**Exhibit 10.19**

** **

**GAS PURCHASE CONTRACT**

 

**BETWEEN W. O. OPERATING COMPANY, LTD. AS “SELLER”**

 

**AND DUKE ENERGY FIELD SERVICES, LP AS “BUYER”**

 

**DATED NOVEMBER 1, 2003**

 

BOR147100*

 

**INDEX**

 
| **SECTION**                                  |                                                       | **PAGE** |
|----------------------------------------------|------------------------------------------------------------|----------|
|                                         |                                                       |     |   |
| 1.                                           | COMMITMENT                                                 |     | 1 |
| 2.                                           | DELIVERY POINTS                                            |     | 1 |
| 3.                                           | DELIVERY PRESSURE                                          |     | 1 |
| 4.                                           | QUANTITY                                                   |     | 1 |
| 5.                                           | PRICE                                                      |     | 2 |
| 6.                                           | TERM                                                       |     | 5 |
| 7.                                           | ADDRESSES AND NOTICES                                      |     | 6 |
| 8.                                           | TERMINATION OF PRIOR CONTRACTS AND RELEASE SIGNATURE  PAGE |     | 7 |
|                                         |                                                       |     |   |
| EXHIBIT A GENERAL  TERMS AND CONDITIONS |                                                       |     |
|                                         |                                                       |     |
| A.                                           | DEFINITIONS                                                |     | A-1 |
| B.                                           | DELIVERY DATE                                              |     | A-1 |
| C.                                           | RESERVATIONS OF SELLER                                     |     | A-2 |
| D.                                           | METERING                                                   |     | A-2 |
| E.                                           | DETERMINATION OF GAS COMPOSITION                           |     | A-3 |
| F.                                           | QUALITY OF GAS                                             |     | A-3 |
| G.                                           | BILLING AND PAYMENT                                        |     | A-4 |
| H.                                           | FORCE MAJEURE                                              |     | A-4 |
| I.                                           | WARRANTY OF TITLE                                          |     | A-5 |
| J.                                           | ROYALTY                                                    |     | A-5 |
| K.                                           | SEVERANCE AND SIMILAR TAXES                                |     | A-5 |
| L.                                           | INDEMNIFICATION AND RESPONSIBLITY FOR INJURY OR  DAMAGE    |     | A-5 |
| M.                                           | RIGHT OF WAY                                               |     | A-6 |
| N.                                           | ASSIGNMENT                                                 |     | A-6 |
| O.                                           | MISCELLANEOUS PROVISIONS                                   |     | A-6 |

 

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**GAS PURCHASE CONTRACT**

 

This Contract isentered as of the 1st day of November 2003, between **W.****O. OPERATING****COMPANY, LTD.**(“Seller”) and **DUKE ENERGY FIELD SERVICES, LP**(“Buyer”).

 

For and in consideration of the mutual covenants contained herein, theparties agree as follows:

 

**1.**             **COMMITMENT**. Seller will sell and deliver, and Buyerwill purchase and receive gas produced from all wells now or later located onall oil and gas interests now or later owned or controlled by Seller on orallocated to the following lands in Carson County, Texas:

 

W/2 Section 89, Block 7, I&GN Survey

 

NE/4 SW/4 Section 89, Block 7, I&GN Survey

 

The above lands contain the following well(s), which are or soon willbe producing:

 

Rosa #1

 

Rosa #3

 

Definitions and General Terms and Conditions included in this Contractare attached as Exhibit A and incorporated by reference.

 

**2.             DELIVERYPOINTS.**  The Delivery Points for gas to bedelivered by Seller to Buyer for existing sources of production will be at theinlets of Buyer’s Facilities at a mutually agreeable site at or near Seller’ssources of production. The Delivery Points for future sources of productioncommitted under this Contract will be established under Section B.2 of Exhibit A.Title to the gas and all its components shall pass to and vest in Buyer at theDelivery Points without regard to the purposes for which Buyer may later use orsell the gas or its components.

 

**3.**             **DELIVERY PRESSURE.**  Sellerwill deliver the gas at the Delivery Points at a pressure sufficient to enableit to enter Buyer’s Facilities against the working pressure at reasonablyuniform rates of delivery, not to exceed the maximum allowable operatingpressure established by Buyer or pressures that prevent others from producingratably. Buyer in its discretion may require that Seller install and operate apressure relief or reduction device upstream of any Delivery Point set at thepressure designated by Buyer to limit the pressure at

 

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which Seller deliversgas, where Seller’s deliveries might interfere with ratable deliveries fromothers or to enhance safety.

 

**4.             QUANTITY.**  (a) Seller shall deliver and Buyer shall purchase and take Seller’s gas subject tothe operating conditions and capacity of Buyer’s Facilities and resale markets.Although there is no specific purchase quantity, Buyer will Use commerciallyreasonable efforts to market gas for resale and operate its facilities in aneffort to maintain consistent takes of all available quantities.  If Buyer takes less than the full quantitiesavailable, Buyer will use commercially reasonable efforts to purchase gas fromthe lands covered by this Contract ratably with its purchases of similar gas ineach common gathering system or area within its capabilities using existingfacilities, in compliance with Buyer’s existing contracts and with applicablelaws and regulations, including ratable purchases from Buyer’s affiliates.

 

(b)           Seller may disposeof any gas not taken by Buyer for any reason, including events of forcemajeure, subject to Buyer’s right to resume purchases at any subsequenttime.  In the event Buyer does not takegas for 15 consecutive days and Seller secures a different temporary market,Buyer may resume purchases only upon 15 days’ advance written notice as of the beginningof a month unless otherwise agreed.

 

(c)           Seller will usecommercially reasonable efforts to deliver gas meeting the quality requirementsand to avoid delivery of Inferior Liquids as defined in Exhibit A, Section A(g).In the event the gas at any Delivery Point becomes insufficient in volume,quality, or pressure, Buyer may cease gas takes from those points so long asthe condition exists, or may terminate this Contract as to any affected gasupon 30 days advance written notice to Seller. If Buyer ceases taking gas under this Section for 30 consecutivedays for reasons other than quality [Ex. A Sec. F] or force majeure [Ex. A Sec.H], Seller may terminate this Contract with respect to the affected sources asto the then productive zones upon 30 days’ advance written notice to Buyer; providedthat during the notice period Buyer may resume consistent takes and purchases,and thereby avoid Contract termination under Seller’s notice.

