Document:

Unassociated Document

    
      [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

     

    PARTICIPATION
AGREEMENT

     

    THIS
AGREEMENT made and entered into this 6th of
April 2009, by and between

    

    ARCHER
EXPLORATION, INC.

    1701
Westwind Dr. Suite #125

    Bakersfield,
CA 93301

    A Nevada
corporation, hereinafter called "Operator," and

     

    AMERICAN
PETRO-HUNTER, INC.

     

    1694
Falmouth Road, Suite 123

     

    Centerville,
MA 02632

     

     

    A
Massachusetts corporation, hereinafter called "Participant"
WITNESSETH:

     

    WHEREAS
Archer has acquired all right, title and interest to the [*] (the Prospect") and
the land, geological and geophysical information and data used to develop the
concept of the Prospect. In addition, Archer is the owner of oil and gas leases
(hereinafter referred to as "said leases") totaling [*], as more fully described
in Exhibit "A-4" to Exhibit "C" of this Agreement covering and embracing the
lands (hereinafter referred to as "said lands") in the Area of Mutual Interest
(hereinafter referred to as the "AMI"), shown on the attached Exhibit "A" and
described as follows:

     

    [*]

     

    Pursuant
to this Participation Agreement, Archer will make a portion of its working
interest in the [*] available to the Participants. Each Participant shall be
obligated to pay its proportional share of the acquisition costs, including the
anticipated oil and gas lease acquisition costs, which costs are deemed paid in
full with the consideration tendered with this Agreement, together with the
drilling and completing costs of the Test Well provided for in the attached
Operating Agreement; estimates of these costs are set out in the "Authorization
For Expenditure" attached hereto as Exhibit "B" in this Participation
Agreement.

     

    WHEREAS
Participant desires to earn an assignment of Twenty-Five Percent of One Hundred
Percent (25% of 100%) Archer's leasehold working interest in said lands and the
AMI for the consideration of $200,000.00, on conditions hereinafter set
forth:

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      

       

    

    NOW
THEREFORE, in consideration of the mutual covenants and agreements herein
contained, the parties hereto agree as follows:

     

    1.           For
the purposes of this Agreement, the following definitions and/or interpretations
shall apply:

     

    (a) Initial
Test Well is a well drilled to sufficient depth to test for the presence of oil
or gas on a given property within the AMI.

     

    (b) A
Completed Well is a well which has been fully equipped for the taking of
production, through and including the tanks for an oil well and through and
including the Christmas tree for gas.

     

    (c) Paying
quantities means a quantity (in the judgment of a reasonable and prudent
operator) of oil, gas (including any gaseous hydrocarbons produced with oil)
and/or gas (including any liquid hydrocarbons produced with gas) sufficient to
repay, with a reasonable profit, the cost and expense of operating the
well.

     

    (d) Contract
depth is a depth sufficient to fully test the [*], whichever is first
encountered. This depth is an estimated distance, which will be actually
determined based on results of the seismic study to be conducted per Section 2
below.

     

    (e) A Dry
Hole is a well drilled to contract depth that is plugged and abandoned as being
incapable of commercial production.

     

    (f) Term of
Agreement is as long as operations are being conducted on the leased lands or
until terminated under a provision of this Agreement.

     

    (g) Net
Revenue is that revenue derived from the sale of hydrocarbons from the oil/gas
well after costs associated with the production of the same as described in the
COPAS Agreement, which is attached to the Operating Agreement, have been
deducted.

     

    (h) Seismic
Survey shall mean the acquisition of additional Seismic Data over the Prospect
area, either 2D or 3D as determined by Operator, and the processing of the data
acquired.

     

    (i) Prospect
is the land, geological and geophysical information and data used to develop the
concept to locate and extract hydrocarbons from the lands within an A M
I.

     

    (j) Earning
shall mean that the Participant has paid its entry fee and pro rata share of all
costs of the operations in connection with the Prospect up to and including the
completion of the initial Test Well. (k) Participant assignment of Interest
shall mean any action or attempted action by Participant that would or could
result in a change in the name of the entity holding title to or exercising
control over Participant's right, title or interest in and to the Prospect.
Further, any action resulting in a change of ownership, or control of ownership
of Participant, including but not limited to a change from private to public
ownership, shall be deemed an assignment or attempt to assign, as contemplated
under this Agreement.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    2. Participant
hereby agrees to (i) pay for, acquire, assume and be responsible for its
undivided share of Archer's rights, interests and obligations under and pursuant
to the acquisition and operation of the Prospect and (ii) abide and be bound by
each and all of the terms and provisions of any oil and gas leases, acquired by
Archer, the costs thereof and (iii) the exploration and development costs of the
[*], including seismic study and the drilling and testing of the initial Test
Well on said prospect. In general, each Participant will be responsible for
their pro rata share of the cost of the Prospect, which shall include the
completion of the initial Test Well, and will thereby earn and own an undivided
working interest in the applicable leases proportionate to their participation
interest hereunder, that being Twenty-Five Percent of One Hundred Percent (25%
of 100%) of the working interest.

     

    By the
consideration tendered with this Agreement, Participant shall be deemed to have
paid its pro rata share of all fees and costs of the Prospect, including land
acquisition and seismic, up to the drilling of the Initial Test Well. Not
included in this amount are delay rental payments for leases previously acquired
or the cost of drilling and completing the Initial Test Well. Cash calls may be
made by Operator from time to time for delay rental payments.

     

    Operator
will issue a cash call for Participant's pro rata share of the cost of drilling
the Initial Test Well sufficiently in advance of the drilling of the Initial
Test Well to insure that all funds are collected by Operator prior to the
signing of a drilling contract for drilling rig. Additional cash calls in
connection with the drilling and completion of the Initial Test Well shall be
made as set forth in this Agreement and in
the Operating Agreement, as appropriate.

    

    3. Pursuant
to this Participation Agreement and the Operating Agreement attached hereto as
Exhibit "C", Archer, or its assigns, shall serve as Operator for the Prospect.
All operations will be conducted under the terms and conditions of the said
Participation Agreement, or the Operating Agreement which names Archer, or its
assigns, as Operator, as appropriate. Except as provided for in Paragraph 4
below, each Participant(s) hereunder agrees to abide by the decision of the
majority in interest of Participants as to all elections under the Operating
Agreement.

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    4.           Commencing
with the signing of this Participation Agreement, Operator shall perform such
tasks necessary to develop the Prospect with the goal of drilling and completing
the Initial Test Well for the production of Hydrocarbons from the lands in the
AML Participant and Operator agree to the terms and conditions of Section 5
below, which specifies how the duties are to be performed by Operator prior to
the commencement of actual drilling operations. Nothing in this Agreement
precludes the cessation of all activities in connection with this Prospect in
the event that the Operator's recommendation drawn from the Seismic Study
results in the agreement of Participant and Operator that the Initial Test Well
will not produce hydrocarbons in paying quantities_ In which case, the
Participant will be deemed not to have earned and the Parties to this Agreement
shall have no further obligations to each other. Participant understands that
Operator's recommendation is only its best assessment of the Seismic Data and is
no guarantee of the presence or absence of hydrocarbons under the leased
lands.

    

    All AFEs
and elections attached thereto are due and payable at the Office of Operator, no
later than close of business on the fifteenth (15th)
calendar day following the Participant(s) receipt of the AFE. If that date falls
on a Saturday, Sunday, or recognized holiday, the next calendar day will be
used, unless there is a rig on site, in which case Participant has twenty-four
(24) hours to notify Operator of its election. Participant(s) agrees to pay its
pro rata share of costs on a given AFE, even if the total cost exceeds that
shown on the AFE. Failure to timely pay ANY AFE shall be deemed to be an
election not to participate in the [*].

    

    Subsequent
to earning, Participant(s) shall have the right to independently exercise its
"non-consent" rights, under the terms and conditions set forth in the Operating
Agreement with respect to any operation for which Particpant(s) has the right to
exercise non-consent rights under the Operating Agreement. Upon proposing or
receipt of a proposal under the provisions of Articles VI, Paragraph B., 1., of
the Operating Agreement, Operator shall immediately give the written notice set
forth in said Article VI, Paragraph B., 1., of the Operating Agreement to the
Participant hereunder. The Participant shall have fifteen (15) days within which
to notify Operator whether or not they wish to participate in the cost of the
proposed operation, unless there is a rig on site, in which case Participant
shall have twenty-four (24) hours to notify Operator of its election. Failure to
timely notify Operator of its election shall constitute an election not to
proceed in accordance with the proposed operation but to go "Non-Consent" per
the terms of Article VI, Paragraph B., 2. of the Operating Agreement. Any
Participant electing not to participate pursuant to this non-consent provision
shall suffer forfeiture of any and all right, title and interest in the [*]. If
a Participant goes non-consent on any operation subsequent to hook-up of the
Initial Test Well, it shall retain the interest previously earned.

    

    Notwithstanding
any other provision of this Agreement, in no event shall the Participant be
entitled to participate on a "non-consent" basis with respect to the Initial
Test Well as set forth in the AFE and in Article VI, of the Operating Agreement
or any subsequent operations.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    Any
election, by Participant, not to participate prior to earning, whether by formal
notice or by failure to elect and/or to timely pay, shall result in the
forfeiture of any and all of Participant's right title and interest in the
[*].

     

    5.           Operator's
duties shall be:

     

    (a) [*]

     

    (b) to
conduct a study of the Seismic Data and issue a report of its findings to the
Participant.

     

    (c) to report
to Participant a recommendation as to the suitability of the Prospect for the
drilling of a Test Well, the location and depth of same.

     

    (d) [*]

     

    (e) to
maintain leases held and acquired by paying rentals and extending terms, where
necessary. During the term of this Agreement the Operator shall keep the said
leases free and clear from all liens.

     

    (f) to issue
AFEs and Cash Calls to fund operations.

     

    (g) to drill,
with Participant’s participation, the Initial Test Well on lands within the
AMI.

     

    (h) to
operate the production of any hydrocarbons found on the Leased Lands from the
Initial Test Well and/or any follow up wells under the terms and provisions of
the Joint Operating Agreement.

     

    
      	
               
      

            	
              6.

            	
              (a)

            	
              If
      it is determined by Operator, based upon its analysis of the Seismic Data,
      that there is a probability of the Initial Test Well producing in paying
      quantities, [*], or a date mutually acceptable to both parties, at a
      location mutually acceptable between Operator and Participant, initially
      presumed to be located in [*]. Should Operator and Participant disagree,
      Participant shall not unreasonably withhold its consent to Operator's
      proposal.  Thereafter Operator shall diligently and continuously
      prosecute the drilling of said test well in a proper and workmanlike
      manner to contract depth. Operator shall furnish Participant with copies
      of daily drilling reports as well as copies of all logs. Participant shall
      have on-site access to all operations on the subject lands. Participant's
      access shall be at its sole risk.

            

    

    

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    (b) In the
event any well provided for herein is lost for any reason prior to being drilled
to contract depth, or Operator has encountered during the drilling of any well
mechanical difficulty or formation or condition which would render further
drilling impractical or impossible, Operator shall plug and abandon such well
and thereafter commence a substitute well at a mutually agreed location within
forty-five (45) days after cessation of Operators drilling operations in the
prior well, or at a time mutually agreed between Operator and Participant. In
the event of a disagreement, Participant shall not unreasonably withhold its
consent in these matters. Any substitute well drilled hereunder shall be drilled
subject to the same terms and conditions and to the same depth as provided for
the well so lost or abandoned. Any reference herein or hereafter made to the
test well shall be deemed to be a reference to any substitute well or wells
which may be drilled there for.

    

    (c) In the
event the test well, or substitute well there for is abandoned after reaching
contract depth due to the well being incapable of producing oil and/or gas in
paying quantities, Operator shall have the right to commence a second test well
within ninety (90) days after abandonment of the test well, or at a time
mutually agreed between the Operator and Participant, at a location mutually
acceptable between Operator and Participant. In the event of a disagreement,
Participant shall not unreasonably withhold its consent in these matters. Once
consent (election to participate) is given, Operator shall diligently and
continuously prosecute the drilling of the second test well in a proper and
workmanlike manner to contract depth and complete said test well within 45 days
from the date of commencement.

    

    (d) By the
performance of the covenants and conditions hereof and upon completion of the
test well as a producer of oil and/or gas in paying quantities and in accordance
with the terms and conditions hereof, Participant shall earn and receive within
fifteen (15) days thereof an interest in said lands as follows:

    

    (1) An
assignment of twenty-five percent of One Hundred Percent (25% of 100%) of
Archer's working interest in the AMI. The assignment to Participant from
Operator shall be subject to an overriding royalty being the difference between
lessor royalty and twenty five percent (25.0%). Archer covenants and agrees to
deliver to Operator no less than a seventy-five percent (75.0%) net revenue
interest.

