Exhibit
10.2


 


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


 


MODEL FORM
OPERATING AGREEMENT


 





 


OPERATING
AGREEMENT


 


DATED


 


February
1, 2005,


 


	
  OPERATOR

  	
  Piceance Gas Fesources, LLC, and its designated Contract Operator,

  
	
   

  	
  Orion Energy Partners, L.P.

  
	
   

  
	
  CONTRACT AREA

  
	
   

  
	
   

  
	
   

  



COUNTY OR PARISH OF Garfield, STATE OF Colorado


 


	
   

  	
  CONFIDENTIAL

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  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

  
	
   

  	
   

  	
  A. OIL AND GAS INTERESTS:

  	
   

  	
  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

  
	
   

  	
   

  	
   

  	
  1. Failure of Title

  	
   

  	
  3

  
	
   

  	
   

  	
   

  	
  2. Loss by Non-Payment or Erroneous Payment of Amount Due

  	
   

  	
  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

  
	
   

  	
   

  	
  A. INITIAL WELL:

  	
   

  	
  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

  
	
   

  	
   

  	
   

  	
  (Option 2) No Gas Balancing Agreement

  	
   

  	
  11

  
	
  VII. 

  	
   

  	
  EXPENDITURES AND LIABILITY OF PARTIES

  	
   

  	
  11

  
	
   

  	
   

  	
  A. LIABILITY OF PARTIES:

  	
   

  	
  11

  
	
   

  	
   

  	
  B. LIENS AND SECURITY INTERESTS:

  	
   

  	
  11

  
	
   

  	
   

  	
  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

















 


	
   

  	
   

  	
  D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

  	
   

  	
  15

  
	
   

  	
   

  	
  E. WAIVER OF RIGHTS TO PARTITION:

  	
   

  	
  15

  
	
   

  	
   

  	
  F. PREFERENTIAL RIGHT TO PURCHASE:

  	
   

  	
  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 Orion Energy Partners, L.P. 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.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


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.

  
	
  o

  	
  B.

  	
  Exhibit “B,” Form of Lease.

  
	
  ý

  	
  C.

  	
  Exhibit “C,” Accounting Procedure.

  
	
  ý

  	
  D.

  	
  Exhibit “D,” Insurance.

  
	
  ý

  	
  E.

  	
  Exhibit “E,” Gas Balancing Agreement.

  
	
  o

  	
  F.

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

  
	
  o

  	
  G.

  	
  Exhibit “G,” Tax Partnership.

  
	
  o

  	
  H.

  	
  Other:

  



 


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:


 


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


 


B.  Interests of Parties in Costs
and Production:


 


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


 


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, 18.75% royalty and 2.5% interest in proceeds (or
equivalent 2.5% overriding royalty interest) in favor of Lynx Energy Company,
Inc. 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 interest in said
Leaseholds shall be deemed separate leasehold interests for the purpose of this
agreement.


 


C. Subsequently Created Interests:


 


If any party has contributed
hereto a Lease or Interest that is burdened with an assignment of production
given as security for the payment of money, or if, after the date of this
agreement, any party creates an overriding royalty, production payment, net
profits interest, assignment of production or other burden payable out of
production attributable to its working interest hereunder, such burden shall be
deemed a “Subsequently Created Interest.” Further, if any party has contributed
hereto a Lease or Interest burdened with an overriding royalty, production
payment, net profits interest, or order 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 Drillsite of any proposed well prior to commencement of drilling
operations and, if a majority in interest of the Drilling Parties so request or
Operator so elects, title examination shall be made on the entire Drilling
Unit, or any portion of The Contract Area as deemed appropriate by the
Operator. 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 the 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:


 


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 under Article IV.B.l. or a loss of title under
Article IV.B.2. above, any Lease or Interest acquired by any party hereto
(other than the party whose interest has failed or was lost) during the ninety
(90) day period provided by Article IV.B.l. and Article IV.B.2. above 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:


 


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


 


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


 


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


 


C. Employees and Contractors:


 


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


 


D. Rights and Duties of Operator:


 


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


 


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


 


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


 


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” within the Contract Area. All Wells within the Contract Area will be
drilled pursuant to the terms of Article VI.B.