 

**5.             PRICE**.

 

**5.1          Consideration**.  As full consideration for the gas and all itscomponents delivered to Buyer each month. Buyer shall pay Seller (i) percentagedetermined in Table 5.1 below of the net value determined under Section 5.2below for residue gas attributable to Seller’s gas, and (ii) percentagedetermined in Table 5.1 below of the net value determined under Section 5.3below

 

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for any NGL’sattributable to Seller’s gas.  Noseparate payment or value calculation is to be made under this Contract forhelium, sulfur, CO2, other non-hydrocarbons, or Inferior Liquids.

 

**Table 5.1**

 
| **Average MCFD delivered  hereunder in a  production month/delivery point** | ** ** | **Percentage in 5.1 (i) and 5.1 (ii) for  such production month** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|
| 0-150 MCFD                                                                  |       | 75%                                                                         |
|                                                                        |       |                                                                        |
| 151 and Greater  MCFD                                                       |       | 80%                                                                         |

 

**5.2          ResidueGas Value**.  The netresidue gas value will be determined by multiplying the MMBtu’s of residue gasattributable to Seller times the “Index Price,” which shall be 98% of the priceper MMBtu published in *Inside F.E.R.C. ‘sGas Market Report*in its first publication of the month in which thegas is delivered for “Prices of Spot Gas Delivered to Pipelines” for PanhandleEastern Pipeline Company: Texas, Oklahoma (mainline). If this price quotationis discontinued or materially modified, its successor will be used, or in theabsence of a successor, Buyer will select another publication that enablescalculation of an Index Price closely comparable to that previously used.  If a change in the Index Price calculationbecomes necessary, Buyer will so inform Seller by written notice, setting forththe changes.

 

**5.3          NGL Value.**  The net valueof any recovered NGLs attributable to Seller will be determined by multiplyingthe quantity of each NGL component attributable to Seller’s gas by the averageprice per gallon for each NGL component f.o.b. Buyer’s plant or plants.  The term “average price per gallon for eachNGL component f.o.b. Buyer’s plant or plants” as to each NGL component willmean the simple average of the midpoint of the daily high/low spot price for (i) ethane,(ii) propane, (iii) isobutane, (iv) normal butane, and (v) naturalgasoline (pentanes and heavier) during the month as reported for Conway/Group140 Spot Gas Liquids Price (Mapco), Kansas published by the Oil PriceInformation Service (or in its absence, a comparable successor publicationdesignated by Buyer) less a transportation, fractionation, and storage (“TF&S”)fee of $0.065244 per gallon. The TF&S fee for NGL components shall beadjusted as follows, but shall never be less than the initial fee.  The TF&S fee shall be adjusted at the beginningof each calendar year beginning with 2004 by an amount equal to the annual percentagechange in the preliminary estimate of the implicit price deflator, seasonallyadjusted, for the gross domestic product (“GDP”) as computed and most recentlypublished by the U.S.

 

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Department of Commerce, or in its absence, a similar successoradjustment factor designated by Buyer.

 

**5.4          LowVolume Delivery Points. **Theprice for gas delivered at any Delivery Point where the volume delivered toBuyer has been less than 450 Mcf per month for three consecutive months will bereduced to one-half (1/2) of that computed under Section 5.1, 5.2 and 5.3 effectivethe first day of the month following the three month period. The price for gasfrom the affected Delivery Points will remain so reduced until the quantitydelivered from the Delivery Point is again at least 450 Mcf per month for threeconsecutive months effective as of the first day of the following month.

 

**5.5**          **Allocation of ResidueGas****and NGL’s.** Buyer will determinethe residue gas and NGL’s attributable to Seller using the followingdefinitions and procedures.  Additional definitionsare in Section A of Exhibit A.  From time to time Buyer may make changes and adjustmentsin its allocation methods to improve accuracy of efficiency.

 

(a)        Field Compression-allCompression downstream from the Delivery Points, including that adjacent to theplant inlet, that compresses gas to the plant inlet pressure.

(b)        Low Pressure Gas-anygas delivered by Seller into Buyer’s Facilities at pressures that allow receiptat Buyer’s Field Compression at a compressor station inlet pressure equal to orless than zero pounds psig.

(c)        IntermediatePressure Gas-any gas delivered by Seller into Buyer’s Facilities at pressuresthat allow receipt at Buyer’s Field Compression at a compressor station inletpressure of greater than zero pounds (0#) psig.

(d)        High Pressure Gas-anygas delivered by Seller into Buyer’s Facilities that is not compressed by FieldCompression.

(e)        Plant Inlet Gallons-thequantity of each NGL component attributable to Seller delivered to the plantinlet will be determined by multiplying the gallons of each component containedin the gas delivered by Seller at each Delivery Point by the applicablepercentage as follows:

 
| High Pressure         |   | 90 | % |
|-----------------------|--------|----|---|
| Intermediate Pressure |   | 88 | % |
| Low Pressure          |   | 85 | % |

 

(f)         NGL’s Attributableto Seller-the quantity of each NGL component attributable to Seller’s gaswill be determined by multiplying Seller’s Plant Inlet Gallons times fixedrecovery percentages as follows:

 

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| Ethane                        |   | 50 | % |
|-------------------------------|--------|----|---|
| Propane                       |   | 90 | % |
| Iso & Normal Butanes |   | 95 | % |
| Pentanes & Heavier   |   | 95 | % |

 

(g).       Residue GasAttributable to Seller-the MMBtu’s of residue gas attributable to Sellerwill be the sum of the MMBtu’s of methane and heavier hydrocarbons contained inthe gas delivered at the Delivery Points by Seller, less the MMBtu’s containedin the NGL gallons allocated to Seller’s gas determined under Section 5.5(f) above,less the applicable percentage below of the MMBtu’s delivered at each DeliveryPoint for gathering and plant fuel, losses, and unaccountables:

 
| High Pressure         |   | 10 | % |
|-----------------------|--------|----|---|
| Intermediate Pressure |   | 12 | % |
| Low Pressure          |   | 15 | % |

 

Whenever force majeure ormaintenance needs prevent normal gathering and processing operations for Seller’sgas, fixed recovery percentages will not apply, and Seller’s attributable NGLgallons and residue gas will be based on Seller’s prorata share of actualgathering and processing results during those periods based on gascompositions, volumes from each common source, and an equitable distributionamong suppliers of fuel, losses, and unaccountables, in a manner similar tothat used for Buyer’s purchase contracts that call for allocations based onactual results.  Buyer will include theadjusted overall monthly recoveries in its monthly gas statement to Seller.

