ex10x9.htm



Exhibit 10.9


 








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


MODEL FORM OPERATING AGREEMENT









 

















OPERATING AGREEMENT 


DATED


 



	 	                                              ,    	  ,      2013       ,	 
	 	 	         year	 





 


 



	OPERATOR	   PETROSHARE CORP. 
	 	 
	CONTRACT AREA	  Township 6 North, Range 90 West, 6th P.M
	
 


   Section 25: All 


	
 


 

	 
	
 


 

	 
	 	 





 



 



	COUNTY OR PARISH OF 	MOFFAT	  , STATE OF 	COLORADO












 



	 	
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









 




  





  











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 


TABLE OF CONTENTS



	Article	 	 	Page
	 I.	 	DEFINITIONS 	 1
	 II.	 	EXHIBITS	 1
	 III.	 	INTERESTS OF PARTIES 	 2
	 	 	A.  OIL AND GAS INTERESTS:	 2
	 	 	B.  INTERESTS OF PARTIES IN COSTS AND PRODUCTION 	 2
	 	 	C.  SUBSEQUENTLY CREATED INTERESTS: 	 2
	 IV.	 	TITLES 	 2
	 	 	A.  TITLE EXAMINATION 	 2
	 	 	B.  LOSS OR FAILURE OF TITLE 	 3
	 	 	1.  Failure of Title 	 3
	 	 	2.  Loss by Non-Payment or Erroneous Payment of Amount Due	 3
	 	 	3.  Other Losses 	 3
	 	 	4.  Curing Title 	 3
	 V.	 	OPERATOR 	 4
	 	 	A.  DESIGNATION AND RESPONSIBILITIES OF OPERATOR	 4
	 	 	B.  RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR	 4
	 	 	1.  Resignation or Removal of Operator	 4
	 	 	2.  Selection of Successor Operator 	 4
	 	 	3.  Effect of Bankruptcy	 4
	 	 	C.  EMPLOYEES AND CONTRACTORS 	 4
	 	 	D.  RIGHTS AND DUTIES OF OPERATOR: 	 4
	 	 	1.  Competitive Rates and Use of Affiliates	 4
	 	 	2.  Discharge of Joint Account Obligations	 4
	 	 	3.  Protection from Liens 	 4
	 	 	4.  Custody of Funds 	 5
	 	 	5.  Access to Contract Area and Records 	 5
	 	 	6.  Filing and Furnishing Governmental Reports 	 5
	 	 	7.  Drilling and Testing Operations	 5
	 	 	8.  Cost Estimates 	 5
	 	 	9.  Insurance	 5
	 VI.	 	DRILLING AND DEVELOPMENT 	 5
	 	 	A.  INITIAL WELL	 5
	 	 	B.  SUBSEQUENT OPERATIONS: 	 5
	 	 	1.  Proposed Operations 	 5
	 	 	2.  Operations by Less Than All Parties 	 6
	 	 	3.  Stand-By Costs	 7
	 	 	4.  Deepening 	 8
	 	 	5.  Sidetracking 	 8
	 	 	6.  Order of Preference of Operations	 8
	 	 	7.  Conformity to Spacing Pattern 	 9
	 	 	8.  Paying Wells 	 9
	 	 	C.  COMPLETION OF WELLS; REWORKING AND PLUGGING BACK 	 9
	 	 	1.  Completion 	 9
	 	 	2.  Rework, Recomplete or Plug Back	 9
	 	 	D.  OTHER OPERATIONS	 9
	 	 	E.  ABANDONMENT OF WELLS 	 9
	 	 	1.  Abandonment of Dry Holes	 9
	 	 	2.  Abandonment of Wells That Have Produced	 10
	 	 	3.  Abandonment of Non-Consent Operations	 10
	 	 	F.  TERMINATION OF OPERATIONS	 10
	 	 	G.  TAKING PRODUCTION IN KIND	 10
	 	 	(Option 1) Gas Balancing Agreement 	 10
	 	 	(Option 2) No Gas Balancing Agreement	 11
	 VII.	 	EXPENDITURES AND LIABILITY OF PARTIES	 11
	 	 	A.  LIABILITY OF PARTIES	 11
	 	 	B.  LIENS AND SECURITY INTERESTS 	 12
	 	 	C.  ADVANCES	 12
	 	 	D.  DEFAULTS AND REMEDIES 	 12
	 	 	1.  Suspension of Rights 	 13
	 	 	2.  Suit for Damages	 13
	 	 	3.  Deemed Non-Consent 	 13
	 	 	4.  Advance Payment 	 13
	 	 	5.  Costs and Attorneys’ Fees 	 13
	 	 	E.  RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES 	 13
	 	 	F.  TAXES 	 13
	 VIII.	 	ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST 	 14
	 	 	A.  SURRENDER OF LEASES	 14
	 	 	B.  RENEWAL OR EXTENSION OF LEASES	 14
	 	 	C.  ACREAGE OR CASH CONTRIBUTIONS 	 14





                                                       


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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989














	 	 	 	 
	 	 	D.  ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST: 	15
	 	 	E.  WAIVER OF RIGHTS TO PARTITION 	15
	 	 	F.  PREFERENTIAL RIGHT TO PURCHASE 	15
	IX.	 	INTERNAL REVENUE COEDE ELECTION	15
	X.	 	CLAIMS AND LAWSUITS	15
	XI.	 	FORCE MAJEURE 	16
	XII.	 	NOTICES	16
	XIII.	 	TERM OF AGREEMENT 	16
	XIV.	 	COMPLIANCE WITH LAWS AND REGULATIONS	16
	 	 	A.  LAWS, REGULATIONS AND ORDERS	16
	 	 	B.  GOVERNING LAW 	16
	 	 	C.  REGULATORY AGENCIES: 	16
	XV.	 	MISCELLANEOUS 	17
	 	 	A.  EXECUTION 	17
	 	 	B.  SUCCESSORS AND ASSIGNS 	17
	 	 	C.  COUNTERPARTS	17
	 	 	D.  SEVERABILITY 	17
	XVI.	 	OTHER PROVISIONS 	17
	 	 	 	 
	 	 	 	 





 








 


 


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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 






	
1

	
OPERATING AGREEMENT








	
2

	
THIS AGREEMENT, entered into by and between               PetroShare Corp.           ,








	
3

	
hereinafter designated and referred to as  "Operator,"  and  the  signatory  party  or  parties   other  than  Operator,  sometimes








	
4

	
hereinafter referred to individually as "Non-Operator," and collectively as "Non-Operators."








	
5

	
WITNESSETH:








	
6

	
WHEREAS, the parties to this  agreement  are  owners  of  Oil  and  Gas  Leases  and/or  Oil  and  Gas  Interests  in  the  land








	

7



	
identified  in  Exhibit  "A,"  and  the  parties  hereto  have  reached  an  agreement  to  explore  and  develop  these  Leases  and/or  Oil








	

8



	
and Gas Interests for the production of Oil and Gas to the extent and as hereinafter provided,








	
9

	
NOW, THEREFORE, it is agreed as follows:









	
10

	
ARTICLE I.








	
11

	
DEFINITIONS








	
12

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








	
13

	
A.   The term "AFE" shall mean an Authority for Expenditure prepared by a party to this agreement for the purpose of








	
14

	
estimating the costs to be incurred in conducting an operation hereunder.








	
15

	
B.   The term "Completion" or "Complete" shall mean a single operation intended to complete a well as a producer of Oil








	
16

	
and  Gas  in  one  or  more  Zones,  including,  but  not  limited  to,  the  setting  of  production  casing,  perforating,  well  stimulation








	
17

	
and production testing conducted in such operation.








	
18

	
C.   The term "Contract Area" shall mean all of the lands, Oil and Gas Leases and/or Oil and Gas Interests intended to be








	
19

	
developed  and  operated  for  Oil  and  Gas  purposes  under  this  agreement.  Such  lands,  Oil  and  Gas  Leases  and  Oil  and  Gas








	
20

	
Interests are described in Exhibit "A."








	
21

	
D.   The term "Deepen" shall mean a single operation whereby a well is drilled to an objective Zone below the deepest








	
22

	
Zone  in  which  the  well  was  previously  drilled,  or  below  the  Deepest  Zone  proposed  in  the  associated  AFE,  whichever  is  the








	
23

	
lesser.








	
24

	
E.   The terms "Drilling Party" and "Consenting Party" shall mean a party who agrees to join in and pay its share of the








	
25

	
cost of any operation conducted under the provisions of this agreement.








	
26

	
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








	
27

	
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








	
28

	
established by the pattern of drilling in the Contract Area unless fixed by express agreement of the Drilling Parties.








	
29

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








	
30

	
located.








	
31

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








	
32

	
I.    The  term  "Non-Consent  Well"  shall  mean  a  well  in  which  less  than  all  parties  have  conducted  an  operation  as








	
33

	
provided in Article VI.B.2.








	
34

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








	
35

	
proposed operation.








	
36

	
K.    The  term  "Oil  and  Gas"  shall  mean  oil,  gas,  casinghead  gas,  gas  condensate,  and/or  all  other  liquid  or  gaseous








	
37

	
hydrocarbons and  other  marketable  substances  produced  therewith,  unless  an  intent  to  limit  the  inclusiveness  of  this  term  is








	
38

	
specifically stated.








	
39

	
L.   The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and mineral interests in Oil and Gas in tracts








	
40

	
of land lying within the Contract Area which are owned by parties to this agreement.








	
41

	
M.    The  terms  "Oil  and  Gas  Lease,"  "Lease"  and  "Leasehold"  shall  mean  the  oil  and  gas  leases  or  interests  therein








	
42

	
covering tracts of land lying within the Contract Area which are owned by the parties to this agreement.








	
43

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








	
44

	
Completion in a shallower Zone.








	
45

	
O.   The term "Recompletion" or "Recomplete" shall mean an operation whereby a Completion in one Zone is abandoned








	
46

	
in order to attempt a Completion in a different Zone within the existing wellbore.








	
47

	
P.    The  term  "Rework"  shall  mean  an  operation  conducted  in  the  wellbore  of  a  well  after  it  is  Completed  to  secure,








	
48

	
restore, or improve production  in  a  Zone  which  is  currently  open  to  production  in  the  wellbore.    Such  operations  include,  but








	
49

	
are not limited  to,  well  stimulation  operations  but  exclude  any  routine  repair  or  maintenance  work  or  drilling,  Sidetracking,








	
50

	
Deepening, Completing, Recompleting, or Plugging Back of a well.








	
51

	
Q.   The  term  "Sidetrack"  shall  mean  the  directional  control  and  intentional  deviation  of  a  well  from  vertical  so  as  to








	
52

	
change  the  bottom  hole  location  unless  done  to  straighten  the  hole  or  drill  around  junk  in  the  hole  to  overcome  other








	
53

	
mechanical difficulties.








	
54

	
R.   The term "Zone" shall mean a stratum of earth containing or thought to contain a common accumulation of Oil and








	
55

	
Gas separately producible from any other common accumulation of Oil and Gas.








	
56

	
Unless the context otherwise clearly indicates, words used in the singular include the plural, the word "person" includes








	
57

	
natural and artificial persons, the plural includes the singular, and any gender includes the masculine, feminine, and neuter.








	
58

	
ARTICLE II.








	
59

	
EXHIBITS








	
60

	
The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof:








	
61 

	
    X     A. Exhibit "A," shall include the following information:








	
62

	
(1) Description of lands subject to this agreement,








	
63

	
(2) Restrictions, if any, as to depths, formations, or substances,








	
64

	
(3) Parties to agreement with addresses and telephone numbers for notice purposes,








	
65

	
(4) Percentages or fractional interests of parties to this agreement,








	
66

	
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to this agreement,








	
67

	
(6) Burdens on production.








	
68 

	
             B.  Exhibit "B," Form of Lease.








	
69 

	
    X     C.   Exhibit "C," Accounting Procedure.








	
70 

	
    X      D.  Exhibit "D," Insurance.








	
71 

	
             E.   Exhibit "E," Gas Balancing Agreement.








	
72 

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








	
73 

	
             G.  Exhibit "G," Tax Partnership.








	
74 

	
    X      H.  Other:     Memorandum of Operating Agreement and Financing Statement









 




  





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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 





	
1

	
If  any  provision  of  any  exhibit,  except  Exhibits  "E,"  "F"  and  "G,"  is  inconsistent  with  any  provision  contained  in








	
2

	
the body of this agreement, the provisions in the body of this agreement shall prevail.








	
3

	
ARTICLE III.








	
4

	
INTERESTS OF PARTIES








	
5

	
A. Oil and Gas Interests:








	
6

	
If  any  party  owns  an  Oil  and  Gas  Interest  in  the  Contract  Area,  that  Interest  shall  be  treated  for  all  purposes  of  this








	
7

	
agreement  and  during  the  term  hereof  as  if  it  were  covered  by  the  form  of  Oil  and  Gas  Lease  attached  hereto  as  Exhibit  "B,"








	
8

	
and the owner thereof shall be deemed to own both royalty interest in such lease and the interest of the lessee thereunder.








	
9

	
B. Interests of Parties in Costs and Production:








	
10

	
Unless  changed  by other provisions,  all costs  and  liabilities  incurred  in  operations under this  agreement  shall  be borne








	
11

	
and  paid,  and  all  equipment  and  materials  acquired  in  operations  on  the  Contract  Area  shall  be  owned,  by  the  parties  as  their








	
12

	
interests  are  set  forth  in  Exhibit  "A."    In  the  same  manner,  the  parties  shall  also  own  all  production  of  Oil  and  Gas  from  the








	
13

	
Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter.








	
14

	

Regardless of which party has contributed any Oil and Gas Lease or Oil and Gas Interest on which royalty or other










	
15

	

burdens may be payable and except as otherwise expressly provided in this agreement, each party  Operator / shall pay or deliver, or










	
16

	

cause to be paid or delivered, all burdens on its share of the production from the Contract Area for the account of al parties.   /up to, but not in excess of,










	
17

	
______   and shall indemnify, defend and hold the other parties free from any liability therefor.








	
18

	

Except as otherwise expressly provided in this agreement, if any party has contributed hereto any Lease or Interest which is










	
19 

	

burdened with any royalty, overriding royalty, production payment or other burden on production in excess of the amounts










	

20 



	
stipulated above, such party so burdened shall assume and alone bear all such excess obligations and shall indemnify, defend








	

21 



	

and hold the other parties hereto harmless from any and all claims attributable to such excess burden. However, so long as







	

22 



	

theDrilling Unit for the productive Zone(s) is identical with the Contract Area, each party shall pay or deliver, or cause to










	

23



	
be paid or delivered, all burdens on production from the Contract Area due under the terms of the Oil and Gas Lease(s)








	

24



	
which such party has contributed to this agreement, and shall indemnify, defend and hold the other parties free from any








	

25



	
liability therefor.Operator shall have no liability with respect to the payment of burdens except to the extent of its gross negligence.








	

26



	
No party shall ever be responsible, on a price basis higher than the price received by such party, to any other party's








	

27



	
lessor or royalty owner, and if such other party's lessor or royalty owner should demand and receive settlement on a higher








	

28



	
price basis, the party contributing the affected Lease shall bear the additional royalty burden attributable to such higher price.








	
29

	
Nothing contained  in  this Article III.B. shall be deemed an assignment or cross-assignment of interests covered hereby,








	
30

	
and  in  the  event  two  or  more  parties  contribute  to  this  agreement  jointly  owned  Leases,  the  parties'  undivided  interests  in








	
31

	
said Leaseholds shall be deemed separate leasehold interests for the purposes of this agreement.








	
32

	
C.  Subsequently Created Interests:








	
33

	
If any party has contributed hereto a Lease or Interest that is burdened with an assignment of production given as security








	
34

	
for   the   payment   of   money,   or   if,   after   the  date   of   this   agreement,   any   party   creates   an   overriding   royalty,   production








	
35

	
payment,  net  profits  interest,  assignment  of  production  or  other  burden  payable  out  of  production  attributable  to  its  working








	
36

	
interest  hereunder,  such  burden  shall  be  deemed  a  "Subsequently  Created  Interest."Further,  if  any  party  has  contributed








	
37

	
hereto  a  Lease  or  Interest  burdened  with  an  overriding  royalty,  production  payment,  net  profits  interests,  or  other  burden








	
38

	
payable  out  of  production  created  prior  to  the  date  of  this  agreement,  and  such  burden  is  not  shown  on  Exhibit  "A,"  such








	
39

	
burden  also  shall  be  deemed  a  Subsequently  Created  Interest  to  the  extent  such  burden  causes  the  burdens  on  such  party's








	
40

	
Lease or Interest to exceed the amount stipulated in Article III.B. above.








	
41

	
The  party  whose  interest  is  burdened  with  the  Subsequently  Created  Interest  (the  "Burdened  Party")  shall  assume  and








	
42

	
alone  bear,  pay  and  discharge  the  Subsequently  Created  Interest  and  shall  indemnify,  defend  and  hold  harmless  the  other








	
43

	
parties  from  and  against  any  liability  therefor.    Further,  if  the  Burdened  Party  fails  to  pay,  when  due,  its  share  of  expenses








	
44

	
chargeable  hereunder,  all  provisions  of  Article  VII.B.  shall  be  enforceable  against  the  Subsequently  Created  Interest  in  the








	
45

	
same  manner  as  they  are  enforceable  against  the  working  interest  of  the  Burdened  Party.    If  the  Burdened  Party  is  required








	
46

	
under  this  agreement  to  assign  or  relinquish  to  any  other  party,  or  parties,  all  or  a  portion  of  its  working  interest  and/or  the








	
47

	
production  attributable  thereto,  said  other  party,  or  parties,  shall  receive  said  assignment  and/or  production  free  and  clear  of








	
48

	
said  Subsequently  Created  Interest,  and  the  Burdened  Party  shall  indemnify,  defend  and  hold  harmless  said  other  party,  or








	
49

	
parties, from any and all claims and demands for payment asserted by owners of the Subsequently Created Interest.








	
50

	
ARTICLE IV.








	
51

	
TITLES








	
52

	
A.  Title Examination:








	
53

	
Title examination shall be made on the Drillsite of any proposed well prior to commencement of drilling operations and,








	
54

	
if  a  majority  in  interest  of  the  Drilling  Parties  so  request  or  Operator  so  elects,  title  examination  shall  be  made  on  the  entire








	
55

	
Drilling  Unit,  or  maximum  anticipated  Drilling  Unit,  of  the  well.   The  opinion  will  include  the  ownership  of  the  working








	
56

	
interest,  minerals,  royalty,  overriding  royalty  and  production  payments  under  the  applicable  Leases.Each  party  contributing








	
57

	
Leases  and/or  Oil  and  Gas  Interests  to  be  included  in  the  Drillsite  or  Drilling  Unit,  if  appropriate,  shall  furnish  to  Operator








	
58

	
all  abstracts  (including  federal  lease  status  reports),  title  opinions,  title  papers  and  curative  material  in  its  possession  free  of








	
59

	
charge.   All  such  information  not  in  the  possession  of  or  made  available  to  Operator  by  the  parties,  but  necessary  for  the








	
60

	
examination  of  the  title,  shall  be  obtained  by  Operator.    Operator  shall  cause  title  to  be  examined  by  attorneys  on  its  staff  or








	
61

	
by  outside  attorneys.   Copies  of  all  title  opinions  shall  be  furnished  to  each  Drilling  Party. Costs  incurred  by  Operator  in








	
62

	
procuring   abstracts,   fees   paid   outside   attorneys or title examination  (including preliminary, supplemental, shut-in royalty








	
63

	
opinions and division order title opinions),  ( fees paid to outside landmen or brokers) / and other direct charges as provided in Exhibit "C" shall be borne by the Drilling








	
64 

	
Parties  in  the  proportion  that  the  interest  of  each  Drilling  Party  bears  to  the  total  interest  of  all  Drilling  Parties  as  such








	
65

	
interests  appear  in  Exhibit  "A."    Operator  shall  make  no  charge  for  services  rendered  by  its  staff  attorneys  or  other  personnel








	
66

	
in the performance of the above functions.








	
67 

	

Each party  Operator /shall be responsible for securing curative matter and pooling amendments or agreements required in










	
68

	
connection with any title opinion obtained as set forth above./ Leases or Oil and Gas Interests contributed by such party. Operator shall be responsible for the preparation








	
69

	
and  recording  of  pooling  designations  or  declarations  and  communitization  agreements  as  well  as  the  conduct  of  hearings








	
70

	
before  governmental  agencies  for  the  securing  of  spacing  or  pooling  orders  or  any  other  orders  necessary  or  appropriate  to








	
71

	
the  conduct  of  operations  hereunder.   This  shall  not  prevent  any  party  from  appearing  on  its  own  behalf  at  such  hearings.








	
72

	
Costs  incurred  by  Operator,  including  fees  paid  to  outside  attorneys,  which  are  associated  with  hearings  before  governmental








	
73

	
agencies,  and   which   costs  are   necessary  and  proper   for   the  activities   contemplated   under  this  agreement,   shall   be  direct








	
74

	
charges to the joint account and shall not be covered by the administrative overhead charges as provided in Exhibit "C."









 




  





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1  

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








	
2  

	
functions.








	
3

	

No well shall be drilled on the Contract Area until after (1) the title to the Drillsite or Drilling Unit, if appropriate, has










	
4  

	
been  examined  as  above  provided,  and  (2)  the  title  has  been  approved  by  the  examining  attorney  or  title  has  been  accepted  by








	
5  

	
Operator. a/ ll of the Drilling Parties in such well.








	
6 

	
B. Loss or Failure of Title:










	
7

	

1. Failure of Title: Should any Oil and Gas Interest or Oil and Gas Lease be lost through failure of title, which results in a














	
8  

	
reduction  of  interest  from  that  shown  on  Exhibit  "A,"  the  party  credited  with  contributing  the  affected  Lease  or  Interest








	
9  

	
(including,  if  applicable,  a  successor  in  interest  to  such  party)  shall  have  ninety  (90)  days  from  final  determination  of  title








	
10  

	
failure  to  acquire  a  new  lease  or  other  instrument  curing  the  entirety  of  the  title  failure,  which  acquisition  will  not  be  subject








	
11  

	
to  Article  VIII.B.,  and  failing  to  do  so,  this  agreement,  nevertheless,  shall  continue  in  force  as  to  all  remaining  Oil  and  Gas








	
12  

	
Leases and Interests; and,








	
13  

	
                 (a) The party credited with contributing the Oil and Gas Lease or Interest affected by the title failure (including, if








	
14  

	
applicable,  a  successor  in  interest  to  such  party)  shall  bear  alone  the  entire  loss  and  it  shall  not  be  entitled  to  recover  from








	
15  

	
Operator  or  the  other  parties  any  development  or  operating  costs  which  it  may  have  previously  paid  or  incurred,  but  there








	
16  

	
shall be no additional liability on its part to the other parties hereto by reason of such title failure;








	
17  

	
                 (b)  There  shall  be  no  retroactive  adjustment  of  expenses  incurred  or  revenues  received  from  the  operation  of  the








	
18  

	
Lease  or  Interest  which  has  failed,  but  the  interests  of  the  parties  contained  on  Exhibit  "A"  shall  be  revised  on  an  acreage








	
19  

	
basis,  as  of  the  time  it  is  determined  finally  that  title  failure  has  occurred,  so  that  the  interest  of  the  party  whose  Lease  or








	
20  

	
Interest is affected by the title failure will thereafter be reduced in the Contract Area by the amount of the Lease or Interest failed;








	
21  

	
                 (c) If the proportionate interest of the other parties hereto in any producing well previously drilled on the Contract








	
22  

	
Area  is  increased  by  reason  of  the  title  failure,  the  party  who  bore  the  costs  incurred  in  connection  with  such  well  attributable








	
23  

	
to  the  Lease  or  Interest  which  has  failed  shall  receive  the  proceeds  attributable  to  the  increase  in  such  interest  (less  costs  and








	
24  

	
burdens  attributable  thereto)  until  it  has  been reimbursed  for  unrecovered  costs  paid  by  it  in  connection  with  such  well








	
25  

	
attributable to such failed Lease or Interest;








	
26  

	
                 (d) Should any person not a party to this agreement, who is determined to be the owner of any Lease or Interest








	
27  

	
which  has  failed,  pay  in  any  manner  any  part  of  the  cost  of  operation,  development,  or  equipment,  such  amount  shall  be  paid








	
28  

	
to the party or parties who bore the costs which are so refunded;








	
29  

	
                 (e) Any liability to account to a person not a party to this agreement for prior production of Oil and Gas which arises








	
30  

	
by  reason  of  title  failure  shall  be  borne  severally  by  each  party  (including  a  predecessor  to  a  current  party)  who  received








	
31  

	
production  for  which  such  accounting  is  required  based  on  the  amount  of  such  production  received,  and  each  such  party  shall








	
32  

	
severally indemnify, defend and hold harmless all other parties hereto for any such liability to account;








	
33  

	
                 (f) No charge shall be made to the joint account for legal expenses, fees or salaries in connection with the defense of








	
34  

	
the  Lease  or  Interest  claimed  to  have  failed,  but  if  the  party  contributing  such  Lease  or  Interest  hereto  elects  to  defend  its  title








	
35  

	
it shall bear all expenses in connection therewith; and








	
36  

	
                 (g)  If  any party is  given credit  on Exhibit "A" to a  Lease or  Interest  which  is  limited solely to  ownership  of an








	
37  

	
interest  in  the  wellbore  of  any  well  or  wells  and  the  production  therefrom,  such  party's  absence  of  interest  in  the  remainder








	
38  

	
of  the  Contract  Area  shall  be  considered  a  Failure  of  Title  as  to  such  remaining  Contract  Area  unless  that  absence  of  interest








	
39  

	
is reflected on Exhibit "A."








	
40  

	
           2.   Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake or oversight, any rental, shut-in well








	
41  

	
payment,  minimum  royalty  or  royalty  payment,  or  other  payment  necessary  to  maintain  all  or  a  portion  of  an  Oil  and  Gas








	
42  

	
Lease  or  interest  is  not  paid  or  is  erroneously  paid,  and  as  a  result  a  Lease  or  Interest  terminates,  there  shall  be  no  monetary








	
43  

	
liability  against  the  party  who  failed  to  make  such  payment.  Unless  the  party  who  failed  to  make  the  required  payment








	
44  

	
secures  a  new  Lease  or  Interest  covering  the  same  interest  within  ninety  (90)  days  from  the  discovery  of  the  failure  to  make








	
45  

	
proper  payment,  which  acquisition  will  not  be  subject  to  Article  VIII.B.,  the  interests  of  the  parties  reflected  on  Exhibit  "A"








	
46  

	
shall  be  revised  on  an  acreage  basis,  effective  as  of  the  date  of  termination  of  the  Lease  or  Interest  involved,  and  the  party








	
47  

	
who  failed  to  make  proper  payment  will  no  longer  be  credited  with  an  interest  in  the  Contract  Area  on  account  of  ownership








	
48  

	
of  the  Lease  or  Interest  which  has  terminated.  If  the  party  who  failed  to  make  the  required  payment  shall  not  have  been  fully








	
49

	
reimbursed,  at  the  time  of  the  loss,  from  the  proceeds  of  the  sale  of  Oil  and  Gas  attributable  to  the  lost  Lease  or  Interest,








	
50  

	
calculated  on  an  acreage  basis,  for  the  development  and  operating  costs  previously  paid  on  account  of  such  Lease  or  Interest,








	
51  

	
it  shall  be  reimbursed  for  unrecovered  actual  costs  previously  paid  by  it  (but  not  for  its  share  of  the  cost  of  any  dry  hole








	
52  

	
previously drilled or wells previously abandoned) from so much of the following as is necessary to effect reimbursement:








	
53  

	
                 (a) Proceeds of Oil and Gas produced prior to termination of the Lease or Interest, less operating expenses and lease








	
54  

	
burdens  chargeable  hereunder  to  the  person  who  failed  to  make  payment,  previously  accrued  to  the  credit  of  the  lost  Lease  or








	
55  

	
Interest, on an acreage basis, up to the amount of unrecovered costs;








	
56  

	
                 (b) Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable hereunder to the person who failed








	
57  

	
to  make  payment,  up  to  the  amount  of  unrecovered  costs  attributable  to  that  portion  of  Oil  and  Gas  thereafter  produced  and








	
58  

	
marketed  (excluding  production  from  any  wells  thereafter  drilled)  which,  in  the  absence  of  such  Lease  or  Interest  termination,








	
59  

	
would  be  attributable  to  the  lost  Lease  or  Interest  on  an  acreage  basis  and  which  as  a  result  of  such  Lease  or  Interest








	
60  

	
termination  is  credited  to  other  parties,  the  proceeds  of  said  portion  of  the  Oil  and  Gas  to  be  contributed  by  the  other  parties








	
61  

	
in proportion to their respective interests reflected on Exhibit "A"; and,








	
62  

	
                 (c) Any monies, up to the amount of unrecovered costs, that may be paid by any party who is, or becomes, the owner








	
63  

	
of the Lease or Interest lost, for the privilege of participating in the Contract Area or becoming a party to this agreement.








