Document:

exhibit_10-1.htm

EXHIBIT 10.1

 

AGREEMENT OF PURCHASE AND SALE

THIS AGREEMENT made as of the 27th day of August, 2009.

BETWEEN:

 

	 MEGAWEST ENERGY MISSOURI CORP., a Delaware corporation, having offices in the City of Calgary, in the Province of Alberta, Canada (hereinafter referred to as "Vendor")

- and -

 

MEGA PARTNERS 1, LLC, a Delaware limited liability company, having offices in New York, New York, USA (hereinafter referred to as "Purchaser")

WHEREAS Vendor wishes to sell and Purchaser wishes to purchase a portion of the interest of Vendor in and to the Assets, subject to and in accordance with the terms and conditions hereof;

NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the premises and the mutual covenants and agreements hereinafter set forth, the Parties have agreed as follows:

ARTICLE 1

INTERPRETATION

	
1.1
	
Definitions

In this Agreement, unless the context otherwise requires:

	
  
	
(a)
	
"AFE's" means the authorities for expenditure, operations notices and mail ballots, if any, set out in Schedule "B" under the heading "AFE's";

	
  
	
(b)
	
"Assets" means an undivided ten per cent (10%) interest in and to the Petroleum and Natural Gas Rights, the Tangibles and the Miscellaneous Interests, but shall not include the Corporate Inventory;

	
  
	
(c)
	
"Certificate" means a written certification of a matter or matters of fact which, if required from a corporation, shall be made by an officer of the corporation, on behalf of the corporation and not in any personal capacity, and which, if required from a limited partnership, shall be made by the general partner of the limited partnership, on behalf
of the limited partnership and not in any personal capacity;

	
  
	
(d)
	
"Closing" means the closing of the purchase and sale herein provided for;

	
  
	
(e)
	
"Closing Place" means the offices of Parent in Calgary, Alberta, Canada, or such other place as may be agreed upon in writing by Vendor and Purchaser;

 

 

 

1

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	 	
(f) 
	
"Closing Time" means the hour of 10:00 a.m. on the 27th day of August, 2009 or such other time and date as may be agreed upon in writing by Vendor and Purchaser;

	
  
	
(g)
	
"Corporate Inventory" means the equipment and materials set forth and described in Schedule "B" under the heading "Corporate Inventory";

	
  
	
(h)
	
"Counsel" means any attorney at law, barrister, or solicitor or any firm thereof retained by Vendor or Purchaser, as the case may be;

	
  
	
(i)
	
"Facilities" means the Grassy Creek Facilities and the Marmaton River Facilities;

	
  
	
(j)
	
"Grassy Creek Facilities" shall mean the existing land and production project owned by Vendor (including gathering system, water source well, and water disposal well, injection wells, steam injection equipment, tanks and associated equipment and materials) in the Grassy Creek area of Missouri, currently comprised of 15 steam injection wells and 46 production
wells, all of which are fully equipped and tied in.  The Project Area for the Grassy Creek Project is the W1/2 Section 16, Township 35N, Range 33W, Vernon County, Missouri, containing 312 acres, more or less, as further described on Schedule “A” under the heading “Grassy Creek”;

	
  
	
(k)
	
"Lands" means the lands set out in Schedule "A" under the heading "Lease Description/Rights Held";

	
  
	
(l)
	
"Leased Substances" means all Petroleum Substances, rights to or in respect of which are granted, reserved or otherwise conferred by or under the Title Documents but only to the extent included in the Assets;

	
  
	
(m)
	
"Marmaton River Facilities" shall mean the existing land and production project owned by Vendor (including gathering system, water source well, and water disposal well, injection wells, steam injection equipment, tanks and associated equipment and materials) in the Marmaton area of Missouri, currently comprised of 13 steam injection wells and 40 production
wells, all of which are fully equipped and tied in, and a Subsequent Phase, made up of 10 steam injection wells and 24 production wells, all of which have been drilled but which are not yet completed or tied in.  The Project Area for the Marmaton River Project is that portion of the NE1/4 Section 7 south of Highway 54 (containing 121 acres, more or less); the N1/2 SE Section 7 (containing 80 acres, more or less) the easternmost 30 acres in the SESE Section 7; and that portion of the NWNW Section 8 south
of Highway 54 (containing 25 acres, more or less), all in Township 35N, Range 33W, Vernon County, Missouri as further described on Schedule "A" under the heading "Marmaton";

	
  
	
(n)
	
"Miscellaneous Interests" means, subject to any and all limitations and exclusions provided for in this definition, all property, assets, interests and rights pertaining to the Petroleum and Natural Gas Rights and the Tangibles, or either of them, but only to the extent that such property, assets, interests and rights pertain to the Petroleum and Natural
Gas Rights and the Tangibles, or either of them, including without limitation any and all of the following:

 

 

 

2

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	 	
(i) 
	
contracts and agreements further described on Schedule "A" under the heading "Contracts" relating to the Petroleum and Natural Gas Rights and the Tangibles, or either of them, including without limitation gas purchase contracts, Production Contracts, processing agreements, transportation agreements and agreements for the construction, ownership and operation of facilities;

	
  
	
(ii)
	
fee simple rights to, and rights to enter upon, use or occupy, the surface of any lands which are or may be used to gain access to or otherwise use the Petroleum and Natural Gas Rights and the Tangibles, or either of them, as further described on Schedule "A" under the heading "Surface Rights";

	
  
	
(iii)
	
all records, books, documents, licences, reports and data which relate to the Petroleum and Natural Gas Rights and the Tangibles, or either of them, excluding any of the foregoing that pertain to seismic, geological or geophysical matters; and

	
  
	
(iv)
	
the Wells (and no other wells), including the wellbores and any and all casing;

	
  
	
(o)
	
"Parent" means MegaWest Energy Corp., a corporation organized under the laws of the Province of Alberta, Canada;

	
  
	
(p)
	
"Party" means a party to this Agreement;

	
  
	
(q)
	
"Permitted Encumbrances" means:

	
  
	
(i)
	
liens for taxes, assessments and governmental charges which are not due or the validity of which is being diligently contested in good faith by or on behalf of Vendor;

	
  
	
(ii)
	
mechanics', builders' and materialmen's liens in respect of services rendered or goods supplied for which payment is not due;

	
  
	
(iii)
	
easements, rights of way, servitudes and other similar rights in and to the surface of land (including without limitation rights of way and servitudes for highways and other roads, railways, sewers, drains, gas and oil pipelines, gas and water mains, electric light, power, telephone, telegraph and cable television conduits, poles, wires and cables) which do not materially impair the use of the Assets affected thereby;

	
  
	
(iv)
	
the right reserved to or vested in any municipality or government or other public authority by the terms of any permit or by any statutory provision, to terminate any such permit or to require annual or other periodic payments as a condition of the continuance thereof;

	
  
	
(v)
	
rights of general application reserved to or vested in any governmental authority to levy taxes on the Leased Substances or any of them or the income therefrom, and governmental requirements and limitations of general application as to production rates on the operations of any property;

 

 

 

3

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
  
	
(vi)
	
statutory exceptions to title, and the reservations, limitations, provisos and conditions in any original grants from any applicable governing authority of any of the mines and minerals within, upon or under the Lands;

	
  
	
(vii)
	
any security held by any Third Party encumbering Vendor's interest in and to the Assets or any part or portion thereof, in respect of which Vendor delivers a discharge to Purchaser at or prior to Closing;

	
  
	
(viii)
	
the Production Contracts and agreement or agreements (if any) for the sale of Leased Substances that are terminable on not greater than 31 days' notice (without an early termination penalty or other cost); and

	
  
	
(ix)
	
all royalty burdens, liens, adverse claims, penalties, reductions in interests and other encumbrances set out in Schedule "A";

	
  
	
(r)
	
"Petroleum and Natural Gas Rights" means the interests set out in Schedule "A" under the heading "Lease Description/Rights Held";

	
  
	
(s)
	
"Petroleum Substances" means any of crude oil, crude bitumen and products derived therefrom, synthetic crude oil, petroleum, natural gas, natural gas liquids, and any and all other substances related to any of the foregoing, whether liquid, solid or gaseous, and whether hydrocarbons or not, including without limitation sulphur;