 

**5.6          PriceRenegotiation Rights.**  Notwithstanding theforegoing provisions of this Section 5, PRICE, if at any time, and fromtime to time, Buyer in its sole judgment determines that at any or all DeliveryPoints, regulatory or operating conditions relating to Buyer’s Facilities ormarket conditions relating to Buyer’s purchase of gas or resale of residue gasand NGL’s indicate that a downward price revision is necessary or appropriate,then Buyer may notify Seller of Buyer’s intent to renegotiate Seller’s priceand pricing basis or to terminate this Contract, upon 30 days advance writtennotice from Buyer to Seller prior to the proposed effective date. If Seller isnot willing to accept a renegotiated price nominated by Buyer, then as to allgas affected by Buyer’s notice, Seller may (i) cause a renegotiation ofpricing percentages or (ii) terminate this Contract as to the affected gasby written notice to Buyer at any time prior to the effective date of Buyer’snominated price. Whether or not notice of termination is given by Seller withinthat period, if Seller makes and Buyer accepts deliveries of gas from theaffected sources after

 

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the effective date of theprice change, Seller will be deemed to have accepted Buyer’s nominated pricefor those deliveries.

 

**6.             TERM.**This Contract shall be in force for a primary term extendingthrough October 31, 2008, and from year to year thereafter until canceled by eitherparty as of the end of the primary term or any anniversary thereafter by givingthe other party at least 60 but not more than 120 days’ advance written noticeof termination.

 

**7.             ADDRESSESAND NOTICES****.**  Either party may give notices to the otherparty or parties by first class mail postage prepaid, by overnight deliveryservice, or by facsimile with receipt confirmed at the following addresses orother addresses furnished by a party by written notice.  Unless Seller objects in writing, Buyer mayalso use Seller’s current address for payments. Any telephone numbers below aresolely for information and are not for Contract notices.  The parties opt out of electronic delivery ofnotices and amendments under this Contract, except that notices and hand signedamendments may be delivered by facsimile with receipt confirmed as statedabove.

 
| Notices to Seller:                 | W.O. Operating Company,  Ltd.      |
|------------------------------------|------------------------------------|
|                               | Attn: Gas Contract  Administration |
|                               | P. O. Box 960                      |
|                               | Pampa, TX 79066-0960               |
|                               | Phone:                             | (806) 665-8298 |
|                               | Fax:                               | (806) 665-1960 |
|                               |                               |
| Notices to Buyer – General:   | Duke Energy Field  Services, LP    |
| (Gas Acquisitions and  Accounting) | Two Warren Place                   |
|                               | 6120 South Yale,  Suite 1100  |
|                               | Tulsa, OK 74136                    |
|                               | Phone:                             | (918) 492-3331 |
|                               | Fax:                               | (918) 492-3375 |
|                               |                               |
| Ownership changes,  Division       | Duke Energy Field  Services, LP    |
| Orders:                            | Attn: Division Orders              |
|                               | Two Warren Place                   |
|                               | 6120 South Yale,  Suite 1100  |
|                               | Tulsa, OK 74136                    |
|                               | Fax: (918) 499-4286                |

 

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**8.             TERMINATIONOF PRIOR CONTRACTS AND RELEASE.**

 

**8.1          Terminationand Release.**  This Contract terminates and supersedes any prior contracts for thesale or handling of gas between the parties or their predecessors in interestthat apply or applied to any gas produced from any sources covered by thisContract effective as of its date. In negotiating the terms of this Contract,the parties have compromised and settled any and all price, fee payment, andother disputes relating to or under the superseded contract(s). Inconsiderationof the covenants contained herein, each party hereby releases the other party,its affiliates, and its predecessors in interest under the prior contracts fromany causes of action, claims, and liabilities (i) that they failed to paythe full prices or fees under the prior contracts, including interest, (ii) thatthey failed to perform any other obligation under the prior contracts, and (iii) arisingfrom their relationship as parties to the prior contracts

 

**8.2          Exceptions.**  Thistermination and release does not include, and the parties expressly retain, theright to receive payments under the prior contract(s) for current gas productionfor which payment is not yet due and for which a party has not yet made paymentin the ordinary course of business.  Thismutual release also does not include matters relating to title to gas and gasprocessing rights, Seller’s obligations for payment of third parties and severancetaxes, related interest and penalties, or gas imbalances under prior gatheringor take in kind agreements.

 

IN WITNESS WHEREOF, the parties haveset their hands in person or by their duly authorized representatives as of thedate set first forth above.

 

 
| **W. O. OPERATING COMPANY, Ltd.** | **DUKE ENERGY FIELD SERVICES, LP** |
|-----------------------------------|------------------------------------|
|                              |                               |
|                              |                               |
| By                                | /s/ Miles O’ Loughlin         |   | By | /s/ Mark B. Concienne |   |
|                              |                               |
| Title:                            | Manager                            |   | Title: | Managing Director |   |
|                              |                               |
| Executed on                       |    3-18-04          |   | Executed on |    3/25/04 |   |
|                              | Seller                             |   | Buyer |
|                                   |                                    |  |  |  |  |  |  |  |  |  |  |

 

 

Signature Sheet for Gas Purchase Contract

 

Dated as of November 1, 2003

 

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**EXHIBIT A**

 

**TO GASPURCHASE CONTRACT**

** **

**BETWEENW.O. OPERATING COMPANY, LTD. AS “SELLER”**

** **

**AND DUKEENERGY FIELD SERVICES, LP AS “BUYER”**

** **

**DATED ASOF NOVEMBER 1, 2003**

 

BOR147100*

 

**GENERALTERMS & CONDITIONS**

 

**A. DEFINITIONS**

 

Except where the contextindicates a different meaning or intent, and whether or not capitalized, thefollowing terms will have meaning as follows:

 

a. Affiliate-acompany (i) in which a party owns directly or indirectly more than 50% ofthe issued and outstanding voting stock or other equity interests; (ii) whichowns directly or indirectly more than 50% of the issued and outstanding votingstock or equity interests of the party; (iii) in which a company describedin (ii) owns, directly or indirectly, more than 50% of the issued andoutstanding voting stock or other equity interests, or (iv) coventurers ofthe Duke Energy Field Services, LP or its successors.