 


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


 


If all parties to whom such
notice is delivered elect to participate in such a proposed operation, the
parties shall be contractually committed to participate therein provided such
operations are commenced within the time period hereafter set forth, and
Operator shall, no later than ninety (90) days after expiration of the notice
period of thirty (30) days (or as promptly as practicable after the expiration
of the 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 or 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. (Also see Article XVI.E) 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 (exclusive of
Saturday, Sunday and legal holidays) after delivery of such notice, shall
advise the proposing party of its desire to (i) limit participation to such party’s
interest as shown on Exhibit “A” or (ii) carry only its proportionate part
(determined by dividing such party’s interest in the Contract Area by the
interests of all Consenting Parties in the Contract Area) of Non-Consenting
Parties’ interests, or (iii) carry its proportionate part (determined as
provided in (ii)) of Non-Consenting Parties’ interests together with all or a
portion of its proportionate part of any Non-Consenting Parties’ interests that
any Consenting Party did not elect to take. Any interest of Non-Consenting
Parties that is not carried by a Consenting Party shall be deemed to be carried
by the party proposing the operation if such party does not withdraw its
proposal. Failure to advise the proposing party within the time required shall
be deemed an election under (i). In the event a drilling rig is on location,
notice may be given by telephone, and the time permitted for such a response
shall not exceed a total of forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays). The proposing party, at its election, may withdraw
such proposal if there is less than 100% participation and shall notify all
parties of such decision within ten (10) days, or within twenty-four (24) hours
if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained,
the proposing party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as Operator
shall commence such operation within the period provided in Article VI.B.1.,
subject to the same extension right as provided therein.


 


(b) Relinquishment of
Interest for Non-Participation. The entire cost and risk of conducting such
operations shall be borne by the Consenting Parties in the proportions they
have elected to bear same under the terms of the preceding paragraph.
Consenting Parties shall keep the leasehold estates involved in such operations
free and clear of all liens and encumbrances of every kind 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, 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) 150% of each such
Non-Consenting Party’s share of the cost of any newly acquired surface
equipment beyond the wellhead connections (including but not limited to stock
tanks, separators, treaters, pumping equipment and piping), plus 100% of each
such Non-Consenting Party’s share of the cost of operation of the well
commencing with first production and continuing until each such
Non-Consenting Party’s relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party’s
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from
the beginning of the operations; and


 


(ii) 300% of
(a) that portion of the costs and expenses of drilling, Reworking,
Sidetracking, Deepening, Plugging Back, testing, Completing, and Recompleting,
after deducting any cash contributions received under Article VIII.C., and of
(b) that portion of the cost of newly acquired equipment in the well (to and
including the wellhead connections), which would have been chargeable to such
Non-Consenting Party if it had participated therein.


 


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


 


(c) Reworking,
Recompleting or Plugging Back. An election not to participate in the
drilling, Sidetracking or Deepening of a well shall be deemed an election not
to participate in any Reworking or Plugging Back operation proposed in such a
well, or portion thereof, to which the initial non-consent election applied
that is conducted at any time prior to full recovery by the Consenting Parties
of the Non-Consenting Party’s recoupment amount. Similarly, an election not to
participate in the Completing or Recompleting of a well shall be deemed an
election not to participate in any Reworking operation proposed in such a well,
or portion thereof, to which the initial non-consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party’s recoupment amount. Any such Reworking, Recompleting
or Plugging Back operation conducted during the recoupment period shall be
deemed part of the cost of operation of said well and there shall be added to
the sums to be recouped by the Consenting Parties 300% of that portion of the
costs of the Reworking, Recompleting or Plugging Back operation which would
have been chargeable to such Non-Consenting Party had it participated therein.
If such a Reworking, Recompleting or Plugging Back operation is proposed during
such recoupment period, the provisions of this Article VI.B. shall be
applicable as between said Consenting Parties in said well.


 


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


 


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


 


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


 


If and when the Consenting
Parties recover from a Non-Consenting Party’s relinquished interest the amounts
provided for above, the relinquished interests of such Non-Consenting Party
shall automatically revert to it as of 7:00 a.m. on the day following the day
on which such recoupment occurs, and, from and after such reversion, such
Non-Consenting Party shall own the same interest in such well, the material and
equipment in or pertaining thereto, and the production therefrom as such
Non-Consenting Party would have been entitled to had it participated in the
drilling, Sidetracking, Reworking, Deepening, Recompleting or Plugging Back of
said well. Thereafter, such Non-Consenting Party shall be charged with and shall
pay its proportionate part of the further costs of the operation of said well
in accordance with the terms of this agreement and Exhibit “C” attached hereto.


 


3. Stand-By Costs:
When a well which has been drilled or Deepened has reached its authorized,
depth and all tests have been completed and the results thereof furnished to
the parties, or when operations on the well have been otherwise terminated
pursuant to Article VI.F., stand-by costs incurred pending response to a party’s
notice proposing a Reworking,


 


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 the parties elect to participate in a drilling, Sidetracking, or
Deepening operation proposed pursuant to Article VI.B.l., 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.l. (“Initial Objective”). Such well shall
not be Deepened beyond the Initial Objective without first complying with this
Article to afford the Non-Consenting Parties the opportunity to participate in
the Deepening operation.