	
  
	
(t)
	
"Production Contracts" means the agreement or agreements, if any, set out in Schedule "B" under the heading "Production Contracts";

	
  
	
(u)
	
"Purchase Price" means the sum of money first set out in Section 2.6;

	
  
	
(v)
	
"Specific Conveyances" means all conveyances, assignments, transfers, novations and other documents or instruments that are reasonably required or desirable to convey, assign and transfer the interest of Vendor in and to the Assets to Purchaser and to novate Purchaser in the place and stead of Vendor with respect to the Assets;

	
  
	
(w)
	
"Tangibles" means the Facilities and any and all other tangible depreciable property and assets which are located within, upon or in the vicinity of the Lands and which are used or are intended to be used to produce, process, gather, treat, measure, make marketable or inject the Leased Substances or any of them or in connection with water injection
or removal operations that pertain to the Petroleum and Natural Gas Rights, including without limitation any and all gas plants, oil batteries, buildings, production equipment, pipelines, pipeline connections, meters, generators, motors, compressors, treaters, dehydrators, scrubbers, separators, pumps, tanks, boilers and communication equipment but specifically excluding the Corporate Inventory;

	
  
	
(x)
	
"Third Party" means any individual or entity other than Vendor and Purchaser, including without limitation any partnership, corporation, trust, unincorporated organization, union, government and any department and agency thereof and any heir, executor, administrator or other legal representative of an individual;

 

 

 

 

 

4

 

AGREEMENT OF PURCHASE AND SALE

(continued)

	
  
	
(y)
	
"this Agreement", "herein", "hereto", "hereof" and similar expressions mean and refer to this Agreement of Purchase and Sale;

	
  
	
(z)
	
"Title Documents" means, collectively, any and all certificates of title, leases, reservations, permits, licences, assignments, trust declarations, operating agreements, royalty agreements, gross overriding royalty agreements, participation agreements, farm-in agreements, sale and purchase agreements, pooling agreements and any other documents and agreements
granting, reserving or otherwise conferring rights to (i) explore for, drill for, produce, take, use or market Petroleum Substances, (ii) share in the production of Petroleum Substances, (iii) share in the proceeds from, or measured or calculated by reference to the value or quantity of, Petroleum Substances which are produced, and (iv) rights to acquire any of the rights described in items (i) to (iii) of this definition; but only if the foregoing pertain in whole or in part to Petroleum Substances within, upon
or under the Lands; including without limitation those, if any, set out in Schedule "A" under the heading "Title Document(s)";

	
  
	
(aa)
	
"Vendor's Knowledge" shall mean the knowledge of any supervisors involved directly in matters relating to the matter to which the Knowledge qualifier relates or the current officers, directors or managers of such Vendor, all after due inquiry and investigation; and

	
  
	
(bb)
	
"Wells" means all wells which have been, are, or may be used in connection with the Petroleum and Natural Gas Rights, including without limitation producing, shut-in, abandoned, water source, water disposal, water injection, steam injection, evaluation and delineation wells.

	
1.2
	
Headings

The expressions "Article", "section", "subsection", "clause", "subclause", "paragraph" and "Schedule" followed by a number or letter or combination thereof mean and refer to the specified article, section, subsection, clause, subclause, paragraph and schedule of or to this Agreement.

	
1.3
	
Interpretation Not Affected by Headings

The division of this Agreement into Articles, sections, subsections, clauses, subclauses and paragraphs and the provision of headings for all or any thereof are for convenience and reference only and shall not affect the construction or interpretation of this Agreement.

	
1.4
	
Included Words

When the context reasonably permits, words suggesting the singular shall be construed as suggesting the plural and vice versa, and words suggesting gender or gender neutrality shall be construed as suggesting the masculine, feminine and neutral genders.

	
1.5
	
Schedules

There are appended to this Agreement the following schedules pertaining to the following matters:

 

 

 

5

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
                Schedule "A"
	
-
	
Lease Description/Rights Held

	
  
	
-
	
Grassy Creek

	
  
	
-
	
Marmaton

	
  
	
-
	
Contracts

	
  
	
-
	
Surface Rights

	
  
	
-
	
Title Document(s)

 

	
                Schedule "B"
	
-
	
AFE's

	
  
	
-
	
Production Contracts

	
  
	
-
	
Corporate Inventory

	
  
	
-
	
Pre-Closing Liabilities

	
  
	
-
	
Wire Transfer

	
  
	
-
	
Potential Plugging Obligations

	
  
	
-
	
Information

 

	
                Schedule "C"
	
-
	Form of Petroleum, Natural Gas and General Rights Conveyance

 

	
                Schedule "D" 
	
-
	
Form of Certificate of Vendor

 

	
                Schedule "E"
	
-
	
Form of Certificate of Purchaser

 

 

Such schedules are incorporated herein by reference as though contained in the body hereof.  Wherever any term or condition of such schedules conflicts or is at variance with any term or condition in the body of this Agreement, such term or condition in the body of this Agreement shall prevail.

	
1.6
	
Damages

All losses, costs, claims, damages, expenses and liabilities in respect of which a Party has a claim pursuant to this Agreement include without limitation reasonable legal fees and disbursements on a solicitor and client basis.

 

ARTICLE 2

PURCHASE AND SALE AND CLOSING

	
2.1
	
Purchase and Sale

Vendor hereby agrees to sell, assign, transfer, convey and set over to Purchaser, and Purchaser hereby agrees to purchase from Vendor, the Assets (whether Vendor's interest is absolute or contingent, legal or beneficial) subject to and in accordance with the terms of this Agreement.

	
2.2
	
Closing

Subject to Sections 3.1 and 3.2, Closing shall take place at the Closing Place at the Closing Time.  Subject to all other provisions of this Agreement, possession, risk and ownership of the Assets shall pass from Vendor to Purchaser at the Closing Time.

 

 

 

6

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
2.3 
	
Specific Conveyances

Vendor shall prepare the Specific Conveyances at its cost and as required, none of which shall confer or impose upon a Party any greater right or obligation than contemplated in this Agreement.  All Specific Conveyances that are prepared and circulated to Purchaser by Vendor a reasonable time prior to the Closing Time shall be
executed and delivered by the Parties at Closing.  Forthwith after Closing, Purchaser shall, at its cost, record all Specific Conveyances that by their nature may be recorded.

	
2.4
	
Title Documents and Miscellaneous Interests

Vendor shall deliver to Purchaser after Closing, upon the specific written request of Purchaser and at Purchaser's cost, copies of the Title Documents and any other agreements and documents to which the Assets are subject and copies of contracts, agreements, records, books, documents, licences, reports and data comprising Miscellaneous
Interests which are now in the possession of Vendor or of which it gains possession prior to Closing.

	
2.5
	
Form of Payment

All payments to be made pursuant to this Agreement shall be in United States funds.  All payments to be made at Closing shall be made by wire transfer to the account designated by Vendor on Schedule "B" under the heading "Wire Transfer".

	
2.6
	
Purchase Price

The aggregate consideration to be paid by Purchaser to Vendor for Vendor's interest in and to the Assets shall be US$2,000,000.00.  At Closing, Purchaser shall pay to Vendor the Purchase Price.  The Parties agree that the value of the interest of Vendor in and to the Tangibles and in and to the Miscellaneous Interests
is US$900,000.00.  At Closing, Purchaser shall be solely responsible for all sales taxes, transfer taxes, fees, charges, levies or similar assessments which may be imposed by any governmental authority and pertaining to its acquisition of the Assets or to the circulation and registration of the Specific Conveyances and shall remit any such amounts to the applicable governmental authority according to law.

