Exhibit
10.46


 


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


 


MODEL
FORM OPERATING AGREEMENT


 


 


OPERATING AGREEMENT



DATED


 


	
   

  	
   

  	
  Effective July 1,

  	
  2003,

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Year

  	
   

  	
   

  



 


	
  OPERATOR

  	
   

  	
  WOOLSEY OPERATING
  COMPANY, LLC

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  CONTRACT AREA

  	
   

  	
  SEE PROSPECT
  EXHIBITS “A”, ATTACHED HERETO AND MADE A PART HEREOF

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
  COUNTY OF

  	
   

  	
  BARBER, COMANCHE, 

  	
  , STATE OF

  	
  KANSAS

  
	
   

  	
   

  	
  KIOWA

  	
   

  	
   

  
												



 


 


	
   

  	
  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

  
	
   

  	
   

  	
   

  
	
  I.

  	
   

  	
  DEFINITIONS

  
	
  II.

  	
   

  	
  EXHIBITS

  
	
  III.

  	
   

  	
  INTERESTS OF PARTIES

  
	
   

  	
   

  	
  A. 
  OIL AND GAS INTERESTS:

  
	
   

  	
   

  	
  B. 
  INTERESTS OF PARTIES IN COSTS AND PRODUCTION:

  
	
   

  	
   

  	
  C. 
  SUBSEQUENTLY CREATED INTERESTS:

  
	
  IV.

  	
   

  	
  TITLES

  
	
   

  	
   

  	
  A. 
  TITLE EXAMINATION:

  
	
   

  	
   

  	
  B.  LOSS OR FAILURE OF TITLE:

  
	
   

  	
   

  	
  1. 
  Failure of Title

  
	
   

  	
   

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

  
	
   

  	
   

  	
  3.  Other Losses

  
	
   

  	
   

  	
  4. 
  Curing Title

  
	
  V.

  	
   

  	
  OPERATOR

  
	
   

  	
   

  	
  A. 
  DESIGNATION AND RESPONSIBILITIES OF OPERATOR:

  
	
   

  	
   

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

  
	
   

  	
   

  	
  1. 
  Resignation or Removal of Operator

  
	
   

  	
   

  	
  2.  Selection of Successor
  Operator

  
	
   

  	
   

  	
  3. 
  Effect of Bankruptcy

  
	
   

  	
   

  	
  C.  EMPLOYEES AND CONTRACTORS:

  
	
   

  	
   

  	
  D. 
  RIGHTS AND DUTIES OF OPERATOR:

  
	
   

  	
   

  	
  1. 
  Competitive Rates and Use of Affiliates

  
	
   

  	
   

  	
  2. 
  Discharge of Joint Account Obligations

  
	
   

  	
   

  	
  3. 
  Protection from Liens

  
	
   

  	
   

  	
  4. 
  Custody of Funds

  
	
   

  	
   

  	
  5. 
  Access to Contract Area and Records

  
	
   

  	
   

  	
  6. 
  Filing and Furnishing Governmental Reports

  
	
   

  	
   

  	
  7.  Drilling and Testing
  Operations

  
	
   

  	
   

  	
  8. 
  Cost Estimates

  
	
   

  	
   

  	
  9.  Insurance

  
	
  VI.

  	
   

  	
  DRILLING AND
  DEVELOPMENT

  
	
   

  	
   

  	
  A.  INITIAL WELL:

  
	
   

  	
   

  	
  B. 
  SUBSEQUENT OPERATIONS:

  
	
   

  	
   

  	
  1. 
  Proposed Operations

  
	
   

  	
   

  	
  2. 
  Operations by Less Than All Parties

  
	
   

  	
   

  	
  3. 
  Stand-By Costs

  
	
   

  	
   

  	
  4.  Deepening

  
	
   

  	
   

  	
  5. 
  Sidetracking

  
	
   

  	
   

  	
  6. 
  Order of Preference of Operations

  
	
   

  	
   

  	
  7.  Conformity to Spacing
  Pattern

  
	
   

  	
   

  	
  8. 
  Paying Wells

  
	
   

  	
   

  	
  C. 
  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:

  
	
   

  	
   

  	
  1.  Completion

  
	
   

  	
   