 


In the event any Consenting Party
desires to drill or Deepen a Non-Consent Well to a depth below the Initial
Objective, such party shall give notice thereof, complying with the
requirements of Article VI.B.l., to all parties (including Non-Consenting Parties).
Thereupon, Articles VI.B.l. and 2. shall apply and all parties receiving such
notice shall have the right to participate or not participate in the Deepening
of such well pursuant to said Articles 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, exclusive of Saturday, Sunday
and legal holidays, from delivery of the initial proposal, if a drilling rig is
on location for the well on which such operation is to be conducted, to deliver
to all parties entitled to participate in the proposed operation such party’s
alternative proposal, such alternate proposal to contain the same information
required to be included in the initial proposal. Each party receiving such
proposals shall elect by delivery of notice to Operator within five (5) days
after expiration of the proposal period, or within twenty-four (24) hours
(exclusive of Saturday, Sunday and legal holidays) if a drilling rig is on
location for the well that is the subject of the proposals, to participate in
one of the competing proposals. Any party not electing within the time required
shall be deemed not to have voted. The proposal receiving the vote of parties
owning the largest aggregate percentage interest of the parties voting shall
have priority over all other competing proposals; in the case of a tie vote,
the


 


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, exclusive of Saturday,
Sunday and legal holidays, if a drilling rig is on location). Each party shall
then have two (2) days (or twenty-four (24) hours if a rig is on location) from
receipt of such notice to elect by delivery of notice to Operator to
participate in such operation or to relinquish
interest in the affected well pursuant to the provisions of Article VI.B.2.;
failure by a party to deliver notice within such period shall be deemed an
election not to participate in the prevailing proposal.


 


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


 


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


 


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:


 


ý                                    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 FIFTY
THOUSAND Dollars ($50,000). 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.l. which shall be
governed exclusively by that Article). 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 (exclusive
of Saturday, Sunday and legal holidays) after delivery of notice of the
proposal to plug and abandon such well, such party shall be deemed to have
consented to the proposed abandonment. All such wells shall be plugged and
abandoned in accordance with applicable regulations and at the cost, risk and
expense of the parties who participated in the cost of drilling or Deepening
such well. Any party who objects to plugging and abandoning such well by notice
delivered to Operator within forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays) after delivery of notice of the proposed plugging shall
take over the well as of the end of such forty-eight (48) hour notice period
and conduct further operations in search of Oil and/or Gas subject to the
provisions of Article VI.B.; failure of such party to provide proof reasonably
satisfactory to Operator of its financial capability to conduct such operations
or to take over the well within such period or thereafter to conduct operations
on such well or plug and abandon such well shall entitle Operator to retain or
take possession of the well and plug and abandon the well. The party taking
over the well shall indemnify Operator (if Operator is an abandoning party) and
the other abandoning parties against liability for any further operations
conducted on such well except for the costs of plugging and abandoning the well
and restoring the surface, for which the abandoning parties shall remain
proportionately liable.


 


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


 


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


 


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


 


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


 


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:


 


ý                                   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.


 


Alt 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 this agreement, the recording
supplement executed herewith, or such other documents as it deems necessary as
a lien or mortgage in the applicable real estate records and/or a financing
statement with the proper officer under the Uniform Commercial Code.


 


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


 


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


 


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


 


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


 


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


 


C. Advances:


 


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


 


D. Defaults and Remedies:


 


If any party fails to
discharge any financial obligation under this agreement, including without
limitation the failure to make any advance under the preceding Article VII.C.
or any other provision of this agreement, within the period required for such
payment hereunder, then in addition to the remedies provided in Article VII.B.
of 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 is a result of the default.


 


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


 


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


 


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


 


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


 


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


 


Rentals, shut-in well
payments and minimum royalties which may be required under the terms of any
lease shall be paid by the party or parties who subjected such lease to this
agreement at its or their expense. In the event two or more parties own and
have contributed interests in the same lease to this agreement, such parties
may designate one of such parties to make said payments for and on behalf of
all such parties. Any party may request, and shall be entitled to receive,
proper evidence of all such payments. In the event of failure to make proper
payment of any rental, shut-in well payment or minimum royalty through mistake
or oversight where such payment is required to continue the lease in force, any
loss which results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.


 


Operator shall notify
Non-Operators of the anticipated completion of a shut-in well, or the shutting
in or return to production of a producing well, at least five. (5) days
(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.”


