Document:

Exhibit
10(f)

 

MASTER AGREEMENT

 

This Master Agreement (this “Agreement”) is made and
entered into as of the       day of June, 2001,
by and among Redwood Energy Production, L.P., a Texas limited partnership (“Redwood”),
Gateway Processing Company, a Texas corporation (“Gateway”), and Hanover
Compression Limited Partnership, a Delaware limited partnership (“Hanover”).  Redwood, Gateway, and Hanover are sometimes
hereinafter individually referred to as a “Party” and collectively referred to as the
“Parties.”

 

RECITALS

 

WHEREAS, Redwood has acquired an undivided ninety-five
and three-tenths percent (95.3%) working interest (pending the release from
escrow of the record title Assignment as set forth in that Purchase and Sale
Agreement dated December 29, 2000 between Redwood and Panther Rodessa, L.P., et
al.) in and to the oil and gas leases described on Exhibit A-1 attached hereto
in the Madisonville Rodessa Field in Madison County, Texas (the “MRF”) within
the AMI (hereinafter defined), insofar and only insofar as said oil and gas
leases cover and include the right to produce gas from the Rodessa/Sligo
Interval (hereafter defined); and

 

WHEREAS, as of the date of this Agreement, Redwood’s
oil and gas leases in the MRF encompass the land map with the interpreted field
outline as shown on Exhibit A-2 attached hereto; and

 

WHEREAS, Redwood is the operator of the oil and gas
leases in the MRF; and

 

WHEREAS, Gateway desires to purchase the gas owned or
controlled by Redwood and produced from the Rodessa/Sligo Interval in the AMI;
and

 

WHEREAS, Gateway desires to have Hanover treat the gas
to remove Acid Gas and other impurities to make the gas marketable, deliver the
Acid Gas to Redwood, and deliver the pipeline quality gas to Gateway.

 

NOW, THEREFORE, the Parties agree as follows:

 

ARTICLE I.

Definitions

 

For purposes of this Agreement, the following terms
and phrases shall have the following meanings (other defined terms may be found
elsewhere in this Agreement):

 

“Acid Gas” means carbon dioxide and
hydrogen sulfide removed by the amine treater at the Treatment Plant from gas
produced from wells in the AMI in accordance with the Treating Agreement and
disposed of in the Injection Well.

 

“Affiliate” means (a) any Person that,
directly or indirectly, through one or more other Persons, controls, is
controlled by or is under common control with the Person specified and

 

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(b) with respect to any Person (i) the
securities of which are not publicly traded and (ii) that has no ultimate
parent the securities of which are publicly traded, any executive officer of
the Person specified and any Person controlled by one or more executive
officers of the Person specified.  For
the purpose of this definition of Affiliate, the term “control” means the power
to direct or cause the direction of the management of such Person, whether
through the ownership of voting securities, by contract or agency or otherwise.

 

“Agreement” has the meaning set forth in
the introductory paragraph.

 

“Ancillary Agreements” means
the Gas Purchase Agreement, the Transportation Agreement, the Treating
Agreement, and the Escrow Agreement.

 

“Area of Mutual Interest”
or “AMI” means the area outlined
on Exhibit A, including, without limitation, the lands covered by the leases
described in Exhibit A-1 and such other lands covered by leases or other
interests that Redwood may obtain during the term of this Agreement within the
AMI.  If any lease or other interest
acquired by Redwood lies partially within and partially outside of the AMI, the
entire interest shall be considered as being situated within the AMI, and the
AMI shall be revised to accord with any such change.

 

“Business Day” means any day other than a
Saturday, Sunday, or legal holiday in the State of Texas, and on which banks
are open for business in Houston, Texas.

 

“Claims” means any and all claims, demands,
suits, causes of action, losses, damages, liabilities, fines, penalties and
costs (including, without limitation, attorneys’ fees and costs of litigation),
whether known or unknown, including environmental and non-environmental claims.

 

“Code” means the
Internal Revenue Code of 1986, as amended.

 

“Closing”
has the meaning set forth in Section 2.1.

 

“Contract Year”
means the twelve (12) month period beginning the first day of the month
following the date of initial deliveries of gas under this Agreement, and each
subsequent twelve (12) month period thereafter; provided that the first
Contract Year shall include the period from the date of initial deliveries of
gas until the first day of the following month.

 

“Escrow Agreement”
means the Escrow Agreement in the form
attached hereto as Exhibit F, as the same may be amended from time to
time in accordance with Section 8.3.

 

“Excess Gas” means those proved reserves of
gas owned or controlled by Redwood from the Rodessa/Sligo Interval in the MRF
which are in excess of those proved reserves of gas required to support
production of eighteen million cubic feet of gas per day (18,000 Mcf/d) during
each of the Contract Years remaining under the Initial Term of this Agreement.

 

“Exhibits”  mean the following exhibits
which are attached hereto and made a part hereof for all purposes:

 

Exhibit A—Area of Mutual
Interest

Exhibit A-1—Oil and Gas
Leases

 

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Exhibit A-2—Land Map with
Interpreted Field Outline

Exhibit B—Ruby Magness
Well No. 1

Exhibit C—Gas Purchase
Agreement

Exhibit D—Treating
Agreement

Exhibit E—Transportation
Agreement

Exhibit F—Escrow
Agreement

Exhibit G—Ryder Scott
Reserve Report

 

“Force Majeure”  has the meaning
set forth in Section 8.1 below.

 

“Gas Purchase Agreement”
means the Gas Purchase Agreement between Gateway and Redwood in the form
attached hereto as Exhibit C, as the same may be amended from time to time
in accordance with Section 8.3.

 

“Governmental Authority” means any federal,
state, local, municipal or other government; any governmental, regulatory or
administrative agency, commission, body or other authority exercising or
entitled to exercise any administrative, executive, judicial, legislative,
police, regulatory or taxing authority or power; and any court or governmental
tribunal, including, without limitation, any tribal authority having
jurisdiction.

 

“Initial Term” has the meaning set forth in Section 5.2
below.

 

“Initial Well Report”  means that report furnished
by Redwood to Gateway and Hanover with respect to gas production volumes,
reserves, and composition from the Ruby Magness Well No. 1.

 

“Injection Well” means the disposal well to
be permitted and drilled, recompleted, or purchased as set forth in Section 3.2
below.

 

“Laws” means any and all laws, statutes,
ordinances, permits, decrees, writs, injunctions, orders, codes, judgments,
principles of common law, rules or regulations (including, without limitation,
environmental laws) which are promulgated, issued or enacted by a Governmental
Authority having jurisdiction.

 

“MRF” has the meaning set forth in the
Recitals above.

 

“Party” and/or “Parties”
has the meaning set forth in the introductory paragraph.

 

“Person” means an individual, group,
partnership, limited liability company, corporation, trust or other entity.

 

“Phase I” has the meaning set forth in
Article III.

 

“Phase II” has the meaning set forth in
Article IV.

 

“Plant Location” means the site of the
Treatment Plant.

 

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“Reserve Report” means that report entitled
Estimated Future Reserves and Income Attributable to Certain Leasehold
Interests by Ryder Scott Company, Petroleum Consultants covering the MRF dated
December 31, 2000 attached hereto and made a part hereof as Exhibit G.

 

“Rodessa/Sligo Interval” means the
stratigraphic equivalent of those sands, zones, and horizons occurring below
the surface of the earth encountered between the depths of 11,427 feet and
12,378 feet (electric log measurements) in the Ruby Magness Well No. 1 located
in the Amy Boatwright Survey, A-7, Madison County, Texas.

 

“Supplemental
Reserve
Report” has the meaning set forth in Section 4.1 and 4.4.

 

“Third Party” means any Person other than
the Parties and their respective Affiliates, including any Governmental
Authority.

 

“Transportation
Agreement” means the
Transportation Agreement between Gateway and its Affiliate in the form attached
hereto as Exhibit E, as the same may be amended from time to time in
accordance with Section 8.3.

 

“Treating Agreement”
means the Treating Agreement between Hanover and Gateway in the form attached
hereto as Exhibit D, as the same may be amended from time to time in accordance
with Section 8.3.

 

“Treatment Plant” means the Gas Treatment
Plant to be designed and installed by Hanover, all as more particularly set
forth in the Treating Agreement attached hereto as Exhibit D.

 

ARTICLE II.

Closing and Execution of Instruments

 

2.1          Closing.  The closing of the transactions contemplated hereunder (the
“Closing”) shall be at 10:00 a.m. on
               ,
June      , 2001 at the offices of Redwood Energy
Production, L.P., at One Maritime Plaza, Suite 400, San Francisco, CA
94111.  At the Closing the Parties  (or their Affiliates, as applicable) shall
execute and deliver all of the instruments to be executed in connection
herewith including, without limitation, the Ancillary Agreements.

 

2.2          Further
Assurances.  From
time to time after the Closing, upon reasonable request by any other Party,
each Party agrees to execute and deliver such additional documents as the
requesting Party may reasonably require to accomplish the purposes of this
Agreement.

 

ARTICLE III.

Phase I Initial Development Program

 

The actions conducted by the Parties pursuant to this
ARTICLE III shall be referred to as “Phase I.”

 

3.1          Ruby Magness Well No. 1.  After the Closing, Redwood shall perform, or
cause to be performed, remedial work on the Ruby Magness Well No. 1, conduct an
evaluation to

 

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confirm the production rates and reserves indicated in
the Reserve Report, and provide a current gas composition analysis to confirm
assumptions regarding gas quality used for sizing major equipment to be
installed at the Treatment Plant. Redwood shall furnish the other Parties with
the Initial Well Report indicating the results of the evaluation and
analysis.  If the Initial Well Report substantially
confirms the production rates and reserves indicated in the Reserve Report, and
substantially confirms the assumptions regarding gas quality used for sizing
major equipment to be installed at the Treatment Plant (hereinafter an
“Acceptable Initial Well Report”), and Redwood has successfully acquired a
permit from the applicable Governmental Authority to drill, recomplete, or
purchase the Injection Well as set forth below, the Parties shall be obligated
to perform their Phase I obligations as set forth herein.

 

3.2          Injection Well.  Upon receipt of the Acceptable Initial Well
Report, Hanover shall acquire not less than three (3) acres in the AMI for the
Plant Location, and Redwood will acquire a surface and bottomhole location and
associated injection rights for Redwood’s Injection Well.  Hanover and Redwood will coordinate their
acquisitions so that the Plant Location and the Injection Well location are
located as close as practicable. 
Hanover and Redwood shall have a contemporaneous closing of the Plant
Location and Injection Well location acquisitions.  At the closing, Hanover shall pay to Redwood’s seller the entire
purchase price of the Injection Well location (inclusive of all Third Party
brokerage, title insurance, and land-related costs borne by Redwood).  At the closing, Redwood shall take title to
the Injection Well location, and Hanover shall take title to the Plant
Location.  Hanover shall pay all taxes
assessed against or attributable to the land comprising the Plant Location, and
all taxes assessed against or attributable to Hanover’s improvements, fixtures,
furnishings, equipment, and other personal property on the Plant Location.  Redwood shall pay all taxes assessed against
or attributable to the land comprising the Injection Well location, and all
taxes assessed against or attributable to Redwood’s improvements, fixtures,
furnishings, equipment, and other personal property on the Injection Well
location.  Gateway shall pay all taxes
assessed against or attributable to its improvements, fixtures, furnishings,
equipment, and other personal property within the AMI.  Redwood shall thereafter use its reasonable
efforts to obtain a permit from the applicable Governmental Authority to drill,
recomplete, or purchase the Injection Well which shall be adequately sized for
both Phase I and Phase II estimated volumes of Acid Gas.  Redwood shall notify the other Parties upon
its receipt of the Injection Well permit, and shall within ninety (90) days
after receipt of the Injection Well permit at Redwood’s sole cost, risk, and
expense, subject to rig availability and events of Force Majeure, use
reasonable efforts to commence, or cause to be commenced, drilling or
recompletion operations on the Injection Well. 
Redwood and Hanover shall work closely together during the acquisition
of the Plant Location and the drilling, completion, or recompletion of the
Injection Well so as to efficiently coordinate the fabrication and installation
of the Treatment Plant.  The Injection
Well shall be drilled or recompleted in a prudent manner and in accordance with
oil and gas industry standards and applicable Laws.  The Injection Well shall be drilled or recompleted in accordance
with the following specifications: (i) the Injection Well shall have sufficient
capacity to dispose of all volumes of Acid Gas removed at the Treatment Plant
from reserves owned or controlled by Redwood and produced from the
Rodessa/Sligo Interval in the MRF, and (ii) Redwood shall use its reasonable
efforts to place the Injection Well’s surface location within one thousand feet
(1,000’) of the Treatment Plant.

 

3.3          Construction of
Treatment Plant. 
Promptly after notice from Redwood of the receipt of the Injection Well
permit, Hanover shall commence, or cause to be commenced, the

 

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fabrication of the facilities to be installed at the Treatment
Plant.  The Treatment Plant will be
designed and installed in accordance with the specifications set forth in the
Treating Agreement with an initial capacity sufficient to treat and bring up to
pipeline quality specifications eighteen million cubic feet of gas per day
(18,000 Mcf/d), assuming that the composition of said gas substantially
conforms to the gas quality set forth in the Acceptable Initial Well Report.  Hanover will not be required to install the
facilities at the Plant Location prior to (i) the Injection Well being tested
to the extent reasonably necessary to demonstrate that it will be able to
dispose of the projected volumes of Acid Gas, and (ii) Hanover’s receipt of an
Acceptable Initial Well Report.  Subject
to the aforesaid and subject to events of Force Majeure, the Treatment Plant
will be installed and operational within one hundred eighty (180) days after
the later to occur of (i) the receipt of notification by Redwood that it has
secured the Injection Well permit, or (ii) an Acceptable Initial Well Report;
provided, however, that if as of August 31, 2001, Redwood has not received the
required Injection Well permit and an Acceptable Initial Well Report, then the
one hundred eighty (180) day time period set forth in the previous sentence
will be changed to two hundred seventy (270) days; and provided further that if
as of December 31, 2001, Redwood has not received the required Injection Well
permit and an Acceptable Initial Well Report, then the time period will be
subject to renegotiation.  Hanover will
construct the Acid Gas disposal line from the Treatment Plant to the boundary
of the Plant Location, and Gateway will construct the Acid Gas disposal line
from the boundary of the Plant Location to the Injection Well at the sole cost,
risk, and expense of the Party undertaking such disposal line construction;
provided, however, if the disposal line exceeds one thousand feet (1,000’),
Redwood will reimburse Hanover or Gateway, as appropriate, for the actual
direct costs paid by such Party for that portion of the disposal line that
exceeds one thousand feet (1,000’).  The
Acid Gas disposal line shall have sufficient capacity to transport from the
Treatment Plant to the Injection Well for redelivery to Redwood all Acid Gas
removed at the Treatment Plant from up to fifty million cubic feet of gas per
day (50,000 Mcf/d).  Title to and
custody of the Acid Gas will be transferred from Gateway to Redwood at the
outlet flange of the Acid Gas disposal line at the Injection Well.  To the extent that Redwood has the right to
lay pipelines across any of the lands or leases in the AMI and such right may
be assigned, then, if requested by Hanover or Gateway, Redwood shall assign
such rights to Hanover or Gateway, as applicable, to assist in the installation
of the Acid Gas disposal line, provided that Hanover or Gateway, as applicable,
shall reimburse Redwood for all costs and expenses, if any, incurred in any
assignment of pipeline right-of-way or similar instrument.  No payment made by Redwood to Hanover or
Gateway hereunder shall constitute a release or waiver of Redwood’s audit
rights and right to seek reimbursement for any audit exceptions under Section 8.14
below.  Hanover shall also install and
maintain at the Treatment Plant, at its sole cost, risk, and expense, a
separator, a condensate line, an appropriately-sized water line, and a water
tank, and shall bear up to $1,500.00 per month of the costs to truck such water
to an appropriate disposal location. 
Any costs to dispose of the water in excess of $1,500.00 per month shall
be borne by Redwood.  In addition,
Redwood shall install and maintain at the Treatment Plant, at its sole cost,
risk, and expense, a condensate tank.

 

3.4          Construction of the Gathering and Transportation
System.  Promptly after
notice from Redwood of the receipt of the Injection Well permit, Gateway shall
commence, or cause to be commenced, the acquisition of rights-of-way for the
gathering and transportation pipelines for gas from the MRF.  The gathering line from the Ruby Magness
Well No. 1 to the Treatment Plant will be constructed and operated in
accordance with the specifications set forth in the Gas Purchase Agreement, and
the transportation system from the tailgate of the Treatment

 

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Plant to the TXU Lone Star Gas Company thirty inch
(30”) line will be constructed and operated in accordance with the
specifications set forth in the Transportation Agreement.  Gateway will not be required to install the
gathering line from the Ruby Magness Well No. 1 to the Treatment Plant or the
Transportation System prior to the Injection Well being tested to the extent
reasonably necessary to demonstrate that it will be able to dispose of the
projected volumes of Acid Gas and the receipt of an Acceptable Initial Well
Report.  Subject to the aforesaid and
subject to events of Force Majeure, the gathering and transportation pipelines
will be installed and operational within one hundred eighty (180) days after
the later to occur of (i) Gateway’s receipt of notification by Redwood that it
has secured the Injection Well permit, or (ii) an Acceptable Initial Well
Report.  If the gathering line from the Ruby
Magness Well No. 1 to the Treatment Plant exceeds two thousand feet (2,000’),
Redwood will reimburse Gateway for its actual direct costs associated with that
portion of the gathering line that exceeds two thousand feet (2,000’).  No payment made by Redwood to Gateway
hereunder shall constitute a waiver of Redwood’s audit rights and right to seek
reimbursement for any audit exceptions under Section 8.14 below.  To the extent that Redwood has the right to
lay pipelines across any of the lands or leases in the AMI and such right may
be assigned, then, if requested by Gateway, Redwood shall assign such rights to
Gateway to assist in the installation of the gathering and transportation
pipelines, provided that Gateway shall reimburse Redwood for all costs and
expenses, if any, incurred in any assignment of pipeline right-of-way or
similar instrument.

 

ARTICLE IV.

Phase II Development Program

 

The actions conducted by the Parties pursuant to this
ARTICLE IV shall be referred to as “Phase II.”

 

4.1          Supplemental Reserve Report.  Redwood may elect at its sole discretion to
drill, or cause to be drilled, one (1) or more additional wells in the
MRF.  Upon the successful completion of
any such additional well in the MRF, Redwood shall have Ryder Scott Company
prepare a Supplemental Reserve Report, and shall promptly furnish the other
Parties with a copy of same.  The
Supplemental Reserve Report will show the expected annual gas production by
Contract Year based on proved reserves attributable to Redwood’s interest in the
Rodessa/Sligo Interval in the MRF assuming treating equipment of the same size
as described in Exhibit B to the Treating Agreement.

 

4.2          Additional Treating Facilities / Preferential Right.  If the Supplemental Reserve Report indicates
that Redwood can produce more than 18,000 Mcf per day, on average, during each
Contract Year through the end of the seventh (7th) Contract Year,
then Hanover and Gateway shall commence negotiations to amend the Treating
Agreement for Hanover to install and operate additional facilities at the
Treatment Plant. Any such amendment shall be submitted to Redwood for its
approval. If within sixty (60) Business Days of its receipt of the proposed
Treating Agreement amendment Redwood fails or refuses in its sole discretion to
approve the amendment, it may elect to install and operate, or negotiate with a
Third Party to install and operate, additional treating equipment to handle the
volumes of Excess Gas.  Redwood’s
failure to notify the other Parties in a timely manner shall be deemed an
election not to approve the amendment. 
Once Redwood has prepared or received the specifications, construction
schedule, and pricing information with respect to the installation and
operation of the additional treating

 

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facilities, its shall provide same to Hanover.  Within thirty (30) Business Days of receipt
of such specifications and pricing information, Hanover shall notify Redwood
whether it elects to match such specifications, construction schedule, and
pricing.  Hanover’s failure to notify
Redwood in a timely manner shall be deemed an election not to match such
specifications, construction schedule, and pricing.  If Hanover elects to install and operate the additional
facilities, Hanover and Gateway shall amend the Treating Agreement to reflect
the specifications, construction schedule, and pricing information provided by
Redwood.  If Hanover fails or refuses to
notify Redwood in a timely manner of its election to install and operate the
additional treating facilities in accordance with Redwood’s specifications,
construction schedule, and pricing, or elects not to install and operate the
additional facilities (i) Gateway and Redwood will amend the Gas Purchase
Agreement to release all volumes of Excess Gas, and (ii) the Excess Gas shall
be committed and dedicated to a transportation agreement with terms and
conditions substantially identical to the Transportation Agreement except that
Redwood will be Shipper in lieu of Gateway.

 

4.3          Gathering System for Additional Wells.  Upon notification by Redwood of its
successful completion of any additional well or wells in the AMI, Gateway shall
commence, or cause to be commenced, the construction of a gathering line(s)
from the additional well(s) to the Ruby Magness Well No. 1 (or any other additional
well), or the Treatment Plant (or Redwood’s or a Third Party’s treating
facilities, as the case may be), the actual location and route of the gathering
line(s) to be determined at Gateway’s sole discretion, after reasonable
consultation with Redwood.  Any such
additional gathering line(s) shall be constructed and operated in accordance
with the specifications set forth in that Gas Purchase Agreement.  Gateway will build any additional gathering
line(s) at its sole cost, risk, and expense; provided, however, with respect to
each additional well, to the extent that the gathering line (whether between
wells or between the well and the applicable treating facilities) exceeds five
thousand feet (5,000’), Redwood will reimburse Gateway for its actual direct
costs associated with that portion of the gathering line which exceeds five
thousand feet (5,000’).  To the extent
that Redwood has the right to lay pipelines across any of the lands or leases
in the AMI and such right may be assigned, then, if requested by Gateway,
Redwood shall assign such rights to Gateway to assist in the installation of
the gathering and transportation pipelines, provided that Gateway shall
reimburse Redwood for all costs and expenses, if any, incurred in any
assignment of pipeline right-of-way or similar instrument.  No payment made by Redwood to Gateway
hereunder shall constitute a release or waiver of Redwood’s audit rights and
right to seek reimbursement for any audit exceptions under Section 8.14 below.

 

4.4          Treating Facilities for Non-Rodessa/Sligo Interval
Gas.  If Redwood
completes a well which is capable of producing gas from any formation or
horizon in the AMI other than the Rodessa/Sligo Interval, then Redwood shall
have Ryder Scott Company prepare a Supplemental Reserve Report, and shall
promptly furnish the other Parties with a copy of same and a gas analysis.  The Supplemental Reserve Report will show
the expected annual gas production by Contract Year based on proved reserves
attributable to Redwood’s interest. 
Promptly after receipt of the Supplemental Reserve Report, Hanover and
Gateway shall commence negotiations to amend the Treating Agreement for Hanover
to install and operate additional facilities at the Treatment Plant for the
non-Rodessa/Sligo Interval gas.  Any such
amendment shall be submitted to Redwood for its approval. If within sixty (60)
Business Days of its receipt of the proposed Treating Agreement amendment
Redwood fails or refuses in its sole

 

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discretion to approve the amendment, it may elect to
install and operate, or negotiate with a Third Party to install and operate,
additional treating equipment to handle the volumes of non-Rodessa/Sligo
Interval gas.  Redwood’s failure to
notify the other Parties in a timely manner shall be deemed an election not to
approve the amendment.  Once Redwood has
prepared or received the specifications, construction schedule, and pricing
information with respect to the installation and operation of the additional
treating facilities, its shall provide same to Hanover.  Within thirty (30) Business Days of receipt
of such specifications and pricing information, Hanover shall notify Redwood
whether it elects to match such specifications, construction schedule, and
pricing.  Hanover’s failure to notify
Redwood in a timely manner shall be deemed an election not to match such
specifications, construction schedule, and pricing.  If Hanover elects to install and operate the additional facilities,
Hanover and Gateway shall amend the Treating Agreement to reflect the
specifications, construction schedule, and pricing information provided by
Redwood.  If Hanover fails or refuses to
notify Redwood in a timely manner of its election to install and operate the
additional treating facilities in accordance with Redwood’s specifications,
construction schedule, and pricing, or elects not to install and operate the
additional facilities the non-Rodessa/Sligo Interval gas shall be committed and
dedicated to a transportation agreement with terms and conditions substantially
identical to the Transportation Agreement except that Redwood will be Shipper
in lieu of Gateway.

 

4.5          Preferential Right to Acquire Treatment Plant.  If at any time during the Term hereof,
Hanover enters into an agreement with a Third Party to sell all or any portion
of the Treatment Plant, it shall promptly provide written notice to Redwood and
furnish Redwood with full information concerning the pending sale including the
identity of the proposed purchaser, the purchase price, and all other material
terms of the offer.  Redwood shall have
an optional prior right for a period of ten (10) Business Days from receipt of
Hanover’s notice of the sale, to purchase on the same terms and conditions the
interest that Hanover proposes to sell. 
If the sale of the Treatment Plant is part of a larger transaction,
Hanover shall provide Redwood with a reasonable allocation of that portion of
the purchase price relating to the Treatment Plant.  Redwood shall have no preferential purchase right in any case
where Hanover enters into a financing transaction involving the Treatment
Plant, or in any stock or partnership interest sale which results in a change
in control of the entity that owns the Treatment Plant.

 

ARTICLE V.

Escrow Agreement / Term / Limited Recourse / Third Party Treating

 

5.1          Escrow Agreement.  Prior to the Closing Hanover and Redwood
will enter into an Escrow Agreement with The Chase Manhattan Bank.  In accordance with the Escrow Agreement, The
Chase Manhattan Bank will (i) receive into an Escrow Account all proceeds
derived from the sale of the gas owned or controlled by Redwood, produced from
the Rodessa/Sligo Interval in the AMI in each month, and sold to Gateway, (ii)
remit to Hanover and to Gateway their respective shares of the Fixed Monthly
Treating Fee or the Floating Monthly Treating Fee, as applicable, and (iii)
remit to Redwood all remaining proceeds after payment of the items under (ii)
above.  Redwood shall bear all of The
Chase Manhattan Bank’s fees and expenses arising under or with respect to the
Escrow Agreement.  Notwithstanding the
foregoing, the Parties agree that (i) all amounts to be received by Hanover
pursuant to the provisions of any borehole farmout under Section 5.6 below
shall be paid directly to Hanover and shall not be paid into the Escrow
Account, and (ii) all Third Party treating revenues derived

 

9

 

under Section 5.4 below shall be paid directly to
Hanover and subsequently disbursed as set forth therein, and shall not be paid
into the Escrow Account.

 

5.2          Term.  The term of this Agreement and the transactions contemplated
hereunder shall be for an initial term of seven (7) Contract Years (the
“Initial Term”), and then Contract Year to Contract Year thereafter; provided,
however, this Agreement may be cancelled by any Party at the end of the Initial
Term or at the end of any Contract Year thereafter by providing the other
Parties with prior written notice at least ninety (90) days in advance of the
cancellation date.  The Initial Term
shall be extended (i) by the duration of any event of Force Majeure under
Section 8.1 below, and (ii) for such periods of time in excess of thirty (30)
days in any Contract Year that the Treatment Plant, the gathering or transportation
system, or Redwood’s well(s) are inoperative or shut-in for repairs, mechanical
malfunction, or any other reason whatsoever.

 

5.3          Limited Recourse.  Gateway and Hanover shall look solely to the
proceeds derived from Gateway’s sale of the gas owned or controlled by Redwood
produced from the Rodessa/Sligo Interval in the AMI in each month as the source
of payment of the corresponding gathering, separating, dehydrating, treating,
and transportation fees and expenses incurred in said month with respect to
such gas.  Gateway and Hanover
acknowledge that neither Redwood nor any of its partners, Affiliates, or any of
their directors, officers, employees, or representatives shall have any
personal liability or obligation with respect to any payment made or to be made
by Redwood to Hanover, Gateway, or any of their Affiliates hereunder, and that
the only source for payment of any such gathering, separating, treating,
dehydrating, or transportation fees and expenses incurred in any month are the
proceeds attributable to the Gateway’s sale of Redwood’s owned or controlled
gas produced from the Rodessa/Sligo Interval in the AMI for said month.  All payment obligations to Hanover or
Gateway hereunder are entirely without recourse to Redwood, its partners,
Affiliates, and their directors, officers, employees, and representatives.  Notwithstanding the foregoing, the Parties
agree that nothing herein shall limit Hanover’s or Gateway’s recourse in cases
of Redwood’s fraud or willful misconduct. 
The Parties further agree that (i) any payments to be made by Redwood to
either of the other Parties under Sections 3.3, 3.4, or 4.3 for reimbursement
of costs associated with excess disposal or gathering line length or (ii) any
costs and expenses to be borne by Redwood in connection with oxygen removal
facilities under Section 4.2 of the Gas Purchase Agreement shall be general
partnership obligations which are not subject to limited recourse provisions
hereof.

 

5.4          Third Party Gas Treating.  During the term hereof, all deliveries by
Gateway of Redwood’s owned or controlled gas in the MRF to Hanover for treating
in the Treatment Plant will have priority over any gas deliveries made by any
other party up to the total plant capacity. 
Subject to applicable Laws and the orders of any applicable Governmental
Authority, the Parties agree and acknowledge that Hanover shall not treat any
Third Party gas produced from the Rodessa/Sligo Interval in the AMI.  Hanover may accept and treat non- Rodessa/Sligo
Interval Third Party gas on an interruptible basis subject to availability of
any unused plant capacity.  In the event
that the total volumes of gas delivered by any Third Party and Redwood’s owned
or controlled gas delivered to the Treatment Plant by Gateway exceed plant
capacity, Gateway will have the right to utilize one hundred percent (100%) of
the Treatment Plant capacity for such gas. 
If, subject to the foregoing, Hanover treats Third Party gas in the
Treatment Plant, and using reasonable criteria Redwood has satisfied itself
that its Injection Well has sufficient reservoir capacity to handle the Acid
Gas associated with the gas dedicated under the Gas

 

10

 

Purchase Agreement, then Redwood shall accept in its
Injection Well the Acid Gas associated with the Third Party gas, subject to any
capacity restraints and to the negotiation of a disposal fee mutually agreeable
to Redwood and the Third Party.  Redwood
and Hanover will share the gross Third Party treating revenue (i.e. treating
revenue before deducting direct and indirect costs associated with treating the
Third Party gas volumes) related to treating the Third Party gas and the
disposal fee paid by the Third Party to inject Acid Gas into Redwood’s
Injection Well in the proportion of seventy-five percent (75%) to Redwood and
twenty-five percent (25%) to Hanover; provided, however, if in any month the
proceeds derived from Gateway’s sale of gas owned or controlled by Redwood and
produced from the MRF are insufficient to reach the Floating or the Fixed
Monthly Treating Fee, as such terms are defined in the Gas Purchase Agreement,
then for any such month all (100%) of gross Third Party treating revenue and
the associated disposal fee up to the amount of the shortfall in the Floating
or the Fixed Monthly Treating Fee, as applicable, shall be paid to Hanover for
the benefit of itself and Gateway.  For
any month, once the Floating or the Fixed Monthly Treating Fee amount has been
reached, the allocation of gross Third Party treating revenue and the
associated disposal fee shall return to seventy-five percent (75%) to Redwood
and twenty-five percent (25%) to Hanover.