    

    (2) In
addition, any new leasehold interest acquired within the AMI during the term
hereof by Operator shall be subject to said overriding royalty interest reserved
by Operator, being the difference between lessor royalty and twenty five percent
(25.0%). All information acquired in the drilling of any well by Operator in the
AMI shall be furnished to Participant(s) in a timely manner and at no cost to
Participant(s).

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    (3) Within
three-hundred and sixty-five (365) days from and after the date of the
commencement of production of oil or gas in paying quantities in the test well,
or at a time mutually agreed between the Operator and Participant(s), Operator
shall have the right to commence drilling operations of the next well.
Operations for drilling of each successor well thereafter may commence within
three-hundred and sixty-five (365) days from and after the cessation of drilling
operations in the preceding well, or at a time mutually agreed between the
Operator and Participant(s), until the leased land has been fully developed. As
used in this paragraph, the term "cessation of drilling operations" shall not
include a temporary stoppage of drilling operations in the same well, nor to a
stoppage of longer duration for such purposes where such stoppage is approved in
writing by Operator. In the event of a disagreement, Participant(s) shall not
unreasonably withhold its consent in these matters. This Section of the
Participation Agreement is subject to the terms and conditions of the Leases
held in the AMI. In. the case of any conflict between the two, the requirements
of the Leases shall prevail.

     

    7. Operator
shall have the right to contract out for services and assign duties to qualified
entities in the performance of its obligations under this
Agreement.

    

    8. Participant
shall be responsible for the timely payment of its proportionate share of any
and all expenses in connection with the Prospect, including but not limited to
the drilling and completion of the Initial Test Well.

    

    9. Each
party hereto shall be liable and responsible for and shall indemnify and hold
the other harmless (including costs and attorney's fees) from and against any
claim or actions following injury to, illness or death of any person and any
loss or damage to any property occurring in connection with the performance or
non­performance of this agreement only to the extent of its own negligence
and that of its agents, servants, employees and contractors.

    

    10. The
Initial Test Well shall be drilled subject to the terms and conditions of the
geological requirements set forth in Exhibit "A-2" to the Operating Agreement,
which is attached hereto and made a part hereof.

    

    11. All
operations on the leased lands within the AMI shall be governed by a mutually
acceptable Operating Agreement with, among other attachments, a COPAS Accounting
Procedure. The said Operating Agreement and Accounting Procedure is attached
hereto as Exhibit "C". For the purpose of determining Operator's reimbursable
costs and expenses for any well in which Operator retains a working interest,
the said COPAS Accounting Procedure, as herein modified, shall control. In the
event of a conflict between the provisions of the Operating Agreement and/or the
Accounting Procedure and this Agreement, the terms of the latter shall
control.

     

    12. If any
well is completed as a producer of oil and/or gas in paying quantities, Operator
shall furnish to Participant(s), within ninety (90) days after the date of
completion, an itemized statement of the cost of drilling, testing, completing
and equipping the well, together with an inventory of the material and equipment
therein, thereon and used in connection therewith and Operator shall thereafter
furnish Participants with a monthly itemized statement of the cost of operations
and the quantities and qualities of oil, gas or other minerals which are
produced from said well, together with the amount of proceeds from the sale of
such production in the preceding month; such reports, together with a complete
well record shall be furnished to Participants.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    13. If a
lease described herein covers less that a full oil and gas leasehold estate in
any lands described herein under such lease, or if Operator's interest in such
lease covering any lands described herein under such lease is less than the full
oil and gas leasehold estate (excluding and disregarding any applicable royalty,
overriding royalty, production payment or other burden to which leasehold estate
is subject), then the overriding royalty reserved out of the production from the
lands in which Operator's interest in the oil and gas lease bears to the full
oil and gas leasehold estate in such land, and the interest in the well in which
Operator may acquire a working interest shall be in the proportion that the oil
and gas leasehold estate in such lease covering the lands described herein bears
to the full oil and gas leasehold estate in said lands.

    

    14. Each
extension of any of the said leases, in whole or in part, shall maintain and
continue in effect the rights and interests reserved by Operator in said leases
so extended and in said lands covered thereby. Should a renewal or new lease or
leases covering the said lands, or a part of or interest in the said lands, or a
part of or interest in such a lease, be acquired by Operator, or by a third
party wholly or partly for Operator or Operator's benefit, within three (3)
years from the date of the expiration of the primary term of said lease, the
rights and interests herein reserved by Operator shall attach and apply to each
renewal or new lease, the lands described therein and estate created thereby
with the same result and effect as such reserved rights and interests attach and
apply to the said lease, the said lands or in the estates created by the said
lease. Should Participant, acting as Agent for the Operator, acquire any
additional acreage within the AMI in addition to the [*] described above,
Participant shall assign said leases to Operator. Operator shall reimburse
Participant(s) for all of its approved expenses related to the acquisition.
Operator shall maintain rights and interest in the additional acreage the same
as in all other acreage subject to this Agreement.

     

    15.           The
provisions of this paragraph 15 shall be applicable to all operations conducted
by Operator in which Participant, as to the interest in the said lease covered
by this Agreement, is participating in an operation with a working
interest.

     

    (a) Operator
shall drill all wells necessary to protect the said lands from drainage through
offset wells to said lease(s).

    

    (b) If
Operator should elect to abandon any well either drilled on the said lands or on
said unit of production, or if any well either on the said lands or on said unit
of production ceases to produce in paying quantities and if actual drilling
operations for a replacement well or reworking operations are not commenced
within thirty (30) days thereafter, Operator shall immediately inform
Participant in writing of such fact and Participant shall have the option, to be
exercised within fifteen (15) days, to reacquire free of cost the rights
assigned to Operator hereunder free and clear of liens and encumbrances insofar
as said rights cover and embrace the lands attributable to any such well, if
Participant elects to reacquire any of said lease(s) (or any part or interest as
herein provided), Participant shall also have the option to acquire any well,
together with the material in and around such well then on said lands and
necessary in the operation of such well at a price equal to the reasonable
salvage value of said materials. If Participant elects to take over a well, it
does so with the understanding that it accepts all obligations in connection
with said well, including but not limited to all abandonment costs. Further,
Participant(s) must present to Operator, at the time of notification of intent
to take over a well, proof of a "DOGGR Bond".

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    (c) In the
event Operator desires to surrender any of the said lease(s) as to all or any
part of said lands covered thereby or to allow any of said lease(s) to terminate
or expire, Operator shall notify Participant at least sixty (60) days in advance
of the anniversary date specified in such lease (or the date to be surrendered,
if other than the anniversary date) and Participant shall have fifteen (15) days
after receipt of such notice of its election to take a reassignment of said
lease as to the portion thereof to be relinquished or to be allowed either to
expire or terminate. Should Participant elect to receive a reassignment, it
shall be delivered by Operator not less than fifteen (15) days prior to the
anniversary date of any such lease (or proposed date of surrender). Any
reassignment under terms hereof shall be free of cost to
Participant.

     

    (d)           As
to each well that Operator drills on the leased lands, or lands within the AMI,
Operator shall notify Participant in writing of the following
items:

     

    (1) The exact
legal description of the location.

    (2) The date
actual drilling is commenced.

    (3) The total
depth drilled.

    (4) The date
of completion.

    (5) Whether
completed as a producer of oil and/or gas or as a dry hole.

    (6) The date
any production commences.

    (7) The date
any well is shut -in.

    (8) The date
and amount of payment of any shut-in royalty.

     

    Such
written notice shall be given to Participant within five (5) days after the
occurrence of each of said items.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    (e)           Should
Operator commence any well which will be drilling over the end of the primary
term of any of the said lease(s), Operator shall give Participant written notice
of such drilling at least ten (10) days prior to the end of such primary
term.

     

    16.           Any
notices given or required to be given hereunder shall be accomplished as set
forth below. Operator's address and telephone number are:

     

    ARCHER
EXPLORATION, INC.

    1701
Westwind Drive, Suite 125

    Bakersfield,
CA 93301

    (661)
631-1700

     

    Participant's
address and telephone number are:

     

    AMERICAN
PETRO-HUNTER, INC.

    1694
Falmouth Road, Suite 123

    Centerville,
MA 02632

    (480)
626-5331

     

    Each
Participant shall promptly advise Operator, in writing, of its current address
and telephone number to be used in connection with the giving of any notices
hereunder.

    

    The time
for such receiving party to give any notice in response thereto shall begin to
run on the day following the date the originating notice is received, and
responsive notice shall be deemed given when deposited in the United States mail
or private express courier, properly addressed and with postage or charges
prepaid. Any notice or response sent by Fax with hard copy via U. S. Mail shall
be deemed delivered on the date of fax transmission.

    

    17. Operator,
prior to commencing operations for any well on the leased lands shall, conduct
title work and make reasonable effort to cure any title defects found. Operator
shall keep Participant advised of these efforts. Operator shall promptly furnish
Participant(s) with copies of all title reports, abstracts and attorney's title
opinions obtained by it relating to said lease(s). Operator and Participant
shall make available to each other, any title information it may have pertaining
to said lease(s). Neither party shall be liable for the accuracy of any title
information furnished pursuant to the foregoing. Participant does not warrant
title, either expressed or implied, to the said lease(s).

     

    18. Participant
may not assign its interest or rights under this Agreement without the prior
written consent of Operator. Any change in the name of holder of the
Participant(s)' interest, change in ownership, including but not limited to a
change from private to public ownership of the Participant or any other change
in the status or nature of the ownership interest, shall be considered to be an
assignment, or attempt to assign, under this Section 18.

     

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    19. No party
hereto shall directly or indirectly make or authorize press or public
information releases announcing or concerning the Unit Area and operations
hereunder, the execution of or continuation or termination of this agreement or
the results of any operation conducted hereunder without approval of all parties
hereto

     

    20. Time
shall be the essence of this Agreement in all of its parts. This Agreement may
be executed in any number of counterparts, each of which shall be considered as
an original for all purposes. The terms, covenants and conditions hereof shall
run in favor of and are binding upon the parties hereto, their successors and
assigns, and shall run in favor of and are binding upon the parties hereto,
their successors and assigns, and shall run with the said leases and
lands.

     

    The
$200,000.00 consideration shall be paid to Operator upon Participant's execution
of this Agreement.

     

    IN
WITNESS WHEREOF, Operator and Participant have hereunder caused their names to
be subscribed the day and year first above written.

     

    ARCHER
EXPLORATION,
INC.                                                                           AMERICAN
PETRO-IILTNTER, INC.

    [Missing Graphic Reference]

    

                /s/
John W. Howe,
President                                                                                          /s/
John Lennon, President

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    Exhibit
A

    Property
Map

    

    

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        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    Exhibit
B

    Authority
for Expenditure

    

    [*]

    
      
        
        

      

      
        
        

        
          

        

      

      
        
        

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

         

      

    

    Exhibit
C

    Operating
Agreement

     

     

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

    
      OPERATING
AGREEMENT

       

      THIS
AGREEMENT, entered into by and between ARCHER EXPLORATION, INC.,
hereinafter designated and referred to as “Operator”, and the signatory party
or parties other than Operator, sometimes hereinafter referred to individually
herein as “Non-Operator”, and collectively as “Non-Operators”.

       

      WITNESSETH:

       

      WHEREAS,
the parties to this agreement are owners of
oil and gas leases and/or oil and gas interests in the land identified in
Exhibit “A”, and the parties hereto have reached an agreement to explore and
develop these leases and/or oil and gas interests for the production of oil
and gas to the extend and herein provided,

       

      NOW,
THEREFORE, it is signed as the following:

       

      
        	
                ARTICLE
      I

              

      

      DEFINITIONS

       

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

      
      

      A           The
term “oil and gas” dull means oil, gas, casinghead gas, gas condensate, and all
other liquid or gaseous hydrocarbons and other marketable substances produced
therewith, unless an intent to limit the inclusiveness of this term is
specifically stated.

      B           The
terms “oil and gas lease”, “lease” and “leasehold” shall mean to oil and gas
leases covering tracts of land tying within the Contract Area which are owned by
the parties to this agreement.

      C           The
term “oil and gas interests” shall mean unleased fee and mineral interests in
tracts of land lying within the Contract Area which are owned by parties to this
agreement.

      D           The
term “Contract Area” shall mean all of the lands, oil and gas leasehold
interests and oil and gas interests intended to be developed and operated for
the oil and gas purposes under this agreement.  Such lands, oil and
gas leasehold interests and oil and gas interests are described in Exhibit
“A”.

      E           The
term “drilling unit” shall mean the area fixed for the drilling of one well by
order or rule of any state or federal body having authority.  If a
drilling unit is not fixed by any such ruler or order, a drilling unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
or as fixed by express agreement of the Drilling Parties.