 



	
64 

	
3. Other  Losses:  All losses of Leases or Interests committed to this agreement, other than those set forth in Articles










	
65  

	
IV.B.1.  and  IV.B.2.  above,  shall  be  joint  losses  and  shall  be  borne  by  all  parties  in  proportion  to  their  interests  shown  on








	
66  

	
Exhibit  "A."    This  shall  include  but  not  be  limited  to  the  loss  of  any  Lease  or  Interest  through  failure  to  develop  or  because








	
67  

	
express  or  implied  covenants  have  not  been  performed  (other  than  performance  which  requires  only  the  payment  of  money),








	
68  

	
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








	
69  

	
readjustment of interests in the remaining portion of the Contract Area on account of any joint loss.









	
70 

	

4. Curing Title: In the event of a Failure of Title / as set forth under Article IV.B.1. or a loss of title under Article IV.B.2. above, any












	
71  

	
Lease  or  Interest  acquired  by  any  party  hereto  (other  than  the  party  whose  interest  has  failed  or  was  lost)  during  the  ninety








	
72  

	
(90)  day  period  / following discovery of such failure provided  by  Article  IV.B.1.  and  Article  IV.B.2.  above  covering  all  or  a  portion  of  the  interest  that  has  failed








	
73  

	
or  was  lost  shall  be  offered  at  cost  to  the  party  whose  interest  has  failed  or  was  lost,  and  the  provisions  of  Article  VIII.B.








	
74  

	
shall not apply to such acquisition.









 




  





-3 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989














 


 


 




	
1

	
ARTICLE V.








	
2

	
OPERATOR









	

3



	
A. Designation and Responsibilities of Operator:








	
4

	
  PetroShare Corp.  shall  be  the  Operator  of  the  Contract  Area,  and  shall  conduct










	
5

	
and  direct  and  have full control  of  all  operations  on  the Contract Area  as permitted and  required  by,  and  within  the  limits  of








	
6

	
this agreement.  In its performance of services hereunder for the Non-Operators, Operator  shall  be  an  independent  contractor








	
7

	
not  subject  to  the  control  or  direction  of  the  Non-Operators  except  as  to  the  type  of  operation  to  be  undertaken  in  accordance








	
8

	
with the election procedures contained in this agreement. Operator shall not be deemed, or hold itself out as, the agent of the








	
9

	
Non-Operators with authority to bind them to any obligation or liability assumed or incurred by Operator as to any third








	
10

	
party. Operator shall conduct its activities under this agreement as a reasonable prudent operator, in a good and workmanlike








	
11

	
manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and








	
12

	
regulation, but in no event shall it have any liability as Operator to the other parties for losses sustained or liabilities incurred








	
13

	
except such as may result from gross negligence or willful misconduct.








	
14

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








	
15

	
1. Resignation or Removal of Operator: Operator may resign at any time by giving written notice thereof to Non-Operators.








	
16

	
If Operator terminates its legal existence, no longer owns an interest hereunder in the Contract Area, or is no longer capable of








	
17

	
serving as Operator, Operator shall be deemed to have resigned without any action by Non-Operators, except the selection of a








	
18

	
successor. Operator may be removed only for good cause by the affirmative vote of Non-Operators owning a majority interest








	
19

	
based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of Operator; such vote shall not be








	
20

	
deemed effective until a written notice has been delivered to the Operator by a Non-Operator detailing the alleged default and








	
21

	
Operator has failed to cure the default within thirty (30) days from its receipt of the notice or, if the default concerns an








	
22

	
operation then being conducted, within forty-eight (48) hours of its receipt of the notice.   For purposes hereof, "good cause" shall








	
23

	
mean not only gross negligence or willful misconduct but also the material breach of or inability to meet the standards of








	
24

	
operation contained in Article V.A. or material failure or inability to perform its obligations under this agreement.








	
25

	
Subject to Article VII.D.1., such resignation or removal shall not become effective until 7:00 o'clock A.M. on the first








	
26

	
day of the calendar month following the expiration of ninety (90) days after the giving of notice of resignation by Operator








	
27

	
or action by the Non-Operators to remove Operator, unless a successor Operator has been selected and assumes the duties of








	
28

	
Operator at an earlier date. Operator, after effective date of resignation or removal, shall be bound by the terms hereof as a








	
29

	
Non-Operator. A change of a corporate name or structure of Operator or transfer of Operator's interest to any single








	
30

	
subsidiary, parent or successor corporation shall not be the basis for removal of Operator.








	
31

	
2.   Selection of Successor Operator: Upon the resignation or removal of Operator under any provision of this agreement, a








	
32

	
successor Operator shall be selected by the parties. The successor Operator shall be selected from the parties owning an








	
33

	
interest in the Contract Area at the time such successor Operator is selected. The successor Operator shall be selected by the








	
34

	
affirmative vote of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit "A";








	
35

	
provided, however, if an Operator which has been removed or is deemed to have resigned fails to vote or votes only to








	
36

	
succeed itself, the successor Operator shall be selected by the affirmative vote of the party or parties owning a majority








	
37

	
interest based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of the Operator that was








	
38

	
removed or resigned. The former Operator shall promptly deliver to the successor Operator all records and data relating to








	
39

	
the operations conducted by the former Operator to the extent such records and data are not already in the possession of the








	
40

	
successor operator. Any cost of obtaining or copying the former Operator's records and data shall be charged to the joint








	
41

	
account.








	
42

	
3.   Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is placed in receivership, it shall be deemed to have








	
43

	
resigned without any action by Non-Operators, except the selection of a successor. If a petition for relief under the federal








	
44

	
bankruptcy laws is filed by or against Operator, and the removal of Operator is prevented by the federal bankruptcy court, all








	
45

	
Non-Operators and Operator shall comprise an interim operating committee to serve until Operator has elected to reject or








	
46

	
assume this agreement pursuant to the Bankruptcy Code, and an election to reject this agreement by Operator as a debtor in








	
47

	
possession, or by a trustee in bankruptcy, shall be deemed a resignation as Operator without any action by Non-Operators,








	
48

	
except the selection of a successor. During the period of time the operating committee controls operations, all actions shall








	
49

	
require the approval of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit "A." In








	
50

	
the event there are only two (2) parties to this agreement, during the period of time the operating committee controls








	
51

	
operations, a third party acceptable to Operator, Non-Operator and the federal bankruptcy court shall be selected as a








	
52

	
member of the operating committee, and all actions shall require the approval of two (2) members of the operating








	
53

	
committee without regard for their interest in the Contract Area based on Exhibit "A."








	
54

	
C.  Employees and Contractors:








	
55

	
The number of employees or contractors used by Operator in conducting operations hereunder, their selection, and the








	
56

	
hours of labor and the compensation for services performed shall be determined by Operator, and all such employees or








	
57

	
contractors shall be the employees or contractors of Operator.








	
58

	
D.  Rights and Duties of Operator:








	
59

	
1.  Competitive  Rates and Use of Affiliates: All wells drilled on the Contract Area shall be drilled on a competitive








	
60

	
contract basis at the usual rates prevailing in the area. If it so desires, Operator may employ its own tools and equipment in








	
61

	
the drilling of wells, but its charges therefor shall not exceed the prevailing rates in the area and the rate of such charges








	
62

	
shall be agreed upon by the parties in writing before drilling operations are commenced, and such work shall be performed by








	
63

	
Operator under the same terms and conditions as are customary and usual in the area in contracts of independent contractors








	
64

	
who are doing work of a similar nature. All work performed or materials supplied by affiliates or related parties of Operator








	
65

	
shall be performed or supplied at competitive rates, pursuant to written agreement, and in accordance with customs and








	
66

	
standards prevailing in the industry.








	
67

	
2. Discharge of Joint Account Obligations: Except as herein otherwise specifically provided, Operator shall promptly pay








	
68

	
and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall








	
69

	
charge each of the parties hereto with their respective proportionate shares upon the expense basis provided in Exhibit "C."








	
70

	
Operator shall keep an accurate record of the joint account hereunder, showing expenses incurred and charges and credits








	
71

	
made and received.








	
72

	
3. Protection from Liens: Operator shall pay, or cause to be paid, as and when they become due and payable, all accounts








	
73

	
of contractors and suppliers and wages and salaries for services rendered or performed, and for materials supplied on, to or in








	
74

	
respect of the Contract Area or any operations for the joint account thereof, and shall keep the Contract Area free from









 


 




  





-4 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 




	
1

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








	
2

	
materials supplied.








	
3

	
4. Custody of Funds: Operator shall hold for the account of the Non-Operators any funds of the Non-Operators advanced








	
4

	
or paid to the Operator, either for the conduct of operations hereunder or as a result of the sale of production from the








	
5

	
Contract Area, and such funds shall remain the funds of the Non-Operators on whose account they are advanced or paid until








	
6

	
used  for their intended purpose or otherwise delivered  to the Non-Operators or applied toward the payment of debts as








	
7

	
provided in Article VII.B.  Nothing in this paragraph shall be construed to establish a fiduciary relationship between Operator








	
8

	
and Non-Operators for any purpose other than to account for Non-Operator funds as herein specifically provided.  Nothing in








	
9

	
this paragraph shall require the maintenance by Operator of separate accounts for the funds of Non-Operators unless the








	
10

	
parties otherwise specifically agree.








	
11

	
5. Access to Contract Area and Records: Operator shall, except as otherwise provided herein, permit each Non-Operator








	
12

	
or its duly authorized representative, at the Non-Operator's sole risk and cost, full and free access at all reasonable times to








	
13

	
all operations of every kind and character being conducted for the joint account on the Contract Area and to the records of








	
14

	
operations conducted thereon or production therefrom, including Operator's books and records relating thereto.  Such access








	
15

	
rights shall not be exercised in a manner interfering with Operator's conduct of an operation hereunder and shall not obligate








	
16

	
Operator  to  furnish  any  geologic  or  geophysical  data  of  an  interpretive  nature  unless  the  cost  of  preparation  of  such








	
17

	
interpretive data was charged to the joint account.  Operator will furnish to each Non-Operator upon request copies of any








	
18

	
and  all reports and  information obtained by Operator in connection  with production  and  related  items,  including,  without








	
19

	
limitation,  meter and chart  reports,  production purchaser statements,  run  tickets and  monthly gauge  reports,  but  excluding








	
20

	
purchase contracts and pricing information to the extent not applicable to the production of the Non-Operator seeking the








	
21

	
information.Any audit of Operator's records relating to amounts expended and the appropriateness of such expenditures








	
22

	
shall be conducted in accordance with the audit protocol specified in Exhibit "C."








	
23

	
6. Filing and Furnishing Governmental Reports: Operator will file, and upon written request promptly furnish copies to








	
24

	
each  requesting  Non-Operator  not  in  default  of  its  payment  obligations,  all  operational  notices,  reports  or  applications








	
25

	
required to be filed by local, State, Federal or Indian agencies or authorities having jurisdiction over operations hereunder.








	
26

	
Each Non-Operator shall provide to Operator on a timely basis all information necessary to Operator to make such filings.








	
27

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








	
28

	
limited to the Initial Well:








	
29

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








	
30

	
drilling operations are commenced.








	
31

	
(b) Operator will send to Non-Operators such reports, test results and notices regarding the progress of operations on the well








	
32

	
as the Non-Operators shall reasonably request, including, but not limited to, daily drilling reports, completion reports, and well logs.








	
33

	
(c) Operator shall adequately test all Zones encountered which may reasonably be expected to be capable of producing








	
34

	
Oil and Gas in paying quantities as a result of examination of the electric log or any other logs or cores or tests conducted








	
35

	
hereunder.








	
36

	
8. Cost Estimates: Upon request of any Consenting Party, Operator shall furnish estimates of current and cumulative costs








	
37

	
incurred  for  the  joint  account  at  reasonable  intervals  during  the  conduct  of  any  operation  pursuant  to  this  agreement.








	
38

	
Operator shall not be held liable for errors in such estimates so long as the estimates are made in good faith.








	
39

	
9.  Insurance:  At  all  times  while  operations  are  conducted  hereunder,  Operator  shall  comply  with  the  workers








	
40

	
compensation law of the state where the operations are being conducted; provided, however, that Operator may be a self-








	
41

	
insurer for liability under said compensation laws in which event the only charge that shall be made to the joint account shall








	
42

	
be as provided in Exhibit "C."  Operator shall also carry or provide insurance for the benefit of the joint account of the parties








	
43

	
as outlined in Exhibit "D" attached hereto and made a part hereof.  Operator shall require all contractors engaged in work on








	
44

	
or for the Contract Area to comply with the workers compensation law of the state where the operations are being conducted








	
45

	
and to maintain such other insurance as Operator may require.








	
46

	
In the event automobile liability insurance is specified in said Exhibit "D," or subsequently receives the approval of the








	
47

	
parties,  no  direct  charge  shall  be  made  by  Operator  for  premiums  paid  for  such  insurance  for  Operator's  automotive








	
48

	
equipment.











	
49

	
ARTICLE VI.








	
50

	
DRILLING AND DEVELOPMENT








	
51

	
A.  Initial Well:








	
52

	
On or before the______ day of   ______________  ,  ____ , Operator shall commence the drilling of the Initial








	
53

	
Well at  the following location: a location on the Contract Area of Operator’s choosing








	
54

	
  








	
55

	
  








	
56

	
  








	
57

	
  








	
58

	
  








	
59

	
  








	
60 

	
and shall thereafter continue the drilling of the well with due diligence to a depth sufficient to test the Niobrara formation or to a true vertical depth of 7,855 feet, whichever is the lesser depth.








	
61

	
  








	
62

	
  








	
63

	
  








	
64

	
  








	
65

	
  








	
66

	
  








	
67

	
The drilling of the Initial Well and the participation therein by all parties is obligatory, subject to Article VI.C.1. as to participation








	
68

	
in Completion operations and Article VI.F. as to termination of operations and Article XI as to occurrence of force majeure.








	
69

	
B.Subsequent Operations:








	
70

	
1. Proposed Operations: If any party hereto should desire to drill any well on the Contract Area other than the Initial Well, or








	
71 

	
if  any party should  desire to  /  complete the Initial Well as a horizontal well or to Rework,  Sidetrack,  Deepen,  Recomplete or Plug Back  a  dry hole  or  a  well  no  longer  capable of








	
72

	
producing in paying quantities in which such party has not otherwise relinquished its interest in the proposed objective Zone under








	
73

	
this agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or Plug Back such a well shall give written








	
74

	
notice  of  the  proposed  operation  to  the  parties  who  have  not  otherwise  relinquished  their  interest  in  such  objective  Zone









 


 




  





-5 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 


 




	
1

	
under this agreement and to all other parties in the case of a proposal for Sidetracking or Deepening, specifying the work to be








	
2

	
performed, the location, proposed depth, objective Zone and the estimated cost of the operation.  The parties to whom such a








	
3

	
notice is delivered shall have thirty (30) days after receipt of the notice within which to notify the party proposing to do the work








	
4

	
whether they elect to participate in the cost of the proposed operation.  If a drilling rig is on location, notice of a proposal to








	
5

	
Rework, Sidetrack, Recomplete, Plug Back or Deepen may be given by telephone and the response period shall be limited to forty-








	
6

	
eight (48) hours, exclusive of Saturday, Sunday and legal holidays.  Failure of a party to whom such notice is delivered to reply








	
7

	
within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation.








	
8

	
Any proposal by a party to conduct an operation conflicting with the operation initially proposed shall be delivered to all parties








	
9

	
within the time and in the manner provided in Article VI.B.6.








	
10

	
If all parties to whom such notice is delivered elect to participate in such a proposed operation, the parties shall be








	
11

	
contractually committed to participate therein provided such operations are commenced within the time period hereafter set








	
12

	
forth, and Operator shall, no later than ninety (90) days after expiration of the notice period of thirty (30) days (or as








	
13

	
promptly as practicable after the expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case








	
14

	
may be), actually commence the proposed operation and thereafter complete it with due diligence at the risk and expense of








	
15

	
the parties participating therein; provided, however, said commencement date may be extended upon written notice of same








	
16

	
by Operator to the other parties, for a period of up to thirty (30) additional days if, in the sole opinion of Operator, such








	
17

	
additional time is reasonably necessary to obtain permits from governmental authorities, surface rights (including rights-of-








	
18

	
way) or appropriate drilling equipment,  or to complete title examination  or curative matter required  for title approval or








	
19

	
acceptance.  If the actual operation has not been commenced within the time provided (including any extension thereof as








	
20

	
specifically permitted herein or in the force majeure provisions of Article XI) and if any party hereto still desires to conduct








	
21

	
said operation, written notice proposing same must be resubmitted to the other parties in accordance herewith as if no prior








	
22

	
proposal had been made.  Those parties that did not participate in the drilling of a well for which a proposal to Deepen or








	
23

	
Sidetrack is made hereunder shall, if such parties desire to participate in the proposed Deepening or Sidetracking operation,








	
24

	
reimburse the Drilling Parties in accordance with Article VI.B.4. in the event of a Deepening operation and in accordance








	
25

	
with Article VI.B.5. in the event of a Sidetracking operation.








	
26

	
2. Operations by Less Than All Parties:








	
27

	
(a) Determination of Participation.  If any party to whom such notice is delivered as provided in Article VI.B.1. or








	
28

	
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








	
29

	
Article, the party or parties giving the notice and such other parties as shall elect to participate in the operation shall, no








	
30

	
later than ninety (90) days after the expiration of the notice period of thirty (30) days (or as promptly as practicable after the








	
31

	
expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case may be) actually commence the








	
32

	
proposed operation and complete it with due diligence. Operator shall perform all work for the account of the Consenting








	
33

	
Parties; provided, however, if no drilling rig or other equipment is on location, and if Operator is a Non-Consenting Party,








	
34

	
the Consenting Parties shall either: (i) request Operator to perform the work required by such proposed operation for the








	
35

	
account of the Consenting Parties, or (ii) designate one of the Consenting Parties as Operator to perform such work. The








	
36

	
rights and duties granted to and imposed upon the Operator under this agreement are granted to and imposed upon the party








	
37

	
designated as Operator for an operation in which the original Operator is a Non-Consenting Party.  Consenting Parties, when








	
38

	
conducting operations on the Contract Area pursuant to this Article VI.B.2., shall comply with all terms and conditions of this








	
39

	
agreement.








	
40

	
If less than all parties approve any proposed operation, the proposing party, immediately after the expiration of the








	
41

	
applicable  notice  period,  shall  advise  all  Parties  of  the  total  interest  of  the  parties  approving  such  operation  and  its








	
42

	
recommendation as to whether the Consenting Parties should proceed with the operation as proposed.  Each Consenting Party,








	
43

	
within forty-eight (48) hours (exclusive of Saturday, Sunday, and legal holidays) after delivery of such notice, shall advise the








	
44

	
proposing party of its desire to (i) limit participation to such party's interest as shown on Exhibit "A" or (ii) carry only its








	
45

	
proportionate part (determined by dividing such party's interest in the Contract Area by the interests of all Consenting Parties in








	
46

	
the Contract Area) of Non-Consenting Parties' interests, or (iii) carry its proportionate part (determined as provided in (ii)) of








	
47

	
Non-Consenting  Parties'  interests  together  with  all  or  a  portion  of  its  proportionate  part  of  any  Non-Consenting  Parties'








	
48

	
interests that any Consenting Party did not elect to take.   Any interest of Non-Consenting Parties that is not carried by a








	
49

	
Consenting Party shall be deemed to be carried by the party proposing the operation if such party does not withdraw its








	
50

	
proposal.  Failure to advise the proposing party within the time required shall be deemed an election under (i). In the event a








	
51

	
drilling rig is on location, notice may be given by telephone, and the time permitted for such a response shall not exceed a








	
52

	
total of forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays).  The proposing party, at its election, may








	
53

	
withdraw such proposal if there is less than 100% participation and shall notify all parties of such decision within ten (10)








	
54

	
days, or within twenty-four (24) hours if a drilling rig is on location, following expiration of the applicable response period.








	
55

	
If 100% subscription to the proposed operation is obtained, the proposing party shall promptly notify the Consenting Parties








	
56

	
of their proportionate interests in the operation and the party serving as Operator shall commence such operation within the








	
57

	
period provided in Article VI.B.1., subject to the same extension right as provided therein.








	
58

	
(b) Relinquishment of Interest for Non-Participation. The entire cost and risk of conducting such operations shall be








	
59

	
borne  by  the  Consenting  Parties  in  the  proportions  they  have  elected  to  bear  same  under  the  terms  of  the  preceding








	
60

	
paragraph.  Consenting Parties shall keep the leasehold estates involved in such operations free and clear of all liens and








	
61

	
encumbrances of every kind created by or arising from the operations of the Consenting Parties.  If such an operation results








	
62

	
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








	
63

	
the  surface  location  at  their  sole  cost,  risk  and  expense;  provided,  however,  that  those  Non-Consenting  Parties  that








	
64

	
participated in the drilling, Deepening or Sidetracking of the well shall remain liable for, and shall pay, their proportionate








	
65

	
shares of the cost of plugging and abandoning the well and restoring the surface location insofar only as those costs were not








	
66

	
increased by the subsequent operations of the Consenting Parties.   If any well drilled, Reworked, Sidetracked, Deepened,








	
67

	
Recompleted or Plugged Back under the provisions of this Article results in a well capable of producing Oil and/or Gas in








	
68

	
paying quantities, the Consenting Parties shall Complete and equip the well to produce at their sole cost and risk, and the








	
69

	
well shall then be turned over to Operator (if the Operator did not conduct the operation) and shall be operated by it at the








	
70

	
expense and for the account  of the Consenting Parties.   Upon commencement  of operations for the drilling, Reworking,








	
71

	
Sidetracking, Recompleting, Deepening or Plugging Back of any such well by Consenting Parties in accordance with the








	
72

	
provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the








	
73

	
Consenting  Parties  shall  own  and  be  entitled  to  receive,  in  proportion  to  their  respective  interests,  all  of  such  Non-








	
74

	
Consenting Party's interest  in  the well and  share of production  therefrom  or,  in  the case of  a  Reworking,  Sidetracking,









 


 




  





-6 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 




	
1

	
Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article VI.C.1.  Option No. 2, all of such Non-








	
2

	
Consenting Party's interest in the production obtained from the operation in which the Non-Consenting Party did not elect








	
3

	
to participate.  Such relinquishment shall be effective until the proceeds of the sale of such share, calculated at the well, or








	
4

	
market value thereof if such share is not sold (after deducting applicable ad valorem, production, severance, and excise taxes,








	
5

	
royalty, overriding royalty and other interests not excepted by Article III.C. payable out of or measured by the production








	
6

	
from such well accruing with respect to such interest until it reverts), shall equal the total of the following:








	
7

	
(i)   100% of each such Non-Consenting Party's share of the cost of any newly acquired surface equipment








	
8

	
beyond  the  wellhead  connections  (including  but  not  limited  to  stock  tanks,  separators,  treaters,  pumping  equipment  and








	
9

	
piping), plus 100% of each such Non-Consenting Party's share of the cost of operation of the well commencing with first








	
10

	
production  and  continuing  until  each  such  Non-Consenting  Party's  relinquished  interest  shall  revert  to  it  under  other








	
11

	
provisions of this Article, it being agreed that each Non-Consenting Party's share of such costs and equipment will be that








	
12

	
interest which would have been chargeable to such Non-Consenting Party had it participated in the well from the beginning








	
13

	
of the operations; and








	
14

	
(ii)  400%  of (a) that portion of  the costs and expenses of drilling, Reworking, Sidetracking, Deepening,








	
15

	
Plugging Back, testing, Completing, and Recompleting, after deducting any cash contributions received under Article VIII.C.,








	
16

	
and of (b) that portion of the cost of newly acquired equipment in the well (to and including the wellhead connections),








	
17

	
which would have been chargeable to such Non-Consenting Party if it had participated therein.








	
18

	
Notwithstanding anything to the contrary in this Article VI.B., if the well does not reach the deepest objective Zone








	
19

	
described  in  the notice proposing the well  for reasons other than  the encountering of granite or practically impenetrable








	
20

	
substance or other condition in the hole rendering further operations impracticable, Operator shall give notice thereof to each








	
21

	
Non-Consenting  Party  who  submitted  or  voted  for  an  alternative  proposal  under  Article  VI.B.6.  to  drill  the  well  to  a








	
22

	
shallower Zone than the deepest objective Zone proposed in the notice under which the well was drilled, and each such Non-








	
23

	
Consenting Party shall have the option to participate in the initial proposed Completion of the well by paying its share of the








	
24

	
cost of drilling the well to its actual depth, calculated in the manner provided in Article VI.B.4. (a).  If any such Non-








	
25

	
Consenting Party does not elect to participate in the first Completion proposed for such well, the relinquishment provisions








	
26

	
of this Article VI.B.2. (b) shall apply to such party's interest.








	
27

	
(c)  Reworking,  Recompleting  or  Plugging  Back.  An  election  not  to  participate  in  the  drilling,  Sidetracking  or








	
28

	
Deepening of a well shall be deemed an election not to participate in any Reworking or Plugging Back operation proposed in








	
29

	
such a well, or portion thereof, to which the initial non-consent election applied that is conducted at any time prior to full








	
30

	
recovery  by  the  Consenting  Parties  of  the  Non-Consenting  Party's  recoupment  amount.  Similarly,  an  election  not  to








	
31

	
participate in the Completing or Recompleting of a well shall be deemed an election not to participate in any Reworking








	
32

	
operation proposed in such a well, or portion thereof, to which the initial non-consent election applied that is conducted at








	
33

	
any time prior to full recovery by the Consenting Parties of the Non-Consenting Party's recoupment amount. Any such








	
34

	
Reworking, Recompleting or Plugging Back operation conducted during the recoupment period shall be deemed part of the








	
35

	
cost of operation of said well and there shall be added to the sums to be recouped by the Consenting Parties400% of








	
36

	
that portion of the costs of the Reworking, Recompleting or Plugging Back operation which would have been chargeable to








	
37

	
such Non-Consenting Party had it participated therein.  If such a Reworking, Recompleting or Plugging Back operation is








	
38

	
proposed during such recoupment period, the provisions of this Article VI.B. shall be applicable as between said Consenting








	
39

	
Parties in said well.








	
40

	
(d) Recoupment Matters. During the period of time Consenting Parties are entitled to receive Non-Consenting Party's








	
41

	
share of production, or the proceeds therefrom, Consenting Parties shall be responsible for the payment of all ad valorem,








	
42

	
production, severance, excise, gathering and other taxes, and all royalty, overriding royalty and other burdens applicable to








	
43

	
Non-Consenting Party's share of production not excepted by Article III.C.








	
44

	
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or Deepening operation, the Consenting








	
45

	
Parties shall be permitted to use, free of cost, all casing, tubing and other equipment in the well, but the ownership of all








	
46

	
such equipment shall remain unchanged; and upon abandonment of a well after such Reworking, Sidetracking, Plugging Back,








	
46

	
Recompleting or Deepening, the Consenting Parties shall account for all such equipment to the owners thereof, with each








	
48

	
party receiving its proportionate part in kind or in value, less cost of salvage.








	
49

	
Within ninety (90) days after the completion of any operation under this Article, the party conducting the operations








	
50

	
for the Consenting Parties shall furnish each Non-Consenting Party with an inventory of the equipment in and connected to








	
51

	
the well, and  an  itemized  statement of the cost of drilling, Sidetracking, Deepening, Plugging Back, testing, Completing,








	
52

	
Recompleting, and equipping the well for production; or, at its option, the operating party, in lieu of an itemized statement








	
53

	
of such costs of operation, may submit a detailed statement of monthly billings.  Each month thereafter, during the time the








	
54

	
Consenting Parties are being reimbursed as provided above, the party conducting the operations for the Consenting Parties








	
55

	
shall furnish the Non-Consenting Parties with an itemized statement of all costs and liabilities incurred in the operation of








	
56

	
the well, together with a statement of the quantity of Oil and Gas produced from it and the amount of proceeds realized from








	
57

	
the sale of the well's working interest production during the preceding month.  In determining the quantity of Oil and Gas








	
58

	
produced during any month, Consenting Parties shall use industry accepted methods such as but not limited to metering or








	
59

	
periodic well tests.  Any amount realized from the sale or other disposition of equipment newly acquired in connection with








	
60

	
any such operation which would have been owned by a Non-Consenting Party had it participated therein shall be credited








	
61

	
against the total unreturned costs of the work done and of the equipment purchased in determining when the interest of such








	
62

	
Non-Consenting Party shall revert to it as above provided; and if there is a credit balance, it shall be paid to such Non-








	
63

	
Consenting Party.