 

b. Btu-BritishThermal Unit, or the quantity of heat required to raise the temperature of 1pound of water 1°F at a starting temperature of 59.5°F. MMBtu-onemillion Btu’s.

 

c. Buyer’s Facilities-the gas delivered by Seller will be gathered in gathering systems and may beredelivered to a gas processing plant or plants for the removal of NGL’stogether with gas produced from other properties. The gathering systems andplant or plants, or successor facilities, are “Buyer’s Facilities” whetherowned by Buyer, an affiliate of Buyer, or an unaffiliated third party. Nofacilities downstream of the processing plant or plants other than shortconnecting lines to transmission lines are included in “Buyer’s Facilities.”

 

d. Day-a period of24 consecutive hours beginning and ending at 9:00 a.m. Central Clock Time.

 

e. Force Majeure-seeSection H.2 below.

 

f. Gas-all naturalgas available from the wells or acreage subject to this Contract that arrivesat the surface in the gaseous phase, including all hydrocarbon andnon-hydrocarbon components, casinghead gas produced from oil wells, gas wellgas, stock tank vapors, and other sources of production, unless specificallyexcluded in the Commitment Section above.

 

g. Inferior Liquids-mixedcrude oil, slop oil, salt water, nuisance liquids, and other liquids recoveredby Buyer in its gathering system or at plant inlet receivers. Revenues fromInferior Liquids, drips, and other gathering system liquids will be retained byBuyer to defray costs of treating and handling; Buyer will not allocate or payfor those liquids.

 

f. Mcf-1,000 cubicfeet of gas at a standard condition of 60°F and 14.65 psia.

 

i. Month-acalendar month beginning on the first Day of a month.

 

j. NGL or NGL’s-ethaneand heavier liquefiable hydrocarbons separated from gas and any incidentalmethane in NGL after processing. See Section 5.3(i) through (v) forparticular components.

 

k. Delivery Points-whetherone or more, see Sections 2, B.1, and B.2.

 

l. psi-pounds persquare inch; psia-psi absolute; psig-psi gauge.

 

m. Residue gas-merchantablehydrocarbon gas available for sale from Buyer’s Facilities remaining afterprocessing, and hydrocarbon gas resold by Buyer without first being processed.

 

n. TF&S-NGLtransportation, fractionation, and storage, see Section5.3.

 

**B. DELIVERY DATE; COMPRESSION**

 

**B.1 Existing Sources DeliveryDate.**

 

As to committed sourcesof production, deliveries under this Contract will commence within thirty (30)days of the earlier of (a) Oneok’s refusal to match Buyer’s bona fideoffer contained herein; or (b) termination of the contract currently ineffect between Oneok and Seller. Seller hereby agrees to provide timely andproper notice to terminate such contract. As to committed sources of productionexisting as of the date of this Contract but not yet connected, Seller willcommence and complete with due diligence the construction of the facilitiesnecessary to enable Seller to deliver the committed gas at the Delivery Points,and Buyer will cause prompt commencement and complete with due diligence theconstruction of the facilities necessary and economically feasible to enableBuyer or its gas gathering contractor to receive gas deliveries at the DeliveryPoints.

 

**B.2 Additional SourcesDelivery Date.**

 

As to committed sourcesof production acquired, drilled, or discovered after the date of this Contract,Seller will

 

A-1

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commence and completewith due diligence the construction of the facilities necessary to enableSeller to deliver gas at the Delivery Points established for the additionalproduction. Buyer will cause prompt commencement and complete with duediligence construction of the facilities necessary and economically feasible toenable Buyer or its gas gathering contractor to receive deliveries of gas atthose Delivery Points. If Buyer determines it is not profitable to constructthe facilities, Seller will have the option to construct facilities necessaryto deliver gas into Buyer’s then existing facilities. In the event neitherparty elects to construct the necessary facilities, either party may cancelthis Contract as to the affected gas upon 15 days advance written notice to theother.

 

**B.3 Delivery Rates.**

 

Seller will have agentsor employees available at all reasonable times to receive from Buyer’sdispatchers advice and directions for changes in the rates of delivery of gasas required by Buyer from time to time.

 

**B.4 Options to Compress.**

 

If Seller’s wells becomeincapable of delivering gas into Buyer’s Facilities, neither party will beobligated to compress, but either party will have the option to do so. Ifneither party elects to compress within a reasonable time after the need forcompression appears, Buyer upon written request of Seller will either arrangepromptly to provide compression or release the gas sources unable to delivergas into Buyer’s Facilities as to the then-producing formations from commitmentunder this Contract.

 

**C. RESERVATIONS OF SELLER**

 

**C.1 Reservations.**

 

Seller reserves thefollowing rights with respect to its interests in the oil and gas propertiescommitted by Seller to Buyer under this Contract together with sufficient gasto satisfy those rights:

 

a. To operate Seller’soil and gas properties free from control by Buyer, in such manner, as Seller,in Seller’s sole discretion deems advisable, including without limitation theright, but never the obligation, to drill new wells, to repair and rework oldwells, renew or extend, in whole or in part, any oil and gas lease covering anyof the oil and gas properties, and to abandon any well or surrender any suchoil and gas lease, in whole or in part, when no longer deemed by Seller to becapable of producing gas in paying quantities under normal methods ofoperation.

 

b. To use gas fordeveloping and operating Seller’s oil and gas properties committed under thisContract and to fulfill obligations to Seller’s lessors for those properties.

 

c. To pool, combine, andunitize any of Seller’s oil and gas properties with other properties in thesame field, and to alter pooling, combinations, or units, in which event thisContract will cover Seller’s allocated interest in unitized production insofaras that interest is attributable to the oil and gas properties committed underthis Contract, and the description of property committed will be considered tohave been amended accordingly.

 

**C.2 Exception.**

 

Notwithstanding, Sellerwill not engage in any operation, including without limitation reinjection,recycling, or curtailment, that would materially reduce the amount of gasavailable for sale to Buyer except upon 120 days advance written notice toBuyer, or as much advance notice as is feasible under the circumstances. In theevent Seller ceases or materially curtails deliveries to Buyer under this Section C,the Contract term will be extended by the duration of the interruptions andcurtailments. Buyer will own and be entitled to collect and pay Seller for anyNGL’s that condense or are manufactured from gas during any of Seller’soperations, excluding crude oil and distillate recovered from gas byconventional type mechanical separation equipment and delivered to Buyer.

