 1-9

  	
   

  
	
   

  	
   

  	
  Township 155 North, Range 98 West

  	
   

  
	
   

  	
   

  	
  Sections: 1-12

  	
   

  
	
   

  	
   

  	
  Township 155 North, Range 99 West

  	
   

  
	
   

  	
   

  	
  Sections: 1, 2, 11, 12

  	
   

  
	
   

  	
   

  	
  Township 156 North, Range 96 West

  	
   

  
	
   

  	
   

  	
  Sections: 5, 6

  	
   

  
	
   

  	
   

  	
  Township 156 North, Range 97 West

  	
   

  
	
   

  	
   

  	
  Sections: All

  	
   

  
	
   

  	
   

  	
  Township 156 North, Range 98 West

  	
   

  
	
   

  	
   

  	
  Sections: All

  	
   

  
	
   

  	
   

  	
  Township 156 North, Range 99 West

  	
   

  
	
   

  	
   

  	
  Sections: 1-4, 9-15,
  23-26, 35, 36

  	
   

  
	
   

  	
   

  	
  Township 157 North, Range 96 West

  	
   

  
	
   

  	
   

  	
  Sections: 4-9, 16-23,
  26-35

  	
   

  
	
   

  	
   

  	
  Township 157 North, Range 97 West

  	
   

  
	
   

  	
   

  	
  Sections: All

  	
   

  
	
   

  	
   

  	
  Township 157 North, Range 98 West

  	
   

  
	
   

  	
   

  	
  Sections: 1-3, 10-15,
  22-36

  	
   

  
	
   

  	
   

  	
  Township 158 North, Range 96 West

  	
   

  
	
   

  	
   

  	
  Sections: 28-33

  	
   

  
	
   

  	
   

  	
  Township 158 North, Range 97 West

  	
   

  
	
   

  	
   

  	
  Sections: 25-36

  	
   

  
	
   

  	
   

  	
  Township 158
  North, Range 98 West

  	
   

  
	
   

  	
   

  	
  Sections: 25-27, 34-36

  	
   

  
					



 


 


COUNTY OR PARISH
OF Williams, STATE OF North Dakota


 


 


COPYRIGHT 1989 – ALL
RIGHTS RESERVED

AMERICAN ASSOCIATION OF PETROLEUM

LANDMEN, 4100 FOSSIL CREEK BLVD.

FORT WORTH, TEXAS, 76137, APPROVED FORM.


 


A.A.P.L. NO. 610 – 1989


 

















 


TABLE OF CONTENTS


 


	
  Article

  	
   

  	
  Title

  	
   

  	
  Page

  
	
  I.

  	
   

  	
  DEFINITIONS

  	
   

  	
  1

  
	
  II.

  	
   

  	
  EXHIBITS

  	
   

  	
  1

  
	
  III.

  	
   

  	
  INTERESTS OF PARTIES

  	
   

  	
  2

  
	
   

  	
   

  	
  B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:

  	
   

  	
  2

  
	
   

  	
   

  	
  C. SUBSEQUENTLY CREATED INTERESTS:

  	
   

  	
  2

  
	
  IV.

  	
   

  	
  TITLES

  	
   

  	
  2

  
	
   

  	
   

  	
  A. TITLE EXAMINATION:

  	
   

  	
  2

  
	
   

  	
   

  	
  B. LOSS OR FAILURE OF TITLE:

  	
   

  	
  3

  
	
   

  	
   

  	
   

  	
  3. Other Losses

  	
   

  	
  3

  
	
   

  	
   

  	
   

  	
  4. Curing Title

  	
   

  	
  3

  
	
  V.

  	
   

  	
  OPERATOR

  	
   

  	
  4

  
	
   

  	
   

  	
  A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:

  	
   

  	
  4

  
	
   

  	
   

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

  	
   

  	
  4

  
	
   

  	
   

  	
   

  	
  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

  	
   

  	
  4

  
	
   

  	
   

  	
   

  	
  3. Protection from Liens

  	
   

  	
  4

  
	
   

  	
   

  	
   

  	
  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

  	
   

  	
  5

  
	
   

  	
   

  	
  B. SUBSEQUENT OPERATIONS:

  	
   

  	
  5

  
	
   

  	
   

  	
   

  	
  1. Proposed Operations

  	
   

  	
  5

  
	
   

  	
   

  	
   

  	
  2. Operations by Less Than All Parties

  	
   

  	
  6

  
	
   

  	
   

  	
   

  	
  3. Stand-By Costs

  	
   

  	
  7

  
	
   

  	
   

  	
   

  	
  4. Deepening

  	
   

  	
  8

  
	
   

  	
   

  	
   

  	
  5. Sidetracking

  	
   

  	
  8

  
	
   

  	
   

  	
   

  	
  6. Order of Preference of Operations

  	
   

  	
  8

  
	
   

  	
   

  	
   

  	
  7. Conformity to Spacing Pattern

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
  8. Paying Wells

  	
   

  	
  9

  
	
   

  	
   

  	
  C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
  1. Completion

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
  2. Rework, Recomplete or Plug Back

  	
   

  	
  9

  
	
   

  	
   

  	
  D. OTHER OPERATIONS:

  	
   

  	
  9

  
	
   

  	
   

  	
  E. ABANDONMENT OF WELLS:

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
  1. Abandonment of Dry Holes

  	
   

  	
  9

  
	
   

  	
   

  	
   

  	
  2. Abandonment of Wells That Have Produced

  	
   

  	
  10

  
	
   

  	
   

  	
   

  	
  3. Abandonment of Non-Consent Operations

  	
   

  	
  10

  
	
   

  	
   

  	
  F. TERMINATION OF OPERATIONS:

  	
   

  	
  10

  
	
   

  	
   

  	
  G. TAKING PRODUCTION IN KIND:

  	
   

  	
  10

  
	
   

  	
   

  	
  (Option 1) Gas
  Balancing Agreement

  	
   

  	
  10

  
	
  VII.

  	
   

  	
  EXPENDITURES AND LIABILITY OF PARTIES

  	
   

  	
  11

  
	
   

  	
   

  	
  A. LIABILITY OF PARTIES:

  	
   

  	
  11

  
	
   

  	
   

  	
  B. LIENS AND SECURITY INTERESTS:

  	
   

  	
  12

  
	
   

  	
   

  	
  C. ADVANCES:

  	
   

  	
  12

  
	
   

  	
   

  	
  D. DEFAULTS AND REMEDIES:

  	
   

  	
  12

  
	
   

  	
   

  	
   

  	
  1. Suspension of Rights

  	
   

  	
  13

  
	
   

  	
   

  	
   

  	
  2. Suit for Damages

  	
   

  	
  13

  
	
   

  	
   

  	
   

  	
  3. Deemed Non-Consent

  	
   

  	
  13

  
	
   

  	
   

  	
   

  	
  4. Advance Payment

  	
   

  	
  13

  
	
   

  	
   

  	
   

  	
  5. Costs and Attorneys’ Fees

  	
   

  	
  13

  
	
   

  	
   

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

  	
   

  	
  13

  
	
   

  	
   

  	
  F. TAXES:

  	
   

  	
  13

  
	
  VIII.

  	
   

  	
  ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

  	
   

  	
  14

  
	
   

  	
   

  	
  A. SURRENDER OF LEASES:

  	
   

  	
  14

  
	
   

  	
   

  	
  B. RENEWAL OR EXTENSION OF LEASES:

  	
   

  	
  14

  
	
   

  	
   

  	
  C. ACREAGE OR CASH CONTRIBUTIONS:

  	
   

  	
  14

  



 


i

















 


TABLE OF CONTENTS


 


	
   

  	
   

  	
  D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

  	
   

  	
  15

  
	
   

  	
   

  	
  E. WAIVER OF RIGHTS TO PARTITION:

  	
   

  	
  15

  
	
  IX.

  	
   

  	
  INTERNAL REVENUE CODE ELECTION

  	
   

  	
   

  	
  15

  
	
  X.

  	
   

  	
  CLAIMS AND LAWSUITS

  	
   

  	
   

  	
  15

  
	
  XI.

  	
   

  	
  FORCE MAJEURE

  	
   

  	
   

  	
  16

  
	
  XII.

  	
   

  	
  NOTICES

  	
   

  	
   

  	
  16

  
	
  XIII.

  	
   

  	
  TERM OF AGREEMENT

  	
   

  	
   

  	
  16

  
	
  XIV.

  	
   

  	
  COMPLIANCE WITH LAWS AND REGULATIONS

  	
   

  	
   

  	
  16

  
	
   

  	
   

  	
  A. LAWS, REGULATIONS AND ORDERS:

  	
   

  	
  16

  
	
   

  	
   

  	
  B. GOVERNING LAW:

  	
   

  	
  16

  
	
   

  	
   

  	
  C. REGULATORY AGENCIES:

  	
   

  	
  16

  
	
  XV.

  	
   

  	
  MISCELLANEOUS

  	
   

  	
   

  	
  17

  
	
   

  	
   

  	
  A. EXECUTION:

  	
   

  	
  17

  
	
   

  	
   

  	
  B. SUCCESSORS AND ASSIGNS:

  	
   

  	
  17

  
	
   

  	
   

  	
  C. COUNTERPARTS:

  	
   

  	
  17

  
	
   

  	
   

  	
  D. SEVERABILITY

  	
   

  	
  17

  
	
  XVI.

  	
   

  	
  OTHER PROVISIONS

  	
   

  	
   

  	
  17

  



 


ii

















 


OPERATING
AGREEMENT


 


THIS AGREEMENT, entered
into by and between Evertson Operating Company, Inc.,  hereinafter designated and referred to as “Operator,”
and the signatory party or parties other than Operator, sometimes hereinafter
referred to individually as “Non-Operator,” and collectively as “Non-Operators.”


 


WITNESSETH:


 


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


 


NOW, THEREFORE, it is agreed as follows:


 


ARTICLE
I.


 


DEFINITIONS


 


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


 


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.