      F           The
term “drillsite” shall mean the oil and gas lease or interest on which a
proposed well is to be located.

      G           The
tons “Drilling party” and “Consenting Party” shall mean a party who agrees to
join in and pay its share of the cost of any operation conducted under the
provisions or this agreement’

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

       

      Unless
the context otherwise clearly indicates, words used in the singular include the
plural, the plural indicates the singular, and the neuter gender, includes the
masculine and feminine.

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

       

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      

      

      ARTICLE
II

       

      EXHIBITS

       

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

       

      

      
        	
                 
      

              	
                x

              	
                A.
      Exhibit “A”, shall include the following
  information:

              

      

      
        	
                 
      

              	
                (1)

              	
                Identification
      of lands subject to this agreement,

              

      

      
        	
                 
      

              	
                (2)

              	
                Restrictions,
      if any, as to depths, formations, or
substances,

              

      

      
        	
                 
      

              	
                (3)

              	
                Percentages
      or fractional interests of parties to this
  agreement,

              

      

      
        	
                 
      

              	
                (4)

              	
                Oil
      and gas leases and/or oil and gas interests subject
      to this agreement,

              

      

      
        	
                 
      

              	
                (5)

              	
                Addresses
      of parties for notice purposes.

              

      

      
        	
                 
      

              	
                 ̈

              	
                B.
      Exhibit “B”, Form of Lease.

              

      

      
        	
                 
      

              	
                C.

              	
                Exhibit
      “C”, Accounting Procedure.

              

      

      
        	
                 
      

              	
                x

              	
                D.
      Exhibit “D”, Insurance.

              

      

      
        	
                 
      

              	
                 ̈

              	
                E.
      Exhibit “E”, Gas Balancing
Agreement.

              

      

      
        	
                 
      

              	
                x

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

              

      

      
        	
                 
      

              	
                 ̈

              	
                G.
      Exhibit “G”, Tax Partnership

              

      

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

      

      ARTICLE
III

      INTERESTS
OF PARTIES

       

      A. Oil
and Gas Interest:

       

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

       

      B. Interests
of Parties in Costs and Production:

       

      Unless
changed by other provisions, all costs and liabilities incurred in operations
under this agreement shall be borne and paid, and all equipment and materials
acquired in operations on the Contract Area shall be owned, by the parties as
their interests were set forth Exhibit “A”.  In the same manner, the
parties shall also own all production of oil and gas from the Contract Area
subject to the payment of royalties so the extent of Overriding Royalties and
Landowner Royalties which shall be borne as hereinafter set forth.

       

      Regardless of which party has
contributed the lease(s) and/or oil and gas interest(s) hereto on which royalty
is due and payable, each party entitled to receive a share of production of oil
and gas from the Contract Area shall bear and shall pay or deliver, or cause to
be paid or delivered, to the extent of its such production, the royalty amount
stipulated hereinabove and shall hold the other parties free from any liability
therefore.  No party shall ever be responsible, however, on a price
basis higher than the price received by such party, to any other party’s lessor
or royalty owner, and if such other party’s lessor or royalty owner should
demand and receive settlement on a higher price basis, the party contributing
the affected lease shall bear the additional royalty burden attributable to such
higher price.

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      Nothing contained in this Article III
B. shall be deemed and assigned or cross-assigned of interests covered
hereby.

       

      C.  Excess
Royalties, Overriding Royalties and Other Payments:

       

      Unless
changed by other provisions, if the interest of any party is any lease covered
hereby is subject to any royalty, overriding royalty, production payment or
other burden on production in excess of the amount stipulated in Article III B.,
such party so burdened shall assume and alone bear all such excess obligations
and shall indemnify and hold the other parties hereto harmless from any and all
claims and demands for payment asserted by owners of such excess
burden.

       

      D.
Subsequently Created Interests:

       

      If any
party should hereafter create an overriding royalty, production payment or other
burden payable out of production attributable to its working interests,
hereunder, or if such a burden existed prior to this agreement and is not set
forth in Exhibit “A”, or was not disclosed in writing to all other parties prior
to the execution of this agreement by all parties, or is not a jointly
acknowledged and accepted obligation of all parties (any such interest being
hereinafter referred to as “subsequently created interest” inspective of the
timing of its creation and the party out of whose working interests the
subsequently created interests is derived being hereinafter referred to as
“bounded party”), and:

       

      
        	
                    
      1.  

              	
                If
      the burdened party is required under this agreement to assign or
      relinquish to any other party, or parties, all or a portion of its working
      interests and/or production attributable thereto, said other party, or
      parties shall receive said assignment and/or production free and clear of
      said subsequently created interest and the burdened party shall indemnify
      and save said other party, or parties, harmless from any and all claims
      and demands for payment asserted by owners of the subsequently created
      interests; and,

              

      

       

      
        	
                    
      2 

              	
                If
      the burdened party fails to pay, when due, its shares of expenses
      chargeable hereunder, all provisions of Article VII B. shall be
      enforceable against the subsequently created interests in the same matter
      as they are enforceable against the working interests of the burdened
      party.

              

      

       

      ARTICLE
IV.

      TITLES

       

      A.           Title
Examination:

       

      Title
examination shall be made on the drillsite of any proposed well prior to
commencement of drilling operations or, if the Drilling Parties so request,
title examination shall be made on the leases and/or oil and gas interests
included, or planned to be included, in the drilling unity around such
well.  The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable leases.  At the time a well is proposed, each party
contributing leases and/or oil and gas interests to the drillsite, or to be
included in such drilling unity, shall furnish to Operator all abstracts
(including federal lease status reports), title opinions, title papers and
curative material in its possession free of charge.  All such
information not in the possession of or made available to Operator by the
parties, but necessary for the examination of the title, shall be obtained by
Operator.  Operator shall cause title to be examined by attorneys on
it staff or by outside attorneys.  Copies of all title opinions shall
be furnished to each party hereto.  The cost incurred by Operator is
this title program shall be borne as follows:

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      

       

      Opinion No.
1:  Costs incurred by Operator in procuring abstracts and title
examination (including preliminary, supplemental, shut-in gas royalty opinions
and division under title opinions) shall be a party of the administrative
overhead as provided in Exhibit “C”, and shall not be a direct charge, whether
performed by Operator’s staff attorneys or by outside attorneys.

       

      Opinion No.
2:  Costs incurred by Operatory in procuring abstracts and fee
paid outside attorneys for the title examination (including preliminary,
supplemental, shut-in gas royalty opinions and division order title opinions)
shall be borne by the Drilling Parties in the proportion that the Interest of
each Drilling Party bears to the total interest of all Drilling Parties as such
interests appear in Exhibit “A”.  Operator shall make no charge for
services rendered by its staff attorneys or other personnel in the performance
of the above functions.

       

      Each
party shall be responsible for securing curative matter and pooling amendments
required in connection with leases for oil and gas interests contributed by such
party.  Operator shall be responsible for the preparation and
recording of pooling designations or declarations as well as the conduct of
hearings before governmental agencies for the securing of spacing or pooling
orders.  This shall not prevent any party from appearing on its own
behalf at any such hearing.

       

      No well
shall be drilled on the Counsel Area until after (I) the
title to the drilling or drilling unit has been examined as above provided, and
(2) the title has been approved by the examining attorney or tide has bean
accepted by all of the parties who are to participate in the drilling of the
well.

       

      

      B. [intentionally
left blank]

      

      3.  Other
Losses.  All losses incurred other then those set forth in
Articles IV B.1 and IV B.2 above shall be join losses and shall be home by all
parties in proportion to their interests.  There shall be no
readjustment of interests in the renaming portion of the Contact
Area.

      

      ARTICLE
V.

      OPERATOR

       

      
        	
                A.

              	
                Designation
      and Responsibilities of Operator:

              
	 	 

      

      ARCHER EXPLORATION,
INC. shall be the Operator of the Contact Area, and shall conduct and
direct and have full control of all operations on the Contract Area as permitted
and required by, and within the limits of this agreement.  It shall
conduct all such operations in a good and workmanlike manner, but it shall have
no liability as Operator to the other parties for losses and sustained
liabilities, except such as may result from gross negligence or willful
misconduct.

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      
        	
                B.

              	
                Resignation
      or Removal of Operator and Selection of
  Successor.

              

      

       

      1.      Resignation
or Removal of Operator.  Operator may resign at any time by giving
written notice thereof to Non-Operators.  If Operator terminates its
legal existence, no longer owns its interest hereunder in the Contract Area, or
is no longer capable of serving as Operator, Operator shall be deemed to have
resigned without any actions by Non-Operators, except the selection of a
successor.  Operator may be removed if it fails or refuses to carry
out its duties hereunder, or becomes insolvent, bankrupt or is placed in
receivership, by this affirmative vote of two (2) or more Non-Operators owning a
majority interest based on ownership as shown on Exhibit “A” remaining after
excluding the voting interest of Operator.  Such resignation or
removal shall not become effective until 7:00 o’clock a.m. on the first day of
the calendar month following the expiration of ninety (90) days after the giving
notice of resignation by Operator at an earlier date.  Operator, after
effective date of resignation or removal, shall be bound by the terms hereof as
a Non-Operator.  A change of corporate name or structure of Operator
or transfer of Operator’s interest to any single subsidiary, parent or successor
corporation shall not be the basis for removal of Operator.

       

      2.               Selection of Successor
Operator:  Upon the resignations or removal of Operator, a
successor Operator shall be selected by the parties.  The successor
Operator shall be selected from the parties owning an interest in the Contract
Area at the time such successor Operator is selected.  The successor
Operator shall be selected by the affirmative vote of two (2) of more parties
owning a majority interest based on ownership as shown on Exhibit “A”; provided,
however, if an Operator which has been removed falls to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of two (2) ore more parties owning a majority interest based on ownership as
shown on Exhibit “A” remaining after excluding the voting interest of the
Operator that was removed.

       

      
        	
                C.

              	
                Employees:

              

      

       

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

       

      
        	
                D.

              	
                Drilling
      Contracts:

              

      

       

      All wells
drilled on the Contract Area shall be drilled on a competitive contract basis at
the usual rates prevailing in the area.  If it so desires, Operator
may employ its own tools and equipment in the drilling of wells, but its charges
therefore shall not exceed the prevailing rates in the area and the rates of
such charges shall be agreed upon by the parties in writing before drilling
operations are commenced, and such work shall be performed by Operator under the
same terms and conditions as are customary and usual in the area in contracts of
independent contracts who are doing work of similar nature.

       

      

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      

      

      ARTICLE
VI

      DRILLING
AND DEVELOPMENT

       

      A.           Initial
Well:

       

      On or before the 30th day of
[*], Operator shall commence the drilling of a well for oil and gas at the
following location:

       

      [*]

       

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

       

      unless
granite or other practically impenetrable substance or condition in the hole,
which renders further drilling impractical, is encountered at a lesser depth, or
unless all parties agree to complete or abandon the well at a lesser
depth.

       

      Operator shall make reasonable tests of
all formations encountered during drilling which give indication of containing
oil and gas in quantities sufficient to test, unless this agreement shall be
limited in its application to a specific formation or formations, in which event
Operator shall be required to test only the formation or formations to which
this agreement may apply.

       

      lf, in Operator's judgment, the well
will not produce oil or gas to paying quantities, and it wishes to plug and
abandon the well as a dry hole, the provisions of Article VI.B.1 shall
thereafter apply.

       

      B.           Subsequent
Operations:

       

      1.           Proposed
Operations:  Should any party hereto desire to drill any well
on the Contract Area other than the well provided for in Article VI.A, or to
rework, deepen or plug back a dry hole drilled at the joint expense of all
parties or a well jointly owned by all the parties and not then producing in
paying quantities, the party desiring to drill, rework, deepen or plug back such
a well shall give the other parties written notice of the proposed operation,
specifying the work to be performed, the location, proposed depth, objective
formation and the estimated cost of the operation.  The parties
receiving such a notice shall have thirty (30) days after receipt of the notice
within which to notify the party wishing to do the work whether they elect to
participate in the cost of the proposed operation.  If a drilling rig
is on location, notice of a proposal to rework, plug back or drill deeper may be
given by telephone and the response period shell be limped to twenty-four (24),
inclusive of Saturday, Sunday, and legal holidays.  Failure of a party
receiving such notice to reply within the period above fixed shall constitute an
election by that party not to participate in the cost of the proposed
operation.  Any notice or response given by telephone shall be
promptly confirmed in writing.