 

**D. METERING AND MEASUREMENT**

 

**D.1 Buyer to Install Meters.**

 

Buyer will install,maintain and operate office meters or other measuring devices of standard makeat or near the Delivery Points. Except as otherwise specifically provided tothe contrary in this Section D, office meters or other measurement deviceswill be installed and volumes computed in accordance with accepted industrypractice. Buyer may re-use metering equipment not meeting current standards butmeeting 1985 or later published standards for gas sources not expected todeliver in excess of 100 Mcf per day. A party providing compression facilitieswill also provide sufficient pulsation dampening equipment to prevent pulsationfrom affecting measurement at the Delivery Points. Electronic recording devicesmay be used. Seller will have access to Buyer’s metering equipment atreasonable hours, but only Buyer will read, calibrate, adjust, operate, andmaintain it.

 

**D.2 Unit of Volume.**

 

The unit of volume willbe one cubic foot of gas at a base temperature of 60°F and at a pressure baseof 14.65 psia. Computations of volumes will follow industry accepted practice.

 

**D.3 Pressure, Temperature.**

 

Buyer may measure theatmospheric pressure or may assume the atmospheric pressure to be 13.2 psia.Buyer may determine gas temperature by using a recording thermometer, otherwise,the temperature will be assumed to be 60°F. The specific gravity will be determined annually, or more often at Buyerdeems advisable.

 

**D.4 Check Meters.**

 

Seller may install,maintain, and operate in accordance with accepted industry practice at its ownexpense pressure regulators and check measuring equipment of standard makeusing separate taps. Check meters shall not interfere with operation of Buyer’sequipment.

 

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Buyer will have access toSeller’s check measuring equipment at all reasonable hours, but only Sellerwill read, calibrate, adjust, operate, and maintain it.

 

**D.5 Meter Tests.**

 

Annually, Buyer willverify the accuracy of Buyer’s measuring equipment, and Seller or its leaseoperator will verify the accuracy of any check measuring equipment. If Seller’slease operator or Buyer notifies the other that it desires a special test ofany measuring equipment, they will cooperate to secure a prompt verification ofthe accuracy of the equipment. If either at any time observes a variationbetween the delivery meter and the check meter, it will promptly notify theother, and both will then cooperate to secure an immediate verification of theaccuracy of the equipment. Only if so requested in advance by Seller inwriting, Buyer will give Seller’s lease operator reasonable advance notice ofthe time of all special tests and calibrations of meters and of sampling fordeterminations of gas composition and quality, so that the lease operator mayhave representatives present to witness tests and sampling of make joint testsand obtain samples with its own equipment. Seller will give or cause its leaseoperator to give reasonable advance notice to Buyer of the time of tests andcalibrations of any check meters and of any sampling by Seller fordetermination of gas composition and quality.

 

**D.6 Correction of Errors.**

 

If at any time any of themeasuring or testing equipment is found to be out of service or registeringinaccurately in any percentage, it will be adjusted promptly to read accuratelywithin the limits prescribed by the manufacturer. If any measuring equipment isfound to be inaccurate or out of service by an amount exceeding the greater oftwo percent at a recording corresponding to the average hourly rate of flow forthe period since the last test, or 100 Mcf per month, then previous readingswill be corrected to zero error for any known or agreed period. The volume ofgas delivered during that period will be estimated by the first feasible of thefollowing methods:

 

a.     using the data recorded by any checkmeasuring equipment if registering accurately;

 

b.     correcting the error if the percentage oferror is ascertainable by calibration, test, or mathematical calculation; or

 

c.     by estimating the quantity or qualitydelivered based on deliveries under similar conditions during a period when theequipment was registering accurately.

 

No adjustment will bemade for inaccuracies unless they exceed the greater of two percent of affectedvolumes, or 100 Mcf per month.

 

**D.7 Meter Records.**

 

The parties will preservefor a period of at least two years all test data, charts and similarmeasurement records. The parties will raise metering questions as soon aspracticable after the time of production. No party will have any obligation topreserve metering records for more than two years except to the extent that ametering question has been raised in writing and remains unresolved.

 

**E. DETERMINATION OF GASCOMPOSITION AND HEATING VALUE**

 

Annually, or more oftenas Buyer deems advisable, Buyer will obtain a representative sample of Seller’sgas delivered at each Delivery Point; or Buyer may use continuous samplers. Bychromatography or other accepted method in the industry, Buyer will determinethe composition and gross heating value of the hydrocarbon components of Seller’sgas in Btu per cubic foot on a dry basis at standard conditions, then adjustingthe result for the water vapor content of the gas (by either the volume or Btucontent method), using an industry accepted practice. No heating value will becredited for Btu’s in H2S and other nonhydrocarbon components. Thefirst determination of Btu content for Seller’s deliveries will be made withina reasonable time after deliveries of gas begin. If continuous samplers areused, the determinations will apply to the gas delivered while the sampler wasinstalled. If not, the determination will apply until the first day of themonth following the next determination.

 

**F. QUALITY OF GAS**

 

**F.1 Quality Specifications**

 

The gas shall bemerchantable natural gas, at all times complying with the following qualityrequirements. The gas shall be commercially free of crude oil, water in theliquid phase, brine, air, dust, gums, gum-forming constituents, bacteria, andother objectionable liquids and solids, and not contain more than:

 

a.     1/4 grain of H2S per 100 cubicfeet.

 

b.     Five grains of total sulfur nor more thanone grain of mercaptan per 100 cubic feet.

 

c.     Two mole percent of carbon dioxide.

 

d.     Three mole percent of nitrogen

 

e.     20 parts per million by volume of oxygen,and not have been subjected to any treatment of process that permits or causesthe admission of oxygen, that dilutes the gas, or otherwise causes it to failto meet these quality specifications.

 

f.      Five mole percent of combined carbondioxide, nitrogen, and oxygen.

 

The gas shall:

 

g.     Not exceed 120°F in temperature at theDelivery Point.

 

h.     Have a total heating value of at least 1050Btu’s per cubic foot.