 

5.5          Binding Covenant.  This Agreement and the dedication of gas
owned or controlled by Redwood from the AMI in the Gas Purchase Agreement shall
be a real covenant running with the land. 
Any assignment by Redwood shall be made expressly subject to the terms
and conditions of this Agreement.

 

5.6          Borehole Farmout.  With respect to payment of the Fixed Monthly
Treating Fee (as defined in the Gas Purchase Agreement), Hanover shall look
solely to the proceeds derived from the sale of the gas owned or controlled by
Redwood produced from the Rodessa/Sligo Interval in the AMI in each month as
the source of payment of the corresponding treating fees incurred in said month
with respect to such gas.  If the
proceeds derived from the sale of the gas owned or controlled by Redwood
produced from the Rodessa/Sligo Interval in the AMI are not sufficient to pay the
Fixed Monthly Treating Fee for (i) three (3) consecutive months, or (ii) any
four (4) months in a six (6) month period, or (iii) if in any six (6) month
period Hanover has received proceeds aggregating fifty percent (50%) or less of
the Fixed Monthly Treating Fee and during any two (2) months of the next six
(6) months receives less than the Fixed Monthly Treating Fee, Hanover may
request that Redwood commence the drilling of an additional well to the
Rodessa/Sligo Interval within one hundred twenty (120) days, subject to the
approval of applicable Governmental Authority and rig availability.  If Redwood fails to respond to Hanover’s
request within twenty (20) Business Days of receipt thereof, or refuses to
drill such additional well, then Hanover may request, and Redwood promptly
shall grant, a mutually acceptable borehole farmout for such additional well to
Hanover at a legal location within the AMI. 
If any party holds a deed of trust lien or other security interest over
Redwood’s leasehold interest in the AMI, Redwood shall cause such party to
subordinate its lien or security interest to Hanover’s interest under the
borehole farmout.  Redwood shall serve
as contract operator for Hanover and shall drill, or cause to be drilled, such
additional well at Hanover’s sole cost and expense.  Redwood shall commence the drilling of an additional well to the
Rodessa/Sligo Interval within one hundred twenty (120) days from the grant of
the borehole farmout to Hanover, subject to the approval of applicable
Governmental Authority and rig availability, and shall operate the well on
behalf of Hanover.  Redwood shall drill,
complete, equip, and operate, or plug and abandon, if appropriate, any such
additional well as a reasonable prudent operator

 

11

 

and in accordance with all Laws and Governmental
Authority having jurisdiction.  On the
first day of the month after the month that Hanover has received from the
proceeds of gas produced from the additional well and sold by Redwood on behalf
of Hanover pursuant to the Gas Purchase Agreement an amount equal to two
hundred fifty percent (250%) of all of Hanover’s direct costs and expenses
incurred in drilling and completing the additional well, and one hundred
percent (100%) of all equipment and lease operating costs associated therewith,
all of Hanover’s right, title, and interest in and to the additional well shall
ipso facto revert and revest in
Redwood.

 

ARTICLE VI.

Representations and Warranties

 

Each Party represents and warrants to the other
Parties that as of the date hereof:

 

6.1          Organization and
Good Standing. 
Such Party is duly organized, validly existing and in good standing
under the Laws of the state of its formation and has all requisite corporate or
partnership power and authority to own and develop its interests and assets in
or related to the MRF.  Such Party is
duly qualified to do business in Texas and is in good standing in the State of
Texas and, if applicable, in the other jurisdictions in which it transacts business.

 

6.2          Company
Authority; Authorization of Agreement.  Such Party has all requisite corporate or
partnership power and authority to execute and deliver this Agreement and the
Ancillary Agreements to which it is a party, to consummate the transactions
contemplated by this Agreement and the Ancillary Agreements to which it is a
party, and to perform all of its obligations under this Agreement and the
Ancillary Agreements to which it is a party. 
To the extent it is a party hereto, this Agreement and the Ancillary
Agreements constitute the valid and binding obligations of such Party,
enforceable against it in accordance with their terms, except as such
enforceability may be limited by bankruptcy, insolvency or other Laws relating
to or affecting the enforcement of creditors’ rights and general principles of
equity (regardless of whether such enforceability is considered in a proceeding
at law or in equity).

 

6.3          No Violations.  Such Party’s execution and delivery of this
Agreement and the Ancillary Agreements to which it is a party, and the consummation
of the transactions contemplated hereby and thereby, will not:

 

(a)           conflict with or require the consent
of any Person under any of the terms, conditions or provisions of the charter,
certificate of formation or other organizational document of such Party;

 

(b)           conflict with, result in a breach of,
constitute a default under or constitute an event that with notice or lapse of
time, or both, would constitute a default under, accelerate or permit the
acceleration of the performance required by, or require any consent,
authorization or approval under: (i) any mortgage, indenture, loan, credit
agreement or other agreement evidencing indebtedness for borrowed money to
which such Party is a party or by which such Party is bound except, where such conflict,
breach or default would not materially affect such Party’s ability to
consummate the transactions contemplated hereby and thereby (other than the
Deeds of Trust referenced in Section

 

12

 

15.1 of the Gas Purchase
Agreement); or (ii) any order, judgment or decree of any Governmental
Authority; or

 

(c)           result in the creation or imposition
of any lien or encumbrance on any assets of such Party in the MRF.

 

6.4          Third Party
Claims, Disputes and Litigation.  There are no Third Party Claims, disputes or
litigation pending or, to such Party’s knowledge, threatened against such Party
that would prevent the consummation of the transaction contemplated by this
Agreement or the Ancillary Agreements.

 

6.5          Bankruptcy.  There are no bankruptcy, reorganization or
receivership proceedings pending, being contemplated by or, to such Party’s
knowledge, threatened against such Party.

 

6.6          Foreign Person.  Such Party is not a “foreign person” within
the meaning of Section 1445 of the Code.

 

6.7          Brokers,
Agents and Finders. 
No Person claiming by, through or under such Party is entitled to any
broker’s, finder’s or similar fee by reason of the transactions contemplated by
this Agreement or the Ancillary Agreements.

 

6.8          Investments.  Prior to entering into this Agreement, such
Party was advised by and has relied solely on its own legal, tax and other
professional counsel concerning this Agreement, the Ancillary Agreements, the
interests and assets to which it may become entitled hereunder, and the value
thereof.  Such Party is and will be
acquiring such interests and assets for its own account and not for
distribution or resale in any manner that would violate any state or federal
securities Laws.

 

ARTICLE VII.

Choice of Law and Alternate Dispute Resolution

 

7.1          Choice of Law.  This Agreement shall be governed by and
construed in accordance with the Laws of the State of Texas, without giving
effect to conflicts of laws principles that would apply the laws of another
jurisdiction.

 

7.2          Alternate
Dispute Resolution

 

(a)           Good Faith Efforts.  The Parties wish to avoid disputes relating
to or arising out of this Agreement.  In
the event of any dispute or perceived problems, each Party pledges itself to
give notice to the other Party and to seek first an amicable resolution without
regard to mediation or arbitration. 
Except as otherwise provided in this Agreement, a Party shall be given
thirty (30) days from the date of such notice to correct its performance under
this Agreement.

 

(b)           Mediation.  In the event the Parties cannot reach an
amicable resolution to a dispute or perceived problem, the Parties shall within
fifteen (15) days after the end of the thirty (30)-day period set forth in (a)
agree upon a mediator and shall, within the next fifteen (15) days attempt to
mediate a solution.

 

13

 

(c)           Arbitration.  In the event mediation does not resolve the
matter, any action, dispute, Claim or controversy of any kind between the
Parties arising under, related to, in connection with or pertaining to this
Agreement (a “Dispute”) will be resolved by binding arbitration in
accordance with the terms hereof.  Any
Party may, by summary proceedings, bring an action in court to compel
arbitration of any Dispute.  Any
arbitration will be administered by the American Arbitration Association (the “AAA”)
and in accordance with the terms of this Section 7.2 and the Commercial
Arbitration Rules of the AAA, including the Optional Rules for Emergency
Measures of Protection, as supplemented to the extent necessary by the Federal
Arbitration Act (Title 9 of the United States Code).  If there is any inconsistency between this Section 7.2 and the
Commercial Arbitration Rules, or the Federal Arbitration Act, the terms of this
Section 7.2 will control the rights and obligations of the Parties.  Any arbitration will be conducted by three
(3) arbitrators. If there is another arbitrable Dispute among the Parties
pursuant to any agreement between them that involves the same facts and Parties
as the facts and parties with respect to which an arbitration has been
initiated pursuant to this Agreement, such dispute and any arbitration
initiated in connection therewith shall be consolidated with the arbitration
initiated pursuant to this Agreement. 
No other arbitration shall be consolidated with any arbitration
initiated pursuant to this Agreement without the agreement of the Parties or
parties thereto.  Arbitration must be
initiated within the applicable time limits set forth in this Agreement and not
thereafter or if no time limit is given, within the time period allowed by the
applicable statute of limitations. 
Arbitration may be initiated by any Party (“Claimant”) serving written
notice on the Party or Parties with whom such Dispute exists, respectively (“Respondent”
or “Respondents”)
that Claimant elects to refer the Dispute to binding arbitration. Claimant’s
notice initiating binding arbitration must identify the arbitrator Claimant has
appointed.  Respondent shall respond to
Claimant within thirty (30) days after receipt of Claimant’s notice,
identifying the arbitrator Respondent has appointed.  If Respondent fails for any reason to name an arbitrator within
the thirty (30) day period, Claimant will name the arbitrator for Respondent’s
account. The two (2) arbitrators so chosen shall select a third arbitrator (who
must have not less than seven years experience as an oil and gas lawyer) within
thirty (30) days after the second arbitrator has been appointed.  If the two (2) arbitrators are unable to
agree on a third arbitrator within sixty (60) days from initiation of
arbitration, then a third arbitrator shall be selected by the AAA office in
Houston, Texas, with due regard given to the selection criteria above and input
from the Parties and other arbitrators. 
The AAA shall select the third arbitrator not later than ninety (90)
days from initiation of arbitration. In the event AAA should fail to select the
third arbitrator within ninety (90) days from initiation of arbitration, then
either Party may petition the Chief United States District Judge for the
Southern District of Texas to select the third arbitrator.  Due regard shall be given to the selection
criteria above and input from the Parties and other arbitrators.  Each Party shall pay the compensation and
expenses of the arbitrator named by or for it (or its proportionate share if
more than one Party is aligned in the arbitration as a Claimant or Respondent),
and the Parties comprising the Claimant and the Respondent will each pay
one-half of the compensation and expenses of the third arbitrator.  All arbitrators must be neutral parties who
have never been officers, directors, or employees of the Parties or any of
their Affiliates.  Unless expressly
provided otherwise in this Agreement, the two (2) arbitrators named by the
Parties must have not

 

14

 

less than seven (7) years
experience in the oil and gas industry, and must have a formal education or
training in the area of dispute (e.g., accounting for an accounting
dispute, etc.).  The hearing will be
conducted in Houston, Texas and commence within thirty (30) days after the
selection of the third arbitrator.  The
Parties and the arbitrators should proceed diligently and in good faith in
order that the award may be made as promptly as possible.  Any arbitration proceeding hereunder will be
conducted in Houston, Texas and will be concluded within one hundred eighty
(180) days of the filing of the Dispute with the AAA.  All statutes of limitations and defenses based upon passage of
time applicable to any Dispute (including any counterclaim or setoff) shall be
interrupted by the filing of the arbitration and suspended while the
arbitration is pending.  The arbitrators
will be empowered to award sanctions and to take such other actions as they
deem necessary, to the same extent a judge could impose sanctions or take such
other actions pursuant to the Federal Rules of Civil Procedure and applicable
law; provided, however, that no award by the arbitrators will assess
consequential, punitive, exemplary, or special damages or losses (including,
without limitation, loss of profit or business interruption), but may assess
costs and expenses in a manner deemed equitable.  The arbitrators will make specific written findings of fact and
conclusions of law.  The decision of the
arbitrators will be final and binding on each Party.  Judgment on any award rendered by the arbitrators may be entered
in any court having jurisdiction.

 

ARTICLE
VIII.

Miscellaneous

 

8.1          Force Majeure

 

In the event of any Party hereto being rendered unable, wholly or in
part, by Force Majeure to carry out its obligations under this Agreement, other
than to make payments due hereunder, it is agreed that on such Party giving
notice and full particulars of such Force Majeure in writing or by facsimile to
the other Parties as soon as possible after the occurrence of the cause relied
on, then the obligations of the Party giving such notice, as far as they are
affected by such Force Majeure, shall be suspended from the commencement of and
during the continuance of any inability so caused but for no longer period, and
such cause shall as far as possible be remedied with all reasonable dispatch.

 

The term “Force Majeure,” as used herein, shall mean an act of God, act
of the public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion and any other causes whether of the kind enumerated or otherwise not
reasonably within the control of the Party claiming the suspension and which by
the exercise of reasonable diligence such Party is unable to prevent or
overcome.  Force Majeure shall include
the inability to acquire or delays in acquiring rights-of-way grants, permits,
or licenses at reasonable costs, and shall specifically include governmental
delays in issuing permits required for the installation of the Treatment Plant
if Hanover has filed all necessary applications for permits not later than
September 30, 2001.  Force Majeure shall
also include governmental delays in issuing permits required for the re-entry
of the Ruby Magness Well No. 1 and for the Injection Well.  Notwithstanding the foregoing, this
Agreement shall terminate on June 30, 2003 if any Party fails to obtain, in the
exercise of reasonable diligence, any required permit for the Treatment Plant,
the re-entry of the Ruby Magness Well No. I, or the Injection Well.

 

15

 

8.2          Notices.
All notices and other communications required or desired to be given hereunder
must be in writing and sent (properly addressed as set forth below) by:  (a) U.S. mail with all postage and
other charges fully prepaid, (b) hand delivery or (c) facsimile
transmission.  A notice will be deemed
effective on the date on which such notice is received by the addressee, if by
mail or hand delivery, or on the date sent, if by facsimile (as evidenced by
fax machine confirmation of receipt); provided, however, if such date is not a
Business Day, the date of receipt will be on the next date that is a Business
Day.  Each Party may change its address
by notifying the other Parties in writing of such address change.

 

	
  If to Redwood:

  	
  Redwood Energy Production, L.P.

  
	
   

  	
  One Maritime Plaza, Suite 400

  
	
   

  	
  San Francisco, CA 94111

  
	
   

  	
  Attn:  Mr.
  Stuart J. Doshi

  
	
   

  	
  Telephone 
  (415) 398-8186

  
	
   

  	
  Facsimile: 
  (415) 398-9227

  
	
   

  	
   

  
	
  If to Gateway:

  	
  Gateway Processing Company

  
	
   

  	
  500 Dallas Street, Suite 2615

  
	
   

  	
  Houston, TX 77002

  
	
   

  	
  Attn:  Mr.
  Michael Fadden

  
	
   

  	
  Telephone 
  (713) 336-0844

  
	
   

  	
  Facsimile: 
  (713) 336-0855

  
	
   

  	
   

  
	
  If to Hanover:

  	
  Hanover Compression Limited Partnership

  
	
   

  	
  12001 North Houston Rosslyn Road

  
	
   

  	
  Houston, TX 77086

  
	
   

  	
  Attn:  Mr.
  Michael J. McGhan, President

  
	
   

  	
  Telephone 
  (281) 447-8787

  
	
   

  	
  Facsimile: 
  (281) 447-8781

  

 

8.3          Amendments and
Severability.  No
amendments or other modifications to this Agreement will be effective or
binding on any of the Parties unless the same are in writing, are designated as
an amendment or modification, expressly reference this Agreement, and are
signed by each such Party.  The
invalidity of any one or more provisions of this Agreement will not affect the
validity of this Agreement as a whole, and in case of any such invalidity, this
Agreement will be construed as if the invalid provision had not been included
herein.  Any of the Ancillary Agreements
may be amended by the Parties thereto without the consent of any Party to this
Agreement who is not a party to the particular Ancillary Agreement being
amended; provided, however, that if any such amendment materially changes or
impairs any rights or alters or increases any payment or perfomance obligations
described in this Agreement or in the particular Ancillary Agreement for the
Party who is not a party to the amended Ancillary Agreement, the written
consent of such affected Party to such amendment shall be required.

 

8.4          Successors and
Assigns.  This
Agreement may not be assigned, either in whole or in part, without the express
written consent of the non-assigning Parties, which consent shall not be
unreasonably withheld; provided, however, without the consent of the other
Parties, any Party may assign this Agreement to a lender for collateral
security purposes.  The terms, covenants
and 

 

16

 

conditions contained in this Agreement are binding
upon and inure to the benefit of the Parties and their respective successors
and permitted assigns.

 

8.5          No Partnership
Created.  It is
not the purpose or intention of this Agreement to create (and it should not be
construed as creating) a joint venture, partnership or any type of association,
and the Parties are not authorized to act as an agent or principal for each
other with respect to any matter related hereto.  If, for federal income tax purposes, this Agreement and the operations
hereunder are regarded as a partnership, and if the Parties have not otherwise
agreed to form a tax partnership, each Party thereby affected elects to be
excluded from the application of all of the provisions of Subchapter “K,”
Chapter 1, Subtitle “A,” of the Code, as permitted and authorized by Section
761 of the Code and the regulations promulgated thereunder.  Any Party is authorized and directed to
execute on behalf of each Party such evidence of this election as may be
required by the Secretary of the Treasury of the United States or the Federal
Internal Revenue Service, including specifically, but not by way of limitation,
all of the returns, statements, and the data required by Treasury Regulations
§1.761.  Should there be any requirement
that each Party give further evidence of this election, each such Party shall
execute such documents and furnish such other evidence as may be required by
the Federal Internal Revenue Service or as may be necessary to evidence this
election.  No such Party shall give any
notices or take any other action inconsistent with the election made
hereby.  If any present or future income
tax laws of the state in which the MRF is located or any future income tax laws
of the United States contain provisions similar to those in Subchapter “K,”
Chapter 1, Subtitle “A,” of the Code, under which an election similar to that
provided by Section 761 of the Code is permitted, each Party 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.

 

8.6          Waiver of Certain
Remedies. 
Notwithstanding anything to the contrary in this Agreement, in no event
shall any Party be entitled to receive or be liable to any other Party for (and
each Party hereby waives) any consequential, special, indirect, or punitive
damages arising out of this Agreement or the transactions contemplated hereby,
irrespective of whether alleged to be by way of indemnity (other than indemnity
for Third Party claims) as a result of breach of any provision of this
Agreement, tort (including negligence and strict liability), or otherwise,
including, without limitation, any loss of profits, loss of income, loss of
use, loss of revenue, loss of contracts, loss of fuel, REGARDLESS OF WHETHER
ANY SUCH DAMAGES ARE CAUSED BY, CONTRIBUTED TO BY, OR ARISE OUT OF, THE SOLE,
JOINT OR CONCURRENT NEGLIGENCE (IN ANY DEGREE) OR STRICT LIABILITY OF THE OTHER
PARTIES.

 

8.7          No Third Party
Beneficiaries. 
Nothing contained in this Agreement will entitle anyone other than the
Parties or their successors and permitted assigns to any Claim, cause of
action, remedy or right of any kind whatsoever.

 

8.8          Construction.  THE PARTIES ACKNOWLEDGE THAT THEY HAVE HAD
AN ADEQUATE OPPORTUNITY TO REVIEW EACH AND EVERY PROVISION CONTAINED IN THIS
AGREEMENT AND TO SUBMIT THE SAME TO LEGAL COUNSEL FOR REVIEW AND COMMENT.  BASED ON THE FOREGOING, THE PARTIES AGREE
THAT THE RULE OF CONSTRUCTION THAT A CONTRACT BE

 

17

 

CONSTRUED AGAINST THE DRAFTER, IF ANY, NOT BE APPLIED
IN THE INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT.

 

8.9          Conflict in
Agreements.  If
any conflict exists between this Agreement and any Ancillary Agreement, then
(as between the Parties) the provisions of this Agreement shall control.

 

8.10        Execution in Counterparts.  This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, all which
when taken together shall constitute one and the same agreement.

 

8.11        Entire Agreement.  This Agreement and the Exhibits attached
hereto, which are incorporated herein by reference, supersede all prior and
contemporaneous negotiations, understandings, memoranda of understanding and
agreements (whether oral or written) between the Parties with respect to the
subject matter hereof and constitute the entire understanding and agreement
between the Parties with respect thereto.

 

8.12        Headings.  The headings contained herein are for
reference only and shall not in any way affect the meaning or interpretation of
this Agreement.

 

8.13        DTPA Waiver.  After consultation with their respective
attorneys, and to the extent permitted by applicable law, each Party waives its
respective rights under the Deceptive Trade Practices—Consumer Protection Act,
Section 17.41 et seq., Texas Business and Commerce Code.

 

8.14        Audit.  Within twelve (12) months from the date of any payment from
Redwood to Hanover or Gateway under Sections 3.3, 3.4, or 4.3, Redwood or
Hanover may conduct an audit of the books and records relating to the disposal
or gathering pipeline, as applicable. 
The audit shall be conducted at the offices of Hanover or Gateway, as
applicable, during usual business hours. 
The audited Party shall cooperate with Redwood or Hanover, as
applicable, and its representatives during any audit, including, if requested
by Redwood or Hanover, as applicable, providing access to necessary
personnel.  Within ten (10) Business
Days of the completion of the audit, Redwood or Hanover, as applicable, shall
furnish the audited Party with any audit exceptions.  The Parties shall thereafter attempt to resolve any audit
exceptions in a prompt and amicable manner; provided, however, if the Parties
cannot reach agreement, either Party may initiate the Alternate Dispute
Resolution procedures of Section 7.2.

 

8.15        No Reliance.  Each Party acknowledges that it has relied
only upon its own independent investigation and analysis of the MRF and, except
as expressly set forth in this Agreement, is not acting in reliance upon the
representations or warranties of any other Party with respect to any of the
matters covered hereby.

 

8.16        Acid Gas Indemnification.  Hanover shall DEFEND, INDEMNIFY,
PROTECT, and HOLD HARMLESS Gateway and Redwood and their respective officers,
directors, employees, agents, and representatives, from and against all Claims,
including, without limitation, any Claims with respect to damage to property,
or injury or death of any person, arising out of, with respect to, or in
connection with Acid Gas prior to its delivery at the boundary of the Plant
Location into Gateway’s Acid Gas disposal line,

 

18

 

including, without limitation, any claims arising
out of, with respect to, or in connection with the sole, joint, or concurrent
negligence or strict liability of Gateway or Redwood, or their respective
officers, directors, employees, agents, and representatives.

 

Gateway shall DEFEND, INDEMNIFY, PROTECT, and HOLD
HARMLESS Hanover and Redwood and their respective officers, directors,
employees, agents, and representatives, from and against all Claims, including,
without limitation, any Claims with respect to damage to property, or injury or
death of any person, arising out of, with respect to, or in connection with
Acid Gas delivered hereunder from the boundary of the Plant Location up to the
outlet flange of the Acid Gas disposal line at the Injection Well, including,
without limitation, any claims arising out of, with respect to, or in
connection with the sole, joint, or concurrent negligence or strict liability
of Hanover or Redwood, or their respective officers, directors, employees,
agents, and representatives.

 

Redwood shall DEFEND, INDEMNIFY, PROTECT, and HOLD
HARMLESS Gateway and Hanover and their respective officers, directors,
employees, agents, and representatives, from and against all Claims, including,
without limitation, any Claims with respect to damage to property, or injury or
death of any person, arising out of, with respect to, or in connection with
Acid Gas delivered hereunder from and after the outlet flange of the Acid Gas
disposal line at the Injection Well, including, without limitation, any claims
arising out of, with respect to, or in connection with the sole, joint, or
concurrent negligence or strict liability of Hanover or Gateway, or their
respective officers, directors, employees, agents, and representatives.

 

IN WITNESS WHEREOF, the Parties hereto have caused this Agreement to be
duly executed and delivered by its respective officers, thereunto duly
authorized, in multiple originals, all as of the day and year first above
written.

 

	
   

  	
  REDWOOD ENERGY
  PRODUCTION, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Redwood Energy Company,

  
	
   

  	
   

  	
  its General Partner

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  GATEWAY PROCESSING
  COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

19

 

	
   

  	
  HANOVER COMPRESSION
  LIMITED PARTNERSHIP

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  

 

20

Exhibit
C

 

GAS PURCHASE AGREEMENT

 

 

between

 

 

GATEWAY PROCESSING
COMPANY

 

 

and

 

 

REDWOOD ENERGY
PRODUCTION, L.P.

 

21

 

INDEX

 

GAS PURCHASE AND SALES AGREEMENT

 

	
  ARTICLE I – Definitions

  
	
   

  
	
  ARTICLE II – Dedication and Commitment

  
	
   

  
	
  ARTICLE III – Quantity

  
	
   

  
	
  ARTICLE IV – Quality

  
	
   

  
	
  ARTICLE V - Delivery Conditions

  
	
   

  
	
  ARTICLE VI – Measurement

  
	
   

  
	
  ARTICLE VII – Price

  
	
   

  
	
  ARTICLE VIII – Liquids and Liquifyables

  
	
   

  
	
  ARTICLE
  IX – Taxes

  
	
   

  
	
  ARTICLE X – Regulation

  
	
   

  
	
  ARTICLE XI - Force Majeure

  
	
   

  
	
  ARTICLE XII – Title

  
	
   

  
	
  ARTICLE XIII – Term

  
	
   

  
	
  ARTICLE XIV - Billing and Payment

  
	
   

  
	
  ARTICLE XV – Miscellaneous

  
	
   

  
	
  ARTICLE XVI - Notice and Representatives

  
	
   

  
	
  ARTICLE XVII - Alternative Dispute
  Resolution

  

 

22

 

GAS
PURCHASE AGREEMENT

 

THIS AGREEMENT, made and entered into this
          day
of                         ,
2001, by and between GATEWAY PROCESSING COMPANY, herein referred to as “Buyer”
and REDWOOD ENERGY PRODUCTION, L.P., herein referred to as “Seller”.

 

W I T N E S S E T H:

 

WHEREAS, Seller has available Seller’s Gas Reserves
(as such term is defined below); and

 

WHEREAS, the parties hereto desire to enter into an
Agreement for the sale by Seller and the purchase by Buyer of Seller’s Gas
Reserves;

 

NOW THEREFORE, in consideration of the premises and
the mutual covenants herein contained, Seller agrees to sell and deliver to
Buyer and Buyer agrees to purchase and receive from Seller, pursuant to the
terms and conditions hereinafter set forth, Seller’s Gas Reserves.

 

ARTICLE I–
Definitions

 

Capitalized terms used and not otherwise defined in
this Agreement have the meanings given to them in the Master Agreement of even
date herewith among Buyer, Seller and Hanover, as the same may properly be
amended from time to time (the “Master Agreement”), which Master Agreement sets
forth the obligations of the parties to install equipment and perform certain
operations in the AMI.  Such definitions
shall survive termination of the Master Agreement.  In addition, the following defined terms are used in this
Agreement:

 

1.1           The term “Btu” shall
mean British Thermal Units and “MMBtu” shall mean one million (1,000,000) Btu.

 

1.2           “Day” or “day” shall
mean the 24-hour period commencing at 9:00 a.m., local time, on one calendar
day and ending at 9:00 a.m., local time, on the following calendar day.

 

1.3           “Gas” or “gas” shall
mean natural gas produced from gas wells (gas well gas) and gas produced in
association with oil from oil wells (oil well gas), and the residue gas from
treating gas well gas or oil well gas or both.

 

1.4           “Gross heating
value” shall mean the number of Btu’s evolved by the complete combustion, at
constant pressure, of the amount of gas which would occupy a volume of one (1)
cubic foot at a temperature of sixty degrees (60o) Fahrenheit, if saturated
with water vapor and under a pressure equivalent to that of thirty (30) inches
of mercury at thirty-two degrees (32o) Fahrenheit, and under standard
gravitational force (acceleration 980.665 cm per second per second) with air of
the same temperature and pressure as the gas when the products of combustion
are cooled to the initial temperature of the gas and air and when the water
formed by combustion is condensed to the liquid state.  The gross heating value of the gas thus
obtained shall be expressed on the measurement basis set forth in Section 6.1
of this Agreement.

 

23

 

1.5           “Hanover” shall mean
Hanover Compression Limited Partnership, a Delaware limited partnership.

 

1.6           “Jurisdictional
Agency” shall mean the Texas Railroad Commission and other regulatory agencies
having jurisdiction.

 

1.7           “Lone Star” shall
mean TXU Lone Star Pipeline Company.

 

1.8           “Mcf” shall mean one
thousand (1,000) cubic feet of gas.  The
term “Bcf” shall mean one billion cubic feet of gas.

 

1.9           “MMBtus Delivered”
shall have the meaning set forth in Section 7.2(b) below.

 

1.10         “Month” or “month”
shall mean the period beginning at 9:00 a.m., local time, on the first day of a
calendar month and ending at 9:00 a.m., local time on the first day of the
succeeding calendar month.

 

1.11         “Point of Delivery”
shall have the meaning set forth in Section 5.1 below.

 

1.12         “Point of
Measurement” shall have the meaning set forth in Section 5.2 below.

 

1.13         “Seller’s Delivery
Capacity” shall mean the maximum quantity of gas well gas owned or controlled
by Seller and attributable to the well(s) covered hereunder averaged over a period
of seventy-two (72) hours which, in the course of prudent operations (as
determined by Seller exercised in good faith and consistent with the lawful
rules and regulations of the Jurisdictional Agency), can be delivered at a
stabilized flow rate to Buyer at the Point of Delivery set forth in Section 5.1
at the pressure provided in Section 5.4. 
Such determined delivery capacity shall be effective as of the first day
of the next succeeding month in which such determination is made and thereafter
until superseded by the results of the next determination.  As soon as practicable after the date on
which delivery is commenced hereunder, Seller’s Delivery Capacity shall be
determined.  Either party shall have the
right to request tests for determination of Seller’s Delivery Capacity, but not
more often than once every three (3) months, in which case Seller shall conduct
and Buyer may witness such test within thirty (30) days of such request.

