Unassociated Document


    DRILLING
      AND OPERATING AGREEMENT

    Indigo
      Tapo 2006 5-Well Program 1

    


    THIS
      AGREEMENT made and entered into on July ___, 2006 between TAPO Energy, LLC,
      a
      West Virginia Limited Liability Company with offices at PO Box 235, West Union,
      WV 26456 (the "Operator"), and the Developers listed in Exhibit "A"
      (individually referred to as a "Developer" and collectively as the "Developers")
      with HUB Energy, LLC as its Advisor.

    


    WITNESSETH:

    


    WHEREAS,
      Operator, by virtue of certain oil and gas leases, has certain rights to develop
      oil and gas wells on the Drilling Sites (“Drilling Sites”) in areas identified
      in Exhibit "B" (the "Drilling Areas"); and

    


    WHEREAS,
      the parties hereto have reached an agreement to drill and develop the Drilling
      Sites as provided herein;

    


    NOW,
      THEREFORE, in consideration of the mutual covenants and agreements set forth
      herein and intending to be legally bound hereby, the parties agree as
      follows:

    


    
      	
            	1.	
              Drilling
                and Operation of Wells; Assignment of Wells; Operator's Reservation
                of
                

              Overriding
                Royalty; Representations; Outside Activities. 

            


    

    


    (a)
      The
      Operator, as Developer's independent contractor, a-grees to drill, complete
      (or
      plug and abandon) and operate five (5) wells in the Drilling Areas in accordance
      with the terms and conditions of this Agreement.

    


    (b)
      Upon
      completion of each well and payment in full by the Developers in accordance
      with
      Exhibit "C", Operator shall assign to the Developers the respective interest
      shown in Exhibit "D" in the Wells (“Wells”) located on the Drilling Sites ,
      which assignment shall be limited to the depth and area described in Exhibit
      "A". Each well shall be individually identified on Exhibit “D”.

    


    (c)
      Various parties shall receive an overriding royalty equal to one-sixteenth
      (1/16) of all gross revenues from all gas produced, saved and marketed from
      any
      well or wells drilled on the Drilling Sites, including any revenues received
      from any compressor and/or pipeline facilities or portions thereof that are
      a
      part of the facilities for such wells or from which outside revenues are
      received. The reservation of such royalty shall be absolute and shall not be
      affected by (i) Operator's resignation as Operator hereunder, (ii) the
      termination of this Agreement, (iii) the performance or nonperformance by
      Operator of its duties and obligations under this Agreement, or (iv) the
      delegation by Operator of its duties hereunder. This overriding royalty interest
      is in addition to the customary 12.5% royalty interest due to the
      landowner.

    



    
      
         

      

      
        
        

        
          

        

      

      
         

      

    


    


    (d)
      It is
      understood and agreed that the assignments described above and the oil and
      gas
      development activities contemplated by this Agreement relate only to the
      Drilling Sites described in Exhibit "B" as well as those determined in
      accordance with 1(f) and Wells described in Exhibit “D”. Nothing contained in
      this Agreement shall be interpreted to restrict in any manner the right of
      each
      of the parties hereto to conduct without participation of any other party hereto
      any additional activities relating to exploration, development, drilling,
      production or delivery of oil and gas on lands adjacent to or in the immediate
      vicinity of the aforesaid Drilling Sites or elsewhere.

    


    (e)
      Operator represents and warrants to Developer that: (i) attached hereto as
      Exhibit "E" will be true and correct copies of the Leases; (ii) to the best
      knowledge of Operator, Operator is not currently in default with respect to
      the
      performance of any of the terms and conditions of the leases and presently
      knows
      no basis for claiming any such default by it; (iii) no consent or approval
      of
      any third party is currently required with respect to the assignment of the
      Drilling Sites to Developer in the manner contemplated by this Agreement; and
      (iv) each assignment of the Drilling Sites will effectively assign to the
      Developer such right, title and interest of the Operator in and to the Drilling
      Sites which such assignment purports to assign. Operator shall arrange for
      a
      title examination to be conducted on the Drilling Sites in order to obtain
      appropriate abstracts, opinions, certificates and other information necessary
      to
      determine the adequacy of title to the applicable Lease and the fee title of
      the
      lessor to the property covered by the Lease. The results of such title
      examination will be made available to any Developer upon request.

    


    (f)
      If
      Operator determines, with respect to any Drilling Site, before operations
      commence with respect to such Drilling Site, based upon available production
      information for any other wells which may have been recently drilled in the
      immediate area of such Drilling Site, or upon discovery of title defects, or
      upon such other evidence as Operator may obtain, that it would not be in the
      best interest of the parties hereto to drill a well on such Drilling Site,
      then
      Operator shall notify the Developers of such determination and such Drilling
      Site shall thereupon be withdrawn from this Agreement. Operator shall attempt
      to
      acquire an additional drilling site(s) for the purpose of providing the
      necessary number of drilling sites required to drill the number of wells
      specified in Section 1(a), but Operator shall notify, by certified mail,
      Developers of each replacement drilling site. If a majority in interest of
      the
      Developers do not reject it in writing within seven (7) days after notification
      from Operator, the new drilling site shall become subject to this Agreement.
      If
      rejected, Operator shall propose another drilling site in place of the rejected
      drilling site.

    


    


    2.        
      Interest
      of Parties

    


    Exhibit
      "D" lists the respective interests of Operator and each Developer in the net
      revenues (after payment of royalties, overriding royalties, production payments,
      share of development and operating ex-penses) and ownership of the wells,
      equipment and production with respect to the wells to be drilled hereunder,
      except as otherwise provided in Section 20.