	
2.7
	
Allocation of Purchase Price

The Parties shall allocate the Purchase Price as follows:

	
Petroleum and Natural Gas Rights

Tangibles

Miscellaneous Interests

 

Total
	
$1,100,000.00

899,990.00

10.00

 

$2,000,000.00

 

 

 

 

7

 

AGREEMENT OF PURCHASE AND SALE

(continued)

ARTICLE 3

CONDITIONS OF CLOSING

	
3.1
	
Purchaser's Conditions

The obligation of Purchaser to purchase the Assets is subject to the following conditions precedent, which are inserted herein and made part hereof for the exclusive benefit of Purchaser and may only be waived by Purchaser:

	
  
	
(a)
	
except for representations qualified by "material" or "materiality" in which case such representations must be true and accurate in all respects when made and at Closing, the representations and warranties of Vendor herein contained shall be true in all material respects when made and as of the Closing Time, and a Certificate to that effect shall have been delivered by Vendor to Purchaser at Closing;

	
  
	
(b)
	
except for obligations qualified by "material" or "materiality" in which case compliance must be performed and complied with in all respects by Vendor prior to or at the Closing, all obligations of Vendor contained in this Agreement to be performed prior to or at Closing shall have been timely performed in all material respects, and a Certificate to that effect shall have been delivered by Vendor to Purchaser at
Closing;

	
  
	
(c)
	
from the date hereof to the Closing Time, the Assets shall have suffered no material, adverse damage or change, and a Certificate to that effect shall have been delivered by Vendor to Purchaser at Closing;

 

	
  
	
(d)
	
no suit, action or other proceedings shall, on the date of Closing, be pending or threatened before any court or governmental agency seeking to restrain, prohibit, or obtain damages or other relief in connection with the consummation of the transactions contemplated by this Agreement; and

 

	
  
	
(e)
	
Vendor shall have delivered to Purchaser at or prior to Closing discharges of any security held by any Third Party encumbering Vendor's interest in and to the Assets or any part or portion thereof.

If any one or more of the foregoing conditions precedent has or have not been satisfied, complied with, or waived by Purchaser, at or before the Closing Time, Purchaser may in addition to any other remedies which it may have available to it, rescind this Agreement by written notice to Vendor.  The provisions of this Section 3.1
shall not limit or waive any claim by Purchaser for the Vendor's indemnification set forth in Sections 4.1 and 5.1.  If Purchaser rescinds this Agreement, Purchaser and Vendor shall be released and discharged from all obligations hereunder except as provided in Sections 3.3 and 11.14.

	
3.2
	
Vendor's Conditions

The obligation of Vendor to sell the Assets is subject to the following conditions precedent, which are inserted herein and made part hereof for the exclusive benefit of Vendor and may be waived by Vendor:

 

 

 

 

 

8

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	 	
(a) 
	
the representations and warranties of Purchaser herein contained shall be true in all material respects when made and as of the Closing Time, and a Certificate to that effect shall have been delivered by Purchaser to Vendor at Closing;

	
  
	
(b)
	
all obligations of Purchaser contained in this Agreement to be performed prior to or at Closing shall have been timely performed in all material respects, and a Certificate to that effect shall have been delivered by Purchaser to Vendor at Closing;

	
  
	
(c)
	
all amounts to be paid by Purchaser to Vendor at Closing shall have been paid to Vendor in the form stipulated in this Agreement; and

	
  
	
(d)
	
Parent shall have received US$2,200,000.00 in connection with the issuance and sale of perpetual convertible preferred shares and common stock purchase warrants as contemplated by that certain Confidential Term Sheet executed by Parent and Purchaser.

If any one or more of the foregoing conditions precedent has or have not been satisfied, complied with, or waived by Vendor, at or before the Closing Time, Vendor may in addition to any other remedies which it may have available to it, rescind this Agreement by written notice to Purchaser.  If Vendor rescinds this Agreement, Purchaser
and Vendor shall be released and discharged from all obligations hereunder except as provided in Sections 3.3 and 11.14.

	
3.3
	
Efforts to Fulfil Conditions Precedent

Purchaser and Vendor shall proceed diligently and in good faith and use best efforts to satisfy and comply with and assist in the satisfaction and compliance with the conditions precedent.  If Purchaser or Vendor elect to rescind this Agreement pursuant to Sections 3.1 and 3.2 (respectively), such Party shall include the reason
for the failure of the condition precedent along with the written notices set forth in Sections 3.1 and 3.2.

 

ARTICLE 4

REPRESENTATIONS AND WARRANTIES

	
4.1
	
Representations and Warranties of Vendor

Except for the express representations and warranties of Vendor set forth in this Section 4.1 and the representations and warranties of Vendor set forth in the Specific Conveyances, Purchaser acknowledges that it is purchasing Vendor's interest in and to the Assets on an "as is, where is" basis, without representation and warranty
and without reliance on any information provided to or on behalf of Purchaser by Vendor or any Third Party.  Subject in all instances to Permitted Encumbrances, Vendor makes the following representations and warranties to Purchaser as of the date of this Agreement and as of the Closing Time (provided, however, no claim in respect of which shall be made or be enforceable by Purchaser unless written notice of such claim, with reasonable particulars, is given by Purchaser to Vendor within a period of three
(3) years from the Closing Time):

	
  
	
(a)
	
Vendor is a corporation duly organized and validly existing under the laws of the State of Delaware, is authorized to carry on business in the State in which the Lands are located, and has good right, full power and absolute authority to sell, assign, transfer, convey and set over the interest of Vendor in and to the Assets;

 

 

 

9

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
  
	
(b)
	
the execution, delivery and performance of this Agreement has been duly and validly authorized by any and all requisite corporate, shareholders' and directors' actions and will not result in any violation of, be in conflict with or constitute a default under any articles, charter, bylaw or other governing document to which Vendor is bound;

	
  
	
(c)
	
the execution, delivery and performance of this Agreement will not result in any violation of, be in conflict with or constitute a default under any term or provision of any agreement or document to which Vendor is party or by which Vendor is bound, nor under any judgment, decree, order, statute, regulation, rule or license applicable to Vendor;

	
  
	
(d)
	
this Agreement and any other agreements delivered in connection herewith constitute valid and binding obligations of Vendor enforceable against Vendor in accordance with their terms;

	
  
	
(e)
	
no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body exercising jurisdiction over the Assets is required for the due execution, delivery and performance by Vendor of this Agreement, other than authorizations, approvals or exemptions from requirement therefor, previously obtained and currently in force;

	
  
	
(f)
	
Vendor has not incurred any obligation or liability, contingent or otherwise, for brokers' or finders' fees in respect of this Agreement or the transaction to be effected by it for which Purchaser shall have any obligation or liability;

	
  
	
(g)
	
the interest of Vendor in and to all property, assets, interests and rights comprising the Tangibles is sufficient such that Vendor is not subject to any penalty, fee, levy, charge or other compensation payable to any Third Party for the use of or access to the Tangibles, and, without restricting the generality of the foregoing, none of the Tangibles is leased or rented;

	
  
	
(h)
	
Except for the Permitted Encumbrances, Vendor has not alienated or encumbered the Assets or any part or portion thereof, Vendor has not committed and is not aware of there having been committed any act or omission whereby the Assets or any part or portion thereof may be cancelled or determined or owing to another party, and the Assets are now free and clear of all liens, royalties, conversion rights and other claims
of Third Parties, created by, through or under Vendor or of which Vendor has knowledge;

	
  
	
(i)
	
Vendor has not received notice from any Third Party claiming an interest in and to the Assets adverse to the interest of Vendor and Vendor has no reason to believe that any such claim may be made;

	
  
	
(j)
	
Vendor has not failed to comply with, perform, observe or satisfy any term, condition, obligation or liability which has heretofore arisen under the provisions of any of the Title Documents or any other agreements and documents to which the Assets are subject in any material respect and to Vendor's Knowledge, all other parties to said agreements and documents are not in breach or default thereof in any material respect;

 

 

10

 

AGREEMENT OF PURCHASE AND SALE

(continued)

	
  
	
(k)
	
Vendor has not received notice of default and is not in any material respect and to Vendor's Knowledge, in any default under any obligation, agreement, document, order, writ, injunction or decree of any court or of any commission or administrative agency, which might result in impairment or loss of the interest of Vendor in and to the Assets or which might otherwise adversely affect the Assets;

	
  