 

1.14         “Seller’s Gas
Reserves” shall mean all gas owned or controlled by Seller and attributable to
Seller’s interest in and/or which Seller has the right to market from the
Rodessa/Sligo Interval in the AMI.  The
Rodessa/Sligo Interval is broadly defined as the stratigraphic equivalent of
those sands, zones and horizons occurring below the surface of the earth
between the depths of 11,427 feet and 12,378 feet (electric log measurements)
in the Ruby Magness Well No. 1 located in the Amy Boatwright Survey, A-7,
Madison County, Texas.

 

1.15         “Taxes” shall mean
any tax (other than ad valorem or income taxes), license, gross receipts tax,
fee or charge now or hereafter levied, assessed or made by any governmental
authority on the act, right, or privilege of producing, transporting, handling,
treating, delivering or marketing gas and/or related Liquids and Liquefiables
which are measured by the volume, value or sales price of the gas or other
hydrocarbons in question.

 

24

 

ARTICLE II–
Dedication and Commitment

 

2.1           Dedication and
Commitment. Seller hereby commits and dedicates to the performance of this
Agreement Seller’s Gas Reserves produced from the AMI and Seller’s Gas Reserves
produced from any wells’ unit acreage on the AMI or any other acreage pooled or
unitized therewith, reserving, however, to Seller the following:

 

(a)           All gas which Seller may require for
fuel for operation and development upon the AMI; and

 

(b)           All gas which Seller may require for
delivery to lessors under the terms of leases constituting any part of the AMI.

 

(c)           The right to pool or unitize the
leases (or any portion thereof) committed hereto with other lands and leases so
long as such action does not reduce Seller’s Gas Reserves.  In the event of any such pooling or unitization,
this Agreement will cover Seller’s interest in the pool or unit formed and the
gas attributable thereto to the extent that such interest is derived from
Seller’s Gas Reserves.

 

If in Phase II, Buyer is required to release Excess
Gas from commitment and dedication to this Agreement, the Excess Gas will be
committed and dedicated to a transportation agreement with terms and conditions
substantially identical to the Transportation Agreement except that Seller will
be “Shipper” thereunder in lieu of Buyer.

 

2.2           Seller’s
Facilities.  Seller agrees to act
with due diligence to obtain, install, and operate all equipment required under
the Master Agreement and necessary to effect delivery of gas to Buyer pursuant
to this Agreement.  Except as indicated in
the Master Agreement Seller will not install facilities upstream of the Point
of Delivery.

 

2.3           Buyer’s
Facilities.  Buyer agrees to act
with due diligence to obtain, install, and operate all equipment required under
the Master Agreement and necessary to receive delivery of gas from Seller pursuant
to this Agreement.

 

2.4           Easements.  To the extent that it may be contractually
or lawfully empowered to do so under its leasehold without impairing its own
similar rights, Seller hereby grants, assigns and transfers to Buyer, or its
designee, an easement across Seller’s lease(s), and across any adjoining lands
in which Seller may have an interest, together with the right of ingress and
egress, for the purpose of installing, using, inspecting, repairing, operating,
replacing, and/or removing Buyer’s pipe, meters, lines, and other equipment
used or useful in the performance of this Agreement.  It is intended that any property of Buyer or its designee placed
in or upon any of such land shall remain the personal property of Buyer or its
designee, subject to removal by it upon the expiration or termination of this
Agreement for any reason.  Buyer or its
designee shall have a reasonable time after the expiration of this Agreement to
remove same.

 

2.5           Management and
Operation.  Subject to the terms of
this Agreement and the Master Agreement, the control, management and operation
of the leases and wells located on the AMI, and the regulation of the flow of
gas at the Point of Delivery shall be and remain the exclusive right of Seller
including, but not limited to, the drilling of any wells and repair and 

25

 

reworking of old
wells; but Seller shall use its reasonable efforts to regulate the flow of gas
to meet Buyer’s fluctuating requirements. 
Nothing herein shall require Seller to deliver any volume in excess of
Seller’s allowable as established by the Jurisdictional Agency.

 

2.6           Acreage,
Engineering and Geological Data. 
Upon written request from Buyer, Seller will furnish Buyer, as
available, all information concerning engineering, tests and basic geological
data on all wells now or hereafter drilled upon the AMI.  Such data shall include, but is not limited
to all core analyses, sample logs, well logs, drilling and completion reports,
pressure data, production data and flow potential data now or hereafter in
existence.  Seller shall furnish Buyer
all acreage changes affecting the AMI and, upon request, shall furnish Buyer
information concerning production allowables and proration status with respect
to each well connected under this Agreement. 
Buyer shall utilize all reasonable efforts to insure that the
confidentiality of all such information and data is maintained by its
employees, agents, and representatives. 
Buyer agrees that, at a minimum, it will utilize the same procedures and
safeguards with respect to Seller’s information that it uses to protect its own
sensitive, confidential, or proprietary data.

 

ARTICLE III– Quantity

 

3.1           During the term of
this Agreement, Seller agrees to sell and deliver to Buyer, and Buyer shall
have the continuing right to purchase, daily volumes of gas well gas as so
requested by Buyer up to Seller’s Delivery Capacity.  If adequate facilities are installed pursuant to the Treating
Agreement to treat gas available for sale by Seller to Buyer at the Point of
Delivery to enable the gas to meet the pipeline quality specifications set
forth in Article IV, then Buyer shall use its reasonable commercial efforts to
purchase all available daily volumes of gas attributable to Seller’s Delivery
Capacity.  It is mutually understood by
the parties hereto that nothing contained in this Agreement shall obligate
Buyer to purchase minimum quantities of gas or pay for same if available and
not taken in cases of Force Majeure or a lack of market for MMBtus Delivered.

 

3.2           Buyer shall not be
obligated to maintain a gathering pipeline connection to any well when, in
Buyer’s sole judgment, the continuation of such connection under the terms and
conditions of this Agreement would no longer be economical for Buyer.  If Buyer elects to discontinue the
connection of any such well, Buyer shall so notify Seller thirty (30) days in
advance, and shall release the well and the acreage attributable thereto from
this Agreement.  For a period of twenty
(20) days from the date of Seller’s receipt of the disconnect notice hereunder,
Seller shall have the option, but not the obligation, to acquire the pipeline
and the Well Meter (defined in Section 6.2) connected to the affected well for
salvage value.  Upon Buyer’s receipt of
notice from Seller of its exercise of the option hereunder, the parties shall
negotiate to determine the salvage value thereof.  At the closing of the transaction contemplated herein, Buyer
shall execute, acknowledge, and deliver to Seller a legally-sufficient
conveyance and bill of sale, and Seller shall remit to Buyer by wire transfer
in immediately available funds the agreed salvage value of the acquired
pipeline and the applicable Well Meter. 
If the parties cannot reach agreement with respect to the price to be
paid upon exercise of the option within fifteen (15) days from the commencement
of negotiations, either party may invoke the Alternative Dispute Resolution
procedures set forth in Article XVII below.

 

26

 

ARTICLE IV– Quality

 

4.1           The parties
acknowledge that the gas, as delivered by Seller to Buyer, at the Point of
Delivery will be in its natural state and will not meet the pipeline quality
specifications for hydrocarbon liquids, water vapor, carbon dioxide (CO2),
hydrogen sulfide (H2S), nitrogen (N2), total inerts and/or Btu’s per cubic
foot.  In order to market the gas Buyer
will have to separate the gas from hydrocarbon liquids and water, treat the gas
to remove or reduce these impurities, and dehydrate the gas to enable the gas
to meet pipeline quality specifications. 
Buyer has entered into the Treating Agreement with Hanover to separate,
treat, and dehydrate all of the gas delivered by Seller to Buyer hereunder, so
that such gas meets applicable pipeline quality specifications, as follows:

 

(a)           The natural gas shall be of
merchantable quality and shall be commercially free from water, hazardous
substances, hydrocarbon liquids, bacteria and other objectionable liquids,
solids and/or gas components;

 

(b)           shall specifically contain not more
than five hundredths of one percent (0.05%) by volume of oxygen;

 

(c)           shall not contain more than five (5)
grains of total sulfur consisting of not more than one quarter (1⁄4) grain of
hydrogen sulfide and one (1) grain of mercaptan sulfur per one hundred (100)
cubic feet of gas;

 

(d)           shall not contain more than two
percent (2%) by volume of carbon dioxide;

 

(e)           shall not contain more than four
percent (4%) by volume total non-hydrocarbon and inert gases (including carbon
dioxide, nitrogen, oxygen, helium, etc.);

 

(f)            shall contain not more than seven
pounds (7#) of water vapor per one million (1,000,000) cubic feet of gas;

 

(g)           shall be at temperatures not in
excess of one hundred twenty (120) degrees Fahrenheit or less than forty (40)
degrees Fahrenheit; and

 

(h)           shall have a hydrocarbon dewpoint not
to exceed forty (40) degrees Fahrenheit at the delivery pressure and shall have
a heat content of not less than nine hundred fifty (950) or more than eleven
hundred (1,100) British Thermal Units per cubic foot under conditions of
measurement.

 

4.2           The parties agree
that the Fixed Monthly Treating Fee set forth in Article VII shall include all
costs and expenses to gather, separate, treat, dehydrate, and transport up to
18,000 Mcf per day, on average over the month, of Seller’s Gas Reserves
delivered by Seller to Buyer to the Point of Delivery, except for the costs of
meeting the specifications in Section 4.1 (b) which shall be borne by Seller.  Seller, at its sole cost, shall insure that
Seller’s Gas Reserves conform to the specifications in Section 4.1(b) so that
such gas will be accepted by the transporting pipeline.  If any of Seller’s Gas Reserves fails at any
time to conform to the specifications in Section 4.1 (b), Buyer may refuse to
accept such gas and Buyer shall notify

 

27

 

Seller of any such
failure.  If, within thirty (30) days
following receipt of such notice, Seller does not notify Buyer that Seller will
treat the gas so as to make it meet the above specifications, Buyer may accept
the delivery of gas, and at its option, treat the gas for a mutually agreeable
fee set forth in a separate agreement between the parties so that it will
conform to the above specifications and charge Seller a fee for such
service.  Buyer may continue to refuse
to accept gas not meeting the above specifications, in which event Seller shall
have the right upon thirty (30) days’ written notice to Buyer, to have released
from this Agreement, only that gas that Buyer then refuses to take, and Seller
will be free to sell such gas elsewhere.

 

4.3           Seller shall have
the right to be represented and to participate in all tests of gas delivered
hereunder, and to inspect any equipment used in determining the nature or
quality of gas.

 

ARTICLE V-
Delivery Conditions

 

5.1           The Point of
Delivery for all gas to be purchased hereunder shall be at the inlet flange of
Buyer’s or its designee’s pipeline to be located at a mutually agreeable point
at the outlet of Seller’s wellhead equipment at the Ruby Magness Well No. 1
located in the Amy Boatwright Survey, A-7, Madison County, Texas.

 

5.2           The Point of
Measurement for all gas to be purchased hereunder shall be at the Point of
Redelivery to Lone Star set forth in the Transportation Agreement.  Buyer will pay Seller for the gas delivered
at the Point of Delivery based on the volume measured and the Btu’s determined
at the Point of Measurement unless proven to be in error.

 

5.3          Ownership,
title and custody of the gas shall pass from Seller to Buyer at the Point of
Delivery.  Seller shall be deemed in
control, custody and possession of the gas sold and purchased hereunder until
the same shall have been delivered to Buyer at the Point of Delivery.  Buyer shall be deemed in control, custody
and possession of the gas sold and purchased hereunder after the same shall
have been delivered to Buyer at the Point of Delivery.  Seller does hereby DEFEND, INDEMNIFY,
PROTECT, and HOLD HARMLESS Buyer, its officers, directors, employees, agents,
and representatives, from and against all claims, suits, expenses, liabilities,
costs, and losses, including attorneys’ fees and court costs (collectively,
“Claims”), including, without limitation, any Claims with respect to damage to
property, or injury or death of any person, arising out of, with respect to, or
in connection with gas delivered hereunder up to the Point of Delivery
including, without limitation, any Claims arising out of, with respect to, or
in connection with the sole, joint, or concurrent negligence or strict
liability of Buyer, its officers, directors, employees, agents, and
representatives.  Buyer does hereby
DEFEND, INDEMNIFY, PROTECT, and HOLD HARMLESS Seller, its officers, directors,
employees, agents, and representatives, from and against all Claims, including,
without limitation, any Claims with respect to damage to property, or injury or
death of any person, arising out of, with respect to, or in connection with gas
delivered hereunder from and after the Point of Delivery including, without
limitation, any Claims arising out of, with respect to, or in connection with
the sole, joint, or concurrent negligence or strict liability of Seller, its
officers, directors, employees, agents, and representatives.

 

28

 

5.4           Seller shall deliver
gas at a pressure sufficient to enter Buyer’s, or Buyer’s designee’s, pipeline
at the Point of Delivery against the pressure prevailing therein from time to
time but not in excess of Buyer’s maximum allowed operating pressure; provided,
however, that Seller shall not be obligated to deliver gas at a pressure in
excess of 1000 psig.

 

5.5           If the pressure
available at the Point of Delivery is less than 1000 psig, either Seller or
Buyer may install, own and operate the required compressor to boost the
pressure at the Point of Delivery to a minimum of 1000 psig giving Hanover a
right to first refusal to supply such compression services at competitive
rates.  If Buyer installs the
compressor, then a mutually agreeable compression fee will be set forth in a
separate agreement between the parties. 
If compression facilities are installed by Seller, they shall be
installed and operated by Seller at Seller’s risk and expense, and shall be
operated so as to prevent the pulsations therefrom from interfering with
Buyer’s measurement of the gas.  Hanover
is a third party beneficiary of this Section 5.5.

 

ARTICLE VI–
Measurement

 

The measurement conditions and procedures set forth in
this Article VI shall be applicable to this Agreement except to the extent that
they are inconsistent with Lone Star’s then current measurement conditions and
procedures at the Point of Measurement in which case Lone Star’s then current
measurement conditions and procedures shall apply at the Point of Measurement.

 

6.1           The unit of volume
for measurement of gas delivered hereunder shall be the quantity of gas
contained in one (1) cubic foot of space at a base temperature of sixty degrees
(60o) Fahrenheit and at a pressure of fourteen and sixty-five hundredths
(14.65) psia, and otherwise provided by the Standard Gas Measurement Law of the
Jurisdictional Agency.  Except as
provided by that law, all fundamental constants, observations, records, and
procedures involved in determining and/or verifying the quantity and other
characteristics of gas delivered hereunder shall, unless otherwise specified
herein, be in accordance with the standards prescribed in Report No. 3 of the
American Gas Association (“AGA”) as from time to time amended or
supplemented.  All measurements of gas
shall be determined by calculation into terms of such unit.  All quantities given herein, unless
otherwise expressly stated, are in terms of such unit.

 

6.2           Buyer or its
designee shall install, maintain and operate, or cause such to be done, at its
own expense, a measuring station located at the gas outlet of the field
separator installed for a well (“Well Meter”) and a measuring station located
at the Point of Measurement.  Each
measuring station shall be so equipped with orifice meters, recording gauges,
or other types of meter or meters of standard make and design commonly
acceptable in the industry, as to accomplish the accurate measurement of gas
delivered hereunder.  The changing of
the charts and calibrating and adjusting of meters shall be done by Buyer or
Buyer’s designee.

 

6.3           Seller may, at its
option and expense, install check meters and gas samplers for checking Buyer’s
metering equipment; and they shall be so installed so as not to interfere with
the operation of Buyer’s facilities. 
Measurements of gas shall be by the Buyer’s or its designee’s
measurement equipment only, except as otherwise herein provided.

 

29

 

6.4           The temperature of
gas flowing through the meter or meters shall be determined by the continuous
use of a recording thermometer installed so that it will properly record the
temperature of the gas flowing through the meter or meters, or at Buyer’s
option, by periodic tests conducted with a mercury thermometer.  The arithmetical average of the hourly
temperature recorded each day during the time that gas was actually flowing
through the meter shall be used in computing measurements for that day.

 

6.5           The specific gravity
of the gas flowing through the meter or meters may, at Buyer’s option, be
determined by the use of a recording gravitometer installed so that it will
properly record the specific gravity of the gas flowing through the meter or
meters.  The arithmetical average of the
hourly specific gravity during the time that gas was actually flowing through
the meter each day shall be used in computing measurements for that day.  If Buyer does not elect to install a
recording gravitometer, the specific gravity of the gas flowing through the meter
or meters shall be determined at quarterly intervals, or more often, at Buyer’s
election, by use of the AGA accepted gravitometer or by computation from
fractional analysis of samples of gas taken at the Point of Measurement.  Specific gravities so determined will be
used in calculating gas deliveries for the day on which the test is made, and
for all following days, until the next specific gravity test is made.

 

6.6           The gross heating
value in Btu’s will be determined only at the Point of Measurement and may, at
Buyer’s option, be determined by a recording calorimeter installed at the Point
of Measurement.  The arithmetical
average of the hourly heating values recorded each day during the time that gas
was actually flowing through the meter shall be considered as the gross heating
value of the gas delivered during such day. 
If Buyer does not elect to install a recording calorimeter, the gross
heating value of the gas at the Point of Measurement shall be determined by
Buyer at quarterly intervals (or other intervals as agreed to by Buyer or
Seller) by the taking of samples at Buyer’s meter.  The sample may be run on a calorimeter at another location or the
heating value may be computed from fractional analysis of such samples.  The result shall be applied to gas
deliveries for the day when the sample is taken, and for all following days,
until that on which a new sample is taken. 
Seller shall have the right to witness all of Buyer’s tests for heating
value of the gas.

 

6.7           Each party shall
have the right to be present at the time of any installing, reading, cleaning,
changing, repairing, inspection, testing, calibrating, or adjusting done in
connection with the other’s measuring equipment used in measuring deliveries
hereunder.  The records from such measuring
equipment shall remain the property of their owner, but upon request, each will
submit to the other its records and charts, together with calculations
therefrom subject to return within fifteen (15) days after receipt thereof.

 

At least once each quarter, Buyer shall calibrate the
meters and instruments or cause the same to be calibrated.  Buyer shall give Seller sufficient notice in
advance of such tests so that Seller may, at its election, be present in person
or by its representative, to observe adjustments, if any, which are made.  For the purpose of measurement and meter
calibration, the atmospheric pressure shall be assumed to be fourteen and
seven-tenths (14.7) psia, irrespective of variations in natural atmospheric
pressure from time to time.

 

30

 

6.8           If, upon any tests,
the metering equipment in the aggregate is found to be inaccurate by more than
two percent (2%), registration thereof and any payment based upon such
registration, shall be corrected at the rate of such inaccuracy for any period
of inaccuracy which is definitely known or agreed upon, or if not known or
agreed upon, then for a period extending back one-half (1/2) of the time
elapsed since the last date of calibration. 
Following any tests, any metering equipment found to be inaccurate to
any degree shall be adjusted immediately to measure accurately.  If for any reason any meter is out of
service or out of repair so that the quantity of gas delivered through such
meter cannot be ascertained or computed from the readings thereof, the quantity
of gas delivered during such period shall be estimated and agreed upon by the
parties hereto upon the basis of the best available data, using the first of
the following methods which is feasible:

 

(a)           By using the registration of any
check measuring equipment of Seller, if installed and registering accurately;

 

(b)           By correcting the error, if the
percentage of error is ascertainable by calibration, test or mathematical
calculation;

 

(c)           By estimating the quantity of
deliveries by deliveries during the preceding periods under similar conditions
when the meter was registering accurately.

 

6.9           The measurement
hereunder shall be corrected for deviation from Boyle’s Law at the pressure and
temperatures under which gas is delivered hereunder.

 

ARTICLE VII– Price

 

7.1           It is recognized
that gas sold and purchased at the Point of Delivery is not of marketable
pipeline quality, but the reduction or removal of hydrocarbon liquids, water
vapor, hydrogen sulfide, carbon dioxide and nitrogen, will allow the gas to
become marketable.  During each month,
the price Buyer will pay Seller for each Mcf of untreated gas purchased from
Seller at the Point of Delivery will be determined as follows:

 

(a)           During each month Wellhead Revenue
will be determined by multiplying the Resale Price per MMBtu by the MMBtus
Delivered and deducting from this amount the greater of (i) the Fixed Monthly
Treating Fee or (ii) the Floating Monthly Treating Fee; and

 

(b)           Wellhead Revenue so determined will
be divided by the monthly production in Mcfs delivered at the Point of
Delivery, with said Mcfs to be determined by the Well Meter referred to in
Section 6.2.

 

The result of the calculation in (a) and (b) will be
the price paid by Buyer at the Point of Delivery for each Mcf of untreated gas
purchased during the month.

 

7.2           For purposes of this
Price provision the following definitions are applicable:

 

(a)           Resale Price – the weighted average
price per MMBtu that Buyer receives for the sale of the MMBtus Delivered.  Said Resale Price will be determined monthly
at

 

31

 

the Point of Measurement
and will be net of fees and charges, if any, incurred by Buyer or its designee
to have gas transported from the Point of Measurement to Buyer’s resale
customer.  Buyer shall use its
reasonable commercial efforts to obtain the best possible Resale Price for the
MMBtus Delivered.  Unless otherwise
approved by Seller in writing, no MMBtus Delivered shall be sold or otherwise
disposed of by Buyer to any affiliate of Buyer or Hanover, and all sales will
be made to Third Parties upon  “arms
length” terms.

 

(b)           MMBtus Delivered – MMBtus measured by
Buyer or its designee at the Point of Measurement.

 

(c)           Fixed Monthly Treating Fee -

 

(i)            First two Contract Years - $691,500
per month

 

(ii)           Third, Fourth and Fifth Contract
Years - $691,500 per month plus the Monthly Inflation Adjustment Amount

 

(iii)          Sixth Contract Year - $540,000 per
month plus the Monthly Inflation Adjustment Amount (using as the denominator
for such calculation the Consumer Price Index for the last month of the fourth
(4th) Contract Year)

 

(iv)          Seventh Contract Year and, if not
terminated in accordance with Section 13.1, each Contract Year thereafter
-  $540,000 per month plus the Monthly
Inflation Adjustment Amount (using as the denominator for such calculation the
Consumer Price Index for the last month of the fourth (4th) Contract
Year).

 

Buyer agrees that the Fixed Monthly Treating Fee shall
be reduced proportionately for that portion of the month that Seller’s wells
are shut-in due to malfunctions and shut downs of the Treatment Plant.  On any day that Seller is capable of
delivering 18,000 Mcf based on the then current Seller’s Delivery Capacity, but
Buyer is unable to take deliveries of at least 17,000 Mcf, then the Fixed
Monthly Treating Fee for the month in which that day(s) occurs shall be
reduced.  The Fixed Monthly Treating Fee
for that month shall be equal to the applicable Fixed Monthly Treating Fee set
forth above multiplied by a fraction the numerator of which is the actual
deliveries of gas (in Mcf) at the Point of Delivery during the month and the
denominator of which is the number of days in the month multiplied by 18,000
Mcf.

 

Buyer agrees that if Seller’s wells experience
downtime in excess of three (3) days in any month for workovers or due to well
mechanical and/or operational problems (“Excess Downtime”) and Seller notifies
Buyer in writing of such Excess Downtime within twenty-five (25) days following
the end of the month in which the Excess Downtime occurs, then a portion of the
Fixed Monthly Treating Fee for that month shall be deferred as follows.  The Fixed Monthly Treating Fee for the month
in which the Excess Downtime occurs will be reduced by $22,500 for each day of
Excess Downtime.  Twenty-five percent of
the total reduction in the Fixed Monthly Treating Fee associated with the
Excess Downtime will be added to the Fixed Monthly Treating Fee otherwise due
and payable in each of the following four months.

 

32

 

(d)           Floating Monthly Treating Fee –

(i)            If the Resale Price for the month is
four dollars ($4.00) per MMBtu or less, then the Floating Monthly Treating Fee
will be equal to the Fixed Monthly Treating Fee.

(ii)           If the Resale Price for the month is
more than four dollars ($4.00) per MMBtu, then the Floating Monthly Treating
Fee will be the sum of (x) and (y):

(x)            Fixed Monthly
Treating Fee; and

(y)           An amount equal
to thirty percent (30%) of the Resale Price in excess of four dollars ($4.00)
per MMBtu multiplied by the MMBtus Delivered during the month.

 

With regard to this Floating Monthly Treating Fee, if
on or before one hundred eighty (180) days after the later to occur of (i) the receipt
by Buyer of notification from Seller that it has secured the Injection Well
permit, or (ii) an Acceptable Initial Well Report as described in Section 3.1
of the Master Agreement, the Treatment Plant is ready to receive and treat
Seller’s gas and Buyer’s, or its designee’s, pipeline is ready to receive
Seller’s gas at the Point of Delivery and transport the treated gas, then a
price of three dollars and seventy-five cents ($3.75) per MMBtu will be
substituted for four dollars ($4.00) per MMBtu wherever the latter price
appears.  If as of August 31, 2001,
Seller has not received required permits for the Injection Well and received an
Acceptable Initial Well Report, then the one hundred eighty (180) day period will
be changed to two hundred ten (210) days and, if as of December 31, 2001,
Seller has not received the required Injection Well permits and an Acceptable
Initial Well Report, then the time period will be subject to renegotiation.

 

With respect only to the first month of gas deliveries
hereunder, if the date of the initial gas deliveries at the Point of Delivery
under this Agreement is after the first day of the month, the Fixed or Floating
Monthly Treating Fee, as applicable, shall be adjusted downward by multiplying
the actual Fee by a fraction, the numerator of which is the number of days
remaining in said month, and the denominator of which is the total number of
days in said month.

 

(e)           Monthly Inflation Adjustment Amount –
the amount determined by multiplying $150,000 by a fraction the numerator of
which is the Consumer Price Index published by the U.S. Department of Labor for
the particular month for which the Monthly Inflation Adjustment Amount is being
determined and the denominator of which is the Consumer Price Index for the
last month of the second (2nd) Contract Year
(other than with respect to the calculation for Section 7.2(c) (iii) and
(iv).  For the purposes of this
provision, the Consumer Price Index will be the monthly Consumer Price Index
for All Urban Consumers (CPI-U) 1982-84 = 100, not seasonably adjusted.

 

7.3           Buyer will be
responsible for all residue transportation, marketing and pipeline imbalances,
provided that Seller keeps Buyer informed as to changes in wellhead production.

 

33

 

ARTICLE VIII– Liquids and Liquefiables

 

8.1           The parties agree and Buyer has
provided in the Treating Agreement that all condensate recovered by Hanover in
the field separator and delivered to Seller’s storage tank will be sold by
Buyer and Seller will receive all (100%) of the sales proceeds determined at
the Treatment Plant.  All natural gas
liquids (e.g. ethane, propane, butane and heavier hydrocarbons) recovered at
the Treatment Plant will be sold by Buyer and Seller will receive seventy-five
percent (75%) and Hanover will receive twenty-five percent (25%) of the
proceeds determined at the Treatment Plant. 
All drip liquids recovered by scrubbers at the Treatment Plant will be
retained by Hanover.

 

ARTICLE IX– Taxes

 

9.1           Seller shall pay, or
cause to be paid, all existing, new or increased Taxes imposed upon Seller with
respect to the gas prior to its delivery to Buyer at the Point of
Delivery.  Buyer shall pay, or cause to
be paid, all existing, new or increased Taxes imposed upon Buyer with respect
to the gas after its delivery to Buyer at the Point of Delivery.  Seller shall reimburse Buyer for fifty
percent (50%) of any new or increased Taxes imposed upon Buyer after the
effective date of this Agreement with respect to the gas after its delivery to
Buyer at the Point of Delivery.  Seller
shall pay, or caused to be paid, all existing, new or increased Taxes imposed
upon Seller and Buyer with respect to the Liquids and Liquefiable sold by Buyer
pursuant to Article VIII.

 

ARTICLE
X– Regulation

 

10.1         This Agreement shall be subject to all
present and future valid and applicable Laws, orders, rules and regulations of
any regulatory body, governmental entity or agency having jurisdiction, so long
as such Laws, orders, rules and regulations shall be in force and effect, but
nothing in this Agreement shall prevent either party from contesting the
validity of any such Law, order, rule or regulation, nor shall anything in this
Agreement be construed to require either party to waive its right to assert the
lack of jurisdiction of such regulatory body, governmental entity or agency
over this Agreement or any party thereto.

 

ARTICLE XI- Force
Majeure

 

11.1         In the event of
either party hereto being rendered unable, wholly or in part, by Force Majeure
to carry out its obligations under this Agreement, other than to make payments
due hereunder, it is agreed that on such party giving notice and full
particulars of such Force Majeure in writing or by facsimile to the other party
as soon as possible after the occurrence of the cause relied on, then the
obligations of the party giving such notice, as far as they are affected by
such Force Majeure, shall be suspended from the commencement of and during the
continuance of any inability so caused but for no longer period, and such cause
shall as far as possible be remedied with all reasonable dispatch.

 

The term “Force Majeure,” as used herein, shall mean an act of God, act
of the public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion and any other causes whether of the kind enumerated or otherwise not
reasonably within the control of the party claiming the suspension and which by
the exercise of reasonable diligence such party is unable 

 

34

 

to prevent or overcome.  Force Majeure shall include the inability to acquire or delays in
acquiring rights-of-way grants, permits, or licenses at reasonable costs, and
shall specifically include governmental delays in issuing permits required for
the installation of the Treatment Plant if Hanover has filed all necessary
applications for permits not later than September 30, 2001.  Force Majeure shall also include
governmental delays in issuing permits required for the re-entry of the Ruby
Magness Well No. 1 and for the Injection Well. 
Notwithstanding the foregoing, this Agreement shall terminate on June
30, 2003 if any Party fails to obtain, in the exercise of reasonable diligence,
any required permit for the Treatment Plant, the re-entry of the Ruby Magness
Well No. I, or the Injection Well.