  	
  2. 
  Rework, Recomplete or Plug Back

  
	
   

  	
   

  	
  D. 
  OTHER OPERATIONS:

  
	
   

  	
   

  	
  E. 
  ABANDONMENT OF WELLS:

  
	
   

  	
   

  	
  1. 
  Abandonment of Dry Holes

  
	
   

  	
   

  	
  2. 
  Abandonment of Wells That Have Produced

  
	
   

  	
   

  	
  3. 
  Abandonment of Non-Consent Operations

  
	
   

  	
   

  	
  F.  TERMINATION OF OPERATIONS:

  
	
   

  	
   

  	
  G. 
  TAKING PRODUCTION IN KIND:

  
	
   

  	
   

  	
  (Option 1) Gas Balancing Agreement

  
	
   

  	
   

  	
  (Option 2) No Gas Balancing Agreement

  
	
  VII.

  	
   

  	
  EXPENDITURES AND
  LIABILITY OF PARTIES

  
	
   

  	
   

  	
  A. 
  LIABILITY OF PARTIES:

  
	
   

  	
   

  	
  B.  LIENS AND SECURITY
  INTERESTS:

  
	
   

  	
   

  	
  C.  ADVANCES:

  
	
   

  	
   

  	
  D. 
  DEFAULTS AND REMEDIES:

  
	
   

  	
   

  	
  1. 
  Suspension of Rights

  
	
   

  	
   

  	
  2. 
  Suit for Damages

  
	
   

  	
   

  	
  3. 
  Deemed Non-Consent

  
	
   

  	
   

  	
  4. 
  Advance Payment

  
	
   

  	
   

  	
  5. 
  Costs and Attorneys’ Fees

  
	
   

  	
   

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

  
	
   

  	
   

  	
  F.  TAXES:

  
	
  VIII.

  	
   

  	
  ACQUISITION,
  MAINTENANCE OR TRANSFER OF INTEREST

  
	
   

  	
   

  	
  A. 
  SURRENDER OF LEASES:

  
	
   

  	
   

  	
  B. 
  RENEWAL OR EXTENSION OF LEASES:

  
	
   

  	
   

  	
  C. 
  ACREAGE OR CASH CONTRIBUTIONS:

  



 


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  D. 
  ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:

  
	
   

  	
   

  	
  E. 
  WAIVER OF RIGHTS TO PARTITION:

  
	
  IX.

  	
   

  	
  INTERNAL REVENUE CODE ELECTION

  
	
  X.

  	
   

  	
  CLAIMS AND LAWSUITS

  
	
  XI.

  	
   

  	
  FORCE MAJEURE

  
	
  XII.

  	
   

  	
  NOTICES

  
	
  XIII.

  	
   

  	
  TERM OF AGREEMENT

  
	
  XIV.

  	
   

  	
  COMPLIANCE WITH LAWS AND REGULATIONS

  
	
   

  	
   

  	
  A.  LAWS, REGULATIONS AND ORDERS:

  
	
   

  	
   

  	
  B. 
  GOVERNING LAW:

  
	
   

  	
   

  	
  C. 
  REGULATORY AGENCIES:

  
	
  XV.

  	
   

  	
  MISCELLANEOUS

  
	
   

  	
   

  	
  A.  EXECUTION:

  
	
   

  	
   

  	
  B. 
  SUCCESSORS AND ASSIGNS:

  
	
   

  	
   

  	
  C. 
  COUNTERPARTS:

  
	
   

  	
   

  	
  D. 
  SEVERABILITY

  
	
  XVI.

  	
   

  	
  OTHER PROVISIONS

  



 


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OPERATING AGREEMENT


 


THIS
AGREEMENT, entered into by and between WOOLSEY OPERATING COMPANY, LLC,
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 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:


 


ý                                    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.


 


ý                                    B.                                     Exhibit
“B,” Form of Lease.


 


ý                                    C.                                     Exhibit
“C,” Accounting Procedure.


 


ý                                    D.                                    Exhibit
“D,” Insurance.


 


ý                                    E.                                      Exhibit
“E,” Gas Balancing Agreement.


 


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


 


o                                    G.                                     Exhibit
“G,” Tax Partnership.