    
      
         

      

      
        2

        
          

        

      

      
         

      

    


    


    


    3.    Drilling
      of Wells

     

    (a)
      Except as otherwise provided in Exhibit "C", the price for each well shall
      include all tangible and intangible costs which may be incurred in drilling
      and
      completing such well, including without limi-tation, the costs of site
      preparation and restoration, permits and bonds, roadways, surface damages,
      power
      at the site, water, Operator's overhead and profit, rights-of-way, drilling
      rigs, collection tanks and other equipment necessary or appropriate to dispose
      of brine, equipment and material, costs of title examination, access rights,
      logging, cementing, perforating, fracturing, casing, meter (other than utility
      purchase meters), separator and geological and engineering services but shall
      not cover the costs and expenses of:

    


    (i)
      services, equipment and any facilities necessary or appropriate for the
      production and sale or disposal of oil and/or natural gas liquids;
      and

    


    (ii)
      drilling through, casing and cementing a void in a coal mine or seam with
      respect to any well;

    


    Any
      such
      extra costs shall be paid by the parties, in proportion to their respective
      interests in the well with respect to which such expenses were incurred, based
      on Exhibit "D" or, if not set forth therein, at Operator's invoice costs for
      expenses incurred or third party services performed and materials furnished,
      plus ten percent (10%), which ten percent shall be in lieu of any charge by
      Operator for its profit or overhead, 

    


    (b)
      Operator shall determine the timing of and the order of the drilling of the
      wells. Any well drilled hereunder shall be drilled to a depth sufficient to
      thoroughly test the Gordon sand horizons, or to 3,000 feet, except in the case
      that the operator deems it prudent to drill to a depth of 5,500 feet, or
      sufficient depth, to test the Benson Formation. The Operator shall have the
      right to direct stoppage of work at any time prior to reaching the depth
      specified herein whenever a natural open flow of gas occurs which is in a
      sufficient quantity that continued operations are hazardous in the sole opinion
      of Operator, or whenever the natural open flow is in excess of 5OO Mcf/day.
      

    


    (c)
      Operator shall have the exclusive right to pay for, own, use and assign, any
      pipeline and dehydration facilities in connection with the wells being drilled
      hereunder; provided, however, that sufficient capacity will be maintained for
      the delivery of gas under this Agreement.

    


    (d)
      Operator shall determine whether or not to run the prod-uction casing for an
      attempted completion or to plug and abandon the wells drilled hereunder, which
      determination shall be final and binding on all parties after the well has
      been
      drilled to target depth. If any Developer shall request Operator to employ
      any
      procedures which cause delay or additional cost, then such Developer shall
      pay
      for all such additional costs.

    


    (e)
      If
      Operator elects not to run production casing for an attempted completion, the
      well shall be considered to be a dry hole under this Agreement. Operator will
      plug and abandon the well in the manner as prescribed by regulations of the
      appropriate governmental agencies and regulatory bodies. Operator shall furnish
      a plugging report showing the well has been plugged. The charge for plugging
      and
      abandoning the well shall be paid by the Developers, and Operator shall refund
      the portion of the price of such well to the Developers set forth in Exhibit
      "F".


    
      
         

      

      
        3

        
          

        

      

      
         

      

    


    


    


    (f)
      If
      election is made by Operator to run production casing, Operator shall so advise
      the Developers as soon as practical and the same shall be run and cemented
      according to acceptable field practices for the area, and shall be perforated
      at
      points selected by Operator, and the fracturing treatment shall be performed
      in
      accordance with customary practices in the area.

    


    (g)
      This
      Agreement shall not be construed as a guarantee as to the commercial
      productivity of the wells covered by this Agreement. Operator shall not be
      liable for or act as a guarantor of services or materials provided by third
      parties or against any geological faults, geological accidents, or other
      geological circumstances, which may appear during or subsequent to the
      completion of any well hereunder which affects the commercial productivity
      of
      such well. Any costs and expenses of remedial work shall be considered operating
      costs under Section 8.

    


    4.     Operator
      Responsibilities

    


    (a) The
      Operator shall conduct and direct and have full control of all operations as
      permitted and required by this Agreement. Operator shall, in addition to its
      other obligations hereunder:

    


    
      	 	
              (i)

            	
              determine
                at all times when any well shall be completed, plugged and abandoned
                or
                remedial work performed and which sands to complete (whether upon
                completion of drilling operations or
                thereafter);

            


    

    


    
      	 	
              (ii)

            	
              manage
                and conduct all field operations in connection with drilling, testing,
                completing, recompleting, equipping, operating and producing of the
                wells;

            


    

    


    
      	 	
              (iii)

            	
              maintain
                all wells, equipment, pipelines and facilities in good working order
                during the useful life thereof; and

            


    

    


    
      	 	
              (iv)

            	
              perform
                the necessary administrative and accounting
                functions.

            


    

     

    (b) The
      decision of Operator shall be final and conclusive, and shall be binding upon
      all parties. Operator shall conduct all such operations in a good and
      workmanlike manner, but it shall have no liabilities as Operator to any party
      for losses sustained, or liabilities incurred, except such as may result from
      Operator’s gross negligence or willful misconduct.

    


    



    5.    Employees

    


    The
      number of employees and their selection, hours of employment and compensation
      shall be determined by Operator. All employees shall be employees of the
      Operator.

    


    6.    Sale
      of Production

    


    (a) Subject
      to Sections 10 and 20 hereto, each Developer hereby reserves the exclusive
      right
      to take in kind or separately dispose of his proportionate share of all oil
      and
      gas produced from the wells to be drilled hereunder, exclusive of production
      which may be used in development and producing operations, preparing and
      treating oil and gas for marketing purposes, production unavoidably lost and
      production used to fulfill any free gas obligations under the terms of the
      applicable lease.

    


    
      	 	
              (i)

            	
              If
                any Developer exercises the right to take his share of oil and gas
                in
                kind, such Developer shall pay or deliver, or cause to be paid or
                delivered to the Operator, all royalties and overriding royalties
                based
                upon the highest price then being paid by industrial, utility, pipeline
                or
                other purchasers for gas of a like kind , at the point of delivery
                to
                either the purchaser or pipeline transporting facilities. Such price
                shall
                include all appropriate compression and transportation fees as the
                case
                may be.

            


    

    


    
      	 	
              (ii)

            	
              In
                the event Developer elects to separately dispose of his share of
                oil and
                gas, all royalties and overriding royalties shall be based on the
                contract
                price includiong brokerage fees, if any, and transportation and
                compression fees as long as the gas is in Operator’s possession prior to
                the delivery point.

            


    

    


    (b) Any
      extra
      expenditure incurred in taking in kind or separate disposition by any Developer
      of its proportionate share of the production shall be borne by the Developer,
      and such Developer shall reimburse Operator for any loss of income that Operator
      incurs by reason of such separate disposition.