       

      If all
parties elect to participate in such a proposed operation, Operator shall.
within ninety (90) days after expiration of the notice period of thirty (30)
days (or as promptly as possible after the expiration of the twenty-four (24)
hour period when a drilling is on location, as the case may be, actually
commence the proposed operation and complete it with due diligence at the risk
and expense of all parties hereto; provided, however, said commencement date may
be extended upon written notice of same by Operator to the other parties, for a
period of up to thirty (30) additional days if, in the sole opinion of Operator,
such additional time is reasonably necessary to obtain permits from governmental
authorities, surface rights (including rights-of-way) or appropriate drilling
equipment, or to complete title examination or curative matter required for
title approval at acceptance.  Notwithstanding the force majure
provision of Article XI, if the actual operation has not been commenced within
the time period provided (including any extension thereof as specifically
permitted herein) and if any party hereto still desires to conduct said
operation, written notice proposing same must be submitted to the other parties
in accordance with the provisions hereof as if no prior proposal has been
made..

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      2.           Operations by Less than All
Parties.  If any party receiving such notice as provided in
Article VI.B.1 or VII.D.1 (Option No. 3) elects not to participate in the
proposed operation, than in order to be entitled to the benefits of this
Article, the party or parties giving the notice and such other parties as shall
elect to participate in the operation shall, within ninety (90) days after the
expiration of the notice period of thirty (30) days (or as promptly as possible
after the expiration of the twenty-four (24) hour period when drilling is on
location, as the case may be) actually commence the proposed operation and
complete it with due diligence, Operator stall perform all work for the account
of the Consenting Parties; provided, however, if no drilling rig or other
equipment is en location, and if Operator is a Non-Consenting Party, the
Consenting Parties shall either: (a) request Operator to perform the work
required by such proposed operation for the account of the Consenting Parties,
or (b) designate one (1) of the Consenting Parties as Operator to perform such
work.  Consenting Parties, when conducting operations on the Contract
Area pursuant to this Article VI.B.2., shall comply with all terms and
conditions of thus agreement.

       

      If less than all parties approve any
proposed operation, the proposing party, immediately after the expiration of the
applicable notice period, shall advise the Consenting Parties of the total
interest of the parties approving such operations and its recommendation as to
whether the Consenting Parties should proceed with the operation as
proposed.  Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after receipt of such notice,
shall advise the proposing party of its desire to (a) limit participation to
such party's interest as shown on Exhibit "A" or (b) carry its proportionate
part of Non-Consenting Parties' interests and failure to advise the proposing
party shall be deemed an election under (a).  In the event a drilling
rig is on location, the time permitted for such a response shall not exceed a
total of twenty-four hours (inclusive of Saturday, Sunday and legal
holidays).  The proposing party at its election, may withdraw such
proposal if there is sufficient participation and shall promptly notify all
parties of such decision.

       

      The entire cost and risk of conducting
such operations shall borne by the Consenting Parties in the proportions they
have elected to bear same under the terms of the preceding
paragraph.  Consenting Parties shall keep the leasehold estates
involved in such operations free and clear of all liens and encumbrances of
every kind created by or arising from the operations of the Consenting
Parties.  If such an operation results in a dry hole, the Consenting
parties shall plug and abandon the well and restore the surface location at t
heir sole cost, risk and expense.  If any well drilled, reworked,
deepened or plugged back under the provisions of this Article results in a
producer 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 the well
shall then be turned over to Operator and shall be operated by it at the expense
and for the account of the Consenting Parties.  Upon commencement of
operations for the drilling, reworking, deepening or plugging back of any such
well by Consenting Parties in accordance with the provisions of this Article,
each Non-Consenting Party shall be deemed to have relinquished to Consenting
Parties, and the Consenting Parties shall own and be entitled to receive, is
proportion to their respective interests, all of such Non-Consenting Party’s
interest in the well and share of production therefrom until the proceeds of the
sale of such share, calculated at the well, or market value thereof if such
share is not sold, (after deducting production taxes, excise taxes, royalty,
overriding royalty and other interests not excepted by Article III.D payable out
of or measured by the production from such well accruing with respect to such
interest until it reverts) shall equal the total of the following:

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

       

       

      

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

       

      (b)           50%
of that portion of the costs and expenses of drilling, reworking, deepening,
plugging back, testing and completing after deducting any cash contributions
received under Article VIII.C and 500% 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 Non-Consulting Parry if it had
participated therein.

       

      An election not to participate to the
drifting of the deepening of a well shall be deemed as election not to
participate in any reworking or plugging back operation proposed in such a well,
or portion thereof, to which the initial Non-Consent election applied that is
conducted at any time prior to full recovery by the Consenting Parties of the
Non-Consenting Party's recoupment account.  Any such reworking or
plugging back operation conducted during the recoupment period shall be deemed
part of the cost of operation of said well and there shall he added to the sums
to be recouped by the Consenting Parties one hundred percent (100%) of that
portion of the costs of the reworking or plugging back operation which would
have been chargeable to such Non-Consulting Party had it participated
therein.  If such a re-working or plugging back operation is proposed
during such recoupment period, the provisions of this Article VI.B shall be
applicable as between said Consenting Parties in said well.

       

      During the period of time Consenting
Parties are entitled to receive Non-Consenting Party's share of production, or
the proceeds therefrom, Consenting Parties shall he responsible for the payment
of all production, severance, excise, gathering and other taxes and all royalty,
and other burdens applicable to Non-Consenting Party's share of production not
excepted by Article III.D.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      In the case of any reworking, 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, 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, less cost of
salvage.

       

      Within sixty (60) days after the
completion of any operation under this Article, the party conducing the
operation for the Consenting Parties shall furnish each Non-Consenting Party
with an inventory of the equipment in and connected to the well, and an itemized
statement of the cost of drilling, deepening, plugging back, testing,
completing, and equipping the well for production, or, at its option, the
operating party, in lieu of an itemized statement of such costs of operation,
may submit a detailed statement of monthly billings.  Each month
thereafter, during the time the Consenting Parties are being reimbursed as
provided above, the party conducting the operations for the Consenting Parties
shall furnish the Non-Consenting Parties with the itemized statement of all
costs and liabilities incurred in the operation of the well, together with a
statement of the quantity of oil and gas produced from it and the amount of
proceeds realized from the sale of the well's working interest production during
the preceding month.  In determining the quantity of oil and gas
produced during any month, Consenting Parties shall use industry accepted
methods such as, but not limited to, metering or periodic well
tests.  Any amount realized from the sale or other disposition of
equipment newly acquired in connection with any such operation which would have
been owned in a Non-Consenting Party had it participated therein shall be
credited against the total unreturned cost of the work done and of the equipment
purchased in determining when the interest of such Non-Consenting Party shall
revert to as above provided; and if there is a credit balance, it shall be paid
to such Non-Consenting Party.

       

      If and when the Consenting Parties
recover from a Non-Consenting Party's relinquished interest the amounts provided
for above, the relinquished interest of such Non-Consenting Party shall
automatically revert to it, and, from and after such reversion, such
Non-Consenting Party shall own the same interest in such well, the material and
equipment in or pertaining thereto, and the production therefrom as such
Non-Consenting Party would have been entitled to had it participated in the
drilling, reworking, deepening or plugging back of said
well.  Thereafter, such Non-Consenting Party shall be charged with and
shall pay its proportionate part of the further costs of its operation of said
well with the terms of this agreement and the accounting procedure attached
hereto,

       

      Notwithstanding the provisions of this
Article VI.B.2., it is agreed that without the mutual consent of all parties no
wells shall be completed in or produced from a source of supply from which a
well located elsewhere on the contract area is producing unless such well
conforms to the then existing well spacing pattern for such source of
supply.

       

      The provisions of this Article shall
have no application whatsoever to the drilling of the initial well described in
Article VI.A., except: (a) as to Article VII.D.I. (Option No. 2), if selected,
or (b) as to the reworking, deepening and plugging back of such initial well
after if has been drilled to the depth specified in Article VI.A,  if
it shall thereafter prove to he a dry hole or, if initially completed for
production, ceases to produce paying quantities.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

       

      ARTICLE
VII.

      EXPENDITURES
AND LIABILITY OF PARTIES

       

      A.           Liability of
Parties:

       

      The liability of the partner
shall be several, not joint or collective. Each party shall be responsible only
for its obligations, and shall be liable only for its proportionate share of the
costs of developing and operating the Contract Area. Accordingly, the liens
granted among the parties in Article VII.B. are given to secure only the debts of each
severally. 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 the parties liable as partners.

       

      B.           Liens and Payment Defaults:

       

      Each
Non-Operator grants to Operator a lien upon its oil and gas rights to
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 Exhibit "C". 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 lien rights or security interest as security for the
payment thereof. In addition, upon default by any Non-Operator in the payment of
its share of expense, Operator shall have the right without prejudice to other
rights or remedies, to collect from the purchaser the proceeds from the sale of
such Non-Operator's share of oil and/or gas until the amount owed by such
Non-Operator, plus interest, has been paid.  Each purchaser shall be
entitled to rely upon Operator's written statement concerning the amount of any
default. Operator grants a like lien and security interest to the Non-Operators
to secure payment of Operator’s proportionate share of expense.

       

      If any
party fails or is unable to pay its share of expense within sixty (60) days
after rendition of a statement therefor by Operator, the non-defaulting parties,
including Operator, shall, upon request by Operator, pay the unpaid amount in
the proportion that the interest of each such party bears to the interest of all
such parties. Each party so paying its share of the unpaid amount
shall, to obtain reimbursement thereof, be subrogated to the security rights
described in the foregoing paragraph.

       

      C.           Payments and
Accounting:

       

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

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

       

       

      Operator,
at its election, shall have the right from tine to time to demand and receive
from the other parties payment in advance of their respective shares of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month
which right may be exercised only by submission to each such party of an
itemized statement of such estimated expense, together with an invoice for its
share thereof. Each such statement and invoice for the payment in advance of
estimated expense shall be submitted on or before the 29th day of
the next preceding month.  Each party shall pay to Operator its
proportionate share of such estimate within fifteen (15) days after such
estimate and invoice is received. If any party fails to pay its share of said
estimate within said time the amount due shall bear interest as provided in
Exhibit "C” until paid. Proper adjustment shall be made monthly between advances
and actual ex­pense to the end that each party shall bear and pay its
proportionate share of actual expenses incurred, and no more.

       

      D.           Limitation
of Expenditures:

       

      1.           Drill
or Deepen:  Without the consent of all parties, no well shall be
drilled or deepened, pursuant to the provisions of Article VI.B.2 of this
agreement.  Consent to the drilling or deepening shall
include:

       

      (Option No. 1:  All
necessary expenditures for the drilling or deepening, testing, completing and
equipping of the well, including necessary tankage and/or surface
facilities.

       

      (Option No. 2: All necessary
expenditures for the drilling or deepening and testing of the well. When such
well has reached is authorized depth, and all tests have been completed, and the
results thereof furnished to the parties, Operator shall give immediate notice
to the Non-Operators who have the right to participate in the completion costs.
The parties receiving such notice shall have twenty four (24) hours (exclusive
of Saturday, Sunday and legal holidays) in which to elect to participate in the
setting of casing the completion attempt.  Such election, when made,
shall include consent to all necessary expenditures for the completing and
equipping of such well, including necessary tankage and/or surface
facilities.  Failure of any party receiving such notice to reply
within the period above fixed shall constitute an election by that party not to
participate in the cost of the completion attempt.  If one or more,
but less than all of the parties, elect to set pipe and to attempt a completion,
the provisions of Article VI.B.2. hereof (the phrase “reworking, deepening or
plugging back” as contained in Article VIB.2. shall be deemed to include
“completing”) shall apply to the operations thereafter conducted by less than
all parties.

       

      2.           Rework or Plug
Back.  Without the consent of all parties, no well shall be
reworked or plugged back except a well reworked or plugged back pursuant to the
provisions of Article VI.B.2. of this agreement. Consent to the reworking of
plugging back of a well shall include all necessary expenditures in conducting
such operations and completing and equipping of said well, including necessary
tankage and/or surface facilities.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

       

      3.           Other
Operations. Without the consent of
all parties, Operator shall not undertake any single project reasonably
estimated to require an expenditure in excess of Twenty Five Thousand Dollars
($25,000.00) except in connection with a well, the drilling reworking,
deepening, completing, in completing, or plugging back of which has been
previously authorized by or pursuant to this agreement; provided, however, that,
in case of explosion, fire, flood or other sudden emergency, whether of the same
or different nature, Operator may take such steps and incur such expenses as in
its opinion are required to deal with the emergency to safeguard life and
property but Operator, as promptly as possible, shall report the emergency to
the other parties. If Operator prepares an authority for expenditure (AFE) for
its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of Twenty Five
Thousand Dollars ($25,000) but less than the amount first set forth in this
paragraph.