	
(l)
	
no suit, action or other proceeding before any court or governmental agency has been commenced against Vendor or, to the knowledge, information and belief of Vendor, has been threatened against Vendor or any Third Party, which might result in impairment or loss of the Assets or which might otherwise adversely affect the Assets or any rights to, and rights to enter upon, use or occupy the surface of any lands which
are or may be used to gain access to or otherwise use the Petroleum and Natural Gas Rights and the Tangibles, or either of them;

	
  
	
(m)
	
except as to routine, regular maintenance operations on the Assets, the Assets are currently idle and not in operation or production;

	
  
	
(n)
	
all amounts due and payable by Vendor to Third Parties prior to the date hereof and pertaining to the Assets have been fully paid, including without limitation (i) any and all ad valorem and property taxes, (ii) any and all production, severance and similar taxes, charges and assessments based upon or measured by the ownership or production of the Leased Substances or any of them or the receipt of proceeds therefor,
and (iii) all amounts due and payable in connection with Permitted Encumbrances, provided however, in the case of any and all amounts due and payable prior to the time Vendor acquired an interest in and to the Assets to which such amounts pertain, Vendor makes this representation and warranty only based upon Vendor's Knowledge;

	
  
	
(o)
	
in respect of the Assets except in connection with the AFE's, there are no financial commitments of Vendor which are in excess of $25,000.00 and which are due as of the date hereof or which may become due by virtue of matters occurring or arising prior to the date hereof;

	
  
	
(p)
	
in respect of the Assets that are operated by Vendor, if any, Vendor holds all valid licenses, permits and similar rights and privileges that are required and necessary under applicable law to operate the Assets as presently operated and holds all contracts or agreements that are reasonably necessary to own, explore, develop, maintain or use the Assets in the manner in which they are currently being owned, explored,
developed, operated, maintained or used;

	
  
	
(q)
	
any and all operations of Vendor, and to Vendor's Knowledge, any and all operations by Third Parties, on or in respect of the Assets, have been conducted in accordance with good oil and gas industry practices and in material compliance with all applicable laws, rules, regulations, orders and directions of governmental and other competent authorities;

	
  
	
(r)
	
there are no active area of mutual interest provisions in any of the Title Documents or other agreements or documents to which the Assets are subject;

 

 

 

 

 

11

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	 	
(s) 
	
excepting production limits of general application in the oil and gas industry, none of the Wells is subject to production or other penalties imposed by the Title Documents or by any other agreements and documents to which the Assets are subject, or by any laws, rules, regulations, orders or directions of governmental or other competent authorities;

	
  
	
(t)
	
Vendor is not aware of and has not received:

	
  
	
(i)
	
any orders or directives which relate to environmental matters and which require any work, repairs, construction or capital expenditures with respect to the Assets, where such orders or directives have not been complied with in all material respects; or

	
  
	
(ii)
	
any demand or notice issued with respect to the breach of any environmental, natural resource, human health or safety law, rule, regulation, statute, ordinance, guideline, code or other legally enforceable requirement applicable to the Assets, including without limitation, respecting the use, storage, treatment, transportation or disposition of environmental contaminants (as such laws, rules, regulations, statutes,
ordinances, guidelines, codes or requirements are in existence as of the date of this Agreement, "Applicable Environmental Laws"), which demand or notice remains outstanding on the date hereof;

	
  
	
(iii)
	
information concerning a condition that with the passage of time could result in a demand or notice as described in Subsection (t)(ii) above.

	
  
	
(u)
	
except for the Production Contracts, Vendor is not a party to and the Assets are not otherwise bound or affected by any (i) production sales contracts pertaining to the Leased Substances or any of them that cannot be terminated on notice of 31 days or less (without an early termination penalty or other cost), (ii) gas balancing or similar agreements pertaining to the Leased Substances or any of them, (iii) agreements
for the transportation, processing or disposal of the Leased Substances or any of them or substances produced in connection with the Leased Substances or any of them, (iv) agreements for the contract operation by a Third Party of the Assets or any of them, and (v) agreements to provide transportation, processing or disposal capacity or service to any Third Party;

 

	
  
	
(v)
	
except as set forth on Schedule "B" under the heading "Pre-Closing Liabilities", no agreement or document to which the Assets or Vendor is bound involves an assumption by Purchaser or its successors of any pre-Closing liabilities or claims, or any post-Closing liabilities or claims aside from those arising under the oil and gas leases comprising the Assets or pursuant to the Operating Agreement described in Section
10.1;

 

	
  
	
(w)
	
Schedule "B" under the heading "Potential Plugging Obligations" lists all dry holes, shut-in, or inactive wells on the Assets or on lands pooled or unitized therewith drilled by Vendor (or to Vendor’s Knowledge, drilled by other parties) other than those:  (i) properly plugged and abandoned; and (ii) wells that are shut in or temporarily inactive are in compliance with all applicable regulations,
laws or rules for which a reasonably prudent operator would use such wells in the future;

 

 

 

 

 

12

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
  
	
(x)
	
to the Vendor's Knowledge, except for the proposed restart costs relating to the Facilities, the Tangibles have been maintained in a state of repair so as to be reasonably adequate for normal operations;

 

	
  
	
(y)
	
to Vendor’s Knowledge, all of the information provided to Purchaser in writing or orally by the Parties listed on Schedule "B" under the heading "Information” heretofore or hereafter furnished by Vendor with respect to the Assets is true and correct in all material respects, and, to Vendor’s Knowledge, does not omit any information that is necessary to prevent such information from being misleading
in any material respect;

 

	
  
	
(z)
	
to Vendor's Knowledge, the location of each well and plant (if drilled or built) would comply with all applicable laws and all applicable rules, regulations and orders of governmental agencies having jurisdiction; and

 

	
  
	
(aa)
	
no Asset is subject to (or has related to it) any "partnership" (as defined in Section 761 of the United States Internal Revenue Code of 1986 (as amended from time to time).

 

	
4.2
	
Representations and Warranties of Purchaser

Purchaser makes the following representations and warranties to Vendor, no claim in respect of which shall be made or be enforceable by Vendor unless written notice of such claim, with reasonable particulars, is given by Vendor to Purchaser within a period of three (3) years from the Closing Time:

	
  
	
(a)
	
Purchaser is a limited liability company duly organized and validly constituted under the laws Delaware and, on the day of the Closing Time will be authorized to carry on business in the State in which the Lands are located, and will have good right, full power and absolute authority to purchase the interest of Vendor in and to the Assets;

	
  
	
(b)
	
the execution, delivery and performance of this Agreement has been duly and validly authorized by any and all requisite partnership actions and will not result in any violation of, be in conflict with or constitute a default under any partnership agreement or other governing document to which Purchaser is bound;

	
  
	
(c)
	
the execution, delivery and performance of this Agreement will not result in any violation of, be in conflict with or constitute a default under any term or provision of any agreement or document to which Purchaser is party or by which Purchaser is bound, nor under any judgment, decree, order, statute, regulation, rule or license applicable to Purchaser;

	
  
	
(d)
	
this Agreement and any other agreements delivered in connection herewith constitute valid and binding obligations of Purchaser enforceable against Purchaser in accordance with their terms;

	
  
	
(e)
	
no authorization or approval or other action by, and no notice to or filing with, any governmental authority or regulatory body exercising jurisdiction over the Assets is required for the due execution, delivery and performance by Purchaser of this Agreement, other than authorizations, approvals or exemptions from requirement therefor, previously
obtained and currently in force; and

 

 

13

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
  
	
(f)
	
Purchaser has not incurred any obligation or liability, contingent or otherwise, for brokers' or finders' fees in respect of this Agreement or the transaction to be effected by it for which Vendor shall have any obligation or liability.

 

ARTICLE 5

INDEMNITIES

	
5.1
	
Vendor's Indemnities

Vendor shall be liable to Purchaser for and shall, in addition, indemnify Purchaser from and against, all losses, costs, claims, damages, expenses (including without limitation, court costs and consultants' and attorneys' fees) and liabilities suffered, sustained, paid or incurred by Purchaser (a) which would not have been suffered, sustained,
paid or incurred had all of the representations and warranties contained in Section 4.1 been accurate and truthful, or (b) which relate to or arise from Vendor's ownership or operation of the Assets prior to the Closing Time.