    


    (c) If
      any
      Developer fails or neglects to make the arrangements necessary to take in kind
      or separately dispose of his proportionate share of oil and gas produced from
      any well covered by this Agreement within thirty (30) days following completion
      of such well, the Operator shall have the right but not the obligation, to
      sell
      such oil and gas to others at any time and from time to time, for the account
      of
      the Developer at the best price reasonably obtainable under the circumstances.
      Any such purchase or sale by the Operator shall be subject to the right of
      the
      Developer to exercise its right to take in kind or to separately dispose of
      its
      share of oil and gas not previously delivered to any purchaser or committed
      to
      any purchaser. Any such purchase or sale by Operator of any Developer’s share of
      oil and gas shall be only for such reasonable periods of time as are consistent
      with the minimum needs of the industry under the particular circumstances,
      but
      in no event for a period in excess of one and one-half years.

    (d) With
      respect to operations hereunder, Developers agree to release Operator from
      any
      and all losses, damages, injuries, claims and causes of action arising out
      of,
      incident to or resulting directly or indirectly from Operator’s interpretation
      or application of rules, rulings, regulations or orders of the Department of
      Energy or predecessor or successor agencies to the extent such interpretation
      or
      application was made in good faith. Each Developer further agrees to reimburse
      Operator for any amounts applicable to such Developer’s share of production that
      Operator may be required to refund, rebate or pay as a result of any such
      incorrect interpretation or application, together with any interest and
      penalties thereon.


    
      
         

      

      
        4

        
          

        

      

      
         

      

    


    


    


    7.    Production
      Proceeds

    


    (a)
       To
      facilitate the collection and disbursement of the proceeds from the sale of
      oil
      and gas from any well covered by this Agreement, each Developer hereby
      irrevocably appoints Operator as his exclusive agent to collect any and all
      proceeds from the sale of such oil and gas whether such sale is made by the
      Developer or the Operator on behalf of the Developer and hereby agrees to name
      Operator as such agent in any contract for the separate disposition of such
      oil
      and gas. Any person or persons making payment to Operator shall be released
      from
      any and all liability with regard to the proceeds of such sale.

    


    (b) Operator
      shall make a diligent effort to collect all payments due but shall have no
      liability with regard to any nonpayment of proceeds from the sale of such oil
      and gas.

    


    (c) All
      monies collected by Operator shall be held in trust for the account of all
      parties.

    


    (d) Subject
      to Sections 10 and 20 hereof, Operator shall disburse, no later than the
      twenty-eighth (28th) day of the month following the month in which proceeds
      of
      sale are received, the entire proceeds of such sale, less payment of lessor's
      royalties and any overriding royalties, production payments, operating expenses
      or other charges under Section 8 and delinquent advance payments under Section
      9; provided, however, if Operator enters into a take-or-pay contract which
      provides a credit to the purchaser for any payments by it for failing to take
      delivery, Operator shall have the right, but not the obligation, to deposit
      all
      or a portion of such payments in escrow, Operator shall have the right to retain
      such monies in escrow or disburse them from time to time to such person or
      persons as it determines are entitled thereto. If Operator disburses such monies
      to any person who is later determined to be not entitled thereto Operator shall
      have no liability to Developers or any other persons with respect thereto other
      than to use its best efforts to recover such monies for the account of the
      person who is lawfully entitled thereto, Ac-cordingly, Developers hereby release
      Operator from any and all claims, liabilities and damages related to or arising
      out of such payments or disbursements provided that Operator acted in good
      faith.

    


    8.     Operating
      Fees and Costs

    


    (a) 
      Commencing at the time that a well drilled hereunder begins to produce, Operator
      shall be entitled to an operating fee of $____ per month for each well being
      operated under this Agreement in lieu of direct charges by Operator for its
      services or the use of its equipment for the normal operation and maintenance
      of
      such wells. Such operating fee shall be subject to annual adjustments as
      provided in Subsection (b) below and shall cover all normal, regularly recurring
      operating expenses for the production and sale of oil and/or natural gas,
      including without limi-tation, well tender, routine maintenance and minor
      adjustments, reading meters, recording production, maintaining appropriate
      books
      and records, preparing reports to the Developers, and collecting and disbursing
      revenues, but shall not cover the costs and expenses of:


    
      
         

      

      
        5

        
          

        

      

      
         

      

    


    


    (i)
      lease
      rentals and royalties, including shut-in roy-alties not deducted under Section
      7
      above which have been paid by the Operator for the wells covered by this
      Agreement;

    


    (ii)
      All
      taxes of every kind and nature, including, without limitation, ad valorem taxes,
      assessed or levied upon or in connection with the operation thereof, or the
      production there-from, and which taxes have been paid by the Operator for the
      benefit of the Developers;

    


    (iii)
      materials purchased or furnished by Operator for use on the wells;

    


    (iv)
      transportation of materials, including brine, except where employees of Operator
      transport material in the normal course of operation;

    


    (v)
      tubing, bailing or cleaning out a well and other services requiring equipment
      which is necessary to the efficient operation of a well;

    


    (vi)
      services, equipment and facilities necessary or ap-propriate for the production
      and sale or disposal of oil and/or natural gas liquids;

    


    (vii)
      services of attorneys, accountants, geologists, pe-troleum engineers or other
      professionals relating to operations hereunder.

    


    (viii)
      any applications, filings or reports to either the gas purchaser(s) or
      governmental agencies.

    


    Any
      such
      extra costs shall be paid by the parties, in proportion to their respective
      interests in the well with respect to which such expenses were incurred, based
      on Operator's invoice costs for expenses incurred or third party services
      performed and materials furnished, plus ten percent (10%), which ten percent
      shall be in lieu of any charge by Operator for its profit or overhead, except
      (i) that the charges for maintenance, repair and operation of gathering lines
      and compression and dehydration facilities shall be at a rate established by
      Operator, in its sole discretion, at the time of installation of such
      facilities, provided such rate is competitive with like facilities in the
      industry and (ii) that the charges for professional services shall be at cost,
      which shall be reasonable under the circumstances.