       

      E           Rentals,
Shut-In Well Payments cud Minimum Royalties:

       

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

       

      Operator
shall notify Non-Operator of the anticipated completion of a shut-in gas well,
or the shutting in or return to production of producing gas well, it least five
(5) days (excluding Saturday, Sunday arid legal holidays), or at the earliest
opportunity permitted by circumstances, prior to taking such action, but assumes
no liability for failure to do so.  In the event of failure by
Operator to so notify Non-Operator, the loss of any lease contributed hereto by
Non-Operator for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.3.

       

      F.           Taxes:

       

      Beginning
with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes , and it shall pay all
such taxes assessed thereon before they become delinquent.  Prior to
the rendition date, each Non-Operator shall furnish Operator information as to
banking (to include, but not be limited to, royalties, overriding royalties and
production payments) on leases and oil and gas interests contributed by such
Non-Operator.  If
the assessed valuation of any
leasehold estate is reduced by reason of its being subject to outstanding excess
royalties, overriding royalties or production payments, the reduction in valorem
taxes resulting, therefrom shall inure to the benefit of the owner or owners of
such leasehold estate, and Operator shall adjust the charge to such owner or
owners so as to reflect the benefit of such reduction.  If the ad
valorem taxes are based in whole or in
part upon separate valuations of each party’s working interest, then
notwithstanding anything to the contrary herein, charges to the joint account
shall be made and paid by the parties herein in accordance with the tax value generated
by each party's working interest. Operator shall bill the other parties for
their proportionate shares of all tax payments in the manner provided in Exhibit
“C”.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      If
Operator considers any tax assessment improper, Operator may at its discretion,
protest within the time and manner prescribed by law, and prosecute the protest
to a final determination, unless all parties agree to abandon the protest prior
to final determination.  During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit
“C”.

       

      Each
party shall pay or cause to be paid all production, severance, excise, gathering
and other taxes imposed upon or with respect to the production of handling of
each party’s share of oil and/or gas produced under the terms of this
Agreement.

       

      C.           Insurance

       

      At all
times while operations are conducted hereunder, Operator shall comply with the
workmen's compensation law of the state where the Operations are being conducted;
provided, however. that Operator may be a self-insurer for liability under said
compensation laws in which event the only charge that shall be made to the joint
account shall be as provided in Exhibit "C”. Operator shall also carry or
provide insurance for the benefit of the joint account of the parties as
outlined on Exhibit "D” attached to and made a part hereof.  Operator
shall require all contractors engaged in work on or for the Contract Area to
comply with the workmen's compensation law of the state where the operations are
being conducted and to maintain such other insurance as Operator may
require.

       

      In the
event automobile public liability insurance is specified in said Exhibit "D”, or
subsequently receives the approval of the parties, no direct charge shall be
made by Operator for premiums paid for each insurance for Operator's automotive
equipment

       

      ARTICLE
VIIL

      ACQUISITION,
MAINTENANCE OR TRANSFER OF INTEREST

       

      A. Surrender of Leases:

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      The
leases covered by this agreement, insofar as they embrace acreage in the
Contract Area, shall not be surrendered in whole or in part unless all parties
consent thereto.

       

      However,
should any party desire to surrender its interest in any lease or in any portion
thereof, and the other parties do not agree or consent thereto, the party
desiring to surrender shall assign, without express or implied warranty of
title, all of its interest in such lease, or portion thereof, and any well,
material and equipment which may be located thereon and any rights in production
thereafter secured, to the parties not consenting to such surrender. If the
interest of the assigning party is or includes an oil and gas interest, the
assigning party shall execute and deliver to the party or parties not consenting
to such surrender an oil and gas lease covering such oil and gas interest for a
term of one (1) year and so long thereafter as oil and/or gas is produced from
the land covered thereby, such lease to be on a mutually
accepted.  Upon such assignment or lease, the assigning party shall be
relieved from all obligations thereafter accruing, but not theretofore accrued,
with respect to the interest assigned or leased and the operations of any well
attributable thereto, and the assigning party shall have no further interest in
the assigned or leased premises and its equipment and production other than the
royalties retained in any lease made under the terms of this
Article.  The party assignee or lessee shall pay to the party assignor
or lessor the reasonable salvage value of the latter’s interest in any wells and
equipment attributable to the assigned or leased acreage.  The value
of all material shall be determined in accordance with the provisions of Exhibit
“C”, less the estimated cost of salvaging and the estimated cost of plugging and
abandoning.  If the assignment or lease is in favor of more than one
party, the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties.

       

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

       

      B.           Renewal
or Extension of Leases:

       

      If any
party secures a renewal of any oil and gas lease subject to this agreement, all
other parties shall be notified promptly, and shall have the right for a period
of thirty (30) days following receipt of such notice in which to elect to
participate in the ownership of the renewal lease, insofar as such lease affects
lands within the Contract Areal, by paying to the party who acquired it their
several proper proportionate shares of the acquisition cost allocated to that
part of such lease within the Contract Area, which shall be in proportion to the
interests held of that time by the parties in the Contract Area.

       

      If some,
but less than all, of the parties elect to participate in the purchase of a
renewal lease, it shall be owned by the parties who elect to participate
therein, in a ratio based upon the relationship of their respective percentage
of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal lease. Any renewal lease to which less than all
parties elect to participate shall not be subject to this
agreement.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      Each
party who participates in the purchase of a renewal lease shall be given an
assignment of its proportionate interest therein by the acquiring
party.

       

      The
provision of this Article shall apply to renewal leases whether they are for the
entire interest covered by the expiring lease or cover only a portion of its
area or an interest therein.  Any renewal lease taken before the
expiration of its predecessor lease, or taken or contracted for within six (6)
months after the expiration of the existing lease shall be subject to this
provision; but any lease taken or contracted for more than six (6) months after
the expiration of an existing lease shall not be deemed a renewal lease and
shall not be subject to the of this
agreement.

       

      The
provisions in this Article shall also be applicable to extensions of oil and gas
leases.

       

      C.           Acreage or Cash
Contributions:

       

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

       

      If any
party contracts for any consideration relating to disposition of such party’s
share of substances produced hereunder, such consideration shall not be deemed a
contribution as contemplated in this Article VII.C.

       

      D.           Maintenance of Uniform
Interests:

       

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

       

      1.       the
entire interest of the party in all leases and equipment and production;
or

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      2       an
equal undivided interest in all leases and equipment and production in the
Contract Area.

       

      Every
such sale, encumbrance, transfer or other disposition made by any party shall be
made expressly subject to this agreement and shall be made without prejudice to
the right of the other parties.

       

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

       

      E.           Waiver of Rights to
Partition:

       

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

       

      ARTICLE
IX.

      INTERNAL
REVENUE CODE ELECTION

       

      This
agreement is not intended to create, and shall not be construed to create, a
relationship of partnership or an association for profit between or among the
parties hereto. Notwithstanding any provision herein that the rights and
liabilities hereunder are several and not joint or collective, or that this
agreement and operations hereunder shall not constitute a partnership, if, for
federal income tax purposes, this agreement and the operations hereunder are
regarded as a partnership, each party hereby affected elects to be excluded from
the application of all of the provision of Subchapter "K", Chapter 1, Subtitle
"A", of the Internal Revenue Code of 1986, as permitted and authorized by
Section 761 of the Code and the regulations promulgated thereunder. Operator is
authorized and directed to executed on
behalf of each party hereby affected such evidence of this election as may be
required by the Secretary of the Treasury of the United States or the Federal
Internal Revenue Service, including specifically, but not by way of limitation,
all of the returns, statements, and the data required, by Federal Regulation
1.761. Should there be any requirement that each party hereby affected give
further evidence of this election, each such party shall execute each documents
and furnish such other evidence as may be required by the Federal Internal
Revenue Service or as may be necessary to evidence this election.  No
such party shall give any notices or take any other action inconsistent with the
election made hereby. If any present or future income tax law of the state or
states in which the Contract Area is located of any further income tax laws of
the United States contain provisions similar to those in Subchapter 1, Subtitle
“A”, of the internal Revenue Code of 1986, under which an election similar to
that provided by Section 761 of the Code is permitted, each party hereby
affected shall make such election as may be permitted or required by such
laws.  In making the foregoing election, each such party states that
the income derived by such party from operations hereunder can be adequately
determined without the computation of partnership taxable income.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      ARTICLE
X.

      CLAIMS
AND LAWSUITS

       

      Operator
may settle any single uninsured third party damage claim or suit arising from
operations hereunder if the expenditure does not mead Twenty Five Thousand
Dollars ($25,000.00) and if the payment is in complete settlement of such claims
or suit.  If the amount required for settlement exceeds the above
amounts, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises.  If a claim is made against any party
or if any party is sued on account of any matter arising from operations
hereunder over which such individual has no control because of the rights given
Operator by this agreement, such party shall immediately notify all other
parties, and the claim or suit shall be treated as any other claim or suit
involving operations hereunder.

       

      ARTICLE
XI.

      FORCE
MAJEURE

       

      If any
party is rendered unable, wholly or in part, by force majeure to carry out its obligations under
this agreement, other than the obligation to make money payments, that party
shall give to all other parties prompt written notice of the force majeure with
reasonably full particulars concerning it; thereupon, the obligations of the
party giving the notice, so far as they are affected by the force majeure, shall
be suspending during, but no longer than the continuance of the force
majeure.  The affected party shall use all reasonable diligence to
remove the force majeure situation as quickly as practicable..

       

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

       

      The term
"force majeure", as here employed, shall mean an act of God, strike, lockout,
or other industrial disturbance, act of the public enemy, war, blockade, public
riot lightning, fire, storm, flood, explosion, governmental action, governmental
delay, restraint or inaction, unavailability of equipment, and any other cause,
whether of the kind specifically enumerated above or otherwise, which is not
reasonably within the control of the party claiming suspension.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      

       

      ARTICLE
XII.

      NOTICES

       

      All
notices authorized or required between the parties and required by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
given in writing by mail or telegram, postage or charges prepaid, or by telex or
telecopier and addressed to the parties to whom the notice is given at the
addresses listed on Exhibit "A". The originating notice given under any provision
hereof shall be deemed given only when received by the party to whom such notice
is directed, and the time for such party to give any notice in response thereto
shall run from the date the originating notice is received. The second or any
responsive notice shall be deemed given when deposited in the mail or with the
telegraph company, with postage or charges prepaid or sent by telex or
telecopier.  Each party shall have the right to change its address at
any time, and from time to time, by giving written notice thereof to all other
parties.

       

      ARTICLE
XIII.

      TERM OF
AGREEMENT

       

      This
agreement shall remain in full force and effect as to the oil and gas leases
and/or oil and gas interests subject hereto for the period of time selected
below; provided, however, no party hereto shall ever be construed as having any
right, title or interest in or to any lease or oil and gas interest contributed
by thy other party beyond the term of this agreement.

       

      Option
No. 1.  So long as any of the oil and gas leases subject to this
agreement remain or are continued in force as to any part of the Contract
Area, whether by
production, extension, renewal, or otherwise.

       

      Option
No. 2  In
the event the well described in Article VI.A, or any subsequent well drilled
under any provision of this agreement, results in production of oil and/or gas
in paying quantities, this agreement shall continue in force so long as any such
well or wells produce, or are capable of production, and for an additional
period of 90 days from cessation
of all production; provided, however,  if, prior to the expiration of
such additional period, one or more of the parties hereto are engaged in
drilling, reworking, deepening, plugging
back, testing or attempting to complete a well or wells hereunder, this
agreement shall continue in force until such operations have been completed and
if production results therefrom, this agreement shall continue in force as
provided herein. In the event the well described in Article VI.A, or any
subsequent well drilled hereunder, results in a dry hole, and so other well is
producing, or capable of producing oil and gas from the Contract Area, this
agreement shall terminate unless drilling, deepening, plugging back or reworking
operations are commenced within 90 days from the date of abandonment of said
well.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      It
is agreed,
however, that the termination of this agreement shall not relieve any party
hereto from any liability which has accrued or attached prior to the date of
such termination .

       

      ARTICLE
XIV.

      COMPLIANCE
WITH LAWS AND REGULATIONS

       

      A.           Laws, Regulations and
Orders:

       

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

       

      B.           Governing Law:

       

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

       

      C.           Regulatory
Agendas:

       

      Nothing
herein contained shall grant, or be construed to grant, Operator the right or
authority to waive or release any rights, privileges, or obligations which
Non-Operators may have under federal or state laws or under rules, regulations
or orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on tracts
affecting or adjacent to the Contract Area.

       

      With
respect to operations hereunder, Non-Operators agree to release Operator from
any and all leases, 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 Non-Operator further
agrees to reimburse Operator for any amounts applicable to such Non-Operator’s
share of production that Operator may be required to refund, rebate or pay as a
result of such an incorrect interpretation or application, together with
interest and penalties thereon owing by Operator as a result of such incorrect
interpretation or application.