 


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


 


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


 


B. Renewal or Extension of
Leases:


 


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


 


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


 


If the interests of the
parties in the Contract Area vary according to depth, then their right to
participate proportionately in renewal or replacement Leases and their right to
receive an assignment of interest shall also reflect such depth variances.


 


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 the 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 severally 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 Regulations §1.761. Should there be any requirement that
each party hereby affected give further evidence of this election, each such party
shall execute such documents and furnish such other evidence as may be required
by the Federal Internal Revenue Service or as may be necessary to evidence this
election. No such party shall give any notices or take any other action
inconsistent with the election made hereby. If any present or future income tax
laws of the state or states in which the Contract Area is located or any future
income tax laws of the United States contain provisions similar to those in
Subchapter “K.” Chapter 1, Subtitle “A,” of the Code, under which an election
similar to that provided by Section 761 of the Code is permitted, each party
hereby affected shall make such election as may be permitted or required by
such laws. In making the foregoing election, each such party states that the
income derived by such party from operations hereunder can be adequately
determined without the computation of partnership taxable income.


 


ARTICLE
X.


CLAIMS
AND LAWSUITS


 


Operator may settle any
single uninsured third party damage claim or suit arising from operations
hereunder if the expenditure does not exceed 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 at the joint
expense of the parties participating in the operation from which the claim or
suit arises. If a claim is made against any party or if any party is sued on
account of any matter arising from operations hereunder over which such
individual has no control because of the rights given Operator by this
agreement, such party shall immediately notify all other parties, and the claim
or suite 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, lightning,
fire, storm, flood or other act of nature, explosion, governmental action,
governmental delay, restraint or inaction, unavailability of equipment, and any
other cause, whether of the kind specifically enumerated above or otherwise,
which is not reasonably within the control of the party claiming suspension.


 


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


 


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.


 


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


 


SEE
PAGE 17a


 


17

















 


                                                IN
WITNESS WHEREOF, this agreement shall be effective as of the             day
of                   19    .


 


	
  ATTEST OR WITNESS:

  	
   

  	
  OPERATOR

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Type or print name

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or S.S. No.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  NON-OPERATORS

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Type or print name

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or S.S. No.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Type or print name

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
   

  	
   

  
	
   

  	
   

  	
  Date

  	
   

  	
   

  
	
   

  	
   

  	
  Tax ID or S.S. No.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Type or print name

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title

  	
   

  	
   

  
	
   

  	
   

  	
  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.


 


Individual
acknowledgment:


 


State of                        )


 


                                    )
ss.


 


County of                    )


 


This instrument
was acknowledged before me on


 


                                                           by                                                           


 


	
  (Seal, if any)

  	
   

  
	
   

  	
   

  
	
   

  	
  Title (and Rank)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  My commission expires:

  	
   

  
					



 


Acknowledgment in
representative capacity:


 


State of                        )


 


                                    )
ss.


 


County of                   )


 


This instrument
was acknowledged before me on


 


                                                             by                                                 as                                      of                                             


 


	
  (Seal, if any)

  	
   

  
	
   

  	
   

  
	
   

  	
  Title (and Rank)

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  My commission expires:

  	
   

  
					



 


19

















 


Article XVI


OTHER PROVISIONS


 


A.                                   Order
of Election. It is irrevocably stipulated that an election by any party
hereto to complete a well at the original objective depth or horizon of any
operations conducted hereunder, whether such operation be the drilling of a new
well or the re-entering, deepening, sidetracking or plugging back of a well,
shall take precedence over an election to complete a well at a lesser depth or
horizon than the original objective depth or horizon or drill the well to a
deeper depth or horizon.


 


B.                                     Revenue
Distribution. At the option of the Non-Operators, Operator will make disbursements
of all royalties, overriding royalties and other payments out of, or with respect
to, production which are attributable to the Contract Area at Non-Operator’s direction,
provided Non-Operator shall execute such documents as may be necessary in the
opinion of Operator to enable Operator to receive all payments for oil, gas or
other hydrocarbons directly from said purchaser. In that event, Operator will
use its best efforts to make disbursements correctly, but will be liable for
incorrect disbursements only in the event of gross negligence or willful
misconduct.


 


C.                                     Insurance.
Except as provided in Exhibit “D”, all damage or injury to the Contract
Area and property thereon shall be borne by the parties hereto in proportion to
their interests therein. The liability, if any, of the Parties hereto in
damages for claims growing out of personal injury to or destruction of property
of third parties resulting from an operation conducted hereunder shall be borne
in proportion to the Parties interest in the operation conducted; it being
specifically understood that a Party that has gone non-consent on an operation
shall not have any liability or responsibility for the cost of or liabilities
associated with such operation. Each Party, individually, may acquire such
insurance as it deems proper to protect itself against such claims.