    


    



    
      
         

      

      
        6

        
          

        

      

      
         

      

    


    


    (b) The
      operating fee shall be adjusted as of the first day of April of each year
      following the effective date of this Agreement. The adjustment shall be computed
      by multiplying the then applicable operating fee by the percentage increase
      or
      decrease in the average weekly earnings of “Crude Petroleum, Natural Gas and
      Natural Gas Liquids” workers for the last calendar year compared to the
      preceding calendar year as published by the United States Department of Labor,
      Bureau of Labor Statistics, and shown in the Employment and Earnings
      Publications, Monthly Establishment Data, Hours and Earnings Statistical Table
      C-2, Index Average Weekly earnings of “Crude Petroleum, Natural Gas and Natural
      Gas Liquids” workers, SIC Code #131.2, or any successor index thereto, since
      January 1st
      in the
      year in which this Agreement was executed, in the case of the first adjustment,
      and since the previous adjustment date in the case of each subsequent
      adjustment. The adjusted operating fee shall be the operating fee currently
      in
      use, plus or minus the computed adjustment.

    


    
      	 	
              (c)

            	
              The
                monthly operating fee shall be charged as
                follows:

            


    

     

    
      	 	
              (i)

            	
              An
                active well producing for any portion of the month shall be charged
                for
                the entire month;

            


    

    


    
      	 	
              (ii)

            	
              Gas
                wells shall be charged if directly connected to a permanent sales
                outlet
                even though temporary shut-in due to overproduction or failure of
                the
                purchaser to take the production;

            


    

    


    
      	 	
              (iii)

            	
              A
                producing oil and/or gas well permanently shut down but on which
                plugging
                operations are deferred shall not be charged after the time shut
                down is
                effected; and

            


    

    


    
      	 	
              (iv)

            	
              A
                well being plugged back, drilled deeper, or which is undergoing any
                type
                of workover that requires the use of a drilling rig capable of drilling
                shall not be charged for that period of time during which the well
                does
                not produce.

            


    

    


    (d) Except
      as
      otherwise provided herein, the Operator shall promptly pay and discharge all
      costs and expenses incurred in operations pusuant to this Agreement and charge
      each of the Developers with his respective share of such costs and expenses.
      Each Developer shall pay to the Operator all such costs and expenses within
      15
      days after the receipt of th invoice from Operator.

    


    
      	 	
              9.

            	
              Advance
                Payment

            


    

    


    (a) The
      operator, at its election, shall have the right from time to time to demand
      and
      receive payment in advance from the Developers of their respective shares of
      the
      estimated costs to be incurred in operations hereunder during any month or
      in
      plugging and abandoning any wells which right may be exercised by submission
      to
      each Developer of an AFE statement of such estimated costs, together with an
      invoice forits share thereof. Each such statement and invoice shall be submitted
      on or before the twentieth day of the month preceding the month for which the
      advance is requested. Each Developer shall pay the amount shown on such invoice
      within fifteen days after the date thereof. Proper adjustments shall be made
      monthly between advances and actual costs (including the allowance for
      Operator's overhead), so that each Developer shall bear and pay its
      proportionate share of actual costs incurred, and no more.


    
      
         

      

      
        7

        
          

        

      

      
         

      

    


    


    (b) The
      Operator shall have the right to withhold all or a portion of production
      payments and place such amounts in an escrow account for the purpose of plugging
      and abandoning the wells covered by this Agreement, which right may be exercised
      by submission to each Developer of an itemized statement of such estimated
      plugging costs. Thereafter, Operator shall annually submit to Developers an
      itemized statement of the estimated plugging cost and amount then on deposit.
      Operator shall disburse all proceeds, which accumulate in excess of estimated
      plugging costs (including the allowance for Operator's overhead), as set forth
      in Section 7.

    


    10.   Operator's
      Remedies

    


    In
      the
      event any Developer fails to pay its share of advances, costs and expenses
      hereunder, the Operator shall have the following remedies:

     

    (i) Developer
      shall pay interest monthly on the unpaid balance at the prime rate in effect
      at
      PNC Bank, Pittsburgh, Pennsylvania, on the first day of the month in which
      delinquency occurs plus Two (2%) Percent, plus attorney's fees, court costs
      and
      other costs in connection with the collection of unpaid amounts, and Operator
      shall further have the right, without prejudice to any other rights or remedies
      to:

    


    (ii) 
      withhold
      payment of any working interest under this Agreement or any other account due
      such Developer; or

    


    (iii)
       when
      operations are being conducted under Paragraph 20 (Additional Operations) the
      Operator may elect to treat such Developer as a "Non-Consenting" party with
      respect to such well for any unpaid amount. In the event that Operator exercises
      its rights under this clause, the defaulting Developer shall be deemed to have
      relinquished to Operator, and Operator shall be deemed to own, such Developer's
      interest in any such well or wells provided; however, that Operator shall assume
      the obli-gations of the defaulting Developer with respect to such well or
      wells.

    


    11.   Term
      of Agreement

    


    (a)
      This
      Agreement shall remain in full force and effect for as long as any well covered
      by this Agreement is producing oil or gas hereunder in "paying quantities".
      Each
      party shall be responsible for any existing obligation at the time this
      Agreement terminates. For purposes of this Agreement, the term "paying
      quantities" shall mean a well producing sufficient volumes of oil and/or gas
      to
      yield a reasonable profit over and above the operating costs, maintenance,
      royalties, overriding royalties and marketing the oil and/or
      gas.


    
      
         

      

      
        8

        
          

        

      

      
         

      

    


    


    


    (b)
      The
      Operator shall notify the Developer whenever the 1OO% net working interest
      proceeds equal $500.00 or less for an unrestricted oil and/or gas well
      production period.

    


    (c)
      In
      the event any six (6) continuous production periods are insufficient to pay
      all
      costs and expenses under Section 11(a) hereof, and (i) no restrictions are
      imposed upon the productivity of such well; or (ii) no other operations are
      proposed under this Agreement; then Operator shall schedule the well for
      plugging and abandonment at the sole cost and expense of the Developers.
      Operator shall then proceed to plug and abandon any such well, subject to
      suitable weather and the availability of equipment, upon receipt in advance
      of
      the estimated costs thereof as set forth in Sections 7 and 9 hereof. Operator
      shall bear no responsibility or obligation for any cost related thereto. The
      termination of this Agreement or the abandonment of any well shall not relieve
      the Developers from any liability, which has accrued or attached prior to the
      date of such termination.