 


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


 


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


 


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


 


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


 


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


 


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


 


O.  The term “Recompletion” or “Recomplete”
shall mean an operation whereby a Completion is attempted in another zone
within the existing wellbore, whether or not one zone is abandoned at such
time.


 


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 including
refracturing of a zone, 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.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  B.

  	
   

  	
  Exhibit “B,” Form of Lease.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  x

  	
   

  	
  C.

  	
   

  	
  Exhibit “C,” Accounting Procedure.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  x

  	
   

  	
  D.

  	
   

  	
  Exhibit “D,” Insurance.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  x

  	
   

  	
  E.

  	
   

  	
  Exhibit “E,” Gas Balancing Agreement.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  x

  	
   

  	
  F.

  	
   

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

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  G.

  	
   

  	
  Exhibit “G,” Tax Partnership.

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  x

  	
   

  	
  H.

  	
   

  	
  Other: Recording Supplement and Financing Statement

  



 


1

















 


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:


 


B.  Interests of Parties in Costs and Production:


 


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


 


Regardless of which party has contributed any Oil and Gas Lease or Oil
and Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or
deliver, or cause to be paid or delivered, all burdens on its share of the
production from the Contract Area up to, but not in excess of, 20% and shall indemnify,
defend and hold the other parties free from any liability therefor. Except as
otherwise expressly provided in this agreement, if any party has contributed
hereto any Lease or Interest which is burdened with any royalty, overriding
royalty, production payment or other burden on production in excess of the
amounts stipulated above, such party so burdened shall assume and alone bear
all such excess obligations and shall indemnify, defend and hold the other
parties hereto harmless from any and all claims attributable to such excess
burden.  However, so long as the Drilling
Unit for the productive Zone(s) is identical with the Contract Area, each party
shall pay or deliver, or cause to be paid or delivered, all burdens on
production from the Contract Area due under the terms of the Oil and Gas
Lease(s) which such party has contributed to this agreement, and shall
indemnify, defend and hold the other parties free from any liability therefor.


 


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


 


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


 


C.  Subsequently Created Interests:


 


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


 


The party whose interest is burdened with the Subsequently Created
Interest (the “Burdened Party”) shall assume and alone bear, pay and discharge
the Subsequently Created Interest and shall indemnify, defend and hold harmless
the other parties from and against any liability therefor.  Further, if the Burdened Party fails to pay,
when due, its share of expenses chargeable hereunder, all provisions of Article
VII.B. shall be enforceable against the Subsequently Created Interest in the same
manner as they are enforceable against the working interest of the Burdened
Party.  If the Burdened Party is required
under this agreement to assign 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 Drilling Unit of any proposed
well prior to commencement of drilling operations. 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.”


 


2

















 


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


 


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


 


B. Loss
or Failure of Title:


 


1.             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.


 


4. Curing Title: In the event of a Failure of Title, any Lease
or Interest acquired by any party hereto (other than the party whose interest
has failed or was lost) covering all or a portion of the interest that has
failed or was lost shall be offered at cost to the party whose interest has
failed or was lost, and the provisions of Article VIII.B. shall not apply to
such acquisition.


 


3

















 


ARTICLE
V.


 


OPERATOR


 


A.  Designation and Responsibilities of Operator:


 


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


 


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


 


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


 


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


 


2.  Selection of Successor
Operator: Upon the resignation or removal of Operator under any provision
of this agreement, a successor Operator shall be selected by the parties.  The successor Operator shall be selected from
the parties owning an interest in the Contract Area at the time such successor
Operator is selected.  The successor
Operator shall be selected by the affirmative vote of two (2) or more parties
owning a majority interest based on ownership as shown on Exhibit “A”; provided,
however, if an Operator which has been removed or is deemed to have resigned
fails to vote or votes only to succeed itself, the successor Operator shall be
selected by the affirmative vote of the party or parties owning a majority interest
based on ownership as shown on Exhibit “A” remaining after excluding the voting
interest of the Operator that was removed or resigned.  The former Operator shall within 30 days
after selection of a successor operator promptly deliver to the successor
Operator all records and data relating to the operations conducted by the
former Operator to the extent such records and data are not already in the
possession of the successor operator. 
Any cost of obtaining or copying the former Operator’s records and data
shall be charged to the joint account.


 


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


 


C.  Employees and Contractors:


 


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


 


D.  Rights and Duties of Operator:


 


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


 


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


 


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


 


4

















 


liens and
encumbrances resulting therefrom except for those resulting from a bona fide
dispute as to services rendered or materials supplied.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


ARTICLE
VI.


 


DRILLING
AND DEVELOPMENT


 


A.  Initial Well:


 


There shall be no “Initial Well” as defined herein.


 


B.  Subsequent Operations:


 


1.  Proposed Operations:
If any party hereto should desire to drill any well on the Contract Area other
than the Initial Well, or if any party should desire to Rework, Sidetrack,
Deepen, Recomplete or Plug Back a dry hole or a well no longer capable of producing
in paying quantities in which such party has not otherwise relinquished its
interest in the proposed objective Zone under this agreement, the party
desiring to drill, Rework, Sidetrack, Deepen, Recomplete or Plug Back such a
well shall give written notice of the proposed operation to the parties who
have not otherwise relinquished their interest in such objective Zone


 


5

















 


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.


 


2.  Operations by Less Than
All Parties:


 


(a) Determination of Participation.  If any party to whom such notice is delivered
as provided in Article VI.B.1. or VI.C.1. (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the forty-eight (48)
hour period when a drilling rig is on location, as the case may be) actually
commence the proposed operation and complete it with due diligence.  Operator shall perform all work for the
account of the Consenting Parties; provided, however, if no drilling rig or
other equipment is on location, and if Operator is a Non-Consenting Party, the
Consenting Parties shall either: (i) request Operator to perform the work
required by such proposed operation for the account of the Consenting Parties,
or (ii) 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 VI.B.1.,
subject to the same extension right as provided therein.


 


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


 


6

















 


Deepening, Recompleting or Plugging Back, or a Completion pursuant to
Article VI.C.1.  Option No. 2, all of
such Non-Consenting Party’s interest in the production obtained from the
operation in which the Non-Consenting Party did not elect to participate.  Such relinquishment shall be effective until
the proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold (after deducting applicable ad valorem,
production, severance, and excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.C. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts), shall equal the total of the following: 


 


(i) 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) 400% of (a) that
portion of the costs and expenses of drilling, Reworking, Sidetracking,
Deepening, Plugging Back, testing, Completing, and Recompleting, after
deducting any cash contributions received under Article VIII.C., and of (b)
that portion of the cost of newly acquired equipment in the well (to and
including the wellhead connections), which would have been chargeable to such
Non-Consenting Party if it had participated therein. 


 


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


 


(c) Reworking, Recompleting or Plugging Back. An election not to
participate in the drilling, Sidetracking or Deepening of a well shall be
deemed an election not to participate in any Reworking or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full recovery
by the Consenting Parties of the Non-Consenting Party’s recoupment amount.  Similarly, an election not to participate in
the Completing or Recompleting of a well shall be deemed an election not to
participate in any Reworking operation proposed in such a well, or portion
thereof, to which the initial non-consent election applied that is conducted at
any time prior to full recovery by the Consenting Parties of the Non-Consenting
Party’s recoupment amount.  Any such Reworking,
Recompleting or Plugging Back operation conducted during the recoupment period
shall be deemed part of the cost of operation of said well and there shall be
added to the sums to be recouped by the Consenting Parties 400% 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.


 


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


 


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


 


Within ninety (90) days after the completion of any operation under
this Article, the party conducting the operations for the Consenting Parties
shall furnish each Non-Consenting Party with an inventory of the equipment in
and connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings.  Each
month thereafter, during the time the Consenting Parties are being reimbursed
as provided above, the party conducting the operations for the Consenting
Parties shall furnish the Non-Consenting Parties with an itemized statement of
all costs and liabilities incurred in the operation of the well, together with
a statement of the quantity of Oil and Gas produced from it and the amount of
proceeds realized from the sale of the well’s working interest production
during the preceding month.  In
determining the quantity of Oil and Gas produced during any month, Consenting
Parties shall use industry accepted methods such as but not limited to metering
or periodic well tests.  Any amount
realized from the sale or other disposition of equipment newly acquired in
connection with any such operation which would have been owned by a
Non-Consenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.


 


If and when the Consenting Parties recover from a Non-Consenting Party’s
relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it as of
7:00 a.m. on the first day of the 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,


 


7

















 


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


 


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


 


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


 


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


 


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


 


5.
Sidetracking: Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore
at the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore to
be utilized as follows:


 


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


 


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


 


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


 


8

















 


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.


 


7.
Conformity to Spacing Pattern. Notwithstanding the provisions of this
Article VI.B.2., it is agreed that, unless agreed to by all participating
parties, 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.


 


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.


 


D.  Other Operations:


 


Operator
shall not undertake any single project reasonably estimated to require an
expenditure in excess of Fifty Thousand Dollars ($50,000) except in connection
with the drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting
or Plugging Back of a well that has been previously authorized by or pursuant
to this agreement; provided, however, that, in case of explosion, fire, flood
or other sudden emergency, whether of the same or different nature, Operator
may take such steps and incur such expenses as in its opinion are required to
deal with the emergency to safeguard life and property but Operator, as
promptly as possible, shall report the emergency to the other parties.  If Operator prepares an AFE for its own use,
Operator shall furnish any Non-Operator so requesting an information copy
thereof for any single project costing in excess of Ten Thousand Dollars ($ 10,000).  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 VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed
exclusively be those Articles).  Operator
shall deliver such proposal to all parties entitled to participate
therein.  If within thirty (30) days
thereof Operator secures the written consent of any party or parties owning at
least 51% of the interests of the parties entitled to participate in such
operation, each party having the right to participate in such project shall be
bound by the terms of such proposal and shall be obligated to pay its
proportionate share of the costs of the proposed project as if it had consented
to such project pursuant to the terms of the proposal.


 


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


 


9

















 


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 Operator 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.