       

      Non-Operators
authorize Operator to prepare and not submit such documents as may be required
to be submitted to the purchaser of any crude oil sold hereunder or to any other
person or entity pursuant to the requirements of the "Crude Oil Windfall Profit
Tax Act of 1980”, as same may be amended from time to time ("Act"), and any
valid regulations or rules which may be issued by the Treasury Department from
time to time pursuant to said Act. Each party hereto agrees to
furnish any and all certifications or other information which is required to be
furnished by said Act in a timely manner and in sufficient detail to permit
compliance with said Act.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

       

      ARTICLE
XV.

      OTHER
PROVISIONS

       

      See
provisions attached
as pages 14A mad 14E.

       

      ARTICLE
XV

      OTHER
PROVISIONS

       

       

      A. CONFLICTS:

       

      In the
event of a conflict between the provisions of this Article XV and any other
provisions of this Operating Agreement, the provisions of this Article XV shall
control and prevail.

       

      B.
CASING POINT ELECTION:

       

      Consent
to the drilling or deepening of any well in the Contract Area, including the
initial well, shall not be deemed consent to the running and setting of a
production string of easing therein or to the completion of said well as a
producing well. After the drilling or deepening of such well to the depth or
formation authorized and after appropriate testing, coring and logging have been
made, Operator shall then give immediate notice to the Non-Operators
participating in the drilling or deepening of such well, setting forth
Operator's recommendations with respect to such attempted completion. Each such
party shall within 24 hours after receipt of such notice notify Operator as to
whether or not such party elects to set production casing and to participate in
such completion attempt. Failure to so notify Operator shall be deemed an
election not to participate. Any party electing not to participate in any
operation is subject to the
fotfeiture provisions of the Participation Agreement and such non-consenting
party shall own no further interest in such well beyond the point at which it
elects to non-consent, but shall relinquish all of such interest to the parties
continuing participation in the subject well or operation. Should all parties
hereto elect to so participate, Operator shall conduct such operations for the
joint account of all parties. Should less than all parties elect to so
participate, then such completion operations shall be conducted under the
provisions of Article VI. B.2. hereof, as an operation by less than all
parties.  Should no party elect to attempt such completion or should
the completion attempt result in a dry hate, Operator shall plug and abandon the
well at the joint cost of all parties who participated in the drilling or
deepening of the well.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      C.
SEQUENCE OF ELECTIONS:

       

      It is
agreed that where a well, which has been authorized under the terms of this
agreement by all parties, or by one or more but less than all parties under
Paragraph VI. 13. 1 or 2., shall have been drilled to the objective depth or the
objective formation, whichever is deepest, and the parties participating io the
well cannot mutually agree upon the sequence and timing of further operations
regarding said well, the following elections shall control in the order
enumerated hereafter: (1) An election to do additional logging, coring or
testing; (2) An election to attempt to complete the well at either the objective
depth or objective formation; (3) An election to plug back and attempt to
complete said well; (4) An election to deepen said well; (5) An election to
sidetrack the well.

       

      It is
provided, however, that if at the time said participating parties arc
considering any of the above elections, the hole is in such a condition that a
reasonably prudent operator would not conduct the operations contemplated by the
particular election involved for fear of placing the hole in jeopardy or losing
the same prior to completing the well in the objective depth or objective
formation, such election shall be eliminated from the priorities hereinabove set
forth.

       

      D.
ELECTION OF APPROVING PARTY:

       

      Notwithstanding
any of the provisions of Articles VI and XV.13. and C. hereof, approval of a
proposed operation shall not constitute the approving party as a Consenting
('arty (as defined in
Article 1.G.) to the operation if less than all parties hereto qualified to
participate in the operation approve the proposed operation until said approving
party (a) has been notified in writing that less than all such parties have
consented to the operation and (b) has notified Operator in writing within 24
hours of receipt of said notice that it agrees to be a Consenting Party to the
operation as one participated in by less than all parties.  Failure to
so timely notify Operator shall constitute an election by such party to be a
non-consenting party to the operation

       

      E.           TAXES:

       

      If the
Operator is required hereunder to pay ad valorem taxes based in whole or in part
upon separate valuations of each party's working interest, then notwithstanding
anything to the contrary herein, charges to the joint account shall be made and
paid by the parties hereto in accordance with the tax value generated by each
party's working interest

       

      F.           SPECIAL
INDEMNITY PROVISIONS:

       

      Non-Operators
agree to release Operator from any and all losses, damages, injuries, claims and
causes of action arising out of, incident to or resulting directly or indirectly
from Operator's interpretation or application of rules, rulings, regulations or
orders of any Federal, State, Local or other governmental agency to the extent
Operator's interpretations or application of such rules, rulings, regulations or
orders were made in good faith. Non-Operators further agree to reimburse
Operator for their proportionate share of any amounts Operator may be required
to refund, rebate or pay as a result of an incorrect interpretation or
application of the above noted rules, rulings, regulations or orders, together
with the Non-Operator's proportionate part of interest and penalties owing by
Operator as a result of such
incorrect interpretation or application of such rules, rulings, regulations or
orders. Non-Operators shall, however, be entitled to recovery from Operator for
any losses incurred through Operator's willful or negligent failure to make any
required Federal, State, Local or other governmental filings.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

       

      G. CRITICAL
OPERATIONS:

       

      The
provisions of Article VI and this Article XV notwithstanding, Non-Operator may not elect to go
non-consent on any “critical operation”. A critical operation is defined as the abandonment
or re-abandonment of any well on the properly, the dry hole phase of the Initial
Test Well on the Prospect, as well as any other operation, which in the opinion
of the Operator is necessary for the prudent operation of the property, to
comply with any law or governmental regulation, or to limit or prevent any damage
to the property.

       

      H.
AFE OVERRUNS AND OPTION TO WITHDRAW:

       

      Subject
to the provisions set out herein, any party participating in any well or
operation conducted under the provisions of this Operating Agreement, including
the Operator, shall have the option of withdrawing from further participation in
such well or operation at such time as the expenditures for the well or
operation exceed the total amount of the Original Authority for Expenditure
(AFE) and approved Supplemental AFE's by 50%. Any such party desiring to so
withdraw (herein called "withdrawing party") shall incur no further Liabilities
and owe no further obligations after the time such election to withdraw is made,
as specified below, with respect to such well or operation. Such withdrawing
party shall own no further interest in such well or production from the well
beyond the point at which it withdraws, but shall relinquish all of such
interest to Archer Exploration, Inc. In the event that Archer Exploration, Inc.
withdraws, it shall relinquish all of such interest to the parties continuing
participation in the subject well or operation. Nothing herein shall be
construed to require a withdrawing party to relinquish its interest in any
producing wells or unit previously earned.

       

      At such
time as Operator
shall have had actual notice that expenditures incurred in any well or operation
exceed the total amount of the Original and Supplemental approved AFE's by 50%,
it shall give written notice of such fact to all parties participating in the
well or operations. If Operator desires to withdraw from further participation,
it shall so notify all participating parties in its notice of over-expenditures.
Any other party desiring to withdraw from further participation in the well or
operation shall so notify Operator in writing within five days after receipt of
the original notice by Operator. Failure to give such timely written notice
shall constitute an election to continue participation in such well or
operation. Each withdrawing party shall be responsible for its accrued
obligations and liabilities up to and until such time as Operator receives the
required written notice of its election to withdraw. In the event any party
withdraws from further participation in a well or operation as
provided for herein, all risk, cost and expense incurred for such well or
operation from such time as Operator (or the other participating parties, if
Operator withdraws) receives written notice of this withdrawal shall be borne by
Archer Exploration, Inc., with Archer Exploration, Inc. assuming the
proportionate share of the withdrawing party's share of the cost, risk and
expense. In the event that Archer Exploration, Inc. withdraws, it shall
relinquish all of such interest to the parties continuing participation in the
subject well or operation

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      It is
understood and agreed that the election to withdraw afforded all participating
parties herein shall be a one-time election as to any one well or operation but
is a recurring right for each additional well or operation, Furthermore, no
party may be relieved of its obligations and liabilities during the periods of
time that (1) Operator does not have actual knowledge of the requisite excessive
expenditure; or (2) it is necessary for Operator to carry out any contractual
obligations made for the joint account of the parties; or (3) Operator is
required to remove tools and equipment from the hole for which the joint account
is responsible; or (4) it is necessary to plug and abandon the well; or (5)
emergency conditions exist, such as, but not limited to, loss of control of
well, blow-out, pollution problems and so forth.

       

      I.
AGREEMENT SUBJECT TO APPLICABLE LAWS - REPORTING:

       

      This
agreement and the respective rights and obligations of the parties hereunder
shall he subject to all applicable Federal, State, Local or other governmental
laws, rules, regulations and orders, and in the event this agreement or any
provision hereof is or the operations contemplated hereby are, found to be
inconsistent with or contrary to any such law, rule, regulation or order, the
latter shall be deemed to control and this agreement shall he regarded as
modified accordingly, and as so modified, to continue in full force and effect.
Opciator shall prepare and furnish to a duly constituted authority having
jurisdiction in the premises through its proper agency or department any and all
reports, statements and information that may be requested when such reports are
required to be filed by Operator.

       

      Operator
shall act as the representative of all parties hereto in all hearings and
proceedings before administrative bodies concerning the Contract Area and,
subject to approval by Non-Operators, all costs and expenses incurred by
Operator directly or by retention of outside personnel in participation in such
hearings or proceedings shall be proper charges against the joint account;
provided, however, that nothing herein contained shall prohibit any of the
parties other than Operator from participating in any such hearings or
proceedings in his or its own behalf and at his or its own cost and
expense.

       

      The
Operator shall at all times consult freely with the other parties concerning the
operations being or to be conducted on the Contract Area and shall permit any
party hereto to collaborate in any litigation or hearings before any
administrative body, state or federal, affecting the Contract Area or the
production therefrom.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      J.          THIRD PARTY DISCLAIM-ER:

       

      It is not the intention of the
parties that this contract is made or intended for the benefit of any third
person or party.

       

      K.          PROPOSED
OPERATIONS:

       

      Notwithstanding
anything to the contrary contained in Article VI. B.1. and VI.D.2., the term
“Proposed Operations” shall expressly include reworking and sidetracking as well
as any other operations as may, from time to time, be accepted practices in the
area and locality in which the operations arc to be pursued.

       

      L.
PROPOSALS WHILE A WELL IS PRODUCING IN COMMERCIAL QUANTITIES:

       

      Notwithstanding
anything contained in this agreement to the contrary, no party shall propose the
reworking, deepening, plugging back or sidetracking of any well jointly owned by
the parties that is then producing in commercial quantities, without obtaining
prior written consent of all parties.

       

      M.           SINGLE
PROPOSAL:

       

      Notwithstanding
anything to the
contrary contained in this agreement, the parties shall not be required to
consider or make an election whether to participate in any proposed additional
operation to drill, sidetrack, rework, deepen or plug back any well

      
      

      while:

       

      1.       Any
drilling, reworking, deepening or plugging back operations arc in progress on
any well covered by this agreement; or

       

      2.       Any
proposal to drill, rework, deepen or plug hack any well covered by

       

      this
agreement is being considered;

       

      provided,
however, should any operation be proposed in order to comply with any express or
implied covenant provided for in any tease or interest subject to this
agreement, or if any lease will expire at the end of its primary term in the
absence of such operation, the proposing party shall clearly include this
information in its notice of the proposed
operation. Should any party receiving such notice fail to reply within thirty
(30) days after receipt thereof, either to elect to participate or to become a
non-consenting party, such failure to reply shall constitute an election by such
party not to participate in the proposed operation. Additionally, any party's
waiver of or failure to assert or invoke the rights herein provided for in any
circumstances shall in no way prejudice such party's right to assert the rights
herein provided as to any future circumstance or occurrence.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      N.           PRESS
RELEASES:

       

      No party
hereto shall directly or indirectly make or authorize press or public
information releases announcing or concerning the Unit Area and operations
hereunder, the execution of or continuation or termination of this agreement or
the results of any operation conducted hereunder without approval of all parties
hereto.

       

      O. PRINTED vs. TYPEWRITTEN
PROVISIONS:

       

      In the
event of a conflict between the printed portion of this agreement and the
typewritten or handwritten portions of this agreement, the typewritten or
handwritten portions shall prevail.

       

      P.
COUNTERPART EXECUTION:

       

      If
counterparts of this agreement are executed, such counterparts may be combined
by Operator in and treated and given effect for all purposes as a single
instrument. This agreement also may be ratified by separate instruments
referring hereto, each of which shall have the effect of the original agreement
and of adopting by reference all of the provisions herein
contained.