 

**F.2 Quality Tests.**

 

Buyer will makedeterminations of conformity of the gas with the above specifications usingprocedures generally accepted in the gas industry. Such determinations will bemade as often as Buyer reasonably deems necessary.

 

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If in the lease operator’sjudgment the result of any such test or determination is inaccurate, Buyer uponrequest will again conduct the questioned test or determination. The costs ofthe additional test or determination will be borne by Seller unless it showsthe original test or determination to have been materially inaccurate.

 

**F.3 Separation Equipment.**

 

Seller will employ onlyconventional mechanical separation equipment at all production sites covered bythis Contract. Low temperature, absorption, and similar separation facilitiesare not considered conventional mechanical separation equipment. Except forliquids removed through operation of conventional mechanical separators andexcept for removal of substances as required to enable Seller to comply withthis Section F, no components of the gas will be removed prior to deliveryto Buyer.

 

**F.4 Rights as to OffSpecification**

 

a. If any of the gasdelivered by Seller fails to meet the quality specifications stated in thisSection, Buyer may at its option accept delivery of and pay for such gas ordiscontinue or curtail taking of gas at any Delivery Point whenever its qualitydoes not conform to the quality specifications. If Buyer accepts delivery ofoff specification gas from Seller or incurs costs relating to inferior gasquality in its gathering system, Buyer may deduct from the proceeds otherwisepayable a reasonable fee for monitoring the gas quality and treating andhandling the gas. Buyer typically adjusts gas quality deduction levelsannually, but may do so more often if needed.

 

b. If Buyer is decliningto take off quality gas, Seller may by written notice to Buyer request arelease of the affected gas from commitment under this Contract. In that event,Buyer will within 30 days either (i) waive its right to refuse to take theaffected off quality gas (subject to its right to charge treating fees underthis Section F) and again take gas from the affected sources, or (ii) releasethe affected gas from commitment under this Contract.

 

**G. BILLING AND PAYMENT**

 

**G.1 Statement and PaymentDate.**

 

Buyer will render toSeller on or before the last working day of each month a statement showing thevolume of gas delivered by Seller during the preceding month. Buyer will makepayment to Seller on or before the last day of each month for all gas deliveredduring the preceding month. As between the parties, late payments by Buyer andrecoupments/refunds from Seller will carry simple interest at the lesser of 6%per annum or the maximum lawful interest rate; provided that no interest willaccrue as to monthly principal amounts of less than $1,000 due for less thanone year when paid. The parties waive any rights to differing interest rates.Except as limited in Section G.2 below, Buyer may recover any overpaymentsor collect any amounts due from Seller to Buyer for any reason at any timeunder this or other transactions by deducting them from proceeds payable toSeller.

 

**G.2 Audit Rights; Time Limitto Assert Claims.**

 

a. Subject to theexecution of a reasonable confidentiality obligation, each party will have theright during reasonable business hours to examine the books, records and chartsof the other party and to review its own records to the extent necessary toverify performance of this Contract and the accuracy of any statement, chargeor computation. If any examination reveals an inaccuracy in any payment, theappropriate adjustment will promptly be made.

 

b. No adjustment for anybilling or payment will be made, and payments shall be final after the lapse oftwo years from their due date except to the extent that (i) either partyhas noted a specific exception to the other party in writing during thatperiod, (ii) Buyer has made the appropriate correction, or (iii) underpaymentclaims arise with respect to severance tax or third party liabilities andrelated interest.

 

c. No party will have anyright to recoup or recover prior overpayments or underpayments that result fromerrors that occur in spite of good faith performance if the amounts involved donot exceed $10/month/meter. Either party may require prospective correction ofsuch errors.

 

**G.3 Metering RecordsAvailability.**

 

Buyer will not berequired to furnish gas volume records relating to electronic recording devicesfor gas meters other than daily volume information unless there are indicationsthe meter was not operating properly.

 

**H. FORCE MAJEURE**

 

**H.1 Suspension of Performance.**

 

In the event either partyis rendered unable, wholly or in part, by force majeure to carry out itsobligations under this Contract, other than to make payments due, theobligations of that party, so far as they are affected by force majeure, willbe suspended during the continuance of any inability so caused, but for nolonger period. The party whose performance is affected by force majeure will providenotice to the other party, which notice may initially be oral, followed by awritten notification.

 

**H.2 Force Majeure Definition.**

 

“Force Majeure” meansacts of God, strikes, lockouts or other industrial disturbances, acts of thepublic enemy, war, blockades, insurrections, riots, epidemics, landslides,lightning, earthquakes, storms, floods, washouts, arrests and restraints ofgovernments and people, civil disturbances, fires, explosions, breakage oraccidents to machinery or lines of pipe, freezing of wells or lines of pipe,partial or entire failure of wells or sources of supply of gas, inability toobtain at reasonable cost servitude’s, right of way grants, permits,governmental approvals, or licenses, inability to obtain at reasonable costmaterials or supplies for constructing or

 

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maintaining facilities,and other causes, whether of the kind listed above or otherwise, not within thecontrol of the party claiming suspension and which by the exercise ofreasonable diligence the party is unable to prevent or overcome.

 

**H.3 Labor Matters Exception.**

 

The settlement of strikesor lockouts will be entirely within the discretion of the party having thedifficulty, and settlement of strikes, lockouts, or other labor disturbanceswhen that course is considered inadvisable is not required.

 

**I. WARRANTY OF TITLE**

 

Seller warrants that ithas good title and processing rights to the gas delivered, free and clear ofany and all liens, encumbrances, and claims whatsoever, and that Seller hasgood right and lawful authority to sell the same. Seller grants to Buyer theright to process Seller’s gas for extraction of NGL’s and other valuablecomponents. If Seller’s title or right to receive any payment is questioned or involvedin litigation, Buyer will have the right to withhold the contested paymentwithout interest until title information is received, during the pendency oflitigation, until the title or right to receive the questioned payments arefreed from question, or until Seller furnishes security for repaymentacceptable to Buyer. Without impairment of Seller’s warranty of title to gasand gas processing rights, if Seller owns less than full title to the gasdelivered, payments will be made only in the proportion that Seller’s interestbears to the entire title to the gas.