 


ý                                    H.                                    Other:
EXHIBITS “H”, AFE’S FOR EACH INITIAL TEST WELL WITHIN EACH PROSPECT
    


 


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


 


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ARTICLE III.


INTERESTS OF PARTIES


 


A. Oil and Gas Interests:


 


If any party
owns an Oil and Gas Interest in the Contract Area, that Interest shall be
treated for all purposes of this agreement and during the term hereof as if it
were covered by the form of Oil and Gas Lease 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, as shown on Exhibit A and shall indemnify,
defend and hold the other parties free from any liability therefor.  Except as otherwise expressly provided in
this agreement, if any party has contributed hereto any Lease or Interest which
is burdened with any royalty, overriding royalty, production payment or other
burden on production in excess of the amounts stipulated above, such party so
burdened shall assume and alone bear all such excess obligations and shall
indemnify, defend and hold the other parties hereto harmless from any and all
claims attributable to such excess burden. 
However, so long as the Drilling Unit for the productive Zone(s) is
identical with the Contract Area, each party shall pay or deliver, or cause to
be paid or delivered, all burdens on production from the Contract Area due
under the terms of the Oil and Gas Lease(s) which such party has contributed to
this agreement, and shall indemnify, defend and hold the other parties free
from any liability therefor.


 


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


 


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


 


C.
Subsequently Created Interests:


 


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


 


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


 


 


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ARTICLE IV.


TITLES


 


A. Title Examination:


 


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


 


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


 


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


 


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


 


B. Loss or Failure of Title:


 


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


 


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ARTICLE V.


OPERATOR


 


A. Designation and Responsibilities of
Operator:


 


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


 


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


 


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


 


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


 


5

















 


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.


 


ARTICLE VI.


DRILLING AND DEVELOPMENT


 


A. Initial Well:


 


On or before
the 31st day of December, 2003, Operator shall commence operations for the
drilling of the Initial Well at the following location:


 


SEE AFE’S ATTACHED AS EXHIBIT
“H”, ATTACHED HERETO AND MADE A PART HEREOF, FOR INITIAL WELL WITHIN EACH PROSPECT


 


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


 


SEE AFE’S ATTACHED AS EXHIBIT
“H”, ATTACHED HERETO AND MADE A PART HEREOF, FOR DEPTHS AND FORMATIONS FOR
INITIAL WELL WITHIN EACH PROSPECT


 


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


 


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


 


6

















 


under this agreement and to all
other parties in the case of a proposal for Sidetracking or Deepening,
specifying the work to be performed, the location, proposed depth, objective
Zone and the estimated cost of the operation. The parties to whom such a notice
is delivered shall have thirty (30) days after receipt of the notice within
which to notify the party proposing to do the work whether they elect to
participate in the cost of the proposed operation.  If a drilling rig is on location, notice of a proposal to Rework,
Sidetrack, Recomplete, Plug Back or Deepen may be given by telephone and the
response period shall be limited to forty-eight (48) hours.  Failure of a party to whom such notice is
delivered to reply within the period above fixed shall constitute an election
by that party not to participate in the cost of the proposed operation.  Any proposal by a party to conduct an
operation conflicting with the operation initially proposed shall be delivered
to all parties within the time and in the manner provided in
Article VI.B.6.


 


If all parties
to whom such notice is delivered elect to participate in such a proposed
operation, the parties shall be contractually committed to participate therein
provided such operations are commenced within the time period hereafter set
forth, and Operator shall, no later than ninety (90) days after expiration of
the notice period of thirty (30) days (or as promptly as practicable after the
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
thereafter complete it with due diligence at the risk and expense of the
parties participating therein; provided, however, said commencement date may be
extended upon written notice of same by Operator to the other parties, for a
period of up to thirty (30) additional days if, in the sole opinion of
Operator, such additional time is reasonably necessary to obtain permits from
governmental authorities, surface rights (including rights-of-way) or
appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance.  If the actual operation has not been commenced within the time
provided (including any extension thereof as specifically permitted herein or
in the force majeure provisions of Article XI) and if any party hereto
still desires to conduct said operation, written notice proposing same must be
resubmitted to the other parties in accordance herewith as if no prior proposal
had been made.  Those parties that did
not participate in the drilling of a well for which a proposal to Deepen or
Sidetrack is made hereunder shall, if such parties desire to participate in the
proposed Deepening or Sidetracking operation, reimburse the Drilling Parties in
accordance with Article VI.B.4. in the event of a Deepening operation and
in accordance with Article VI.B.5. in the event of a Sidetracking
operation.