 

ARTICLE XII– Title

 

12.1         Seller warrants for
itself, its successors, legal representatives, and assigns title to all gas
delivered to Buyer hereunder, and warrants that it has the right and lawful
authority to sell the same and that such gas is free from liens, encumbrances,
and claims of every kind.  Seller shall
indemnify and save Buyer harmless from all Claims of whatsoever nature arising
from and out of Claims of any or all persons to said gas or title thereto, or
to royalties, Taxes, license fees, payments or other charges thereon applicable
before the title to the gas passes to Buyer at the Point of Delivery, and,
except for any Claims of Panther Rodessa, L.P. or Newstar Energy U.S.A., Inc.,
Buyer shall indemnify and save Seller harmless from all Claims of whatsoever
nature arising from and out of Claims of any or all persons to said gas or
title thereto, or to Taxes, license fees, payments or other charges thereon
applicable after the title to the gas passes to Buyer at the Point of Delivery.

 

12.2         If at any time
Seller’s title is questioned or involved in any action, Buyer may  (i) refuse to take the gas, or (ii) if gas
has been taken, withhold payment of sums due up to the amount of the claim
until Seller furnishes a bond or a corporate undertaking in form and substance
reasonably acceptable to Buyer or until the title matter is resolved to the
reasonable satisfaction of Buyer, or (iii) interplead funds in the amount of
the claim into the registry of any court having jurisdiction over the
matter.  Any funds which are withheld by
Buyer shall be maintained in an interest-bearing account, and the interest
accruing thereon shall be tendered to the party who ultimately receives the
payment.

 

ARTICLE XIII– Term

 

13.1         The term of this
Agreement and the transactions contemplated hereunder shall be for an initial
term of seven (7) Contract Years (the “Initial Term”), and then Contract Year
to Contract Year thereafter; provided, however, this Agreement may be cancelled
by any Party at the end of the Initial Term or at the end of any Contract Year
thereafter by providing the other Party with prior written notice at least
sixty (60) days in advance of the cancellation date.  The Initial Term shall be extended (i) by the duration of any event
of Force Majeure under Article XI above, and (ii) for such periods of time in
excess of thirty (30) days in any Contract Year that the Treatment Plant, the
gathering or transportation system, or Redwood’s well(s) are inoperative or
shut-in for repairs, mechanical malfunction, or any other reason whatsoever.

 

35

 

ARTICLE XIV-
Billing and Payment

 

14.1         Buyer shall render to
Seller on or before the forty-fifth (45th) day after the month of delivery a
statement showing the total MMBtus Delivered at Point of Measurement hereunder
during the month of delivery.  Said
statement will also reflect the portion of MMBtus Delivered by Buyer to each of
Buyer’s resale customers and the respective resale prices applicable to said
month of delivery.  Said statement will
be deemed correct for the purposes of all payments under this Agreement unless
proven to be in error.  Based on the
MMBtus Delivered and resale prices set forth in the statement, Buyer will
determine the Resale Price applicable to said month of delivery under Section
7.2.

 

14.2         Buyer will require
each customer to whom Buyer sells any of the MMBtus Delivered to remit the
amount due Buyer directly to the Escrow Agent pursuant to the Escrow
Agreement.  Distribution of the proceeds
to Seller and Hanover will be as set forth in the Escrow Agreement.

 

14.3         Each party shall have
the right at all reasonable times to examine the books, records and charts of
the other party to the extent necessary to verify the accuracy of any
statement, charge, computation or demand made under or pursuant to any of the
provisions of this Agreement.  All books
of accounts, records and charts of either party relating to deliveries of gas
hereunder, and the amount due hereunder shall be preserved for a period of two
(2) years.

 

14.4         In the event an error
is discovered in the amount shown due in any statement rendered by Buyer, such
error shall be adjusted within thirty (30) days after the amount thereof is
determined.  Claims for errors shall be
made promptly upon discovery, but in any event, within six (6) months of the
date of such statement.

 

14.5         Seller assumes full
responsibility and liability for and agrees to pay all royalties, overriding
royalties and other payments due to the owners of the mineral interest and will
make settlement with all persons having interest in the gas (including Liquids
and Liquefiables) sold by Seller hereunder to Buyer.

 

ARTICLE XV–
Miscellaneous

 

15.1         No waiver by either
Seller or Buyer of any default of the other under this Agreement shall operate
as a waiver of any future default, whether of like or different character or
nature, nor shall any failure to exercise any right hereunder be considered as
a waiver of such right in the future.

 

15.2         Seller expressly does
not by the terms of this Agreement, sell, transfer, or assign unto Buyer any
title or interest whatsoever in Seller’s leases or any equipment of any nature
owned or used by Seller in the operation of its leases.

 

15.3         This Agreement may be
executed in any number of counterparts, no one of which need be executed by all
parties, or may be ratified, adopted, or consented to by separate instrument,
in writing specifically referring hereto, and it shall be binding upon all
parties who execute a counterpart, ratification, adoption, or consent with the
same force and effect, and to the

 

36

 

same extent as if
all such parties had executed and signed the same document, with each separate
counterpart, ratification, adoption or consent deemed to be an original.

 

15.4         This Agreement may
not be assigned, either in whole or in part, without the express written
consent of the non-assigning party, which consent shall not be unreasonably
withheld; provided, however, without the consent of the other party either
party may assign this Agreement to a lender for collateral security
purposes.  The terms and provisions of
this Agreement shall extend to and be binding upon the parties hereto, their
respective heirs, successors, permitted assigns and legal representatives;
provided, however, that no change in ownership or change in any right to
receive payment hereunder with respect to said leases or wells or the gas
produced therefrom shall be binding upon Buyer until the first day of the month
next following the date upon which Buyer shall have been furnished with
certified copies of recorded instruments and other proper and sufficient
evidence supporting and defining such change, without regard to whether Buyer
has had previous actual notice and knowledge thereof.

 

15.5         Notwithstanding
anything to the contrary in this Agreement, in no event shall either Buyer or
Seller be entitled to receive or be liable to the other for (and each party
hereby waives) any consequential, special, indirect, or punitive damages
arising out of this Agreement or the transactions contemplated hereby,
irrespective of whether alleged to be by way of indemnity (other than indemnity
for Third Party claims) as a result of breach of any provision of this Agreement,
tort (including negligence and strict liability), or otherwise, including,
without limitation, any loss of profits, loss of income, loss of use, loss of
revenue, loss of contracts, loss of fuel, REGARDLESS OF WHETHER ANY SUCH
DAMAGES ARE CAUSED BY, CONTRIBUTED TO BY, OR ARISE OUT OF, THE SOLE, JOINT OR
CONCURRENT NEGLIGENCE (IN ANY DEGREE) OR STRICT LIABILITY OF THE OTHER PARTY.

 

15.6         The parties hereto
agree that this agreement shall be construed under the laws of the State of
Texas, without giving effect to principles that would apply the laws of another
jurisdiction.

 

ARTICLE XVI-
Notice and Representatives

 

16.1         All parties Seller
hereby appoint Redwood Energy Production, L.P. to serve as their representative
hereunder for the purpose of giving and receiving notices and requests, making
and witnessing tests, delivering the quantities of gas deliverable hereunder,
receiving payments therefor, allocating, prorating, and distributing such
payments among the various parties Seller, and doing and receiving all things
provided for concerning Seller in this Agreement.  Buyer may act, and shall be fully protected in acting, in
reliance upon any and all acts and things done and performed by or agreements
made with respect to all matters dealt with herein by such representative on
behalf of the parties Seller as fully and effectively as though each had done,
performed, made or executed the same, and Buyer shall not be required to see
the application of any monies paid to such representative.  Such parties Seller may change their
representative and designate one of their number as the new representative from
time to time by delivery of written notice of change of designation to Buyer.

 

16.2         Any notice provided
for in the Agreement shall be in writing and shall be considered as having been
given: (i) if delivered personally; or (ii) if mailed by registered or

 

37

 

certified United
States mail, postage prepaid, to the following addresses; or (iii) if delivered
by e-mail or facsimile transmission.

 

Any statement or payment provided for in the Agreement
shall be considered as having been delivered if delivered personally or if
mailed by United States mail, postage prepaid, to the following addresses:

 

SELLER’S REPRESENTATIVE

 

REDWOOD ENERGY PRODUCTION, L.P.

One Maritime Plaza, Suite 400

San Francisco, CA 94111

Telephone: 415-398-8186

Facsimile: 415-398-9227

E-Mail: georesco@aol.com

 

BUYER

 

GATEWAY PROCESSING COMPANY

500 Dallas, Suite 2615

Houston, Texas 77002

Telephone: 713-336-0844, extension 102

Facsimile: 713-336-0855

E-Mail: mfadden@gatewayenergy.com

 

Such address may, from time to time, be changed by
mailing by certified or registered mail appropriate notice thereof to the other
party.

 

ARTICLE XVII-
Alternative Dispute Resolution

 

17.1         Good Faith Efforts.  The parties wish to avoid disputes relating
to or arising out of this Agreement.  In
the event of any dispute or perceived problems, each party pledges itself to
give notice to the other party and to seek first an amicable resolution without
regard to mediation or arbitration. 
Except as otherwise provided in this Agreement, a party shall be given
thirty (30) days from the date of such notice to correct its performance under
this Agreement.

 

17.2         Mediation.  In the event the parties cannot reach an
amicable resolution to a dispute or perceived problem, the parties shall within
fifteen (15) days after the end of the thirty (30) day period set forth in 17.1
agree upon a mediator and shall, within the next fifteen (15) days attempt to
mediate a solution.

 

17.3         Arbitration.  In the event mediation does not resolve the
matter, any action, dispute, Claim or controversy of any kind between the
parties arising under, related to, in connection with or pertaining to this
Agreement (a “Dispute”) will be resolved by binding arbitration in accordance
with the terms hereof.  Any party may,
by summary proceedings, bring an action in court to compel arbitration of any
Dispute.  Any arbitration will be
administered by

 

38

 

the American
Arbitration Association (the “AAA”) and in accordance with the terms of this
Section 17.3 and the Commercial Arbitration Rules of the AAA, including the
Optional Rules for Emergency Measures of Protection, as supplemented to the
extent necessary by the Federal Arbitration Act (Title 9 of the United States
Code).  If there is any inconsistency
between this Section 17.3 and the Commercial Arbitration Rules, or the Federal
Arbitration Act, the terms of this Section 17.3 will control the rights and
obligations of the parties.  Any
arbitration will be conducted by three (3) arbitrators. If there is another
arbitrable Dispute among the parties pursuant to any agreement between them
that involves the same facts and parties as the facts and parties with respect
to which an arbitration has been initiated pursuant to this Agreement, such
dispute and any arbitration initiated in connection therewith shall be
consolidated with the arbitration initiated pursuant to this Agreement.  No other arbitration shall be consolidated
with any arbitration initiated pursuant to this Agreement without the agreement
of the parties or parties thereto. 
Arbitration must be initiated within the applicable time limits set
forth in this Agreement and not thereafter or if no time limit is given, within
the time period allowed by the applicable statute of limitations.  Arbitration may be initiated by any party
(“Claimant”) serving written notice on the party or parties with whom such
Dispute exists, respectively (“Respondent” or “Respondents”) that Claimant
elects to refer the Dispute to binding arbitration. Claimant’s notice
initiating binding arbitration must identify the arbitrator Claimant has
appointed.  Respondent shall respond to
Claimant within thirty (30) days after receipt of Claimant’s notice,
identifying the arbitrator Respondent has appointed.  If Respondent fails for any reason to name an arbitrator within
the thirty (30) day period, Claimant will name the arbitrator for Respondent’s
account. The two (2) arbitrators so chosen shall select a third arbitrator (who
must have not less than seven years experience as an oil and gas lawyer) within
thirty (30) days after the second arbitrator has been appointed.  If the two (2) arbitrators are unable to
agree on a third arbitrator within sixty (60) days from initiation of
arbitration, then a third arbitrator shall be selected by the AAA office in
Houston, Texas, with due regard given to the selection criteria above and input
from the parties and other arbitrators. 
The AAA shall select the third arbitrator not later than ninety (90)
days from initiation of arbitration. In the event AAA should fail to select the
third arbitrator within ninety (90) days from initiation of arbitration, then
either party may petition the Chief United States District Judge for the
Southern District of Texas to select the third arbitrator.  Due regard shall be given to the selection
criteria above and input from the parties and other arbitrators.  Each party shall pay the compensation and
expenses of the arbitrator named by or for it (or its proportionate share if
more than one party is aligned in the arbitration as a Claimant or Respondent),
and the parties comprising the Claimant and the Respondent will each pay one-half
of the compensation and expenses of the third arbitrator.  All arbitrators must be neutral parties who
have never been officers, directors, or employees of the parties or any of
their Affiliates.  Unless expressly
provided otherwise in this Agreement, the two (2) arbitrators named by the
parties must have not less than seven (7) years experience in the oil and gas
industry, and must have a formal education or training in the area of dispute
(e.g., accounting for an accounting dispute, etc.).  The hearing will be conducted in Houston, Texas and commence
within thirty (30) days after the selection of the third arbitrator.  The parties and the arbitrators should
proceed diligently and in good faith in order that the award may be made as
promptly as possible.  Any arbitration
proceeding hereunder will be conducted in Houston, Texas and will be concluded
within one hundred eighty (180) days of the filing of the Dispute with the
AAA.  All statutes of limitations and
defenses based upon passage of time applicable to any Dispute (including any
counterclaim or setoff) shall be interrupted by the filing of the arbitration
and

 

39

 

suspended while
the arbitration is pending.  The
arbitrators will be empowered to award sanctions and to take such other actions
as they deem necessary, to the same extent a judge could impose sanctions or
take such other actions pursuant to the Federal Rules of Civil Procedure and
applicable law; provided, however, that no award by the arbitrators will assess
consequential, punitive, exemplary, or special damages or losses (including,
without limitation, loss of profit or business interruption), but may assess
costs and expenses in a manner deemed equitable.  The arbitrators will make specific written findings of fact and
conclusions of law.  The decision of the
arbitrators will be final and binding on each party.  Judgment on any award rendered by the arbitrators may be entered
in any court having jurisdiction.

 

IN WITNESS WHEREOF, the parties have executed this
Agreement in one or more copies or counterparts, each of which, when executed
by Buyer and Seller, will constitute and be an original effective Agreement
between Buyer and Seller, executing same on the dates shown below, but shall be
effective as of the date set forth on Page 1 hereof.

 

	
   

  	
  BUYER

  
	
   

  	
   

  
	
   

  	
  GATEWAY PROCESSING
  COMPANY

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  SELLER / SELLER’S
  REPRESENTATIVE

  
	
   

  	
   

  
	
   

  	
  REDWOOD ENERGY
  PRODUCTION, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  REDWOOD ENERGY COMPANY,

  its General Partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

40

 

	
  STATE OF TEXAS

  	
  §

  
	
   

  	
   

  
	
  COUNTY OF HARRIS

  	
  §

  

 

This instrument was acknowledged before me on this
          day of June, 2001 by
                                   ,
the                           
of GATEWAY PROCESSING COMPANY, a
                 
corporation on behalf of said corporation.

 

	
  My Commission Expires:

  	
   

  	 

	
   

  	
   

  	
   

  
	
   

  	
  Notary Public in and
  for Harris

  County, Texas

  
					

 

 

	
  STATE OF

  	
  §

  
	
   

  	
   

  
	
  COUNTY OF

  	
   

  	
  §

  
			

 

This instrument was acknowledged before me on this
    day of June, 2001 by
                                          ,
the
                              
of REDWOOD ENERGY COMPANY, the General Partner of REDWOOD ENERGY PRODUCTION,
L.P., a Texas limited partnership, on behalf of said limited partnership.

 

	
  My Commission Expires:

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Notary Public in and
  for 

  ____________County,

  

 

41

 

TREATING
AGREEMENT

 

This
TREATING AGREEMENT (“Agreement”) is dated June 15, 2001, and is by and between
Hanover Compression Limited Partnership, a Delaware limited partnership with
offices at 12001 North Houston Rosslyn, Houston, Texas 77086 (“Hanover”) and
Gateway Processing Company, a Texas corporation (“Gateway”).

 

RECITALS

 

WHEREAS, Redwood Energy Production, L.P. (“Redwood”)
owns or controls natural gas reserves in the AMI (see definitions below) on
which there is an existing well known as the Ruby Magness Well No. 1, and on
which additional wells are expected to be drilled; and

 

WHEREAS, Gateway has agreed
to purchase, transport and market the gas produced from the AMI pursuant to the
terms of a Gas Purchase Agreement of even date herewith between Redwood and
Gateway; and

 

WHEREAS,
Gateway has requested that Hanover accept and treat gas produced from the AMI
and purchased by Gateway, and Hanover has agreed to provide a gas treating
plant for purposes of treating the gas produced from the AMI.

 

NOW
THEREFORE, in consideration of the mutual covenants contained herein, Gateway
agrees to tender for treating, and Hanover agrees to treat in the Treatment
Plant to be provided by Hanover Gateway’s natural gas (which is to be sold by
Redwood to Gateway pursuant to the Gas Purchase Agreement) on the following
terms and conditions:

 

ARTICLE
I

 

DEFINITIONS

 

Capitalized
terms used and not otherwise defined in this Agreement have the meanings given
to them in the Master Agreement of even date herewith among Hanover, Gateway
and Redwood, as the same may from time to time properly be amended (the “Master
Agreement”).  Such definitions shall
survive termination of the Master Agreement.

 

1.1                               “Pipeline
Quality Gas” shall mean gas meeting the specifications in Exhibit C, attached
hereto.

 

1.2                               “Taxes” shall mean
any tax (other than ad valorem or income taxes), license, gross receipts tax,
fee or charge now or hereafter levied, assessed or made by any governmental
authority on the act, right, or privilege of producing, transporting, handling,
treating, delivering or marketing gas and/or related liquids and liquefiables
which are measured by the volume, value or sales price of the gas or other
hydrocarbons in question.

 

ARTICLE
11

 

EQUIPMENT
AND INSTALLATION

 

2.1                                 Hanover, at its
own expense, agrees to install, own and operate the Treatment Plant on the
Plant Location.  The Treatment Plant
shall be operational within the time period required by Section 3.3 of the
Master

 

42

 

Agreement.  The Treatment Plant will consist of the
equipment set forth in Exhibit B, together with related piping, valves,
instrumentation, control building, emergency shutdown facilities, meters and
ancillary equipment required by Hanover to perform the treating and compression
services contemplated by this Agreement.

 

2.2                                 Gateway,
at its own expense, agrees to install, own and operate measuring stations at
the Point of Delivery and Point of Redelivery as defined in Article VI
hereof.  Gateway shall provide Hanover
with suitable copies of meter charts by the 20th day of each month showing the
volume of gas delivered hereunder during the previous month.  Hanover may install a check meter, provided
that its use or operation must not interfere with Gateway’s measurement
facilities.

 

2.3                                 It
is agreed that during and with respect to the operation of the Treatment Plant,
Hanover will be responsible for complying with state and federal rules,
regulations, and orders applicable to the Treatment Plant concerning air and
water quality standards, specifically regulations dealing with hydrogen
sulfide.  Each party shall furnish the
other with one copy of all permits issued to it relating to environmental
standards associated with its performance under this agreement.  Hanover will obtain all necessary permits
including, if required, from the State Air Control Board with respect to the
Treatment Plant, and Hanover shall seek to obtain such permits with the permits
to be based on injection of Acid Gas.

 

ARTICLE
III

 

MAINTENANCE
AND OPERATION

 

3.1                                 Hanover
shall be solely responsible for the maintenance and operation of the Treatment
Plant, and shall be responsible for all costs associated with the Treatment
Plant, including, but not limited to, costs for:

 

(A)                              operating labor;

 

(B)                                maintenance labor
and material;

 

(C)                                electric power;

 

(D)                               all chemicals and
supplies;

 

(E)                                 sanitary water and
treated water;

 

(F)                                 hazard,
casualty and liability insurance of the Treatment Plant and related equipment.

 

3.2                               Gateway shall
deliver the gas to be treated hereunder at the Point of Delivery at a pressure
consistent with Section 5.5 of the Gas Purchase Agreement.  If during Phase I or Phase 11, the pressure
available at the Point of Delivery is less than I 000 psig, either Gateway or
Hanover may, but neither is obligated to, install, own and operate the required
compressor to boost the pressure at the Point of Delivery to a minimum of 1000
psig.  If Hanover installs

 

43

 

the
compressor, then a mutually agreeable compression fee will be set forth in a
separate agreement between the parties. Hanover shall deliver Pipeline Quality
Gas to Gateway at the Point of Redelivery at a pressure sufficient to permit
the Pipeline Quality Gas to be delivered into Lone Star’s 30-inch pipeline, but
in no event in excess of 1,000 psig.

 

3.3                               All
condensate recovered by Hanover in the field separator shall be sold by Gateway
and 1 00% of the proceeds of such sales determined at the Treatment Plant shall
be payable to Redwood.  All natural gas
liquids (such as ethane, propane, butane and heavier hydrocarbons) that are
recovered at the Treatment Plant shall be sold by Gateway and the proceeds
determined at the Treatment Plant shall be distributed 75% to Redwood and 25%
to Hanover.  Natural gas drip liquids
recovered in the Treatment Plant scrubbers will be retained by Hanover and
accrue to Hanover’s benefit.

 

3.4                               Hanover shall
receive the gas from Gateway and take custody of the gas at the Point of
Delivery, treat the gas, compress the gas and return Pipeline Quality Gas to
Gateway at the Point of Redelivery, less Treatment Plant instrument gas, fuel
gas (for reboilers, flare, electric power generators and compressors), shutdown
and blowdown gas losses, and shrinkage. 
Each use of gas at the Treatment Plant as well as the Acid Gas delivered
to Redwood will be separately metered by Hanover.  Title to the gas shall remain in Gateway at all times, and
Hanover shall not have nor acquire any right, title or interest in or to the
gas being treated.  Hanover shall take
all commercially reasonable steps as a prudent operator to minimize gas lost or
unaccounted for in the Treatment Plant; provided however Hanover shall, under
no circumstances, be liable for any loss of gas or liquids that may result from
the operation of the Treatment Plant, unless such loss results from the negligence
of Hanover.

 

3.5                               If Hanover treats
gas owned by any Person other than Gateway, the reduction in MMBtus for
instrument gas, fuel gas, shutdown and blowdown gas losses, shrinkage and
lost/unaccounted for gas (all such reductions in

 

MMBtus being referred to as “Fuel Use”)
attributable to Gateway’s gas will be limited to Gateway’s proportionate share
of Treatment Plant Fuel Use based on volumes (Mcf) delivered by the respective
parties to the inlet of the Amine Plant.

 

3.6                                 Gateway will have the obligation to promptly
advise Hanover of all material changes in wellhead production.

 

3.7                               Assuming pressure
of at least 850 psig at the Point of Delivery, the Treatment Plant will be
designed and installed by Hanover to treat a maximum of eighteen million cubic feet
per day (I 8,000 mcf/d) of gas of the quality set forth in Exhibit A to remove
sufficient quantities of C02, H2S and
Nitrogen to enable the treated gas to meet the Pipeline Quality Gas
specifications.  Regardless of the
volume treated in the Treatment Plant or the actual composition of the
untreated wellhead gas, all gas delivered by Hanover

 

44

 

to
Gateway at the Point of Redelivery shall meet the Pipeline Quality Gas
specifications.

 

So long as the Injection Well is within 1,000 feet
of the Plant Location, Acid Gas produced at the Treatment Plant will be
delivered by pipeline to Redwood at a pressure sufficient to allow Redwood to
inject the Acid Gas into its Injection Well. 
Nitrogen produced at the Treatment Plant will be vented or consumed in
the operation but, in any case, not returned to Redwood or Gateway.

 

3.8                                 Gateway
will comply with all its material obligations under the Gas Purchase Agreement
and will enforce and protect its rights thereunder for the benefit of Hanover.

 

ARTICLE
IV

 

PAYMENTS

 

4.1                                 Hanover shall pay
or cause to be paid all existing, new or increased Taxes imposed upon Hanover
with respect to the gas after delivery to Hanover at the Point of
Delivery.  Gateway shall pay any Taxes imposed
upon Gateway that are required to be collected by Hanover and paid to the State
of Texas.  Hanover shall not be liable
to pay any royalties associated with the gas treated pursuant to this
Agreement.

 

4.2                                 Gateway’s covenants and agreements in the Gas
Purchase Agreement to market the gas shall accrue to the benefit of Hanover and
Hanover shall be entitled to enforce such covenants as if it is a party to the
Gas Purchase Agreement.

 

4.3                                 For services
performed hereunder, Hanover will receive a portion of the

 

Fixed Monthly Treating Fee or Floating Monthly
Treating Fee, as said terms are defined in the Gas Purchase Agreement.  Gateway shall cause all payments for MMBtu’s
Delivered, as said term is defined in the Gas Purchase Agreement, to be sent
directly to The Chase Manhattan Bank (“Escrow Agent”).  Gateway shall be responsible for managing
the collection of all receivables associated with sale of the gas.  Gateway shall not, however, become obligated
to pay or be a guarantor of any receivables which are ultimately not paid by
any customer.  Hanover shall instruct
the Escrow Agent in accordance with the Escrow Agreement to remit the following
amounts in the following order, subject to adjustment as provided in the next
paragraph.  First, the Escrow Agent shall
deduct from amounts received in Escrow the greater of the Fixed Monthly
Treating Fee or the Floating Monthly Treating Fee and shall pay (i) to Hanover
ninety-two and two-tenths percent (92.2%) of the Fixed Monthly Treating Fee
plus seventy percent (70%) of the amount determined pursuant to Section 7.2 (d)
(ii) (y) of the Gas Purchase Agreement for services performed hereunder and
(ii) to Gateway seven and eight-tenths percent (7.8%) of the Fixed Monthly

 

45

 

Treating
Fee plus thirty percent (30%) of the amount determined pursuant to Section 7.2
(d) (ii) (y) of the Gas Purchase Agreement for Gateway’s gathering and
transportation services with respect to the MMBtu’s Delivered. The balance
shall be distributed in accordance with Section 4 of the Escrow Agreement.  Payments out of Escrow to all parties will
be accomplished by wire transfer.

 

In the event that one hundred percent of the monies
due to Gateway from its customers for the month of gas production have not been
received in Escrow by the payment date set forth in the Escrow Agreement, the
amounts paid hereunder to Redwood, Gateway and Hanover for said month of gas
production will be proportionately reduced. 
When the balance due from the customers is deposited in Escrow, the
Escrow Agent will make the appropriate distribution of said funds to enable
each Party to receive the total monies (including the previous payment) due
that Party for the month of gas production in question.  Notwithstanding the above, Hanover will be
entitled to have deducted and be paid out of the Escrow from amounts otherwise
due Gateway, or be paid by Gateway upon demand, the amount of any reasonable
expenses Hanover incurs associated with remedies Hanover is specifically entitled
to take pursuant to Section 4.4 below that have not previously been reimbursed
(for example, expenses associated with collection of accounts receivable).

 

4.4                                 In
the event of any of the following, Hanover shall have the right upon notice to
Gateway and subject to the Escrow Agreement to demand, collect, receive,
receipt for, sue for, compound and give acquittance for any or all amounts due
or to become due and payable into escrow, and in Hanover’s reasonable
discretion file any claim or take any other action or proceeding which Hanover may deem reasonably necessary
or appropriate to protect and realize upon such receivables.  Gateway will provide Hanover on request with
all information relating to such receivables as Hanover may reasonably request
and will cooperate with Hanover in its collection efforts:

 

(a)                                  An involuntary case or other proceeding is be
commenced against Gateway which seeks liquidation, reorganization or other
relief with respect to it or its debts or other liabilities under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, and such involuntary
case or other proceeding shall remain undismissed or unstayed for a period of
30 days; or an order for relief against Gateway shall be entered in any such
case under the Federal Bankruptcy Code; or

 

(b)                                 Gateway commences a voluntary case or other
proceeding seeking liquidation, reorganization or other relief with respect to
itself or its debts or other liabilities under any bankruptcy, insolvency or
other similar law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian or other similar official of it or any
substantial part of its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an

 

46

 

involuntary case or other
proceeding commenced against it, or shall make a general assignment for the
benefit of creditors, or shall fail generally to, or shall admit in writing its
inability to pay its debts generally as they become due, or shall take any
corporate action to authorize or effect any of the foregoing; or

 

(c)                                  Gateway
discontinues its usual business; or

 

(d)                                 In any five month
period, there are at least three months in which the amount collected by
Gateway is less than 80% of the amount due to be paid into escrow for that
month.

 

4.5                                 Gateway agrees
that it will engage Hanover Measurement Services Company, L.P. or its
subsidiary to provide measurement calibration, data collection, chart
integration and statement preparation services related to the meters to be
owned by Gateway as required of Gateway in connection with this Agreement, so
long as such services are available to Gateway at competitive rates for the
area in which the services are rendered.

 

ARTICLE
V

 

TERM OF
AGREEMENT

 

5.1                                 The term of this
Agreement and the transactions contemplated hereunder shall be for an initial
term of seven (7) Contract Years (the “Initial Term”), and then Contract Year
to Contract Year thereafter; provided, however, this Agreement may be cancelled
by any Party at the end of the Initial Term-or at the end of any Contract Year
thereafter by providing the other Party with prior written notice at least
sixty (60) days in advance of the cancellation date.  The Initial Term shall be extended (i) by the duration of any
event of Force Majeure, and (ii) for such periods of time in excess of thirty
(30) days in any Contract Year that the Treatment Plant, the gathering or
transportation system, or Redwood’s well(s) are inoperative or shut-in for
repairs, mechanical malfunction, or any other reason whatsoever.

 

ARTICLE
VI

 

POINT OF
DELIVERY AND POINT OF REDELIVERY

 

6.1                                 The
Point of Delivery for all gas to be treated hereunder shall be at the
interconnection of Gateway’s gathering line from the Ruby Magness Well No. 1
and the separator installed by Hanover for the Ruby Magness Well No. 1.

 

6.2                                 The Point of
Redelivery for all Pipeline Quality Gas shall be the inlet flange of
Transporter’s System, as said term is defined in the Transportation Agreement,
located at a mutually agreeable point at the outlet of the nitrogen rejection
unit installed at the Treatment Plant.