 

**J. ROYALTY AND OTHER INTERESTS**

 

**J.1 Seller’s Responsibility.**

 

Seller is responsible forall payments due to the owners of all working interests, mineral interests,royalties, overriding royalties, bonus payments, production payments and thelike. Buyer assumes no direct liability to Seller’s royalty or other interestowners under this Contract. For federal and Indian leases, Buyer may at anytime require Seller to sign and furnish a Payor Information From or otherpapers to the Minerals Management Service or successor agency to cover Buyer’sroyalty payments for Seller and to verify Buyer’s refusal to assume Seller’slease royalty payment obligations.

 

**J.2 Buyer’s Payment Services.**

 

At Seller’s request,Buyer agrees to deduct from payments to Seller and to disburse other workingand mineral interests, royalties, overriding royalties, other workinginterests, bonus payments, production payments, and the like as Seller directsfrom time to time on Seller’s behalf. In return, Buyer shall retain from theproceeds otherwise due Seller a monthly fee of $35.00 per well or othersettlement payment basis. Buyer reserves the right to adjust this fee uponadvance written notice to Seller.

 

**J.3 Buyer’s Reliance onOwnership Information.**

 

Buyer shall not commencepayments for any month under Section J.2 until 30 days after receipt fromSeller of all title information and executed payment directions necessary forsuch payments. Payments on behalf of Seller shall include penalties andinterest when payable under applicable laws or regulations. Buyer shall deductall such payments, penalties, and interest from the amounts otherwise dueSeller. Buyer may at any time upon at least 30 days advance written notice ceasedisbursements on behalf of Seller under Section J.2 and J.3 as of the endof any month.

 

**K. SEVERANCE AND SIMILAR TAXES**

 

**K.1 Included in Price.**

 

Reimbursement to Sellerfor Seller’s full liability for severance and similar taxes levied upon Seller’sgas production is included in the prices payable under this Contract,regardless of whether some included interests may be exempt from taxation.

 

**K.2 Tax Responsibilities andDisbursements.**

 

Seller shall bear allsales, severance, and other taxes imposed upon Seller with respect to the gasdelivered hereunder, and Buyer shall bear all taxes imposed upon Buyer withrespect to such gas after delivery to Buyer. Unless otherwise required by law,severance and similar taxes that are payable on a monthly basis and are basedupon the value or volume of the gas produced and sold by Seller shall becomputed and paid by Buyer for the account of Seller, and Buyer shall deductsuch payments from the amounts due Seller. Notwithstanding, Buyer will computeand pay severance and similar taxes only at the standard tax rate. If specialincentive tax programs or deductions are available that require more detailedcalculations that Seller desires to use, Seller will file with the taxauthorities and pursue any necessary refund claim with them.

 

**L. INDEMNIFICATION ANDRESPONSIBILITY FOR INJURY OR DAMAGE**

 

**L.1 Title, Royalty, andSeverance Taxes.**

 

**SELLER RELEASES AND AGREES TODEFEND, INDEMNIFY, AND SAVE BUYER, ITS AFFILIATES, AND THEIR OFFICERS,EMPLOYEES, AND AGENTS (“BUYER INDEMNITEES”) HARMLESS FROM AND AGAINST ALLCLAIMS, CAUSES OF ACTION, LIABILITIES, AND COSTS (INCLUDING REASONABLEATTORNEYS’ FEES AND COSTS OF INVESTIGATION AND DEFENSE) RELATING TO (a) SELLER’STITLE TO GAS AND GAS PROCESSING RIGHTS, (b) PAYMENTS TO OTHER WORKING ANDMINERAL INTERESTS, AND OTHER OWNERS, AND (c) ROYALTY AND OVERRIDINGROYALTY PAYMENTS, SALES, SEVERANCE, AND SIMILAR TAXES, THAT ARE THERESPONSIBILITY OF SELLER UNDER SECTIONS 1, J, AND K ABOVE.**

 

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**L.2 Responsibility for Injuryor Damage.**

 

**As between the parties, Sellerwill be in control and possession of the gas deliverable hereunder andresponsible for any injury or damage relating to handling or delivery of gasuntil the gas has been delivered to Buyer; after delivery, Buyer will be deemedto be in exclusive control and possession and responsible for any injury ordamage relating to handling or gathering of gas. THE PARTY HAVINGRESPONSIBILITY UNDER THE PRECEDING SENTENCE SHALL RELEASE, DEFEND, INDEMNIFY,AND HOLD THE OTHER PARTY, ITS AFFILIATES, AND THEIR OFFICERS, EMPLOYEES, ANDAGENTS HARMELESS FROM AND AGAINST ALL CLAIMS, CAUSES OF ACTION, LIABILITIES,AND COSTS (INCLUDING REASONABLE ATTORNEYS’ FEES AND COSTS OF INVESTIGATION ANDDEFENSE) ARSING FROM ACTUAL AND ALLEGED LOSS OF GAS, PERSONAL INJURY, DEATH,AND DAMAGE FOR WHICH THE PARTY IS RESPONSIBLE UNDER THIS SECTION L.2;PROVIDED THAT NEITHER PARTY WILL BE INDEMNIFED FOR ITS OWN NEGLIGENCE OR THATOF ITS AGENTS, SERVANTS, OR EMPLOYEES.**

 

**M.****RIGHT OF WAY**

 

Insofar as Seller’s leaseor leases permit and insofar as Seller or its lease operator may have anyrights however derived (whether pursuant to oil and gas lease, easement,governmental agency order, regulation, statute, or otherwise), Seller grants toBuyer and Buyer’s gas gathering contractor, if any, and their assignees theright of free entry and the right to lay and maintain pipelines, meters, andany equipment on the lands or leases subject to this Contract as reasonablynecessary in connection with the purchase or handling of Seller’s gas. Allpipelines, meters, and other equipment placed by Buyer or Buyer’s contractorson the lands and leases will remain the property of the owner and may beremoved by the owner at any time. Without limitation, Buyer or its gatheringcontractor may disconnect and remove measurement and other facilities from anyDelivery Point due to low volume, quality, term expiration, or other cause.

 

**N.****ASSIGNMENT**

 

**N.1 Binding on Assignees.**

 

Either party may assignthis Contract. This Contract is binding upon and inures to the successors,assigns, heirs, personal representatives, and representatives in bankruptcy ofthe parties, and, subject to any prior dedications by the assignee, shall bebinding upon any prior dedications by the assignee, shall be binding upon any purchaserof Buyer’s Facilities and upon any purchaser of the properties of Sellersubject to this Contract. Nothing contained in this Section will preventeither party from mortgaging its rights as security for its indebtedness, butsecurity is subordinate to the parties’ rights and obligations under thisContract.