       

      Q.
DESIGNATION OF OPERATOR AS AGENT:

       

      To the
extent permitted by law, the parties to this Operating Agreement hereby
designate Operator to he their agent in connection with all filings of
applications, reports, etc. required by each and every federal or state
regulatory body, commission, or agency having regulatory jurisdiction over the
oil and/or gas produced from the properties covered by this Operating Agreement,
including but not limited to any Filings with F.E.R.C. or other federal, state
or local governmental body which may be required under the terms of the Natural
Gas Policy Act of 1978 ("NGPA") and other applicable federal or state statutes
or local ordinances or the regulations which have been or may be issued by any
such governmental body pursuant to such statutes or ordinances; provided
however, that all other parties to this agreement shall indemnify and hold
harmless Operator from any loss, risk, cost and expense resulting from
Operator's making such things on their behalf, except in the event of Operator's
gross negligence or willful misconduct, in which case Operator will solely hear
any penalty or claim. In particular, each party agrees to bear and be
responsible for its share of any refund
obligation which may become due in the event any such governmental body should
determine that prices received in the sale of oil or gas exceed the maximum
price permitted by law. Operator shall make no filing with F.E.R.C. or any other
federal, state or local governmental body that may be required under the terms
of the NGPA or other applicable federal or state statutes or local ordinances or
the regulations which may have been or may be issued by any such governmental
body pursuant to such statutes or ordinances without obtaining the prior written agreement
of all Non-Operators with respect to such filings.

       

      R.
ASSIGNMENT OF AN INTEREST:

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      
        [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      Notwithstanding
the provisions contained in Article VIII. D., no
sale or assignment shall be binding upon Operator until Operator shall have been
furnished with a certified copy of a recorded instrument evidencing same, and no
sale or assignment shall be effective until all monies due and accounts payable
accruing or arising out of the development and operation of the leases subject
hereto, prior to the effective date of said assignment, shall have been paid in
full by the party assigning its interest hereunder.

       

      S.
ADDITIONAL PARTIES

       

      If the
interest of any original party comes to be held by more then one individual or
entity, all of the owners of such interest shall collectively act as one party
for the purposes of this agreement, including without limitation the purposes
hereinafter provided.  Such owners shall designate one of their number
to act as their designee hereunder.

       

      
        	
                 
      

              	
                1.

              	
                All
      of the owners of such interest shall act in unison receiving, making and
      being bound by election, votes, options, consents, notices and responses
      under this agreement (“Elections”), and such Elections as made by the
      designee shall be binding upon all of such owners.  The designee
      of such owners shall receive all notices, information and copies and
      performance shall be tendered to such designee.  Operator shall
      not be obligated to notify or inform or provide copies of location plats,
      etc. to only the designee of such owners on behalf of all such
      owners.

              

      

       

      
        	
                 
      

              	
                2.

              	
                Operator
      shall not be required to make more than one billing for the entire
      interest of any original party.  Operator shall issue billings
      to the designee on behalf of all of such
owners.

              

      

       

      
        	
                 
      

              	
                3.

              	
                Proceeds
      of production attributable to the interest of such owners shall be
      disbursed to the designee on behalf of all such
  parties.

              

      

       

      The
previous owner of the interest shall be deemed to be the designee of such owners
until 30 days after the following items are furnished to Operator:

      
        	 	 	 
	 	

                1.

              	

                Written
      notice of the assignment or other transfer and a certified copy or
      photocopy of the recorded assignment or other applicable instrument
      documenting the transfer;

              
	 	 	 
	 	

                2.

              	

                The
      name of the designee and a written statement signed by the designee
      accepting the obligation to act hereunder and agreeing to be bound hereby,
      on behalf of the designee, his or its heirs, successors and assigns;
      and

              
	 	 	 
	
                 
      

              	
                3.

              	
                Written
      consent from all of the owners of the entire interest evidencing their
      agreement to have the designee, his or its heirs, successors and assigns
      act on their behalf as hereinabove
      provided.

              

      

       

      Such
owners may from time to time replace the designee by furnishing to Operator the
items provided above.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      T. PIPELINES and/or GATHERING
LINES:

       

      If any
party to this agreement proposes the construction or acquisition and operation
of a pipeline and/or gathering line to transport production from the Contract
Area, then such party shall offer to the other party the opportunity to
participate in the construction or acquisition, operation and ownership of the
pipeline/gathering line, including the right of transporting production from the
Contract Area. Should all parties participate therein, then, as between such
parties, to the extent not prohibited by governmental rules, regulations and
laws, there shall not be a transportation charge for gas owned by such a party
and transported from the Contract Area through such pipeline/gathering
line.

       

      U.
INDEPENDENT CONTRACTOR:

       

      In its
performance hereunder, Operator shall be an independent contractor, not subject
to the control or direction of Non-Operators, except as to the type of operation
to he undertaken in accordance with the election procedures contained in the
agreement

       

      ARTICLE
XVI

       

      MISCELLANEOUS

       

      This
agreement shall be binding upon and shall inure to the benefit of the parties
hereto and as their respective heirs, deviates, legal representatives,
successors and assigns.

       

      This
instrument may be executed in any number of counterparts, each of which shall be
considered an original for all purposes.

       

      IN
WITNESS WHEREOF, this agreement shall be effective as of 18th day of March,
2009.

       

      Archer
Exploration, Inc., who has prepared and circulated this form for execution,
represents and warrants that the form was printed from and with the exception
listed below, is identical to the AAPL Form 610-1982 Model Form Operating
Agreement, as published in diskette form by Forms On-A-Disk, Inc.  No
changes, alterations, or modifications, other than those in Articles IV, VI,
VII, VIII, and XV, have been made to the form.

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      

      OPERATOR

       

      

       

      ARCHER
EXPLORATION, INC.

      

      /s/ John
W. Howe

      John W.
Howe, President

       

      NON-OPERATORS

       

       

      AMERICAN
PETRO-HUNTER, INC.

       

      /s/ John
Lennon

      John
Lennon - President

       

      

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

      EXHIBIT
“A”

      

      [*]

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      [*]
Designates portions of this document that have been omitted pursuant to a
request for confidential treatment filed separately with the
Commission

      

      

      EXHIBIT
“D”

      

       

      Attached
to and made a part of that certain Operating Agreement dated March 18, 2009

      by and
between Archer Exploration, Inc., and American Petro-Hunter, Inc.

      __________________________________________________________________

      

       

      
        	
                 
      

              	
                1.

              	
                Worker's
      Compensation Insurance including Employers' Liability, in compliance with
      the State of California.

              

      

       

      
        	
                 
      

              	
                2.

              	
                Comprehensive
      General Liability Insurance, excluding products, within limits of One
      Million Dollars ($1,000,000.00) for injuries or death to one person; Two
      Million Dollars ($2,000,000.00) General
  Aggregate.

              

      

       

      
        	
                 
      

              	
                3.

              	
                Operator
      shall maintain Excess/Umbrella Liability Coverage in the amount of Four
      Million Dollars ($4,000,000.00).

              

      

       

      
        	
                 
      

              	
                4.

              	
                Operator
      shall require that each independent contractor and subcontractor carry and
      maintain insurance at its/his own expense in amounts deemed necessary to
      cover the risks inherent to the work or services being performed. Operator
      will furnish, or cause to be furnished, evidence of insurance coverage
      maintained by its contractors and subcontractors when required by
      Non-operators.

              

      

       

      
        	
                 
      

              	
                5.

              	
                Well
      Control-Seepage-Pollution Insurance with coverage in an amount not less
      than Two Million Dollars ($2,000,000.00) per occurrence for drilling
      wells, Five Hundred Thousand Dollars ($500,000.00) for workover wells and
      Two Hundred Fifty Thousand ($250,000.00) for producing wells and such
      other insurance, self-insurance, or combination thereof as deemed
      necessary and agreed to hi writing by the parties to this agreement, to
      cover the risks inherent to the work being performed by
      Operator.

              

      

       

      

      
        
          
             

          

          
             

            
              

            

          

          
             

          

        

      

      

       

      EXHIBIT
“F”

       

      Attached
to and made a part of that certain Operating Agreement dated March 18, 2009 by
and between Archer Exploration, Inc., and American Petro-Hunter,
Inc.

       

      NON-DISCRIMINATION,
CERTIFICATE OF NON-SECREGATED

      FACILTI1ES
AND COMPLIANCE WITH LAWS

       

       

      To the extent applicable, the parties
to this Operating Agreement shall comply with and abide by all Federal, State,
and Local laws, statutes, codes, regulations, executive orders, rules,
ordinances, mandates, aid directives [collectively "Laws"] dealing with equal
employment opportunity hiring and reporting requirements, affirmative action
compliance programs, employment of the handicapped, the Americans With
Disabilities Act, employment of and affirmative action programs for disabled
veterans and veterans of the Vietnam era, utilization of minority business
enterprises, minority business enterprises subcontracting programs, utilization
of women-owned business concerns, women-owned business subcontracting programs,
utilization of small business concerns and small business concerns owned and
controlled by socially and economically disadvantaged individuals, small
business and small disadvantaged business subcontracting programs, utilization
of labor surplus area concerns, labor surplus area subcontracting programs,
non-segregated facilities certification requirements, Title VII of the Civil
Rights Act of 1964, Civil Rights Act of 1991, non-discrimination under federal
and state contracts, Age Discrimination in Employment Act of 1967, National
Labor Relations Act, Immigration Reform arid Control Act of 1986, Pregnancy
Discrimination Act of 1978, Federal Family Care and Medical Leave Act, Equal Pay
Act, sexual harassment, worker's compensation discrimination, AIDS or HIV
positive status discrimination, sex discrimination, race discrimination, sexual
orientation discrimination, religious creed discrimination, marital status
discrimination, medical condition discrimination, national origin
discrimination, and all new and additional Laws dealing with the same or similar
matters, all of which laws are incorporated herein by reference.

       

      Each
party hereto certifies that it does not and will not maintain any facilities it
provides for its employees in a segregated manner or permit its employees to
perform their services at any location under its control where segregated
facilities are maintained, and such party will obtain a similar certification in
the form approved by the Director, Office of the Federal Contract Compliance
Programs, prior to the award of any non-exempt subcontract.jbsmithnote.htm

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

    

     

     

     

    

    
      	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	
              US
    $7,716.40

            	 
      	
              July
      1, 2009

            

    

    

    PROMISSORY NOTE

         FOR VALUE
RECEIVED, the
undersigned, Ecology Coatings, Inc., a Nevada corporation (the “The Maker”),
promises to pay to the order of JB Smith LC. (the “Holder”), the principal
amount of Seven Thousand Seven Hundred Sixteen and 40/100 dollars
($7,716.40.00), together with interest thereon as provided below.

    

    ARTICLE
I

    TERMS OF
REPAYMENT

    

    
      	
              1.  

            	
              Interest.
      The Note shall bear interest (“Interest”) equal to five (5%)
      percent per annum on the unpaid principal balance, computed on a three
      hundred and sixty-five (365) day year, during the term of the Note.
      The Maker shall pay all Interest. In no event shall the rate of Interest
      payable on this Note exceed the maximum rate of interest permitted to be
      charged under applicable law.

            

    

    

    
      	
              2.  

            	
              Payments.
      All payments by the Maker under this Note shall first be credited
      against costs and expenses provided for hereunder, second to the payment
      of any penalties, third to the payment of accrued and unpaid interest, if
      any, and the remainder shall be credited against principal. All payments
      due hereunder shall be payable in legal tender of the United States of
      America, and in same day funds delivered to the Holder by cashier’s check,
      certified check, or any other means of guaranteed funds to the mailing
      address provided below, or at such other place as the Holder or any holder
      hereof shall designate in writing for such purpose from time to time. If a
      payment hereunder otherwise would become due and payable on a Saturday,
      Sunday or legal holiday, the due date thereof shall be extended to the
      next succeeding business day, and Interest, if any, shall be payable
      thereon during such extension.

            

    

    

    
      	
              3.  

            	
              Maturity
      Date. All of the outstanding principal and interest shall be
      payable within fifteen (15) days following receipt of a written payment
      demand from the Holder.

            

    

    

    
      	
              4.  

            	
              Pre-Payment
      Demand. If  the Maker completes an underwritten public
      offering of its common stock or other form of security convertible into
      common stock pursuant to an effective registration statement under the
      Securities Act of 1933 (the “Act”), as amended, or a managed private
      offering exempt from registration under Section 4(2) of the Act and
      Regulation D promulgated thereunder (collectively, a “New Offering”)
      which results in proceeds received by the Maker net of underwriting
      discounts and commissions, of at least One Million and 00/100 dollars
      ($1,000,000.00) (a “Pre-Payment Event”), then at the sole and absolute
      discretion of the Holder, and upon written demand to the Maker (the
      “Pre-Payment Notice”), all amounts owed under this Note shall become due
      and payable within fifteen (15) days following Maker’s receipt of the
      Pre-Payment Notice.