 

6.3                                 Control, custody
and possession of the gas shall pass from Gateway to Hanover at the Point of
Delivery.  Gateway shall be deemed in
control, custody and possession of the gas treated hereunder until the same

 

47

 

shall
have been delivered to Hanover at the Point of Delivery.  Hanover shall be deemed in control, custody
and possession of the gas treated hereunder after the same shall have been
delivered to Hanover at the Point of Delivery. 
Title to and custody of the Acid Gas will be transferred from Gateway to
Redwood at the outlet flange of the Acid Gas disposal line at the Injection
Well.  Gateway does hereby agree to
DEFEND, INDEMNIFY, PROTECT, and HOLD HARMLESS Hanover, its officers, directors,
employees, agents, and representatives, from and against all claims, suits,
expenses, liabilities, costs, and losses, including attorneys’ fees and court
costs (collectively, “Claims”), including, without limitation, any Claims with
respect to damage to property, or injury or death of any person, arising out
of, with respect to, or in connection with gas delivered hereunder up to the
Point of Delivery including, without limitation, any Claims arising out of,
with respect to, or in connection with the sole, joint, or concurrent
negligence or strict liability of Hanover, its officers, directors, employees,
agents, and representatives. Hanover does hereby agree to DEFEND, INDEMNIFY,
PROTECT, and HOLD HARMLESS Gateway, its officers, directors, employees, agents,
and representatives, from and against all Claims, including, without
limitation, any Claims with respect to damage to property, or injury or death
of any person, arising out of, with respect to, or in connection with gas
delivered hereunder from and after the Point of Delivery including, without
limitation, any Claims arising out of, with respect to, or in connection with
the sole, joint, or concurrent negligence or strict liability of Gateway, its
officers, directors, employees, agents, and representatives. Neither party will
have any obligation to the other with respect to the Acid Gas after title is
transferred to Redwood at the outlet flange of the Acid Gas disposal line at
the Injection Well.

 

ARTICLE
VII

 

THIRD
PARTY AND NON-RODESSA/SLIGO INTERVAL GAS

 

7.1                               During
the term hereof, all deliveries by Gateway of Redwood’s owned or controlled gas
in the MRF to Hanover for treating in the Treatment Plant will have priority
over any gas deliveries made by any Third Party up to the total plant
capacity.  Hanover may accept and treat
non-Rodessa/Sligo Interval Third Party gas on an interruptible basis subject to
availability of any unused plant capacity. 
In the event that the total volumes of gas delivered by any Third Party
and Redwood’s owned or controlled gas delivered to the Treatment Plant by
Gateway exceed plant capacity, Gateway will have the right to utilize one
hundred percent (I 00%) of the Treatment Plant capacity for such gas.

 

7.2                               The residue (treated)
gas attributable to (i) Third Party gas and (ii) non- Rodessa/Sligo Interval
gas owned or controlled by Redwood in the AMI but not committed to the Gas
Purchase Agreement, which has been treated in the Treatment Plant, including
any expansion of the Treatment Plant, shall be committed and dedicated to a
transportation agreement with terms and conditions substantially identical to
the Transportation Agreement except that

 

48

 

the
Third Party or Redwood, as the case may be, shall be “Shipper” thereunder
instead of Gateway.

 

ARTICLE
VIll

 

INSURANCE

 

8. 1                              Unless
specifically waived by Gateway in writing, at any and all times during

 

the term of this Agreement, Hanover agrees to carry
insurance of the types and in the minimum amounts as follows:

 

(A)                              Worker’s
compensation insurance.

 

(B)                                Employer’s
liability insurance in the minimum limits: $500,000 per accident covering
injury or death to any employee which may be outside the scope of the worker’s
compensation statute of the state in which the work is performed.

 

(C)                                Comprehensive
general liability insurance with minimum limits of $500,000 for injury to or
death of any one person and $1,000,000 for any one accident and with minimum
limits of $100,000 for property damage.

 

(D)                               All such insurance
shall be maintained in full force and effect during the term of this Agreement,
and shall not be canceled, altered, or amended without ten (IO) days prior
written notice having first been furnished Gateway.  Hanover agrees to have its insurance carrier furnish Gateway a
certificate or certificates evidencing insurance coverage in accordance with
the above requirements and, when requested by Gateway, to furnish certified
copies of all said insurance policies.

 

ARTICLE
IX

 

HOLD
HARMLESS AGREEMENT

 

9.1                                 Gateway
will hold Hanover harmless from any claims, demands, or causes of action for
death, bodily injuries, or property damage, including all costs of
investigation, defense, and attorney’s fees, of any kind or character which might
be asserted against Hanover, its agents, servants, employees, or sub-
contractors, which are occasioned by the negligent acts or omissions of
Gateway, its employees, agents, servants, or subcontractors in connection with
this Agreement or the parties’ performance hereunder.

 

9.2                                 Hanover will hold
Gateway harmless from any claims, demands, or causes of action for death,
bodily injuries, or property damage, including all costs of investigation,
defense, attorney’s fees, of any kind or character which might be asserted
against Gateway, which are occasioned by the negligent acts

 

49

 

or
omissions of Hanover, its employees, agents, servants, or sub-contractors in
connection with this Agreement or the parties’ performance hereunder.

 

9.3                                 No party shall be
liable to the other for special, indirect or consequential damages resulting
from or arising out of this Agreement, including, without limitation, loss of
profit or business interruptions including loss or delay of production, however
same may be caused.

 

ARTICLE
X

 

FORCE
MAJEURE

 

In
the event of any Party hereto being rendered unable, wholly or in part, by
Force Majeure to carry out its obligations under this Agreement, other than to
make payments due hereunder, it is agreed that on such Party giving notice and
full particulars of such Force Majeure re in writing or by facsimile to the
other Parties as soon as possible after the occurrence of the cause relied on,
then the obligations of the Party giving such notice, as far as they are
affected by such Force Majeure, shall be suspended from the commencement of and
during the continuance of any inability so caused but for no longer period, and
such cause shall as far as possible be remedied with all reasonable dispatch.

 

The
term “Force Majeure,” as used herein, shall mean an act of God, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion and any other causes whether of the kind enumerated or otherwise not
reasonably within the control of the Party claiming the suspension and which by
the exercise of reasonable diligence such Party is unable to prevent or
overcome.  Force Majeure shall include
the inability to acquire or delays in acquiring rights-of-way grants, permits,
or licenses at reasonable costs, and shall specifically include governmental
delays in issuing permits required for the installation of the Treatment Plant
if Hanover has filed all necessary applications for permits not later than
September 30, 2001.  Force Majeure shall
also include governmental delays in issuing permits required for the re-entry
of the Ruby Magness Well No. 1 and for the Injection Well.  Notwithstanding the foregoing, this
Agreement shall terminate on June 30, 2003 if any Party fails to obtain, in the
exercise of reasonable diligence, any required permit for the Treatment Plant,
the re-entry of the Ruby Magness Well No. 1, or the Injection Well.

 

ARTICLE
XI

 

INDEPENDENT
CONTRACTOR

 

11.1                         It is not the
purpose or intention of this Agreement to create (and it should not be
construed as creating) a joint venture, partnership or any type of association,
and the Parties are not authorized to act as an agent or principal for each
other with respect to any matter related hereto.  If, for federal income tax purposes, this Agreement and the
operations hereunder are regarded as a partnership, and if the Parties have not
otherwise agreed to form a tax partnership, each Party thereby affected elects
to be excluded from the application of all of the provisions of Subchapter “K,”
Chapter 1, Subtitle “A,” of the Code, as permitted and authorized by Section
761 of the Code and the regulations promulgated thereunder.  Any Party is authorized and directed to
execute on behalf of each Party such evidence of this election as may be
required

 

50

 

by
the Secretary of the Treasury of the United States or the Federal Internal
Revenue Service, including specifically, but not by way of limitation, all of
the returns, statements, and the data required by Treasury Regulations
§1.761.  Should there be any requirement
that each Party give further evidence of this election, each such Party shall
execute such documents and furnish such other evidence as may be required by
the Federal Internal Revenue Service or as may be necessary to evidence this
election.  No such Party shall give any
notices or take any other action inconsistent with the election made hereby.  If any present or future income tax laws of
the state in which the AMI is located or any future income tax laws of the
United States contain provisions similar to those in Subchapter “K,” Chapter 1,
Subtitle “A,” of the Code, under which an election similar to that provided by
Section 761 of the Code is permitted, each Party 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 Xii

 

ASSIGNMENT

 

12.1                           This
Agreement shall extend to and be binding upon the successors and assigns of the
parties hereto.  Neither party may
assign any of its right, title, or interest in, to or under this Agreement
without the prior written consent of the other, which shall not be unreasonably
withheld; and no such assignment shall in any way operate to enlarge, alter, or
change any obligation of the other party or parties hereto.

 

ARTICLE XIll

 

CONSTRUCTION

 

13.1                           THE PARTIES ACKNOWLEDGE THAT THEY HAVE HAD AN
ADEQUATE OPPORTUNITY TO REVIEW EACH AND EVERY PROVISION CONTAINED IN THIS
AGREEMENT AND TO SUBMIT THE SAME TO LEGAL COUNSEL FOR REVIEW AND COMMENT.  BASED ON THE FOREGOING, THE PARTIES AGREE
THAT THE RULE OF CONSTRUCTION THAT A CONTRACT BE CONSTRUED AGAINST THE DRAFTER,
IF ANY, NOT BE APPLIED IN THE INTERPRETATION AND CONSTRUCTION OF THIS
AGREEMENT.

 

ARTICLE XIV

 

TITLE TO EQUIPMENT

 

14.1                           Title
to the Treatment Plant and equipment shall remain with Hanover for all purposes,
and Gateway shall not have or acquire any rights, title, or interest in such
equipment, or any equipment used by Hanover in this operation.

 

51

 

ARTICLE XV

 

NOTIFICATIONS

 

15.1                           All notifications under this Agreement shall
be made by United States mail, postage paid to:

 

“Hanover”

 

Hanover Compression Limited Partnership

12001 N. Houston Rosslyn

Houston, Texas 77086

Attn: Michael J. McGhan, President

Telephone No. 281.447.8787

Facsimile No. 281.447.8781

 

“Gateway”

 

Gateway Processing Company

500 Dallas Street, Suite 2615

Houston, TX 77002

Attn: Mr. Michael Fadden

Telephone No. 713.336.0844

Facsimile No. 713.336.0855

 

15.2                           The above addresses may be changed at any
time by giving written notice to the other party.

 

ARTICLE XVI

 

CHOICE OF LAW PROVISION

 

16.1                         This Agreement
shall be construed under and governed by the internal laws of the State of
Texas without regard to principles of conflicts of laws.

 

ARTICLE XVII

 

ALTERNATE DISPUTE RESOLUTION

 

17.1                           The Alternate Dispute Resolution set forth in
Section 7.2 of the Master Agreement shall be applicable to this Agreement.

 

ARTICLE XVIII

 

CONFIDENTIALITY

 

18.1                           Subject
to disclosure required by applicable laws (including rules, regulations and
decisions of entities having jurisdiction, including regulatory bodies and
courts) or in connection with the reporting obligations of a public company or
in connection with any financing transaction, shareholder disclosure and
reporting, or to authorized employees and agents, or to the Parties to the
Master Agreement, or in connection with the Master Agreement, each party shall
maintain the confidentiality of this Agreement and its subject matter, as well
as the relationship and transactions described herein, unless such party first
obtains the consent of the other party, which consent shall not be unreasonably
withheld.

 

52

 

	
   

  	
  HANOVER
  COMPRESSION LIMITED PARTNERSHIP

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name:
  

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  
	
   

  	
   

  
	
   

  	
  GATEWAY
  PROCESSING COMPANY

  
	
   

  	
   

  
	
   

  	
   

  	
  By:

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Name: 

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Title:
  

  	
   

  

 

53

 

EXHIBIT A

 

Gas Specifications

 

The following
specifications are an estimate and are subject to the covenant of Redwood in
the Master Agreement to provide a current gas analysis to confirm the following
assumptions:

 

Wellhead Gas Analysis:

 

Methane
and heavier hydrocarbons - 71 %

 

Nitrogen
- 14%

 

H2S
- 7%

 

C02
- 8%

 

EXHIBIT B

 

Plant Specifications

 

Separation
and Dehydration Facilities

 

450
GPM Amine Plant

 

15,000
mcf per day capacity Mehra Process Nitrogen Rejection Unit (“NRU”)

 

1000
HP Acid Gas well injection compressor

 

1500
HP NRU tailgate compressor

 

Required
emergency shutdown equipment

 

The
Treatment Plant will be capable of treating 18,000 mcf per day of wellhead
production to remove sufficient H2S, C02 and N2 to enable the gas
to meet Pipeline Quality Gas specifications.

 

54

 

EXHIBIT C

 

Pipeline Quality Gas

 

The
natural gas shall:

 

(A)                              be of merchantable
quality and shall be commercially free from water, hazardous substances,
hydrocarbon liquids, bacteria and other objectionable liquids, solids and/or
gas components;

 

(B)                                not contain more
than five (5) grains of total sulfur consisting of not more than one quarter
(1/4)  grain of hydrogen sulfide
and one (1) grain of mercaptan sulfur per one hundred (I 00) cubic feet of gas;

 

(C)                                not contain more  than two percent (2%) by  volume of carbon dioxide;

 

(D)                               not contain more
than four percent (4%) by volume total non-hydrocarbon and inert gases
(including carbon dioxide, nitrogen, oxygen, helium, etc.);

 

(E)                                 contain not more
than seven pounds (7#) of water vapor per one million (1,000,000) cubic feet of
gas;

 

(F)                                 be at temperatures
not in excess of one hundred twenty (120) degrees Fahrenheit or less than forty
(40) degrees Fahrenheit; and

 

(G)                                have a hydrocarbon
dewpoint not to exceed forty (40) degrees Fahrenheit at the delivery pressure
and shall have a heat content of not less than nine hundred fifty (950) or more
than eleven hundred (1,100) British Thermal Units per cubic foot under
conditions of measurement.

 

55

 

Exhibit
D

 

AMENDMENT

TO

TREATING
AGREEMENT

DATED
JUNE 15, 2001

 

There is in existence between Hanover Compression
Limited Partnership, a Delaware limited partnership (“Hanover”) and Gateway
Processing Company, a Texas corporation (“Gateway”) a Treating Agreement dated
June 15, 2001 (“Treating Agreement”).

 

Hanover and Gateway
hereby agree to amend the Treating Agreement effective January 23, 2002 by
deleting Section 12.1 in its entirety and substituting the following therefor:

 

12.1                           This
Agreement shall extend to and be binding upon the successors and assigns of the
parties hereto.  Neither party may
assign any of its right, title, or interest in, to or under this Agreement
without the prior written consent of the other, which shall not be unreasonably
withheld; provided, however, without the consent of the other party either
party may assign this Agreement to a lender for collateral security
purposes.  No such assignment shall in
any way operate to enlarge, alter, or change any obligation of the other party
or parties hereto.

 

Except as indicated
above, all other terms and conditions of the Treating Agreement shall remain in
full force and effect.

 

Accepted and agreed to this
             
day of
                   , 2002.

 

 

	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Hanover Compression Limited

  Partnership

  	
   

  	
  Gateway Processing Company

  

 

56

Exhibit D

 

AMENDMENT

TO

TREATING
AGREEMENT

DATED
JUNE 15, 2001

 

There is in existence between Hanover Compression
Limited Partnership, a Delaware limited partnership (“Hanover”) and Gateway
Processing Company, a Texas corporation (“Gateway”) a Treating Agreement dated
June 15, 2001 (“Treating Agreement”).

 

Hanover and Gateway
hereby agree to amend the Treating Agreement effective January 23, 2002 by
deleting Section 12.1 in its entirety and substituting the following therefor:

12.1         This
Agreement shall extend to and be binding upon the successors and assigns of the
parties hereto.  Neither party may
assign any of its right, title, or interest in, to or under this Agreement
without the prior written consent of the other, which shall not be unreasonably
withheld; provided, however, without the consent of the other party either
party may assign this Agreement to a lender for collateral security
purposes.  No such assignment shall in
any way operate to enlarge, alter, or change any obligation of the other party
or parties hereto.

Except as
indicated above, all other terms and conditions of the Treating Agreement shall
remain in full force and effect.

 

Accepted and agreed to this
             
day of
                   , 2002.

 

 

	
  By:

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Hanover Compression Limited 

  Partnership

  	
   

  	
  Gateway Processing Company

  

 

57

Exhibit
E

 

TRANSPORTATION AGREEMENT

 

between

 

GATEWAY PIPELINE COMPANY

 

and

 

 

GATEWAY PROCESSING
COMPANY

 

58

 

TABLE OF CONTENTS

 

	
  ARTICLE I - DEFINITIONS

  
	
   

  
	
  ARTICLE II - QUANTITY

  
	
   

  
	
  ARTICLE III

  
	
   

  
	
  POINT
  OF DELIVERY, POINT OF REDELIVERY AND CONSTRUCTION OF FACILITIES

  
	
   

  
	
  ARTICLE IV - DELIVERY
  PRESSURE

  
	
   

  
	
  ARTICLE V - FEES

  
	
   

  
	
  ARTICLE VI - MEASUREMENT

  
	
   

  
	
  ARTICLE VII - QUALITY

  
	
   

  
	
  ARTICLE VIII -
  BILLING AND PAYMENT

  
	
   

  
	
  ARTICLE IX -
  NON-ODORIZATION OF GAS

  
	
   

  
	
  ARTICLE X - TITLE

  
	
   

  
	
  ARTICLE XI -
  DULY CONSTITUTED AUTHORITIES

  
	
   

  
	
  ARTICLE XII - TERM

  
	
   

  
	
  ARTICLE XIII - FORCE
  MAJEURE

  
	
   

  
	
  ARTICLE XIV -
  NOTICES AND MISCELLANEOUS

  
	
   

  
	
  EXHIBIT
  “A” - DESCRIPTION OF TRANSPORTATION SYSTEM

  

 

59

 

TRANSPORTATION AGREEMENT

 

This Agreement, is made
and entered into this          
day of
                              ,
2001, by and between GATEWAY PROCESSING COMPANY, a Texas corporation,
hereinafter referred to as “Shipper”, and GATEWAY PIPELINE COMPANY, a Texas
corporation, hereinafter referred to as “Transporter”.

 

W I T N E S S E T H:

 

WHEREAS, Shipper desires
to have natural gas transported from the Point of Delivery to the Point of
Redelivery (as such terms are defined in Article III); and

 

WHEREAS, Transporter will
construct, or cause to be constructed, a pipeline and appurtenant facilities
between the Point of Delivery and the Point of Redelivery set forth herein; and

 

WHEREAS, Transporter
agrees to accept and transport said gas for redelivery for the account of
Shipper under terms and conditions herein set forth.

 

NOW, THEREFORE, in
consideration of the mutual covenants set forth herein, the parties hereto agree
as follows:

 

ARTICLE
I - Definitions

Capitalized terms used
and not otherwise defined in this Agreement have the meanings given to them in
the Master Agreement (as defined below). 
Such definitions shall survive termination of the Master Agreement.  In addition, the following defined terms are
used in this Agreement:

A.            The term “Btu” shall mean British
Thermal Units and “MMBtu” shall mean one million (1,000,000) Btu.

 

B.            The term “Day” or “day” shall mean the 24-hour period
commencing at 9:00 a.m., local time, on one calendar day and ending at 9:00
a.m., local time, on the following calendar day.

 

60

 

C.            The term “Gas” or “gas” shall mean
natural gas produced from gas wells (gas well gas) and gas produced in
association with oil from oil wells (oil well gas), and the residue gas from
treating gas well gas or oil well gas or both.

 

D.            The term “gross heating value” shall
mean the number of Btu’s evolved by the complete combustion, at constant
pressure, of the amount of gas which would occupy a volume of one (1) cubic
foot at a temperature of sixty degrees (60o) Fahrenheit, if saturated with
water vapor and under a pressure equivalent to that of thirty (30) inches of
mercury at thirty-two degrees (32o) Fahrenheit, and under standard
gravitational force (acceleration 980.665 cm per second per second) with air of
the same temperature and pressure as the gas when the products of combustion
are cooled to the initial temperature of the gas and air and when the water
formed by combustion is condensed to the liquid state.  The gross heating value of the gas thus
obtained shall be expressed on the measurement basis set forth in Article VI,
Section A of this Agreement.

 

E.             The term “Hanover” shall mean
Hanover Compression Limited Partnership, a Delaware limited partnership.

 

F.             The term “Jurisdictional Agency”
shall mean the Texas Railroad Commission and other regulatory agencies having
jurisdiction.

 

G.            The term “Lone Star” shall mean TXU
Lone Star Pipeline Company.

 

H.            The term “Master Agreement” shall mean the agreement
among Redwood, Shipper and Hanover of even date herewith as the same may
properly be amended from time to time, setting forth the obligations of the
parties to install equipment and perform certain operations in the AMI.

 

I.              The term “Maximum Daily Volume”
shall mean the maximum capacity of the Transportation System to transport gas,
which at an inlet pressure at the Point of Delivery of one thousand (1,000)
psig and an outlet pressure at the Point of Redelivery of nine hundred fifty
(950) psig will be approximately 60,000 Mcf per day.

 

J.             The term “Mcf” shall mean one
thousand (1,000) cubic feet of gas.  The
term “Bcf” shall mean one billion cubic feet of gas.

 

K.            The term “Month” or “month” shall
mean the period beginning at 9:00 a.m., local time, on the first day of a
calendar month and ending at 9:00 a.m., local time on the first day of the
succeeding calendar month.

 

61

 

L.             The term “Redwood” shall mean
Redwood Energy Production, L.P.

 

M.           The term “taxes” shall mean any tax
(other than ad valorem or income taxes), license, gross receipts tax, fee or
charge now or hereafter levied, assessed or made by any governmental authority
on the act, right or privilege of transporting, handling, or delivering gas
which is related to or determined by the volume, value or sales price of the
gas in question.

 

N.            The term “Transportation System” or
“Transporter’s System” shall mean the pipeline and appurtenant facilities
constructed, or to be constructed, by Transporter, at its expense, as described
in Exhibit “A”.

 

ARTICLE II - Quantity

 

A.            Subject to the terms and conditions
hereof:

 

1.             Shipper will deliver, or cause to
be delivered, to Transporter for transportation hereunder all gas that Shipper
owns, controls or has the right to market which is produced from the AMI.

 

2.             Transporter will accept for
Shipper’s account the daily volume of gas tendered by Shipper up to the Maximum
Daily Volume, and, subject to Sections B. and C. herein and to normal meter
variances and unaccounted for gas, Transporter shall redeliver to Shipper on
each day a quantity of gas (in terms of MMBtu’s) equivalent to the quantity of
gas (in terms of MMBtu’s) delivered by Shipper to Transporter on such day.   Transporter shall not be obligated to
maintain a pipeline connection at the Point of Delivery when, in Transporter’s
sole judgment, the continuation of such connection under the terms and
conditions of this Agreement would no longer be profitable for Transporter.

 

3.             Although Shipper has the
preferential right to have gas transported through Transporter’s System
pursuant to this Agreement, Transporter may transport gas for Third Party
shippers through any unused capacity on any day or days that Shipper is not
utilizing all of the Maximum Daily Volume.

 

B.            Imbalances

 

Gas tendered by
Shipper to Transporter for transportation hereunder at the Point of Delivery
shall be delivered as nearly as practicable at uniform hourly rates of flow
consistent with normal pipeline operations. 
Gas redelivered at the Point of Redelivery by Transporter to Shipper
shall be maintained as nearly as practicable at uniform hourly rates of flow

 

62

 

approximately
equal to the rates at which gas is received by Transporter from Shipper for
transportation hereunder, consistent with normal pipeline operations.

 

It is recognized
that because of dispatching and other variations certain imbalances may occur
between the volumes of gas delivered hereunder by Shipper and the volumes of
gas redelivered hereunder by Transporter. 
Such imbalances shall be corrected, insofar as practicable, during the
month following the month in which they occur.

 

C.            Allocated Volumes

 

If gas is
delivered to the Transportation System at more than one Point of Delivery, then
both the Mcf’s and MMBtu’s redelivered at the Point of Redelivery will be
allocated back to each Point of Delivery based on the following formula:

 

A = B(C/T)

 

Where:

 

A -          Allocated Mcf’s/MMBtu’s at the Point
of Delivery

 

B -           Mcf’s/MMBtu’s measured at the Point
of Redelivery

 

C -                                 Mcf’s/MMBtu’s
measured at Point of Delivery

 

T -                                 Total
Mcf’s/MMBtu’s measured at all points of delivery into the Transportation System

 

D.            Acreage, Engineering, and
Geological Data.  Upon written
request from Transporter, Shipper will furnish Transporter, as available, all
information concerning engineering, tests and basic geological data on all
wells now or hereafter drilled upon the AMI, the gas production from which
Shipper owns, controls or has the right to market.  Such data shall include, but is not limited to, all core
analyses, sample logs, well logs, drilling and completion reports, pressure
data, production data and flow potential data now or hereafter in
existence.  Shipper shall furnish
Transporter all acreage changes affecting the AMI and, upon request, shall
furnish Transporter information concerning production allowables and proration
status with respect to each well connected under this Agreement.  Transporter shall utilize all reasonable
efforts to insure that the confidentiality of all such information and data is
maintained by its employees, agents, and representatives.  Transporter agrees that, at a minimum, it
will utilize the

 

63

 

same procedures
and safeguards with respect to Shipper’s information that it uses to protect
its own sensitive, confidential, or proprietary data.

 

ARTICLE III

 

Point of
Delivery, Point of Redelivery and Construction of Facilities

 

A.            Point of Delivery

 

The Point of
Delivery for all gas delivered by or for the account of Shipper to Transporter
hereunder shall be at the inlet flange of Transporter’s System located at a
mutually agreeable point at the outlet of the nitrogen rejection unit installed
at the Plant Location.

 

B.            Point of Redelivery

 

The Point of
Redelivery for all gas to be redelivered by Transporter to Shipper shall be at
the outlet flange of Transporter’s System at the point of interconnection of
Transporter’s System and Lone Star’s 30-inch pipeline in the W. M. Durhan A-89
Survey, Madison County, Texas.

 

C.            Construction of Facilities

 

1.             Transporter will construct,
operate, and maintain or cause to be constructed, operated and maintained, at
its expense, the Transportation System and all facilities necessary to receive
gas for transportation hereunder at the Point of Delivery and to redeliver gas
at the Point of Redelivery.  The
measurement facilities to be installed at the Point of Delivery and Point of
Redelivery are set forth in Article VI.

 

2.             Subject
to Article XIII, the Transportation System will be constructed and ready to
receive and transport gas not later than one hundred eighty (180) days after
the later to occur of (a) receipt by Transporter of notification from Redwood
that it has received the Injection Well permits, or (b) an Acceptable Initial
Well Report.  If as of August 31, 2001,
Redwood has not received required permits for the Injection Well and received
an Acceptable Initial Well Report, then the one hundred eighty (180) day period
will be changed to two hundred ten (210) days, and if as of December 31, 2001,
Redwood has not received the required Injection Well permits and an Acceptable
Initial Well Report, then the time period will be subject to renegotiation.

 

64

 

D.                            Indemnification

 

Transporter shall
indemnify and hold Shipper harmless against any and all claims, demands, costs,
expenses, losses and causes or suits for damages or otherwise arising out of
the operations conducted hereunder by Transporter.  Shipper shall indemnify and hold Transporter harmless against any
and all claims, demands, costs, expenses, losses and causes or suits for
damages or otherwise arising out of the operations conducted hereunder by
Shipper.  As between Shipper and
Transporter, Shipper shall be deemed to be in control and possession of the gas
and responsible for damages or injuries caused thereby, prior to delivery of
the gas hereunder to Transporter at the Point of Delivery and after redelivery
of the gas to Shipper at the Point of Redelivery.  Transporter shall be deemed to be in control and possession of
the gas and responsible for damages or injuries caused thereby after receipt of
said gas hereunder by Transporter at the Point of Delivery and prior to
redelivery of the gas to Shipper at the Point of Redelivery.

 

ARTICLE IV -
Delivery Pressure

 

All gas delivered
hereunder by Shipper shall be delivered at a pressure sufficient to permit the
gas to enter the Transportation System at the operating pressure maintained
therein from time to time.  Transporter
shall not be obligated to receive gas hereunder at pressures exceeding the
maximum allowable operating pressure for the Transportation System prescribed
under any applicable governmental regulations.

 

Subject to the
aforegoing, gas will be redelivered by Transporter at the Point of Redelivery
provided herein at such pressures as may exist at that point from time to time.

 

Nothing herein
shall be construed to obligate Transporter to install compression facilities in
order to receive, transport or redeliver the gas.

 

ARTICLE V - Fees

 

A.            Shipper shall pay Transporter
monthly for services performed pursuant to this Agreement the following fees:

 

1.             For gas purchased by Shipper
pursuant to the Gas Purchase Agreement:

 

a.             First Five Contract Years – ten
cents ($0.10) per Mcf for each Mcf measured or determined monthly at the Well
Meter, as said term is defined in the Gas Purchase

 

65

 

Agreement, for the
Ruby Magness Well No. 1 Point of Delivery, and any additional Point of
Delivery, set forth in the Gas Purchase Agreement.

 

b.             Sixth Contract Year and each
Contract Year thereafter – eight cents ($0.08) per Mcf for each Mcf measured or
determined monthly at the Well Meter, as said term is defined in the Gas
Purchase Agreement, for the Ruby Magness Well No. 1 Point of Delivery, and
any additional Point of Delivery, set forth in the Gas Purchase Agreement.

 

2.             For
all other gas which is committed and/or dedicated to this Agreement:

 

a.             First Five Contract Years – twelve
cents ($0.12) per Mcf for each Mcf measured or determined monthly at the Point
of Delivery set forth in Article III, Section A.

 

b.             Sixth Contract Year and each Contract
Year thereafter – ten cents ($0.10) per Mcf for each Mcf measured or determined
monthly at the Point of Delivery set forth in Article III, Section A.

 

B.            Transporter agrees to pay all taxes
which may be levied with respect to the transportation service performed
hereunder or the business of performing such service; provided, however, that
Shipper shall reimburse Transporter for fifty percent (50%) of any new or
increased taxes relating to such transportation service or the business of
performing such service arising after the effective date of this Agreement.

 

C.            The parties understand that the
rates provided herein are freely negotiated between the parties and no party
during the existence of this Agreement will seek to have the rates amended,
modified, revised or otherwise changed by any regulatory authority.

 

ARTICLE
VI - Measurement

The measurement conditions and procedures set forth in
this Article VI shall be applicable to this Agreement except to the extent that
they are inconsistent with Lone Star’s then current measurement conditions and
procedures at the Point of Redelivery in which case Lone Star’s then current
measurement conditions and procedures shall apply at the Point of Redelivery.