 


2.                                       Operations by Less Than All Parties:


 


(a)                                  Determination
of Participation.  If any party to
whom such notice is delivered as provided in Article VI.B.1. or VI.C.1.
(Option No. 2) elects not to participate in the proposed operation, then, in
order to be entitled to the benefits of this Article, the party or parties
giving the notice and such other parties as shall elect to participate in the
operation shall, no later than ninety (90) days after the expiration of the
notice period of thirty (30) days (or as promptly as practicable after the
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be) actually commence the proposed operation and
complete it with due diligence. 
Operator shall perform all work for the account of the Consenting
Parties; provided, however, if no drilling rig or other equipment is on
location, and if Operator is a Non-Consenting Party, the Consenting Parties
shall either: (i) request Operator to perform the work required by such
proposed operation for the account of the Consenting Parties, or (ii) designate
one of the Consenting Parties as Operator to perform such work.  The rights and duties granted to and imposed
upon the Operator under this agreement are granted to and imposed upon the
party designated as Operator for an operation in which the original Operator is
a Non-Consenting Party.  Consenting
Parties, when conducting operations on the Contract Area pursuant to this
Article VI.B.2., shall comply with all terms and conditions of this
agreement.


 


If less than
all parties approve any proposed operation, the proposing party, immediately
after the expiration of the applicable notice period, shall advise all Parties
of the total interest of the parties approving such operation and its
recommendation as to whether the Consenting Parties should proceed with the
operation as proposed.  Each Consenting
Party, within forty-eight (48) hours after delivery of such notice, shall
advise the proposing party of its desire to (i) limit participation to such
party’s interest as shown on Exhibit “A” or (ii) carry only its proportionate
part (determined by dividing such party’s interest in the Contract Area by the
interests of all Consenting Parties in the Contract Area) of Non-Consenting
Parties’ interests, or (iii) carry its proportionate part (determined as
provided in (ii)) of Non-Consenting Parties’ interests together with all or a
portion of its proportionate part of any Non-Consenting Parties’ interests that
any Consenting Party did not elect to take. 
Any interest of Non-Consenting Parties that is not carried by a
Consenting Party shall be deemed to be carried by the party proposing the
operation if such party does not withdraw its proposal.  Failure to advise the proposing party within
the time required shall be deemed an election under (i).  In the event a drilling rig is on location,
notice may be given by telephone, and the time permitted for such a response
shall not exceed a total of forty-eight (48) hours).  The proposing party, at its election, may withdraw such proposal
if there is less than 100% participation and shall notify all parties of such
decision within ten (10) days, or within twenty-four (24) hours if a drilling
rig is on location, following expiration of the applicable response
period.  If 100% subscription to the
proposed operation is obtained, the proposing party shall promptly notify the
Consenting Parties of their proportionate interests in the operation and the
party serving as Operator shall commence such operation within the period
provided in Article VI.B.1., subject to the same extension right as
provided therein.


 


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


 


7

















 


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


 


(i)                                     200
% of each such Non-Consenting Party’s share of the cost of any newly acquired
surface equipment beyond the wellhead connections (including but not limited to
stock tanks, separators, treaters, pumping equipment and piping), plus 100% of
each such Non-Consenting Party’s share of the cost of operation of the well
commencing with first production and continuing until each such Non-Consenting
Party’s relinquished interest shall revert to it under other provisions of this
Article, it being agreed that each Non-Consenting Party’s share of such costs
and equipment will be that interest which would have been chargeable to such
Non-Consenting Party had it participated in the well from the beginning of the
operations; and


 


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


 


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


 


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


 


(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 six-month
period 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 period.  In determining the
quantity of Oil and Gas produced during any period, 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,


 


8

















 


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: 
During the penalty payout period set forth under VI A.2 (b),
Non-Consenting Parties shall not be granted the option to participate in a
Deepening operation.