 


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).


 


F.  Termination of Operations:


 


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


 


G.  Taking Production in Kind:


 


x          Option No. 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


 


10

















 


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 (10) days written notice of such intended
purchase and the price to be paid or the pricing basis to be used. 


 


All parties shall give
timely written notice to Operator of their Gas marketing arrangements for the
following month, excluding price, and shall notify Operator immediately in the
event of a change in such arrangements. Operator shall maintain records of all
marketing arrangements, and of volumes actually sold or transported, which records
shall be made available to Non-Operators upon reasonable request.


 


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


 


ARTICLE
VII.


 


EXPENDITURES
AND LIABILITY OF PARTIES


 


A.  Liability of Parties:


 


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


 


11

















 


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, the recording supplement
executed herewith, 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 Sixty (60) 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.


 


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


 


12

















 


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


 


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 designated by all of the parties (currently American Oil and Gas,
Inc.) 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.3.


 


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


 


F.  Taxes:


 


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


 


13

















 


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 (1) year and so
long thereafter as Oil and/or Gas is produced from the land covered thereby Upon
such assignment or lease, the assigning party shall be relieved from all
obligations thereafter accruing, but not theretofore accrued, with respect to
the interest assigned or leased and the operation of any well attributable
thereto, and the assigning party shall have no further interest in the assigned
or leased premises and its equipment and production other than the royalties
retained in any lease made under the terms of this Article.  The party assignee or lessee shall pay to the
party assignor or lessor the reasonable salvage value of the latter’s interest
in any well’s salvable materials and equipment attributable to the assigned or
leased acreage.  The value of all
salvable materials and equipment shall be determined in accordance with the
provisions of Exhibit “C,” less the estimated cost of salvaging and the estimated
cost of plugging and abandoning and restoring the surface.  If such value is less than such costs, then
the party assignor or lessor shall pay to the party assignee or lessee the
amount of such deficit.  If the assignment
or lease is in favor of more than one party, the interest shall be shared by
such parties in the proportions that the interest of each bears to the total
interest of all such parties.  If the
interest of the parties to whom the assignment is to be made varies according
to depth, then the interest assigned shall similarly reflect such variances.


 


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


 


B. Renewal or Extension of
Leases:


 


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


 


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


 


C.  Acreage or Cash Contributions:


 


While
this agreement is in force, 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.


 


14

















 


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


 


D.  Assignment; Maintenance of Uniform Interest:


 


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


 


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


 


E. Waiver of Rights to Partition:


 


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


 


F.  Preferential Right to Purchase:


 


ARTICLE IX.


 


INTERNAL REVENUE CODE ELECTION


 


If,
for federal income tax purposes, this agreement and the operations hereunder
are regarded as a partnership, and if the parties have not otherwise agreed to
form a tax partnership pursuant to Exhibit “G” or other agreement between them,
each party thereby affected elects to be excluded from the application of all
of the provisions of Subchapter “K,” Chapter 1, Subtitle “A,” of the Internal
Revenue Code of 1986, as amended (“Code”), as permitted and authorized by
Section 761 of the Code and the regulations promulgated thereunder.  Operator is authorized and directed to
execute on behalf of each party hereby affected such evidence of this election
as may be required by the Secretary of the Treasury of the United States or the
Federal Internal Revenue Service, including specifically, but not by way of
limitation, all of the returns, statements, and the data required by Treasury
Regulation §1.761.  Should there be any
requirement that each party hereby affected give further evidence of this election,
each such party shall execute such documents and furnish such other evidence as
may be required by the Federal Internal Revenue Service or as may be necessary
to evidence this election.  No such party
shall give any notices or take any other action inconsistent with the election
made hereby.  If any present or future
income tax laws of the state or states in which the Contract Area is located or
any future income tax laws of the United States contain provisions similar to
those in Subchapter “K,” Chapter1, Subtitle “A,” of the Code, under which an
election similar to that provided by Section 761 of the Code is permitted, each
party hereby affected shall make such election as may be permitted or required
by such laws.  In making the foregoing
election, each such party states that the income derived by such party from
operations hereunder can be adequately determined without the computation of
partnership taxable income.


 


ARTICLE X.


 


CLAIMS AND LAWSUITS


 


Operator
may settle any single uninsured third party damage claim or suit arising from
operations hereunder if the expenditure does not exceed Fifty Thousand Dollars
($50,000) 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 a 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.


 


15

















 


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.


 


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.


 


ý            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.


o


 


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 of Colorado


 


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


 


16

















 


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.


 


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


 


1)              Notwithstanding anything contained herein
to the contrary, Operator shall not expend in any operations on any well
drilled hereunder an amount in excess of 
125% of the amount authorized for such operation by virtue of the
original AFE without first submitting a Supplemental AFE to the Non-operator(s)
for approval.  Any Non-Operator(s)
receiving  such a Supplemental AFE shall
have a period of 48 hours in which to approve or reject these additional
expenditures.  Failure to respond shall
constitute approval, if such party has actually received the supplemental
AFE.  In the event of non-approval, all
subsequent operations conducted pursuant to such Supplemental AFE shall be
subject to the provisions of Article VI.b.2 herein.


 


2)              This agreement is subject to the terms
and conditions of that certain Purchase and Sale Agreement, between Tahosa
Holdings, LLC, Mélange International, LLC
(“Mélange”), Evertson Energy Partners, LLC, Rose Exploration, Inc.  Empire Oil Company and
American Oil and Gas, Inc., Dated effective October 11, 2005 (“the Purchase and
Sale Agreement”).  In the event of a
conflict between this agreement and the Purchase and Sale Agreement, the terms
of the Purchase and Sale Agreement shall prevail.


 


3)              It is understood that there are multiple
horizons that could be drilled in the Contract Area.  Consequently, the overhead rates normally set
forth in the COPAS attachment (Exhibit “C”) to this agreement shall be as
follows:


 


	
  Well Measured Depth

  	
   

  	
  Monthly Drilling Rate

  	
   

  	
  Monthly Producing Rate

  	
   

  
	
  0’ to 10,000’

  	
   

  	
  $

  	
  6,454.00

  	
   

  	
  $

  	
  893.00

  	
   

  
	
  10,001’ to
  15,000’

  	
   

  	
  $

  	
  7,839.00

  	
   

  	
  $

  	
  1,071.00

  	
   

  
	
  15,001’ to
  20,000’

  	
   

  	
  $

  	
  8,880.00

  	
   

  	
  $

  	
  1,186.00

  	
   

  



 


4)              Area of Mutual Interest\


 













 


If any party hereto acquires
leases or rights to acquire leases within the Contract Area during the term
beginning on the date of this Operating Agreement and ending October 1, 2010,
then the acquiring party shall offer an interest in such leases or rights to
the other parties.  The parties to whom
the offer is made will have a period of 21 calendar days following receipt of
the offer in which to elect to acquire it proportionate working interest
(Evertson Energy Partners 25%; American Oil & Gas 50%; Teton 25%) in the
offered interest by paying its proportionate share of the offering party’s
out-of-pocket acquisition costs for such leases or rights.  Failure of a party to respond within the
21-day period shall be an election not to acquire the interest.  If, pursuant to this AMI provision, a party
acquires an interest in a farmin or other earning agreement but then elects not
to participate in the drilling of an earning well under that agreement, it
shall retain only those rights it previously earned by participating in past
drilling and will immediately assign its rights to participate in all future
drilling and earning to the other parties.


 


This AMI provision is in
addition to the mutual interest responsibilities under the Purchase and Sale
Agreement dated October 7, 2005, among American, Tahosa Holdings, LLC, Melange
International, LLC, Evertson Energy Partners, LLC, Rose Exploration, Inc., and
Empire Oil Company, in accordance with which American acquired much of its
interest in the Contract Area, and to which Teton is subject.


 


5)     The non-operating parties hereto mutually
designate Evertson Operating Company, Inc., as Operator of the lands subject to
this agreement.  When and if Evertson
Energy Partners no longer owns an interest in these lands, Evertson Operating
Company, Inc., shall be deemed to have resigned as Operator of the lands under
this agreement.


 


17

















 


IN WITNESS WHEREOF, this agreement shall be effective
as of the 22nd day of May, 2006. 


 


Paul Urban, who
has prepared and circulated this form for execution, represents and warrants that
the form was printed from and, with the exception(s) listed below, is identical
to the AAPL Form 610-1989 Model Form Operating Agreement, as published in
computerized form by Forms On-A-Disk, Inc. No changes, alterations, or modifications,
other than those made by strikethrough and/or insertion and that are clearly
recognizable as changes in Articles                                                                                                   ,
have been made to the form.


 


	
  ATTEST
  OR WITNESS:

  	
   

  	
  OPERATOR

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Evertson Operating
  Company, Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Bruce F. Evertson

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Bruce F. Evertson

  
	
   

  	
   

  	
  Type or print name

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or S.S. No.

  	
  47-0794660

  
						



 


NON-OPERATORS


 


	
   

  	
   

  	
  American Oil and Gas,
  Inc.

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
  /s/ Patrick D. O’Brien

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Patrick D.
  O’Brien

  
	
   

  	
   

  	
  Type or print name

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
  CEO

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or S.S. No.

  	
  88-0451554

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Evertson Energy
  Partners, LLC

  
	
   

  	
   

  	
  By Evertson Management
  Inc., Managing Member

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
  /s/ Bruce F. Evertson

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Bruce F. Evertson

  
	
   

  	
   

  	
  Type or print name

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or S.S. No.

  	
  71-0897715

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Teton Williston, LLC

  
	
   

  	
   

  	
  By Teton Energy
  Corporation, Its Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
  /s/ Karl F. Arleth

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Karl F. Arleth

  
	
   

  	
   

  	
  Type or print name

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
  President

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or S.S. No.

  	
   

  
								



 


18

















 


ACKNOWLEDGMENTS


 


Note: The following forms of acknowledgment are the
short forms approved by the Uniform Law on Notarial Acts.