	
64

	
If and when the Consenting Parties recover from a Non-Consenting Party's relinquished interest the amounts provided








	
65

	
for above, the relinquished interests of such Non-Consenting Party shall automatically revert to it as of 7:00 a.m. on the day








	
66

	
following the day on which such recoupment occurs, and, from and after such reversion, such Non-Consenting Party shall








	
67

	
own the same interest in such well, the material and equipment in or pertaining thereto, and the production therefrom as








	
68

	
such  Non-Consenting  Party  would  have  been  entitled  to  had  it  participated  in  the  drilling,  Sidetracking,  Reworking,








	
69

	
Deepening, Recompleting or Plugging Back of said well. Thereafter, such Non-Consenting Party shall be charged with and








	
70

	
shall pay its proportionate part of the further costs of the operation of said well in accordance with the terms of this








	
71

	
agreement and Exhibit "C" attached hereto.








	
72

	
3. Stand-By Costs: When a well which has been drilled or Deepened has reached its authorized depth and all tests have








	
73

	
been  completed  and  the  results  thereof  furnished  to  the  parties,  or  when  operations  on  the  well  have  been  otherwise








	
74

	
terminated pursuant to Article VI.F., stand-by costs incurred pending response to a party's notice proposing a Reworking,







 




 




  





-7 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 



	
1

	
Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in such a well (including the period required









	
2

	
under Article VI.B.6. to resolve competing proposals) shall be charged and borne as part of the drilling or Deepening








	
3

	
operation just completed. Stand-by costs subsequent to all parties responding, or expiration of the response time permitted,








	
4

	
whichever first occurs, and prior to agreement as to the participating interests of all Consenting Parties pursuant to the terms








	
5

	
of the second grammatical paragraph of Article VI.B.2. (a), shall be charged to and borne as part of the proposed operation,








	
6

	
but if the proposal is subsequently withdrawn because of insufficient participation, such stand-by costs shall be allocated








	
7

	
between the Consenting Parties in the proportion each Consenting Party's interest as shown on Exhibit "A" bears to the total








	
8

	
interest as shown on Exhibit "A" of all Consenting Parties.








	
9

	
In the event that notice for a Sidetracking operation is given while the drilling rig to be utilized is on location, any party








	
10

	
may request and receive up to five (5) additional days after expiration of the forty-eight hour response period specified in








	
11

	
Article VI.B.1. within which to respond by paying for all stand-by costs and other costs incurred during such extended








	
12

	
response period; Operator may require such party to pay the estimated stand-by time in advance as a condition to extending








	
13

	
the response period. If more than one party elects to take such additional time to respond to the notice, standby costs shall be








	
14

	
allocated between the parties taking additional time to respond on a day-to-day basis in the proportion each electing party's








	
15

	
interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the electing parties.








	
16

	
4. Deepening: If less than all parties elect to participate in a drilling, Sidetracking, or Deepening operation proposed








	
17

	
pursuant to Article VI.B.1., the interest relinquished by the Non-Consenting Parties to the Consenting Parties under Article








	
18

	
VI.B.2. shall relate only and be limited to the lesser of (i) the total depth actually drilled or (ii) the objective depth or Zone








	
19

	
of which the parties were given notice under Article VI.B.1. ("Initial Objective"). Such well shall not be Deepened beyond the








	
20

	
Initial Objective without first complying with this Article to afford the Non-Consenting Parties the opportunity to participate








	
21

	
in the Deepening operation.








	
22

	
In the event any Consenting Party desires to drill or Deepen a Non-Consent Well to a depth below the Initial Objective,








	
23

	
such party shall give notice thereof, complying with the requirements of Article VI.B.1., to all parties (including Non-








	
24

	
Consenting Parties). Thereupon, Articles VI.B.1. and 2. shall apply and all parties receiving such notice shall have the right to








	
25

	
participate or not participate in the Deepening of such well pursuant to said Articles VI.B.1. and 2. If a Deepening operation








	
26

	
is approved pursuant to such provisions, and if any Non-Consenting Party elects to participate in the Deepening operation,








	
27

	
such Non-Consenting party shall pay or make reimbursement (as the case may be) of the following costs and expenses.








	
28

	
(a) If the proposal to Deepen is made prior to the Completion of such well as a well capable of producing in paying








	
29

	
quantities, such Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the case may be) that share of costs








	
30

	
and expenses incurred in connection with the drilling of said well from the surface to the Initial Objective which Non-








	
31

	
Consenting Party would have paid had such Non-Consenting Party agreed to participate therein, plus the Non-Consenting








	
32

	
Party's share of the cost of Deepening and of participating in any further operations on the well in accordance with the other








	
33

	
provisions of this Agreement; provided, however, all costs for testing and Completion or attempted Completion of the well








	
34

	
incurred by Consenting Parties prior to the point of actual operations to Deepen beyond the Initial Objective shall be for the








	
35

	
sole account of Consenting Parties.








	
36

	
(b) If the proposal is made for a Non-Consent Well that has been previously Completed as a well capable of producing








	
37

	
in paying quantities, but is no longer capable of producing in paying quantities, such Non-Consenting Party shall pay (or








	
38

	
reimburse Consenting Parties for, as the case may be) its proportionate share of all costs of drilling, Completing, and








	
39

	
equipping said well from the surface to the Initial Objective, calculated in the manner provided in paragraph (a) above, less








	
40

	
those costs recouped by the Consenting Parties from the sale of production from the well. The Non-Consenting Party shall








	
41

	
also pay its proportionate share of all costs of re-entering said well. The Non-Consenting Parties' proportionate part (based








	
42

	
on the percentage of such well Non-Consenting Party would have owned had it previously participated in such Non-Consent








	
43

	
Well) of the costs of salvable materials and equipment remaining in the hole and salvable surface equipment used in








	
44

	
connection with such well shall be determined in accordance with Exhibit "C." If the Consenting Parties have recouped the








	
45

	
cost of drilling, Completing, and equipping the well at the time such Deepening operation is conducted, then a Non-








	
46

	
Consenting Party may participate in the Deepening of the well with no payment for costs incurred prior to re-entering the








	
47

	
well for Deepening








	
48

	
The foregoing shall not imply a right of any Consenting Party to propose any Deepening for a Non-Consent Well prior








	
49

	
to the drilling of such well to its Initial Objective without the consent of the other Consenting Parties as provided in Article








	
50

	
VI.F.








	
51

	
5. Sidetracking: Any party having the right to participate in a proposed Sidetracking operation that does not own an








	
52

	
interest in the affected wellbore at the time of the notice shall, upon electing to participate, tender to the wellbore owners its








	
53

	
proportionate share (equal to its interest in the Sidetracking operation) of the value of that portion of the existing wellbore








	
54

	
to be utilized as follows:








	
55

	
(a) If the proposal is for Sidetracking an existing dry hole, reimbursement shall be on the basis of the actual costs








	
56

	
incurred in the initial drilling of the well down to the depth at which the Sidetracking operation is initiated.








	
57

	
(b) If the proposal is for Sidetracking a well which has previously produced, reimbursement shall be on the basis of








	
58

	
such party's proportionate share of drilling and equipping costs incurred in the initial drilling of the well down to the depth








	
59

	
at which the Sidetracking operation is conducted, calculated in the manner described in Article VI.B.4(b) above. Such party's








	
60

	
proportionate share of the cost of the well's salvable materials and equipment down to the depth at which the Sidetracking








	
61

	
operation is initiated shall be determined in accordance with the provisions of Exhibit "C."








	
62

	
6. Order of Preference of Operations. Except as otherwise specifically provided in this agreement, if any party desires to








	
63

	
propose the conduct of an operation that conflicts with a proposal that has been made by a party under this Article VI, such








	
64

	
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








	
65

	
an operation on a well where no drilling rig is on location, or twenty-four (24) hours, exclusive of Saturday, Sunday and legal








	
66

	
holidays, from delivery of the initial proposal, if a drilling rig is on location for the well on which such operation is to be








	
67

	
conducted, to deliver to all parties entitled to participate in the proposed operation such party's alternative proposal, such








	
68

	
alternate proposal to contain the same information required to be included in the initial proposal. Each party receiving such








	
69

	
proposals shall elect by delivery of notice to Operator within five (5) days after expiration of the proposal period, or within








	
70

	
twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays) if a drilling rig is on location for the well that is the








	
71

	
subject of the proposals, to participate in one of the competing proposals. Any party not electing within the time required








	
72

	
shall be deemed not to have voted. The proposal receiving the vote of parties owning the largest aggregate percentage








	
73

	
interest of the parties voting shall have priority over all other competing proposals; in the case of a tie vote, the 








	
74

	 





 







  





-8 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 




	
1

	
initial proposal shall prevail. Operator shall deliver notice of such result to all parties entitled to participate in the operation








	
2

	
within five (5) days after expiration of the election period (or within twenty-four (24) hours, exclusive of Saturday, Sunday








	
3

	
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








	
4

	
is on location) from receipt of such notice to elect by delivery of notice to Operator to participate in such operation or to








	
5

	
relinquish interest in the affected well pursuant to the provisions of Article VI.B.2.; failure by a party to deliver notice within








	
6

	
such period shall be deemed an election not to participate in the prevailing proposal.








	
7

	
7. Conformity to Spacing Pattern. Notwithstanding the provisions of this Article VI.B.2., it is agreed that no wells shall be








	
8

	
proposed to be drilled to or Completed in or produced from a Zone from which a well located elsewhere on the Contract








	
9

	
Area is producing, unless such well conforms to the then-existing well spacing pattern for such Zone.








	
10

	
8. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging Back, Completion, Recompletion, or








	
11

	
Sidetracking operation under this agreement with respect to any well then capable of producing in paying quantities except








	
12

	
with the consent of all parties that have not relinquished interests in the well at the time of such operation.








	
13

	
C. Completion of Wells; Reworking and Plugging Back:








	
14

	
1. Completion: Without the consent of all parties, no well shall be drilled, Deepened or Sidetracked, except any well








	
15

	
drilled, Deepened or Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.  Consent to the drilling,








	
16

	
Deepening or Sidetracking shall include:








	
17

	
o    Option  No.  1:  All  necessary  expenditures  for  the  drilling,  Deepening  or  Sidetracking,  testing,  Completing  and








	
18

	
equipping of the well, including necessary tankage and/or surface facilities.








	
19

	
þ    Option No. 2: All necessary expenditures for the drilling, Deepening or Sidetracking and testing of the well. When








	
20

	
such well has reached its authorized depth, and all logs, cores and other tests have been completed, and the results








	
21

	
thereof furnished to the parties, Operator shall give immediate notice to the Non-Operators having the right to








	
22

	
participate  in  a  Completion  attempt  whether  or  not  Operator  recommends  attempting  to  Complete  the  well,








	
23

	
together with Operator's AFE for Completion costs if not previously provided.  The parties receiving such notice








	
24

	
shall have forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) in which to elect by delivery of








	
25

	
notice to Operator to participate in a recommended Completion attempt or to make a Completion proposal with an








	
26

	
accompanying AFE.  Operator shall deliver any such Completion proposal, or any Completion proposal conflicting








	
27

	
with Operator's proposal, to the other parties entitled to participate in such Completion in accordance with the








	
28

	
procedures specified in Article VI.B.6.  Election to participate in a Completion attempt shall include consent to all








	
29

	
necessary expenditures for the Completing and equipping of such well, including necessary tankage and/or surface








	
30

	
facilities but excluding any stimulation  operation  not  contained  on the Completion  AFE. Failure  of any party








	
31

	
receiving  such  notice to  reply  within  the period  above  fixed  shall  constitute  an  election  by that party not to








	
32

	
participate  in  the  cost  of  the  Completion  attempt;  provided,  that  Article  VI.B.6.  shall  control  in  the  case  of








	
33

	
conflicting Completion proposals.  If one or more, but less than all of the parties, elect to attempt a Completion, the








	
34

	
provision  of  Article  VI.B.2.  hereof  (the  phrase  "Reworking,  Sidetracking,  Deepening,  Recompleting  or  Plugging








	
35

	
Back"  as contained  in  Article  VI.B.2.  shall  be  deemed  to  include  "Completing")  shall  apply to  the  operations








	
36

	
thereafter conducted by less than all parties; provided, however, that Article VI.B.2. shall apply separately to each








	
37

	
separate Completion or Recompletion attempt undertaken hereunder, and an election to become a Non-Consenting








	
38

	
Party as to one Completion or Recompletion attempt shall not prevent a party from becoming a Consenting Party








	
39

	
in  subsequent  Completion  or  Recompletion  attempts  regardless  whether  the  Consenting  Parties  as  to  earlier








	
40

	
Completions  or  Recompletion  have  recouped  their  costs  pursuant  to  Article  VI.B.2.;  provided  further,  that  any








	
41

	
recoupment of costs by a Consenting Party shall be made solely from the production attributable to the Zone in








	
42

	
which the Completion attempt is made.  Election by a previous Non-Consenting party to participate in a subsequent








	
43

	
Completion or Recompletion attempt shall require such party to pay its proportionate share of the cost of salvable








	
44

	
materials  and  equipment  installed  in  the  well  pursuant  to  the  previous  Completion  or  Recompletion  attempt,








	
45

	
insofar and only insofar as such materials and equipment benefit the Zone in which such party participates in a








	
46

	
Completion attempt.








	
47

	
2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted or Plugged Back except a well Reworked,








	
48

	
Recompleted, or Plugged Back pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the Reworking,








	
49

	
Recompleting  or  Plugging  Back  of  a  well  shall  include  all  necessary  expenditures  in  conducting  such  operations  and








	
50

	
Completing and equipping of said well, including necessary tankage and/or surface facilities.








	
51

	
D. Other Operations:








	
52

	
Operator shall not undertake any single project reasonably estimated to require an expenditure in excess of








	
53

	
  Twenty-five thousandDollars ($ 25,000.00) except in connection with the








	
54

	
drilling, Sidetracking, Reworking, Deepening, Completing, Recompleting or Plugging Back of a well that has been previously








	
55

	
authorized  by or  pursuant  to  this  agreement;  provided,  however,  that,  in  case  of  explosion,  fire,  flood  or  other  sudden








	
56

	
emergency, whether of the same or different nature, Operator may take such steps and incur such expenses as in its opinion








	
57

	
are required to deal with the emergency to safeguard life and property but Operator, as promptly as possible, shall report the








	
58

	
emergency to the other parties. If Operator prepares an AFE for its own use, Operator shall furnish any Non-Operator so








	
59

	
requesting an information copy thereof for any single project costing in excess of   Twenty-five thousand Dollars








	
60

	
($ 25,000.00 ). Any party who has not relinquished its interest in a well shall have the right to propose that








	
61

	
Operator perform repair work or undertake the installation of artificial lift equipment or ancillary production facilities such as








	
62

	
salt water disposal wells or to conduct additional work with respect to a well drilled hereunder or other similar project (but








	
63

	
not including the installation of gathering lines or other transportation or marketing facilities, the installation of which shall








	
64

	
be governed  by separate agreement between  the parties) reasonably estimated to require an  expenditure in  excess of the








	
65

	
amount first set forth above in this Article VI.D. (except in connection with an operation required to be proposed under








	
66

	
Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed exclusively be those Articles).  Operator shall deliver such








	
67

	
proposal to all parties entitled to participate therein. If within thirty (30) days thereof Operator secures the written consent








	
68

	
of any party or parties owning at least 75% of the interests of the parties entitled to participate in such operation,








	
69

	
each party having the right to participate in such project shall be bound by the terms of such proposal and shall be obligated








	
70

	
to pay its proportionate share of the costs of the proposed project as if it had consented to such project pursuant to the terms








	
71

	
of the proposal.








	
72

	
E. Abandonment of Wells:








	
73

	
1.  Abandonment of Dry Holes: Except for any well drilled or Deepened pursuant to Article VI.B.2., any well which has








	
74

	
been drilled or Deepened under the terms of this agreement and is proposed to be completed as a dry hole shall not be









 





  





-9 -
















A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989



	
1

	
plugged and abandoned without the consent of all parties. Should Operator, after diligent effort, be unable to contact any








	
2 

	
party, or should any party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after








	
3

	
delivery of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the








	
4

	
proposed abandonment.  All such wells shall be plugged and abandoned in accordance with applicable regulations and at the








	
5

	
cost, risk and expense of the parties who participated in the cost of drilling or Deepening such well.  Any party who objects to








	
6

	
plugging and abandoning such  well by notice delivered  to Operator within  forty-eight  (48) hours (exclusive of Saturday,








	
7

	
Sunday and legal holidays) after delivery of notice of the proposed plugging shall take over the well as of the end of such








	
8

	
forty-eight (48) hour notice period and conduct further operations in search of Oil and/or Gas subject to the provisions of








	
9

	
Article VI.B.; failure of such party to provide proof reasonably satisfactory to Operator of its financial capability to conduct








	
10

	
such operations or to take over the well within such period or thereafter to conduct operations on such well or plug and








	
11

	
abandon such well shall entitle Operator to retain or take possession of the well and plug and abandon the well.  The party








	
12

	
taking over the well shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties against








	
13

	
liability for any further operations conducted on such well except for the costs of plugging and abandoning the well and








	
14

	
restoring the surface, for which the abandoning parties shall remain proportionately liable.








	
15

	
2.  Abandonment  of  Wells  That  Have  Produced:  Except  for  any  well  in  which  a  Non-Consent  operation  has  been








	
16

	
conducted hereunder for which the Consenting Parties have not been fully reimbursed as herein provided, any well which has








	
17

	
been completed as a producer shall not be plugged and abandoned without the consent of all parties.  If all parties consent to








	
18

	
such abandonment, the well shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk








	
19

	
and expense of all the parties hereto.  Failure of a party to reply within sixty (60) days of delivery of notice of proposed








	
20

	
abandonment shall be deemed an election to consent to the proposal.  If, within sixty (60) days after delivery of notice of the








	
21

	
proposed abandonment of any well, all parties do not agree to the abandonment of such well, those wishing to continue its








	
22

	
operation  from the Zone then  open  to production  shall be obligated  to take over the well as  of the expiration  of the








	
23

	
applicable notice period and shall indemnify Operator (if Operator is an abandoning party) and the other abandoning parties








	
24

	
against liability for any further operations on the well conducted by such parties.  Failure of such party or parties to provide








	
25

	
proof reasonably satisfactory to Operator of their financial capability to conduct such operations or to take over the well








	
26

	
within the required period or thereafter to conduct operations on such well shall entitle operator to retain or take possession








	
27

	
of such well and plug and abandon the well.








	
28

	
Parties taking over a well as provided herein shall tender to each of the other parties its proportionate share of the value of








	
29

	
the well's salvable material and equipment, determined in accordance with the provisions of Exhibit "C," less the estimated cost








	
30

	
of salvaging and the estimated cost of plugging and abandoning and restoring the surface; provided, however, that in the event








	
31

	
the estimated plugging and abandoning and surface restoration costs and the estimated cost of salvaging are higher than the








	
32

	
value of the well's salvable material and equipment, each of the abandoning parties shall tender to the parties continuing








	
33

	
operations their proportionate shares of the estimated excess cost.  Each abandoning party shall assign to the non-abandoning








	
34

	
parties, without warranty, express or implied, as to title or as to quantity, or fitness for use of the equipment and material, all








	
35

	
of its interest in the wellbore of the well and related equipment, together with its interest in the Leasehold insofar and only








	
36

	
insofar as such Leasehold covers the right to obtain production from that wellbore in the Zone then open to production.  If the








	
37

	
interest of the abandoning party is or includes and Oil and Gas Interest, such party shall execute and deliver to the non-








	
38

	
abandoning party or parties an oil and gas lease, limited to the wellbore and the Zone then open to production, for a term of








	
39

	
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








	
40

	
attached as Exhibit "B."  The assignments or leases so limited shall encompass the Drilling Unit upon which the well is located.








	
41

	
The payments by, and the assignments or leases to, the assignees shall be in a ratio based upon the relationship of their








	
42

	
respective percentage of participation in the Contract Area to the aggregate of the percentages of participation in the Contract








	
43

	
Area of all assignees. There shall be no readjustment of interests in the remaining portions of the Contract Area.








	
44

	
Thereafter, abandoning parties shall have no further responsibility, liability, or interest in the operation of or production








	
45

	
from the well in the Zone then open other than the royalties retained in any lease made under the terms of this Article.  Upon








	
46

	
request, Operator shall continue to operate the assigned well for the account of the non-abandoning parties at the rates and








	
47

	
charges contemplated by this agreement, plus any additional cost and charges which may arise as the result of the separate








	
48

	
ownership of the assigned well.  Upon proposed abandonment of the producing Zone assigned or leased, the assignor or lessor








	
49

	
shall then have the option to repurchase its prior interest in the well (using the same valuation formula) and participate in








	
50

	
further operations therein subject to the provisions hereof.








	
51

	
3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1. or VI.E.2. above shall be applicable as








	
52

	
between Consenting Parties in the event of the proposed abandonment of any well excepted from said Articles; provided,








	
53

	
however, no well shall be permanently plugged and abandoned unless and until all parties having the right to conduct further








	
54

	
operations therein have been notified of the proposed abandonment and afforded the opportunity to elect to take over the well








	
55

	
in accordance with the provisions of this Article VI.E.; and provided further, that Non-Consenting Parties who own an interest








	
56

	
in a portion of the well shall pay their proportionate shares of abandonment and surface restoration cost for such well as








	
57

	
provided in Article VI.B.2.(b).








	
58

	
F. Termination of Operations:








	
59

	
Upon the commencement of an operation for the drilling, Reworking, Sidetracking, Plugging Back, Deepening, testing,








	
60

	
Completion or plugging of a well, including but not limited to the Initial Well, such operation shall not be terminated without








	
61

	
consent of parties bearing 75% of the costs of such operation; provided, however, that in the event granite or other








	
62

	
practically  impenetrable  substance  or  condition  in  the  hole  is  encountered  which  renders  further  operations  impractical,








	
63

	
Operator may discontinue operations and give notice of such condition in the manner provided in Article VI.B.1, and the








	
64

	
provisions of Article VI.B. or VI.E. shall thereafter apply to such operation, as appropriate.













	
65

	
G. Taking Production in Kind:








	
66

	
o   Option No. 1: Gas Balancing Agreement Attached








	
67

	
Each  party  shall  take  in  kind  or  separately  dispose  of  its  proportionate  share  of  all  Oil  and  Gas  produced  from  the








	
68

	
Contract Area, exclusive of production which may be used in development and producing operations and in preparing and








	
69

	
treating Oil and Gas for marketing purposes and production unavoidably lost.   Any extra expenditure incurred in the taking








	
70

	
in kind or separate disposition by any party of its proportionate share of the production shall be borne by such party.   Any








	
71

	
party  taking  its  share  of  production  in  kind  shall  be  required  to  pay  for  only  its  proportionate  share  of  such  part  of








	
72

	
Operator's surface facilities which it uses.








	
73 

	
Each  party  shall  execute  such  division  orders  and  contracts  as  may  be  necessary  for  the  sale  of  its  interest  in








	
74

	
production  from  the  Contract  Area,  and,  except  as  provided  in  Article  VII.B.,  shall  be  entitled  to  receive  payment







 




  





-10 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989














 


 




	
1

	
directly from the purchaser thereof for its share of all production.








	
2

	
If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate








	
3

	
share of the Oil produced from the Contract Area, Operator shall have the right, subject to the revocation at will by








	
4

	
the party owning it, but not the obligation, to purchase such Oil or sell it to others at any time and from time to








	
5

	
time,  for  the  account  of  the  non-taking  party.  Any  such  purchase or  sale  by Operator  may  be  terminated  by








	
6

	
Operator upon at least ten (10) days written notice to the owner of said production and shall be subject always to








	
7

	
the right of the owner of the production upon at least ten (10) days written notice to Operator to exercise at any








	
8

	
time its right to take in kind, or separately dispose of, its share of all Oil not previously delivered to a purchaser.








	
9

	
Any purchase or sale by Operator of any other party's share of Oil shall be only for such reasonable periods of time








	
10

	
as are consistent with the minimum needs of the industry under the particular circumstances, but in no event for a








	
11

	
period in excess of one (1) year.








	
12

	
Any such sale by Operator shall be in a manner commercially reasonable under the circumstances but Operator











	
13

	
shall have no duty to share any existing market or to obtain a price equal to that received under any existing








	
14

	
market.   The sale or delivery by Operator of a non-taking party's share of Oil under the terms of any existing








	
15

	
contract of Operator shall not give the non-taking party any interest in or make the non-taking party a party to said








	
16

	
contract.   No purchase shall be made by Operator without first giving the non-taking party at least ten (10) days








	
17

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











	
18

	
All  parties shall give timely  written  notice to Operator of their  Gas marketing arrangements for the following








	
19

	
month,  excluding  price,  and  shall  notify  Operator  immediately  in  the  event  of  a  change  in  such  arrangements.








	
20

	
Operator shall maintain records of all marketing arrangements, and of volumes actually sold or transported, which








	
21

	
records shall be made available to Non-Operators upon reasonable request.









	
22

	
In the event one or more parties' separate disposition of its share of the Gas causes split-stream deliveries to separate








	
23

	
pipelines and/or deliveries which on a day-to-day basis for any reason are not exactly equal to a party's respective proportion-








	
24

	
ate share of total Gas sales to be allocated to it, the balancing or accounting between the parties shall be in accordance with








	
25

	
any Gas balancing agreement between the parties hereto, whether such an agreement is attached as Exhibit "E" or is a








	
26

	
separate agreement.  Operator shall give notice to all parties of the first sales of Gas from any well under this agreement.








	
27

	
þ Option No. 2: No Gas Balancing Agreement:








	
28

	
Each partyshall /  may take in kind or separately dispose of its proportionate share of all Oil and Gas produced from








	
29

	
the  Contract  Area,  exclusive of  production  which  may be  used  in  development  and  producing  operations  and  in








	
30

	
preparing and treating Oil and Gas for marketing purposes and production unavoidably lost.Any extra expenditures








	
31

	
incurred in the taking in kind or separate disposition by any party of its proportionate share of the production shall








	
32

	
be borne by such party.  Any party taking its share of production in kind shall be required to pay for only its








	
33

	
proportionate share of such part of Operator's surface facilities which it uses.








	
34

	
Each party shall execute such division orders and contracts as may be necessary for the sale of its interest in








	
35

	
production from the Contract Area, and, except as provided in Article VII.B., shall be entitled to receive payment








	
36

	
directly from the purchaser thereof for its share of all production.








	
37

	
If any party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate








	
38

	
share  of  the  Oil  and/or  Gas  produced  from  the  Contract  Area,  Operator shall  have  the  right,  subject  to  the








	
39

	
revocation at will by the party owning it, but not the obligation, to purchase such Oil and/or Gas or  sell sell such Oil and/or Gas sell / it to others








	
40

	
at any time and from time to time, for the account of the non-taking party.  Any such purchase or sale by Operator








	
41

	
may be terminated by Operator upon at least ten (10) days written notice to the owner of said production and shall








	
42

	
be subject always to the right of the owner of the production upon at least ten (10) days written notice to Operator








	
43

	
to exercise its right to take in kind, or separately dispose of, its share of all Oil and/or Gas not previously delivered








	
44

	
to  a purchaser;  provided, however,  that the effective date of  any  such  revocation  may be deferred  at  Operator's








	
45

	
election  for  a  period  not  to  exceed  ninety  (90)  days  if  Operator  has  committed  such  production  to  a  purchase








	
46

	
contract having a term extending beyond such ten (10) -day period. Any purchase or sale by Operator of any other








	
47

	
party's  share  of  Oil  and/or  Gas  shall  be  only  for  such  reasonable  periods  of  time  as  are  consistent  with  the








	
48

	
minimum needs of the industry under the particular circumstances, but in no event for a period in excess of one (1)








	
49

	
year.