 


5.                                       Sidetracking:  During the penalty payout period set forth under VI A.2 (b),
Non-Consenting Parties shall not be granted the option to participate in a
Sidetracking operation


 


6.                                       Order of Preference of Operations.
Except as otherwise specifically provided in this agreement, if any party
desires to propose the conduct of an operation that conflicts with a proposal
that has been made by a party under this Article VI, such party shall have
fifteen (15) days from delivery of the initial proposal, in the case of a
proposal to drill a well or to perform an operation on a well where no drilling
rig is on location, or twenty-four (24) hours, from delivery of the initial
proposal, if a drilling rig is on location for the well on which such operation
is to be conducted, to deliver to all parties entitled to participate in the
proposed operation such party’s alternative proposal, such alternate proposal
to contain the same information required to be included in the initial
proposal.  Each party receiving such
proposals shall elect by delivery of notice to Operator within five (5) days
after expiration of the proposal period, or within twenty-four (24)) 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


 


9

















 


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:


 


o            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.


 


ý            Option No. 2:
All necessary expenditures for the drilling, Deepening or Sidetracking and
testing of the well.  When such well has
reached its authorized depth, and all logs, cores and other tests have been
completed, and the results thereof furnished to the parties, Operator shall
give immediate notice to the Non-Operators having the right to participate in a
Completion attempt whether or not Operator recommends attempting to Complete
the well, together with Operator’s AFE for Completion costs if not previously
provided.  The parties receiving such
notice shall have forty-eight (48) hours) in which to elect by delivery of
notice to Operator to participate in a recommended Completion attempt or to
make a Completion proposal with an accompanying AFE.  Operator shall deliver any such Completion proposal, or any
Completion proposal conflicting with Operator’s proposal, to the other parties
entitled to participate in such Completion in accordance with the procedures
specified in Article VI.B.6. Election to participate in a Completion
attempt shall include consent to all necessary expenditures for the Completing
and equipping of such well, including necessary tankage and/or surface
facilities but excluding any stimulation operation not contained on the
Completion AFE.  Failure of any party
receiving such notice to reply within the period above fixed shall constitute
an election by that party not to participate in the cost of the
Completion attempt; provided, that Article VI.B.6. shall control in the
case of conflicting Completion proposals. 
If one or more, but less than all of the parties, elect to attempt a
Completion, the provision of Article VI.B.2. hereof (the phrase
“Reworking, Sidetracking, Deepening, Recompleting or Plugging Back” as
contained in Article VI.B.2. shall be deemed to include “Completing”) shall
apply to the operations thereafter conducted by less than all parties.  During the penalty payout period as set
forth under Article VI.B.2.(b), Non-consenting Parties shall not have the
option to participate in subsequent operations


 


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


 


D. Other Operations:


 


Operator shall
not undertake any single project reasonably estimated to require an expenditure
in excess of Twenty five thousand and No/100 Dollars ($25,000) except in
connection with the drilling, Sidetracking, Reworking, Deepening, Completing,
Recompleting or Plugging Back of a well that has been previously authorized by
or pursuant to this agreement; provided, however, that, in case of explosion,
fire, flood or other sudden emergency, whether of the same or different nature,
Operator may take such steps and incur such expenses as in its opinion are
required to deal with the emergency to safeguard life and property but
Operator, as promptly as possible, shall report the emergency to the other
parties.  If Operator prepares an AFE
for its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of Twenty
five thousand and No/100 Dollars ($25,000). Operator, at its sole discretion,
may perform repair work or undertake the installation of artificial lift
equipment or ancillary production facilities or to conduct additional work with
respect to a well drilled hereunder or other similar project (but not including
the installation of gathering lines or other transportation or marketing
facilities, the installation of which shall be governed by separate agreement
between the parties) reasonably estimated to require an expenditure in excess
of the amount first set forth above in this Article VI.D. (except in
connection with an operation required to be proposed under Articles VI.B.1. or
VI.C.1. Option No. 2, which shall be governed exclusively be those
Articles).  Operator shall deliver such
proposal to all parties entitled to participate therein.  If within thirty (30) days thereof Operator
secures the written consent of any party or parties owning at least 70% 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


 


10

















 


plugged and abandoned without
the consent of all parties.  Should
Operator, after diligent effort, be unable to contact any party, or should any
party fail to reply within forty-eight (48) hours after delivery of notice of
the proposal to plug and abandon such well, such party shall be deemed to have
consented to the proposed abandonment. 
All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or Deepening such well.  Any party who objects to plugging and
abandoning such well by notice delivered to Operator within forty-eight (48)
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 to the reasonable satisfaction of Operator (if Operator is an
abandoning party) and the other abandoning parties against liability for any
further operations conducted on such well except for the costs of plugging and
abandoning the well and restoring the surface, for which the abandoning parties
shall remain proportionately liable.