	
5.2
	
Purchaser's Indemnities for Representations and Warranties

Purchaser shall be liable to Vendor for and shall, in addition, indemnify Vendor from and against, all losses, costs, claims, damages, expenses and liabilities suffered, sustained, paid or incurred by Vendor which would not have been suffered, sustained, paid or incurred had all of the representations and warranties contained in Section
4.2 been accurate and truthful.

	
5.3
	
Time Limitation

No claim under this Article 5 shall be made or be enforceable by a Party unless written notice of such claim, with reasonable particulars, is given by such Party to the Party against whom the claim is made within a period of three (3) years from the Closing Time.

	
5.4
	
Limitation

Notwithstanding any other provision in this Agreement, Purchaser shall not be liable to nor be required to indemnify Vendor in respect of any losses, costs, claims, damages, expenses and liabilities suffered, sustained, paid or incurred by Vendor in respect of which Vendor is liable to and has indemnified Purchaser pursuant to Section
5.1, and Vendor shall not be liable to nor be required to indemnify Purchaser in respect of any losses, costs, claims, damages, expenses and liabilities suffered, sustained, paid or incurred by Purchaser in respect of which Purchaser is liable to and has indemnified Vendor pursuant to Section 5.2, in both cases disregarding the time limit set out in Section 5.3.

 

ARTICLE 6

PURCHASER'S INDEMNITIES

	
6.1
	
General Indemnity

Purchaser shall be liable to Vendor for and shall, in addition, indemnify Vendor from and against, all losses, costs, claims, damages, expenses and liabilities suffered, sustained, paid or incurred by Vendor which arise out of any matter or thing occurring or arising from and after the Closing
Time and which relates to the Assets, provided however that subject to the provisions of Section 6.3 hereof, Purchaser shall not be liable to nor be required to indemnify Vendor in respect of any losses, costs, claims, damages, expenses and liabilities suffered, sustained, paid or incurred by Vendor that arise out of acts or omissions of Vendor or to the extent such matters are items for which Vendor indemnifies Purchaser pursuant to Section 5.1 above.

 

 

 

14

 

AGREEMENT OF PURCHASE AND SALE

(continued)

	
6.2
	
Abandonment and Reclamation

Purchaser shall see to the timely performance of all abandonment and reclamation obligations pertaining to the ownership of the Assets after the Closing Time (as further set forth in Section 6.3 below) which in the absence of this Agreement would be the responsibility of Vendor.  Purchaser shall be liable to Vendor for and shall,
in addition, indemnify Vendor from and against, all losses, costs, claims, damages, expenses and liabilities suffered, sustained, paid or incurred by Vendor should Purchaser fail to timely perform such obligations.

	
6.3
	
Environmental Matters

Except to the extent such matters are items for which Vendor indemnifies Purchaser pursuant to Section 5.1 above, Purchaser shall be liable to Vendor for and shall, in addition, indemnify Vendor from and against, all losses, costs, claims, damages, expenses and liabilities suffered, sustained, paid or incurred by Vendor which pertain to
environmental damage or contamination or other environmental problems but only to the extent relating to the ownership of the Assets after the Closing Time and to the extent such environmental damage or contamination or other environmental problems occur or arise subsequent to the Closing Time.  Without limiting the generality of the foregoing, such environmental damage or contamination or other environmental problems shall include (i) surface, underground, air, ground water or surface water contamination,
(ii) the abandonment or plugging of or failure to abandon or plug any of the Wells, (iii) the restoration or reclamation of any part of the Assets, (iv) the breach of applicable government rules and regulations in effect at any time (including any Applicable Environmental Laws), and (v) the removal of or failure to remove foundations, structures or equipment.

 

ARTICLE 7

OPERATING ADJUSTMENTS

	
7.1
	
No Adjustments

Except for the indemnity obligation under Article 5, there shall be no adjustments made between the Parties in respect of benefits and obligations of any kind and nature relating to the operation (prior to the Closing Time) of the Assets conveyed pursuant to this Agreement, including without limitation maintenance, development, operating
and capital costs, government incentives and administration fees, royalties and other burdens, and proceeds from the sale of production, whether accruing, payable or paid and received or receivable.

 

 

 

 

15

 

AGREEMENT OF PURCHASE AND SALE

(continued)

ARTICLE 8

MAINTENANCE OF ASSETS

	
8.1
	
Maintenance of Assets

Until the Closing Time, Vendor shall, to the extent that the nature of its interest permits, and subject to the Title Documents and any other agreements and documents to which the Assets are subject:

	
  
	
(a)
	
maintain the Assets in a proper and prudent manner in accordance with good oil and gas industry practices and in material compliance with all applicable laws, rules, regulations, orders and directions of governmental and other competent authorities;

	
  
	
(b)
	
pay or cause to be paid all costs and expenses relating to the Assets which become due from the date hereof to the Closing Time; and

	
  
	
(c)
	
perform and comply with all covenants and conditions contained in the Title Documents and any other agreements and documents to which the Assets are subject.

	
8.2
	
Consent of Purchaser

Notwithstanding Section 8.1, until the time of Closing, Vendor shall not, without the written consent of Purchaser, which consent shall not be unreasonably withheld by Purchaser and which, if provided, shall be provided in a timely manner:

	
  
	
(a)
	
make any commitment or propose, initiate or authorize any capital expenditure with respect to the Assets of which Vendor's share is in excess of $25,000.00, except in case of an emergency or in respect of amounts which Vendor may be committed to expend or be deemed to authorize for expenditure without its consent;

	
  
	
(b)
	
surrender or abandon any of the Assets;

	
  
	
(c)
	
amend or terminate any Title Document or any other agreement or document to which the Assets are subject, or enter into any new agreement or commitment relating to the Assets; or

	
  
	
(d)
	
sell, encumber or otherwise dispose of any of the Assets or any part or portion thereof excepting sales of the Leased Substances or any of them in the normal course of business.

 

ARTICLE 9

PRE-CLOSING INFORMATION

	
9.1
	
Production of Documents

At all reasonable times from the date hereof until the Closing Time, Vendor shall make available to Purchaser and Purchaser's Counsel in Vendor's offices in Calgary, Alberta, Canada the following information pertaining to the Assets to which Vendor
has possession or to which it has access:

 

 

 

16

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
  
	
(a)
	
all title opinions and reports;

	
  
	
(b)
	
all of the Title Documents and any other agreements and documents to which the Assets are subject including without limitation (i) production sales contracts pertaining to the Leased Substances or any of them, (ii) gas balancing or similar agreements pertaining to the Leased Substances or any of them, (iii) agreements for the transportation, processing or disposal of the Leased Substances or any of them or substances
produced in connection with the Leased Substances or any of them, (iv) agreements for the contract operation by a Third Party of the Assets or any of them, and (v) agreements to provide transportation, processing or disposal capacity or service to any Third Party;

	
  
	
(c)
	
mortgages, deeds of trust, security agreements, chattel mortgages and other encumbrances affecting the Assets;

	
  
	
(d)
	
evidence with respect to the payment of all bonuses, rentals, royalties and other payments due under the Title Documents and any other agreements and documents to which the Assets are subject;

	
  
	
(e)
	
evidence with respect to the payment of all taxes, charges and assessments pertaining to the Assets;

	
  
	
(f)
	
lease records, data sheets, production records, ownership maps and surveys;

	
  
	
(g)
	
permits, easements, licenses and orders;

	
  
	
(h)
	
all documents and information relevant to environmental damage or contamination or other environmental problems pertaining to the Assets;

	
  
	
(i)
	
accounting records, policies of insurance, consulting agreements, field contracts and other agreements relating to the operation of the Assets; and

 

	
  
	
(j)
	
any additional information directly related to the Assets and reasonably requested by Purchaser to the extent such information is in Vendor's possession or control.

 

ARTICLE 10

OPERATIONS FOLLOWING CLOSING

	
10.1
	
Operating Agreement

The Parties shall execute at Closing an Operating Agreement substantially in the form attached as Schedule "F" hereto, which operating Agreement shall govern operations on the Lands subsequent to the Closing Time.