	
50

	
Any such sale by Operator shall be in a manner commercially reasonable under the circumstances, but Operator








	
51

	
shall have no duty to share any existing market or transportation arrangement or to obtain a price or transportation








	
52

	
fee  equal  to  that  received  under  any  existing  market  or  transportation  arrangement.The  sale  or  delivery  by








	
53

	
Operator of a non-taking party's share of production under the terms of any existing contract of Operator shall not








	
54

	
give the non-taking party any interest in or make the non-taking party a party to said contract.  No purchase of Oil








	
55

	
and Gas and no sale of Gas shall be made by Operator without first giving the non-taking party ten days written








	
56

	
notice of such intended purchase or sale and the price to be paid or the pricing basis to be used. Operator shall give








	
57

	
notice to all parties of the first sale of Gas from any well under this Agreement.








	
58

	
All  parties shall give timely  written  notice to Operator of their  Gas marketing arrangements for the following








	
59

	
month,  excluding  price,  and  shall  notify  Operator  immediately  in  the  event  of  a  change  in  such  arrangements.








	
60

	
Operator shall maintain records of all marketing arrangements, and of volumes actually sold or transported, which








	
61

	
records shall be made available to Non-Operators upon reasonable request.








	
62

	
ARTICLE VII.








	
63

	
EXPENDITURES AND LIABILITY OF PARTIES








	
64

	
A. Liability of Parties:








	
65

	
The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations,








	
66

	
and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area.  Accordingly, the








	
67

	
liens granted among the parties in Article VII.B. are given to secure only the debts of each severally, and no party shall have








	
68

	
any liability to third parties hereunder to satisfy the default of any other party in the payment of any expense or obligation








	
69

	
hereunder.  It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other








	
70

	
partnership,  joint  venture,  agency  relationship  or  association,  or  to  render  the  parties  liable  as  partners,  co-venturers,  or








	
71

	
principals.  In their relations with each other under this agreement, the parties shall not be considered fiduciaries or to have








	
72

	
established a confidential relationship but rather shall be free to act on an arm's-length basis in accordance with their own








	
73

	
respective self-interest, subject, however, to the obligation of the parties to act in good faith in their dealings with each other








	
74

	
with respect to activities hereunder.













  





-11 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 




	
1

	
B. Liens and Security Interests:








	
2

	
Each party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquires in Oil and Gas








	
3

	
Leases and Oil and Gas Interests in the Contract Area, and a security interest and/or purchase money security interest in any








	
4

	
interest it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for use in connection








	
5

	
therewith, to secure performance of all of its obligations under this agreement including but not limited to payment of expense,








	
6

	
interest and fees, the proper disbursement of all monies paid hereunder, the assignment or relinquishment of interest in Oil








	
7

	
and Gas Leases as required hereunder, and the proper performance of operations hereunder.  Such lien and security interest








	
8

	
granted by each party hereto shall include such party's leasehold interests, working interests, operating rights, and royalty and








	
9

	
overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or








	
10

	
otherwise becoming subject to this agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or








	
11

	
used or obtained for use in connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts








	
12

	
(including, without limitation, accounts arising from gas imbalances or from the sale of Oil and/or Gas at the wellhead),








	
13

	
contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the








	
14

	
foregoing.








	
15

	
To perfect the lien and security agreement provided herein, each party hereto shall execute and acknowledge the recording








	
16

	
supplement and/or any financing statement prepared and submitted by any party hereto in conjunction herewith or at any time








	
17

	
following execution hereof, and Operator is authorized to file this agreement or the recording supplement executed herewith as








	
18

	
a lien or mortgage in the applicable real estate records and as a financing statement with the proper officer under the Uniform








	
19

	
Commercial Code in the state in which the Contract Area is situated and such other states as Operator shall deem appropriate








	
20

	
to perfect the security interest granted hereunder.  Any party may file this agreement, the recording supplement executed








	
21

	
herewith, or such other documents as it deems necessary as a lien or mortgage in the applicable real estate records and/or a








	
22

	
financing statement with the proper officer under the Uniform Commercial Code.








	
23

	
Each party represents and warrants to the other parties hereto that the lien and security interest granted by such party to








	
24

	
the other parties shall be a first and prior lien, and each party hereby agrees to maintain the priority of said lien and security








	
25

	
interest against all persons acquiring an interest in Oil and Gas Leases and Interests covered by this agreement by, through or








	
26

	
under such party.  All parties acquiring an interest in Oil and Gas Leases and Oil and Gas Interests covered by this agreement,








	
27

	
whether  by  assignment,  merger,  mortgage,  operation  of  law,  or  otherwise,  shall  be  deemed  to  have  taken  subject








	
28

	
to the lien and security interest granted by this Article VII.B. as to all obligations attributable to such interest hereunder








	
29

	
whether or not such obligations arise before or after such interest is acquired.








	
30

	
To  the  extent  that  parties  have  a  security  interest  under  the  Uniform  Commercial  Code  of  the  state  in  which  the








	
31

	
Contract Area is situated, they shall be entitled to exercise the rights and remedies of a secured party under the Code.








	
32

	
The bringing of a suit and the obtaining of judgment by a party for the secured indebtedness shall not be deemed an








	
33

	
election  of  remedies  or  otherwise  affect  the  lien  rights  or  security  interest  as  security  for  the  payment  thereof.In








	
34

	
addition, upon default by any party in the payment of its share of expenses, interests or fees, or upon the improper use








	
35

	
of funds by the Operator, the other parties shall have the right, without prejudice to other rights or remedies, to collect








	
36

	
from the purchaser the proceeds from the sale of such defaulting party's share of Oil and Gas until the amount owed by








	
37

	
such  party,  plus interest  as provided  in  "Exhibit  C," has been  received,  and  shall  have  the  right  to  offset  the amount








	
38

	
owed against the proceeds from the sale of such defaulting party's share of Oil and Gas.  All purchasers of production








	
39

	
may rely on a notification of default from the non-defaulting party or parties stating the amount due as a result of the








	
40

	
default,  and  all  parties  waive  any  recourse  available  against  purchasers  for  releasing  production  proceeds  as  provided  in








	
41

	
this paragraph.








	
42

	
If any party fails to pay its share of cost within one hundred twenty (120) days after rendition of a statement therefor by








	
43

	
Operator,  the  non-defaulting  parties,  including  Operator,  shall  upon  request  by  Operator,  pay  the  unpaid  amount  in  the








	
44

	
proportion that the interest of each such party bears to the interest of all such parties.  The amount paid by each party so








	
45

	
paying its share of the unpaid amount shall be secured by the liens and security rights described in Article VII.B., and each








	
46

	
paying party may independently pursue any remedy available hereunder or otherwise.








	
47

	
If any party does not perform all of its obligations hereunder, and the failure to perform subjects such party to foreclosure








	
48

	
or execution proceedings pursuant to the provisions of this agreement, to the extent allowed by governing law, the defaulting








	
49

	
party waives any available right of redemption from and after the date of judgment, any required valuation or appraisement








	
50

	
of the mortgaged or secured property prior to sale, any available right to stay execution or to require a marshaling of assets








	
51

	
and any required bond in the event a receiver is appointed.  In addition, to the extent permitted by applicable law, each party








	
52

	
hereby grants to the other parties a power of sale as to any property that is subject to the lien and security rights granted








	
53

	
hereunder, such power to be exercised in the manner provided by applicable law or otherwise in a commercially reasonable








	
54

	
manner and upon reasonable notice.








	
55

	
Each party agrees that the other parties shall be entitled to utilize the provisions of Oil and Gas lien law or other lien








	
56

	
law of any state in which the Contract Area is situated to enforce the obligations of each party hereunder.  Without limiting








	
57

	
the generality of the foregoing, to the extent permitted by applicable law, Non-Operators agree that Operator may invoke or








	
58

	
utilize the mechanics' or materialmen's lien law of the state in which the Contract Area is situated in order to secure the








	
59

	
payment  to  Operator  of  any  sum  due  hereunder  for  services  performed  or  materials  supplied  by  Operator.








	
60

	
C. Advances:








	
61

	
Operator, at its election, shall have the right from time to time to demand and receive from one or more of the other








	
62

	
parties payment in advance of their respective shares of the estimated amount of the expense to be incurred in operations








	
63

	
hereunder during the next succeeding month, which right may be exercised only by submission to each such party of an








	
64

	
itemized statement of such estimated expense, together with an invoice for its share thereof.  Each such statement and invoice








	
65

	
for the payment in advance of estimated expense shall be submitted on or before the 20th day of the next preceding month.








	
66

	
Each party shall pay to Operator its proportionate share of such estimate within fifteen (15) days after such estimate and








	
67

	
invoice is received.  If any party fails to pay its share of said estimate within said time, the amount due shall bear interest as








	
68

	
provided in Exhibit "C" until paid.  Proper adjustment shall be made monthly between advances and actual expense to the end








	
69

	
that each party shall bear and pay its proportionate share of actual expenses incurred, and no more.








	
70

	
D. Defaults and Remedies:








	
71

	
If any party fails to discharge any financial obligation under this agreement, including without limitation the failure to








	
72

	
make any advance under the preceding Article VII.C. or any other provision of this agreement, within the period required for








	
73

	
such payment hereunder, then in addition to the remedies provided in Article VII.B. or elsewhere in this agreement, the








	
74

	
remedies specified below shall be applicable.  For purposes of this Article VII.D., all notices and elections shall be delivered









 


 




  





-12 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 




	
1

	
only by Operator, except that Operator shall deliver any such notice and election requested by a non-defaulting Non-Operator,








	
2

	
and  when  Operator  is  the party  in  default,  the applicable notices  and  elections  can  be delivered  by any Non-Operator.








	
3

	
Election of any one or more of the following remedies shall not preclude the subsequent use of any other remedy specified








	
4

	
below or otherwise available to a non-defaulting party.








	
5

	
1. Suspension of Rights: Any party may deliver to the party in default a Notice of Default, which shall specify the default,








	
6

	
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








	
7

	
or more of the remedies provided in this Article.  If the default is not cured within thirty (30) days of the delivery of such








	
8

	
Notice of Default, all of the rights of the defaulting party granted by this agreement may upon notice be suspended until the








	
9

	
default is cured, without prejudice to the right of the non-defaulting party or parties to continue to enforce the obligations of








	
10

	
the defaulting party previously accrued or thereafter accruing under this agreement. If Operator is the party in default, the








	
11

	
Non-Operators shall have in addition the right, by vote of Non-Operators owning a majority in interest in the Contract Area








	
12

	
after excluding the voting interest of Operator, to appoint a new Operator effective immediately.  The rights of a defaulting








	
13

	
party that may be suspended hereunder at the election of the non-defaulting parties shall include, without limitation, the right








	
14

	
to receive information  as to any operation  conducted  hereunder during the period  of such  default, the right to elect to








	
15

	
participate in an operation proposed under Article VI.B. of this agreement, the right to participate in an operation being








	
16

	
conducted under this agreement even if the party has previously elected to participate in such operation, and the right to








	
17

	
receive proceeds of production from any well subject to this agreement.








	
18

	
2.  Suit  for  Damages:  Non-defaulting  parties  or  Operator  for  the  benefit  of  non-defaulting  parties  may  sue  (at  joint








	
19

	
account expense) to collect the amounts in default, plus interest accruing on the amounts recovered from the date of default








	
20

	
until the date of collection at the rate specified in Exhibit "C" attached hereto.  Nothing herein shall prevent any party from








	
21

	
suing any defaulting party to collect consequential damages accruing to such party as a result of the default.








	
22

	
3.  Deemed  Non-Consent:  The  non-defaulting  party  may  deliver  a  written  Notice  of  Non-Consent  Election  to  the








	
23

	
defaulting party at any time after the expiration of the thirty-day cure period following delivery of the Notice of Default, in








	
24

	
which event if the billing is for the drilling a new well or the Plugging Back, Sidetracking, Reworking or Deepening of a








	
25

	
well which is to be or has been plugged as a dry hole, or for the Completion or Recompletion of any well, the defaulting








	
26

	
party will be conclusively deemed to have elected not to participate in the operation and to be a Non-Consenting Party with








	
27

	
respect  thereto  under  Article  VI.B.  or  VI.C.,  as  the  case  may  be,  to  the  extent  of  the  costs  unpaid  by  such  party,








	
28

	
notwithstanding any election to participate theretofore made. If election is made to proceed under this provision, then the








	
29

	
non-defaulting parties may not elect to sue for the unpaid amount pursuant to Article VII.D.2.








	
30

	
Until the delivery of such Notice of Non-Consent Election to the defaulting party, such party shall have the right to cure








	
31

	
its default by paying its unpaid share of costs plus interest at the rate set forth in Exhibit "C," provided, however, such








	
32

	
payment shall not prejudice the rights of the non-defaulting parties to pursue remedies for damages incurred by the non-








	
33

	
defaulting parties as a result of the default.  Any interest relinquished pursuant to this Article VII.D.3. shall be offered to the








	
34

	
non-defaulting parties in proportion to their interests, and the non-defaulting parties electing to participate in the ownership








	
35

	
of such interest shall be required to contribute their shares of the defaulted amount upon their election to participate therein.








	
36

	
4. Advance Payment: If a default is not cured within thirty (30) days of the delivery of a Notice of Default, Operator, or








	
37

	
Non-Operators  if  Operator  is  the  defaulting  party,  may  thereafter  require  advance  payment  from  the  defaulting








	
38

	
party of such defaulting party's anticipated share of any item of expense for which Operator, or Non-Operators, as the case may








	
39

	
be, would be entitled to reimbursement under any provision of this agreement, whether or not such expense was the subject of








	
40

	
the previous default.  Such right includes, but is not limited to, the right to require advance payment for the estimated costs of








	
41

	
drilling a well or Completion of a well as to which an election to participate in drilling or Completion has been made.  If the








	
42

	
defaulting party fails to pay the required advance payment, the non-defaulting parties may pursue any of the remedies provided








	
43

	
in the Article VII.D. or any other default remedy provided elsewhere in this agreement.  Any excess of funds advanced remaining








	
44

	
when the operation is completed and all costs have been paid shall be promptly returned to the advancing party.








	
45

	
5. Costs and Attorneys' Fees: In the event any party is required to bring legal proceedings to enforce any financial








	
46

	
obligation of a party hereunder, the prevailing party in such action shall be entitled to recover all court costs, costs of








	
47

	
collection, and a reasonable attorney's fee, which the lien provided for herein shall also secure.








	
48

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








	
49

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








	
50

	
by the party or parties who subjected such lease to this agreement at its or their expense.  In the event two or more parties








	
51

	
own and have contributed interests in the same lease to this agreement, such parties may designate one of such parties to








	
52

	
make said payments for and on behalf of all such parties.  Any party may request, and shall be entitled to receive, proper








	
53

	
evidence of all such payments.  In the event of failure to make proper payment of any rental, shut-in well payment or








	
54

	
minimum royalty through mistake or oversight where such payment is required to continue the lease in force, any loss which








	
55

	
results from such non-payment shall be borne in accordance with the provisions of Article IV.B.2.








	
56

	
Operator  shall  notify Non-Operators  of  the  anticipated  completion  of  a  shut-in  well,  or  the  shutting  in  or  return  to








	
57

	
production of a producing well, at least five (5) days (excluding Saturday, Sunday, and legal holidays) prior to taking such








	
58

	
action, or at the earliest opportunity permitted by circumstances, but assumes no liability for failure to do so.  In the event of








	
59

	
failure by Operator to so notify Non-Operators, the loss of any lease contributed hereto by Non-Operators for failure to make








	
60

	
timely payments of any shut-in well payment shall be borne jointly by the parties hereto under the provisions of Article 61








	
61 

	
IV.B.3.








	
62

	
F. Taxes:








	
63

	
Beginning with the first calendar year after the effective date hereof, Operator shall render for ad valorem taxation all








	
64

	
property subject to this agreement which by law should be rendered for such taxes, and it shall pay all such taxes assessed








	
65

	
thereon before they become delinquent.  Prior to the rendition date, each Non-Operator shall furnish Operator information as








	
66

	
to burdens (to include, but not be limited to, royalties, overriding royalties and production payments) on Leases and Oil and








	
67

	
Gas Interests contributed by such Non-Operator. If the assessed valuation of any Lease is reduced by reason of its being








	
68

	
subject  to  outstanding  excess  royalties,  overriding  royalties  or  production  payments,  the  reduction  in  ad  valorem  taxes








	
69

	
resulting therefrom shall inure to the benefit of the owner or owners of such Lease, and Operator shall adjust the charge to








	
70

	
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








	
71

	
upon separate valuations of each party's working interest, then notwithstanding anything to the contrary herein, charges to








	
72

	
the joint account shall be made and paid by the parties hereto in accordance with the tax value generated by each party's








	
73

	
working interest. Operator shall bill the other parties for their proportionate shares of all tax payments in  the manner








	
74

	
provided in Exhibit "C."









 


 




  





-13 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 




	
1

	
If Operator considers any tax assessment improper, Operator may, at its discretion, protest within the time and manner








	
2

	
prescribed by law, and prosecute the protest to a final determination, unless all parties agree to abandon the protest prior to final








	
3

	
determination.  During the pendency of administrative or judicial proceedings, Operator may elect to pay, under protest, all such taxes








	
4

	
and any interest and penalty.  When any such protested assessment shall have been finally determined, Operator shall pay the tax for








	
5

	
the joint account, together with any interest and penalty accrued, and the total cost shall then be assessed against the parties, and be








	
6

	
paid by them, as provided in Exhibit "C."








	
7

	
Each party shall pay or cause to be paid all production, severance, excise, gathering and other taxes imposed upon or with respect








	
8

	
to the production or handling of such party's share of Oil and Gas produced under the terms of this agreement.








	
9

	
ARTICLE VIII.








	
10

	
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST








	
11

	
A. Surrender of Leases:








	
12

	
The Leases covered by this agreement, insofar as they embrace acreage in the Contract Area, shall not be surrendered in whole








	
13

	
or in part unless all parties consent thereto.








	
14

	
However, should any party desire to surrender its interest in any Lease or in any portion thereof, such party shall give written








	
15

	
notice of the proposed surrender to all parties, and the parties to whom such notice is delivered shall have thirty (30) days after








	
16

	
delivery of the notice within which to notify the party proposing the surrender whether they elect to consent thereto.  Failure of a








	
17

	
party to whom such notice is delivered to reply within said 30-day period shall constitute a consent to the surrender of the Leases








	
18

	
described in the notice.  If all parties do not agree or consent thereto, the party desiring to surrender shall assign, without express or








	
19

	
implied warranty of title, all of its interest in such Lease, or portion thereof, and any well, material and equipment which may be








	
20

	
located thereon and any rights in production thereafter secured, to the parties not consenting to such surrender.  If the interest of the








	
21

	
assigning party is or includes an Oil and Gas Interest, the assigning party shall execute and deliver to the party or parties not








	
22

	
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








	
23

	
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."








	
24

	
Upon such assignment or lease, the assigning party shall be relieved from all obligations thereafter accruing, but not theretofore








	
25

	
accrued, with respect to the interest assigned or leased and the operation of any well attributable thereto, and the assigning party








	
26

	
shall have no further interest in the assigned or leased premises and its equipment and production other than the royalties retained








	
27

	
in any lease made under the terms of this Article.  The party assignee or lessee shall pay to the party assignor or lessor the








	
28

	
reasonable salvage value of the latter's interest in any well's salvable materials and equipment attributable to the assigned or leased








	
29

	
acreage.  The value of all salvable materials and equipment shall be determined in accordance with the provisions of Exhibit "C," less








	
30

	
the estimated cost of salvaging and the estimated cost of plugging and abandoning and restoring the surface.  If such value is less








	
31

	
than such costs, then the party assignor or lessor shall pay to the party assignee or lessee the amount of such deficit.  If the








	
32

	
assignment or lease is in favor of more than one party, the interest shall be shared by such parties in the proportions that the








	
33

	
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








	
34

	
varies according to depth, then the interest assigned shall similarly reflect such variances.








	
35

	
Any assignment, lease or surrender made under this provision shall not reduce or change the assignor's, lessor's or surrendering








	
36

	
party's interest as it was immediately before the assignment, lease or surrender in the balance of the Contract Area; and the acreage








	
37

	
assigned, leased or surrendered, and subsequent operations thereon, shall not thereafter be subject to the terms and provisions of this








	
38

	
agreement but shall be deemed subject to an Operating Agreement in the form of this agreement.








	
39

	
B. Renewal or Extension of Leases:








	
40

	
If any party secures a renewal or replacement of an Oil and Gas Lease or Interest subject to this agreement, then all other parties








	
41

	
shall be notified promptly upon such acquisition or, in the case of a replacement Lease taken before expiration of an existing Lease,








	
42

	
promptly upon expiration of the existing Lease.  The parties notified shall have the right for a period of thirty (30) days following








	
43

	
delivery of such notice in which to elect to participate in the ownership of the renewal or replacement Lease, insofar as such Lease








	
44

	
affects lands within the Contract Area, by paying to the party who acquired it their proportionate shares of the acquisition cost








	
45

	
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








	
46

	
parties in the Contract Area.  Each party who participates in the purchase of a renewal or replacement Lease shall be given an








	
47

	
assignment of its proportionate interest therein by the acquiring party.








	
48

	
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








	
49

	
by the parties who elect to participate therein, in a ratio based upon the relationship of their respective percentage of participation in








	
50

	
the Contract Area to the aggregate of the percentages of participation in the Contract Area of all parties participating in the








	
51

	
purchase of such renewal or replacement Lease.  The acquisition of a renewal or replacement Lease by any or all of the parties hereto








	
52

	
shall not cause a readjustment of the interests of the parties stated in Exhibit "A," but any renewal or replacement Lease in which








	
53

	
less than all parties elect to participate shall not be subject to this agreement but shall be deemed subject to a separate Operating








	
54

	
Agreement in the form of this agreement.








	
55

	
If the interests of the parties in the Contract Area vary according to depth, then their right to participate proportionately in








	
56

	
renewal or replacement Leases and their right to receive an assignment of interest shall also reflect such depth variances.








	
57

	
The provisions of this Article shall apply to renewal or replacement Leases whether they are for the entire interest covered by








	
58

	
the expiring Lease or cover only a portion of its area or an interest therein.  Any renewal or replacement Lease taken before the








	
59

	
expiration of its predecessor Lease, or taken or contracted for or becoming effective within six (6) months after the expiration of the








	
60

	
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








	
61

	
the renewal or replacement Lease becomes effective; but any Lease taken or contracted for more than six (6) months after the








	
62

	
expiration of an existing Lease shall not be deemed a renewal or replacement Lease and shall not be subject to the provisions of this








	
63

	
agreement.








	
64

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








	
65

	
C. Acreage or Cash Contributions:








	
66

	
While this agreement is in force, if any party contracts for a contribution of cash towards the drilling of a well or any other








	
67

	
operation on the Contract Area, such contribution shall be paid to the party who conducted the drilling or other operation and shall








	
68

	
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








	
69

	
the contribution is made shall promptly tender an assignment of the acreage, without warranty of title, to the Drilling Parties in the








	
70

	
proportions said Drilling Parties shared the cost of drilling the well. Such acreage shall become a separate Contract Area and, to  the








	
71

	
extent possible, be governed by provisions identical to this agreement.  Each party shall promptly notify all other parties of any








	
72

	
acreage or cash contributions it may obtain in support of any well or any other operation on the Contract Area.  The above








	
73

	
provisions shall also be applicable to optional rights to earn acreage outside the Contract Area which are in support of well drilled








	
74

	
inside Contract Area.









 


 




  





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A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 




	
1

	
If any party contracts for any consideration relating to disposition of such party's share of substances produced hereunder,








	
2

	
such consideration shall not be deemed a contribution as contemplated in this Article VIII.C.








	
3

	
D. Assignment; Maintenance of Uniform Interest:








	
4

	
For the purpose of maintaining uniformity of ownership in the Contract Area in the Oil and Gas Leases, Oil and Gas








	
5

	
Interests, wells, equipment and production covered by this agreement no party shall sell, encumber, transfer or make other








	
6

	
disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests embraced within the Contract Area or in wells,








	
7

	
equipment and production unless such disposition covers either:








	
8

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








	
9

	
2. an equal undivided percent of the party's present interest in all Oil and Gas Leases, Oil and Gas Interests, wells,








	
10

	
equipment and production in the Contract Area.








	
11

	
Every sale, encumbrance, transfer or other disposition made by any party shall be made expressly subject to this agreement








	
12

	
and shall be made without prejudice to the right of the other parties, and any transferee of an ownership interest in any Oil and








	
13

	
Gas Lease or Interest shall be deemed a party to this agreement as to the interest conveyed from and after the effective date of








	
14

	
the  transfer  of  ownership;  provided,  however,  that  the  other  parties  shall  not  be  required  to  recognize  any  such  sale,








	
15

	
encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the








	
16

	
instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee.  No assignment or other








	
17

	
disposition of interest by a party shall relieve such party of obligations previously incurred by such party hereunder with respect








	
18

	
to the interest transferred, including without limitation the obligation of a party to pay all costs attributable to an operation








	
19

	
conducted hereunder in which such party has agreed to participate prior to making such assignment, and the lien and security








	
20

	
interest granted by Article VII.B. shall continue to burden the interest transferred to secure payment of any such obligations.








	
21

	
If, at any time the interest of any party is divided among and owned by four or more co-owners, Operator, at its discretion,








	
22

	
may require such co-owners to appoint a single trustee or agent with full authority to receive notices, approve expenditures,








	
23

	
receive billings for and approve and pay such party's share of the joint expenses, and to deal generally with, and with power to








	
24

	
bind, the co-owners of such party's interest within the scope of the operations embraced in this agreement; however, all such co-








	
25

	
owners shall have the right to enter into and execute all contracts or agreements for the disposition of their respective shares of








	
26

	
the Oil and Gas produced from the Contract Area and they shall have the right to receive, separately, payment of the sale








	
27

	
proceeds thereof.








	
28

	
E. Waiver of Rights to Partition:








	
29

	
If permitted by the laws of the state or states in which the property covered hereby is located, each party hereto owning an








	
30

	
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








	
31

	
undivided interest therein.








	
23

	
F. Preferential Right to Purchase:








	
33

	
o (Optional; Check if applicable.)








	
34

	
Should any party desire to sell all or any part of its interests under this agreement, or its rights and interests in the Contract








	
35

	
Area, it shall promptly give written notice to the other parties, with full information concerning its proposed disposition, which








	
36

	
shall include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase








	
37

	
price, a legal description sufficient to identify the property, and all other terms of the offer.  The other parties shall then have an








	
38

	
optional prior right, for a period of ten (10) days after the notice is delivered, to purchase for the stated consideration on the








	
38

	
same terms and conditions the interest which the other party proposes to sell; and, if this optional right is exercised, the








	
40

	
purchasing parties shall share the purchased interest in the proportions that the interest of each bears to the total interest of all








	
41

	
purchasing parties.  However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage








	
42

	
its interests, or to transfer title to its interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage of its interests,








	
43

	
or to dispose of its interests by merger, reorganization, consolidation, or by sale of all or substantially all of its Oil and Gas assets








	
44

	
to any party, or by transfer of its interests to a subsidiary or parent company or to a subsidiary of a parent company, or to any








	
45

	
company in which such party owns a majority of the stock.








	
46

	
ARTICLE IX.








	
47

	
INTERNAL REVENUE CODE ELECTION








	
48

	
If, for federal income tax purposes, this agreement and the operations hereunder are regarded as a partnership, and if the








	
49

	
parties have not otherwise agreed to form a tax partnership pursuant to Exhibit "G" or other agreement between them, each








	
50

	
party thereby affected elects to be excluded from the application of all of the provisions of Subchapter "K," Chapter 1, Subtitle








	
51

	
"A," of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and authorized by Section 761 of the Code and








	
52

	
the regulations promulgated thereunder.  Operator is authorized and directed to execute on behalf of each party hereby affected








	
53

	
such evidence of this election as may be required by the Secretary of the Treasury of the United States or the Federal Internal








	
54

	
Revenue Service, including specifically, but not by way of limitation, all of the returns, statements, and the data required by








	
55

	
Treasury Regulation §1.761.   Should there be any requirement that each party hereby affected give further evidence of this








	
56

	
election, each such party shall execute such documents and furnish such other evidence as may be required by the Federal Internal








	
57

	
Revenue Service or as may be necessary to evidence this election.  No such party shall give any notices or take any other action








	
58

	
inconsistent with the election made hereby.  If any present or future income tax laws of the state or states in which the Contract








	
59

	
Area is located or any future income tax laws of the United States contain provisions similar to those in Subchapter "K," Chapter








	
60

	
1, Subtitle "A," of the Code, under which an election similar to that provided by Section 761 of the Code is permitted, each party








	
61

	
hereby affected shall make such election as may be permitted or required by such laws.  In making the foregoing election, each








	
62

	
such party states that the income derived by such party from operations hereunder can be adequately determined without the








	
63

	
computation of partnership taxable income.