 


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


 


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


 


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


 


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


 


F.  Termination
of Operations:


 


Upon the
commencement of an operation for the drilling, Reworking, Sidetracking,
Plugging Back, Deepening, testing, Completion or plugging of a well, including
but not limited to the Initial Well, such operation shall not be terminated
unless in the sole opinion of Operator, such operation should be terminated
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 have the right to take in kind or separately dispose
of its proportionate share of all Oil and Gas produced from the Contract Area,
exclusive of production which may be used in development and producing
operations and in preparing and 
treating Oil and Gas for marketing purposes and production unavoidably
lost.  Any extra expenditure incurred in
the taking in kind or separate disposition by any party of its proportionate
share of the production shall be borne by such party.  Any party taking its share of production in kind shall be
required to pay for only its proportionate share of such part of  Operator’s surface facilities which it uses.


 


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


 


11

















 


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 sixty (60) 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.


 


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


 


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


 


o                Option No. 2:
No Gas Balancing Agreement:


 


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


 


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


 


If any party fails to make the arrangements necessary to take in kind
or separately dispose of its proportionate share of the Oil and/or Gas produced
from the Contract Area, Operator shall have the right, subject to the  revocation at will by the party owning it,
but not the obligation, to purchase such Oil and/or Gas or sell it to others at
any time and from time to time, for the account of the non-taking party.  Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to the owner
of said production and shall be subject always to the right of the owner of the
production upon at least sixty (60) days written notice to Operator to exercise
its right to take in kind, or separately dispose of, its share of all Oil
and/or Gas not previously delivered to a purchaser; provided, however, that the
effective date of any such revocation may be deferred at Operator’s election
for a period not to exceed ninety (90) days if Operator has committed such
production to a purchase contract having a term extending beyond such ten (10)
-day period.  Any purchase or sale by
Operator of any other  party’s share of
Oil and/or Gas shall be only for such reasonable periods of time as are
consistent with the  minimum needs of
the industry under the particular circumstances, but in no event for a period
in excess of one (1) year.


 


Any such sale by Operator shall be in a manner commercially reasonable
under the circumstances, but Operator shall have no duty to share any existing
market or transportation arrangement or to obtain a price or transportation fee
equal to that received under any existing market or transportation
arrangement.  The sale or delivery by
Operator of a non-taking party’s share of production under the terms of any
existing contract of Operator shall not give the non-taking party any interest
in or make the non-taking party a party to said contract.  Operator shall give notice to all parties of
the first sale of Gas from any well under this Agreement.


 


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


 


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.


12

















 


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 Thirty (30) days after rendition of a
statement therefor by Operator, the non-defaulting parties, including Operator,
shall upon request by Operator, pay the unpaid amount in the  proportion that the interest of each such
party bears to the interest of all such parties.  The amount paid by each party so paying its share of the unpaid
amount shall be secured by the liens and security rights described in
Article VII.B., and each paying party may independently pursue any remedy
available hereunder or otherwise.


 


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


 


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


 


C.  Advances:


 


Operator, at
its election, shall have the right from time to time to demand and receive from
one or more of the other parties payment in advance of their respective shares
of the estimated amount of the expense to be incurred in operations hereunder
during the next succeeding month, which right may be exercised only by
submission to each such party of an itemized statement of such estimated
expense, together with an invoice for its share thereof.  Each such statement and invoice for the
payment in advance of estimated expense shall be submitted on or before the
20th day of the next preceding month. 
Each party shall pay to Operator its proportionate share of such
estimate within thirty (30) days after date of invoice and after such estimate
and  invoice is received.  If any party fails to pay its share of said
estimate within said time, the amount due shall bear interest as provided in
Exhibit “C” until paid.  Proper
adjustment shall be made monthly between advances and actual expense to the end
that each party shall bear and pay its proportionate share of actual expenses
incurred, and no more.