 

 

 

 

17

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

ARTICLE 11

GENERAL

	
11.1
	
Further Assurances

Each Party will, from time to time and at all times after Closing, without further consideration, do such further acts and deliver all such further assurances, deeds and documents as shall be reasonably required in order to fully perform and carry out the terms of this Agreement.  Until Purchaser receives legal ownership of the
Assets, Vendor shall act as Purchaser's agent (including without limitation to serve operation notices and authorizations for expenditure) as Purchaser reasonably and lawfully directs.  Purchaser shall be liable to Vendor and shall, in addition, indemnify Vendor from and against, all losses, costs, claims, damages, expenses and liabilities suffered, sustained, paid or incurred by Vendor arising in connection with all acts or omissions of Vendor in its capacity as agent of Purchaser to the extent such
acts and omissions were expressly authorized by Purchaser. For a period not to exceed the time limitation set forth in Article 5.3 herein, each Party shall give prompt notice to the other Party of the occurrence or non-occurrence of any event, the occurrence or non-occurrence of which, to such Party’s Knowledge, would be likely to cause any representation or warranty contained in Article 4 to be untrue or inaccurate.  The delivery of any notice pursuant to this Article 11.1 shall not be deemed
to (i) modify the representations or warranties hereunder of the Party delivering such notice or (ii) limit or otherwise affect the remedies available hereunder to the Party receiving such notice.

	
11.2
	
No Merger

The covenants, representations, warranties and indemnities contained in this Agreement shall be deemed to be restated in any and all assignments, conveyances, transfers and other documents conveying the interests of Vendor in and to the Assets to Purchaser, subject to any and all time and other limitations contained in this Agreement.  There
shall not be any merger of any covenant, representation, warranty or indemnity in such assignments, conveyances, transfers and other documents notwithstanding any rule of law, equity or statute to the contrary and such rules are hereby waived.

	
11.3
	
Entire Agreement

The provisions contained in any and all documents and agreements collateral hereto shall at all times be read subject to the provisions of this Agreement and, in the event of conflict, the provisions of this Agreement shall prevail.  No amendments shall be made to this Agreement unless in writing, executed by the Parties.  This
Agreement supersedes all other agreements, documents, writings and verbal understandings among the Parties relating to the subject matter hereof and expresses the entire agreement of the Parties with respect to the subject matter hereof.

	
11.4
	
Subrogation

The assignment and conveyance to be effected by this Agreement is made with full right of substitution and subrogation of Purchaser in and to all covenants, representations, warranties and indemnities previously given or made by others in respect of the Assets or any part or portion thereof.

 

 

 

 

18

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
11.5 
	
Governing Law

This Agreement shall be governed by and construed in accordance with the internal laws of the State of Missouri applicable to a contract executed and performed in such State, without giving effect to conflicts of laws principles requiring the application of the law of another State, except that, to the extent that the law of a state in
which a portion of the Assets is located (or which is otherwise applicable to a portion of the Assets) necessarily governs, the law of such state shall apply as to that portion of the property located in (or otherwise subject to the laws of) such state.  EACH PARTY HERETO WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT.  Each Party hereby (a) irrevocably
submits to the exclusive jurisdiction of the state and federal courts of Jackson County, Missouri, for the purposes of any suit, action or proceeding arising out of or relating to this Agreement, and (b) waives, and agrees not to assert in any such suit, action or proceeding, any claim that (i) it is not personally subject to the jurisdiction of such court or of any other court to which proceedings in such court may be appealed; (ii) such suit, action or proceeding is brought in an inconvenient forum; or, (iii)
the venue of such suit, action or proceeding is improper.

	
11.6
	
Enurement

This Agreement may not be assigned by a Party without the prior written consent of the other Party, which consent may be unreasonably and arbitrarily withheld.  This Agreement shall be binding upon and shall enure to the benefit of the Parties and their respective administrators, trustees, receivers, successors and permitted
assigns.

	
11.7
	
Time of Essence

Time shall be of the essence in this Agreement.

	
11.8
	
Notices

The addresses for service and the fax numbers of the Parties shall be as follows:

 

	 	
Vendor - 
	
MegaWest Energy Missouri Corp.

c/o MegaWest Energy Corp.

800, 926 - 5th Avenue S.W.

Calgary, Alberta, Canada

T2P 0N7

 

Attention:  Land Department

(403) 984-6343

 

	 	
Purchaser  - 
	
Mega Partners 1, LLC

641 Lexington Ave., 26th Floor

New York, New York  10022 

 

Attention:  Jay Snodgrass, Associate, and Kim Page, Controller

(Fax) (212) 207-3452

 

 

 

 

19

 

AGREEMENT OF PURCHASE AND SALE

(continued)

All notices, communications and statements required, permitted or contemplated hereunder shall be in writing, and shall be delivered as follows:

	
  
	
(a)
	
by personal service on a Party at the address of such Party set out above, in which case the item so served shall be deemed to have been received by that Party when personally served;

	
  
	
(b)
	
by facsimile transmission to a Party to the fax number of such Party set out above, in which case the item so transmitted shall be deemed to have been received by that Party when transmitted; or

	
  
	
(c)
	
except in the event of an actual or threatened postal strike or other labour disruption that may affect mail service, by mailing first class registered post, postage prepaid, to a Party at the address of such Party set out above, in which case the item so mailed shall be deemed to have been received by that Party five days following the date of mailing (the date of mailing being the postmarked date of the envelope
containing the notice, communication or statement or if the subject envelope has been lost or destroyed, the date of such notice, communication or statement or if undated the date of the transmittal letter accompanying the same).

A Party may from time to time change its address for service or its fax number or both by giving written notice of such change to the other Party.

	
11.9
	
Limit of Liability

Except in the case of Vendor's fraud or wilful misconduct, in no event shall the liability of Vendor to Purchaser in respect of claims of Purchaser arising out of or in connection with this Agreement exceed, in the aggregate, the Purchase Price.  Furthermore, in no event shall any Party be liable to the other Party hereunder
for any indirect, consequential, exemplary, special or incidental damages.

	
11.10
	
Invalidity of Provisions

In case any of the provisions of this Agreement should be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby.

	
11.11
	
Waiver

No failure on the part of any Party in exercising any right or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or remedy preclude any other or further exercise thereof or the exercise of any right or remedy in law or in equity or by statute or otherwise conferred.  No
waiver of any provision of this Agreement, including without limitation, this section, shall be effective otherwise than by an instrument in writing dated subsequent to the date hereof, executed by a duly authorized representative of the Party making such waiver.

 

 

 

20

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

	
11.12 
	
Amendment

This Agreement shall not be varied in its terms or amended by oral agreement or by representations or otherwise other than by an instrument in writing dated subsequent to the date hereof, executed by a duly authorized representative of each Party.

	
11.13
	
Agreement not Severable

This Agreement extends to the whole of the Assets and is not severable without Purchaser's express written consent or as otherwise herein provided.

	
11.14
	
Confidentiality and Public Announcements

Until Closing has occurred, each Party shall keep confidential all information obtained from the other Party in connection with the Assets and shall not release any information concerning this Agreement and the transactions herein provided for, without the prior written consent of the other Party, which consent shall not be unreasonably
withheld.  Nothing contained herein shall prevent a Party at any time from furnishing information (i) to any governmental agency or regulatory authority or to the public if required by applicable law, provided that the Parties shall advise each other in advance of any public statement which they propose to make, (ii) in connection with obtaining consents or complying with preferential, pre-emptive or first purchase rights contained in Title Documents and any other agreements and documents to which the
Assets are subject, or (iii) to procure the consent of Purchaser's lenders, partners, or joint investors (or any potential successor thereof).

	
11.15
	
Perpetuities

Notwithstanding anything elsewhere herein contained, the right of Purchaser to acquire any interest in the Assets from Vendor shall not extend beyond twenty one (21) years after the lifetime of the last survivor of the lawful descendants now living of Her Majesty Queen Elizabeth II.