	
64

	
ARTICLE X.








	
65

	
CLAIMS AND LAWSUITS








	
66

	
Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure








	
67

	
does not exceed Fifty thousand Dollars ($ 50,000.00) and if the payment is in complete settlement








	
68

	
of such claim or suit.  If the amount required for settlement exceeds the above amount, the parties hereto shall assume and take over








	
69

	
the further handling of the claim or suit, unless such authority is delegated to Operator.  All costs and expenses of handling settling,








	
70

	
or otherwise discharging such claim or suit shall be a the joint expense of the parties participating in the operation from which the








	
71

	
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








	
72

	
hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall








	
73

	
immediately notify all other parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. 74










	
74

	 





 




  





-15 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 


 




	
1

	
ARTICLE XI.








	
2

	
FORCE MAJEURE








	
3

	
If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other








	
4

	
than the obligation to indemnify or make money payments or furnish security, that party shall give to all other parties








	
5

	
prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the








	
6

	
party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the








	
7

	
continuance of the force majeure.  The term "force majeure," as here employed, shall mean an act of God, strike, lockout, or








	
8

	
other industrial disturbance, act of the public enemy, war, blockade, public riot, lightening, fire, storm, flood or other act of








	
9

	
nature, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other








	
10

	
cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party








	
11

	
claiming suspension.








	
12

	
The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The








	
13

	
requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes,








	
14

	
lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handled shall








	
15

	
be entirely within the discretion of the party concerned.








	
16

	
ARTICLE XII.








	
17

	
NOTICES








	
18

	
All  notices  authorized  or  required  between  the  parties  by any of  the  provisions  of  this  agreement,  unless  otherwise








	
19

	
specifically provided, shall be in writing and delivered in person or by United States mail, courier service, telegram, telex,








	
20

	
telecopier or any other form of facsimile, postage or charges prepaid, and addressed to such parties at the addresses listed on








	
21

	
Exhibit "A."  All telephone or oral notices permitted by this agreement shall be confirmed immediately thereafter by written








	
22

	
notice.  The originating notice given under any provision hereof shall be deemed delivered only when received by the party to








	
23

	
whom such notice is directed, and the time for such party to deliver any notice in response thereto shall run from the date








	
24

	
the originating notice is received.  "Receipt" for purposes of this agreement with respect to written notice delivered hereunder








	
25

	
shall be actual delivery of the notice to the address of the party to be notified specified in accordance with this agreement, or








	
26

	
to the telecopy, facsimile or telex machine of such party.  The second or any responsive notice shall be deemed delivered when








	
27

	
deposited in the United States mail or at the office of the courier or telegraph service, or upon transmittal by telex, telecopy








	
28

	
or facsimile, or when personally delivered to the party to be notified, provided, that when response is required within 24 or








	
29 

	
48 hours, such response shall be given orally or by telephone, telex, telecopy or other facsimile within such period. Each party








	
30

	
shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other








	
31

	
parties.  If a party is not available to receive notice orally or by telephone when a party attempts to deliver a notice required








	
32

	
to be delivered within 24 or 48 hours, the notice may be delivered in writing by any other method specified herein and shall








	
33

	
be deemed delivered in the same manner provided above for any responsive notice.








	
34

	
ARTICLE XIII.








	
35

	
TERM OF AGREEMENT








	
36

	
This agreement shall remain in full force and effect as to the Oil and Gas Leases and/or Oil and Gas Interests subject








	
37

	
hereto for the period of time selected below; provided, however, no party hereto shall ever be construed as having any right, title








	
38

	
or interest in or to any Lease or Oil and Gas Interest contributed by any other party beyond the term of this agreement.








	
39

	
o Option No. 1: So long as any of the Oil and Gas Leases subject to this agreement remain or are continued in








	
40

	
force as to any part of the Contract Area, whether by production, extension, renewal or otherwise.








	
41

	
þ Option No. 2: In the event the well described in Article VI.A., or any subsequent well drilled under any provision








	
42

	
of this agreement, results in the Completion of a well as a well capable of production of Oil and/or Gas in paying








	
43

	
quantities, this agreement shall continue in force so long as any such well is capable of production, and for an








	
44

	
additional  period  of     90     days  thereafter;  provided,  however,  if,  prior  to  the  expiration  of  such








	
45

	
additional period, one or more of the parties hereto are engaged in drilling, Reworking, Deepening, Sidetracking,








	
46

	
Plugging Back, testing or attempting to Complete or Re-complete a well or wells hereunder, this agreement shall








	
47

	
continue  in  force  until  such  operations  have  been  completed  and  if  production  results  therefrom,  this  agreement








	
48

	
shall continue in force as provided herein.  In the event the well described in Article VI.A., or any subsequent well








	
49

	
drilled  hereunder,  results  in  a  dry  hole,  and  no  other  well  is  capable  of  producing  Oil  and/or  Gas  from  the








	
50

	
Contract  Area,  this  agreement  shall  terminate  unless  drilling,  Deepening,  Sidetracking,  Completing,  Re-








	
51

	
completing, Plugging Back or Reworking operations are commenced within   180    days from the








	
52

	
date of abandonment of said well.  "Abandonment" for such purposes shall mean either (i) a decision by all parties








	
53

	
not  to  conduct  any  further  operations  on  the  well  or  (ii)  the  elapse  of  180  days  from  the  conduct  of  any








	
54

	
operations on the well, whichever first occurs.








	
55

	
The termination of this agreement shall not relieve any party hereto from any expense, liability or other obligation or any








	
56

	
remedy therefor which has accrued or attached prior to the date of such termination.








	
57

	
Upon termination of this agreement and the satisfaction of all obligations hereunder, in the event a memorandum of this








	
58

	
Operating Agreement has been filed of record, Operator is authorized to file of record in all necessary recording offices a








	
59

	
notice of termination, and each party hereto agrees to execute such a notice of termination as to Operator's interest, upon








	
60

	
request of Operator, if Operator has satisfied all its financial obligations.








	
61

	
ARTICLE XIV.








	
62

	
COMPLIANCE WITH LAWS AND REGULATIONS








	
63

	
A. Laws, Regulations and Orders:








	
64

	
This agreement shall be subject to the applicable laws of the state in which the Contract Area is located, to the valid rules,








	
65

	
regulations,  and  orders  of  any  duly  constituted  regulatory  body  of  said  state;  and  to  all  other  applicable  federal,  state,








	
66

	
and local laws, ordinances, rules, regulations and orders.








	
67

	
B. Governing Law:








	
68

	
This  agreement  and  all  matters  pertaining  hereto,  including  but  not  limited  to  matters  of  performance,  non-








	
69

	
performance,  breach,  remedies, procedures,  rights,  duties, and interpretation or  construction,  shall  be  governed and








	
70

	
determined by the law of the state in which the Contract Area is located.  If the Contract Area is in two or more states,








	
71

	
the law of the state of   Colorado shall govern.








	
72

	
C. Regulatory Agencies:








	
73

	
Nothing herein contained shall grant, or be construed to grant, Operator the right or authority to waive or release any








	
74

	
rights, privileges, or obligations which Non-Operators may have under federal or state laws or under rules, regulations or









 


 




  





-16 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989






 


 




	
1

	
orders promulgated under such laws in reference to oil, gas and mineral operations, including the location, operation, or








	
2

	
production of wells, on tracts offsetting or adjacent to the Contract Area.








	
3

	
With respect to the operations hereunder, Non-Operators agree to release Operator from any and all losses, damages,








	
4

	
injuries, claims and causes of action arising out of, incident to or resulting directly or indirectly from Operator's interpretation








	
5

	
or application of rules, rulings, regulations or orders of the Department of Energy or Federal Energy Regulatory Commission








	
6

	
or predecessor or successor agencies to the extent such interpretation or application was made in good faith and does not








	
7

	
constitute  gross  negligence.   Each  Non-Operator  further  agrees  to  reimburse  Operator  for  such  Non-Operator's  share  of








	
8

	
production or any refund, fine, levy or other governmental sanction that Operator may be required to pay as a result of such








	
9

	
an incorrect interpretation or application, together with interest and penalties thereon owing by Operator as a result of such








	
10 

	
incorrect interpretation or application.








	
11

	
ARTICLE XV.








	
12

	
MISCELLANEOUS








	
13

	
A. Execution:








	
14

	
This  agreement  shall  be  binding  upon  each  Non-Operator  when  this  agreement  or  a  counterpart  thereof  has  been








	
15

	
executed by such Non-Operator and Operator notwithstanding that this agreement is not then or thereafter executed by all of








	
16

	
the parties to which it is tendered or which are listed on Exhibit "A" as owning an interest in the Contract Area or which








	
17

	
own, in fact, an interest in the Contract Area.   Operator may, however, by written notice to all Non-Operators who have








	
18

	
become bound by this agreement as aforesaid, given at any time prior to the actual spud date of the Initial Well but in no








	
19

	
event later than five days prior to the date specified in Article VI.A. for commencement of the Initial Well, terminate this








	
20

	
agreement  if Operator in its sole discretion  determines that there is insufficient participation to justify commencement of








	
21

	
drilling operations.  In the event of such a termination by Operator, all further obligations of the parties hereunder shall cease








	
22

	
as  of  such  termination.  In  the  event  any  Non-Operator  has  advanced  or  prepaid  any  share  of  drilling  or  other  costs








	
23

	
hereunder, all sums so advanced shall be returned to such Non-Operator without interest.In the event Operator proceeds








	
24

	
with drilling operations for the Initial Well without the execution hereof by all persons listed on Exhibit "A" as having a








	
25

	
current  working  interest  in  such  well,  Operator  shall  indemnify Non-Operators  with  respect  to all costs  incurred  for  the








	
26

	
Initial Well which would have been charged to such person under this agreement if such person had executed the same and








	
27

	
Operator shall receive all revenues which would have been received by such person under this agreement if such person had








	
28

	
executed the same.








	
29

	
B. Successors and Assigns:








	
30

	
This agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs,








	
31

	
devisees, legal representatives, successors and  assigns, and  the terms hereof shall be deemed  to  run  with the Leases  or








	
32

	
Interests included within the Contract Area.








	
33

	
C. Counterparts:








	
34

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








	
35

	
purposes.








	
36

	
D. Severability:








	
37

	
For the purposes of assuming or rejecting this agreement as an executory contract pursuant to federal bankruptcy laws,








	
38

	
this agreement shall not be severable, but rather must be assumed or rejected in its entirety, and the failure of any party to








	
39

	
this agreement to comply with all of its financial obligations provided herein shall be a material default.








	
40

	
ARTICLE XVI.








	
41

	
OTHER PROVISIONS







42



	
43

	
SEE ATTACHED PAGE 17







43


44


45


46


47


48


49


50


51


52


53


54


55


56


57


58


59


60


61


62


63


64


65


66


67


68


69


70


71


72


73


74


 




  





-17 -











  


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989




 






	
1

	
IN WITNESS WHEREOF, this agreement shall be effective as of the 30th day of September ,









	
2 

	
2013 .








	
3

	
_____________________, 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








	
4

	
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








	
5

	
, have been made to the form.








	6	ATTEST OR WITNESS: 	 	 	
OPERATOR


 


	
7

	
  

	 	 	
  


PETROSHARE CORP.


 


	
  


8

	/s/ Fredrick J. Witsell	 	
  


By:

	/s/ Stephen J. Foley
	
  


9 

	Secretary	 	 	
  


Stephen J. Foley


	
  


10

	 	 	 	
Type or print name


 


	
11

	 	 	 	Title	CFO
	
12

	 	 	 	
  


Date

	9/30/2013
	
13

	 	 	
  

	Tax ID or S.S. No.	46-1454523
	
  


14

	 	 	 	 
	 	 	 	 	 







	15	NON-OPERATORS
	
16

	 	 	 	
  


  


	17	 	 	 	
ROYALE INVESTMENTS, LLC


	
  


  

	
 


 

	 	
  


By:

	/s/ William W. Reid
	
  


18

	
  

	 	 	William W. Reid
	
  


19

	 	 	 	
Type or print name


 


	
20

	 	 	 	Title	Manager
	
21

	 	 	 	Date	10/03/13
	
22

	 	 	 	Tax ID or S.S. No.	 
	
  


23

	 	 	 	 
	 	 	 	 	 











	24	 	 	 	RANCHER ENERGY CORP.
	25	 	 	 	 
	
  


  

	 	 	By:	/s/ Jon Nicolaysen
	
  


26

	
  

	 	 	Jon Nicolaysen
	
  


  


27

	 	 	 	
Type or print name


 


	
28

	 	 	 	
  


Title

	
  


President & CEO


	
29

	 	 	 	Date	10/2/13
	
30

	 	 	 	Tax ID or S.S. No.	98-0422451
	
  


31

	 	 	 	 
	 	 	 	 	 










	32	 	 	 	U.S. Energy Development Co.
	 	 	 	 	 
	
  


  

	 	 	By:	/s/ Douglas K. Walch
	
  


33

	
  

	 	 	Douglas K. Walch
	
  


  


34

	 	 	 	
Type or print name MAW


 


	
35

	 	 	 	
  


Title

	
  


President


	
36

	 	 	 	Date	9/30/2013
	
37

	 	 	 	Tax ID or S.S. No.	16-1142489
	 	 	 	 	 







 





-18 -











 


A.A.P.I. FORM 610 - MODEL FORM OPERATING AREEMENT - 1989








	
1

	
ACKNOWLEDGMENTS








	
2

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








	
3

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








	
4

	
  








	
5

	
Individual acknowledgment:








	
6

	
State of Colorado )








	
7

	

State of _______________ ) ss.










	
8

	
County of Denver )








	
9

	
This instrument was acknowledged before me on








	
10 

	
October 3, 2013 by William Reid, Manager of Royale Investments 








	
11

	 













	
12

	
(Seal, if any) JESSICA M. BROWNE___ _                              ____ /s/ Jessica M. Browne








	
13

	
NOTARY PUBLIC                                                                                Title (and Rank) Notary Public








	
14

	

STATE OF COLORADO                                                                      My commission expires: 5/16/2016










	
15

	
NOTARY ID 20124030931 / MY COMMISSION EXPIRES MAY 16, 2016








	
16

	
Acknowledgment in representative capacity:








	
17

	
State of New York )








	
18

	

State of _______________ ) ss.










	
19

	
County of Erie ) 








	
20

	
This instrument was acknowledged before me on








	
21 

	
September 30, 2013 by Douglas K. Walch  as








	
22

	
President of U. S. Energy Development Corporation 









	
23

	
_________ (Seal, if any) ____________________________________ /s/ Michelle Anne Chambers 








	
24

	
_________ (Seal, if any) ____________________________________Title (and Rank) ___________________________








	
25

	

_________ (Seal, if any) ____________________________________My commission expires: 11/14/13










	
26

	
Michele Anne Chambers








	
27

	
NOTARY PUBLIC, STATE OF NEW YORK








	
28

	
QUALIFIED IN ERIE COUNTY








	
29

	
NO 6136845








	
30

	
MY COMMISSION EXPIRES NOV 14, 2013







31


32


33


34


35


36


37








 


 




  





  











  




 



 


EXHIBIT A




Attached to that certain Operating Agreement dated effective September 30, 2013, between PetroShare Corp, as Operator, and Royale Investments LLC, Rancher Energy Corp, US Energy Development Co., as Non-Operators.








	
I. 

	
Oil and Gas Leases Subject to Agreement:












The Oil and Gas Leases more particularly described on Exhibit "A-1" attached hereto.








	
II. 

	
Participants and Addresses:














	 	 	Expense Interest	 
	
PetroShare Corp


7200 S. Alton Way, Suite B220 


Centennial, CO 80111


Attn: Frederick J. Witsell


(303) 500-1168 Office 


(303) 881-2157 Cell


fwitsell@petrosharecorp.com

	 	 	35.0000%	 
	 	 	 	 	 
	
Rancher Energy Corp

	 	 	30.0000%	 
	
c/o A.L. (Sid) Overton, Esq. 


6950 E. Belleview Ave., Ste 202 


Greenwood Village, CO 80111 


Attn: Jon Nicolaysen, President


(303) 779-5900 Office

	 	 	 	 
	
(303) 779-6006 Fax


sidoverton@oalaw.net

	 	 	 	 
	 	 	 	 	 
	
US Energy Development Co. 


2350 North Forest Road 


Getzville, NY 14068


Attn: Douglas K. Walsh 


(716) 636-0401 ext. 310


(716) 636-0418 Fax

	 	 	25.0000%	 
	 	 	 	 	 
	
Royale Investments, LLC

	 	 	10.0000%	 
	
211 Harbour Dr.


Naples, FL 34103

	 	 	 	 
	
Attn: Bill Reid

	 	 	 	 
	
(303) 520-5127 Main

	 	 	 	 
	
Email: billreid@goldresourcecorp.com

	 	 	 	 
	 	 	 	 	 
	
 

	 	 	 	 












  





  











  








 






EXHIBIT A-1


Buck Peak Participation Agreement Leases dated September 30, 2013


 


 





	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
BUCK PEAK LEASES AND EXPIRATION DATES

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
LESSOR NAME AND ADDRESS

	 	
DESCRIPTION

	 	
DATE AND TERM

	 	 	
GROSS ACRES

	 	 	
NET ACRES

	 	 	
NET REVENUE INTEREST

	 	 	
RECORDING

	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	
to be delivered 8/8ths

	 	 	 	 
	
West Half of Section 25

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Jim F. Kowach

	 	
T6N-R90W, 6th P.M. Sec 25: W/2

	 	
10/31/2008 - 2014 6 years

	 	 	 	335.54	 	 	 	167.77	 	 	 	78.5000	%	 	 	20104936	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Barbara Wilaby

	 	
T6N-R90W, 6th P.M. Sec 25: W/2

	 	
10/31/2011 - 2014 3 years

	 	 	 	335.54	 	 	 	167.77	 	 	 	78.5000	%	 	 	20103288	 
	
Sub Total - Kowach / Wilaby

	 	
W/2 Section 25, T6N R90W

	 	 	100.00	%	 	 	335.54	 	 	 	335.54	 	 	 	78.5000	%	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
East Half of Section 25

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Mark A Voloshin, 


PO Box 981, 


Craig, CO 81626

	 	
T6N-R90W, 6th P.M. 


Assessor's Tract # 74 


Sec 25: Lots 1, 2, 7, 8, 9,10,15,16

	 	
5/12/2011- 2016 Five (5) Years

	 	 	 	335.61	 	 	 	52.83	 	 	 	78.5000	%	 	 	20103153	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Betty Arnone, 


1713 South Vancouver Ct,


Lakewood, CO 80228

	 	
T6N-R90W, 6th P.M. 


Assessor's Tract # 74 


Sec 25: Lots 1,2,7,8,9,10,15 & 16

	 	
5/12/2011- 2016 Five (5) Years

	 	 	 	335.61	 	 	 	26.41	 	 	 	78.5000	%	 	 	20102832	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Helen McKee, 


10436 Jacob Place, 


Littleton, CO 80125-8932

	 	
T6N-R90W, 6th P.M. 


Assessor's Tract # 74 


Sec 25: Lots 1, 2, 7, 8, 9, 10, 15 & 16

	 	
5/12/2011- 2016 Five (5) Years

	 	 	 	335.61	 	 	 	26.41	 	 	 	78.5000	%	 	 	20102839	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Gary R Semro and Robert W. Semro,


6522 Trailhead Rd, 


Highlands Ranch, CO 80130

	 	
T6N-R90W, 6th P.M. 


Assessor's Tract # 74 


Sec 25: Lots 1, 2, 7, 8, 9, 10, 15 & 16

	 	
5/12/2011- 2016 Five (5) Years

	 	 	 	335.61	 	 	 	26.41	 	 	 	78.5000	%	 	 	20102847	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Sharon Fitzgerald (Hebenstreit), 


337 Coronado Drive, 


Sedalia, CO 80135

	 	
T6N-R90W, 6th P.M. 


Assessor's Tract # 74 


Sec 25: Lots 1, 2, 7, 8, 9,10,15,16

	 	
5/12/2011- 2016 Five (5) Years

	 	 	 	335.61	 	 	 	26.41	 	 	 	78.5000	%	 	 	20103140	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Brad Ocker (Eugena Grace Voloshin), 


9591 County Rd 33, 


Craig, CO 81625

	 	
T6N-R90W, 6th P.M. 


Assessor's Tract # 74 


Sec 25: Lots 1, 2, 7, 8, 9,10,15,16

	 	
5/12/2011- 2016 Five (5) Years

	 	 	 	335.61	 	 	 	8.55	 	 	 	78.5000	%	 	 	20102856	 
	
Sub Total - Semro / Voloshin

	 	
E/2 Section 25, T6N R90W

	 	 	49.7661	%	 	 	335.61	 	 	 	167.02	 	 	 	78.5000	%	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
BCK LLC


Charles S Keith

	 	
T6N-R90W, 6th P.M. A


ssessor's Tract # 74 Sec 25: 


Lots 1, 2, 7, 8, 9,10,15,16

	 	
2/22/2011 - 2014 3 years + 2 yr ext

	 	 	 	335.61	 	 	 	41.43	 	 	 	77.5000	%	 	 	20111728	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Strontia springs Resources, LLC


James Keith

	 	
T6N-R90W, 6th P.M. 


Assessor's Tract # 74 


Sec 25: Lots 1, 2, 7, 8, 9,10,15,16

	 	
2/22/2011 - 2014 3 years + 2 yr ext

	 	 	 	335.61	 	 	 	41.43	 	 	 	77.5000	%	 	 	20111730	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
JZTZ LLC 


Debra Ann Ziehm

	 	
T6N-R90W, 6th P.M. 


Assessor's Tract # 74 


Sec 25: Lots 1, 2, 7, 8, 9,10,15,16

	 	
2/22/2011 - 2014 3 years + 2 yr ext

	 	 	 	335.61	 	 	 	41.43	 	 	 	77.5000	%	 	 	20111729	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
MKRESOURCES LLC


Margaret Keith

	 	
T6N-R90W, 6th P.M.


Assessor's Tract # 74


Sec 25: Lots 1, 2, 7, 8, 9,10,15,16

	 	
2/22/2011 - 2014 3 years + 2 yr ext

	 	 	 	335.61	 	 	 	26.41	 	 	 	77.5000	%	 	 	20111731	 
	
Sub Total - Keith

	 	
E/2 Section 25, T6N R90W

	 	 	44.9075	%	 	 	335.61	 	 	 	150.71	 	 	 	77.5000	%	 	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Quicksilver Resources 


Joanie Voloshin

	 	
T6N-R90W, 6th P.M.


Assessor's Tract # 74


Sec 25: Lots 1,2,7,8,9,10,15,16

	 	 	
2/22/2011 - 2014 3 years + 2 yr ext 

	 	 	 	335.61	 	 	 	8.94	 	 	 	82.500	% 	 	 	20111728	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
SWEPI thru Quicksilver Resources


Joanie Voloshin

	 	
T6N-R90W, 6th P.M.


Assessor's Tract # 74


Sec 25: Lots 1,2,7,8,9,10,15,16

	 	 	
 


2/22/2011 - 2014 3 years + 2 yr ext 

	 	 	 	335.61	 	 	 	8.94	 	 	 	81.000	% 	 	 	20111728	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 	 	
Ownership %

	 	 	
Gross Acres

	 	 	
Net Acres

	 	 	
NRI% Delivered

	 	 	 	 	 
	
West Half of Section 25

	 	 	 	 	100.000	%	 	 	335.54	 	 	 	335.54	 	 	 	78.5000	%	 	 	 	 
	
East Half of Section 25

	 	 	 	 	100.000	%	 	 	335.61	 	 	 	335.61	 	 	 	78.2247	%	 	 	 	 
	
SECTION 25 TOTAL

	 	 	 	 	100.000	%	 	 	671.15	 	 	 	671.15	 	 	 	78.3623	%	 	 	 	 







 



 






 


 




 




  





  











  








 


 


 






 



	 	
COPAS 2005 Accounting Procedure


Recommended by COPAS







 



Exhibit  “C”


ACCOUNTING PRODECURE






	1	 	JOINT OPERATIONS
	2	Attached to and made part of that certain Operating Agreement dated                                      , 20103, between PetroShare Corp, as Operator, and
	3	Rancher Energy Corp. a Nevada Corporation, US Energy Development Co., Royale Investments, LLC as Non-Operator(s).
	4	 	 
	5	 	 
	6	 	 
	7	 	 
	8	 	I. GENERAL PROVISIONS
	9	 	 
	10	IF THE PARTIES FAIL TO SELECT EITIIER ONE OF COMPETING "ALTERNATIVE'' PROVISIONS, OR SELECT ALL THE
	11	COMPETING "ALTERNATIVE" PROVISIONS, ALTERNATIVE 1IN EACH SUCH INSTANCE SHALL BE DEEMED TO HAVE
	12	BEEN ADOPTED BY THE PARTIES AS A RESULT OF ANY SUCH OMISSION OR DUPLICATE NOTATION.
	13	 	 
	14	IN THE EVENT THAT ANY "OPTIONAV' PROVISION OF TIIIS ACCOUNTING PROCEDURE IS NOT ADOPTED BY THE
	15	PARTIES TO THE AGREEMENT BY A TYPED, PRINTED OR HANDWRITTEN INDICATION, SUCH PROVISION SHALL NOT
	16	FORM A PART OF TIDS ACCOUNTING PROCEDURE, AND NO INFERENCE SHALL BE MADE CONCERNING THE INTENT
	17	OF THE PARTIES IN SUCH EVENT.
	18	 	 
	
19

	
1.

	
DEFINITIONS


	
20

	  	  
	
21

	  	
All terms used in this Accounting Procedure shall have the following meaning, unless otherwise expressly defined in the Agreement:


	
22

	  	  
	
23

	  	
"Affiliate'' means for a person, another person that controls, is controlled by, or is under common control with that person. In this


	
24

	  	
definition, (a) control means the ownership by one person, directly or indirectly, of more than fifty percent (50%) of the voting securities


	
25

	  	
of a corporation or, for other persons, the equivalent ownership interest (such as partnership interests), and (b) "person" means an


	
26

	  	
individual, corporation, partnership, trust, estate, unincorporated organization, association, or other legal entity.


	
27

	  	  
	
28

	  	
"Agreement" means the operating agreement, farmout agreement, or other contract between the Parties to which this Accounting


	
29

	  	
Procedure is attached.


	
30

	  	  
	
31

	  	
"Controllable Material" means Material that, at the time of acquisition or disposition by the Joint Account, as applicable, is so classified


	
32

	  	
in the Material Classification Manual most recently recommended by the Council of Petroleum Accountants Societies (COPAS).


	
33

	  	  
	
34

	  	
"Equalized Freight" means the procedure of charging transportation  cost to the Joint Account based upon the distance from the nearest


	
35

	  	
Railway Receiving Point to the property.


	
36

	  	  
	
37

	  	
"Excluded Amount" means a specified excluded trucking amount most recently recommended by COPAS.


	
38

	  	  
	
39

	  	
"Field Office" means a structure, or portion of a structure, whether a temporary or permanent installation, the primary function of which is


	
40

	  	
to directly serve daily operation and maintenance activities of the Joint Property and which serves as a staging area for directly chargeable


	
41

	  	
field personnel.


	
42

	  	  
	
43

	  	
"First Level Supervision" means those employees whose primary function in Joint Operations is the direct oversight of the Operator's


	
44

	  	
field employees and/or contract labor directly employed  On-site in a field operating  capacity.  First Level Supervision functions may


	
45

	  	
include, but are not limited to:


	
46

	  	  
	
47

	  	
▪  Responsibility for field employees and contract labor engaged in activities that can include field operations, maintenance,


	
48

	  	
construction, well remedial work, equipment movement and drilling


	
49

	  	
▪  Responsibility for day-to-day direct oversight of rig operations


	
50

	  	
▪  Responsibility for day-to-day direct oversight of construction operations


	
51

	  	
▪  Coordination of job priorities and approval of work procedures


	
52

	  	
▪  Responsibility for optimal resource utilization (equipment, Materials, personnel)


	
53

	  	
▪  Responsibility for meeting production and field operating expense targets


	
54

	  	
▪  Representation of the Parties in local matters involving community, vendors, regulatory agents and landowners, as an incidental


	
55

	  	
part of the supervisor’s operating responsibilities


	
56

	  	
▪  Responsibility for all emergency responses with field staff


	
57

	  	
▪  Responsibility for implementing safety and environmental practices


	
58

	  	
▪  Responsibility for field adherence to company policy


	
59

	  	
▪  Responsibility for employment decisions and performance appraisals for field personnel


	
60

	  	
▪  Oversight of sub-groups for field functions such as electrical, safety, environmental, telecommunications, which may have group


	
61

	  	
or team leaders.