 


D.  Defaults and Remedies:


 


If any party
fails to discharge any financial obligation under this agreement, including
without limitation the failure to  make
any advance under the preceding Article VII.C. or any other provision of
this agreement, within the period required for such payment hereunder, then in addition
to the remedies provided in Article VII.B. or elsewhere in this agreement,
the remedies specified below shall be applicable.  For purposes of this Article VII.D., all notices and
elections shall be delivered


 


13

















 


only by Operator, except that Operator
shall deliver any such notice and election requested by a non-defaulting
Non-Operator, and when Operator is the party in default, the applicable notices
and elections can be delivered by any Non-Operator.  Election of any one or more of the following remedies shall not
preclude the subsequent use of any other remedy specified below or otherwise
available to a non-defaulting party.


 


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


 


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


 


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


 


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


 


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


 


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


 


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


 


Rentals,
shut-in well payments and minimum royalties which may be required under the
terms of any lease shall be paid by the party or parties 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.


 


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.”


 


14

















 


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.  The parties notified shall
have the right for a period of thirty (30) days following delivery of such
notice in which to elect to participate in the ownership of the renewal or replacement
Lease, insofar as such Lease affects lands within the Contract Area, by paying
to the party who acquired it their proportionate shares of the acquisition cost
allocated to that part of such Lease within the Contract Area, which shall be
in proportion to the interest held at that time by the parties in the Contract
Area.  Each party who participates in
the purchase of a renewal or replacement Lease shall be given an assignment of
its proportionate interest therein by the acquiring party.


 


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


 


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


 


The provisions
of this Article shall apply to renewal or replacement Leases whether they
are for the entire interest covered by 
the expiring Lease or cover only a portion of its area or an interest
therein.  Any renewal or replacement
Lease taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this agreement
is in effect at the time of such acquisition or at the time the renewal or
replacement Lease becomes effective; but any Lease taken or contracted for more
than six (6) months after the expiration of an existing Lease shall not be
deemed a renewal or replacement Lease and shall not be subject to the
provisions of this  agreement.


 


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


 


C.
Acreage or Cash Contributions:


 


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


 


15

















 


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:


 


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


 


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


 


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


 


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





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


 


E.
Waiver of Rights to Partition:


 


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


 


ARTICLE IX.


INTERNAL REVENUE CODE ELECTION


 


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


 


ARTICLE X.


CLAIMS AND LAWSUITS


 


Operator may
settle any single uninsured third party damage claim or suit arising from
operations hereunder if the expenditure does not exceed  twenty
thousand and No/100 Dollars ($  20,000) and if the payment is in
complete settlement of such claim or suit. 
If the amount required for settlement exceeds the above amount, the
parties hereto shall assume and take over the further handling of the claim or
suit, unless such authority is delegated to Operator.  All costs and expenses of handling settling, or otherwise
discharging such claim or suit shall be a the joint expense of the parties
participating in the operation from which the claim or suit arises.  If a claim is made against any party or if
any party is sued on account of any matter arising from operations hereunder
over which such individual has no control because of the rights given Operator
by this agreement, such party shall immediately notify all other parties, and
the claim or suit shall be treated as any other claim or suit involving
operations hereunder.


 


16

















 


ARTICLE XI.


FORCE MAJEURE


 


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


 


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


 


ARTICLE XII.


NOTICES


 


All notices
authorized or required between the parties by any of the provisions of this
agreement, unless otherwise specifically provided, shall be in writing and
delivered in person or by United States mail, courier service, telegram, telex,
telecopier or any other form of facsimile, postage or charges prepaid, and
addressed to such parties at the addresses listed on Exhibit “A.”  All telephone or oral notices permitted by
this agreement shall be confirmed immediately thereafter by written
notice.  The originating and responsive
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
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. 
When response is required within 24 or 48 hours, such response shall be
given orally or by telephone, telex, telecopy or other facsimile within such
period.  Each party shall have the right
to change its address at any time, and from time to time, by giving written
notice thereof to all other parties.  If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 or 48 hours,
the notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice.