 

A.            The unit of volume for measurement
of gas delivered hereunder shall be the quantity of gas contained in one (1)
cubic foot of space at a base temperature of sixty degrees (60o) Fahrenheit and
at a pressure of fourteen and sixty-five hundredths (14.65) psia, and otherwise
provided by the Standard Gas Measurement Law of the Jurisdictional Agency.  Except as provided by that law, all
fundamental constants, observations, records, and procedures

 

66

 

involved in
determining and/or verifying the quantity and other characteristics of gas
delivered hereunder shall, unless otherwise specified herein, be in accordance
with the standards prescribed in Report No. 3 of the American Gas Association
(AGA) as from time to time amended or supplemented.  All measurements of gas shall be determined by calculation into
terms of such unit.  All quantities
given herein, unless otherwise expressly stated, are in terms of such unit.

 

B.            Transporter or its designee shall
install, maintain and operate, or cause such to be done, at its own expense, a
measuring station located at the Point of Delivery and a measuring station
located at the Point of Redelivery. 
Each measuring station shall be so equipped with orifice meters,
recording gauges, or other types of meter or meters of standard make and design
commonly acceptable in the industry, as to accomplish the accurate measurement
of gas transported hereunder.  The
changing of the charts and calibrating and adjusting of meters shall be done by
Transporter or Transporter’s designee.

 

C.            Shipper may, at its option and
expense, install check meters and gas samplers for checking Transporter’s
metering equipment; and they shll be so installed so as not to interfere with
the operation of Transporter’s facilities. 
Measurements of gas shall be by Transporter’s, or its designee’s,
measurement equipment only, except as otherwise herein provided.

 

D.            The temperature of gas flowing
through the meter or meters shall be determined by the continuous use of a
recording thermometer installed so that it will properly record the temperature
of the gas flowing through the meter or meters, or at Transporter’s option, by
periodic tests conducted with a mercury thermometer.

 

E.             The specific gravity of the gas
flowing through the meter or meters may, at Transporter’s option, be determined
by the use of a recording gravitometer installed so that it will properly
record the specific gravity of the gas flowing through the meter or
meters.  The arithmetical average of the
hourly specific gravity during the time that gas was actually flowing through
the meter each day shall be used in computing measurements for that day.  If Transporter does not elect to install a
recording gravitometer, the specific gravity of the gas flowing through the
meter or meters shall be determined at quarterly intervals, or more often, at
Transporter’s election, by use of the AGA accepted gravitometer or by
computation from fractional analysis of samples of gas taken at the Point of
Redelivery.  Specific gravities so
determined will be used in

 

67

 

calculating gas
deliveries for the day on which the test is made, and for all following days,
until the next specific gravity test is made.

 

F.             The gross heating value in British
Thermal Units will be determined only at the Point of Redelivery unless there
is more than one Point of Delivery into Transporter’s System in which case the
gross heating value in British Thermal Units will also be determined for
allocation purposes at each Point of Delivery. 
The gross heating value in British Thermal Units may, at Transporter’s
option, be determined by a recording calorimeter.  The arithmetical average of the hourly heating values recorded
each day during the time that gas was actually flowing through the meter shall
be considered as the gross heating value of as delivered during such day.  If Transporter does not elect to install a
recording calorimeter, the gross heating value of the gas shall be determined
by Transporter at quarterly intervals (or other intervals as agreed to by
Transporter or Shipper) by the taking of samples at Transporter’s meter.  The sample may be run on a calorimeter at
another location or the heating value may be computed from fractional analysis of
such samples.  The result shall be applied
to gas deliveries for the day when the sample is taken, and for all following
days, until that on which a new sample is taken.  Shipper shall have the right to witness all of Transporter’s
tests for heating value of the gas.

 

G.            At the Point of Redelivery,
Transporter shall, if necessary, install the necessary mechanical separation
equipment required to ensure that no free liquids are allowed to enter Lone
Star’s pipeline.  Any liquids recovered
by said separation equipment shall be deemed to belong to Transporter.

 

H.            Each party shall have the right to
be present at the time of any installing, reading, cleaning, changing,
repairing, inspection, testing, calibrating, or adjusting done in connection
with the other’s measuring equipment used in measuring deliveries
hereunder.  The records from such
measuring equipment shall remain the property of their owner, but upon request,
each will submit to the other its records and charts, together with
calculations therefrom subject to return within fifteen (15) days after receipt
thereof.

 

At least once each
quarter, Transporter shall calibrate the meters and instruments or cause the
same to be calibrated.  Transporter
shall give Shipper sufficient notice in advance of such tests so that Shipper
may, at its election, be present in person or by its representative, to observe
adjustments, if any, which are made. 
For the purpose of measurement and meter calibration, the

 

68

 

atmospheric
pressure shall be assumed to be fourteen and seven-tenths (14.7) psia,
irrespective of variations in natural atmospheric pressure from time to time.

 

I.              If, upon any tests, the metering
equipment in the aggregate is found to be inaccurate by more than two percent
(2%), registration thereof and any payment based upon such registration, shall
be corrected at the rate of such inaccuracy for any period of inaccuracy which
is definitely known or agreed upon, or if not known or agreed upon, then for a
period extending back one-half (1/2) of the time elapsed since the last date of
calibration.  Following any tests, any
metering equipment found to be inaccurate to any degree shall be adjusted
immediately to measure accurately.  If
for any reason any meter is out of service or out of repair so that the
quantity of gas delivered through such meter cannot be ascertained or computed
from the readings thereof, the quantity of gas delivered during such period
shall be estimated and agreed upon by the parties hereto upon the basis of the
best available data, using the first of the following methods which is
feasible:

 

1.             By using the registration of any
check measuring equipment of Shipper, if installed and registering accurately;

 

2.             By correcting the error, if the
percentage of error is ascertainable by calibration, test or mathematical
calculation;

 

3.             By estimating the quantity of
deliveries by deliveries during the preceding periods under similar conditions
when the meter was registering accurately.

 

J.             The measurement hereunder shall be
corrected for deviation from Boyle’s Law at the pressure and temperatures under
which gas is delivered hereunder.

 

ARTICLE VII - Quality

 

The gas delivered
at the Point of Delivery and Point of Redelivery shall meet the quality
specifications below except to the extent they are inconsistent with Lone
Star’s then current quality specifications at the Point of Redelivery in which
case Lone Star’s then current quality specifications shall apply.

 

(a)                                  The
natural gas shall be of merchantable quality and shall be commercially free
from water, hazardous substances, hydrocarbon liquids, bacteria and other
objectionable liquids, solids and/or gas components;

 

69

 

(b)                                 shall
specifically contain not more than five hundredths of one percent (.05%) by
volume of oxygen;

 

(c)                                  shall
not contain more than five (5) grains of total sulfur consisting of not more
than one quarter (1⁄4) grain of hydrogen sulfide and one (1) grain of mercaptan
sulfur per one hundred (100) cubic feet of gas;

 

(d)                                 shall
not contain more than two percent (2%) by volume of carbon dioxide;

 

(e)                                  shall
not contain more than four percent (4%) by volume total non-hydrocarbon and
inert gases (including carbon dioxide, nitrogen, oxygen, helium, etc.);

 

(f)                                    shall
contain not more than seven pounds (7#) of water vapor per one million
(1,000,000) cubic feet of gas;

 

(g)                                 shall
be at temperatures not in excess of one hundred twenty (120) degrees Fahrenheit
or less than forty (40) degrees Fahrenheit; and

 

(h)                                 shall
have a hydrocarbon dewpoint not to exceed forty (40) degrees Fahrenheit at the
delivery pressure and shall have a heat content of not less than nine hundred
fifty (950) or more than eleven hundred (1,100) British Thermal Units per cubic
foot under conditions of measurement.

 

ARTICLE VIII
- Billing and Payment

 

A.            On or before the twentieth (20th)
day of each month, Transporter shall render to Shipper its bill for all gas
transported during the preceding month.

 

B.            Shipper shall pay Transporter, at
Transporter’s address designated herein, in good funds on or before the last
day of the month in which such invoice is rendered; provided, however, that if
Transporter renders a bill after the twentieth (20th) day of the month, that
due date shall be extended to ten (10) days after the bill is rendered for the
gas transported for Shipper hereunder during the preceding month.

 

C.            Should Shipper fail to pay all of
the amount of any bill as herein provided when such amount is due, interest on
the unpaid portion of the bill shall accrue and be payable at the rate of one
and one-half percent (1.5%) per month from the due date until the date of
payment; provided, however, that no interest rates or charges provided in this
Agreement are intended to

 

70

 

exceed the maximum
allowed by law and any such rates or charges stated herein shall be conformed,
if necessary, to the maximum rates or charges allowed by law.  If such failure to pay continues for thirty
(30) days after payment is due, Transporter, in addition to any other remedy it
may have under this Agreement, may suspend further transportation until such
amount is paid; provided, however, that if Shipper in good faith shall dispute
the amount of any such bill or part thereof and shall pay to Transporter such
amounts as it concedes to be correct, and, at any time thereafter within thirty
(30) days of a demand made by Transporter, shall furnish good and sufficient
corporate undertaking acceptable to Transporter, guaranteeing payment to
Transporter of the amount ultimately found due upon such bill after a final
determination, which may be reached either by agreement or judgment of court,
as the case may be, then no interest will be due on the unpaid portion of the
bill.

 

D.            In the event an error is discovered
in the amount shown due in any statement rendered by Transporter, such error
shall be adjusted within thirty (30) days after the amount thereof is
determined.  Claims for errors shall be
made promptly upon discovery, but in any event, within six (6) months of the
date of such statement.

 

E.             Transporter and Shipper shall each
have the right to examine at all reasonable times the books, records, and
charts of the other to the extent necessary to verify or audit the accuracy of
any statement, bill, chart, or computation made under or pursuant to this
Agreement.  All books of accounts,
records, and charts of either party relating to deliveries of gas hereunder,
and the amount due hereunder, shall be preserved for a period of two (2) years.

 

ARTICLE IX -
Non-Odorization of Gas

 

It is understood
and agreed that none of the gas delivered by Transporter for Shipper pursuant
to this Agreement shall be odorized unless required by governmental
authority.  Any odorization that is
required by any applicable state or federal statute, order, rule, or regulation
at a location beyond the Point of Redelivery shall be the sole responsibility
of Shipper.  Shipper agrees to indemnify
and hold Transporter harmless from any and all losses or damages that may be
incurred as the result of the operation and maintenance of odorization
facilities or equipment at or near the Point of Redelivery.

 

71

 

ARTICLE X - Title

 

Shipper hereby
warrants that at the time of delivery of gas to Transporter it will have good
title or the good right to deliver such gas, and that such gas shall be free
and clear of all liens and adverse claims; and agrees, with respect to the gas
delivered by it, to indemnify Transporter against all suits, actions, debts,
accounts, damages, costs (including attorneys’ fees), losses and expenses
arising from or out of any adverse claims of any and all persons to or against
said gas.

 

ARTICLE XI -
Duly Constituted Authorities

 

This Agreement and
all operations hereunder are subject to the applicable federal and state laws
and the applicable ordinances, orders, rules and regulations of any local,
state or federal governmental authority having or asserting jurisdiction; but
nothing contained herein shall be construed as a waiver of any right to
question or contest any such law, ordinance, order, rule or regulation in any
forum having jurisdiction in the premises. 
If any regulatory authority or governmental entity by statute, rule,
regulation or order dictates any action or requirement which prevents or
materially impedes the performance of the transportation service, the
Transporter shall not be liable to Shipper to the extent of such prevention or
impedance.  If, due to any governmental
or regulatory agency action, Transporter is required to incur major
unanticipated expenditures in connection with the transportation service to be
rendered hereunder, Shipper agrees to enter into good faith negotiations with
Transporter to determine the appropriate transportation fees to be paid in
order to reflect such additional costs.

 

ARTICLE XII - Term

 

This Agreement
shall be effective from the date first set forth herein and shall continue in
force and effect for a Primary Term of ten (10) Contract Years, and Contract
Year to Contract Year thereafter until terminated by either party by written
notice to the other party no later than ninety (90) days prior to the end of
the Primary Term or the end of any Contract Year thereafter.  Notwithstanding the above, if an imbalance
exists on the date of termination hereof between the total quantities of gas
theretofore delivered and redelivered hereunder, the term hereof shall be
extended for a period sufficient to allow the party whose deliveries or
redeliveries are in arrears to eliminate any deficit.

 

 

72

 

At the end of the term of this Agreement, either party
has the right to cease operations and neither party will assert before any
regulatory authority the right to service not explicitly provided for under the
terms and conditions of this Agreement.

 

ARTICLE XIII
- Force Majeure

 

In the event of either Party hereto being rendered unable, wholly or in
part, by Force Majeure to carry out its obligations under this Agreement, other
than to make payments due hereunder, it is agreed that on such Party giving
notice and full particulars of such Force Majeure in writing or by facsimile to
the other Party as soon as possible after the occurrence of the cause relied
on, then the obligations of the Party giving such notice, as far as they are
affected by such Force Majeure, shall be suspended from the commencement of and
during the continuance of any inability so caused but for no longer period, and
such cause shall as far as possible be remedied with all reasonable dispatch.

 

The term “Force
Majeure,” as used herein, shall mean an act of God, act of the public enemy,
war, blockade, public riot, lightning, fire, storm, flood, explosion and any
other causes whether of the kind enumerated or otherwise not reasonably within
the control of the Party claiming the suspension and which by the exercise of
reasonable diligence such Party is unable to prevent or overcome.  Force Majeure shall include the inability to
acquire or delays in acquiring rights-of-way grants, permits, or licenses at
reasonable costs, and shall specifically include governmental delays in issuing
permits required for the installation of the Treatment Plant if Hanover has
filed all necessary applications for permits not later than September 30,
2001.  Force Majeure shall also include
governmental delays in issuing permits required for the re-entry of the Ruby
Magness Well No. 1 and for the Injection Well. 
Notwithstanding the foregoing, this Agreement shall terminate on June
30, 2003 if any Party fails to obtain, in the exercise of reasonable diligence,
any required permit for the Treatment Plant, the re-entry of the Ruby Magness
Well No. 1, or the Injection Well.

 

ARTICLE XIV -
Notices and Miscellaneous

 

A.            Notices

 

Any notice
provided for in the Agreement shall be in writing and shall be considered as
having been given: (i) if delivered personally; or (ii) if mailed by registered
or

 

73

 

certified United
States mail, postage prepaid, to the following addresses: or (iii) if delivered
by e-mail or facsimile transmission.

 

Any statement or
payment provided for in the Agreement shall be considered as having been
delivered if delivered personally or if mailed by United States mail, postage
prepaid, to the following addresses:

 

SHIPPER

 

GATEWAY PROCESSING
COMPANY

500 Dallas, Suite
2615

Houston, Texas
77002

 

TRANSPORTER

 

GATEWAY PIPELINE
COMPANY

500 Dallas, Suite
2615

Houston, Texas
77002

 

Such address may,
from time to time, be changed by mailing by certified or registered mail
appropriate notice thereof to the other party.

 

B.            Miscellaneous Provisions

 

1.             No modification of the terms and
provisions of this Agreement shall be made except by the execution of written
agreements.

 

2.             No waiver by either Transporter or
Shipper of any one or more defaults by the other in the performance of any
provisions of this Agreement shall operate or be construed as a waiver of any
future default or defaults, whether of a like or different character.

 

3.             Any party which shall succeed by
purchase, merger, or consolidation to the properties, substantially as an
entity, of Transporter or of Shipper, as the case may be, shall be entitled to
the rights and shall be subject to the obligations of its predecessor in title
under this Agreement.  Either party may,
without relieving itself of its obligations under this Agreement, assign any of
its rights hereunder to a company with which it is an Affiliate, but otherwise
no assignment of this Agreement, or any of the rights or obligations hereunder
shall be made by Transporter or Shipper unless there first shall have been
obtained a consent thereto by the other party, which shall not be unreasonably
withheld.  Any attempted assignment in
violation of this

 

74

 

provision shall be
void.  It is agreed, however, that the
restriction on assignments contained in this paragraph shall not in any way
prevent either party to this Agreement from pledging or mortgaging its rights
hereunder as security for its indebtedness, without the assumption of
obligations hereunder by the pledgee or mortgagee.

 

4.             Notwithstanding anything to the
contrary in this Agreement, in no event shall either Transporter or Shipper be
entitled to receive or be liable to the other for (and each party hereby
waives) any consequential, special, indirect, or punitive damages arising out
of this Agreement or the transactions contemplated hereby, irrespective of
whether alleged to be by way of indemnity (other than indemnity for Third Party
claims) as a result of breach of any provision of this Agreement, tort
(including negligence and strict liability), or otherwise, including, without
limitation, any loss of profits, loss of income, loss of use, loss of revenue,
loss of contracts, loss of fuel, REGARDLESS
OF WHETHER ANY SUCH DAMAGES ARE CAUSED BY, CONTRIBUTED TO BY, OR ARISE OUT OF,
THE SOLE, JOINT OR CONCURRENT NEGLIGENCE (IN ANY DEGREE) OR STRICT LIABILITY OF
THE OTHER PARTY.

 

5.             This Agreement may be executed in
any number of counterparts, no one of which need be executed by all parties, or
may be ratified, adopted, or consented to by separate instrument, in writing
specifically referring hereto, and it shall be binding upon all parties who
execute a counterpart, ratification, adoption, or consent with the same force
and effect, and to the same extent as if all such parties had executed and
signed the same document, with each separate counterpart, ratification,
adoption or consent deemed to be an original.

 

6.             This Agreement contains the entire
contract between the parties and there are no oral promises, agreements, or
warranties affecting it.

 

7.             The descriptive headings of these
general provisions are formulated and used for convenience only and shall not
be deemed to affect the meaning or construction of any such provisions.

 

8.             This Agreement was prepared and
negotiated jointly by both parties and shall not be construed as prepared by
one party to the exclusion of the other.

 

9.             THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS.

 

75

 

IN WITNESS
WHEREOF, the parties hereto have caused this Agreement to be duly executed in
duplicate originals, as of the date first hereinabove written.

 

	
   

  	
  SHIPPER

  
	
   

  	
   

  	
   

  
	
   

  	
  GATEWAY PROCESSING COMPANY

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  TRANSPORTER

  
	
   

  	
   

  	
   

  
	
   

  	
  GATEWAY PIPELINE COMPANY

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

Signature page to Transportation Agreement between
Gateway Pipeline Company and Gateway Processing Company dated
                                              .

 

76

 

STATE OF TEXAS

 

COUNTY OF HARRIS

 

This instrument
was acknowledged before me on this
            day of
                             ,
2001, by DOUGLAS C. MOSS, the Vice President of GATEWAY PIPELINE
COMPANY, a Texas corporation on behalf of said corporation.

 

	
   

  	
   

  	
   

  
	
  My Commission Expires:

  	
   

  	
   

  
	
  

  

  	
   

  	
  

  Notary Public in and for Harris County, Texas

  

 

 

 

STATE OF TEXAS

 

COUNTY OF HARRIS

 

This instrument
was acknowledged before me on this
             day of
                             ,
2001, by MICHAEL T. FADDEN, the President of GATEWAY PROCESSING
COMPANY, a Texas corporation, on behalf of said corporation.

 

	
   

  	
   

  	
   

  
	
  My Commission Expires:

  	
   

  	
   

  
	
  

  

  	
   

  	
  

  Notary Public in and for Harris County, Texas

  

 

77

 

EXHIBIT
“A” - DESCRIPTION OF TRANSPORTATION SYSTEM

 

to

 

TRANSPORTATION AGREEMENT

 

dated

 

 

between

 

GATEWAY PIPELINE COMPANY

 

as Transporter

 

and

 

GATEWAY PROCESSING
COMPANY

 

as Shipper

 

 

DESCRIPTION OF
TRANSPORTATION SYSTEM

 

The Transportation
System is comprised of approximately 40,000 feet of eight-inch nominal diameter
natural gas pipeline and appurtenant facilities located between the Point of
Delivery and the Point of Redelivery in Madison County, Texas.  The Transportation System, which has a
maximum allowable operating pressure (MAOP) of 1,440 psig, will be designed,
constructed and operated in accordance with the appropriate regulatory
authorities.

 

78

Exhibit E

 

AMENDMENT

TO

TRANSPORTATION
AGREEMENT

DATED
JUNE 15, 2001

 

 

There is in existence between Gateway Pipeline
Company, a Texas corporation, (“GPC”) and Gateway Processing Company, a Texas
corporation (“GPRC”) a Transportation Agreement dated June 15, 2001
(“Transportation Agreement”).

 

GPC and GPRC hereby agree
to amend the Transportation Agreement effective November 14, 2002 as follows:

 

1.     In Section I of Article I – Definitions
change “60,000 Mcf per day” to “50,000 Mcf per day”; and

 

2.     Delete Exhibit A in its entirety and
substitute the attached Exhibit A therefor.

 

Except as indicated
above, all other terms and conditions of the Transportation Agreement shall
remain in full force and effect.

 

Accepted and agreed to this 14th
day of November, 2002.

 

 

	
  By:

  	
   

  	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Gateway Pipeline Company

  	
   

  	
   

  	
  Gateway Processing Company

  

 

79Exhibit
10(f)(1)

 

FIRST AMENDED AND RESTATED MASTER AGREEMENT

 

This First Amended and Restated Master Agreement (this “Agreement”)
is made and entered into as of the 12th day of September, 2002, by and
among Redwood Energy Production, L.P., a Texas limited partnership (“Redwood”),
Gateway Processing Company, a Texas corporation (“Gateway”), and Hanover
Compression Limited Partnership, a Delaware limited partnership (“Hanover”).  Redwood, Gateway, and Hanover are sometimes
hereinafter individually referred to as a “Party” and collectively referred to as the
“Parties.”

 

RECITALS

 

WHEREAS, Redwood acquired an undivided ninety-five and three-tenths
percent (95.3%) working interest (pending the release from escrow of the record
title Assignment as set forth in that Purchase and Sale Agreement dated
December 29, 2000 between Redwood and Panther Rodessa, L.P., et al.) in and to
the oil and gas leases described therein insofar and only insofar as said oil
and gas leases cover and include the right to produce gas from the
Rodessa/Sligo Interval (hereafter defined); and

 

WHEREAS, Exhibit A-1 attached hereto has been amended from that
attached to the original Master Agreement (hereafter defined) and sets forth
the oil and gas leases currently held by Redwood in the Madisonville Rodessa
Field in Madison County, Texas (the “MRF”) within the AMI (hereinafter
defined), insofar and only insofar as said oil and gas leases cover and include
the right to produce gas from the Rodessa/Sligo Interval (hereafter defined);
and

 

WHEREAS, as of the date of this Agreement, Redwood’s oil and gas leases
in the MRF lie within the interpreted field outline as shown on Exhibit A-2
attached to the Master Agreement; and

 

WHEREAS, Redwood is the operator of the oil and gas leases in the MRF;
and

 

WHEREAS, Gateway desires to purchase the gas owned or controlled by
Redwood and produced from the Rodessa/Sligo Interval in the AMI; and

 

WHEREAS, Gateway desires to have Hanover treat the gas to remove Acid
Gas and other impurities to make the gas marketable, deliver the Acid Gas to
Redwood, and deliver the pipeline quality gas to Gateway; and

 

WHEREAS, the Parties have previously entered into that Master Agreement
and the Ancillary Agreements (hereafter defined) dated as of June 15, 2001 in
connection with operations in the MRF, and the Parties desire to enter into
this Agreement in order to amend and restate the Master Agreement in its
entirety and ratify and amend in certain respects certain of the Ancillary
Agreements;

 

NOW, THEREFORE, the Parties agree as follows:

 

1

 

ARTICLE I.

Definitions

 

For purposes of this Agreement, the following terms and phrases shall
have the following meanings (other defined terms may be found elsewhere in this
Agreement):

 

“Acid
Gas” means carbon dioxide and hydrogen sulfide removed by the amine
treater at the Treatment Plant from gas produced from wells in the AMI in
accordance with the Treating Agreement and disposed of in the Injection Well.

 

“Affiliate”
means (a) any Person that, directly or indirectly, through one or more
other Persons, controls, is controlled by or is under common control with the
Person specified and (b) with respect to any Person (i) the
securities of which are not publicly traded and (ii) that has no ultimate
parent the securities of which are publicly traded, any executive officer of
the Person specified and any Person controlled by one or more executive
officers of the Person specified.  For
the purpose of this definition of Affiliate, the term “control” means the power
to direct or cause the direction of the management of such Person, whether
through the ownership of voting securities, by contract or agency or otherwise.

 

“Agreement”
has the meaning set forth in the introductory paragraph.

 

“Ancillary Agreements” means
the Gas Purchase Agreement, the Transportation Agreement, the Treating
Agreement, and the Escrow Agreement.

 

“Area of Mutual Interest”
or “AMI” means the area outlined
on Exhibit A, including, without limitation, the lands covered by the leases
described in Exhibit A-1 and such other lands covered by leases or other
interests that Redwood may obtain during the term of this Agreement within the
AMI.  If any lease or other interest
acquired by Redwood lies partially within and partially outside of the AMI, the
entire interest shall be considered as being situated within the AMI, and the
AMI shall be revised to accord with any such change.

 

“Business
Day” means any day other than a Saturday, Sunday, or legal holiday
in the State of Texas, and on which banks are open for business in Houston,
Texas.

 

“Claims”
means any and all claims, demands, suits, causes of action, losses, damages,
liabilities, fines, penalties and costs (including, without limitation,
attorneys’ fees and costs of litigation), whether known or unknown, including
environmental and non-environmental claims.

 

“Code” means the
Internal Revenue Code of 1986, as amended.

 

“Closing” has the meaning
set forth in Section 2.1.

 

“Contract Year”
means the twelve (12) month period beginning the first day of the month
following the date of initial deliveries of gas under this Agreement, and each
subsequent twelve (12) month period thereafter; provided that the first
Contract Year shall include the period from the date of initial deliveries of
gas until the first day of the following month.

 

“Electricity Cost Reimbursement”
has the meaning set forth in Section 6.1.

 

2

 

“Escrow Agreement”
means the amended Escrow Agreement to be entered into by the Parties as
described in Section 5.1.

 

“Excess
Gas” means those proved reserves of gas owned or controlled by
Redwood from the Rodessa/Sligo Interval in the MRF which are in excess of those
proved reserves of gas required to support production of eighteen million cubic
feet of gas per day (18,000 Mcf/d) during each of the Contract Years remaining
under the Initial Term of this Agreement.

 

“Exhibits”  mean
the following exhibits which are attached to the Master Agreement and, as
amended hereby, herein incorporated by reference for all purposes:

 

Exhibit A—Area of Mutual Interest

Exhibit A-1—Oil and Gas Leases

Exhibit A-2—Land Map with Interpreted Field Outline

Exhibit B—Ruby Magness Well No. 1

Exhibit C—Gas Purchase Agreement

Exhibit D—Treating Agreement

Exhibit E—Transportation Agreement

Exhibit F—Ryder Scott Reserve Report

 

“Force
Majeure”  has the meaning set forth in Section 9.1
below.

 

“Gas Purchase Agreement” means the Gas Purchase Agreement between
Gateway and Redwood in the form attached to the Master Agreement as Exhibit C, as
the same has been amended hereby.

 

“Governmental
Authority” means any federal, state, local, municipal or other
government; any governmental, regulatory or administrative agency, commission,
body or other authority exercising or entitled to exercise any administrative,
executive, judicial, legislative, police, regulatory or taxing authority or
power; and any court or governmental tribunal, including, without limitation,
any tribal authority having jurisdiction.

 

“Initial Term” has the meaning set forth in Section 5.2
below.

 

“Initial
Well Report”  means that report furnished by Redwood to
Gateway and Hanover with respect to gas production volumes, reserves, and
composition from the Ruby Magness Well No. 1.

 

“Injection
Well” means the disposal well to be permitted and drilled,
recompleted, or purchased as set forth in Section 3.2 below.

 

“Laws”
means any and all laws, statutes, ordinances, permits, decrees, writs,
injunctions, orders, codes, judgments, principles of common law, rules or
regulations (including, without limitation, environmental laws) which are
promulgated, issued or enacted by a Governmental Authority having jurisdiction.

 

“Minimum Payment”
has the meaning set forth in Section 6.3 below.

 

3

 

“MRF”
has the meaning set forth in the Recitals above.

 

“Party”
and/or “Parties”
has the meaning set forth in the introductory paragraph.

 

“Person”
means an individual, group, partnership, limited liability company,
corporation, trust or other entity.

 

“Phase
I” has the meaning set forth in Article III.

 

“Phase
II” has the meaning set forth in Article IV.

 

“Plant
Location” means the site of the Treatment Plant.

 

“Reserve
Report” means that report entitled Estimated Future Reserves and
Income Attributable to Certain Leasehold Interests by Ryder Scott Company,
Petroleum Consultants covering the MRF dated December 31, 2000 attached to the
Master Agreement as Exhibit F.

 

“Rodessa/Sligo
Interval” means the stratigraphic equivalent of those sands, zones,
and horizons occurring below the surface of the earth encountered between the
depths of 11,427 feet and 12,378 feet (electric log measurements) in the Ruby
Magness Well No. 1 located in the Amy Boatwright Survey, A-7, Madison County,
Texas.

 

“Schedules” mean the
following schedules which are attached hereto and herein incorporated by
reference for all purposes:

 

Schedule I—Initial Well Report

Schedule II—Acid Gas Disposal Permit

Schedule III—Throughput Fee Agreement

 

“Supplemental  Reserve Report”
has the meaning set forth in Section 4.1 and 4.4.

 

“Third
Party” means any Person other than the Parties and their respective
Affiliates, including any Governmental Authority.

 

“Throughput Fee Agreement” means
that Throughput Fee Agreement between Hanover, Redwood, and Jeffrey A Farris,
Jr. and Kathryn Sue Farris attached hereto as Schedule III.

 

“Transportation Agreement”
means the Transportation Agreement
between Gateway and its Affiliate in the form attached to the Master Agreement
as Exhibit E.

 

“Treating Agreement”
means the Treating Agreement between Hanover and Gateway in the form attached to the Master Agreement as Exhibit D,
as amended as of January 23, 2002.

 

“Treatment Plant”
means the Gas Treatment Plant to be designed and installed by Hanover, all as
more particularly set forth in the Treating Agreement.

 

4

 

ARTICLE II.

Closing and Execution of Instruments;
Ratification

 

2.1  Closing.  The closing of the transactions contemplated
hereunder (the “Closing”) shall be at 10:00 a.m. on September
      , 2002. 
At the Closing the Parties  (or
their Affiliates, as applicable) shall execute and deliver all of the
instruments to be executed in connection herewith.