	
62

	  	  
	
63

	  	
"Joint Account" means the account showing the charges paid and credits received in the conduct of the Joint Operations that are to be


	
64

	  	
shared by the Parties, but does not include proceeds attributable to hydrocarbons and by-products produced under the Agreement.


	
65

	  	  
	
66

	  	
"Joint Operations" means all operations necessary or proper for the exploration, appraisal, development, production, protection, maintenance, repair, abandonment, and restoration of the Joint Property.









 




  





1











  








		
COPAS 2005 Accounting Procedure


Recommended by COPAS







 







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	13	 	 
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	18	 	 
	
19

	
 

	
 


	
20

	 	 
	
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22

	 	 
	
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24

	 	
 


	
25

	 	
 


	
26

	 	
 


	
27

	 	 
	
28

	 	
 


	
29

	 	
 


	
30

	 	 
	
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32

	 	
 


	
33

	 	 
	
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35

	 	
 


	
36

	 	 
	
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38

	 	 
	
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40

	 	
 


	
41

	 	
 


	
42

	 	 
	
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44

	 	
 


	
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46

	 	 
	
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48

	 	
 


	
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52

	 	
 


	
53

	 	
 


	
54

	 	
 


	
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58

	 	
 


	
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61

	 	
 


	
62

	 	 
	
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64

	 	
 


	
65

	 	 
	
66

	 	
 











 




  





2











  








		
COPAS 2005 Accounting Procedure


Recommended by COPAS







 


 






	1	 	"Joint Property" means the real and personal property subject to the Agreement.
	2	 	 
	3	 	"Laws" means any laws, rules, regulations, decrees, and orders of the United States of America or any state thereof and all other
	4	 	goverenental bodies, agencies, and other authorities having jurisdiction over or affecting the provisions contained in or the transactions
	5	 	
contemplated by the Agreement or the Parties and their operations, whether such laws now exist or are hereafter amended, enacted,


	6	 	
promulgated or issued.


	7	 	 
	8	 	
"Material" means personal property, equipment, supplies, or consumables acquired or held for use by the Joint Property.


	9	 	 
	
10

	  	
"Non-Operators" means the Parties to the Agreement other than the Operator.


	
11

	  	  
	
12

	  	
"Offshore Facilities" means platforms, surface and subsea development and production systems, and other support systems such as oil and


	
13

	  	
gas handling facilities, living quarters, offices, shops, cranes, electrical supply equipment and systems, fuel and water storage and piping,


	
14

	  	
heliport, marine docking installations, communication facilities, navigation aids, and other similar facilities necessary in the conduct of


	
15

	  	
offshore operations, all of which are located offshore.


	
16

	  	  
	
17

	  	
"Off-site" means any location that is not considered On-site as defined in this Accounting Procedure.


	
18

	  	  
	
19

	  	
"On-site" means on the Joint Property when in direct conduct of Joint Operations. The term "On-site" shall also include that portion of


	
20

	  	
Offshore Facilities, Shore Base Facilities, fabrication yards, and staging areas from which Joint Operations are conducted, or other


	
21

	  	
facilities that directly control equipment on the Joint Property, regardless of whether such facilities are owned by the Joint Account.


	
22

	  	  
	
23

	  	
"Operator" means the Party designated pursuant to the Agreement to conduct the Joint Operations.


	
24

	  	  
	
25

	  	
"Parties" means legal entities signatory to the Agreement or their successors and assigns. Parties shall be referred to individually as


	
26

	  	
"Party."


	
27

	  	  
	
28

	  	
"Participating Interest" means the percentage of the costs and risks of conducting an operation under the Agreement that a Party agrees,


	
29

	  	
or is otherwise obligated, to pay and bear.


	
30

	  	  
	
31

	  	
"Participating Party" means a Party that approves a proposed operation or otherwise agrees, or becomes liable, to pay and bear a share of


	
32

	  	
the costs and risks of conducting an operation under the Agreement.


	
33

	  	  
	
34

	  	
"Personal Expenses" means reimbursed costs for travel and temporary living expenses.


	
35

	  	  
	
36

	  	
"Railway Receiving Point" means the railhead nearest the Joint Property for which freight rates are published, even though an actual


	
37

	  	
railhead may not exist.


	
38

	  	  
	
39

	  	
"Shore Base Facilities" means onshore support facilities that during Joint Operations provide such services to the Joint Property as a


	
40

	  	
receiving and transshipment point for Materials; debarkation point for drilling and production personnel and services; communication,


	
41

	  	
scheduling and dispatching center; and other associated functions serving the Joint Property.


	
42

	  	  
	
43

	  	
"Supply Store" means a recognized source or common stock point for a given Material item.


	
44

	  	  
	
45

	  	
"Technical Services" means services providing specific engineering, geoscience, or other professional skills, such as those performed by


	
46

	  	
engineers, geologists, geophysicists, and technicians, required to handle specific operating conditions and problems for the benefit of Joint


	
47

	  	
Operations; provided, however, Technical Services shall not include those functions specifically identified as overhead under the second


	
48

	  	
paragraph of the introduction of Section III (Overhead). Technical Services may be provided by the Operator, Operator's Affiliate, Non-


	
49

	  	
Operator, Non-Operator Affiliates, and/or third parties.


	
50

	  	  
	
51

	
2.

	
STATEMENTS AND BILLINGS


	
52

	  	  
	
53

	  	
The Operator shall bill Non-Operators on or before the last day of the month for their proportionate share of the Joint Account for the


	
54

	  	
preceding month. Such bills shall be accompanied by statements that identify the AFE (authority for expenditure), lease or facility, and all


	
55

	  	
charges and credits summarized by appropriate categories of investment and expense. Controllable Material shall be separately identified


	
56

	  	
and fully described in detail, or at the Operator's option, Controllable Material may be summarized by major Material classifications.


	
57

	  	
Intangible drilling costs, audit adjustments, and unusual charges and credits shall be separately and clearly identified.


	
58

	  	  
	
59

	  	
The Operator may make available to Non-Operators any statements and bills required under Section I.2 and/or Section I.3.A (Advances


	
60

	  	
and Payments by the Parties) via email, electronic data interchange, internet websites or other equivalent electronic media in lieu of paper


	
61

	  	
copies. The Operator shall provide the Non-Operators instructions and any necessary information to access and receive the statements and


	
62

	  	
bills within the timeframes specified herein. A statement or billing shall be deemed as delivered twenty-four (24) hours (exclusive of


	
63

	  	
weekends and holidays) after the Operator notifies the Non-Operator that the statement or billing is available on the website and/or sent via


	
64

	  	
email or electronic data interchange transmission. Each Non-Operator individually shall elect to receive statements and billings


	
65

	  	
electronically, if available from the Operator, or request paper copies. Such election may be changed upon thirty (30) days prior written


	
66

	  	
notice to the Operator.









 


 




  





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	1	3.	ADVANCES AND PAYMENTS BY THE PARTIES
	2	 	 
	3	 	A.   Unless otherwise provided for in the Agreement, the Operator may require the Non-Operators to advance their share of the estimated 
	4	 	cash outlay for the succeeding month's operations within fifteen (15) days after receipt of the advance request or by the first day of
	5	 	
the month for which the advance is required, whichever is later. The Operator shall adjust each monthly billing to reflect advances 


	6	 	
received from the Non-Operators for such month. If a refund is due, the Operator shall apply the amount to be refunded to the 


	7	 	subsequent month's billing or advance, unless the Non-Operator sends the Operator a written request for a cash refund. The Operator 
	8	 	
shall remit the refund to the Non-Operator within fifteen (15) days of receipt of such written request.


	9	 	 
	
10

	 	
B.    Except as provided below, each Party shall pay its proportionate share of all bills in full within fifteen (15) days of receipt date. If


	
11

	 	
payment is not made within such time, the unpaid balance shall bear interest compounded monthly at the prime rate published by the


	
12

	 	
Wall Street Journal on the first day of each month the payment is delinquent plus three percent (3%), per annum, or the maximum


	
13

	 	

contract rate permitted by the applicable usury Laws governing the Joint Property, whichever is the lesser, plus attorney's fees, court




	
14

	 	

costs, and other costs in connection with the collection of unpaid amounts. If the Wall Street Journal ceases to be published or




	
15

	 	

discontinues publishing a prime rate, the unpaid balance shall bear interest compounded monthly at the prime rate published by the




	
16

	 	Federal Reserve plus three percent (3%), per annum. Interest shall begin accruing on the first day of the month in which the payment
	
17

	 	
was due. Payment shall not be reduced or delayed as a result of inquiries or anticipated credits unless the Operator has agreed.


	
18

	 	Notwithstanding the foregoing, the Non-Operator may reduce payment, provided it furnishes documentation and explanation to the
	
19

	 	
Operator at the time payment is made, to the extent such reduction is caused by:


	
20

	 	
 


	
21

	 	
(1)   being billed at an incorrect working interest or Participating Interest that is higher than such Non-Operator's actual working


	
22

	 	interest or Participating Interest, as applicable; or
	
23

	 	

(2)   being billed for a project or AFE requiring approval of the Parties under the Agreement that the Non-Operator has not approved




	
24

	 	

or is not otherwise obligated to pay under the Agreement; or




	
25

	 	

(3)   being billed for a property in which the Non-Operator no longer owns a working interest, provided the Non-Operator has




	
26

	 	
furnished the Operator a copy of the recorded assignment or letter in-lieu. Notwithstanding the foregoing, the Non-Operator


	
27

	 	shall remain responsible for paying bills attributable to the interest it sold or transferred for any bills rendered during the thirty
	
28

	 	
(30) day period following the Operator's receipt of such written notice; or


	
29

	 	
(4)   charges outside the adjustment period, as provided in Section I.4 (Adjustments).


	
30

	 	 
	
31

	4.	

ADJUSTMENTS




	
32

	 	
 


	
33

	 	A.    Payment of any such bills shall not prejudice the right of any Party to protest or question the correctness thereof; however, all bills
	
34

	 	
and statements, including payout statements, rendered during any calendar year shall conclusively be presumed to be true and correct,


	
35

	 	
with respect only to expenditures, after twenty-four (24) months following the end of any such calendar year, unless within said


	
36

	 	
period a Party takes specific detailed written exception thereto making a claim for adjustment. The Operator shall provide a response


	
37

	 	

to all written exceptions, whether or not contained in an audit report, within the time periods prescribed in Section I.5 (Expenditure




	
38

	 	
Audits).


	
39

	 	
 


	
40

	 	
B.    All adjustments initiated by the Operator, except those described in items (1) through (4) of this Section I.4.B, are limited to the


	
41

	 	
twenty-four (24) month period following the end of the calendar year in which the original charge appeared or should have appeared


	
42

	 	
on the Operator's Joint Account statement or payout statement. Adjustments that may be made beyond the twenty-four (24) month


	
43

	 	
period are limited to adjustments resulting from the following:


	
44

	 	 
	
45

	 	
(1)   a physical inventory of Controllable Material as provided for in Section V (Inventories of Controllable Material), or


	
46

	 	
(2)   an offsetting entry (whether in whole or in part) that is the direct result of a specific joint interest audit exception granted by the


	
47

	 	
Operator relating to another property, or


	
48

	 	
(3)   a government/regulatory audit, or


	
49

	 	
(4)   a working interest ownership or Participating Interest adjustment.


	
50

	 	 
	
51

	
5.

	
EXPENDITURE AUDITS


	
52

	 	 
	
53

	 	

A.   A Non-Operator, upon written notice to the Operator and all other Non-Operators, shall have the right to audit the Operator's




	
54

	 	
accounts and records relating to the Joint Account within the twenty-four (24) month period following the end of such calendar year in


	
55

	 	
which such bill was rendered; however, conducting an audit shall not extend the time for the taking of written exception to and the


	
56

	 	
adjustment of accounts as provided for in Section I.4 (Adjustments). Any Party that is subject to payout accounting under the


	
57

	 	
Agreement shall have the right to audit the accounts and records of the Party responsible for preparing the payout statements, or of


	
58

	 	
the Party furnishing information to the Party responsible for preparing payout statements. Audits of payout accounts may include the


	
59

	 	
volumes of hydrocarbons produced and saved and proceeds received for such hydrocarbons as they pertain to payout accounting


	
60

	 	
required under the Agreement. Unless otherwise provided in the Agreement, audits of a payout account shall be conducted within the


	
61

	 	
twenty-four (24) month period following the end of the calendar year in which the payout statement was rendered.


	
62

	 	
 


	
63

	 	

Where there are two or more Non-Operators, the Non-Operators shall make every reasonable effort to conduct a joint audit in a




	
64

	 	

manner that will result in a minimum of inconvenience to the Operator. The Operator shall bear no portion of the Non-Operators'




	
65

	 	
audit cost incurred under this paragraph unless agreed to by the Operator. The audits shall not be conducted more than once each year


	
66

	 	
without prior approval of the Operator, except upon the resignation or removal of the Operator, and shall be made at the expense of












 




 




  





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	1	 	
those Non-Operators approving such audit.


	2	 	 
	3	 	
The Non-Operator leading the audit (hereinafter "lead audit company") shall issue the audit report within ninety (90) days after 


	4	 	
completion of the audit testing and analysis; however, the ninety (90) day time period shall not extend the twenty-four (24) month 


	5	 	
requirement for taking specific detailed written exception as required in Section I.4.A (Adjustments) above. All claims shall be 


	6	 	
supported with sufficient documentation.


	7	 	 
	8	 	
A timely filed written exception or audit report containing written exceptions (hereinafter "written exceptions") shall, with respect to


	9	 	
the claims made therein, preclude the Operator from asserting a statute of limitations defense against such claims, and the Operator


	
10

	 	
hereby waives its right to assert any statute of limitations defense against such claims for so long as any Non-Operator continues to


	
11

	 	
comply with the deadlines for resolving exceptions provided in this Accounting Procedure. If the Non-Operators fail to comply with


	
12

	 	
the additional deadlines in Section I.5.B or I.5.C, the Operator's waiver of its rights to assert a statute of limitations defense against


	
13

	 	


the claims brought by the Non-Operators shall lapse, and such claims shall then be subject to the applicable statute of limitations,






	
14

	 	

provided that such waiver shall not lapse in the event that the Operator has failed to comply with the deadlines in Section I.5.B or




	
15

	 	

I.5.C.




	
16

	 	 
	
17

	 	

B.    The Operator shall provide a written response to all exceptions in an audit report within one hundred eighty (180) days after Operator




	
18

	 	
receives such report. Denied exceptions should be accompanied by a substantive response. If the Operator fails to provide substantive


	
19

	 	
response to an exception within this one hundred eighty (180) day period, the Operator will owe interest on that exception or portion


	
20

	 	
thereof, if ultimately granted, from the date it received the audit report. Interest shall be calculated using the rate set forth in Section


	
21

	 	
I.3.B (Advances and Payments by the Parties).


	
22

	 	 
	
23

	 	


C.    The lead audit company shall reply to the Operator's response to an audit report within ninety (90) days of receipt, and the Operator






	
24

	 	


shall reply to the lead audit company's follow-up response within ninety (90) days of receipt; provided, however, each Non-Operator






	
25

	 	


shall have the right to represent itself if it disagrees with the lead audit company's position or believes the lead audit company is not






	
26

	 	

adequately fulfilling its duties. Unless otherwise provided for in Section I.5.E, if the Operator fails to provide substantive response




	
27

	 	
to an exception within this ninety (90) day period, the Operator will owe interest on that exception or portion thereof, if ultimately


	
28

	 	

granted, from the date it received the audit report. Interest shall be calculated using the rate set forth in Section I.3.B (Advances and




	
29

	 	
Payments by the Parties).


	
30

	 	 
	
31

	 	

D.    If any Party fails to meet the deadlines in Sections I.5.B or I.5.C or if any audit issues are outstanding fifteen (15) months after




	
32

	 	
Operator receives the audit report, the Operator or any Non-Operator participating in the audit has the right to call a resolution


	
33

	 	
meeting, as set forth in this Section I.5.D or it may invoke the dispute resolution procedures included in the Agreement, if applicable.


	34	 	
The meeting will require one month's written notice to the Operator and all Non-Operators participating in the audit. The meeting


	35	 	
shall be held at the Operator's office or mutually agreed location, and shall be attended by representatives of the Parties with


	36	 	
authority to resolve such outstanding issues. Any Party who fails to attend the resolution meeting shall be bound by any resolution


	
37

	 	

reached at the meeting. The lead audit company will make good faith efforts to coordinate the response and positions of the




	38	 	
Non-Operator participants throughout the resolution process; however, each Non-Operator shall have the right to represent itself.


	
39

	 	
Attendees will make good faith efforts to resolve outstanding issues, and each Party will be required to present substantive information


	
40

	 	

supporting its position. A resolution meeting may be held as often as agreed to by the Parties. Issues unresolved at one meeting may




	
41

	 	
be discussed at subsequent meetings until each such issue is resolved.


	
42

	 	
 


	
43

	 	
If the Agreement contains no dispute resolution procedures and the audit issues cannot be resolved by negotiation, the dispute shall


	
44

	 	
shall choose a mutually acceptable mediator and share the costs of mediation services equally. The Parties shall each have present


	
45

	 	
be submitted to mediation. In such event, promptly following one Party's written request for mediation, the Parties to the dispute


	
46

	 	
at the mediation at least one individual who has the authority to settle the dispute. The Parties shall make reasonable efforts to


	
47

	 	
ensure that the mediation commences within sixty (60) days of the date of the mediation request. Notwithstanding the above, any


	
48

	 	
Party may file a lawsuit or complaint (1) if the Parties are unable after reasonable efforts, to commence mediation within sixty (60)


	
49

	 	
days of the date of the mediation request, (2) for statute of limitations reasons, or (3) to seek a preliminary injunction or other


	
50

	 	
provisional judicial relief, if in its sole judgment an injunction or other provisional relief is necessary to avoid irreparable damage or


	
51

	
 

	
to preserve the status quo. Despite such action, the Parties shall continue to try to resolve the dispute by mediation.


	
52

	 	 
	
53

	 	

E.    o (Optional Provision- Forfeiture Penalties)




	
54

	 	
If the Non-Operators fail to meet the deadline in Section I.5.C, any unresolved exceptions that were not addressed by the Non­


	
55

	 	
Operators within one (1) year following receipt of the last substantive response of the Operator shall be deemed to have been


	
56

	 	
withdrawn by the Non-Operators. If the Operator fails to meet the deadlines in Section I.5.B or I.5.C, any unresolved exceptions that


	
57

	 	
were not addressed by the Operator within one ( 1) year following receipt of the audit report or receipt of the last substantive response


	
58

	 	
of the Non-Operators, whichever is later, shall be deemed to have been granted by the Operator and adjustments shall be made,


	
59

	 	
without interest, to the Joint Account.


	
60

	 	
 


	
61

	6.	
APPROVAL BY PARTIES


	
62

	 	
  


	
63

	 	

A.    GENERAL MATTERS




	
64

	 	

 




	
65

	 	
Where an approval or other agreement of the Parties or Non-Operators is expressly required under other Sections of this Accounting


	
66

	 	
Procedure and if the Agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, the














  










 




  





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COPAS 2005 Accounting Procedure


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	1	 	Operator shall notify all Non-Operators of the Operator's proposal and the agreement or approval of a majority in interest of the 
	2	 	Non-Operators shall be controlling on all Non-Operators.
	3	 	 
	4	 	This Section I.6.A applies to specific situations of limited duration where a Party proposes to change the accounting for charges from
	5	 	
that prescribed in this Accounting Procedure. This provision does not apply to amendments to this Accounting Procedure, which are 


	6	 	
covered by Section I.6.B.


	7	 	 
	8	B.	
AMENDMENTS


	9	 	 
	
10

	 	
If the Agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, this Accounting


	
11

	 	Procedure can be amended by an affirmative vote of    One     (  1  ) or more Parties, one of which is the Operator,
	
12

	 	
having a combined working interest of at least     Seventy Six      percent   ( 76 %), which approval shall be binding on all Parties,


	
13

	 	
provided, however, approval of at least one (1) Non-Operator shall be required.


	
14

	 	
 


	
15

	C.	
AFFILIATES


	
16

	 	 
	
17

	 	
For the purposes of administering the voting procedures in Section I.6.A and I.6.B, if Parties to this Agreement are Affiliates of each


	
18

	 	other, then such Affiliates shall be combined and treated as a single Party having the combined working interest or Participating
	
19

	 	
Interest of such Affiliates.


	
20

	 	
 


	
21

	 	

For the purposes of administering the voting procedures in Section I.6.A, if a Non-Operator is an Affiliate of the Operator, votes




	
22

	 	under Section I.6.A shall require the majority in interest of the Non-Operator(s) after excluding the interest of the Operator's
	
23

	 	

Affiliate.




	
24

	 	 
	
25

	 	
 II. DIRECT CHARGES


	
26

	 	
 


	
27

	 	
The Operator shall charge the Joint Account with the following items:


	
28

	 	
 


	
29

	1.	
RENTALS AND ROYALTIES


	
30

	 	 
	
31

	 	
Lease rentals and royalties paid by the Operator, on behalf of all Parties, for the Joint Operations.


	
32

	 	
 


	
33

	2.	LABOR
	
34

	 	
 


	
35

	 	A.    Salaries and wages, including incentive compensation programs as set forth in COPAS MFI-37 ("Chargeability of Incentive
	
36

	 	
Compensation Programs"), for


	
37

	 	
 


	
38

	 	(1)   Operator's field employees directly employed On-site in the conduct of Joint Operations,
	
39

	 	
 


	
40

	 	
(2)   Operator's employees directly employed on Shore Base Facilities, Offshore Facilities, or other facilities serving the Joint


	
41

	 	
Property if such costs are not charged under Section II.6 (Equipment and Facilities Furnished by Operator) or are not a


	
42

	 	function covered under Section III (Overhead),
	
43

	 	
 


	
44

	 	(3)   Operator's employees providing First Level Supervision,
	
45

	 	
 


	
46

	 	

(4)   Operator's employees providing On-site Technical Services for the Joint Property if such charges are excluded from the




	
47

	 	
overhead rates in Section III (Overhead),


	
48

	 	
 


	
49

	 	
(5)   Operator's employees providing Off-site Technical Services for the Joint Property if such charges are excluded from the


	
50

	 	overhead rates in Section III (Overhead).
	
51

	
 

	
 


	
52

	 	Charges for the Operator's employees identified in Section II.2.A may be made based on the employee's actual salaries and wages,
	
53

	 	
or in lieu thereof, a day rate representing the Operator's average salaries and wages of the employee's specific job category.


	
54

	 	
 


	
55

	 	

Charges for personnel chargeable under this Section II.2.A who are foreign nationals shall not exceed comparable compensation paid




	
56

	 	

to an equivalent U.S. employee pursuant to this Section II.2, unless otherwise approved by the Parties pursuant to Section




	
57

	 	
I.6.A (General Matters).


	
58

	 	 
	
59

	 	
B.     Operator's cost of holiday, vacation, sickness, and disability benefits, and other customary allowances paid to employees whose


	
60

	 	

salaries and wages are chargeable to the Joint Account under Section II.2.A, excluding severance payments or other termination




	
61

	 	
allowances. Such costs under this Section II.2.B may be charged on a "when and as-paid basis" or by "percentage assessment" on the


	
62

	 	
amount of salaries and wages chargeable to the Joint Account under Section II.2.A. If percentage assessment is used, the rate shall


	
63

	 	
be based on the Operator's cost experience.


	
64

	 	
 


	
65

	 	
C.    Expenditures or contributions made pursuant to assessments imposed by governmental authority that are applicable to costs


	
66

	 	
chargeable to the Joint Account under Sections II.2.A and B











 









  





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COPAS 2005 Accounting Procedure


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	1	 	D.    Personal Expenses of personnel whose salaries and wages are chargeable to the Joint Account under Section II.2.A when the
	2	 	
expenses are incurred in connection with directly chargeable activities.


	3	 	 
	4	 	
E.    Reasonable relocation costs incurred in transferring to the Joint Property personnel whose salaries and wages are chargeable to the


	5	 	Joint Account under Section 11.2.A. Notwithstanding the foregoing, relocation costs that result from reorganization or merger of a
	6	 	Party, or that are for the primary benefit of the Operator, shall not be chargeable to the Joint Account. Extraordinary relocation
	7	 	
costs, such as those incurred as a result of transfers from remote locations, such as Alaska or overseas, shall not be charged to the


	8	 	
Joint Account unless approved by the Parties pursuant to Section I.6.A (General Matters).


	9	 	 
	
10

	  	
F.    Training costs as specified in COPAS MFI-35 ("Charging of Training Costs to the Joint Account") for personnel whose salaries and


	
11

	  	
wages are chargeable under Section II.2.A. This training charge shall include the wages, salaries, training course cost, and Personal


	
12

	  	
Expenses incurred during the training session. The training cost shall be charged or allocated to the property or properties directly


	
13

	  	
benefiting from the training. The cost of the training course shall not exceed prevailing commercial rates, where such rates are


	
14

	  	
available.


	
15

	  	  
	
16

	  	
G.   Operator's current cost of established plans for employee benefits, as described in COPAS MFI-27 ("Employee Benefits Chargeable


	
17

	  	
to Joint Operations and Subject to Percentage Limitation"), applicable to the Operator's labor costs chargeable to the Joint Account


	
18

	  	
under Sections II.2.A and B based on the Operator's actual cost not to exceed the employee benefits limitation percentage most


	
19

	  	
recently recommended by COPAS.


	
20

	  	  
	
21

	  	
H.    Award payments to employees, in accordance with COPAS MFI-49 ("Awards to Employees and Contractors") for personnel whose


	
22

	  	
salaries and wages are chargeable under Section II.2.A.


	
23

	  	  
	
24

	
3.

	
MATERIAL


	
25

	  	  
	
26

	  	
Material purchased or furnished by the Operator for use on the Joint Property in the conduct of Joint Operations as provided under Section


	
27

	  	
IV (Material Purchases, Transfers, and Dispositions). Only such Material shall be purchased for or transferred to the Joint Property as


	
28

	  	
may be required for immediate use or is reasonably practical and consistent with efficient and economical operations. The accumulation


	
29

	  	
of surplus stocks shall be avoided.


	
30

	  	  
	
31

	
4.

	
TRANSPORTATION


	
32

	  	  
	
33

	  	
A.   Transportation of the Operator's, Operator's Affiliate's, or contractor's personnel necessary for Joint Operations.


	
34

	  	  
	
35

	  	
B.    Transportation of Material between the Joint Property and another property, or from the Operator's warehouse or other storage point


	
36

	  	
to the Joint Property, shall be charged to the receiving property using one of the methods listed below. Transportation of Material


	
37

	  	
from the Joint Property to the Operator's warehouse or other storage point shall be paid for by the Joint Property using one of the


	
38

	  	
methods listed below:


	
39

	  	  
	
40

	  	
(1)   If the actual trucking charge is less than or equal to the Excluded Amount the Operator may charge actual trucking cost or a


	
41

	  	
theoretical  charge from the Railway  Receiving  Point to the Joint Property.  The basis for the theoretical  charge is the per


	
42

	  	
hundred  weight  charge plus  fuel surcharges from the Railway Receiving  Point to  the Joint Property. The Operator  shall


	
43

	  	
consistently  apply the selected alternative.


	
44

	  	  
	
45

	  	
(2)   If the actual trucking charge is greater than the Excluded Amount the Operator shall charge Equalized Freight. Accessorial


	
46

	  	
charges such as loading and unloading costs, split pick-up costs, detention, call out charges, and permit fees shall be charged


	
47

	  	
directly to the Joint Property and shall not be included when calculating the Equalized Freight.


	
48

	  	  
	
49

	
5.

	
SERVICES


	
50

	  	  
	
51

	  	
The cost of contract services, equipment, and utilities used in the conduct of Joint Operations, except for contract services, equipment, and


	
52

	  	
utilities covered by Section III (Overhead), or Section II.7 (Affiliates), or excluded under Section II.9 (Legal Expense). Awards paid to


	
53

	  	
contractors shall be chargeable pursuant to COPAS MFl-49 ("Awards to Employees and Contractors").


	
54

	  	  
	
55

	  	
The costs of third party Technical Services are chargeable to the extent excluded from the overhead rates under Section III (Overhead).


	
56

	  	  
	
57

	
6.