 


D.                                    Mandatory
Operations. The Parties agree to drill and complete 8 wells on the leases
owned by Piccance Gas Resources, LLC during 2005, with the first well being
located on the lease in T5S-R96W. In addition, the Parties agree to participate
for a 20% interest in the Garden Gulch Road as described in that January 17,
2005 ChevronTexaco/PDC letter agreement. Failure by any Party to fund its share
of the Mandatory Operations will result in the defaulting Party’s forfeiture to
PGR Partners of Piccance Gas Resources, LLC of all of its Membership Interest
in PGR; provided however, if PGR Partners is the defaulting Party, PGR Partners
shall forfeit its Membership interest to the funding Parties prorata. The
Mandatory Operations will be subject to the force majeure provisions in Article XI.


 


17a

















 


E.                                      Drilling
Non-Consents after the Mandatory Operations.


 


1.                                       Drilling
of the First Well. Notwithstanding the provisions of Article VI. to
the contrary, should any party to this Agreement elect to not participate in the
drilling of the first well to be drilled in the Contract Area (the “First Well”),
then upon commencement of operations for the drilling of the First Well by the
Consenting Parties in accordance with the provisions of Article VI., each
Non-Consenting Party shall be deemed to have permanently relinquished to the
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 First Well and in the Contract Area.


 


2.                                       Drilling
of the Second Well. Notwithstanding the provisions of Article VI. to
the contrary, should any party to this Agreement that participated in the drilling
of the First Well elect to not participate in the drilling of the second well
drilled at a location on the Contract Area following the drilling of the First
Well (hereinafter referred to as the “Second Well”), then upon commencement of
operations for the drilling of the Second Well by the Consenting Parties in
accordance with the provisions of Article VI., each Non-Consenting Party
shall be deemed to have permanently relinquished to the 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 Second
Well and in the Contract Area, however retaining unto each Non-Consenting Party
their respective interest in the First Well and the wellbore and equipment and facilities
appurtenant thereto.


 


3.                                       Subsequent
Wells. Notwithstanding the provisions Article VI. to the contrary,
should any Party that participated in the drilling of the First Well and Second
Well elect to not participate in any well drilled on the Contract Area
following the drilling of the Second Well (hereinafter referred to as the “Subsequent
Well”), then upon commencement of operations for the drilling of the Subsequent
Well by the Consenting Parties in accordance with the provisions of Article VI.,
each Non- Consenting Party shall be deemed to have permanently relinquished to
the 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 Subsequent Well and the wellbore and
equipment and facilities appurtenant thereto. The non-consent penalty described
in this Article XVI.E.3. shall apply to each Subsequent Well drilled, on a
well-by-well basis.


 


F.                                      Operator.
The right to operate cannot be assigned by the Operator. Orion will be contract
operator, so long as Orion retains a minimum 25% interest in the Contract Area.


 


17a

















 





 

















 


	
   

  	
  COPAS - 1984 - ONSHORE

  
	
   

  	
   

  
	
   

  	
  Recommended
  by the Council

  
	
  Kraftbill 601, BOX 800

  	
  of Petroleum
  Accountants

  
	
  TULSA OK 74101

  	
  Societies

  



 





 


EXHIBIT “C”


 


Attached to and made a part of
                                             


 


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 of
Petroleum Accountants Societies.


 


2.                                      Statement
and Billings


 


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


 


3.                                      Advances
and Payments by Non-Operators


 


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


 


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


 


4.                                      Adjustments


 


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


 


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 year without prior approval of Operator, except upon the resignation
or removal of the Operator, and shall be made at the expense of those
Non-Operators approving such audit.


 


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


 


6.                                      Approval
By Non-Operators


 


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


 


II. DIRECT CHARGES


 


Operator shall charge the
Joint Account with the following items:


 


1.                                      Ecological
and Environmental


 


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


 


2.                                      Rentals
and 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 and 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 percent most 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 like material is
normally available or railway receiving point nearest the Joint Property unless
agreed to by the Parties.


 


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


 


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


 


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
rate shall include costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross investment less
accumulated depreciation not to exceed eight percent (8.0%) 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


 


Expense of
handling, investigating and settling litigation or claims, discharging of
liens, payment of judgements 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 other legal expense is considered to be covered by the overhead provisions
of Section III unless otherwise agreed to by the Parties, except as
provided in Section I, Paragraph 3.


 


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 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.


 


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:


 


ý Fixed Rate
Basis, Paragraph 1A, or


o Percentage
Basis, Paragraph 1B


 


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


 


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


 


o shall be
covered by the overhead rates, or


ý 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:


 


ý shall be
covered by the overhead rates, or


o shall not be covered by the overhead rates.