 

**N.2 Notice of Assignment.**

 

Any assignment orsublease by Seller of any oil and gas properties or any gas rights contractedto Buyer will be made expressly subject to the provisions of this Contract. Notransfer of or succession to the interest of Seller, however effected, willbind Buyer unless and until the original instrument or other proper proof thatthe claimant is legally entitled to an interest has been furnished to Buyer atits Division Order address noted in the Notices Section or subsequentaddress.

 

**O. MISCELLANEOUS PROVISIONS**

 

**O.1 Governing Law.**

 

THIS CONTRACT SHALL BEGOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS,without reference to those that might refer to the laws of anotherjurisdiction.

 

**O.2 Default and Nonwaiver.**

 

A waiver by a party ofany one or more defaults by the other in the performance of any provisions ofthis Contract will not operate as a waiver of any future default or defaults,whether of a like or different character.

 

**O.3 Counterparts.**

 

This Contract may beexecuted in any number of counterparts, all which will be considered togetheras one instrument, and this Contract will be binding upon all parties executingit, whether or not executed by all parties owning an interest in the producingsources affected by this Contract.

 

**O4. Negotiations: EntireAgreements; Amendment; No Third Party Beneficiaries.**

 

The language of thisContract shall not be construed in favor of or against either Buyer or Seller,but shall be construed as if the language were drafted mutually by bothparties. This Contract constitutes the final and complete agreement between theparties. There are no oral promises, prior agreements, understanding,obligations, warranties, or representations between the parties relating tothis Contract other that those set forth herein. All waivers, modifications,amendments, and changes to this Contract shall be in writing and executed bythe authorized representatives of the parties. The relations between theparties are those of independent contractors; this Contract creates no jointventure, partnership, association, other special relationship, or fiduciaryobligations. There are no third party beneficiaries of Buyer’s sales contractor of this Contract.

 

**O.5 Ratification.**

 

If requested in writingby Buyer of other interest owners, this Contract may be ratified and adopted byany owner of an interest in any oil and gas properties subject to this Contractor any lands or leases with which those oil and

 

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gas properties may bepooled or unitized, by execution and delivery to Buyer of an instrument inwriting ratifying and adopting this Contract insofar as the owner’s interest inany such land, lease or oil and gas properties is concerned, and the ratifyingowner will become a party Seller to this Contract with like force and effect asthough the owner had executed this Contract as amended as of the time ofexecution of the ratification, and all of the terms and provisions of thisContract as amended to the date of the ratification will become binding uponBuyer and the ratifying owner.

 

**O.6 Compliance with Laws andRegulations.**

 

This Contract is subjectto all valid statutes and rules and regulations of any duly constitutedfederal or state authority or regulatory body having jurisdiction. Neitherparty will be in default as a result of compliance with laws and regulations.

 

**O.7 Fees and Cost; Damages.**

 

In the event of a breach,the parties are entitled to recover as their sole and exclusive damages forbreach of the price and quality obligations under this Contract the price forgas taken by Buyer in the case of Seller and the lost margin less avoided costsin the case of Buyer. In the event mediation or arbitration is necessary toresolve a dispute other than one arising under the indemnification obligationof this Contract, each party agrees to bear its own attorney’s fees and costsof investigation and defense, and each party waives any right to recover thosefees and costs from the other party or parties.

 

**O.8 Mutual Waiver of CertainRemedies.**

 

Except as to the partiesindemnification obligations, NEITHER PARTY SHALL BE LIABLE OR OTHERWISERESPONSIBLE TO THE OTHER FOR CONSEQUENTIAL OR INCIDENTAL DAMAGES, FOR LOSTPRODUCTION, OR FOR PUNITIVE DAMAGES, AS TO ANY ACTION OR OMISSION, WHETHERCHARACTERIZED AS A CONTRACT BREACH OR TORT, THAT ARISES OUT OF OR RELATES TOTHIS CONTRACT OR ITS PREFORMANCE OR NONPERFORMANCE.

 

**O.9 Arbitration.**

 

The parties desire toresolve any disputes that may arise informally, if possible. All disputesarising out of or relating to this Contract that are not resolved by agreementof the parties must be resolved by agreement of the parties must be resolvedusing the provisions of this Section O.9. To that end, if a dispute ordisputes arise out of or relating to this Contract, a party shall give writtennotice of the disputes to the other involved parties, and each party willappoint an employee to negotiate with the other party concerning the disputes.If the disputes have not been resolved by negotiation within 30 days of initialdispute notice, the disputes shall be resolved by negotiation within 30 days ofthe initial dispute notice, the disputes shall be resolved by arbitration inaccordance with the then current Comprehensive Arbitration Rules andProcedures of the Center for Public Resources Institute for Dispute Resolution(“Rules”) and this Section O.9. The arbitration shall be governed by theUnited States Arbitration Act, 9 U.S.C. §§ 1-16, and the Rules, to theexclusion of any provision of state law inconsistent with them. The arbitrationshall be initiated by a party seeking arbitration by written notice transmittedto the other party or parties involved. The parties shall select onedisinterested arbitration with at least ten years’ experience in the naturalgas industry or ten years’ experience with natural gas law, and not previouslyemployed by either party or its affiliates, and if possible, shall be selectedby agreement between the parties. If the parties cannot select an arbitrator byagreement within 15 days of the date of the notice of arbitration, a qualifiedarbitrator will be selected in accordance with the Rules. If the disputesinvolve an amount greater than $100,000, they will be decided by a panel ofthree arbitrators with the above qualifications, one selected by each party,and the third selected by the party-appointed arbitrators, or in the absence oftheir agreement, pursuant to the Rules. The arbitrators(s) shall resolve thedisputes and render a final award in accordance with the substantive law of thestate referenced in Section O.1 above, “Governing Law.” The arbitrator’saward will be limited by the provisions set forth in Sections O.7, “Fees andCosts; Damages” and O.8 above, “Mutual Waiver of Certain Remedies.” Thearbitrator(s) shall set forth the reasons for the award maybe entered in anycourt having jurisdiction.

 

END OF EXHIBIT ATO GAS PURCHASE

CONTRACT

 

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