	
EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR


	
58

	  	  
	
59

	  	
In the absence of a separately negotiated agreement, equipment and facilities furnished by the Operator will be charged as follows:


	
60

	  	  
	
61

	  	
A.   The Operator  shall charge the Joint Account  for use of  Operator-owned  equipment  and facilities, including but  not limited to


	
62

	  	
production facilities, Shore Base Facilities, Offshore Facilities, and Field Offices, at rates commensurate with the costs of ownership


	
63

	  	
and operation. The cost of Field Offices shall be chargeable to the extent the Field Offices provide direct service to personnel who


	
64

	  	
are chargeable pursuant  to Section II.2.A (Labor). Such rates may include labor, maintenance,  repairs, other operating expense,


	
65

	  	
insurance, taxes, depreciation using straight line depreciation method, and interest on gross investment less accumulated depreciation


	
66

	  	
not to exceed       ten          percent (    10   %) per annum; provided, however, depreciation shall not be charged when the









 


 




  





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	1	 	equipment and facilities investment have been fully depreciated. The rate may include an element of the estimated cost for 
	2	 	abandonment, reclamation, and dismantlement. Such rates shall not exceed the average commercial rates currently prevailing in the 
	3	 	
immediate area of the Joint Property.


	4	 	 
	5	 	
B.    In lieu of charges in Section II.6.A above, the Operator may elect to use average commercial rates prevailing in the immediate area 


	6	 	
of the Joint Property, less twenty percent (20%). If equipment and facilities are charged under this Section II.6.B, the Operator shall 


	7	 	adequately document and support commercial rates and shall periodically review and update the rate and the supporting 
	8	 	
documentation. For automotive equipment, the Operator may elect to use rates published by the Petroleum Motor Transport 


	9	 	
Association (PMTA) or such other organization recognized by COPAS as the official source of rates.


	
10

	 	
  


	
11

	7.	AFFILIATES
	
12

	 	
  


	
13

	 	
A.   Charges for an Affiliate's goods and/or services used in operations requiring an AFE or other authorization from the Non-Operators


	
14

	 	

may be made without the approval of the Parties provided (i) the Affiliate is identified and the Affiliate goods and services are




	
15

	 	
specifically detailed in the approved AFE or other authorization, and (ii) the total costs for such Affiliate's goods and services billed


	
16

	 	to such individual project do not exceed     $  5200.000.00          If the total costs for an Affiliate's goods and services charged to such
	
17

	 	

individual project are not specifically detailed in the approved AFE or authorization or exceed such amount, charges for such




	
18

	 	Affiliate shall require approval of the Parties, pursuant to Section I.6.A (General Matters).
	
19

	 	
  


	
20

	 	
B.    For an Affiliate's goods and/or services used in operations not requiring an AFE or other authorization from the Non-Operators,


	
21

	 	

charges for such Affiliate's goods and services shall require approval of the Parties, pursuant to Section I.6.A (General Matters), if the




	
22

	 	
charges exceed   $  5200.000.00       in a given calendar year.


	
23

	 	
  


	
24

	 	C.   The cost of the Affiliate's goods or services shall not exceed average commercial rates prevailing in the area of the Joint Property,
	
25

	 	
unless the Operator obtains the Non-Operators' approval of such rates. The Operator shall adequately document and support


	
26

	 	
commercial rates and shall periodically review and update the rate and the supporting documentation; provided, however,


	
27

	 	documentation of commercial rates shall not be required if the Operator obtains Non-Operator approval of its Affiliate's rates or
	
28

	 	
charges prior to billing Non-Operators for such Affiliate's goods and services. Notwithstanding the foregoing, direct charges for


	
29

	 	

Affiliate-owned communication facilities or systems shall be made pursuant to Section II.12 (Communications).




	
30

	 	 
	
31

	 	

If the Parties fail to designate an amount in Sections II.7.A or II.7.B, in each instance the amount deemed adopted by the Parties as a




	
32

	 	
result of such omission shall be the amount established as the Operator's expenditure limitation in the Agreement. If the Agreement


	
33

	 	does not contain an Operator's expenditure limitation, the amount deemed adopted by the Parties as a result of such omission shall be
	
34

	 	
zero dollars ($ 0.00).


	
35

	 	 
	
36

	8.	
DAMAGES AND LOSSES TO JOINT PROPERTY


	
37

	 	
  


	
38

	 	
All costs or expenses necessary for the repair or replacement of Joint Property resulting from damages or losses incurred, except to the


	
39

	 	

extent such damages or losses result from a Party's or Parties' gross negligence or willful misconduct, in which case such Party or Parties




	
40

	 	
shall be solely liable.


	
41

	 	
  


	
42

	 	
The Operator shall furnish the Non-Operator written notice of damages or losses incurred as soon as practicable after a report has been


	
43

	 	

received by the Operator.




	
44

	 	
 


	
45

	9.	
LEGAL EXPENSE


	
46

	 	
  


	
47

	 	
Recording fees and costs of handling, settling, or otherwise discharging litigation, claims, liens and title and regulatory work / incurred in or resulting from


	
48

	 	

operations under the Agreement, or necessary to protect or recover the Joint Property, to the extent permitted under the Agreement. Costs




	
49

	 	

of the Operator's or Affiliate's legal staff or outside attorneys, including fees and expenses, are not chargeable unless approved by the




	
50

	 	Parties pursuant to Section I.6.A (General Matters) or otherwise provided for in the Agreement.
	
51

	
  

	
  


	
52

	 	Notwithstanding the foregoing paragraph, costs for procuring abstracts, fees paid to outside attorneys for title examinations (including
	
53

	 	

preliminary, supplemental, shut-in royalty opinions, division order title opinions), and curative work shall be chargeable to the extent




	
54

	 	
permitted as a direct charge in the Agreement.


	
55

	 	
  


	
56

	 	
 


	
57

	10.	

TAXES AND PERMITS




	
58

	 	
 


	
59

	 	

All taxes and permitting fees of every kind and nature, assessed or levied upon or in connection with the Joint Property, or the production




	
60

	 	

therefrom, and which have been paid by the Operator for the benefit of the Parties, including penalties and interest, except to the extent the




	
61

	 	

penalties and interest result from the Operator's gross negligence or willful misconduct.




	
62

	 	

 




	
63

	 	

If ad valorem taxes paid by the Operator are based in whole or in part upon separate valuations of each Party's working interest, then




	
64

	 	

notwithstanding any contrary provisions, the charges to the Parties will be made in accordance with the tax value generated by each Party's




	
65

	 	
working interest.


	
66

	 	
  









  





 




 




  





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	1	 	
Costs of tax consultants or advisors, the Operator's employees, or Operator's Affiliate employees in matters regarding ad valorem or other


	2	 	
tax matters, are not permitted as direct charges unless approved by the Parties pursuant to Section I.6.A (General Matters).


	3	 	 
	4	 	Charges to the Joint Account resulting from sales/use tax audits, including extrapolated amounts and penalties and interest, are permitted, 
	5	 	
provided the Non-Operator shall be allowed to review the invoices and other underlying source documents which served as the basis for


	6	 	
tax charges and to determine that the correct amount of taxes were charged to the Joint Account. If the Non-Operator is not permitted to 


	7	 	review such documentation, the sales/use tax amount shall not be directly charged unless the Operator can conclusively document the 
	8	 	
amount owed by the Joint Account.


	9	 	 
	
10

	11.	
INSURANCE


	
11

	 	 
	
12

	 	

Net premiums paid for insurance required to be carried for Joint Operations for the protection of the Parties. If Joint Operations are




	
13

	 	
conducted at locations where the Operator acts as self-insurer in regard to its worker's compensation and employer's liability insurance


	
14

	 	

obligation, the Operator shall charge the Joint Account manual rates for the risk assumed in its self-insurance program as regulated by the




	
15

	 	
jurisdiction governing the Joint Property. In the case of offshore operations in federal waters, the manual rates of the adjacent state shall be


	
16

	 	used for personnel performing work On-site, and such rates shall be adjusted for offshore operations by the U.S. Longshoreman and
	
17

	 	
Harbor Workers (USL&H) or Jones Act surcharge, as appropriate.


	
18

	 	 
	
19

	12.	
 COMMUNICATIONS


	
20

	 	
  


	
21

	 	

Costs of acquiring, leasing, installing. operating. repairing. and maintaining communication facilities or systems, including satellite, radio




	
22

	 	
and microwave facilities, between the Joint Property and the Operator's office(s) directly responsible for field operations in accordance


	
23

	 	

with the provisions of COPAS MFI-44 ("Field Computer and Communication Systems"). If the communications facilities or systems




	
24

	 	
serving the Joint Property are Operator-owned, charges to the Joint Account shall be made as provided in Section II.6 (Equipment and


	
25

	 	

Facilities Furnished by Operator). If the communication facilities or systems serving the Joint Property are owned by the Operator's




	
26

	 	

Affiliate, charges to the Joint Account shall not exceed average commercial rates prevailing in the area of the Joint Property. The Operator




	
27

	 	shall adequately document and support commercial rates and shall periodically review and update the rate and the supporting
	
28

	 	
documentation.


	
29

	 	
  


	
30

	13.	
ECOLOGICAL, ENVIRONMENTAL, AND SAFETY


	
31

	 	
  


	
32

	 	

Costs incurred for Technical Services and drafting to comply with ecological, environmental and safety Laws or standards recommended by




	
33

	 	
Occupational Safety and Health Administration (OSHA) or other regulatory authorities. All other labor and functions incurred for


	
34

	 	
ecological, environmental and safety matters, including management, administration, and permitting, shall be covered by Sections II.2


	
35

	 	(Labor), II.5 (Services), or Section III (Overhead), as applicable.
	
36

	 	
  


	
37

	 	
Costs to provide or have available pollution containment and removal equipment plus actual costs of control and cleanup and resulting


	
38

	 	responsibilities of oil and other spills as well as discharges from permitted outfalls as required by applicable Laws, or other pollution
	
39

	 	
containment and removal equipment deemed appropriate by the Operator for prudent operations, are directly chargeable.


	
40

	 	
  


	
41

	14.	
ABANDONMENT AND RECLAMATION 


	
42

	 	 
	
43

	 	
Costs incurred for abandonment and reclamation of the Joint Property, including costs required by lease agreements or by Laws.


	
44

	 	 
	
45

	15.	
OTHER EXPENDITURES


	
46

	 	
  


	
47

	 	
Any other expenditure not covered or dealt with in the foregoing provisions of this Section II (Direct Charges), or in Section III


	
48

	 	
(Overhead) and which is of direct benefit to the Joint Property and is incurred by the Operator in the necessary and proper conduct of the


	
49

	 	
Joint Operations. Charges made under this Section II.1.5 shall require approval of the Parties, pursuant to Section I.6.A (General Matters).


	
50

	 	 
	
51

	
  

	 
	
52

	 	
III. OVERHEAD


	
53

	 	
  


	
54

	 	
As compensation for costs not specifically identified as chargeable to the Joint Account pursuant to Section II (Direct Charges), the Operator


	
55

	 	
shall charge the Joint Account in accordance with this Section III.


	
56

	 	
  


	
57

	 	
Functions included in the overhead rates regardless of whether performed by the Operator, Operator's Affiliates or third parties and regardless


	
58

	 	of location, shall include, but not be limited to, costs and expenses of:
	
59

	 	 
	
60

	 	
▪  warehousing, other than for warehouses that are jointly owned under this Agreement


	
61

	 	
▪  design and drafting (except when allowed as a direct charge under Sections II.13, III..I.A.(ii), and III.2, Option B)


	
62

	 	
▪  inventory costs not chargeable under Section V (Inventories of Controllable Material)


	
63

	 	
▪  procurement


	
64

	 	
▪  administration


	
65

	 	
▪  accounting and auditing


	
66

	 	
▪  gas dispatching and gas chart integration



















 


 




  





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	1	 	▪  human resources
	2	 	▪  management
	3	 	
▪  supervision not directly charged under Section II.2 (Labor)


	4	 	▪  legal services not directly chargeable under Section II.9 (Legal Expense)
	5	 	
▪  taxation, other than those costs identified as directly chargeable under Section II.10 (Taxes and Permits)


	6	 	
▪  preparation and monitoring of permits and certifications; preparing regulatory reports; appearances before or meetings with 


	7	 	governmental agencies or other authorities having jurisdiction over the Joint Property, other than On-site inspections; reviewing, 
	8	 	

interpreting, or submitting contents on or lobbying with respect to Laws or proposed Laws.




	9	 	 
	
10

	 	
Overhead charges shall include the salaries or wages plus applicable payroll burdens, benefits, and Personal Expenses of personnel performing


	
11

	 	overhead functions, as well as office and other related expenses of overhead functions.
	
12

	 	
  


	
13

	1.	
OVERHEAD-DRILLING AND PRODUCING OPERATIONS


	
14

	 	
  


	
15

	 	
As compensation for costs incurred but not chargeable under Section II (Direct Charges) and not covered by other provisions of this


	
16

	 	Section III, the Operator shall charge on either:
	
17

	 	
  


	
18

	 	 þ   (Alternative 1) Fixed Rate Basis, Section III.1.B.
	
19

	 	
 o   (Alternative 2) Percentage Basis, Section III.1.C.


	
20

	 	
  


	
21

	A.	
TECHNICAL SERVICES


	
22

	 	 
	
23

	 	
(i)     Except as otherwise provided in Section II.13 (Ecological Environmental and Safety) and Section III.2 (Overhead - Major


	
24

	 	Construction and Catastrophe), or by approval of the Parties pursuant to Section I.6.A (General Matters), the salaries, wages,
	
25

	 	
related payroll burdens and benefits, and Personal Expenses for On-site Technical Services, including third party Technical


	
26

	 	
Services:


	
27

	 	 
	
28

	 	
þ   (Alternative 1- Direct) shall be charged direct to the Joint Account.


	
29

	 	
  


	
30

	 	
 o  (Alternative 2 - Overhead) shall be covered by the overhead rates.


	
31

	 	
  


	
32

	 	
(ii)    Except as otherwise provided in Section II.13 (Ecological, Environmental, and Safety) and Section III.2 (Overhead - Major


	
33

	 	
Construction and Catastrophe), or by approval of the Parties pursuant to Section I.6.A (General Matters), the salaries, wages,


	
34

	 	

related payroll burdens and benefits, and Personal Expenses for Off-site Technical Services, including third party Technical




	
35

	 	Services:
	
36

	 	
  


	
37

	 	
o   (Alternative 1 - All Overhead) shall be covered by the overhead rates.


	
38

	 	 
	
39

	 	
o   (Alternative 2 - All Direct) shall be charged direct to the Joint Account.


	
40

	 	
  


	
41

	 	
þ   (Alternative 3 - Drilling Direct) shall be charged direct to the Joint Account, only to the extent such Technical Services


	
42

	 	are directly attributable to drilling, redrilling, deepening, or sidetracking operations, through completion, temporary
	
43

	 	
abandonment, or abandonment if a dry hole. Off-site Technical Services for all other operations, including workover,


	
44

	 	recompletion, abandonment of producing wells, and the construction or expansion of fixed assets not covered by Section
	
45

	 	
III.2 (Overhead · Major Construction and Catastrophe) shall be covered by the overhead rates.


	
46

	 	
  


	
47

	 	

Notwithstanding anything to the contrary in this Section III, Technical Services provided by Operator's Affiliates are subject to limitations




	
48

	 	

set forth in Section II.7 (Affiliates). Charges for Technical personnel performing non-technical work shall not be governed by this Section




	
49

	 	

III.1 .A. but instead governed by other provisions of this Accounting Procedure relating to the type of work being performed.




	
50

	 	 
	
51

	
B.

	
OVERHEAD-FIXED RATE BASIS


	
52

	 	 
	
53

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


	
54

	 	
  


	
55

	 	
Drilling Well Rate per month $7,500.00 8,200.00   (prorated for less than a full month) / for wells drilled to a TVD of 4,200 feet or more.  5,000.00 for well drilled to a TVD of less than 4,200 feet


	
56

	 	
  


	
57

	 	
Producing Well Rate per month $750.00 $820.00 (prorated for less than a full month) /  for wells drilled to a TVD of 4,200 feet or more.  500.00 for wells drilled to a TVD of less than 4,200 feet.


	
58

	 	 
	
59

	 	
(2)  Application of Overhead-Drilling Well Rate shall be as follows:


	
60

	 	
  


	
61

	 	
(a)    Charges for onshore drilling wells shall begin on the spud location work begins date / and terminate on the date the drilling and/or completion


	
62

	 	
equipment used on the well is released, whichever occurs later. Charges for offshore and inland waters drilling wells shall


	
63

	 	
begin on the date the drilling or completion equipment arrives on location and terminate on the date the drilling or completion


	
64

	 	
equipment moves off location, or is released, whichever occurs first. No charge shall be made during suspension of drilling


	
65

	 	
and/or completion operations for fifteen (15) or more consecutive calendar days.


	
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	1	 	(b)   Charges for any well undergoing any type of workover, recompletion, and/or abandonment for a period of five (5) or more 
	2	 	consecutive work-days shall be made at the Drilling Well Rate. Such charges shall be applied for the period from date 
	3	 	operations, with rig or other units used in operations, commence through date of rig or other unit release, except that no charges 
	4	 	
shall be made during suspension of operations for fifteen (15) or more consecutive calendar days.


	5	 	 
	6	 	

(3)  Application of Overhead-Producing Well Rate shall be as follows:




	7	 	 
	8	 	

(a)   An active well that is produced, injected into for recovery or disposal, or used to obtain water supply to support operations for




	9	 	any portion of the month shall be considered as a one-well charge for the entire month.
	
10

	 	
  


	
11

	 	(b)   Each active completion in a multi-completed well shall be considered as a one-well charge provided each completion is
	
12

	 	
considered a separate well by the governing regulatory authority.


	
13

	 	
  


	
14

	 	
(c)   A one-well charge shall be made for the month in which plugging and abandonment operations are completed on any well,


	
15

	 	
unless the Drilling Well Rate applies, as provided in Sections III.1.B.(2)(a) or (b). This one-well charge shall be made whether


	
16

	 	or not the well has produced.
	
17

	 	
  


	
18

	 	
(d)  An active gas well shut in because of overproduction or failure of a purchaser, processor, or transporter to take production shall


	
19

	 	

be considered as a one-well charge provided the gas well is directly connected to a permanent sales outlet.




	
20

	 	
  


	
21

	 	

(e)   Any well not meeting the criteria set forth in Sections III.1.B.(3) (a), (b), (c), or (d) shall not qualify for a producing overhead




	
22

	 	
charge.


	
23

	 	
  


	
24

	 	(4)  The well rates shall be adjusted on the first day of April each year following the effective date of the Agreement; provided,
	
25

	 	
however, if this Accounting Procedure is attached to or otherwise governing the payout accounting under a farmout agreement, the


	
26

	 	
rates shall be adjusted on the first day of April each year following the effective date of such farmout agreement. The adjustment


	
27

	 	shall be computed by applying the adjustment factor most recently published by COPAS. The adjusted rates shall be the initial or
	
28

	 	
amended rates agreed to by the Parties increased or decreased by the adjustment factor described herein, for each year from the


	
29

	 	
effective date of such rates, in accordance with COPAS MFI-47 ("Adjustment of Overhead Rates").


	
30

	 	 
	
31

	C.	
OVERHEAD-PERCENTAGE BASIS


	
32

	 	
  


	
33

	 	(1)  Operator shall charge the Joint Account at the following rates: 
	
34

	 	
  


	
35

	 	
(a)   Development Rate ______ percent (_____ ) % of the cost of development of the Joint Property, exclusive of costs


	
36

	 	

provided under Section II.9 (Legal Expense) and all Material salvage credits.




	
37

	 	
  


	
38

	 	(b)   Operating Rate _________percent (_____%) of the cost of operating the Joint Property, exclusive of costs
	
39

	 	

provided under Sections II.1 (Rentals and Royalties) and II.9 (Legal Expense); all Material salvage credits; the value




	
40

	 	

of substances purchased for enhanced recovery; all property and ad valorem taxes, and any other taxes and assessments that




	
41

	 	
are levied, assessed, and paid upon the mineral interest in and to the Joint Property. 


	
42

	 	 
	
43

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


	
44

	 	 
	
45

	 	
(a)   The Development Rate shall be applied to all costs in connection with:


	
46

	 	
  


	
47

	 	
[i]     drilling, redrilling, sidetracking, or deepening of a well


	
48

	 	
[ii]    a well undergoing plugback or workover operations for a period of five (5) or more consecutive work-days


	
49

	 	
[iii]   preliminary expenditures necessary in preparation for drilling


	
50

	 	[iv]   expenditures incurred in abandoning when the well is not completed as a producer
	
51

	
  

	
[v]    construction or installation of fixed assets, the expansion of fixed assets and any other project clearly discernible as a


	
52

	 	 fixed asset, other than Major Construction or Catastrophe as defined in Section lli.2 (Overhead-Major Construction
	
53

	 	
 and Catastrophe).


	
54

	 	
  


	
55

	 	
(b)   The Operating Rate shall be applied to all other costs in connection with Joint Operations, except those subject to Section III.2


	
56

	 	
(Overhead-Major Construction and Catastrophe).


	
57

	 	
  


	
58

	2.	OVERHEAD-MAJOR CONSTRUCTION AND CATASTROPHE
	
59

	 	 
	
60

	 	
To compensate the Operator for overhead costs incurred in connection with a Major Construction project or Catastrophe, the Operator


	
61

	 	
shall either negotiate a rate prior to the beginning of the project, or shall charge the Joint Account for overhead based on the following


	
62

	 	
rates for any Major Construction project in excess of the Operator's expenditure limit under the Agreement, or for any Catastrophe


	
63

	 	
regardless of the amount. If the Agreement to which this Accounting Procedure is attached does not contain an expenditure limit, Major


	
64

	 	
Construction Overhead shall be assessed for any single Major Construction project costing in excess of $100,000 gross.


	
65

	 	
  


	
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	1	 	Major Construction shall mean the construction and installation of fixed assets, the expansion of fixed assets, and any other project clearly 
	2	 	discernible as a fixed asset required for the development and operation of the Joint Property, or in the dismantlement, abandonment, 
	3	 	
removal, and restoration of platforms, production equipment, and other operating facilities.


	4	 	 
	5	 	
Catastrophe is defined as a sudden calamitous event bringing damage, loss, or destruction to property or the environment, such as an oil 


	6	 	
spill, blowout, explosion, fire, storm, hurricane, or other disaster. The overhead rate shall be applied to those costs necessary to restore the 


	7	 	Joint Property to the equivalent condition that existed prior to the event.
	8	 	 
	9	 	
A.  If the Operator absorbs the engineering, design and drafting costs related to the project:


	
10

	 	
  


	
11

	 	
(1)  5.0 % of total costs if such costs are less than $!00,000; plus


	
12

	 	
  


	
13

	 	

(2)   3.0 % of total costs in excess of $100,000 but less than $1,000,000; plus




	
14

	 	
  


	
15

	 	

(3)   2.0 % of total costs in excess of $1,000,000.




	
16

	 	 
	
17

	 	

B.   If the Operator charges engineering, design and drafting costs related to the project directly to the Joint Account:




	
18

	 	 
	
19

	 	

(1)   5.0 % of total costs if such costs are less than $!00,000; plus




	
20

	 	
  


	
21

	 	

(2)   3.0 % of total costs in excess of $100,000 but less than $1,000,000; plus




	
22

	 	 
	
23

	 	

(3)   2.0 % of total costs in excess of $1,000,000.




	
24

	 	 
	
25

	 	

Total cost shall mean the gross cost of any one project. For the purpose of this paragraph, the component parts of a single Major




	
26

	 	

Construction project shall not be treated separately, and the cost of drilling and workover wells and purchasing and installing pumping




	
27

	 	
units and downhole artificial lift equipment shall be excluded. For Catastrophes, the rates shall be applied to all costs associated with each


	
28

	 	

single occurrence or event.




	
29

	 	
  


	
30

	 	
On each project, the Operator shall advise the Non-Operator(s) in advance which of the above options shall apply.


	
31

	 	
  


	
32

	 	

For the purposes of calculating Catastrophe Overhead, the cost of drilling relief wells, substitute wells, or conducting other well operations




	
33

	 	
directly resulting from the catastrophic event shall be included. Expenditures to which these rates apply shall not be reduced by salvage or


	
34

	 	

insurance recoveries. Expenditures that qualify for Major Construction or Catastrophe Overhead shall not qualify for overhead under any




	
35

	 	
other overhead provisions.


	
36

	 	
  


	
37

	 	

In the event of any conflict between the provisions of this Section III.2 and the provisions of Sections II.2 (Labor), II.5 (Services), or II.7




	
38

	 	
(Affiliates), the provisions of this Section III.2 shall govern.


	
39

	 	
  


	
40

	3.	

AMENDMENT OF OVERHEAD RATES




	
41

	 	
  


	
42

	 	
The overhead rates provided for in this Section III may be amended from time to time if, in practice, the rates are found to be insufficient


	
43

	 	

Or excessive, in accordance with the provisions of Section I.6.B (Amendments).




	
44

	 	 
	45	 	 
	
46

	 	

IV. MATERIAL PURCHASES, TRANSFERS, AND DISPOSITIONS




	
47

	 	
  


	
48

	 	
The Operator is responsible for Joint Account Material and shall make proper and timely charges and credits for direct purchases, transfers, and


	
49

	 	
dispositions. The Operator shall provide all Material for use in the conduct of Joint Operations; however, Material may be supplied by the Non-


	
50

	 	
Operators, at the Operator's option. Material furnished by any Party shall be furnished without any express or implied warranties as to quality,


	
51

	 	fitness for use, or any other matter.
	
52

	
  

	
  


	
53

	1.	DIRECT PURCHASES
	
54

	 	
  


	
55

	 	
Direct purchases shall be charged to the Joint Account at the price paid by the Operator after deduction of all discounts received. The


	
56

	 	

Operator shall make good faith efforts to take discounts offered by suppliers, but shall not be liable for failure to take discounts except to




	
57

	 	
the extent such failure was the result of the Operator's gross negligence or willful misconduct A direct purchase shall be deemed to occur


	
58

	 	
when an agreement is made between an Operator and a third party for the acquisition of Material for a specific well site or location.


	
59

	 	Material provided by the Operator under "vendor stocking programs," where the initial use is for a Joint Property and title of the Material
	
60

	 	
does not pass from the manufacturer, distributor, or agent until usage, is considered a direct purchase. If Material is found to be defective


	
61

	 	
or is returned to the manufacturer, distributor, or agent for any other reason, credit shall be passed to the Joint Account within sixty (60)


	
62

	 	
days after the Operator has received adjustment from the manufacturer, distributor, or agent.


	
63

	 	
  


	
64

	 	
  


	
65

	 	
  


	
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	1	2.	 TRANSFERS
	2	 	 
	3	 	A transfer is determined to occur when the Operator (i) furnishes Material from a storage facility or from another operated property, (ii) has 
	4	 	assumed liability for the storage costs and changes in value, and (iii) has previously secured and held title to the transferred Material. 
	5	 	
Similarly, the removal of Material from the Joint Property to a storage facility or to another operated property is also considered a transfer; 


	6	 	
provided, however, Material that is moved from the Joint Property to a storage location for safe-keeping pending disposition may remain 


	7	 	charged to the Joint Account and is not considered a transfer. Material shall be disposed of in accordance with Section IV.3 (Disposition of 
	8	 	

Surplus) and the Agreement to which this Accounting Procedure is attached.




	9	 	 
	
10

	 	
A.   PRICING


	
11

	 	 
	
12

	 	

The value of Material transferred to/from the Joint Property should generally reflect the market value on the date of physical transfer.




	
13

	 	

Regardless of the pricing method used, the Operator shall make available to the Non-Operators sufficient documentation to verify the




	
14

	 	
Material valuation. When higher than specification grade or size tubulars are used in the conduct of Joint Operations, the Operator


	
15

	 	
shall charge the Joint Account at the equivalent price for well design specification tubulars, unless such higher specification grade or


	
16

	 	sized tubulars are approved by the Parties pursuant to Section l.6.A (General Matters). Transfers of new Material will be priced
	
17

	 	
using one of the following pricing methods; provided, however, the Operator shall use consistent pricing methods, and not alternate


	
18

	 	
between methods for the purpose of choosing the method most favorable to the Operator for a specific transfer:


	
19

	 	
  


	
20

	 	

(1)   Using published prices in effect on date of movement as adjusted by the appropriate COPAS Historical Price Multiplier (HPM)




	
21

	 	
or prices provided by the COPAS Computerized Equipment Pricing System (CEPS).


	
22

	 	 
	
23

	 	

(a)    For oil country tubulars and line pipe, the published price shall be based upon eastern mill carload base prices (Houston,




	
24

	 	
Texas, for special end) adjusted as of date of movement, plus transportation cost as defined in Section IV.2.B (Freight).