The validity and effect of these forms in any state
will depend upon the statutes of that state.


 


Acknowledgment in representative capacity:


 


	
  State of

  	
  Nebraska

  	
   

  	
  )

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ) ss.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  County of

  	
  Kimball

  	
   

  	
  )

  	
   

  
						



 


This instrument was acknowledged before me on


 


	
   

  	
  by

  	
  Bruce F. Evertson

  	
   as

  



 


	
  President

  	
   of

  	
  Evertson Operating
  Company, Inc.

  	
   

  



 


	
  (Seal, if any)

  	
   

  
	
   

  	
   

  
	
   

  	
  Title (and Rank)

  	
   

  
	
   

  	
   

  
	
   

  	
  My commission
  expires:

  	
   

  
				



 


Acknowledgment in representative capacity:


 


	
  State of

  	
  Colorado

  	
   

  	
  )

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ) ss.

  	
   

  
	
  City and

  	
   

  	
   

  	
   

  
	
  County of

  	
  Denver

  	
   

  	
  )

  	
   

  
						



 


This instrument was acknowledged before me on


 


	
   

  	
  by

  	
  Patrick D. O’Brien 

  	
   as

  



 


	
  CEO

  	
   of

  	
  American Oil and Gas,
  Inc.

  	
   

  



 


	
  (Seal, if any)

  	
   

  
	
   

  	
   

  
	
   

  	
  Title (and Rank)

  	
   

  
	
   

  	
   

  
	
   

  	
  My commission
  expires:

  	
   

  
				



 


Acknowledgment in representative capacity:


 


	
  State of

  	
  Nebraska

  	
   

  	
  )

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ) ss.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  County of

  	
  Kimball

  	
   

  	
  )

  	
   

  
						



 


This instrument was acknowledged before me on


 


	
   

  	
  by

  	
  Bruce F. Evertson 

  	
   as

  



 


	
  President

  	
   of

  	
  Evertson Management
  Inc., Managing Member of Evertson Energy Partners, LLC.

  	
   

  



 


	
  (Seal, if any)

  	
   

  
	
   

  	
   

  
	
   

  	
  Title (and Rank)

  	
   

  
	
   

  	
   

  
	
   

  	
  My commission
  expires:

  	
   

  
				



 


19

















 


Acknowledgment in representative capacity:


 


	
  State of

  	
  Colorado

  	
   

  	
  )

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  ) ss.

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  County of

  	
  Denver

  	
   

  	
  )

  	
   

  
						



 


This instrument was acknowledged before me on


 


	
   

  	
  by

  	
  Karl F. Arleth

  	
   as

  



 


	
  President

  	
   of

  	
  Teton Energy
  Corporation, Manager of Teton Williston, LLC

  	
   

  



 


	
  (Seal, if any)

  	
   

  
	
   

  	
   

  
	
   

  	
  Title (and Rank)

  	
   

  
	
   

  	
   

  
	
   

  	
  My commission
  expires:

  	
   

  
				



 


20

















 


Exhibit
“A”


Attached
to and made a part of that certain Joint Operating Agreement dated May 

22, 2006 by and between Evertson Operating Company, American Oil and Gas, 

Inc., and Teton Williston, LLC.


 


1.     Description of
Lands subject to this Agreement:


Township
155 North, Range 97 West


Sections:
1-9


Township
155 North, Range 98 West


Sections:
1-12


Township
155 North, Range 99 West


Sections:
1, 2, 11, 12


Township
156 North, Range 96 West


Sections:
5, 6


Township
156 North, Range 97 West


Sections:
All


Township
156 North, Range 98 West


Sections:
All


Township
156 North, Range 99 West


Sections:
1-4, 9-15, 23-26, 35, 36


Township
157 North, Range 96 West


Sections:
4-9, 16-23, 26-35


Township
157 North, Range 97 West


Sections:
All


Township
157 North, Range 98 West


Sections:
1-3, 10-15, 22-36


Township
158 North, Range 96 West


Sections:
28-33


Township
158 North, Range 97 West


Sections:
25-36


Township
158 North, Range 98 West


Sections:
25-27, 34-36


All
located in Williams County, North Dakota


 


2.     Restrictions, if
any, as to depths, formations and substances:


None


 


3.     Parties to this
Agreement with addresses and telephone numbers for notice purposes:


 


Evertson
Operating Company, Inc.


and


Evertson
Energy Partners, LLC


4362
East Highway 30


P.O. Box
397


Kimball,
Nebraska, 69145


(308)
235-4871


(308)
235-2800 Fax


Attn:
Bruce Evertson


bruce@evertson.com


 


American
Oil and Gas, Inc.


1050
Seventeenth Street, Suite 2400


Denver,
Colorado 80202


(303)
595-0125


(303)
595-0709 Fax


Attn:
Pat O’Brien


pobrien@americanoilandgasinc.com


 


Teton
Williston, LLC


410
Seventeenth Street, Suite 1850


Denver,
Colorado 80202


(303)
565-4600


(303)
565-4606


 

















 


Attn: Karl Arleth


kfarleth@teton-energy.com


 


4.     Percentages or
Fractional interests of the Parties to this Agreement:


	
  American
  Oil and Gas, Inc.

  	
  50% Working Interest

  
	
  Evertson
  Energy Partners, LLC.

  	
  25% Working Interest

  
	
  Teton
  Williston, LLC

  	
  25% Working Interest

  



 


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


All current
leases and/or interests owned by the parties within the lands 


subject
to this Agreement and all future leases and/or interests acquired 


pursuant
to the Area of Mutual Interest provision of that certain Purchase 


and Sale
Agreement between the Parties, covering the subject lands 


and
dated October 11, 2005


 


6.     Burdens on
Production:


Those
provided for in that certain Purchase and Sale Agreement between the 


Parties,
covering the subject lands and dated October 11, 2005


 

















 


	
   

  	
   

  	
  COPAS  1984  ONSHORE

  
	
   

  	
   

  	
  Recommended by the Council

  
	
   

  	
   

  	
  of Petroleum Accountants

  
	
   

  	
   

  	
  Societies

  



 


EXHIBIT  “ C ”


 


Attached to and made a part of that certain
Operating Agreement dated May 22, 2006, by and between Evertson Operating Company,
Inc., as “Operator”, and American Oil and Gas, Inc., and Teton Williston, LLC,
as “Non-Operators”.


 


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 thebilling 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 thirty (30) 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 Wallstreet Journal Primeon the first day of the month in which
delinquency occurs plus 2% 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.


 


COPYRIGHT © 1985 by the Council of Petroleum
Accountants Societies.


 


1

















 


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 unless agreed to
by the Operator. The audits shall not be conducted more than once each yearwithout prior approval of Operator,
except upon the resignation or removal of the Operator, and shall be madeat 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 Royalties


 


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


 


3.                                      Labor


 


A.                                   (1)                                  Salaries and wages of Operator’s field
employees directly employed on the Joint Property in the conduct of Joint Operations.


 


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


 


(3)                                  Salaries and wages of Technical Employees
directly employed 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.


 


B.                                   Operator’s cost of holiday, vacation, sickness
and disability benefits and other customary allowances paid to employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II. Such costs under this Paragraph 3B may be
charged on a “when and as paid basis” or by “percentage assessment” on the amount of salaries and wages chargeable
to the Joint Account under Paragraph 3A of this Section II. If percentage assessment is used, the rate shall be based on the Operator’s
cost experience.


 


C.                                     Expenditures or contributions made pursuant to
assessments 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.


 


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


 


4.                                      Employee Benefits


 


Operator’s
current costs or established plans for employees’ group life insurance,
hospitalization, pension, retirement,  stock purchase, thrift, bonus, and other benefit plans of a like nature,
applicable to Operator’s labor cost chargeable to the Joint Account under Paragraphs 3A and 3B of
this Section II shall be Operator’s actual cost not to exceed the percentmost recently recommended by the Council
of Petroleum Accountants Societies.


 


2

















 


5.                                      Material


 


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


 


6.                                      Transportation


 


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


 


A.                                   If Material is moved to the Joint Property
from the Operator’s warehouse or other properties, no charge shall be made to the Joint Account for a distance
greater than the distance from the nearest reliable supply store where likematerial 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 normallyavailable, or railway receiving point
nearest the Joint Property unless agreed to by the Parties. No charge shall bemade to the Joint Account for moving
Material to other properties belonging to Operator, unless agreed to by theParties.


 


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.  


 


7.                                      Services


 


The
cost of contract services, equipment and utilities provided by outside sources,
except services excluded by Paragraph  10 of Section II and Paragraph i, ii, and iii, of Section III.  The cost of professional consultant services
and contract services of
technical personnel directly engaged on the Joint Property if such charges are
excluded from the overhead rates.
The cost of professional consultant services or contract services of technical
personnel not directly engaged on the Joint Property shall not be charged to the Joint Account unless
previously agreed to by the Parties.


 


8.                                      Equipment and Facilities
Furnished By Operator


 


A.                                   Operator shall charge the Joint Account for
use of Operator owned equipment and facilities at rates commensurate with costs of ownership and operation. Such
rates shall include costs of maintenance, repairs, other operating expense, insurance, taxes, depreciation, and
interest on gross investment less accumulated depreciation not to exceed Ten percent (10%) per annum. Such rates
shall not exceed average commercial rates currently prevailing in the immediate area of the Joint Property.


 


B.                                     In lieu of charges in Paragraph 8A above,
Operator may elect to use average commercial rates prevailing in the immediate area of the Joint Property less
20%.  For automotive equipment, Operator
may elect to use rates published
by the Petroleum Motor Transport Association.  


 


9.                                      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 as soon as practicable after a report thereof has been received by
Operator.  


 


10.                               Legal Expense


 


All
regulatory expense and all expense of handling, investigating and settling
litigation or claims, compliance with State and/or Federal rules and
regulations, acquisition of the title materials and examination of title, 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, except that no charge for
services of Operator’s legal staff or fees or expense of outside attorneys shall be made unless
previously agreed to by the Parties.  All
costs, whether legal, professional or otherwise, incurred in compliance with
state and/or federal rules and regulations with respect to unitization,
spacing, proration, and production shall constitute a direct charge.