	
11.16
	
Negotiated Transaction

The Parties (a) represent and warrant to each other that in the negotiation and drafting of this Agreement, they have been represented by, and have relied upon the advice and counsel of, Counsel of their own choosing, and (b) affirm their Counsel have both had a substantial role in the negotiation and drafting of this Agreement and, therefore,
this Agreement shall be deemed drafted by all Parties and any rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of this Agreement.

	
11.17
	
Counterpart Execution

This Agreement may be executed in multiple counterparts, no one copy of which need be executed by Vendor and Purchaser.  A valid and binding contract shall arise if and when counterpart execution pages are executed and delivered by Vendor and Purchaser.

 

 

 

21

 

AGREEMENT OF PURCHASE AND SALE

(continued)

 

IN WITNESS WHEREOF the Parties have executed and delivered this Agreement as of the day and year first above written.

	
MEGAWEST ENERGY MISSOURI CORP.

 
	
MEGA PARTNERS 1, LLC, a Delaware limited liability company

 

	
Per:     ________________________________

 

 

Per:     ________________________________
	
 

By: ________________________________

Name: ________________________________

Title: ________________________________

 

	  	  

 

 

 

 

 

 

 

 

 

 

 

22

 

SCHEDULE "A"

 

 

THIS PAGE AND THE  SCHEDULES FOUND IN EXHIBIT 10.2 (THE OPERATING AGREEMENT) CONTAIN THE LEASE DESCPRIPTONS FORMING PART OF AN AGREEMENT OF PURCHASE AND SALE MADE AS OF THE 27th DAY OF AUGUST, 2009 BETWEEN MEGAWEST ENERGY MISSOURI CORP. AND MEGA PARTNERS 1, LLC.

 

Marmaton

	
Inventory

	
Chemicals and minor spare parts

	
Phase 1 wells

	
40 production wells phase 1 c/w pumpjacks-tubing- wellheads

	
13 Injection Wells, phase 1 c/w tubing, steam meters

	
 Oil field piping

	
2 Service wells

	  
	
Phase 2 wells

	
24 production wells phase 2  standing cased

	
10 Injection Wells, standing cased

	
In stock materials for MR2 pipe fittings instruments valves etc.

	
In stock materials surplus to  MR2 pipe fittings instruments valves etc.

	  
	
Facilities

	
Empire gas line (to MR1 and Grassy Creek)

	
plant and battery building

	
Thermotics 50MMBTU Generator

	
Steam and Condensate piping

	
Water Source Equipment -Pump-VFD-Transformer- MO

	
Disposal Well tubing, meter-MO

	
Tanks (14)-MO

	
Electrical -MO

	
Softener Skid MARLOW - MO

	
Transfer Pumps - MO

	
Disposal Pumps (2) - MO

	
Control Valves - MO

	
Power Gen Set - MO

	
Heat tracing and insulation

	  
	  

 

 

23

 

SCHEDULE "A"

(continued)

Grassy Creek

	
Inventory

	
Chemicals and minor spare parts

	
Phase 1 wells

	
46 production wells-pumpjacks-tubing- wellheads materials only

	
15 Injection Wells, casing, tubing, steam meters materials only

	
2 Service wells

	  
	
Facilities

	  
	
Empire gas line (MR1 and Grassy Creek)

	
Steam, condensate and oil field piping

	
plant and battery building

	
CE Natco 50MMBTU Generator

	
Water Source Equipment -Pump-transformer casing- MO

	
Disposal Well Casing, tubing, meter-MO

	
Tanks (14)-MO

	
Electrical -MO

	
Softener Skid (uic)- MO

	
Transfer Pumps - MO

	
Disposal Pumps (2) - MO

	
Control Valves - MO

	  
	  

Contracts

Assignment of Overriding Royalty Interests dated May 14, 2008 (Long Override)

Surface Rights

Nil

Title Documents

See the attached 111 page Mineral Property Report dated July 13, 2009

 

 

 

24

 

SCHEDULE "B"

 

 

THIS PAGE AND THE FOLLOWING 4 PAGES COMPRISE SCHEDULE "B" ATTACHED TO AND FORMING PART OF AN AGREEMENT OF PURCHASE AND SALE MADE AS OF THE 27th DAY OF AUGUST, 2009 BETWEEN MEGAWEST ENERGY MISSOURI CORP. AND MEGA PARTNERS 1, LLC

AFE's

Nil.

Production Contracts

Nil.

Corporate Inventory

(NOT forming a part of this transaction, whether located in Missouri or elsewhere

	
Kansas

	
Boiler 50 mill btu/hr Chetopa

	
Softener skid (1)

	
33 Production Wells pumpjacks-tubing-wellheads

	
21 injection wells

	
Tanks (10)

	
Subtotal for Kansas

	  
	
Kentucky

	
Casing

	
Tubing

	
Rods

	
Pumpjack gearboxes

	
Pipe, Valves, Fittings

	
Wellheads & equip

	
Fabbed Well Headers remaining inventory shown

	
Cement Blocks

	
Metal Strap

	
Anchors

	
Texas Gates

	
Tanks

	
Softener Skid

	
Stainless liner

	
Blue Sky Valve

	
Subtotal for Kentucky

 

 

 

25

 

SCHEDULE "B"

(continued)

 

	
Texas

	  
	
 3  - 5 1/2'' QB2 X 8 RD. LTC. L-80 20LB. CROSS OVER JTS.

	
52 JTS.  5 1/2'' 17LB. J-55 LTC. 8-RD.  APPOX. 2.260'.

	
104 JTS. 5 1/2'' 20LB. L-80, QB2.  APPOX. 4,630'.

	
9 JTS.  8 5/8'' J-55 24LB.  LTC. 8 RD.  APPOX. 380'.

	
4 5 1/2'' QB2 CUT-OFF JTS.  AND 1  5 1/2''  17LB  J-55 CUT-OFF.

	
Subtotal for Texas

	  
	
Surplus equipment

	
Thermotics 50MMBTU Generator

	
UI 50MMBTU Steam Generator

	
Struthers 50 MMBTU Steam Generator

	
Struthers 50 MMBTU Steam Generator

	
Struthers 50 MMBTU Steam Generator

	
Struthers 50 MMBTU Steam Generator

	
Struthers 50 MMBTU Steam Generator

	
Subtotal for surplus equipment

	  
	
Vehicles

	
pickup truck (leased)

	
pickup truck (leased)

	
pickup truck (leased)

	
utility vehicles

	
truck and mast

	
truck and rig

	
trailer

	
trailer

	
farm tractor and mower

	
Subtotal for vehicles

 

 

26

 

SCHEDULE "B"

(continued)

Pre-Closing Liabilities

Nil

Wire Transfer

Wachovia NY International

11 Penn Plaza/BSMT 4 Floor

New York, NY

10001

 

Fed #: ABA 026005092

 

Beneficiary Bank:

BMO Bank of Montreal

100 King St. West

First Canadian Place

Toronto, Ontario

M6X 1A3

 

Swift Address: BOFMCAM2

 

Account with Institution/Beneficiary Bank Identifier:  BOFMCAM2NBB

 

Beneficiary Account #: 710 – 33082 – 14 Cash 33082

Beneficiary Name: MegaWest Energy Corporation

Beneficiary Address: Suite 800, 926-5th AV SW, Calgary, AB T2P 0N7

 

 

 

27

 

SCHEDULE "B"

(continued)

Potential Plugging Obligations

	  	
Common Name
	  	
Sec
	
T
	  	
R
	  	
State
	
County
	
Latitude
	
Longitude
	
TD

	  	  	  	  	  	  	  	  	  	  	  	  	  
	