    


    (d)
      In
      lieu of plugging and abandoning such well under Section 11(c) hereof Operator
      shall have the right, but not the obligation, to takeover the well or sell
      the
      well and the appropriate equipment and materials at a purchase price determined
      by Operator.

    


    (i)
      In
      the event Operator elects to takeover or sell such well the Operator will return
      the purchase price and any escrow monies accrued for such well to the
      Developers, or apply to any accounts due Operator, less $ 10,000.00 which shall
      remain in Operator’s escrow bonding account for the plugging and abandonment
      liability.

    


    In
      either
      event the Developers shall assign their interest as directed by Operator,
      without warranty, express or implied, as to title, quantity, quality or fitness
      for use of the equipment and material, together with their interests in the
      well, equipment, material and the lease to the land upon which the well is
      located, free and clear of all liens and encumbrances, and each Developer
      appoints the Operator as its attorney-in--fact with full power of substitution
      to execute, deliver and record the appropriate assignment or other instrument
      of
      transfer for and on behalf of the Developer. This power-of-attorney is coupled
      with an interest and shall be irrevocable. Upon such assignment the well shall
      be removed from this Agreement provided, however, such removal shall not relieve
      De-velopers from any liability, which has accrued or attached prior to the
      date
      of such removal. Furthermore, Operator agrees to hold the Developers harmless
      from and against any and all liabilities in connection with plugging and
      abandonment of any such wells.

    


    12.   Audit

    


    (a) Any
      Developer, upon ten (10) days' written request to the Operator, shall have
      the
      right to audit, during normal business hours, the Operator's books and records
      relating to the receipts, disbursements and accounting of any and all wells
      covered by this Agreement.

    


    (b)
      The
      Operator shall, upon written request, furnish any Developer with copies of
      all
      well logs, production records and any other pertinent data.


    
      
         

      

      
        9

        
          

        

      

      
         

      

    


    


    13.    Assignment/Delegation
      By Operator

    


    Operator
      shall have the sole and absolute right to pledge or assign its interest in
      the
      wells, production, equipment or leasehold interests covered hereby and to
      delegate its duties hereunder to another operator, without notice to
      Developers.

    


    14.  Assignment
      by Developer

    


    (a)
      Any
      Developer shall have the sole and absolute right to
      assign
      any interest it acquires pursuant to this Agreement. Such assignment may be
      made
      with or without notice to Operator; provided, however, until such time as
      Operator has received written notice and copies of such assignment, it may
      deal
      solely with such Developer and need not recognize any party claiming through
      or
      under such Developer.

    


    (b)
      If
      the interest of any Developer is subsequently divided among and owned by
      co-owners, Operator may, at its discretion, require such co-owners to appoint
      a
      single trustee or agent with full authority to receive notices, reports, and
      distribution of the proceeds of production; to approve expenditures; to receive
      billings for and approve and pay all costs, expenses and liabilities incurred
      hereunder; to exercise any rights granted
      to such co-owners hereunder; to grant any approvals or author-izations required
      or contemplated; and to deal generally with, and with power to bind, such
      co-owners with respect to all activities and operations contemplated by this
      Agreement; provided, however, that each such co-owner shall continue to have
      the
      right to enter into all contracts for sale of their respective share of oil
      and
      gas produced from the wells covered by this Agreement.

    


    15.   Liability
      of Developers

    


    (a) The
      liability of the Developers shall be several, not joint or collective. Each
      Developer shall be liable only to the extent of his respective share of the
      development, operating or other expenses for the wells covered by this
      Agreement.

    (b) It
      is not
      the intention of the parties to create, nor shall this Agreement be construed
      as
      creating, a mining or other partnership or association, or to render them liable
      as partners or joint venturers for any purpose. Operator shall be deemed to
      be
      an independent contractor,

    


    16.     Provision
      Concerning Taxation

    


    (a)
      Each
      of the parties elects, under the authority of Section 761(a) of the Internal
      Revenue Code of 1954, as amended (the "Code"), to be excluded from the
      application of all of the provisions of subchapter K of Chapter 1 of Subtitle
      A
      of the Code. If the income tax laws of the state or states in which the property
      covered hereby is located may contain, or may hereafter contain, provisions
      similar to those contained in Subchapter K of the Code, under which a similar
      election is permitted, each of the Developers authorizes and directs the
      Operator to execute such election or elections on its behalf and to file the
      election with the proper government office or agency. Beginning with the first
      taxable year of operations hereunder, each party agrees that the deemed election
      provided by Section 1.761-2(b) (2) (ii) of the Regulations under the Code will
      apply; and no party will file an application under Section 1.761-2(b) (3) (i)
      and (ii) of said Regulations to revoke said election. If requested by the
      Operator to do so, each Developer agrees to execute and join in such an
      election.


    
      
         

      

      
        10

        
          

        

      

      
         

      

    


    


    


    (b)
      If
      any tax assessment is considered unreasonable by the Operator, it may at its
      discretion protest such valuation within the time and manner prescribed by
      law,
      and prosecute the protest to a final determination When any such protested
      valuation shall have been finally determined, the Operator shall pay the
      assessment for the Developers, together with any interest and penalty accrued,
      and the total cost, including all costs relating to prosecution of the protest,
      shall then be assessed against the Developers, and be paid by them, as provided
      herein.

    


    17.    Insurance

    


    (a)
      At
      all times while operations are conducted hereunder, the Operator shall comply
      with the workmen's compensation laws of the state(s) where operations are being
      conducted. Operator shall also carry or provide such insurance for the benefit
      of the Developers as may be outlined in Exhibit "G" attached hereto. Operator
      shall require all contractors engaged in work on or for the wells covered by
      this Agreement to comply with the workmen's compensation laws of the state(s)
      where operations are being conducted and to maintain such other insurance as
      is
      required of the Operator in Exhibit "G".