 

2.2  Further
Assurances.  From
time to time after the Closing, upon reasonable request by any other Party,
each Party agrees to execute and deliver such additional documents as the
requesting Party may reasonably require to accomplish the purposes of this
Agreement.

 

2.3  Ratification of Ancillary Agreements. 
To the extent each Party is a signatory to the Ancillary Agreements,
each such Party does hereby RATIFY, ADOPT, and APPROVE each of the Ancillary
Agreements, as same may be amended hereby.

 

ARTICLE III.

Phase I Initial Development Program

 

The actions conducted by the Parties pursuant to this ARTICLE III shall
be referred to as “Phase I.”

 

3.1  Ruby Magness Well No. 1.  Redwood has performed, or caused to be
performed, remedial work on the Ruby Magness Well No. 1, conducted an
evaluation to confirm the production rates and reserves indicated in the
Reserve Report, and provided a current gas composition analysis to confirm
assumptions regarding gas quality used for sizing major equipment to be
installed at the Treatment Plant. Redwood has furnished the other Parties with
the Initial Well Report, as set forth on Schedule I attached hereto, indicating
the results of the evaluation and analysis. 
The Initial Well Report substantially confirms the production rates and
reserves indicated in the Reserve Report, and substantially confirms the
assumptions regarding gas quality used for sizing major equipment to be
installed at the Treatment Plant (hereinafter an “Acceptable Initial Well
Report”), and Redwood has successfully acquired a permit from the applicable
Governmental Authority to dispose of Acid Gas into the planned Injection Well
as set forth in Schedule II attached hereto. 
As a result of Redwood’s efforts, the Parties are obligated to perform
the Phase I obligations as set forth herein.

 

3.2  Injection Well.  Hanover has leased the Plant Location, and
Redwood has acquired a surface and bottomhole location and associated injection
rights for Redwood’s Injection Well, together with appropriate easements for
ingress and egress to and from the surface locations.  Hanover shall pay for Redwood’s reasonable attorneys’ fees
associated with the negotiation and acquisition of the Injection Well
location.  Hanover shall pay all taxes
assessed against or attributable to the land comprising the Plant Location, and
all taxes assessed against or attributable to Hanover’s improvements, fixtures,
furnishings, equipment, and other personal property on the Plant Location.  Redwood shall pay all taxes assessed against
or attributable to the land comprising the Injection Well location, and all
taxes assessed against or attributable to Redwood’s improvements, fixtures,
furnishings, equipment, and other personal property on the Injection Well
location.  Gateway shall pay all taxes
assessed against or attributable to its

 

5

 

improvements, fixtures, furnishings, equipment, and other personal
property within the AMI.  Redwood shall
use its reasonable efforts to obtain a permit from the applicable Governmental
Authority to drill the Injection Well which shall be adequately sized for both
Phase I and Phase II estimated volumes of Acid Gas.  Redwood shall notify the other Parties upon its receipt of the
Injection Well permit, and shall, on or before October 15, 2002, use reasonable
efforts to commence, or cause to be commenced, drilling operations on the
Injection Well at its sole cost, risk, and expense, subject only to events of
Force Majeure and compliance with applicable Laws (including possible legal
interference from certain surface or mineral owners).  Hanover shall undertake preliminary site preparation and dirt
work at the Plant Location contemporaneously with Redwood moving the Injection
Well drilling rig onto the Injection Well location.  The Injection Well shall be drilled, completed , and tested in a
prudent manner and in accordance with oil and gas industry standards and
applicable Laws.  The Injection Well
shall have sufficient capacity to dispose of all volumes of Acid Gas removed at
the Treatment Plant from reserves owned or controlled by Redwood and produced
from the Rodessa/Sligo Interval in the MRF.

 

3.3  Hanover’s Drilling of Injection Well.  If, as of October 15, 2002, Redwood has not
yet commenced and diligently prosecuted the drilling of the Injection Well,
after notice to Redwood Hanover or its assigns may, but is not obligated to,
undertake the drilling thereof on Redwood’s behalf, provided that Redwood and
Gateway hereby give their irrevocable consent to the assignment by Hanover as
contemplated above. Hanover may, in its sole discretion, use a third party
contract operator, or select Redwood to serve as contract operator to drill, or
cause to be drilled, the Injection Well at Hanover’s sole cost and
expense.  Hanover shall drill, complete,
equip, and operate or cause its contract operator to drill, complete, equip,
and operate, the Injection Well as a reasonable prudent operator and in
accordance with all Laws and Governmental Authority having jurisdiction.  Hanover shall thereafter be entitled to
receive from all of the Wellhead Revenue (as such term is used in the Gas
Purchase Agreement) attributable to Redwood’s interest in any well within the
AMI an amount equal to two hundred fifty percent (250%) of all of Hanover’s
direct costs and expenses incurred in drilling and completing the Injection
Well, and two hundred fifty percent (250%) of all equipment and one hundred
percent (100%) of lease operating costs associated therewith (including,
without limitation, that portion of the Minimum Payment attributable to
Redwood’s interest, but  not any portion thereof payable as
landowner’s royalty, or by virtue of any net profits or other interest
burdening the interest of Redwood in effect and filed in the Official Records
of Madison County, Texas as of the date hereof).  On the first day of the month after the month that Hanover has
received such amounts, Redwood’s right to receive all of the proceeds from the
sale of gas subject to the Gas Purchase Agreement attributable to Redwood’s
interest in any well within the AMI title shall ipso facto revert to and revest in Redwood.

 

6

 

3.4  Construction
of Treatment Plant. 
Hanover has commenced, or caused to be commenced, the fabrication of the
facilities to be installed at the Treatment Plant.  The Treatment Plant has been designed in accordance with the
specifications set forth in the Treating Agreement with an initial capacity
sufficient to treat and bring up to pipeline quality specifications eighteen
million cubic feet of gas per day (18,000 Mcf/d), assuming that the composition
of said gas substantially conforms to the gas quality set forth in the
Acceptable Initial Well Report.  Hanover
agrees that, during Phase I, if Redwood can produce and Gateway can gather a
quantity of gas in excess of eighteen million cubic feet of gas per day (18,000
Mcf/d), Hanover shall use its reasonable commercial efforts, subject to prudent
operations and operational constraints of the installed capacity of the
Treatment Plant to treat and bring up to pipeline quality specifications such
additional volumes without an increase in the Fixed Monthly Treating Fee or the
Floating Monthly Treating Fee, as appropriate. 
Hanover will not be required to install the facilities at the Plant
Location prior to the Injection Well being tested to the extent reasonably
necessary to demonstrate that it will be able to dispose of the projected
volumes of Acid Gas.  Subject to the
aforesaid and events of Force Majeure, Hanover shall use its reasonable
commercial efforts to install the Treatment Plant and make the same operational
on or before one hundred eighty (180) days from the date of a successful
Injection Well disposal test.  Subject
only to events of Force Majeure, Hanover shall install the Treatment Plant and
make same operational on or before two hundred forty (240) days from the date
of a successful Injection Well disposal test. 
Throughout the Treatment Plant construction and installation phase
hereunder, Hanover shall provide the other Parties with monthly status reports
with respect to the Treatment Plant including an estimated start-up date.  Hanover will construct the Acid Gas disposal
line from the Treatment Plant to the boundary of the Plant Location, and Gateway
will construct the Acid Gas disposal line from the boundary of the Plant
Location to the Injection Well at the sole cost, risk, and expense of the Party
undertaking such disposal line construction; provided, however, if the disposal
line exceeds one thousand feet (1,000’), Redwood will reimburse Hanover or
Gateway, as appropriate, for the actual direct costs paid by such Party for
that portion of the disposal line that exceeds one thousand feet (1,000’).  The Acid Gas disposal line shall have
sufficient capacity to transport from the Treatment Plant to the Injection Well
for redelivery to Redwood all Acid Gas removed at the Treatment Plant from up
to fifty million cubic feet of gas per day (50,000 Mcf/d).  Title to and custody of the Acid Gas will be
transferred from Gateway to Redwood at the outlet flange of the Acid Gas
disposal line at the Injection Well.  To
the extent that Redwood has the right to lay pipelines across any of the lands
or leases in the AMI and such right may be assigned, then, if requested by
Hanover or Gateway, Redwood shall assign such rights to Hanover or Gateway, as
applicable, to assist in the installation of the Acid Gas disposal line,
provided that Hanover or Gateway, as applicable, shall reimburse Redwood for
all costs and expenses, if any, incurred in any assignment of pipeline
right-of-way or similar instrument.  No
payment made by Redwood to Hanover or Gateway hereunder shall constitute a
release or waiver of Redwood’s audit rights and right to seek reimbursement for
any audit exceptions under Section 9.14 below. 
Hanover shall also install and maintain at the Treatment Plant, at its
sole cost, risk, and expense, a separator, a condensate line, an
appropriately-sized water line, and a water tank, and shall bear up to
$1,500.00 per month of the costs to truck such water to an appropriate disposal
location.  Any costs to dispose of the
water in excess of $1,500.00 per month shall be borne by Redwood.  In addition, Redwood shall install and maintain
at the Treatment Plant, at its sole cost, risk, and expense, a condensate tank.  REDWOOD SHALL
DEFEND, INDEMNIFY, PROTECT, AND HOLD HARMLESS

 

7

 

HANOVER AND ITS OFFICERS, DIRECTORS,
EMPLOYEES, AGENTS, AND REPRESENTATIVES, FROM AND AGAINST ALL CLAIMS, INCLUDING,
WITHOUT LIMITATION, ANY CLAIMS WITH RESPECT TO DAMAGE TO PROPERTY, INJURY OR
DEATH OF ANY PERSON, OR BREACH OR VIOLATION OF ANY ENVIRONMENTAL LAW, ARISING
OUT OF, WITH RESPECT TO, OR IN CONNECTION WITH THE CONDENSATE TANK INCLUDING,
WITHOUT LIMITATION, ANY CLAIMS ARISING OUT OF, WITH RESPECT TO, OR IN
CONNECTION WITH THE SOLE, JOINT, OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY
OF HANOVER OR ITS OFFICERS, DIRECTORS, EMPLOYEES, AGENTS, AND REPRESENTATIVES.

 

3.5  Construction of the Gathering and Transportation
System. 
Gateway has commenced, or caused to be commenced, the acquisition of
rights-of-way for the gathering and transportation pipelines for gas from the
MRF.  The gathering line from the Ruby
Magness Well No. 1 to the Treatment Plant will be constructed and operated in
accordance with the specifications set forth in the Gas Purchase Agreement, and
the transportation system from the tailgate of the Treatment Plant to the TXU
Lone Star Gas Company thirty inch (30”) line will be constructed and operated
in accordance with the specifications set forth in the Transportation
Agreement.  Gateway will not be required
to install the gathering line from the Ruby Magness Well No. 1 to the Treatment
Plant or the Transportation System prior to the Injection Well being tested to
the extent reasonably necessary to demonstrate that it will be able to dispose
of the projected volumes of Acid Gas. 
Subject to the aforesaid and events of Force Majeure, the gathering and
transportation pipelines will be installed and operational not later than
thirty (30) days before the estimated start-up date for the Treatment Plant as
set forth in Hanover’s latest monthly status report, but in no event earlier
than ninety (90) days from the date of a successful Injection Well Test.  If the gathering line from the Ruby Magness
Well No. 1 to the Treatment Plant exceeds two thousand feet (2,000’), Redwood
will reimburse Gateway for its actual direct costs associated with that portion
of the gathering line that exceeds two thousand feet (2,000’).  No payment made by Redwood to Gateway
hereunder shall constitute a waiver of Redwood’s audit rights and right to seek
reimbursement for any audit exceptions under Section 9.14 below.  To the extent that Redwood has the right to
lay pipelines across any of the lands or leases in the AMI and such right may
be assigned, then, if requested by Gateway, Redwood shall assign such rights to
Gateway to assist in the installation of the gathering and transportation
pipelines, provided that Gateway shall reimburse Redwood for all costs and
expenses, if any, incurred in any assignment of pipeline right-of-way or
similar instrument.

 

3.6  Redwood Grant of Security Interest to Hanover.  Promptly upon the request of Hanover,
Redwood shall execute a deed of trust and appropriate financing statements, in
form and substance reasonably acceptable to Redwood, granting to Hanover a
security interest in and to all of Redwood’s leasehold interests in the AMI to
secure payments of the Fixed Monthly Treating Fee or the Floating Monthly Treating
Fee (as such terms are used in the Gas Purchase Agreement), as appropriate, in
the amount of the lesser of (i) Four Million Five Hundred Thousand
Dollars ($4,500,000), or (ii) Hanover’s actual sunk capital costs for site
preparation, electrical supply installation, and installation of the Treatment
Plant.  If, at any time, Redwood
acquires debt financing in connection with the Madisonville Field, promptly
upon the request of Redwood, Hanover shall subordinate its liens and security
interests to any lender to Redwood by a subordination agreement, an
inter-creditor agreement, or such other instruments in form and

 

8

 

substance reasonably acceptable
to Redwood and its lender.  If, prior to
payment in full of the secured amount stated above, Redwood sells all or a
portion of its interest to a Third Party equity investor, Hanover shall
promptly execute a partial release of its liens and security interests over
that portion of Redwood’s interest acquired by the Third Party equity investor;
provided, however, in any event prior to its receipt of payment in full of the
secured amount, Hanover shall be entitled to retain its security interests and
liens over the greater of (i) an undivided forty percent (40%) of Redwood’s
current interest, or (ii) the interest retained by Redwood.

 

ARTICLE IV.

Phase II Development Program

 

The actions
conducted by the Parties pursuant to this ARTICLE IV shall be referred to as “Phase II.”

 

4.1  Supplemental Reserve Report.  Redwood may elect at its sole discretion to
drill, or cause to be drilled, one (1) or more additional wells in the
MRF.  Upon the successful completion of
any such additional well in the MRF, Redwood shall have Ryder Scott Company
prepare a Supplemental Reserve Report, and shall promptly furnish the other
Parties with a copy of same.  The
Supplemental Reserve Report will show the expected annual gas production by
Contract Year based on proved reserves attributable to Redwood’s interest in
the Rodessa/Sligo Interval in the MRF assuming treating equipment of the same
size as described in Exhibit B to the Treating Agreement.

 

4.2  Additional Treating Facilities / Preferential Right.  If the Supplemental Reserve Report indicates
that Redwood can produce more than 18,000 Mcf per day, on average, during each
Contract Year through the end of the seventh (7th) Contract Year,
then Hanover and Gateway shall commence negotiations to amend the Treating
Agreement for Hanover to install and operate additional facilities at the Treatment
Plant. Any such amendment shall be submitted to Redwood for its approval within
sixty (60) days from the receipt by Hanover and Gateway of the Supplemental
Reserve Report. If within sixty (60) Business Days of its receipt of the
proposed Treating Agreement amendment Redwood fails or refuses in its sole
discretion to approve the amendment, it may elect to install and operate, or
negotiate with a Third Party to install and operate, additional treating
equipment to handle the volumes of Excess Gas. 
Redwood’s failure to notify the other Parties in a timely manner shall
be deemed an election not to approve the amendment.  Once Redwood has prepared or received the specifications,
construction schedule, and pricing information with respect to the installation
and operation of the additional treating facilities, it shall provide same to
Hanover.  Within thirty (30) Business
Days of receipt of such specifications and pricing information, Hanover shall
notify Redwood whether it elects to match such specifications, construction
schedule, and pricing.  Hanover’s
failure to notify Redwood in a timely manner shall be deemed an election not to
match such specifications, construction schedule, and pricing.  If Hanover elects to install and operate the
additional facilities, Hanover and Gateway shall amend the Treating Agreement
to reflect the specifications, construction schedule, and pricing information
provided by Redwood.  If Hanover fails
or refuses to notify Redwood in a timely manner of its election to install and
operate the additional treating facilities in accordance with Redwood’s
specifications, construction schedule, and pricing, or elects not to install
and operate the additional facilities (i) Gateway and Redwood will amend the
Gas Purchase Agreement to release all volumes of Excess Gas, and (ii) the

 

9

 

Excess Gas shall be committed
and dedicated to a transportation agreement with terms and conditions
substantially identical to the Transportation Agreement except that Redwood
will be Shipper in lieu of Gateway.

 

4.3  Gathering System for Additional Wells.  Upon notification by Redwood of its
successful completion of any additional well or wells in the AMI, Gateway shall
commence, or cause to be commenced, the construction of a gathering line(s)
from the additional well(s) to the Ruby Magness Well No. 1 (or any other
additional well), or the Treatment Plant (or Redwood’s or a Third Party’s
treating facilities, as the case may be), the actual location and route of the
gathering line(s) to be determined at Gateway’s sole discretion, after
reasonable consultation with Redwood. 
Any such additional gathering line(s) shall be constructed and operated
in accordance with the specifications set forth in that Gas Purchase
Agreement.  Gateway will build any
additional gathering line(s) at its sole cost, risk, and expense; provided,
however, with respect to each additional well, to the extent that the gathering
line (whether between wells or between the well and the applicable treating
facilities) exceeds five thousand feet (5,000’), Redwood will reimburse Gateway
for its actual direct costs associated with that portion of the gathering line
which exceeds five thousand feet (5,000’). 
To the extent that Redwood has the right to lay pipelines across any of
the lands or leases in the AMI and such right may be assigned, then, if
requested by Gateway, Redwood shall assign such rights to Gateway to assist in
the installation of the gathering and transportation pipelines, provided that
Gateway shall reimburse Redwood for all costs and expenses, if any, incurred in
any assignment of pipeline right-of-way or similar instrument.  No payment made by Redwood to Gateway
hereunder shall constitute a release or waiver of Redwood’s audit rights and
right to seek reimbursement for any audit exceptions under Section 9.14 below.

 

4.4  Treating Facilities for Non-Rodessa/Sligo Interval
Gas. 
If Redwood completes a well which is capable of producing gas from any
formation or horizon in the AMI other than the Rodessa/Sligo Interval, then
Redwood shall have Ryder Scott Company prepare a Supplemental Reserve Report,
and shall promptly furnish the other Parties with a copy of same and a gas
analysis.  The Supplemental Reserve
Report will show the expected annual gas production by Contract Year based on
proved reserves attributable to Redwood’s interest.  Promptly after receipt of the Supplemental Reserve Report,
Hanover and Gateway shall commence negotiations to amend the Treating Agreement
for Hanover to install and operate additional facilities at the Treatment Plant
for the non-Rodessa/Sligo Interval gas. 
Any such amendment shall be submitted to Redwood for its approval within
sixty (60) days from the receipt by Hanover and Gateway of the Supplemental
Reserve Report.  If within sixty (60)
Business Days of its receipt of the proposed Treating Agreement amendment
Redwood fails or refuses in its sole discretion to approve the amendment, it
may elect to install and operate, or negotiate with a Third Party to install
and operate, additional treating equipment to handle the volumes of
non-Rodessa/Sligo Interval gas. 
Redwood’s failure to notify the other Parties in a timely manner shall
be deemed an election not to approve the amendment.  Once Redwood has prepared or received the specifications,
construction schedule, and pricing information with respect to the installation
and operation of the additional treating facilities, its shall provide same to
Hanover.  Within thirty (30) Business
Days of receipt of such specifications and pricing information, Hanover shall
notify Redwood whether it elects to match such specifications, construction
schedule, and pricing.  Hanover’s
failure to notify Redwood in a timely manner shall be deemed an election not to
match such specifications, construction schedule, and pricing.  If Hanover elects to install and operate the
additional facilities, Hanover and Gateway shall amend the Treating Agreement
to reflect the specifications, construction schedule, and pricing information
provided by Redwood.  If Hanover fails
or refuses to notify Redwood in a timely manner of its election to install and

 

10

 

operate the additional treating facilities in accordance with Redwood’s
specifications, construction schedule, and pricing, or elects not to install
and operate the additional facilities the non-Rodessa/Sligo Interval gas shall
be committed and dedicated to a transportation agreement with terms and
conditions substantially identical to the Transportation Agreement except that
Redwood will be Shipper in lieu of Gateway.

 

4.5  Preferential Right to Acquire Treatment Plant.  If at any time during the Term hereof,
Hanover enters into an agreement or agreements with one or more Third Parties
so that Hanover shall have sold over fifty percent (50%) of the Treatment Plant
in one (1) or more transactions, it shall promptly provide written notice to
Redwood and furnish Redwood with full information concerning the pending sale
including the identity of the proposed purchaser, the purchase price, and all
other material terms of the offer; provided that the provision of Section 9.4
shall not apply to any such sale by Hanover. 
Redwood shall have an optional prior right for a period of ten (10) Business
Days from receipt of Hanover’s notice of the sale, to purchase on the same
terms and conditions the interest that Hanover proposes to sell.  If the sale of the Treatment Plant is part
of a larger transaction, Hanover shall provide Redwood with a reasonable
allocation of that portion of the purchase price relating to the Treatment
Plant.  Redwood shall have no
preferential purchase right in any case where Hanover enters into a financing
transaction involving the Treatment Plant, or in any stock or partnership
interest sale which results in a change in control of the entity that owns the
Treatment Plant.

 

ARTICLE V.

Amended Escrow Agreement / Term / Limited
Recourse / Third Party Treating

 

5.1  Amendment of Escrow Agreement.  Reference is made to that form of Escrow
Agreement entered into by Hanover and Redwood as of June 15, 2001.  The Parties desire to amend the Escrow
Agreement in several respects as set forth herein.  Each of the Parties, including Gateway, shall execute the amended
Escrow Agreement as a party thereto. 
Any disputes or disagreements concerning the form of the amended Escrow
Agreement or the Escrow Agent shall be resolved in accordance with Article VIII
hereto.  The  Escrow Agent shall be a national bank or major financial
institution reasonably acceptable to the Parties.  The Escrow Agent will (i) receive into the Escrow Account all
proceeds derived from the sale of MMBtus Delivered (as used in the Gas Purchase
Agreement) owned or controlled by Redwood from the Rodessa/Sligo Interval in
the AMI in each month and sold to Gateway, and (ii) remit first, to
Hanover and to Gateway their respective shares of the Fixed Monthly Treating
Fee or the Floating Monthly Treating Fee, as applicable, less any royalty
amount owed by virtue of the Floating Monthly Treating Fee under Section 6.2
below; second, to Hanover the Electricity Cost Reimbursement, if
applicable; third, to Jeffrey A. and Kathryn Sue Farris the Throughput
Fee under the Throughput Fee Agreement; and fourth, to Redwood all
remaining proceeds after payment of the prior items.  Redwood shall bear all of the Escrow Agent’s fees and expenses
arising under or with respect to the Escrow Agreement.  Notwithstanding the foregoing, the Parties
agree that (i) all amounts to be received by Hanover pursuant to the provisions
of any borehole farmout under Section 5.6 below shall be paid directly to
Hanover and shall not be paid into the Escrow Account, and (ii) all Third Party
treating revenues derived under Section 5.4

 

11

 

below shall be paid directly to
Hanover and subsequently disbursed as set forth therein, and shall not be paid
into the Escrow Account. 
Notwithstanding any provision of the Throughput Fee Agreement to the
contrary, Hanover and Redwood agree that Redwood is the primary obligor for the
Throughput Fee under the Throughput Fee Agreement.  To the extent funds are available, the Throughput Fee shall be
paid from the Escrow Account; provided, however, Redwood shall be liable with
respect to such payments irrespective of the availability of funds under the
Escrow Account.

 

5.2  Term.  The term of this Agreement and the
transactions contemplated hereunder shall be for an initial term of seven (7)
Contract Years (the “Initial Term”), and then Contract Year to Contract Year
thereafter; provided, however, this Agreement may be cancelled by any Party at
the end of the Initial Term or at the end of any Contract Year thereafter by
providing the other Parties with prior written notice at least ninety (90) days
in advance of the cancellation date. 
The Initial Term shall be extended (i) by the duration of any event of
Force Majeure under Section 9.1 below, and (ii) for such periods of time in
excess of thirty (30) days in any Contract Year that the Treatment Plant, the
gathering or transportation system, or Redwood’s well(s) are inoperative or
shut-in for repairs, mechanical malfunction, or any other reason whatsoever.

 

5.3  Limited Recourse.  Gateway and Hanover shall look solely to the
proceeds derived from Gateway’s sale of the gas owned or controlled by Redwood
produced from the Rodessa/Sligo Interval in the AMI in each month as the source
of payment of the corresponding gathering, separating, dehydrating, treating,
and transportation fees and expenses incurred in said month with respect to
such gas.  Gateway and Hanover
acknowledge that neither Redwood nor any of its partners, Affiliates, or any of
their directors, officers, employees, or representatives shall have any
personal liability or obligation with respect to any payment made or to be made
by Redwood to Hanover, Gateway, or any of their Affiliates hereunder, and that
the only source for payment of any such gathering, separating, treating,
dehydrating, or transportation fees and expenses incurred in any month are the
proceeds attributable to the Gateway’s sale of Redwood’s owned or controlled
gas produced from the Rodessa/Sligo Interval in the AMI for said month.  All payment obligations to Hanover or Gateway
hereunder are entirely without recourse to Redwood, its partners, Affiliates,
and their directors, officers, employees, and representatives.  Notwithstanding the foregoing, the Parties
agree that nothing herein shall limit Hanover’s or Gateway’s recourse in cases
of Redwood’s fraud or willful misconduct. 
The Parties further agree that (i) any payments to be made by Redwood to
either of the other Parties under Sections 3.4, 3.5, or 4.3 for reimbursement
of costs associated with excess disposal or gathering line length or (ii) any
costs and expenses to be borne by Redwood in connection with oxygen removal
facilities under Section 4.2 of the Gas Purchase Agreement shall be general
partnership obligations which are not subject to limited recourse provisions
hereof.

 

5.4  Third Party Gas Treating.  During the term hereof, all deliveries by
Gateway of Redwood’s owned or controlled gas in the MRF to Hanover for treating
in the Treatment Plant will have priority over any gas deliveries made by any
other party up to the total plant capacity. 
Subject to applicable Laws and the orders of any applicable Governmental
Authority, the Parties agree and acknowledge that Hanover shall not treat any
Third Party gas produced from the Rodessa/Sligo Interval in the AMI.  Hanover may accept and treat non- Rodessa/Sligo
Interval Third Party gas on an interruptible basis subject to availability of
any unused plant capacity.  In the event
that the total volumes of gas delivered by any Third Party and Redwood’s owned
or

 

12

 

controlled gas delivered to the
Treatment Plant by Gateway exceed plant capacity, Gateway will have the right
to utilize one hundred percent (100%) of the Treatment Plant capacity for such
gas.  If, subject to the foregoing,
Hanover treats Third Party gas in the Treatment Plant, and using reasonable
criteria Redwood has satisfied itself that its Injection Well has sufficient
reservoir capacity to handle the Acid Gas associated with the gas dedicated
under the Gas Purchase Agreement, then Redwood shall accept in its Injection
Well the Acid Gas associated with the Third Party gas, subject to any capacity
restraints and to the negotiation of a disposal fee mutually agreeable to
Redwood and the Third Party.  Redwood and
Hanover will share the gross Third Party treating revenue (i.e. treating
revenue before deducting direct and indirect costs associated with treating the
Third Party gas volumes) related to treating the Third Party gas and the
disposal fee paid by the Third Party to inject Acid Gas into Redwood’s
Injection Well in the proportion of seventy-five percent (75%) to Redwood and
twenty-five percent (25%) to Hanover; provided, however, if in any month the
proceeds derived from Gateway’s sale of gas owned or controlled by Redwood and
produced from the MRF are insufficient to reach the Floating or the Fixed
Monthly Treating Fee, as such terms are defined in the Gas Purchase Agreement,
then for any such month all (100%) of gross Third Party treating revenue and
the associated disposal fee up to the amount of the shortfall in the Floating
or the Fixed Monthly Treating Fee, as applicable, shall be paid to Hanover for
the benefit of itself and Gateway.  For
any month, once the Floating or the Fixed Monthly Treating Fee amount has been
reached, the allocation of gross Third Party treating revenue and the
associated disposal fee shall return to seventy-five percent (75%) to Redwood
and twenty-five percent (25%) to Hanover.

 

5.5  Binding Covenant.  This Agreement and the dedication of gas
owned or controlled by Redwood from the AMI in the Gas Purchase Agreement shall
be a real covenant running with the land. 
Any assignment by Redwood shall be made expressly subject to the terms
and conditions of this Agreement.

 

5.6  Borehole Farmout.  With respect to payment of the Fixed Monthly
Treating Fee (as defined in the Gas Purchase Agreement), Hanover shall look
solely to the proceeds derived from the sale of the gas owned or controlled by
Redwood produced from the Rodessa/Sligo Interval in the AMI in each month as
the source of payment of the corresponding treating fees incurred in said month
with respect to such gas.  If the
proceeds derived from the sale of the gas owned or controlled by Redwood
produced from the Rodessa/Sligo Interval in the AMI are not sufficient to pay
the Fixed Monthly Treating Fee for (i) three (3) consecutive months, or (ii)
any four (4) months in a six (6) month period, or (iii) if in any six (6) month
period Hanover has received proceeds aggregating fifty percent (50%) or less of
the Fixed Monthly Treating Fee and during any two (2) months of the next six
(6) months receives less than the Fixed Monthly Treating Fee, Hanover may
request that Redwood commence the drilling of an additional well to the
Rodessa/Sligo Interval within one hundred twenty (120) days, subject to the
approval of applicable Governmental Authority and rig availability.  If Redwood fails to respond to Hanover’s
request within twenty (20) Business Days of receipt thereof, or refuses to
drill such additional well, then Hanover may request, and Redwood promptly
shall grant, a mutually acceptable borehole farmout for such additional well to
Hanover at a legal location within the AMI. 
If any party holds a deed of trust lien or other security interest over
Redwood’s leasehold interest in the AMI, Redwood shall cause such party to
subordinate its lien or security interest to Hanover’s interest under the
borehole farmout.  Redwood shall serve
as contract operator for Hanover and shall drill, or cause to be drilled, such
additional well at Hanover’s sole cost and

 

13

 

expense.  Redwood shall commence the drilling of an
additional well to the Rodessa/Sligo Interval within one hundred twenty (120)
days from the grant of the borehole farmout to Hanover, subject to the approval
of applicable Governmental Authority and rig availability, and shall operate
the well on behalf of Hanover.  Redwood
shall drill, complete, equip, and operate, or plug and abandon, if appropriate,
any such additional well as a reasonable prudent operator and in accordance
with all Laws and Governmental Authority having jurisdiction.  On the first day of the month after the
month that Hanover has received from the proceeds of gas produced from the
additional well and sold by Redwood on behalf of Hanover pursuant to the Gas
Purchase Agreement an amount equal to two hundred fifty percent (250%) of all
of Hanover’s direct costs and expenses incurred in drilling and completing the
additional well, and one hundred percent (100%) of all equipment and lease
operating costs associated therewith, all of Hanover’s right, title, and
interest in and to the additional well shall ipso
facto revert and revest in Redwood.