 


11.                               Taxes


 


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


 


3

















 


12.                               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.  


 


13.                               Abandonment and Reclamation


 


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


 


14.                               Communications


 


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



 


15.                               Other Expenditures


 


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


 


III.  OVERHEAD


 


1.                                      Overhead - Drilling and
Producing Operations


 


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


 


( X ) Fixed Rate Basis, Paragraph lA, or


 


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 inthe overhead rates provided for in the
above selected Paragraph of this Section III unless such cost and expense areagreed to by the Parties as a direct
charge to the Joint Account.


 


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


 


( X ) shall not be covered by the overhead rates.


 


iii.                                    The salaries, wages and Personal Expenses of
Technical Employees 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:


 


( X ) shall be covered by the overhead rates,  except that the time of Operator’s Sr.
Operations Engineer, Phil Kriz, while directly employed in the operation of the
Joint Property, shall be chargeable up to but not to exceed five (5) days per
month.


 


A.                                                                                   Overhead - Fixed Rate Basis


 


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


 


Drilling Well Rate $  refer to Article XVI of the Joint Operating
Agreement

(Prorated for less than a full month)


 


Producing Well Rate $  refer to Article XVI of the Joint Operating
Agreement


 


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


 


(a)                                  Drilling Well Rate


 


(1)                                  Charges for drilling wells shall begin on the
date the well is spudded and terminate on the date the drilling rig, completion
rig, or other units used in completion of the well is released, whichever


 


4

















 


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.


 


(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.  


 


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 


 


5

















 


Account for overhead based on the following rates for any Major Construction
project in excess of $     *50,000.00**:


 


A.           5% of first $100,000 or total cost if less, plus


 


B.             3% of costs in excess of $100,000 but less
than $1,000,000, plus


 


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


 


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


 


3.                                      Catastrophe Overhead


 


To compensate Operator for
overhead costs incurred in the event of expenditures resulting from a single
occurrence due to oil spill, blowout, explosion, fire, storm, hurricane, or
other catastrophes as agreed to by the Parties, which 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.           5% of total costs through $100,000; plus


 


B.             3% of total costs in excess of $100,000 but
less than $1,000,000; plus


 


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


 


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


 


4.                                      Amendment of Rates


 


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


 


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


 


Operator is responsible for Joint Account
Material and shall make proper and timely charges and credits for all Material
movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator’s option,
such Material may be supplied by the Non-Operator. Operator shall make timely
disposition of idle and/or surplus
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, Ohioand casing from Youngstown, Ohio.



 


(b)                                 For grades which are special to one mill only,
prices shall be computed at the mill base of that mill plus transportation cost from that mill to the
railway receiving point nearest the Joint Property as provided above in Paragraph 2.A.(1)(a). For transportation
cost from points other than Eastern mills, the 30,000


 


6

















 


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
Lorain, Ohio.


 


(b)                                 Line Pipe movements (except size 24 inch OD)
and larger with walls 3⁄4 inch and over) less than 30,000 pounds shall be priced at Eastern mill
published carload base prices effective as of date of shipment, plus 20 percent, plus transportation costs
based on freight rates as set forth under provisions of tubular goods pricing in Paragraph A.(1)(a) as
provided above. Freight charges shall be calculated from Lorain, Ohio.


 


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


 


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


 


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


 


(4)                                  Unused new Material, except tubular goods,
moved from the Joint Property shall be priced at the current new price, in
effect on date of movement, as listed by a reliable supply store nearest the
Joint Property, 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.(l) and (2).


 


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.


 


7

















 


(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 actual third-party costs incurred.


 


(2)                                  Material involving erection costs shall be
charged at actual third-party costs incurred. NOTWITHSTANDING ANYTHING
CONTAINED HEREIN, THE PRICE ON USED MATERIALS SHALL NOT EXCEED CURRENT MARKET PRICE FOR COMPARABLE MATERIAL.


 


3.                                      Premium Prices


 


Whenever Material is not
readily obtainable at published or listed prices because of national
emergencies. strikes or other  unusual causes over which the Operator has no control, the Operator may
charge the Joint Account for the required 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 billingNon-Operators for such Material.  Each Non-Operator shall have the right, by so
electing and notifying Operator within ten days after receiving notice from Operator, to furnish in kind all or
part of his share of such Material suitable for use and acceptable to Operator.  


 


4.                                      Warranty of Material
Furnished By Operator


 


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


 


V. INVENTORIES


 


The Operator shall maintain detailed records
of Controllable Material.


 


1.                                      Periodic Inventories, Notice
and Representation


 


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


 


2.                                      Reconciliation and Adjustment
of Inventories


 


Adjustments to the Joint Account
resulting from the reconciliation of a physical inventory shall be made within
six  months following the
taking of the inventory. Inventory adjustments shall be made by Operator to the
Joint Account for  


 


8

















 


overages
and shortages, but, Operator shall be held accountable only for shortages due
to lack of reasonable diligence.


 


3.                                      Special Inventories


 


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


 


4.                                      Expense of Conducting
Inventories


 


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


 


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


 


9

















 


EXHIBIT “D”


 


INSURANCE REQUIREMENTS ATTACHED TO AND MADE A PART OF THE JOINT
OPERATING AGREEMENT DATED MAY 22, 2006 BETWEEN EVERTSON OPERATING COMPANY,
INC., (Operator) AMERICAN OIL AND GAS INC., (Non-Operator), AND TETON
WILLISTON, LLC (Non-Operator).


 


Operator shall carry insurance
for the benefit of the joint account covering Operator’s operations upon the
Unit Area subject to the Joint Operating Agreement to which this Exhibit “ D “
is attached as follows:


 


(a)                                  Workmen’s
compensation insurance in accordance with the requirements of the laws of the
State or States where work is conducted and employers liability insurance of
Five Hundred Thousand Dollars ($500,000.00) bodily injury by accident and Five
Hundred Thousand Dollars ($500,000.00) bodily injury by disease per employee,
with a policy limit of Five Hundred Thousand Dollars ($500,000.00) for bodily
injury by disease.


 


(b)                                 Public
liability insurance with limits of One Million Dollars ($1,000,000) as to any
one occurrence.


 


(c)                                  Automobile
public liability insurance with a combined single limit of up to One Million
Dollars ($1,000,000) per accident.


 


(d)                                 Umbrella
catastrophe liability of Four Million Dollars ($4,000,000) each occurrence and
Ten Million Dollars ($4,000,000) aggregate.


 


Each policy of insurance issued
pursuant to the provisions of (a), (b), (c) or (d) of this section shall
provide by endorsement or otherwise that the provisions of the policy are
extended to cover the interest of the Non-Operator for whom the assured is
acting as Operator, agent, or contractor under contract, but only with respect
to operations conducted by named assured, and shall charge the premiums for all
such insurance to the joint account.


 


Operator carries Control of
Well Insurance covering his proportionate share of expenses involved in
controlling a blowout, the expense of redrilling, ongoing producing operations
and certain other related costs. Coverage under this insurance is available to
non-operating working interest owners. Such insurance is optional, however, and
if not rejected by the non-operating working interest owners prior to spud
date, they will be billed accordingly. Any working interest owner rejecting
above coverage shall be responsible for his proportionate share of such loss,
anything in this agreement to the contrary notwithstanding.


 


Operator shall furnish, upon
request, to Non-Operators a certificate covering each policy of insurance
issued pursuant to this section.


 

















 


EXHIBIT “E”


TO OPERATING AGREEMENT


 


 


GAS
BALANCING AGREEMENT


 


This Gas
Balancing Agreement is between Evertson Operating Company, Inc. (the “Operator”)
and the other signatory parties to the Agreement (the “Non-Operators”).  Operator and Non-Operators are parties to a
Joint Operating Agreement dated May 22, 2006 (the “Operating Agreement”), and sometimes
collectively referred to as the “Parties”, or individually as a “Party”.


 


1.                                      Ownership
of Gas Production.


 


a.                                       It
is the intent of the Parties that each Party shall have the right to take in
kind and separately dispose of its proportionate share of gas (including
casinghead gas) produced from each formation in each well located on the
acreage (the “Contract Area”) covered by the Operating Agreement.


 


b.                                       Operator
shall control the gas production and be responsible for administering the
provisions of this Agreement and shall make reasonable efforts to deliver or
cause to be delivered gas to the Parties’ gas purchasers as may be required in
order to balance the accounts of the Parties in accordance with the provisions
of this Agreement.  For purposes of this
Agreement, Operator shall maintain production accounts of the Parties based on
the number of MMBtu’s actually contained in the gas produced from a particular
formation in a well and delivered at the outlet of lease equipment for each
Party’s account, regardless of whether sales of the gas are made on a wet or
dry basis.  All references in this
Agreement to quantity or volume shall refer to the number of MMBtu’s contained
in the gas stream.  Toward this end,
Operator shall periodically determine or cause to be determined the Btu content
of gas produced from each formation in each well on a consistent basis and
under standard conditions pursuant to any method customarily used in the
industry.


 


2.                                      Balancing
of Production Accounts.


 


a.                                       Any
time a Party, or a Party’s purchaser, is not taking or marketing its full share
of gas produced from a particular formation in a well (a “Non-Marketing Party”),
the remaining Parties (the “Marketing Parties”) shall have the right, but not
the obligation, to produce, take, sell, and deliver for the Marketing Parties’
accounts, in addition to the full share of gas to which the Marketing Parties
are otherwise entitled, all or any portion of the gas attributable to a
Non-Marketing Party.  (Gas attributable
to a Non-Marketing Party, taken by a Marketing Party, is referred to in this
Agreement as “Overproduction”).  If there
is more than one Marketing Party taking gas attributable to a Non-Marketing
Party, each Marketing Party shall be entitled to take a Non-Marketing Party’s
gas in the ratio that the Marketing Party’s interest in production bears to the
total interest in production of all Marketing Parties.