 


A.                                   Overhead
- Fixed Rate Basis


 


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


 


Drilling Well Rate
$ 7,000.00


(Prorated
for less than a full month)


 


Producing Well
Rate $ see page 4a


 


(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

















 


Producing
Well Rates


 


	
  Number of Producing Wells

  Located on Leases Owned by

  Piceance Gas Resources, LLC

  	
   

  	
  Overhead
  Rate

  Per Well Per Month

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
  0-50

  	
   

  	
  $

  	
  700

  	
   

  
	
  51-100

  	
   

  	
  $

  	
  600

  	
   

  
	
  101-150

  	
   

  	
  $

  	
  500

  	
   

  
	
  >150

  	
   

  	
  $

  	
  400

  	
   

  



 


4a

















 


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

















 


To be negotiated on a
Project by Project basis.


 


Account for
overhead based on the following rates for any Major Construction project in
excess of $ N/A:


 


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


 


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


 


C. N/A% 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. N/A% of total
costs through $100,000; plus


 


A. N/A% of total
costs in excess of $100,000 but less than $1,000,000; plus


 


A. N/A% 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 23/8 inches OD and larger, except line pipe,
shall be priced at Eastern mill published carload base prices effective as of
date of movement plus transportation cost using the 80,000 pound carload weight
basis to the railway receiving point nearest the Joint Property for which published
rail rates for tubular goods exist. If the 80,000 pound rail rate is not
offered, the 70,000 pound or 90,000 pound rail rate may be used. Freight
charges for tubing will be calculated from Lorain, Ohio and casing from
Youngstown, Ohio.


 


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


 


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


 


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


 


3.                                      Premium
Prices


 


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


 


4.                                      Warranty
of Material Furnished By Operator


 


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


 


V. INVENTORIES


 


The Operator shall
maintain detailed records of Controllable Material.


 


1.                                      Periodic
Inventories, Notice and Representation


 


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


 


2.                                      Reconciliation
and Adjustment of Inventories


 


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


 


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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.


 


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EXHIBIT “D”


 


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

dated effective February 1, 2005,

by and among Orion Energy Partners, L.P., as Contract Operator for

Piceance Gas Resources, LLC and Piceance Gas Resources, LLC

and its Members, as Non-Operators


 


Operator shall maintain
the following insurance with respect to operations conducted under the
Operating Agreement to which this Exhibit is attached, and shall charge
premiums for such coverage to the Joint Account.


 


1.              Workers’
Compensation and Employer’s Liability Insurance


 


a.               Statutory
Workers’ Compensation coverage as required by the laws of the state in which operations
are conducted.


 


b.              Employer’s
Liability limits of $1,000,000 each accident, $1,000,000 each employee/disease,
and $1,000,000 policy limit.


 


2.              Commercial General
Liability Insurance


 


$1,000,000 limit
per occurrence and general aggregate to cover damages to third parties because
of bodily injury or property damage caused by an occurrence.


 


3.              Business Automobile
Liability Insurance


 


$1,000,000 limit
per accident combined single limit for bodily injury and/or property damage to
third parties covering owned, leased, hired and non-owned vehicles used in the
joint operations.


 


4.              Umbrella or Excess
Liability Insurance


 


$1,000,000 per occurrence and general aggregate in excess of Employer’s
Liability, Commercial General Liability, and Business Automobile Liability.


 


Operator may determine,
in its sole discretion, that well control insurance or other similar coverage
is needed for drilling and completion operations conducted by it under the
terms of the Operating Agreement. In that event, a Non-Operator’s option(s)
with respect to that coverage will be set out in the AFE proposing such
operations. In no event will coverage be provided to the Non-Operators for
production operations or workovers.


 


Each Non-Operator agrees
to be liable for and insure (or self-insure) its proportionate share of Operator’s
deductible or self-insured retention with respect to each of the coverages set
forth above, it being the intent of the parties to the Operating Agreement that
Operator shall not act as an insurer for the joint account to the extent of its
deductible or self-insured retention.


 


Each party to the
Operating Agreement shall have the right to acquire at its own expense such
additional insurance coverage as it desires to protect itself against any
liability not covered by the insurance described above which is maintained by
Operator for the joint account. All insurance maintained by any party to this
Operating Agreement shall contain a waiver by the insurance company of all
rights of subrogation in favor of the parties to the Operating Agreement.


 


Operator shall never be
held responsible for the financial solvency of any insurance carrier. Operator
shall not be liable for inability to obtain or maintain the insurance coverage
set out above due to unavailability or excessive cost. In such event, Operator
shall promptly advise Non-Operator(s).