 

ARTICLE VI.

Treatment Plant Electricity Matters; Amendment to Gas Purchase Agreement;
Minimum Payment to Redwood

 

6.1  Treatment Plant Electricity Matters.  The
Parties have determined that Hanover should purchase rather than generate
electricity for a portion of the Treatment Plant’s power requirements in order
to secure the benefit of additional MMBtus Delivered (as such term is used in
the Gas Purchase Agreement). 
Accordingly, Hanover shall use its reasonable commercial efforts to
acquire electricity at the lowest available rate from unaffiliated Third Party
suppliers.  Hanover must obtain the
prior written approval of Redwood for any power purchase transaction with any
affiliated or related entity.  Hanover
further shall use its reasonable commercial efforts to provide for adequate electrical
service to the Treatment Plant in a timely manner so as not to impede or delay
the commencement of commercial operations of the Treatment Plant.  In order to secure the benefit of additional
MMBtus Delivered, the Parties agree that, in addition to the Fixed Monthly
Treating Fee or the Floating Monthly Treating Fee (as such terms are used in
the Gas Purchase Agreement), as applicable, Hanover shall be entitled to
receive from the proceeds attributable to the sale of MMBtus Delivered on a
monthly basis, the following payments (the “Electricity Cost Reimbursement”):

 

	
  Monthly Resale Price

  (as such term is used in

  the Gas Purchase

  Agreement) :

  	
   

  	
  Electricity Cost Reimbursement

  
	
   

  	
   

  	
   

  
	
  Equal to or Less than $2.50

  	
   

  	
  None

  
	
  $2.51 to $2.60

  	
   

  	
  the lesser of the actual invoice for purchased electricity or $12,500

  
	
  $2.61 to $2.75

  	
   

  	
  the lesser of the actual invoice for purchased electricity or $25,000

  
	
  $2.76 to $3.00

  	
   

  	
  the lesser of the actual invoice for purchased electricity or $50,000

  
	
  $3.01 to $3.25

  	
   

  	
  the lesser of the actual invoice for purchased electricity or $70,000

  
	
  $3.26 to $3.50

  	
   

  	
  the lesser of the actual invoice for purchased electricity or $85,000

  
	
  Equal to or greater than $3.51

  	
   

  	
  the lesser of the actual invoice for purchased electricity or $94,000

  

 

14

 

Hanover shall receive its payments of the Electricity Cost
Reimbursement from the Escrowed Funds in accordance with that Escrow
Agreement.  The Parties further agree
that the Electricity Cost Reimbursement is a limited recourse obligation of the
type described in Section 5.3 above, and Hanover shall look solely to the
MMBtus Delivered each month as the source of payment of the corresponding
Electricity Cost Reimbursement incurred in said month.

 

6.2  Amendment to Gas Purchase Agreement.  The Gas Purchase Agreement between Redwood
and Gateway and dated as of June 15, 2001 is hereby amended as follows:

 

(a)  The $540,000 per month
Fixed Monthly Treating Fee set forth in Section 7.2(c)(iii) is hereby changed
to $615,000 per month.

 

(b)  Section 7.2(d) of the Gas
Purchase Agreement is hereby deleted in its entirety and the following
substituted therefore:

 

(d)           Floating Monthly Treating Fee –

 

(i)  If the Resale Price for the
month is four dollars ($4.00) per MMBtu or less, then the Floating Monthly
Treating Fee will be equal to the Fixed Monthly Treating Fee.

 

(ii)  If the Resale Price for
the month is more than four dollars ($4.00) per MMBtu, then the Floating
Monthly Treating Fee will be the sum of (x) and (y):

 

(x)       Fixed
Monthly Treating Fee; and

 

(y)      An
amount equal to thirty percent (30%) of the Resale Price in excess of four
dollars ($4.00) per MMBtu multiplied by the MMBtus Delivered during the month.

 

With regard to
the Floating Monthly Treating Fee, if (i) Redwood commences drilling the
Injection Well by October 15, 2002 and the Treatment Plant is installed and
operational on or before one hundred eighty (180) days after the receipt by
Buyer of a successful Injection Well disposal test and Buyer’s, or its
designee’s, pipelines are ready to receive Seller’s gas at the Point of
Delivery and transport the treated gas, or (ii) if Redwood fails to commence
drilling the Injection Well by October 15, 2002 but the Treatment Plant is
installed and operational on or before two hundred forty (240) days after the receipt
by Buyer of a successful Injection Well disposal test and Buyer’s, or its
designee’s, pipelines are ready to receive Seller’s gas at the Point of
Delivery and transport the treated gas, then a price of three dollars and
seventy-five cents ($3.75) per MMBtu will be substituted for four dollars
($4.00) per MMBtu wherever the latter price appears, except in the next
sentence.  The Parties agree that if in
any month the Resale 

 

15

 

Price exceeds four dollars
($4.00) per MMBtu, then the Resale Price-based component of the Floating
Monthly Treating Fee (i.e. an amount equal to thirty percent (30%) of the
Resale Price in excess of four dollars ($4.00) per MMBtu multiplied by
the MMBtus Delivered during the month) shall be subject to and bear its share
of the landowner and overriding royalties which are recorded in the Official
Records of Madison County, Texas and in effect as of the date hereof (which
burdens shall not exceed in the aggregate twenty-seven percent (27%) across any
applicable unit) with same remitted monthly to the appropriate royalty owners
through Redwood.

 

With respect
only to the first month of gas deliveries hereunder, if the date of the initial
gas deliveries at the Point of Delivery under this Agreement is after the first
day of the month, the Fixed or Floating Monthly Treating Fee, as applicable,
shall be adjusted downward by multiplying the actual Fee by a fraction, the
numerator of which is the number of days remaining in said month, and the
denominator of which is the total number of days in said month.

 

 

6.3  Monthly Minimum Payment to Redwood.
NOTWITHSTANDING ANY PROVISION OF THIS AGREEMENT OR ANY ANCILLARY AGREEMENT TO
THE CONTRARY, the Parties hereto agree and acknowledge that if in any month
Redwood would receive a payment for the sale of gas owned or controlled by
Redwood within the AMI to Gateway (calculated on the basis of Wellhead Revenue,
as such term is used in the Gas Purchase Agreement, less the Electricity Cost
Reimbursement) of less than Thirty Thousand Dollars ($30,000.00) (the “Minimum
Payment”), the Electricity Cost Reimbursement shall be reduced by such amount
as is required to provide Redwood with the Minimum Payment.  If reducing the Electricity Cost
Reimbursement to zero for the month does not allow Redwood to receive the
Minimum Payment, then the Fixed Monthly Treating Fee or Floating Monthly
Treating Fee (as such terms are used in the Gas Purchase Agreement), as
applicable, shall be reduced by such amount as is required to provide Redwood
with the Minimum Payment.  The Minimum
Payment shall be paid from the Escrowed Funds in accordance with the Escrow
Agreement prior to the payment of the Fixed Monthly Treating Fee or the Floating
Monthly Treating Fee, as applicable.  The
Minimum Payment shall be proportionately reduced for any month that the total
volume of gas attributable to Seller’s Gas Reserves (as such term is used in
the Gas Purchase Agreement) and delivered to the Treatment Plant is less than
the number of days in the month multiplied by 18,000 Mcf in accordance with the
following formula:

 

The Minimum Payment set forth above multiplied by a fraction the
numerator of which is the actual deliveries of gas (in Mcf) at the Point of
Delivery (as defined in the Gas Purchase Agreement) during the month and the
denominator of which is the number of days in the month multiplied by 18,000
Mcf.

 

The amount by which the Electricity Cost Reimbursement and the Fixed
Monthly Treating Fee or the Floating Monthly Treating Fee, as applicable, is
reduced in order to remit to Redwood the Minimum Payment shall be added to the
Fixed Monthly Treating Fee or the Floating Monthly Treating Fee, as applicable,
for the ensuing month, and, if not paid in such month, carried forward on a month-to-month
basis until paid (the “Make-up Amount”). 
The Parties agree that the aggregate Make-up Amount shall not exceed One
Hundred Fifty Thousand Dollars ($150,000.00) (the “Ceiling Cap”), but as such
amount is carried forward and subsequently reduced below the Ceiling Cap, the
difference between One Hundred Fifty Thousand Dollars

 

16

 

($150,000.00) and the outstanding Make-up Amount shall be available for
future Minimum Payments.  The Parties
recognize that certain adjustments to the Ceiling Cap may be required from time
to time, and they agree to negotiate in good faith to resolve such issues in a
timely manner.

 

ARTICLE VII.

Representations and Warranties

 

Each Party
represents and warrants to the other Parties that as of the date hereof:

 

7.1  Organization
and Good Standing. 
Such Party is duly organized, validly existing and in good standing
under the Laws of the state of its formation and has all requisite corporate or
partnership power and authority to own and develop its interests and assets in
or related to the MRF.  Such Party is
duly qualified to do business in Texas and is in good standing in the State of
Texas and, if applicable, in the other jurisdictions in which it transacts
business.

 

7.2  Company
Authority; Authorization of Agreement.  Such Party has all requisite corporate or
partnership power and authority to execute and deliver this Agreement and the
Ancillary Agreements to which it is a party, to consummate the transactions
contemplated by this Agreement and the Ancillary Agreements to which it is a
party, and to perform all of its obligations under this Agreement and the
Ancillary Agreements to which it is a party. 
To the extent it is a party hereto, this Agreement and the Ancillary
Agreements constitute the valid and binding obligations of such Party,
enforceable against it in accordance with their terms, except as such
enforceability may be limited by bankruptcy, insolvency or other Laws relating
to or affecting the enforcement of creditors’ rights and general principles of
equity (regardless of whether such enforceability is considered in a proceeding
at law or in equity).

 

7.3  No
Violations.  Such
Party’s execution and delivery of this Agreement and the Ancillary Agreements
to which it is a party, and the consummation of the transactions contemplated
hereby and thereby, will not:

 

(a)  conflict with or require
the consent of any Person under any of the terms, conditions or provisions of
the charter, certificate of formation or other organizational document of such
Party;

 

(b)  conflict with, result in a
breach of, constitute a default under or constitute an event that with notice
or lapse of time, or both, would constitute a default under, accelerate or
permit the acceleration of the performance required by, or require any consent,
authorization or approval under: (i) any mortgage, indenture, loan, credit
agreement or other agreement evidencing indebtedness for borrowed money to
which such Party is a party or by which such Party is bound except, where such
conflict, breach or default would not materially affect such Party’s ability to
consummate the transactions contemplated hereby and thereby (other than the
Deeds of Trust referenced in Section 15.1 of the Gas Purchase Agreement); or (ii) any
order, judgment or decree of any Governmental Authority; or

 

(c)  result in the creation or
imposition of any lien or encumbrance on any assets of such Party in the MRF.

 

17

 

7.4  Third Party
Claims, Disputes and Litigation.  There are no Third Party Claims, disputes or
litigation pending or, to such Party’s knowledge, threatened against such Party
that would prevent the consummation of the transaction contemplated by this
Agreement or the Ancillary Agreements.

 

7.5  Bankruptcy.  There are no bankruptcy, reorganization or
receivership proceedings pending, being contemplated by or, to such Party’s
knowledge, threatened against such Party.

 

7.6  Foreign
Person.  Such
Party is not a “foreign person” within the meaning of Section 1445 of the
Code.

 

7.7  Brokers,
Agents and Finders. 
No Person claiming by, through or under such Party is entitled to any
broker’s, finder’s or similar fee by reason of the transactions contemplated by
this Agreement or the Ancillary Agreements.

 

7.8  Investments.  Prior to entering into this Agreement, such
Party was advised by and has relied solely on its own legal, tax and other
professional counsel concerning this Agreement, the Ancillary Agreements, the
interests and assets to which it may become entitled hereunder, and the value
thereof.  Such Party is and will be
acquiring such interests and assets for its own account and not for
distribution or resale in any manner that would violate any state or federal
securities Laws.

 

ARTICLE VIII.

Choice of Law and Alternate Dispute
Resolution

 

8.1  Choice of Law.  This Agreement shall be governed by and
construed in accordance with the Laws of the State of Texas, without giving
effect to conflicts of laws principles that would apply the laws of another
jurisdiction.

 

8.2  Alternate
Dispute Resolution

 

(a)  Good Faith Efforts.  The Parties wish to avoid disputes relating
to or arising out of this Agreement.  In
the event of any dispute or perceived problems, each Party pledges itself to
give notice to the other Party and to seek first an amicable resolution without
regard to mediation or arbitration. 
Except as otherwise provided in this Agreement, a Party shall be given
thirty (30) days from the date of such notice to correct its performance under
this Agreement.

 

(b)  Mediation.  In the event the Parties cannot reach an
amicable resolution to a dispute or perceived problem, the Parties shall within
fifteen (15) days after the end of the thirty (30)-day period set forth in (a)
agree upon a mediator and shall, within the next fifteen (15) days attempt to
mediate a solution.

 

(c)  Arbitration.  In the event mediation does not resolve the
matter, any action, dispute, Claim or controversy of any kind between the
Parties arising under, related to, in connection with or pertaining to this
Agreement (a “Dispute”) will be resolved by binding arbitration in
accordance with the terms hereof.  Any
Party may, by summary proceedings, bring an action in court to compel
arbitration of any Dispute.  Any

 

18

 

arbitration
will be administered by the American Arbitration Association (the “AAA”)
and in accordance with the terms of this Section 8.2 and the Commercial
Arbitration Rules of the AAA, including the Optional Rules for Emergency
Measures of Protection, as supplemented to the extent necessary by the Federal
Arbitration Act (Title 9 of the United States Code).  If there is any inconsistency between this Section 8.2 and the
Commercial Arbitration Rules, or the Federal Arbitration Act, the terms of this
Section 8.2 will control the rights and obligations of the Parties.  Any arbitration will be conducted by three
(3) arbitrators. If there is another arbitrable Dispute among the Parties
pursuant to any agreement between them that involves the same facts and Parties
as the facts and parties with respect to which an arbitration has been
initiated pursuant to this Agreement, such dispute and any arbitration
initiated in connection therewith shall be consolidated with the arbitration
initiated pursuant to this Agreement. 
No other arbitration shall be consolidated with any arbitration
initiated pursuant to this Agreement without the agreement of the Parties or
parties thereto.  Arbitration must be
initiated within the applicable time limits set forth in this Agreement and not
thereafter or if no time limit is given, within the time period allowed by the
applicable statute of limitations. 
Arbitration may be initiated by any Party (“Claimant”) serving written
notice on the Party or Parties with whom such Dispute exists, respectively (“Respondent”
or “Respondents”)
that Claimant elects to refer the Dispute to binding arbitration. Claimant’s
notice initiating binding arbitration must identify the arbitrator Claimant has
appointed.  Respondent shall respond to
Claimant within thirty (30) days after receipt of Claimant’s notice,
identifying the arbitrator Respondent has appointed.  If Respondent fails for any reason to name an arbitrator within
the thirty (30) day period, Claimant will name the arbitrator for Respondent’s
account. The two (2) arbitrators so chosen shall select a third arbitrator (who
must have not less than seven years experience as an oil and gas lawyer) within
thirty (30) days after the second arbitrator has been appointed.  If the two (2) arbitrators are unable to
agree on a third arbitrator within sixty (60) days from initiation of
arbitration, then a third arbitrator shall be selected by the AAA office in
Houston, Texas, with due regard given to the selection criteria above and input
from the Parties and other arbitrators. 
The AAA shall select the third arbitrator not later than ninety (90)
days from initiation of arbitration. In the event AAA should fail to select the
third arbitrator within ninety (90) days from initiation of arbitration, then
either Party may petition the Chief United States District Judge for the
Southern District of Texas to select the third arbitrator.  Due regard shall be given to the selection criteria
above and input from the Parties and other arbitrators.  Each Party shall pay the compensation and
expenses of the arbitrator named by or for it (or its proportionate share if
more than one Party is aligned in the arbitration as a Claimant or Respondent),
and the Parties comprising the Claimant and the Respondent will each pay
one-half of the compensation and expenses of the third arbitrator.  All arbitrators must be neutral parties who
have never been officers, directors, or employees of the Parties or any of
their Affiliates.  Unless expressly
provided otherwise in this Agreement, the two (2) arbitrators named by the
Parties must have not less than seven (7) years experience in the oil and gas
industry, and must have a formal education or training in the area of dispute (e.g.,
accounting for an accounting dispute, etc.). 
The hearing will be conducted in Houston, Texas and commence within
thirty (30) days after the selection of the third arbitrator.  The Parties and the arbitrators should
proceed diligently and in good faith in order that the award may be made as
promptly as

 

19

 

possible.  Any arbitration proceeding hereunder will be
conducted in Houston, Texas and will be concluded within one hundred eighty
(180) days of the filing of the Dispute with the AAA.  All statutes of limitations and defenses based upon passage of
time applicable to any Dispute (including any counterclaim or setoff) shall be
interrupted by the filing of the arbitration and suspended while the
arbitration is pending.  The arbitrators
will be empowered to award sanctions and to take such other actions as they
deem necessary, to the same extent a judge could impose sanctions or take such
other actions pursuant to the Federal Rules of Civil Procedure and applicable law;
provided, however, that no award by the arbitrators will assess consequential,
punitive, exemplary, or special damages or losses (including, without
limitation, loss of profit or business interruption), but may assess costs and
expenses in a manner deemed equitable. 
The arbitrators will make specific written findings of fact and
conclusions of law.  The decision of the
arbitrators will be final and binding on each Party.  Judgment on any award rendered by the arbitrators may be entered
in any court having jurisdiction.

 

ARTICLE IX.

Miscellaneous

 

9.1  Force Majeure

 

In the event
of any Party hereto being rendered unable, wholly or in part, by Force Majeure
to carry out its obligations under this Agreement, other than to make payments
due hereunder, it is agreed that on such Party giving notice and full
particulars of such Force Majeure in writing or by facsimile to the other
Parties as soon as possible after the occurrence of the cause relied on, then
the obligations of the Party giving such notice, as far as they are affected by
such Force Majeure, shall be suspended from the commencement of and during the
continuance of any inability so caused but for no longer period, and such cause
shall as far as possible be remedied with all reasonable dispatch.

 

The term
“Force Majeure,” as used herein, shall mean an act of God, act of the public
enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion and
any other causes whether of the kind enumerated or otherwise not reasonably
within the control of the Party claiming the suspension and which by the
exercise of reasonable diligence such Party is unable to prevent or
overcome.  Force Majeure shall include
the inability to acquire or delays in acquiring rights-of-way grants, permits,
or licenses at reasonable costs, and shall specifically include governmental
delays in issuing permits required for the installation of the Treatment Plant
if Hanover has filed all necessary applications for permits not later than
September 30, 2001.  Force Majeure shall
also include governmental delays in issuing permits required for the re-entry
of the Ruby Magness Well No. 1 and for the Injection Well.  Notwithstanding the foregoing, this
Agreement shall terminate on June 29, 2003 if any Party fails to obtain, in the
exercise of reasonable diligence, any required permit for the Treatment Plant,
the re-entry of the Ruby Magness Well No. I, or the Injection Well.

 

9.2  Notices.
All notices and other communications required or desired to be given hereunder
must be in writing and sent (properly addressed as set forth below) by:  (a) U.S. mail with all postage and
other charges fully prepaid, (b) hand delivery or (c) facsimile
transmission.  A notice will be deemed
effective on the date on which such notice is received by the addressee,

 

20

 

if by mail or hand delivery, or
on the date sent, if by facsimile (as evidenced by fax machine confirmation of
receipt); provided, however, if such date is not a Business Day, the date of
receipt will be on the next date that is a Business Day.  Each Party may change its address by
notifying the other Parties in writing of such address change.

 

	
  If to Redwood:

  	
  Redwood Energy Production, L.P.

  
	
   

  	
  One Maritime Plaza, Suite 400

  
	
   

  	
  San Francisco, CA  94111

  
	
   

  	
  Attn:  Mr. Stuart J. Doshi

  
	
   

  	
  Telephone  (415)  398-8186

  
	
   

  	
  Facsimile:  (415)  398-9227

  
	
   

  	
   

  
	
  If to Gateway:

  	
  Gateway Processing Company

  
	
   

  	
  500 Dallas Street, Suite 2615

  
	
   

  	
  Houston, TX 77002

  
	
   

  	
  Attn:  Mr. Michael Fadden

  
	
   

  	
  Telephone  (713)  336-0844

  
	
   

  	
  Facsimile:  (713)  336-0855

  
	
   

  	
   

  
	
  If to Hanover:

  	
  Hanover Compression Limited Partnership

  
	
   

  	
  12001 North Houston Rosslyn Road

  
	
   

  	
  Houston, TX 77086

  
	
   

  	
  Attn:  Mr. Calvin D. Cahill,
  Vice President

  
	
   

  	
  Telephone  (281)  447-8787

  
	
   

  	
  Facsimile:  (281)  447-8781

  

 

9.3  Amendments
and Severability. 
No amendments or other modifications to this Agreement will be effective
or binding on any of the Parties unless the same are in writing, are designated
as an amendment or modification, expressly reference this Agreement, and are
signed by each such Party.  The
invalidity of any one or more provisions of this Agreement will not affect the
validity of this Agreement as a whole, and in case of any such invalidity, this
Agreement will be construed as if the invalid provision had not been included
herein.  Any of the Ancillary Agreements
may be amended by the Parties thereto without the consent of any Party to this
Agreement who is not a party to the particular Ancillary Agreement being
amended; provided, however, that if any such amendment materially changes or
impairs any rights or alters or increases any payment or perfomance obligations
described in this Agreement or in the particular Ancillary Agreement for the
Party who is not a party to the amended Ancillary Agreement, the written
consent of such affected Party to such amendment shall be required.

 

9.4  Successors
and Assigns.  This
Agreement may not be assigned, either in whole or in part, without the express
written consent of the non-assigning Parties, which consent shall not be
unreasonably withheld; provided, however, without the consent of the other
Parties, any Party may assign this Agreement to a lender for collateral
security purposes.  The terms, covenants
and conditions contained in this Agreement are binding upon and inure to the
benefit of the Parties and their respective successors and permitted assigns.

 

21

 

9.5  No
Partnership Created. 
It is not the purpose or intention of this Agreement to create (and it
should not be construed as creating) a joint venture, partnership or any type
of association, and the Parties are not authorized to act as an agent or
principal for each other with respect to any matter related hereto.  If, for federal income tax purposes, this
Agreement and the operations hereunder are regarded as a partnership, and if
the Parties have not otherwise agreed to form a tax partnership, each Party
thereby affected elects to be excluded from the application of all of the
provisions of Subchapter “K,” Chapter 1, Subtitle “A,” of the Code, as
permitted and authorized by Section 761 of the Code and the regulations
promulgated thereunder.  Any Party is
authorized and directed to execute on behalf of each Party such evidence of
this election as may be required by the Secretary of the Treasury of the United
States or the Federal Internal Revenue Service, including specifically, but not
by way of limitation, all of the returns, statements, and the data required by
Treasury Regulations §1.761.  Should
there be any requirement that each Party give further evidence of this
election, each such Party shall execute such documents and furnish such other
evidence as may be required by the Federal Internal Revenue Service or as may
be necessary to evidence this election. 
No such Party shall give any notices or take any other action
inconsistent with the election made hereby. 
If any present or future income tax laws of the state in which the MRF
is located or any future income tax laws of the United States contain
provisions similar to those in Subchapter “K,” Chapter 1, Subtitle “A,” of the
Code, under which an election similar to that provided by Section 761 of the
Code is permitted, each Party 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.

 

9.6  Waiver of
Certain Remedies. 
Notwithstanding anything to the contrary in this Agreement, in no event
shall any Party be entitled to receive or be liable to any other Party for (and
each Party hereby waives) any consequential, special, indirect, or punitive
damages arising out of this Agreement or the transactions contemplated hereby,
irrespective of whether alleged to be by way of indemnity (other than indemnity
for Third Party claims) as a result of breach of any provision of this
Agreement, tort (including negligence and strict liability), or otherwise, including,
without limitation, any loss of profits, loss of income, loss of use, loss of
revenue, loss of contracts, loss of fuel, REGARDLESS OF WHETHER ANY SUCH
DAMAGES ARE CAUSED BY, CONTRIBUTED TO BY, OR ARISE OUT OF, THE SOLE, JOINT OR
CONCURRENT NEGLIGENCE (IN ANY DEGREE) OR STRICT LIABILITY OF THE OTHER PARTIES.

 

9.7  No Third
Party Beneficiaries. 
Nothing contained in this Agreement will entitle anyone other than the
Parties or their successors and permitted assigns to any Claim, cause of
action, remedy or right of any kind whatsoever.

 

22

 

9.8  Construction.  THE PARTIES ACKNOWLEDGE THAT THEY HAVE HAD
AN ADEQUATE OPPORTUNITY TO REVIEW EACH AND EVERY PROVISION CONTAINED IN THIS
AGREEMENT AND TO SUBMIT THE SAME TO LEGAL COUNSEL FOR REVIEW AND COMMENT.  BASED ON THE FOREGOING, THE PARTIES AGREE
THAT THE RULE OF CONSTRUCTION THAT A CONTRACT BE CONSTRUED AGAINST THE DRAFTER,
IF ANY, NOT BE APPLIED IN THE INTERPRETATION AND CONSTRUCTION OF THIS
AGREEMENT.

 

9.9  Conflict in
Agreements.  If
any conflict exists between this Agreement and any Ancillary Agreement, then
(as between the Parties) the provisions of this Agreement shall control.

 

9.10       Execution in Counterparts.  This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, all which
when taken together shall constitute one and the same agreement.

 

9.11       Entire
Agreement.  This
Agreement and the Exhibits attached hereto, which are incorporated herein by
reference, supersede all prior and contemporaneous negotiations,
understandings, memoranda of understanding and agreements (whether oral or
written) between the Parties with respect to the subject matter hereof and
constitute the entire understanding and agreement between the Parties with
respect thereto.

 

9.12       Headings.  The headings contained herein are for
reference only and shall not in any way affect the meaning or interpretation of
this Agreement.

 

9.13       DTPA
Waiver.  After
consultation with their respective attorneys, and to the extent permitted by
applicable law, each Party waives its respective rights under the Deceptive
Trade Practices—Consumer Protection Act, Section 17.41 et seq., Texas Business
and Commerce Code.

 

9.14       Audit.  Within twelve (12) months from the date of
any payment from Redwood to Hanover or Gateway under Sections 3.4, 3.5, or 4.3,
Redwood or Hanover may conduct an audit of the books and records relating to
the disposal or gathering pipeline, as applicable.  The audit shall be conducted at the offices of Hanover or
Gateway, as applicable, during usual business hours.  The audited Party shall cooperate with Redwood or Hanover, as
applicable, and its representatives during any audit, including, if requested
by Redwood or Hanover, as applicable, providing access to necessary
personnel.  Within ten (10) Business
Days of the completion of the audit, Redwood or Hanover, as applicable, shall
furnish the audited Party with any audit exceptions.  The Parties shall thereafter attempt to resolve any audit
exceptions in a prompt and amicable manner; provided, however, if the Parties
cannot reach agreement, either Party may initiate the Alternate Dispute
Resolution procedures of Section 8.2.

 

9.15       No Reliance.  Each Party acknowledges that it has relied only
upon its own independent investigation and analysis of the MRF and, except as
expressly set forth in this Agreement, is not acting in reliance upon the
representations or warranties of any other Party with respect to any of the
matters covered hereby.

 

23

 

9.16       Acid Gas Indemnification.  Hanover
shall DEFEND, INDEMNIFY, PROTECT, and HOLD HARMLESS Gateway and Redwood and
their respective officers, directors, employees, agents, and representatives,
from and against all Claims, including, without limitation, any Claims with
respect to damage to property, or injury or death of any person, arising out
of, with respect to, or in connection with Acid Gas prior to its delivery at
the boundary of the Plant Location into Gateway’s Acid Gas disposal line,
including, without limitation, any Claims arising out of, with respect to, or
in connection with the sole, joint, or concurrent negligence or strict
liability of Gateway or Redwood, or their respective officers, directors,
employees, agents, and representatives.

 

Gateway shall DEFEND, INDEMNIFY, PROTECT, and
HOLD HARMLESS Hanover and Redwood and their respective officers, directors,
employees, agents, and representatives, from and against all Claims, including,
without limitation, any Claims with respect to damage to property, or injury or
death of any person, arising out of, with respect to, or in connection with
Acid Gas delivered hereunder from the boundary of the Plant Location up to the
outlet flange of the Acid Gas disposal line at the Injection Well, including,
without limitation, any Claims arising out of, with respect to, or in
connection with the sole, joint, or concurrent negligence or strict liability
of Hanover or Redwood, or their respective officers, directors, employees,
agents, and representatives.

 

Redwood shall DEFEND, INDEMNIFY, PROTECT, and
HOLD HARMLESS Gateway and Hanover and their respective officers, directors,
employees, agents, and representatives, from and against all Claims, including,
without limitation, any Claims with respect to damage to property, or injury or
death of any person, arising out of, with respect to, or in connection with
Acid Gas delivered hereunder from and after the outlet flange of the Acid Gas
disposal line at the Injection Well, including, without limitation, any Claims
arising out of, with respect to, or in connection with the sole, joint, or
concurrent negligence or strict liability of Hanover or Gateway, or their
respective officers, directors, employees, agents, and representatives.

 

IN WITNESS
WHEREOF, the Parties hereto have caused this Agreement to be duly executed and
delivered by its respective officers, thereunto duly authorized, in multiple
originals, all as of the day and year first above written.

 

SCHEDULES

Schedule I—Initial Well Report

Schedule II—Acid Gas Disposal Permit

Schedule III—Throughput Fee Agreement

 

24

 

	
   

  	
  REDWOOD ENERGY PRODUCTION, L.P.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  Redwood Energy Company, 

  its General Partner

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  GATEWAY PROCESSING COMPANY

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  HANOVER COMPRESSION LIMITED PARTNERSHIP

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
								

 

25

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