 


b.                                       A
Party that has not taken its proportionate share of gas produced from any
formation in a well (an “Underproduced Party”) shall be credited with gas in
storage equal to its share of gas produced but not taken, less its share of gas
used in lease operations, vented or lost (the “Underproduction”).  The Underproduced Party, on giving timely
written notice to Operator, shall be entitled, on a monthly basis beginning the
month following receipt of notice, to produce, take, sell, and deliver, in
addition to the full share of gas to which that Party is otherwise entitled, a
quantity of gas (“Make-up Gas”) equal to 25 percent (25%) of the total share of
gas attributable to all Parties having cumulative Overproduction (individually
called an “Overproduced Party”).  The
Make-up Gas shall be credited against the Underproduced Party’s accrued
Underproduction in order of accrual. 
Notwithstanding the foregoing and subject to subsection (e) below:  (i) an Overproduced Party shall never be
obligated to reduce its takes to less than 75 percent (75%) of the quantity to
which the Party is otherwise entitled.


 


c.                                       If
there is more than one Underproduced Party desiring Make-up Gas, each
Underproduced Party shall be entitled to Make-up Gas in the ratio that the
Party’s interest in production bears to the total interest in production of all
Parties then desiring Make-up Gas.  Any


 

















 


portion of the
Make-up Gas to which an Underproduced Party is entitled and which is not taken
by the Underproduced Party may be taken by any other Underproduced Parties.


 


d.                                       If
there is more than one Overproduced Party required to furnish Make-up Gas, each
Overproduced Party shall furnish Make-up Gas in the ratio that the Party’s
interest in production bears to the total interest in production of all Parties
then required to furnish Make-up Gas. 
Except as provided in (e) below, each Overproduced Party in any
formation in a well shall be entitled, on a monthly basis, to take its full
share of current production less its share of the Make-up Gas then being
produced from the particular formation in the well in which it is overproduced.


 


e.                                       If
Operator, in good faith, believes an Overproduced Party has recovered one
hundred percent (100%) of that Overproduced Party’s share of the recoverable
reserves from a particular formation in a well, that Overproduced Party, on
being notified in writing of that fact by Operator, shall cease taking gas from
the formation in the well and the remaining Parties shall be entitled to take
one hundred percent (100%) of the production until the accounts of the Parties
are balanced.  Thereafter, the Overproduced
Party shall again have the right to take its share of the remaining production,
if any, in accordance with the provisions in this Agreement.  Notwithstanding anything to the contrary,
after an Overproduced Party has recovered one hundred percent (100%) of its
full share of the recoverable reserves, as determined by Operator from a
particular formation in a well, the Overproduced Party may continue to produce
if the continued production is: (i) necessary for lease maintenance purposes;
or, (ii) permitted by Parties owing at least a majority in interest who have
not produced one hundred percent (100%) of their recoverable reserves from the
formation in the well after written ballot conducted by Operator.


 


3.                                      In
Kind or Cash Balancing Upon Depletion.


 


a.                                       If
gas production from a particular formation in a well ceases and no attempt is
made to restore production within sixty (60) days, Operator shall distribute,
within ninety (90) days of the date the well last produced gas from that
formation, a statement of net unrecouped Underproduction and Overproduction and
the months and years in which the unrecouped production accrued (the “Final
Accounting”).


 


b.                                       Each
Overproduced Party shall have the option to either furnish each Underproduced
Party Make-up Gas of like vintage from other sources or remit to Operator for
disbursement to the Underproduced Parties, a sum of money (which sum shall not
include interest) equal to the amount actually received or constructively
received, under subparagraph (e) below, by Overproduced Party for sales during
the month(s) of Overproduction, calculated in order of accrual, less applicable
taxes, royalties, and reasonable costs of marketing and transporting the gas
for which the Overproduced Party was actually paid.  The remittance shall be based on the number
of MMBtu’s of Overproduction and shall be accompanied by a statement showing
the volumes and prices for each month with accrued unrecouped
Overproduction.  If Make-up Gas is
delivered it shall be supplied from sources determined solely by the
Overproduced Party.


 


c.                                       Within
sixty (60) days of receipt of any remittance by Operator from an Overproduced
Party, Operator shall disburse those funds to the Underproduced Party(ies) in
accordance with the Final Accounting. 
Operator assumes no liability with respect to any payment unless the
payment is attributable to Operator’s overproduction; it being the intent of
the parties that each Overproduced Party shall be solely responsible for
reimbursing each Underproduced Party in accordance with the provisions of this
Agreement.  If any Party fails to pay any
sum due under the terms of this Agreement after demand by the Operator, the
Operator may turn responsibility for the collection of that sum to the Party or
Parties to whom it is owed, and Operator shall have no further responsibility
for collection.


 


d.                                       In
determining the amount of Overproduction for which settlement is due,
production taken during any month by an Underproduced Party in excess of the
Underproduced Party’s share shall be treated as Make-up and shall be applied to
reduce prior deficits in the order of accrual of those deficits.


 


e.                                       An
Overproduced Party that took gas in kind for its own use, sold gas to an


 

















 


affiliate, or
otherwise disposed of gas in other than a cash sale shall pay for that gas at
market value at the time it was produced, even if the Overproduced Party sold
the gas to an affiliate at a price greater or lesser than market value.


 


f.                                         If
any refunds are later required by any governmental authority, each Party shall
be accountable for its respective share of any refunds, as finally balanced.


 


4.                                      Risk
of Loss on Underproduced Party.


 


If a producing
or producible zone prematurely ceases producing or is not producible prior to
the complete and normal depletion of the zone due to mechanical or other problems,
the Underproduced Party bears the loss of its Underproduction to the extent
that the Underproduced Party can not prove by clear and convincing evidence
that the relevant zone could not have produced adequate gas to settle the
imbalances; in which case, an Overproduced Party shall not be obligated to make
any kind of settlement (in kind or otherwise) with the Underproduced Party.


 


5.                                      Deliverability
Tests.


 


At the request
of any Party, Operator may produce the entire well stream for a deliverability
test not to exceed seventy-two (72) hours in duration (or such longer period of
time as may be mutually agreed upon by the Parties) if required under the
requesting Party’s gas sales or transportation contract.


 


6.                                      Nominations.


 


Each Party
shall, on a monthly basis, give Operator sufficient time and data either to
nominate the Party’s respective share of gas to the transporting pipeline(s)
or, if Operator is not nominating the Party’s gas, to inform Operator of the
manner in which to dispatch the Party’s gas. 
Except as, and to the extent caused by Operator’s gross negligence or
willful misconduct, Operator shall not be responsible for any fees and/or
penalties associated with imbalances charged by any pipeline to any
Underproduced or Overproduced Parties.


 


7.                                      Statements.


 


On or before
the 20th day of the calendar month following the calendar month of production,
each Party taking gas shall furnish or cause to be furnished to Operator a
statement of gas taken, expressed in terms of MMBtu’s.  If actual volume information sufficient to
prepare the statement is not made available to the taking Party in sufficient
time to prepare it, the taking Party shall nevertheless furnish a statement of
its good faith estimate of the volumes taken. 
Within fifteen (15) days of the receipt of all statements, Operator
shall furnish each Party a statement of the gas balance among the Parties,
including the total quantity of gas produced from each formation in each well,
the portion used in operations, vented or lost, and the total quantity
delivered for each Party’s account.  Any
error or discrepancy in Operator’s monthly statement shall be promptly reported
to Operator and Operator shall make a proper adjustment within fifteen (15)
days after final determination of the correct quantities involved; provided,
however, if no errors or discrepancies are reported to Operator within thirty
(30) days from the date of any statement, the statement shall be conclusively
deemed to be correct.  Additionally,
within sixty (60) days from the end of each calendar year, Non-operators shall
furnish Operator, for the sole purpose of establishing records sufficient to
verify cash balancing values, a statement reflecting amounts actually received
or constructively received under paragraph 3.(e), on a monthly basis, for the
calendar year preceding the immediately concluded calendar year.  Operator may prohibit a Party from producing
gas for its account during any month when the Party is delinquent in furnishing
the monthly or annual statements.


 


8.                                      Payment
of Taxes.


 


Each Party
taking gas shall pay or cause to be paid any and all production, severance,
utility, sales, excise, or other taxes due on that gas.


 

















 


9.                                      Operating
Expenses.


 


The operating
expenses are to be borne in the manner provided in the Operating Agreement,
regardless of whether all Parties are selling or using gas or whether the sale
and use of each are in proportion to their respective interests in the gas.


 


10.                               Overproducing
Allowable.


 


Each Party
shall give Operator sufficient time and data to enable Operator to make
appropriate nominations, forecasts and/or filings with the regulatory bodies
having jurisdiction to establish allowables. 
Each Party shall at all times regulate its takes and deliveries from the
Contract Area so that the well(s) subject to this Agreement shall not curtailed
and/or shut-in for overproducing the assigned allowable production by the
regulatory body having jurisdiction.


 


11.                               Payment
of Leasehold Burdens.


 


At all times
while gas is produced from the Contract Area covered by the Operating
Agreement, each Party agrees to make appropriate settlement of all royalties,
overriding royalties and other payments out of or in lieu of production for
which a Party is responsible, just as if the Party were taking or delivering to
a purchaser the Party’s full share, and the Party’s full share only, of the gas
production, exclusive of gas used in operations, vented, or lost.  Each Party agrees to indemnify and hold each
other Party harmless from any and all claims relating to the payment of
leasehold burdens.


 


12.                               Application
of Agreement.


 


The provisions
of this Agreement shall be separately applicable and shall constitute a
separate agreement with respect to gas produced from each formation in each
well located on the Contract Area.


 


13.                               Term.


 


This Agreement
shall terminate when gas production under the Operating Agreement permanently
ceases and the accounts of the parties are finally settled in accordance with
its provisions.