            

    

    

    
      	
              5.  

            	
              Exemption
      from Restrictions. It is the intent of the Maker and the Holder in
      the execution of this Note that the indebtedness hereunder be exempt from
      the restrictions of the usury laws of any applicable jurisdiction. The
      Maker and the Holder agree that none of the terms and provisions contained
      herein shall be construed to create a contract for the use, forbearance or
      detention of money requiring payment of interest at a rate in excess of
      the maximum interest rate permitted to be charged by the laws of any
      applicable jurisdiction. In such event, if any holder of this Note shall
      collect monies which are deemed to constitute interest which would
      otherwise increase the effective interest rate on this Note to a rate in
      excess of the maximum rate permitted to be charged by the laws of any
      applicable jurisdiction, all such sums deemed to constitute interest in
      excess of such maximum rate shall, at the option of such holder, be
      credited to the payment of this principal amount due hereunder or returned
      to the Maker.

            

    

    

    ARTICLE
II

    COVENANTS

    

    
      	
              6.  

            	
              Conversion
      into Common Stock. If the Maker completes a New Offering, the Maker
      shall give the Holder the option to convert this Note, in whole or in
      part, into Common Stock of the Maker based on a conversion price equal to
      the lower of: (a) the closing bid price per share of the Common Stock
      on the date first above written as reported on the Over-The-Counter
      Bulletin Board, or if there is not such price on the Effective Date, then
      the last bid price on the date nearest preceding the date first above
      written, or; (b) the average price at which the Maker sells its
      Common Stock in the New Offering (the “Conversion Price”)(the “Conversion
      Shares”).

            

    

    

    
      	
              7.  

            	
              Piggyback
      Registration. If the Conversion Shares and the Underlying Shares
      (collectively, the “Shares”) have not been otherwise registered and at any
      time the Maker proposes to file a registration statement, whether or not
      for sale for the Maker’s own account, on a form and in a manner that would
      also permit registration of shares (other than in connection with a
      registration statement on Forms S-4 or S-8 or any similar or successor
      form) the Maker shall give to Holder, written notice of such proposed
      filing promptly, but in any case at least twenty (20) days before the
      anticipated filing. The notice referred to in the preceding sentence shall
      offer the holder(s) holding the Shares the opportunity to register such
      amount of the Shares as he may request (a “Piggyback Registration”).
      Subject to this Section, the Maker will include in each such Piggyback
      Registration (and any related qualification under state blue sky laws and
      other compliance filings, and in any underwriting involved therein) that
      portion of the Shares with respect to which the Maker has received written
      requests for inclusion therein within twenty (20) days after the
      written notice from the Maker is given. The holders holding any portion of
      the Shares will be permitted to withdraw all or part of the Shares from a
      Piggyback Registration at any time prior to the effective date of such
      Piggyback Registration. Notwithstanding the foregoing, the Maker will not
      be obligated to effect any registration of shares under this
      Paragraph 7 as a result of the registration of any of its securities
      solely in connection with mergers effected pursuant to a Form S-4
      Filing.

            

    

    

    
      	
              8.  

            	
               Covenants
      Regarding Registration

            

    

    
      	 
      	
              a.

            	 
      	
              The
      Maker shall use its best efforts to have any registration statement
      declared effective at the earliest possible time, and shall furnish such
      number of prospectuses as shall be reasonably required.

               

            
	 
      	
              b.

            	 
      	
              The
      Maker shall bear all costs, fees and expenses in connection with a
      Piggyback Registration,

            
	 
      	 
      	 
      	 
      
	 
      	
              c.

            	 
      	
              The
      Maker will take all necessary action which may be required in qualifying
      qualifying or registering the Shares included in any Piggyback
      Registration for offering and sale under the securities or blue sky laws
      of such states as are requested by the holders of such Shares, provided
      that the Maker shall not be obligated to execute or file any general
      consent to service or process or to qualify as a foreign corporation to do
      business under the laws of any such jurisdiction.

               

            

    

    
      	
              9.  

            	
              Indemnification.
      The Maker shall, at The Maker’s expense, protect, defend,
      indemnify, save and hold Holder harmless against any and all claims,
      demands, losses, expenses, damages, causes of action (whether legal or
      equitable in nature) asserted by any person or entity arising out of,
      caused by or relating to the Note, including without limitation the
      construction of the Note and the use or application of the proceeds of the
      Note, and The Maker shall pay Holder upon demand all claims, judgments,
      damages, losses and expenses (including court costs and reasonable
      attorneys’ fees and expenses) incurred by Holder as a result of any legal
      or other action arising out of the Note as
  aforesaid.

            

    

    

    
      	
              10.  

            	
              Attorneys
      Fees. The Maker shall reimburse Holder for all reasonable costs,
      attorney’s fees, and all other expenses in connection with this
      Note.

            

    

    

    
      	
              11.  

            	
              Notice of
      Default. So long as any amount under this Note shall remain unpaid,
      the Holder will, unless the Maker otherwise consents in writing, promptly
      give written notice to the Maker in reasonable detail of the occurrence of
      any Event of Default, or any condition, event or act which with the giving
      of notice or the passage of time or both would constitute an Event of
      Default.

            

    

    

     

    ARTICLE
III

    DEFAULT

    

    
      	
              12.  

            	
               Events
      of Default. Any of the following events shall constitute an “Event
      of Default” hereunder:

            

    

    

    
      	 
      	
              a.

            	 
      	
              Failure
      by the Maker to pay the principal or Interest, if any, of this Note when
      due and payable.

            
	 
      	 
      	 
      	 
      
	 
      	
              b.

            	 
      	
              The
      entry of an order for relief under Federal Bankruptcy Code as to the Maker
      or approving a petition in reorganization or other similar relief under
      bankruptcy or similar laws in the United States of America or any other
      competent jurisdiction, and if such order, if involuntary, is not
      satisfied or withdrawn within sixty (60) days after entry thereof; or
      the filing of a petition by the Maker seeking any of the foregoing,
      or

            
	 
      	 
      	 
      	
              consenting
      thereto; or the filing of a petition to take advantage of any debtor’s
      act; or making a general assignment for the benefit of creditors; or
      admitting in writing inability to pay debts as they mature;
    or

            
	 
      	 
      	 
      	 
      
	 
      	
              c.

            	 
      	
              Failure
      by the Maker to pay the principal and Interest, if any, of this Note
      concurrent with a Pre-Payment Event; or

            
	 
      	 
      	 
      	 
      
	 
      	
              d.

            	 
      	
              The
      breach of any covenant made by the Maker in this
  Note.

            

    

         

    
      	
              13.  

            	
              Acceleration.
      Upon any Event of Default (in addition to any other rights or
      remedies provided for under this Note), at the option of the Holder or any
      holder hereof, all sums evidenced hereby, including all principal, accrued
      but unpaid Interest, fees and all other amounts due hereunder, shall
      become immediately due and payable. If an Event of Default relating to
      certain events of bankruptcy or insolvency of the Maker occurs and is
      continuing, the principal of and interest, if any, on this Note will
      become and be immediately due and payable without any declaration or other
      act on the part of the Holder or any holder hereof. This Note shall bear
      interest at the rate of ten (10%) percent per annum upon the occurrence of
      an Event of Default (“Default Interest”). Payments of the Default Interest
      shall be due every thirty (30) days following the occurrence Event of
      Default.

            

    

    

    
      	
              14.  

            	
              No Waiver.
      Failure of the Holder or any holder hereof to exercise any option
      hereunder shall not constitute a waiver of the right to exercise the same
      in the event of any subsequent Event of Default, or in the event of
      continuance of any existing Event of Default after demand or performance
      thereof.

            

    

    

    
      	
              15.  

            	
               Pursuit
      of any Remedy. The Holder or holder hereof may pursue any remedy
      under this Note without notice or presentment. The Holder or any holder
      hereof has the right to direct the time, method and place of conducting
      any proceeding for exercising any remedy available to the Holder or any
      such holder hereof under this Note.

            

    

    

    ARTICLE
IV

    MISCELLANEOUS

    

    
      	
              16.  

            	
              Amendments.
      No amendment or waiver of any provision of this Note, nor consent
      to any departure by the Maker herefrom, shall in any event be effective
      unless the same shall be in writing and signed by the Holder, and then
      such waiver or consent shall be effective only in the specific instance
      and for the specific purpose for which
given.

            

    

    

    
      	
              17.  

            	
              Notices.
      All notices and other communications provided for hereunder shall
      be in writing (including telecopier communication) and mailed, telecopied,
      or delivered, to the Maker or the Holder, as applicable, at their
      respective addresses specified on the signature pages hereof, or, as to
      each party, at such other address as shall be designated by such party in
      a written notice to the other party. All such notices and communications
      shall, when mailed or telecopied, be effective when deposited in the mails
      or telecopied with receipt confirmed,
  respectively.

            

    

    

     

    

    
      	
              18.  

            	
              No Waiver;
      Remedies. No failure on the part of the Holder to exercise, and no
      delay in exercising, any right hereunder shall operate as a waiver
      thereof, nor shall any single or partial exercise of any right hereunder
      preclude any other or further exercise thereof or the exercise of any
      other right. All rights, powers and remedies of the Holder in connection
      with this Note are cumulative and not exclusive, and shall be in addition
      to any other rights, powers or remedies provided by law or
      equity.

            

    

    

    
      	
              19.  

            	
              Severability;
      Headings. If any one or more provisions of this Note shall be held
      to be illegal, invalid or otherwise unenforceable, the same shall not
      affect any other provisions of this Note and the remaining provisions of
      this Note shall remain in full force and effect. Article and paragraph
      headings in this Note are included herein for convenience of reference
      only and shall not constitute a part of this Note for any other purpose or
      be given any substantive effect.

            

    

    

     

    

    
      	
              20.  

            	
              Binding
      Effect; Transfer. This Note shall be binding upon and inure to the
      benefit of the Maker and the Holder and their respective successors and
      assigns. The Holder may not assign or otherwise transfer, or grant
      participations in, this Note or all or any portion of its rights hereunder
      or its interest herein to any person or entity, without the prior written
      consent of the Maker which consent shall not be unreasonably withheld. The
      Maker may not assign or otherwise transfer its rights or obligations
      hereunder or any interest herein without the prior written consent of the
      Holder. Any attempted assignment by the Maker or the Holder in
      contravention of this paragraph shall be null and void and of no force or
      effect.

            

    

    

    
      	
              21.  

            	
              Enforcement.
      It is agreed that time is of the essence of this Note and in the
      event of default of the terms of this Note, the Maker agrees to pay all
      costs of collection or enforcement, including reasonable attorneys’ fees
      and if there is a default in payment of any sum due
    hereunder.

            

    

    

    
      	
              22.  

            	
              Governing
      Law. This Note shall be governed by, and shall be construed and
      enforced in accordance with, the internal laws of the State of Michigan
      without regard to conflicts of laws principles. The venue of any legal
      proceeding taken in connection with this Note will be in Pontiac,
      Michigan.

            

    

    

    
      	
              23.  

            	
              Independence
      of Covenants. All covenants hereunder shall be given independent
      effect so that if a particular action or condition is not permitted by any
      of such covenants, the fact that it would be permitted by an exception to,
      or be otherwise within the limitations of, another covenant shall not
      avoid the occurrence of an Event of Default or event which with notice or
      lapse of time or both would become an Event of Default if such action is
      taken or condition exists.

            

    

    

    
      	
              24.  

            	
               Interpretation.
      The Holder and the Maker hereby waive the benefit of any statute or
      rule of law or judicial decision which would otherwise require that the
      provisions of this Note be construed or interpreted more strongly against
      the party responsible for the drafting
thereof.

            

    

    
      
         

      

      
         

        
          

        

      

      
         

      

    

     

     

     

         IN WITNESS
WHEREOF, this Note has been issued as of date first written
above.

    
      	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              MAKER:

            	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              Ecology
      Coatings, Inc.

            	 
      	 
      
	 
      	 
      	 
      	 
      	 
      
	 
      	 
      	
              /s/ Robert G. Crockett

            	 
      	 
      
	 
      	 
      	
               

              Robert
      G. Crockett

            	 
      	 
      
	 
      	 
      	
              Chief
      Executive Officer

            	 
      	 
      

    

    

    
      	 
      	 
      	 
      
	
              Mailing
      Address of Holder:

            	 
      	 
      
	 
      	 
      	 
      
	
               JB Smith
    LC

            	 
      	 
      
	
              2701
      Cambridge Court

            	 
      	 
      
	
               Suite
      425, Auburn Hills, MI  48326

            	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      
	 
      	 
      	 
      

    

    Mailing
Address of Maker:

    

    Ecology
Coatings, Inc.

    2701
Cambridge Court

    Suite
100

    Auburn
Hills, MI  48326

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