    


    (b)
      Operator shall carry employer's liability and other in-surance as required
      by
      the laws of the State of West Virginia.

    


    (c)
      If
      the parties hereto or any of them shall insure their respective risks beyond
      the
      specific limits of insurance required to be carried by the Operator under the
      terms of this Agreement, the benefits of such insurance shall inure to the
      parties procuring and maintaining the same, respectively, and the cost of such
      insurance shall be borne by such parties, respectively, without reimbursement
      from the other and without an accounting therefor.

    


    (d)
      It is
      further understood and agreed that the Operator is not a guarantor of the
      financial responsibility of the insurer with whom such insurance is carried,
      and
      that except for gross negligence or willful misconduct, Operator shall not
      be
      liable to Developers for any loss suffered on account of the insufficiency
      of
      the insurance carried or the insolvency of the insurer with whom it is carried.
      Operator shall not be liable to Developers for any loss by reason of Operator's
      inability to procure or maintain such insurance. Operator agrees that if at
      any
      time during the life of this Agreement it is unable to obtain or maintain such
      insurance it shall immediately notify Developers in writing of such
      fact.

    


    18.    Claims
      and Lawsuits

    


    (a)
      If
      any party to this Agreement is sued on an alleged cause of action arising out
      of
      the operations hereunder, it shall give prompt written notice of the suit to
      the
      other parties. The Operator shall defend all such actions, and the defense
      of
      lawsuits shall be under the general direction of Operator's
      attorneys.


    
      
         

      

      
        11

        
          

        

      

      
         

      

    


    


    


    (b)
      Any
      suit may be settled during litigation by the Operator. All expenses incurred
      in
      the defense of suits, together with the amount paid to discharge any final
      judgment, shall be considered costs of operations and shall be charged to and
      paid by all parties in proportion to their interests provided that any such
      claim or claims do not result from the Operator's gross negligence or willful
      misconduct and/or are not covered by Operator's insurance.

    


    (c)
      Damage claims caused by and arising out of operations conducted for the joint
      account of the Developers shall be handled by the Operator and its attorneys.
      The settlement of claims of this kind shall be within the discretion of the
      Operator and, if settled, the sums paid in settlement shall be charged as
      expense to and be paid by all Developers in proportion to their respective
      interests, except such claims caused by or arising out of the gross negligence
      or willful misconduct of the Operator which are not covered by the Operator's
      insurance.

    


    19.    Force
      Majeure

    


    (a)
      If
      Operator is rendered unable, wholly or in part, by force majeure to carry out
      its obligations under this Agreement, then the Operator shall give to all
      Developers prompt written notice (by certified mail) of the force majeure with
      reasonably full particulars concerning it; thereupon, the obligations of the
      Operator, so far as it is affected by the force majeure, shall be suspended
      during but no longer than, the continuance of the force majeure. Operator shall
      use all possible diligence to remove the force majeure as quickly as
      possible.

    


    (b)
      The
      requirement that any force majeure shall be remedied with all reasonable
      dispatch shall not require the settlement of strikes, lockouts, or other
      difficulty by the Operator, contrary to its wishes, which shall be entirely
      within the discretion of the Operator.

    


    (c)
      The
      term "force majeure" as used herein shall mean an act of God, strike, lockout,
      or other industrial disturbance, act of the public enemy, war, blockade, riot,
      lightning, fire, storm, flood, explosion, governmental restraint, unavailability
      of equipment, geologic accident, and any other cause whether of the kind
      specifically enumerated above or otherwise, which is not reasonably within
      the
      control of the Operator.

    


    20.     Additional
      Operations

    


    (a) Any
      party
      may submit a written proposal to (i) drill a new well or wells on any Drilling
      Site, or (ii) to rework, recomplete or complete any sands which were not
      completed at the initial completion, deepen or plug back any existing well
      or
      wells on a Drilling Site, all subject to the terms and conditions set forth
      below.

    


    (b) Operator
      shall act in a fiduciary capacity to approve or disapprove any proposal
      submitted by a Developer under Subsection (a) above if the Operator approves
      any
      proposed operation, it shall give each Developer thirty (30) days prior written
      notice indicating the proposed operation, the work to be performed, the
      location, the proposed depth, objective formation and the estimated cost of
      operation. The charge for performing work under Subsection (a) above shall
      be
      Operator's cost plus ten (10%) percent. Before the expiration of the notice
      period, each Devel-oper shall give notice to the Operator indicating whether
      or
      not such Developer wishes to participate in any of the operations by the
      Operator under this Subsection. If any Developer elects not to participate
      or
      fails to notify the Operator of its intention to participate within the time
      prescribed, he shall thereafter be deemed to be a "nonconsenting Party" and
      he
      shall not participate in any of the operations covered under this Section 20.
      Those parties who do elect to participate in the operations covered under this
      Section 20 shall be deemed to be "Consenting Parties" and shall participate
      in
      the benefit of the operations hereunder, and the work shall be commenced by
      the
      Operator and completed with due diligence subject to the availability of
      equipment.


    
      
         

      

      
        12

        
          

        

      

      
         

      

    


    


    (c) The
      entire cost and risk of conducting such operations shall be borne by the
      Consenting Parties in the proportions that their respective interest bear to
      the
      total interest of all Consenting Parties. Consenting Parties shall keep the
      leasehold estates involved in such operations free and clear of all liens and
      encumbrances of every kind created by or arising from the operations of the
      Consenting Parties. If an operation results in a dry hole, the Consenting
      Parties shall plug and abandon the well and restore the surface location at
      their sole cost, risk and expense. If any well drilled, reworked, recompleted,
      completed, deepened or plugged back under the provisions of this Section results
      in the production of oil and/or gas in paying quantities, the Consenting Parties
      shall complete and equip the well to produce at their sole cost and risk, and
      such well shall be operated by the Operator at the expense and for the account
      of the Consenting Parties. Upon commencement of operations for the drilling,
      reworking, recompleting, completing, deepening or plugging back of any such
      well
      by Consenting Parties in accordance with the provisions of this Section, each
      Nonconsenting Party shall be deemed to have relinquished to Consenting Parties,
      and the Consenting Parties shall own and be entitled to receive, in proportion
      to their respective interests, all of such Non-Consenting Party's interest
      in
      the well, its leasehold operating rights, and share of production therefrom
      until the proceeds or market value thereof (after deducting production costs,
      taxes, royalties, overriding royalties and other interests payable out of or
      measured by the production from such well accruing with respect to such interest
      until its reverts) shall equal the total of the following:

    


    (i)
      300%
      of each such Nonconsenting Party's share of the cost of any newly acquired
      surface equipment beyond the wellhead connections (including, without
      limitation, stock tanks, sepa-rators, treaters, pumping equipment and piping),
      plus 300% of each such Nonconsenting Party's share of the cost of operation
      of
      the well commencing with first production and continuing until each such
      Nonconsenting Party's relinquished interest shall revert to it under this
      Section, it being agreed that each Nonconsenting Party's share of such costs
      and
      equipment will be that interest which would have been chargeable to each
      Non-consenting Party had it participated in the well from the beginning of
      the
      operation; and

    


    (ii)
      300%
      of that portion of the costs and expenses of drilling, reworking, recompleting,
      deepening or plugging back, testing and completing, and 300% of that portion
      of
      the cost of newly acquired equipment in the well (to and including the wellhead
      connections), which would have been chargeable to such Nonconsenting Party
      if it
      had participated therein.


    
      
         

      

      
        13

        
          

        

      

      
         

      

    


    


    


    (d) In
      the
      case of any reworking, completing, recompleting, plugging back or deeper
      drilling operation, the Consenting Parties shall be permitted to use, free
      of
      cost, all casing, tubing and other equipment in the well, but the ownership
      of
      all such equipment shall remain unchanged; and upon abandonment of a well after
      such reworking, com-pleting, recompleting, plugging back or deeper drilling,
      the
      Consenting Parties shall account for all such equipment to the owners thereof,
      with each party receiving its proportionate part in kind or in
      value.

    


    (e) Within
      sixty (60) days after the completion of any oper-ation under this Section,
      the
      party conducting the operations for the Consenting Parties shall furnish each
      Nonconsenting Party with an inven-tory of the equipment in and connected to
      the
      well, and an itemized statement of the cost of drilling, deepening, reworking,
      plugging back, testing, completing, recompleting and equipping the well for
      production or, at its option, the Operator, in lieu of an itemized statement
      of
      such costs of operation, may submit a detailed statement of monthly billings,
      Each month thereafter, during the time the Consenting Parties are being
      reimbursed as provided above, the Operator shall furnish the Nonconsenting
      Parties with an itemized statement of all costs and liabilities incurred in
      the
      operation of the well, together with a statement of the quantity of oil and
      gas
      produced from it and the amount of proceeds realized from the sale of the well's
      working interest production during the preceding month. Any amount realized
      from
      the sale or other disposition of equipment newly acquired in connection with
      any
      such operation which would have been owned by a Nonconsenting Party had it
      participated therein shall be credited against the total unreturned costs of
      the
      work done and of the equipment purchased, in determining when the interest
      of
      such Nonconsenting Party shall revert to it as above; provided, however, if
      there is a credit balance it shall be paid to such Nonconsenting
      Party.

    


    (f) If
      and
      when the Consenting Parties recover from a Non-consenting Party's relinquished
      interest the amounts provided for above, the relinquished interest of such
      Nonconsenting Party shall automatically revert to it and from and after such
      reversion such Nonconsenting Party shall own the same interest in such well,
      the
      operating rights and working interest therein, the material and equipment in
      or
      pertaining thereto, and the production therefrom as such Nonconsenting Party
      would have owned had it participated in the drilling, reworking, deepening,
      recompleting, completing or plugging back of said well. Thereafter, such
      Nonconsenting Party shall be charged with and shall pay its proportionate part
      of the further cost of the operation of said well in accordance with the terms
      of this Agreement.

    


    21.    Notices

    


    All
      notices authorized or required between the parties, and required by any of
      the
      provisions of this Agreement, shall, unless otherwise specifically provided,
      be
      given in writing by United States Certified Mail and
      addressed to the party to whom the notice is given at the addresses listed
      in
      this Agreement. All notices under this Agreement required to be given to the
      Developers by the Operator shall be deemed given when the Operator deposits
      such
      notice with the U.S. Certified Mail. All notices under this Agreement required
      to be given to the Operator by the Developers shall be deemed given when
      received by the Operator. Each party shall have the right to change its address
      at any time, and from time to time, by giving written notice to the
      others.


    
      
         

      

      
        14

        
          

        

      

      
         

      

    


    


    


    22.     Miscellaneous

    


    (a)
      Each
      Developer certifies that he has the authority to execute this Agreement and
      that
      he will indemnify Operator for any damages, costs and expenses that may be
      caused by any lack of authority and furthermore each Developer agrees to take
      all steps necessary to obtain such authority.

    


    (b)
      This
      Agreement sets forth the entire understanding between the parties with respect
      to the subject matter hereof. There are no restrictions, agreements, promises,
      representations, warranties, cove-nants or undertakings other than those
      expressly set forth herein. This Agreement supercedes all prior negotiations,
      agreements and understandings between the parties, whether written or oral,
      with
      respect to the subject matter hereof.

    


    (c)
      The
      provisions of this Agreement may be waived, altered, amended, or supplemented,
      in whole or in part, only by an amendment signed by the parties
      hereto.

    


    (d)
      No
      failure or delay on the part of any party in exercising any power, right or
      privilege hereunder shall operate as a waiver thereof, nor shall any single
      or
      partial exercise of any such power, right or privilege preclude any other or
      further exercise thereof or of any other right, power or privilege. All rights
      and remedies existing under this Agreement are cumulative to, and not exclusive
      of, any rights or remedies otherwise available.

    


    (e)
      The
      parties shall from time to time do and perform such other and further acts
      and
      execute and deliver any and all such other and further instruments as may be
      required by law or reasonably requested by either party to establish, maintain
      and protect the respective rights and remedies of
      the
      other
      and to carry out and effect the intents and purposes of this
      Agreement.

    


    (f)
      This
      Agreement shall be governed by and construed in accordance with the laws of
      the
      State of West Virginia without giving effect to the rules governing conflict
      of
      laws.