 


14.                               Operator’s
Liability.


 


Except as
otherwise provided in this Agreement, Operator is authorized to administer the
provisions of this Agreement, but shall have no liability to the other Parties
for losses sustained or liability incurred which arise out of or in connection
with the performance of Operator’s duties (including Operator’s negligence)
except as may result from Operator’s gross negligence or willful misconduct.


 


15.                               Audits.


 


Any
Underproduced Party shall have the right for a period of ninety (90) after
receipt of payment pursuant to a Final Accounting and after giving written
notice to all Parties, to audit an Overproduced Party’s accounts and receipts
relating to a payment.  Any Overproduced
Party shall have the right for a period of ninety (90) after tender of payment
for unrecouped volumes and on giving written notice to all Parties, to audit an
Underproduced Party’s records as to volumes. 
The Party conducting the audit shall bear the costs of the audit.  Additionally, Operator shall have the right
for a period of ninety (90) after receipt of an annual statement from a
Non-operator, under paragraph 6. after giving written notice, to audit the
affected Non-operator’s accounts and records relating to a payment.  The costs of the audit shall be borne by the
joint accounts.


 


16.                               Operator’s
Fees.


 


Operator shall
charge the joint account of the Parties $100.00 per formation in each well, per
month, for each month during which Operator maintains balancing accounts for a
well.


 

















 


17.                               Liquefiable
Hydrocarbons Not Covered Under Agreement.


 


The Parties
shall share proportionately in and own all liquid hydrocarbons recovered with
the gas by lease equipment, in accordance with their respective interests.


 


Nothing in
this Gas Balancing Agreement shall cause the Operator to produce a well or
reservoir at higher than maximum allowable rates which might have been
established by a regulatory authority.


 


18.                               Conflict.


 


If there is a
conflict between the terms of this Agreement and the terms of any gas sales
contract entered into by any Party covering the Contract Area subject to the
Operating Agreement, the terms of this Agreement shall govern.


 


This Agreement
is executed by Operator and Non-Operators and shall be deemed effective for all
purposes as of May 22, 2006.


 


	
   

  	
  Operator

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
    Evertson
  Operating Company, Inc.

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Bruce F.
  Evertson

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Bruce F. Evertson

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Type or
  print name

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
  President

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or
  S.S. No.

  	
    47-0794660

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Non-Operators

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
    American
  Oil and Gas, Inc.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Patrick
  D. O’Brien

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
    Patrick
  D. O’Brien

  	
   

  	
   

  
	
   

  	
   

  	
  Type or
  print name

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
  CEO

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or
  S.S. No.

  	
    88-0451554

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
    Evertson
  Energy Partners, LLC

    By Evertson Management Inc.,

    Managing Member

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Bruce F.
  Evertson

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
    Bruce
  F. Evertson

  	
   

  	
   

  
	
   

  	
   

  	
  Type or
  print name

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
  President

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or
  S.S. No.

  	
    71-0897715

  	
   

  	
   

  
													



 

















 


	
   

  	
   

  	
    Teton
  Williston, LLC

    By Teton Energy Corporation,

    Its Manager

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
  /s/ Karl F.
  Arleth

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
    Karl
  F. Arleth

  	
   

  	
   

  
	
   

  	
   

  	
  Type or
  print name

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
  President

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Tax ID or
  S.S. No.

  	
   

  	
   

  	
   

  
							



 

















 


EXHIBIT “F”


NON-DISCRIMINATION AND CERTIFICATION OF NON-SEGREGATED FACILITIES


 


Attached to and made a part of that certain Operating Agreement dated
May 22, 2006, by and between Evertson Operating Company, as Operator, and
American Oil and Gas, Inc., and Teton Williston, LLC as Non-Operators.


 


	
  (1)

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

  
	
   

  	
   

  
	
  (2)

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

  
	
   

  	
   

  
	
  (3)

  	
  The Operator
  will send to each labor union or representative of workers with which he has
  a collective bargaining agreement or other contract or understanding, a
  notice, to be provided by the agency contracting officer, advertising the
  labor union or workers’ representative of the Operators’ commitments under
  Section 202 of Executive Order 11246 of September 24, 1965, and shall post
  copies of the notice to conspicuous places available to employees and
  applicants for employment.

  
	
   

  	
   

  
	
  (4)

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

  
	
   

  	
   

  
	
  (5)

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

  
	
   

  	
   

  
	
  (6)

  	
  In the event
  of the Operator’s non-compliance with the nondiscrimination clauses of this
  contract or with any of such rules, regulations, or orders, this contract may
  be cancelled, terminated or suspended in whole or in part and the Operator
  may be declared ineligible for further Government contracts in accordance
  with procedures authorized in Executive Order No. 11246 of September 24,
  1965, and such other sanctions may be imposed and remedies invoked as
  provided in Executive Order No. 11246 of September 24, 1965, or by rule,
  regulation or order of the Secretary of Labor, or as otherwise provided by
  law.

  
	
   

  	
   

  
	
  (7)

  	
  The Operator
  will include the provisions of Paragraphs (1) through (7) in every
  subcontract or purchase order unless exempted by rules, regulations or orders
  of the Secretary of Labor issued pursuant to Section 204 of Executive Order
  No. 11246 of September 24, 1965, so that such provision will be binding upon
  each subcontractor or vender. The Operator will take such action with respect
  to any subcontract or purchase order as the contracting agency may direct as
  a means of enforcing such provisions including sanctions for non-compliance;
  provided. However, that in the event the Operator becomes involved in, or is
  threatened with, litigation with a subcontractor or vendor as a result of
  such direction by the contracting agency, the Operator may request the United
  States to enter into such litigation to protect the interests of the United
  States.

  



 

















 


MODEL FORM RECORDING SUPPLEMENT TO


OPERATING AGREEMENT AND FINANCING STATEMENT


 


THIS
AGREEMENT, entered into by and between Evertson Operating Company, Inc.,
hereinafter referred to as “Operator,” and the signatory party or parties other
than Operator, hereinafter referred to individually as “Non-Operator,” and
collectively as “Non-Operators.”


 


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” (said land, Leases and
Interests being hereinafter called the “Contract Area”), and in any instance in
which the Leases or Interests of a party are not of record, the record owner
and the party hereto that owns the interest or rights therein are reflected on
Exhibit “A”;


 


WHEREAS, the
parties hereto have executed an Operating Agreement dated May 22, 2006 (herein
the “Operating Agreement”), covering the Contract Area for the purpose of
exploring and developing such lands, Leases and Interests for Oil and Gas; and


 


WHEREAS, the
parties hereto have executed this agreement for the purpose of imparting notice
to all persons of the rights and obligations of the parties under the Operating
Agreement and for the further purpose of perfecting those rights capable of
perfection.


 


NOW,
THEREFORE, in consideration of the mutual rights and obligations of the parties
hereto, it is agreed as follows:


 


1.                                       This
agreement supplements the Operating Agreement, which Agreement in its entirety
is incorporated herein by reference, and all terms used herein shall have the
meaning ascribed to them in the Operating Agreement.


 


2.                                       The
parties do hereby agree that:


 


	
  A.

  	
  The Oil and
  Gas Leases and/or Oil and Gas Interests of the parties comprising the
  Contract Area shall be subject to and burdened with the terms and provisions
  of this agreement and the Operating Agreement, and the parties do hereby
  commit such Leases and Interests to the performance thereof.

  
	
   

  	
   

  
	
  B.

  	
  The
  exploration and development of the Contract Area for Oil and Gas shall be
  governed by the terms and provisions of the Operating Agreement, as
  supplemented by this agreement.

  
	
   

  	
   

  
	
  C.

  	
  All costs
  and liabilities incurred in operations under this agreement and the Operating
  Agreement shall be borne and paid, and all equipment and materials acquired
  in operations on the Contract Area shall be owned, by the parties hereto, as
  provided in the Operating Agreement.

  
	
   

  	
   

  
	
  D.

  	
  Regardless
  of the record title ownership to the Oil and Gas Leases and/or Oil and Gas
  Interests identified on Exhibit “A,” all production of Oil and Gas from the
  Contract Area shall be owned by the parties as provided in the Operating
  Agreement; provided nothing contained in this agreement shall be deemed an
  assignment or cross-assignment of interests covered hereby.

  
	
   

  	
   

  
	
  E.

  	
  Each party
  shall pay or deliver, or cause to be paid or delivered, all burdens on its
  share of the production from the Contract Area as provided in the Operating
  Agreement.

  
	
   

  	
   

  
	
  F.

  	
  An
  overriding royalty, production payment, net profits interest or other burden
  payable out of production hereafter created, assignments of production given
  as security for the payment of money and those overriding royalties,
  production payments and other burdens payable out of production heretofore
  created and defined as Subsequently Created Interests in the Operating
  Agreement shall be (i) borne solely by the party whose interest is burdened
  therewith, (ii) subject to suspension if a party is required to assign or
  relinquish to another party an interest which is subject to such burden, and
  (iii) subject to the lien and security interest hereinafter provided if the
  party subject to such burden fails to pay its share of expenses chargeable
  hereunder and under the Operating Agreement, all upon the terms and
  provisions and in the times and manner provided by the Operating Agreement.

  
	
   

  	
   

  
	
  G.

  	
  The Oil and
  Gas Leases and/or Oil and Gas Interests which are subject hereto may not be
  assigned or transferred except in accordance with those terms, provisions and
  restrictions in the Operating Agreement regulating such transfers.

  
	
   

  	
   

  
	
   

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

  
	
   

  	
   

  
	
  H.

  	
  The parties
  shall have the right to acquire an interest in renewal, extension and
  replacement leases, leases proposed to be surrendered, wells proposed to be
  abandoned, and interests to be relinquished as a result of non-participation
  in subsequent operations, all in accordance with the terms and provisions of
  the Operating Agreement.

  



 

















 


	
  I.

  	
  The rights
  and obligations of the parties and the adjustment of interests among them in
  the event of a failure or loss of title, each party’s right to propose
  operations, obligations with respect to participation in operations on the
  Contract Area and the consequences of a failure to participate in operations,
  the rights and obligations of the parties regarding the marketing of
  production, and the rights and remedies of the parties for failure to comply
  with financial obligations shall be as provided in the Operating Agreement.