 


ARTICLE XIII.


TERM OF AGREEMENT


 


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


 


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


 


o            Option No. 2:
In the event the well described in Article VI.A., or any subsequent well
drilled under any provision of this agreement, results in the Completion of a
well as a well capable of production of Oil and/or Gas in paying quantities,
this agreement shall continue in force so long as any such well is capable of
production, and for an additional period of
             
days thereafter; provided, however, if, prior to the expiration of such
additional period, one or more of the parties hereto are engaged in drilling,
Reworking, Deepening, Sidetracking, Plugging Back, testing or attempting to
Complete or Re-complete a well or wells hereunder, this agreement shall
continue in force until such operations have been completed and if production
results therefrom, this agreement shall continue in force as provided
herein.  In the event the well described
in Article VI.A., or any subsequent well drilled hereunder, results in a
dry hole, and no other well is capable of producing Oil and/or Gas from the
Contract Area, this agreement shall terminate unless drilling, Deepening,
Sidetracking, Completing, Re-completing, Plugging Back or Reworking operations
are commenced within
             
days from the date of abandonment of said well.  “Abandonment” for such purposes shall mean either (i) a decision
by all parties not to conduct any further operations on the well or (ii) the
elapse of 180 days from the conduct of any 
operations on the well, whichever first occurs.


 


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


 


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


 


ARTICLE XIV.


COMPLIANCE WITH LAWS AND REGULATIONS


 


A. Laws, Regulations and Orders:


 


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


 


B. Governing Law:


 


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


 


C. Regulatory Agencies:


 


Nothing herein contained shall grant, or be construed to grant,
Operator the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or


 


17

















 


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


 


A.           Prompt Response to
Notice:


 


Notwithstanding
anything to the contrary herein, all periods of time set forth for responses to
notices and consents shall be inclusive of Saturday, Sunday and legal holidays.


 


18

















 


IN WITNESS
WHEREOF, this agreement shall be effective as of the 1st
                  day
of July                   ,
2003.  Woolsey Operating Company, LLC,
who has prepared and circulated this form for execution, represents and
warrants that the form was printed from and, with the exception(s) listed
below, is identical to the AAPL Form 610-1989 Model Form Operating Agreement,
as published in computerized form by Forms On-A-Disk, Inc.  No changes, alterations, or modifications,
other than those made by strikethrough and/or insertion and that are clearly
recognizable as changes in Articles as shown, have been made to the form. 


 


 


	
  ATTEST OR WITNESS:

  	
   

  	
   

  	
  OPERATOR – Woolsey Operating Company, LCC

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  I. Wayne Woolsey

  
	
   

  	
   

  	
   

  	
  Type or
  print name

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Title:

  	
  Manager

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Date

  	
  July 23,
  2003

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Tax ID or
  S.S. No. 43-1984904

  
						



 


NON-OPERATORS


 


 


	
   

  	
   

  	
   

  	
  BETA OIL
  & GAS, INC.

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  David A.
  Wilkins

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Type or
  print name

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  Title
  President & CEO

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
  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.

  	
   

  	
   

  
													



 


19

















 


ACKNOWLEDGMENTS


 


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


 


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


 


 


Acknowledgment in
representative capacity:


 


	
  State of
  Kansas

  	
  )

  
	
   

  	
   

  
	
   

  	
  ) ss.

  
	
   

  	
   

  
	
  County of
  Sedgwick

  	
  )

  



 


This instrument was acknowledged before me on July 23, 2003 by I.
Wayne Woolsey as Manager of Woolsey Operating Company, LLC
                                                .


 


	
  (Seal, if
  any)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Notary Ava
  Ross

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  My
  commission expires: February 4, 2007

  	
   

  	
   

  
					



 


Acknowledgment in
representative capacity:


 


	
  State of
  Oklahoma

  	
  )

  
	
   

  	
   

  
	
   

  	
  ) ss.

  
	
   

  	
   

  
	
  County of 

  	
  )

  



 


This instrument was acknowledged before me on
                                               
by David A. Wilkins as President & CEO of Beta Oil & Gas,
Inc.                                                                     
..


 


 


	
  (Seal, if
  any)

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Notary 

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  My
  commission expires:

  	
   

  	
   

  
					



 


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