    


    (g)
      This
      Agreement may be executed in one or more counterparts, each of which shall
      be
      deemed an original, but all of which together shall constitute one and the
      same
      Instrument and the provisions of this Agreement shall be binding on the
      signatory parties hereto, whether executed by all or a part of the
      Developers.

    


    (h)
      All
      article, section or paragraph headings contained in this Agreement and the
      order
      of articles, sections and paragraphs are for convenience only and shall in
      no
      way limit or otherwise affect the interpretation of any of the terms or
      provisions hereof.


    
      
         

      

      
        15

        
          

        

      

      
         

      

    


    


    


    (i)
      All
      pronouns, singulars, plurals and any variations thereof shall be deemed to
      refer
      to the masculine, feminine, neuter, singular or plural as the identity of the
      person or persons may require.

    


    (j)
      This
      Agreement shall be binding upon and shall inure to the benefit of the
      undersigned parties and their respective heirs, personal representatives,
      successors and assigns.

    


    23.     Other
      Provisions

    


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

    


    


    [THE
      REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]

    


    


    


    
      
         

      

      
        16

        
          

        

      

      
         

      

    


    


    IN
      WITNESS WHEREOF, the parties hereto have executed this Agreement or have caused
      this Agreement to be executed by their duly authorized officers on the date
      first written above.

    


    Indigo
      Tapo 2006 5-Well Program 1

    


    
      	
               

            	
              OPERATOR

            
	
              ATTEST:

            	
              TAPO
                ENERGY, LLC

            
	 	 
	 	 
	 	 
	
              ___________________________

            	
              By:______________________________

            
	
               

            	
              Name:

            
	
               

            	
              Title:

            
	 	 
	
               

            	
              DEVELOPER

            
	
              ATTEST:

            	
              INDIGO-ENERGY,
                INC.

            
	 	 
	 	 
	 	 
	
              ___________________________

            	
              By:______________________________

            
	 	
              Name:
                David Larson

            
	
               

            	
              Title:
                President

            
	 	 
	 	 
	
              WITNESS

            	
              DEVELOPER

            
	
               

            	
              INDIGO-ENERGY
                PARTNERS, LP

            
	
              .

            	By:
              Indigo -Energy, Inc
	
               

            	
              Its
                General Partner

            
	 	 
	 	 
	
              ___________________________

            	
              By:_____________________________

            
	 	
              Name:David
                Larson

            
	
              Title:
                President

            	 
	 	 
	
              WITNESS:

            	
              HUB
                ENERGY, LLC

            
	 	 
	 	 
	
              ___________________________

            	
              By:______________________________

            
	
               

            	
              Name:

            
	
               

            	
              Title:

            
	 	 


    

    



    
      
         

      

      
        17

        
          

        

      

      
         

      

    


    EXHIBIT
      “A"

    


    Developers

    


     

    
      	
              Developers

            	 	
              Amount
                Contributed

            	 	
              Working
                Interest %

            	 
	 	 	 	 	 	 
	 	 	 	 	 	 
	
              Indigo-Energy,
                Inc.

            	 	
              $

            	
              1,071,875

            	 	 	
              61.25

            	
              %

            
	 	 	 	 	 	 	 	 
	
              Indigo
                Energy Partners, LP

            	 	
              $

            	
              459,375

            	 	 	
              26.25

            	
              %

            


    

    



    
      
         

      

      
        18

        
          

        

      

      
         

      

    


    Exhibit
      “B”

    


    Drilling
      Areas

    


    (Maps
      to be Provided)

    


    



    
      
         

      

      
        19

        
          

        

      

      
         

      

    


    Exhibit
      “C”

    


    Cost
      per well

    


    The
      turnkey price per well shall be $350,000.
      In
      exchange for the turnkey price, Tapo Energy, LLC will provide one oil and/or
      gas
      well complete to the pipeline in accordance with the terms of this Drilling
      and
      Operating Agreement. In general, the turnkey cost shall include: the price
      for
      each well shall include all tangible and intangible costs which may be incurred
      in drilling and completing such well, including without limi-tation, the costs
      of site preparation and restoration, permits and bonds, roadways, surface
      damages, power at the site, water, Operator's overhead and profit,
      rights-of-way, drilling rigs, collection tanks and other equipment necessary
      or
      appropriate to dispose of brine, equipment and material, costs of title
      examination, access rights, logging, cementing, perforating, fracturing, casing,
      meter (other than utility purchase meters), separator and geological and
      engineering services but shall not cover the costs and expenses of those items
      explained in Section 3 of this Drilling and Operating Agreement.

    



    
      
         

      

      
        20

        
          

        

      

      
         

      

    


    Exhibit
      “D”

    


    Individual
      Interests and Well Assignments

    


    Each
      individual Developer will be assigned the Working and Net Revenue Interests
      attributable by nature of the amount contributed and stated on Exhibit “A”. Each
      well will be noted along with the corresponding lease.

    


    The
      Assignment Document will specify the assignment of wells and a 500 foot radius
      for wells drilled less than 4,000 feet and a 1,000 foot radius for wells drilled
      in excess of 4,000 feet. The well radius will not extend beyond the boundary
      of
      the lease, or the assigned area of any previously drilled well by Operator
      or
      assigns.

    


    Only
      shallow oil and gas production and drilling rights are to be assigned under
      this
      Agreement. As used herein, the word “shallow” with reference to oil and gas or
      oil and gas sands or horizons as may be encountered from the surface down to
      and
      including a depth of 6,000 feet below the surface or 100 feet below the lowest
      Elk horizon , whichever is deeper.

    



    
      
         

      

      
        21

        
          

        

      

      
         

      

    


    


    


    Exhibit
      “E”

    


    All
      Leases will be attached along with a summary

    



    
      
         

      

      
        22

        
          

        

      

      
         

      

    


    


    


    Exhibit
      “F”

    


    Costs
      to
      be refunded should a well be deemed to be a “Plug and Abandon” well before being
      completed.

    



    
      
         

      

      
        23

        
          

        

      

      
         

      

    


    


    


    Exhibit
      “G”

    


    Insurance
      Requirements of Operator

    


    
      
         

      

      
        24