  
	
   

  	
   

  
	
  J.

  	
  Each party’s
  interest under this agreement and under the Operating Agreement shall be
  subject to relinquishment for its failure to participate in subsequent
  operations and each party’s share of production and costs shall be
  reallocated on the basis of such relinquishment, all upon the terms and
  provisions provided in the Operating Agreement.

  
	
   

  	
   

  
	
  K.

  	
  All other
  matters with respect to exploration and development of the Contract Area and
  the ownership and transfer of the Oil and Gas Leases and/or Oil and Gas
  Interest therein shall be governed by the terms and provisions of the
  Operating Agreement.

  



 


3.                                       The
parties hereby grant reciprocal liens and security interests as follows:


 


A.           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 and the Operating
Agreement including but not limited to payment of expense, interest and fees,
the proper disbursement of all monies paid under this agreement and the
Operating Agreement, the assignment or relinquishment of interest in Oil and
Gas Leases as required under this agreement and the Operating Agreement, and
the proper performance of operations under this agreement and the Operating
Agreement. 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 and the Operating 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 the sale of production at the wellhead), contract rights,
inventory and general intangibles relating thereto or arising therefrom, and
all proceeds and products of the foregoing.


 


B.             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 and the Operating 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 and the
Operating 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 the Operating Agreement and this instrument as to all
obligations attributable to such interest under this agreement and the
Operating Agreement whether or not such obligations arise before or after such
interest is acquired.


 


C.             To
the extent that the 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, interest 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, 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.


 


D.            If
any party fails to pay its share of expenses 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 this paragraph 3 and in the Operating Agreement, and each paying
party may independently pursue any remedy available under the Operating
Agreement or otherwise.


 


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


 


F.              The
lien and security interest granted in this paragraph 3 supplements identical
rights granted under the Operating Agreement.


 


G.             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 under this agreement and the Operating Agreement for services
performed or materials supplied by Operator.


 


H.            The
above described security will be financed at the wellhead of the well or wells
located on the Contract Area and this Recording Supplement may be filed in the
land records in the County or Parish in which the Contract Area is located, and
as a financing statement in all recording offices required under the Uniform
Commercial Code or other applicable state statutes to perfect the
above-described security interest, and any party hereto may file a continuation
statement as necessary under the Uniform Commercial Code, or other state laws.


 


2

















 


4.                                       This
agreement shall be effective as of the date of the Operating Agreement as above
recited. Upon termination of this agreement and the Operating Agreement and the
satisfaction of all obligations thereunder, 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 the request of Operator, if Operator has complied with all of
its financial obligations.


 


5.                                       This
agreement and the Operating 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. No sale, encumbrance, transfer or
other disposition shall be made by any party of any interest in the Leases or
Interests subject hereto except as expressly permitted under the Operating
Agreement and, if permitted, shall be made expressly subject to this agreement
and the Operating Agreement and without prejudice to the rights of the other
parties. If the transfer is permitted, the assignee of an ownership interest in
any Oil and Gas Lease shall be deemed a party to this agreement and the
Operating Agreement as to the interest assigned 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 under this agreement or the
Operating Agreement with respect to the interest transferred, including without
limitation the obligation of a party to pay all costs attributable to an
operation conducted under this agreement and the Operating Agreement in which
such party has agreed to participate prior to making such assignment, and the
lien and security interest granted by Article VII.B. of the Operating Agreement
and hereby shall continue to burden the interest transferred to secure payment
of any such obligations.


 


6.                                       In
the event of a conflict between the terms and provisions of this agreement and
the terms and provisions of the Operating Agreement, then, as between the
parties, the terms and provisions of the Operating Agreement shall control.


 


7.                                       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. In the event that any provision herein is illegal or
unenforceable, the remaining provisions shall not be affected, and shall be
enforced as if the illegal or unenforceable provision did not appear herein.


 


8.                                       Other
provisions.


 


3

















 


Candy Bussinger, who has
prepared and circulated this form for execution, represents and warrants that
the form was printed from and, with the exception(s) listed below, is identical
to the AAPL Form 610RS-1989 Model Form Recording Supplement to Operating
Agreement and Financing Statement, as published in computerized form by Forms
On-A-Disk, Inc. No changes, alterations, or modifications, other than those
made by strikethrough and/or insertion and that are clearly recognizable as
changes in Articles            ,
have been made to the form.


 


IN WITNESS WHEREOF, this agreement shall be
effective as of the  22
day of May , 2006.


 


OPERATOR


 


	
  ATTEST OR WITNESS

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   Evertson
  Operating Company, Inc.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
    Bruce
  F. Evertson

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Type or Print Name

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
    President

  
	
   

  	
  Date:

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
    P.O.
  Box 397, Kimball, NE 69145

  



 


NON-OPERATORS


 


	
  ATTEST OR WITNESS

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
    American
  Oil and Gas, Inc.

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
    Patrick
  D. O’Brien

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Type or Print Name

  
	
   

  	
  Title:

  	
   

  	
    CEO

  
	
   

  	
  Date:

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
    1050
  Seventeenth St., Ste. 1850, Denver, CO 
  80265

  



 


	
  ATTEST OR WITNESS

  	
   

  	
   

  	
    Evertson Energy Partners, LLC

  
	
   

  	
   

  	
   

  	
    By
  Evertson Management, Inc., Its Managing Member

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
    Bruce
  F. Evertson

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Type or Print Name

  
	
   

  	
  Title:

  	
   

  	
    President

  
	
   

  	
  Date:

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
    P.O.
  Box 397, Kimball, NE  69145

  
	
   

  	
   

  	
   

  	
   

  
	
  ATTEST OR WITNESS

  	
   

  	
   

  	
    Teton Williston, LLC

  
	
   

  	
   

  	
   

  	
    By
  Teton Energy Corporation, Its Manager

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
    Karl
  F. Arleth

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Type or Print Name

  
	
   

  	
  Title:

  	
   

  	
    President

  
	
   

  	
  Date:

  	
   

  	
   

  
	
   

  	
  Address:

  	
   

  	
    410
  Seventeenth St., Ste. 1850, Denver, CO 
  80265

  



 


4

















 


ACKNOWLEDGMENTS


 


NOTE:


 


The following
forms of acknowledgment are the short forms approved by the Uniform Law on
Notarial Acts. The validity and effect of these forms in any state will depend
upon the statutes of that state.


 


 


Acknowledgment in Representative Capacity


 


	
  State of
  Nebraska 

  	
  §

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  § ss.

  	
   

  
	
   

  	
   

  	
   

  
	
  County of Kimball

  	
  §

  	
   

  



 


This instrument was acknowledged before me on                                                                                                                          
by Bruce F. Evertson as President of Evertson Operating Company, Inc..


 


 


	
  (Seal, if
  any)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title (and
  Rank)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  My
  commission expires:

  	
   

  
					



 


Acknowledgment in Representative Capacity


 


	
  State of Colorado

  	
  §

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  § ss.

  	
   

  
	
   

  	
   

  	
   

  
	
  County of Denver

  	
  §

  	
   

  



 


This instrument was acknowledged before me on                                                                                                                          
by Patrick D. O’Brien as CEO of American Oil and Gas, Inc..


 


 


	
  (Seal, if
  any)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title (and
  Rank)

  	
   

  



 


5

















 


	
   

  	
   

  	
  My
  commission expires:

  	
   

  



 


 


Acknowledgment in Representative Capacity


 


	
  State of
  Nebraska

  	
  §

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  § ss.

  	
   

  
	
   

  	
   

  	
   

  
	
  County of
  Kimball

  	
  §

  	
   

  



 


This instrument was acknowledged before me on
                                                                                                                         
by Bruce F. Evertson as President of Evertson Management Inc., Managing Member
of Evertson Energy Partners, LLC.


 


 


	
  (Seal, if
  any)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title (and
  Rank)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  My
  commission expires:

  	
   

  
					



 


 


Acknowledgment in Representative Capacity


 


	
  State of Colorado

  	
  §

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  § ss.

  	
   

  
	
   

  	
   

  	
   

  
	
  County of Denver

  	
  §

  	
   

  



 


This instrument was acknowledged before me on
                                                                                                                        
by Karl F. Arleth as President of Teton Energy Corporation, Manager of Teton
Williston, LLC.


 


 


	
  (Seal, if
  any)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title (and
  Rank)

  	
   

  



 


6

















 


	
   

  	
   

  	
  My
  commission expires:

  	
   

  



 


7

















 


Exhibit “A”


Attached to and made a part of that certain
Recording Supplement to


Operating Agreement and Financing Statement


dated May 22, 2006 by and between Evertson Operating Company, American
Oil


and Gas, Inc., and Teton Williston, LLC.


 


1.              Description
of Lands subject to this Agreement:


Township 155 North, Range 97 West


Sections: 1-9


Township 155 North, Range 98 West


Sections: 1-12


Township 155 North, Range 99 West


Sections: 1, 2, 11, 12


Township 156 North, Range 96 West


Sections: 5, 6


Township 156 North, Range 97 West


Sections: All


Township 156 North, Range 98 West


Sections: All


Township 156 North, Range 99 West


Sections: 1-4, 9-15, 23-26, 35, 36


Township 157 North, Range 96 West


Sections: 4-9, 16-23, 26-35


Township 157 North, Range 97 West


Sections: All


Township 157 North, Range 98 West


Sections: 1-3, 10-15, 22-36


Township 158 North, Range 96 West


Sections: 28-33


Township 158 North, Range 97 West


Sections: 25-36


Township 158 North, Range 98 West


Sections: 25-27, 34-36


All located in Williams County, North Dakota


 


2.              Percentages
or Fractional interests of the Parties to this Agreement:


	
  American Oil and Gas, Inc.

  	
  50%
  Working Interest

  
	
  Evertson Energy Partners, LLC.

  	
  25%
  Working Interest

  
	
  Teton Williston, LLC

  	
  25%
  Working Interest