 

















 


Nothing contained in this
Exhibit shall operate as a limitation on a party’s proportionate liability
under the Operating Agreement and all losses not covered by the above-specified
policies shall be borne by the Operator and Non-Operators in proportion to
their interest at the time of any loss.


 

















 


EXHIBIT “E”


 


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

dated effective February 1, 2005,

by and among Orion Energy Partners, L.P., as Contract Operator for

Piceance Gas Resources, LLC and Piceance Gas Resources, LLC

and its Members, as Non-Operators


 


GAS BALANCING AGREEMENT


 


If
any of the Parties to the JOA (collectively, the “Parties” and individually a “Party”)
is not taking or marketing its full share of gas produced from the Contract
Area, the terms of this Gas Balancing Agreement (this “Agreement”) shall
automatically become effective.


 


1.                                       Production
from the Contract Area. Each month, each Party intends to take its full proportionate
share of gas produced from the Wells within the Contract Area (“Well(s)”) (i.e.
its proportionate share of the “MER” (as defined below)). Nothing herein shall
be construed to deny any Party the right to produce and take or deliver to its
purchaser the full amount of its proportionate share of gas production. If a
Party is not taking or marketing its full share of gas produced from the Wells
and therefore is unable to take its pro rata share of its MER, during that period(s),
the other Parties having an interest in the Well may produce each month,
either (i) 100% of the gas that may be produced up to the “MER” (as
defined below) or, (ii) if a gas allowable is assigned, 100% of the
allowable gas production assigned to the Well by the appropriate regulatory body
having jurisdiction, and such Parties shall be entitled to take or deliver to
their purchaser their pro rata share of all such gas production.


 


a.                                      “MER”                                 The
term “MER” shall mean the total daily maximum efficient rate of hydrocarbon
withdrawal from each separately produced producing interval which if exceeded
for a sustained period of time, would lead to underground waste in the form of
reduced ultimate recovery from each producing interval. A Party’s pro rata
share shall be based on the ratio of such Party’s interest in the Well to the
total interests of all Parties then taking gas from the Well as determined in
accordance with the terms of the JOA.


 


b.                                     Liquids.                             All
Parties having an interest in the Well shall share in and own any liquid
hydrocarbons recovered from the gas produced from such Well by lease equipment on
a pro rata basis in accordance with their respective interests in such Well and
subject to the JOA, but the Parties taking or marketing the gas shall own all
of the gas taken or delivered to their respective purchasers and shall own and
shall have the right to all liquids removed from the gas by off lease
processing.


 


2.                                       The
Underproduced Party. On a cumulative basis, each Party not taking or marketing
its full share of the gas produced from the Well (the “Underproduced Party”)
shall be credited with a volume of gas equal to its full share of the gas
produced from such Well, less (i) its share of gas used in its lease
operations, (ii) gas vented or unavoidably lost, and (iii) that
portion


 


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such Party took or
delivered to its purchaser. Each Party taking gas shall furnish, or cause to be
furnished, to the Operator a monthly statement of gas taken.


 


3.                                       Monthly
Gas Balancing Statements. The Operator will maintain a current account of
the gas balance between the Parties for each Well and will furnish all Parties
having an interest in such Well and their purchasers monthly statements showing
the total quantity of gas produced, the amount used in lease operations, vented
and unavoidably lost, the total quantity of liquid hydrocarbons recovered
therefrom, and the monthly and cumulative over and under account of each Party.


 


4.                                       Payments
to Third Parties/Royalties/Taxes.


 


a.                                       Royalty
Payments. Each Party taking or delivering gas to its purchaser shall pay
any and all associated royalties and overriding royalties to the royalty
owners. The term “royalty owner” shall include owners of royalties, overriding
royalties, and other payments out of or in lieu of production for which each
Party is responsible, including the Lynx Energy Company, Inc. Proceeds
Interest.


 


b.                                      Taxes.
Each Party taking or delivering gas to its purchaser shall pay any and all
production taxes, due on such gas.


 


5.                                       Commingled
Intervals. This Agreement shall constitute a separate agreement as to each
producing interval in a Well. Where production from two or more producing
intervals is commingled in the Wellbore so that the gas from each such interval
cannot be separately metered, the commingled producing intervals shall then be
considered to be a single interval.