	
25

	 	
  


	
26

	 	
(b)   For other Material, the published price shall be the published list price in effect at date of movement, as listed by a Supply


	
27

	 	Store nearest the Joint Property where like Material is normally available, or point of manufacture plus transportation
	
28

	 	
costs as defined in Section IV.2.B (Freight).


	
29

	 	
  


	
30

	 	(2)   Based on a price quotation from a vendor that reflects a current realistic acquisition cost.
	
31

	 	
  


	
32

	 	

(3)   Based on the amount paid by the Operator for like Material in the vicinity of the Joint Property within the previous twelve (12)




	
33

	 	months from the date of physical transfer.
	
34

	 	
  


	
35

	 	
(4)   As agreed to by the Participating Parties for Material being transferred to the Joint Property, and by the Parties owning the


	
36

	 	
Material for Material being transferred from the Joint Property.


	
37

	 	
  


	
38

	 	B.  FREIGHT
	
39

	 	
  


	
40

	 	
Transportation costs shall be added to the Material transfer price using the method prescribed by the COPAS Computerized


	
41

	 	
Equipment Pricing System (CEPS). If not using CEPS, transportation costs shall be calculated as follows: 


	
42

	 	 
	
43

	 	
(1)  Transportation costs for oil country tubulars and line pipe shall be calculated using the distance from eastern mill to the


	
44

	 	Railway Receiving Point based on the carload weight basis as recommended by the COPAS MFI-38 ("Material Pricing
	
45

	 	
Manual") and other COPAS MFIs in effect at the time of the transfer.


	
46

	 	
  


	
47

	 	
(2)  Transportation costs for special mill items shall be calculated from that mill's shipping point to the Railway Receiving Point.


	
48

	 	
For transportation costs from other than eastern mills, the 30,000-pound interstate truck rate shall be used. Transportation costs


	
49

	 	
for macaroni tubing shall be calculated based on the interstate truck rate per weight of tubing transferred to the Railway


	
50

	 	
Receiving Point.


	
51

	
  

	
  


	
52

	 	(3)  Transportation costs for special end tubular goods shall be calculated using the interstate truck rate from Houston, Texas, to the
	
53

	 	

Railway Receiving Point.




	
54

	 	
  


	
55

	 	
(4)  Transportation costs for Material other than that described in Sections IV.2.B.(l) through (3), shall be calculated from the


	
56

	 	
Supply Store or point of manufacture, whichever is appropriate, to the Railway Receiving Point


	
57

	 	
  


	
58

	 	
Regardless of whether using CEPS or manually calculating transportation costs, transportation costs from the Railway Receiving Point


	
59

	 	

to the Joint Property are in addition to the foregoing, and may be charged to the Joint Account based on actual costs incurred. All




	
60

	 	
transportation costs are subject to Equalized Freight as provided in Section II.4 (Transportation) of this Accounting Procedure.


	
61

	 	
  


	
62

	 	
C.  TAXES


	
63

	 	
  


	
64

	 	

Sales and use taxes shall be added to the Material transfer price using either the method contained in the COPAS Computerized




	
65

	 	

Equipment Pricing System (CEPS) or the applicable tax rate in effect for the Joint Property at the time and place of transfer. In either




	
66

	 	
case, the Joint Account shall be charged or credited at the rate that would have governed had the Material been a direct purchase.









  





 




  





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COPAS 2005 Accounting Procedure


Recommended by COPAS









 









  


  




	1	D.	CONDITTON
	2	 	 
	3	 	(1)   Condition "A" - New and unused Material in sound and serviceable condition shall be charged at one hundred percent (100%) 
	4	 	of the price as determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes). Material transferred from the 
	5	 	
Joint Property that was not placed in service shall be credited as charged without gain or loss; provided, however, any unused 


	6	 	
Material that was charged to the Joint Account through a direct purchase will be credited to the Joint Account at the original 


	7	 	cost paid less restocking fees charged by the vendor. New and unused Material transferred from the Joint Property may be 
	8	 	
credited at a price other than the price originally charged to the Joint Account provided such price is approved by the Parties 


	9	 	
owning such Material, pursuant to Section I.6.A (General Matters). All refurbishing costs required or necessary to return the


	
10

	 	
Material to original condition or to correct handling, transportation, or other damages will be borne by the divesting property.


	
11

	 	The Joint Account is responsible for Material preparation, handling, and transportation costs for new and unused Material
	
12

	 	
charged to the Joint Property either through a direct purchase or transfer. Any preparation costs incurred, including any internal


	
13

	 	
or external coating and wrapping, will be credited on new Material provided these services were not repeated for such Material


	
14

	 	
for the receiving property.


	
15

	 	
  


	
16

	 	
(2)   Condition "B" - Used Material in sound and serviceable condition and suitable for reuse without reconditioning shall be priced


	
17

	 	

by multiplying the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes) by seventy-five percent




	
18

	 	(75%).
	
19

	 	
  


	
20

	 	
Except as provided in Section IV.2.0(3), all reconditioning costs required to return the Material to Condition "B" or to correct


	
21

	 	
handling, transportation or other damages will be borne by the divesting property.


	
22

	 	 
	
23

	 	

If the Material was originally charged to the Joint Account as used Material and placed in service for the Joint Property, the




	
24

	 	
Material will be credited at the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes) multiplied


	
25

	 	
by sixty-five percent (65%).


	
26

	 	
  


	
27

	 	
Unless otherwise agreed to by the Parties that paid for such Material, used Material transferred from the Joint Property that was


	
28

	 	

not placed in service on the property shall be credited as charged without gain or loss.




	
29

	 	
  


	
30

	 	
(3)   Condition "C" - Material that is not in sound and serviceable condition and not suitable for its original function until after


	
31

	 	

reconditioning shall be priced by multiplying the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C




	
32

	 	

(Taxes) by fifty percent (50%).




	
33

	 	 
	
34

	 	

The cost of reconditioning may be charged to the receiving property to the extent Condition "C" value, plus cost of




	
35

	 	reconditioning, does not exceed Condition "B" value.
	
36

	 	
  


	
37

	 	
(4)   Condition ''D" - Material that (i) is no longer suitable for its original purpose but useable for some other purpose, (ii) is


	
38

	 	obsolete, or (iii) does not meet original specifications but still has value and can be used in other applications as a substitute for
	
39

	 	
 items with different specifications, is considered Condition "D" Material. Casing, tubing, or drill pipe used as line pipe shall be


	
40

	 	
priced as Grade A and B seamless line pipe of comparable size and weight. Used casing, tubing, or drill pipe utilized as line


	
41

	 	
pipe shall be priced at used line pipe prices. Casing, tubing, or drill pipe used as higher pressure service lines than standard line


	
42

	 	pipe, e.g., power oil lines, shall be priced under normal pricing procedures for casing, tubing, or drill pipe. Upset tubular goods
	
43

	 	
shall be priced on a non-upset basis. For other items, the price used should result in the Joint Account being charged or credited


	
44

	 	with the value of the service rendered or use of the Material, or as agreed to by the Parties pursuant to Section 1.6.A (General
	
45

	 	
Matters).


	
46

	 	
  


	
47

	 	
(5)   Condition "E" -Junk shall be priced at prevailing scrap value prices.


	
48

	 	
  


	
49

	E.	
OTHER PRICING PROVISIONS


	
50

	 	 
	
51

	
  

	
(1)   Preparation Costs


	
52

	 	 
	
53

	 	

Subject to Section II (Direct Charges) and Section III (Overhead) of this Accounting Procedure, costs incurred by the Operator




	
54

	 	

in making Material serviceable including inspection, third party surveillance services, and other similar services will be charged




	
55

	 	

to the Joint Account at prices which reflect the Operator's actual costs of the services. Documentation must be provided to the




	
56

	 	

Non-Operators upon request to support the cost of service. New coating and/or wrapping shall be considered a component of




	
57

	 	

the Materials and priced in accordance with Sections IV.l (Direct Purchases) or IV.2.A (Pricing), as applicable. No charges or




	
58

	 	
credits shall be made for used coating or wrapping. Charges and credits for inspections shall be made in accordance with


	
59

	 	
COPAS MFl-38 ("Material Pricing Manual").


	
60

	 	 
	
61

	 	
(2)   Loading and Unloading Costs


	
62

	 	
  


	
63

	 	

Loading and unloading costs related to the movement of the Material to the Joint Property shall be charged in accordance with




	
64

	 	
the methods specified in COPAS MFI-38 ("Material Pricing Manual").


	
65

	 	
  


	
66

	 	
  























 




  





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COPAS 2005 Accounting Procedure


Recommended by COPAS










 



	1	3.	DISPOSITION OF SURPLUS
	2	 	 
	3	 	
Surplus Material is that Material, whether new or used, that is no longer required for Joint Operations. The Operator may purchase, but


	4	 	
shall be under no obligation to purchase, the interest of the Non-Operators in surplus Material.


	5	 	 
	6	 	
Dispositions for the purpose of this procedure are considered to be the relinquishment of title of the Material from the Joint Property to


	7	 	either a third party, a Non-Operator, or to the Operator. To avoid the accumulation of surplus Material, the Operator should make good
	8	 	
faith efforts to dispose of surplus within twelve (12) months through buy/sale agreements, trade, sale to a third party, division in kind, or


	9	 	other dispositions as agreed to by the Parties.
	
10

	  	  
	
11

	  	
Disposal of surplus Materials shall be made in accordance with the terms of the Agreement to which this Accounting Procedure is


	
12

	  	
attached. If the Agreement contains no provisions governing disposal of surplus Material, the following terms shall apply:


	
13

	  	  
	
14

	  	
▪     The Operator may, through a sale to an unrelated third party or entity, dispose of surplus Material having a gross sale value that


	
15

	  	
is less than or equal to the Operator's expenditure limit as set forth in the Agreement to which this Accounting Procedure is


	
16

	  	
attached without the prior approval of the Parties owning such Material.


	
17

	  	  
	
18

	  	
▪      If the gross sale value exceeds the Agreement expenditure limit, the disposal must be agreed to by the Parties owning such


	
19

	  	
Material.


	
20

	  	  
	
21

	  	
▪      Operator may purchase surplus Condition "A" or "B" Material without approval of the Parties owning such Material, based on


	
22

	  	
the pricing methods set forth in Section IV.2 (Transfers).


	
23

	  	  
	
24

	  	
▪      Operator may purchase Condition "C' Material without prior approval of the Parties owning such Material if the value of the


	
25

	  	
Materials, based on the pricing methods set forth in Section IV.2 (Transfers), is less than or equal to the Operator's expenditure


	
26

	  	
limitation set forth in the Agreement. The Operator shall provide documentation supporting the classification of the Material as


	
27

	  	
Condition C.


	
28

	  	  
	
29

	  	
▪      Operator may dispose of Condition "D" or "E" Material under procedures normally utilized by Operator without prior approval


	
30

	  	
of the Parties owning such Material.


	
31

	  	  
	
32

	
4.

	
SPECIAL PRICING PROVISIONS


	
33

	  	  
	
34

	  	
A.    PREMIUM PRICING


	
35

	  	  
	
36

	  	
Whenever Material is available only at inflated prices due to national emergencies, strikes, government imposed foreign trade


	
37

	  	
restrictions, or other unusual causes over which the Operator has no control, for direct purchase the Operator may charge the Joint


	
38

	  	
Account for the required Material at the Operator's actual cost incurred in providing such Material, making it suitable for use, and


	
39

	  	
moving it to the Joint Property. Material transferred or disposed of during premium pricing situations shall be valued in accordance


	
40

	  	
with Section IV.2 (Transfers) or Section IV.3 (Disposition of Surplus), as applicable.


	
41

	  	  
	
42

	  	
B.     SHOP-MADE ITEMS


	
43

	  	  
	
44

	  	
Items fabricated by the Operator's employees, or by contract laborers under the direction of the Operator, shall be priced using the


	
45

	  	
value of the Material used to construct the item plus the cost of labor to fabricate the item. If the Material is from the Operator's


	
46

	  	
scrap or junk account, the Material shall be priced at either twenty-five percent (25%) of the current price as determined in Section


	
47

	  	
IV.2.A  (Pricing)  or  scrap  value,  whichever  is  higher.  In  no  event  shall  the  amount  charged  exceed  the  value  of  the  item


	
48

	  	
commensurate with its use.


	
49

	  	  
	
50

	  	
C.     MILL REJECTS


	
51

	  	  
	
52

	  	
Mill rejects purchased as "limited service" casing or tubing shall be priced at eighty percent (80%) of K-55/J-55 price as determined in


	
53

	  	
Section IV.2 (Transfers). Line pipe converted to casing or tubing with casing or tubing couplings attached shall be priced as K-55/J-


	
54

	  	
55 casing or tubing at the nearest size and weight.


	
55

	  	  
	
56

	  	  
	
57

	  	
V. INVENTORIES OF CONTROLLABLE MATERIAL


	58	 	 
	59	 	 
	60	 	The Operator shall maintain records of Controllable Material charged to the Joint Account, with sufficient detail to perform physical inventories.
	61	 	 
	62	 	Adjustments to the Joint Account by the Operator resulting from a physical inventory of Controllable Material shall be made within twelve (12)
	63	 	months following the taking of the inventory or receipt of Non-Operator inventory report. Charges and credits for overages or shortages will be
	64	 	valued for the Joint Account in accordance with Section IV.2 (Transfers) and shall be based on the Condition "B" prices in effect on the date of
	65	 	physical inventory unless the inventorying Parties can provide sufficient evidence another Material condition applies.
	66	 	 





 




  





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	1	1.	DIRECTED INVENTORIES
	2	 	 
	3	 	Physical inventories shall be performed by the Operator upon written request of a majority in working interests of the Non-Operators 
	4	 	(hereinafter, "directed inventory"); provided, however, the Operator shall not be required to perform directed inventories more frequently 
	5	 	
than once every five (5) years. Directed inventories shall be commenced within one hundred eighty (180) days after the Operator receives 


	6	 	

written notice that a majority in interest of the Non-Operators has requested the inventory. All Parties shall be governed by the results of 




	7	 	any directed inventory.
	8	 	 
	9	 	
Expenses of directed inventories will be borne by the Joint Account; provided, however, costs associated with any post-report follow-up


	
10

	 	

work in settling the inventory will be absorbed by the Party incurring such costs. The Operator is expected to exercise judgment in keeping




	
11

	 	
expenses within reasonable limits. Any anticipated disproportionate or extraordinary costs should be discussed and agreed upon prior to


	
12

	 	
commencement of the inventory. Expenses of directed inventories may include the following:


	
13

	 	
  


	
14

	 	
A.   A per diem rate for each inventory person, representative of actual salaries, wages, and payroll burdens and benefits of the personnel


	
15

	 	
performing the inventory or a rate agreed to by the Parties pursuant to Section I.6.A (General Matters). The per diem rate shall also


	
16

	 	 be applied to a reasonable number of days for pre-inventory work and report preparation.
	
17

	 	
  


	
18

	 	B.   Actual transportation costs and Personal Expenses for the inventory team
	
19

	 	
  


	
20

	 	
C.   Reasonable charges for report preparation and distribution to the Non-Operators.


	
21

	 	
  


	
22

	2.	NON-DIRECTED INVENTORIES
	
23

	 	
  


	
24

	 	A.   OPERATOR INVENTORIES
	
25

	 	
  


	
26

	 	
Physical inventories that are not requested by the Non-Operators may be performed by the Operator, at the Operator's discretion. The


	
27

	 	expenses of conducting such Operator-initiated inventories shall not be charged to the Joint Account.
	
28

	 	
  


	
29

	 	
B.    NON-OPERATOR INVENTORIES 


	
30

	 	 
	
31

	 	

Subject to the terms of the Agreement to which this Accounting Procedure is attached, the Non-Operators may conduct a physical




	
32

	 	

inventory at reasonable times at their sole cost and risk after giving the Operator at least ninety (90) days prior written notice. The




	
33

	 	Non-Operator inventory report shall be furnished to the Operator in writing within ninety (90) days of completing the inventory
	
34

	 	
fieldwork.


	
35

	 	 
	
36

	 	
C.   SPECIAL INVENTORIES


	
37

	 	
  


	
38

	 	The expense of conducting inventories other than those described in Sections V.1 (Directed Inventories), V.2.A (Operator
	
39

	 	
Inventories), or V.2.B (Non-Operator Inventories), shall be charged to the Party requesting such inventory; provided, however,


	
40

	 	
inventories required due to a change of Operator shall be charged to the Joint Account in the same manner as described in Section


	
41

	 	
V.1 (Directed Inventories).


	
42

	 	 
	
43

	 	
  


	
44

	 	 
	
45

	 	
  


	
46

	 	
  


	
47

	 	
  


	
48

	 	
  


	
49

	 	
  


	
50

	 	 
	
51

	
  

	
  


	
52

	 	 
	
53

	 	
  


	
54

	 	
  


	
55

	 	
  


	
56

	 	
  


	
57

	 	
  


	
58

	 	 
	
59

	 	 
	
60

	 	 
	
61

	 	
  


	
62

	 	
  


	
63

	 	
  


	
64

	 	
  


	
65

	 	
  


	
66

	 	
  









  





 


 




  





16











  





















 



EXHIBIT  "D"







Attached to and made a part of that certain Operating Agreement dated effective September 30, 2013, by and between PetroShare Corp as Operator, and Rancher Energy Corp, US Energy Development Co., and Royale Investments, LLC as Non-Operators.







INSURANCE







As to all operations hereunder, Operator shall carry for the benefit and protection of the parties hereto the following insurance coverage:








	
    (i) 

	
Worker's Compensation or Employer's Liability Insurance as required by the laws of the states in which the operations are conducted.













	
    (ii)

	
Comprehensive General Liability Insurance, including contractual liability, with a combined single limit per occurrence of not less than $1,000,000 for bodily injury and property damage and a combined occurrence limit of $2,000,000.













	
   (iii)

	
Comprehensive Automobile Insurance, including hired and non-owned vehicles, with a combined single limit per occurrence of not less than $1,000,000 for bodily injury and property damage.













	
   (iv)

	
Liability Umbrella Insurance (excess of underlying insurance coverage mentioned above) with a combined limit per occurrence coverage of not less than $5,000,000.












The cost of the foregoing insurance coverage shall be charged to the parties pursuant to the Accounting Procedure (Exhibit "C") as follows: item (i) will be included in labor rates, items (ii) and (iv) will be charged to the joint account, and item (iii) is included in mileage rates.







If a Non-Operator wishes to obtain its own insurance coverage for any of the above categories, such party shall provide Operator with a certificate evidencing such coverage. In such event, Operator shall not invoice such party for its share of the cost of that particular coverage. Additionally, all such insurance coverages and all of the insurance coverages described above shall contain a waiver of subrogation in favor of all other parties hereto.







Each party may obtain its own well control or OEE insurance for its proportionate share of such obligation and provide Operator with a certificate evidencing such coverage. In the event a Non-Operator wishes to be covered under Operators OEE insurance, it shall give the Operator its written election to be covered under Operators policy and it shall be responsible for its proportionate share of such premiums and associated deductible expense and receive the coverage benefits as provided under such policy.







To the extent not covered by the aforementioned insurance, the liability of the parties hereto for damages or claims arising out of illness or personal injury to or death of any person or damage to or destruction or loss of property of any person or entity resulting from operations conducted hereunder shall be borne by the parties hereto in the proportions in which they bear the costs of such operations. Additionally, Operator shall not be liable to Non-Operator for damage to or for loss or destruction of jointly owned property from operations hereunder, unless such damage, loss, or destruction arises solely out of the gross negligence or willful misconduct of Operator.




 














  





  











  




























EXHIBIT H


 


MEMORANDUM OF OPERATING AGREEMENT AND FINANCING STATEMENT







Attached to and a made part of that certain Joint Operating Agreement dated September 30, 2013, between PetroShare Corp., Operator, and the signatory parties thereto, Non-Operators.








	
1.0

	
This Memorandum of Operating Agreement and Financing Statement (hereinafter called "Memorandum") shall be effective when the Operating Agreement referred to in Paragraph2.0 below becomes effective, that being September 30, 2013.













	
2.0

	
The parties hereto have entered into an Operating Agreement, providing for the development and production of crude oil, natural gas and associated substances from Buck Peak, (hereinafter called the "Contract Area"), and designating PetroShare Corp., as Operator to conduct such operations.













	
3.0

	
The Operating Agreement provides for certain liens and/or security interests to secure payment by the parties of their respective share of costs under the Operating Agreement. The Operating Agreement contains an Accounting Procedure along with other provisions which supplement the lien and/or security interest provisions, including non-consent clauses which provide that parties who elect not to participate in certain operations shall be deemed to have relinquished their interest until the consenting parties are able to recover their costs of such operations plus a specified amount. Should any person or firm desire additional information regarding the Operating Agreement or wish to inspect a copy of the Operating Agreement, said person or firm should contact the Operator.













	
4.0

	
The purpose of this Memorandum is to more fully describe and implement the liens and/or security interests provided for in the Operating Agreement, and to place third parties on notice thereof.













	
5.0 

	
In consideration of the mutual rights and obligations of the parties hereunder, the parties hereto agree as follows:













	
5.1    

	
The Operator 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 the Operating Agreement.













	
5.2     

	
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 costs.













	
5.3     

	
Each Non-Operator grants to Operator a lien upon its oil and gas rights in the Contract Area, and a security interest in its share of oil and or gas when extracted and its interest in all equipment, to secure payment of its share of expense, together with interest thereon at the rate provided in the Accounting Procedure referred to in Paragraph 3.0 above. To the extent that Operator has a security interest under the Uniform Commercial Code of the state, Operator 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 Operator for the secured indebtedness shall not be deemed an election of remedies or otherwise affect the rights or security interest for the payment thereof.








 
















  





  











  



























	
5.4     

	
The Operator grants to Non-Operator a lien and security interest equivalent to that granted to Operator as described in Paragraph 5.3 above, to secure payment by Operator of its own share of costs when due.













	
6.0 

	
For purposes of protecting said liens and security interest, the parties hereto agree that this Memorandum shall cover all right, title and interest of the debtor(s) in:













	
6.1     

	
Property  Subject to Security Interests













	
(A)     

	
All personal property located upon or used in connection with the Contract Area.













	
(B)      

	
All fixtures on the Contract Area.













	
(C)      

	
All oil, gas and associated substances of value in, on or under the Contract Area which may be extracted therefrom.













	
(D)     

	
All accounts resulting from the sale of the items described in subparagraph(c) at the wellhead of every well located on the Contract Area or on lands pooled therewith.













	
(E)      

	
All items used, useful, or purchased for the production, treatment, storage, transportation, manufacture, or sale of the items described in subparagraph (c).













	
(F)    

	
All accounts, contract rights, rights under any gas balancing agreement, general intangibles, equipment, inventory, farmout rights,  option farmout rights, acreage and or cash contributions, and conversion rights, whether now owned or existing or hereafter acquired or arising, including but not limited to all interest in any partnership, limited partnership, association, joint venture, or other entity or enterprise that holds, owns, or controls any interest in the Contract Area or in any property encumbered by this Memorandum.













	
(G)    

	
All severed and extracted oil, gas, and associated  substances now or hereafter produced from or attributable to the Contract Area, including without limitation oil, gas and associated substances in tanks or pipelines or otherwise held for treatment, transportation, manufacture, processing or sale.













	
(H)     

	
All the proceeds and products of the items described in the foregoing paragraphs now existing or hereafter arising, and all substitutions therefor, replacements thereof, or accessions thereto.













	
(I)      

	
All personal property and  fixtures  now  and  hereafter  acquired  in furtherance of the purpose of this Operating Agreement. Certain of the above-described items are or are to become fixtures on the Contract Area.













	
(J)      

	
The proceeds and products of collateral are also covered.













	
6.2     

	
Property Subject to Liens







 


 




 




  





  











  






 


 



	
(A)     

	
All real property within the Contract Area, including all oil, gas and associated substances of value in, on or under the Contract Area which may be extracted therefrom.













	
(B)      

	
All fixtures within the Contract Area.













	
(C)      

	
All real property and fixtures now and hereafter acquired in furtherance of the purposes of this Operating Agreement.













	
7.0

	
The above items will be financed at the wellhead of the well  or wells  located  on the Contract Area, and this Memorandum is to be filed for record in the real estate records of the county or counties in which the Contract Area is located, and in the Uniform Commercial Code records. All parties who have executed the Operating Agreement are also parties hereto.













	
8.0 

	
On default of any covenant or condition of the Operating Agreement,  in addition to any other remedy afforded by law or the practice of this state, each party to the agreement and any successor to such party by assignment, operation or law, or otherwise, shall have, and is hereby given and vested with, the power and authority to take possession of and sell any interest which the defaulting party has in the subject lands and to foreclose this lien in the manner provided by law.













	
9.0

	
Upon expiration of the subject Operating Agreement and the satisfaction of all debts, the Operator shall file of record a release and termination on behalf of all parties concerned. Upon the filing of such release and termination, all benefits and obligations under this Memorandum shall terminate as to all parties who have executed or ratified this Memorandum. In addition, the Operator shall have the right to file a continuation statement on behalf of all parties who have executed or ratified this Memorandum.













	
10.0

	
It is understood and agreed by the parties hereto that if any part, term or provision of this Memorandum is by the courts held to be illegal or in conflict with any law of the state where made the validity of the remaining portions or provisions shall not be affected, and the rights and obligations of the parties shall be construed and enforced as if the Memorandum did not contain the particular part, term or provision held to be invalid.













	
11.0 

	
This Memorandum shall be binding upon and shall inure to the benefit of the parties hereto and to their respective heirs, devisees, legal representatives, successors and assigns. The failure of one or more persons owning an interest in the Contract Area to execute this Memorandum shall not in any manner affect the validity of the Memorandum as to those persons who have executed this Memorandum.·













	
12.0 

	
A party having an interest in the Contract Area can ratify this Memorandum by execution and delivery of an instrument of ratification, adopting and entering into this Memorandum, and such ratification shall have the same effect as if the ratifying party had executed this Memorandum or a counterpart thereof. By execution or ratification of this Memorandum, such party hereby consents to its ratification and adoption by any party who may have or may acquire any interest in the Contract Area.













	
13.0

	
This Memorandum may be executed or ratified in one or more counterparts and all of the executed or ratified counterparts shall together constitute one instrument.  For the purposes
























  





  











  





















of recording, only one copy of this Memorandum with individual signature pages attached thereto needs to be filed of record.


 


 




	ATTEST OR WITNESS:	 	 	
OPERATOR


 


PetroShare Corporation


 

	 
	
 

	 	 	
By:  

	 
	
 

	 	 	 	 
	
 

	 	 	
 

	 
	 	 	 	
Type or print name 

	 
	 	 	 	 	 
	 	 	 	Title	 
	 	 	 	 	 
	 	 	 	Date: 	 










 




 





	ATTEST OR WITNESS:	 	 	
NON-OPERATORS


 


 U.S. Energy Development Corporation


 

	 
	
  

	 	 	
By: 

	 
	
  

	 	 	 	 
	
  

	 	 	
 

	 
	 	 	 	
Type or print name 

	 
	 	 	 	 	 
	 	 	 	Title:  	 
	 	 	 	 	 
	 	 	 	Date: 	 












 


 









	ATTEST OR WITNESS:	 	 	
NON-OPERATORS


 


 

	 
	
  

	 	 	
By: 

	 
	
  

	 	 	 	 
	
  

	 	 	
 

	 
	 	 	 	
Type or print name 

	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	 	 
	 	 	 	Date: 	 














ACKNOWLEDGMENTS




  





  











  
































Note:           The following forms of acknowledgment  are 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 	 	 )	 
	 	 	 )ss.	 
	COUNTY OF 	 	 )	 





 


 


This instrument was acknowledged before me on ______________________________, 2013, by







___________________________________________________________________________,


 




 


My commission expires:




 



	 	 	 	 
	 	 	Notary Public	 
	 	 	 	 





 


 


 


 


 







  



	STATE OF 	 	)	 
	 	 	)ss.	 
	COUNTY OF 	 	)	 





  





This instrument was acknowledged before me on ______________________________, 2013, by








___________________________________________________________________________,







 


My commission expires:





	 	 	 	 
	 	 	Notary Public	 
	 	 	 	 







 


 


 




  





  











  








 


 


INDIVIDUAL ACKNOWLEDGMENT:


 








  



	STATE OF 	 	)	 
	 	 	)ss.	 
	COUNTY OF 	 	)	 





  




This instrument was acknowledged before me on ______________________________, 2013, by








___________________________________________________________________________,







 


My commission expires:





	 	 	 	 
	 	 	Notary Public