 


6.                                       Make
Up of Gas by the Underproduced Party. On written notice at least 30 days prior
to the beginning of a month from any Underproduced Party to the Operator and to
each Party that has taken or delivered to its purchaser more than its full
share of gas (“Overproduced Party”), the Underproduced Party may, commencing on
the first day of the month after such notice is given, begin taking or
delivering to its purchaser, its full share of gas produced from the Well less
such Party’s share of gas used in lease operations, vented and unavoidably lost
(net share of gas produced), plus its “Make Up Volume.” The term Make Up Volume
means that volume of gas from the Well: (i) during the months of January,
February, March, November and December, 25% of each Overproduced Party’s
net share of gas produced from the Well, and (ii) during the remaining
months, 50% of each Overproduced Party’s net share of gas produced from the
Well. However, in no event shall such Make Up Volume for any month exceed 50%
of the Underproduced Party’s net share of gas produced from the Well. If more
than one Underproduced Party are balancing their gas accounts, each
Underproduced Party may take or deliver to its purchaser that share of the
additional gas as determined herein in proportion to its interest in such Well
to all of the Underproduced Parties’ interests in such Well then balancing
their gas accounts. Any such additional gas taken or delivered to an
Underproduced Party’s purchaser shall be credited against such Underproduced
Party’s Underproduced volume of gas in storage in the order of accrual.


 


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7.                                       Timing
of Make Up. At the end of each calendar year, the Overproduced and Underproduced
Parties shall enter into a cash settlement for the volume of gas, if any,
remaining in imbalance. The Operator shall determine the final accounting of
underproduction and overproduction. In making such cash settlement, each
Overproduced Party shall remit to the Operator a sum of money attributable to
the amount actually or constructively received by such Overproduced Party from
sale or utilization of overproduction which remains accrued to such Party, less
applicable taxes and royalties, and other costs actually paid by the
Overproduced Party in connection with the sale of such gas. The Operator shall
distribute the total of such amounts so collected among the Underproduced Parties
in the proportion of such latter Parties’ underproduction. The “amount actually
or constructively received” shall then be that overproduction remaining
following application of the above rule and valued at the price in effect
at the time such overproduction occurred.


 


(a)                                  During
periods in which a Party is taking gas for its own use and making no sales, gas
so taken will be valued at the maximum price which such Party could have
received for such gas if actually delivered under such Party’s contract, or, if
none, the weighted average price received simultaneously by all other Parties
for gas sold from the Well. In either such instance the value so determined for
gas so used will be deemed to have been constructively received by such using
Party.


 


(b)                                 If
refunds are later required by any governmental authority, each Party shall be
accountable for such refunds on the basis of its share of gas produced and
finally balanced hereunder.


 


(c)                                  If
gas is processed for the recovery of liquifiable hydrocarbons, the gas value will
be based on the amount which would have been received for the sale of such gas
(adjusted for actual Btu content) without processing. Anything herein to the
contrary notwithstanding, the Underproduced Party shall not be entitled to
receive from the Overproduced Party a payment greater than the amount the Underproduced
Party would have been entitled to receive if the sale had been made under the
contract of the Underproduced Party, if any.


 


(d)                                 Each
Party agrees to maintain complete records of gas sold and price received so
Operator’s computations can be made. Operator shall rely on statements
furnished and have no liability with respect to correctness of proceeds
received and distributed.


 


8.                                      Costs
and Expenses. Nothing herein shall change or affect each Party’s
obligations to pay its proportionate share of all costs and liabilities
incurred in any Well pursuant to the Operating Agreement to which this
Agreement is attached.


 


9.                                      Term.
This Agreement shall become effective in accordance with its terms and shall
remain in force and effect as long as the Operating Agreement to which it is
attached remains in effect, and shall inure to the benefit of and be binding
upon the Parties hereto, their successors, legal representatives and assigns.


 


10.                                Liabilities
and Obligations/Indemnity. Each Party hereby indemnifies the other Parties
hereto against all liability for and agrees to defend the Parties hereto
against all claims which


 


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may be asserted by
third parties who now or hereafter stand in contractual relationship with such
indemnifying Party whenever such claims are based upon said contractual
relationship and arise out of the operation of this Agreement or activities of
any Party under its provisions, and further agrees to save the other Parties
hereto harmless from all judgements or damages sustained and costs incurred in
connection herewith.


 


11.                                Role
of the Operator. The Operator under the Operating Agreement is authorized
to carry out the provisions of this Agreement, but shall not be liable for its
failure to do so as long as it acts in good faith and as would a reasonably
prudent Operator in the same or similar circumstances.


 


12.                                Audit.
Notwithstanding any provision to the contrary in this or any other agreement, any
Underproduced Party shall have the right for a period of two (2) years
after the date that gas accounts are settled, to audit an Overproduced Party’s
records as to volumes and prices received for gas produced from the applicable
area, and any Overproduced Party shall have the right for a period of two (2) years
after the gas accounts are settled, to audit any Underproduced Party’s records
as to volumes.


 


13.                                Effective
Time. This Agreement shall be effective as of February 1, 2005.


 


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