*
	
Mashek 4
	  	
20
	
36
	
N
	
33
	
W
	
MO
	
Vernon
	
37.9003513
	
-94.5940032
	
380

	
**
	
D. Stewart 1
	  	
8
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.84161
	
-94.59814
	
344

	
**
	
R. Johnson 1
	  	
29
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.79193
	
-94.58759
	
310

	
***
	
W. Johnson 4
	  	
16
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.82114
	
-94.58045
	
315

	
***
	
W. Johnson 6
	  	
16
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.81475
	
-94.57703
	
280

	
*
	
Mashek 6
	  	
9
	
36
	
N
	
33
	
W
	
MO
	
Vernon
	
37.9165
	
-94.57887
	
300

	
*
	
S. Mashek 2
	  	
8
	
36
	
N
	
33
	
W
	
MO
	
Vernon
	
37.92537
	
-94.57985
	
351

	
^
	
R. Rourk 3
	  	
7
	
34
	
N
	
33
	
W
	
MO
	
Vernon
	
37.712072
	
-94.602299
	
282

	
*
	
S. Mashek 3
	  	
8
	
36
	
N
	
33
	
W
	
MO
	
Vernon
	
37.916033
	
-94.596914
	
340

	
*
	
Mashek 10
	  	
16
	
36
	
N
	
33
	
W
	
MO
	
Vernon
	
37.91227
	
-94.57297
	
310

	
*
	
DD Fritter 1
	  	
16
	
36
	
N
	
33
	
W
	
MO
	
Vernon
	
37.902546
	
-94.573822
	  
	
***
	
W. Johnson  10
	  	
16
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.82256
	
-94.583829
	
320

	
^
	
D. Weaver 1
	  	
15
	
34
	
N
	
33
	
W
	
MO
	
Vernon
	
37.697509
	
-94.529198
	
262

	
***
	
W. Johnson 12
	  	
16
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.81869
	
-94.57611
	
285

	
***
	
W. Johnson 16
	  	
16
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.82542
	
-94.58158
	
285

	
***
	
W. Johnson 17
	  	
16
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.82528
	
-94.57666
	
315

	
**
	
D. Stewart 2
	  	
8
	
35
	
N
	
33
	
W
	
MO
	
Vernon
	
37.8407019
	
-94.6010588
	
330

	  	  	  	  	  	  	  	  	  	  	  	  	  
	
*  6 wells intentionally left open as potentially part of a "next" Project
	  	  
	
**  3 wells intentionally left open as part of a potential expansion of the Marmaton River Project

	
***  6 wells intentionally left open as part of a potential expansion of the Grassy Creek Project
	  
	
^  2 wells to be abandoned - anticipated cost ~$1500/well
	  	  	  	  
	  	  	  	  	  	  	  	  	  	  	  	  	  

 

Information

-any employees, officers, supervisors, and managers of Seller or MegaWest Energy Corp. located in the Calgary, Alberta office

 

 

 

28

 

SCHEDULE "C"

 

THIS AND THE FOLLOWING PAGE COMPRISE SCHEDULE "C" ATTACHED TO AND FORMING PART OF AN AGREEMENT OF PURCHASE AND SALE MADE AS OF THE 27TH DAY OF AUGUST, 2009 BETWEEN MEGAWEST ENERGY MISSOURI CORP. AND MEGA PARTNERS 1, LLC

PETROLEUM, NATURAL GAS AND GENERAL RIGHTS CONVEYANCE

THIS AGREEMENT made as of the 27th day of August, 2009.

BETWEEN:

 

	

MEGAWEST ENERGY MISSOURI CORP., a body corporate, having offices in the City of Calgary, in the Province of Alberta (hereinafter referred to as "Vendor")

- and -

 

MEGA PARTNERS 1, LLC, a Delaware limited liability company, having offices in New York, New York, USA (hereinafter referred to as "Purchaser")

WHEREAS:

	
(A)
	
Vendor and Purchaser entered into that Agreement of Purchase and Sale made as of the 27th day of August, 2009 (the "Sale Agreement") with respect to the "Assets" (which term, when used in this Agreement, has the same meaning as in the Sale Agreement);

	
(B)
	
All of the conditions precedent to the obligations of the parties hereto to close the transactions contemplated by the Sale Agreement have either been fulfilled or waived in the manner provided for waiver in the Sale Agreement;

NOW THEREFORE in consideration of the premises hereto and the covenants and agreements hereinafter set forth and contained, the parties hereto covenant and agree as follows:

	
1.
	
Vendor hereby sells, assigns, transfers, conveys and sets over to Purchaser, and Purchaser hereby purchases from Vendor, all of the right, title, estate and interest of Vendor (whether absolute or contingent, legal or beneficial) in and to the Assets, TO HAVE AND TO HOLD the same, together with all benefit and advantage to be derived therefrom, absolutely, subject to the terms of the Sale Agreement.

	
2.
	
The covenants, representations, warranties and indemnities contained in the Sale Agreement are incorporated herein as fully and effectively as if they were set out herein and there shall not be any merger of any covenant, representation, warranty or indemnity contained in the Sale Agreement by virtue of the execution and delivery hereof, any rule of law, equity or statute to the contrary notwithstanding.

	
3.
	
If any term or provision hereof should conflict with any term or provision of the Sale Agreement, the term and provision of the latter shall prevail and this Agreement shall at all times be read subject to all terms and conditions of the Sale Agreement.

 

 

 

 

29

 

SCHEDULE "C"

(continued)

 

	
4.
	
The assignment and conveyance effected by this Agreement is made with full right of substitution of Purchaser in and to all covenants, representations, warranties and indemnities by others heretofore given or made in respect of the Assets or any part thereof.

	
5.
	
This Agreement shall, in all respects, be subject to, interpreted, construed and enforced in accordance with and under the laws of the State of Missouri.

	
6.
	
This Agreement shall be binding upon and shall enure to the benefit of each of the parties hereto and their respective administrators, trustees, receivers, successors and assigns.

IN WITNESS WHEREOF the parties hereto have executed this Agreement as of the date first above written.

	
MEGAWEST ENERGY MISSOURI CORP.
	
MEGA PARTNERS 1, LLC, a Delaware limited liability company

	
Per:     __________________________________

 

 

Per:     __________________________________
	
 

By: __________________________________

Name: __________________________________

Title: __________________________________

 

 

 

 

 

 

 

 

 

 

 

 

 

30

 

SCHEDULE "D"

 

 

THIS PAGE COMPRISES SCHEDULE "D" ATTACHED TO AND FORMING PART OF AN AGREEMENT OF PURCHASE AND SALE MADE AS OF THE 27TH DAY OF AUGUST, 2009 BETWEEN MEGAWEST ENERGY MISSOURI CORP. AND MEGA PARTNERS 1, LLC

OFFICER'S CERTIFICATE OF VENDOR

	
TO:
	
MEGA PARTNERS 1, LLC ("Purchaser")

The undersigned,                                      , being an officer of MEGAWEST ENERGY
MISSOURI CORP. ("Vendor"), does hereby certify, for and on behalf of Vendor and not in his/her personal capacity, as follows:

	
1.
	
The undersigned is personally familiar, in his/her capacity as an officer of Vendor, with the matters hereinafter mentioned.

	
2.
	
This certificate is made pursuant to an Agreement of Purchase and Sale made as of the 27th day of August, 2009 between Vendor and Purchaser (the "Sale Agreement").

	
3.
	
The definitions contained in the Sale Agreement are herein adopted and wherever used shall have the meanings ascribed to them in the Sale Agreement.

	
4.
	
Except for representations qualified by "material" or "materiality" in which case such representations must be true and accurate in all respects, the representations and warranties of Vendor contained in the Sale Agreement were true in all material respects when made and are true in all material respects as of the date hereof.

	
5.
	
Except for obligations qualified by "material" or "materiality" in which case compliance must be performed and complied with in all respects, all obligations of Vendor contained in the Sale Agreement to be performed prior to or at Closing have been timely performed in all material respects.

	
6.
	
From the date of the sale Agreement to the date hereof, the Assets have suffered no material, adverse damage or change.

DATED as of the 27th day of August, 2009.

	  	___________________________________________________

 

 

 

 

 

 

 

31

 

SCHEDULE "E"

 

THIS PAGE COMPRISES SCHEDULE "E" ATTACHED TO AND FORMING PART OF AN AGREEMENT OF PURCHASE AND SALE MADE AS OF THE 27TH DAY OF AUGUST, 2009 BETWEEN MEGAWEST ENERGY MISSOURI CORP. AND MEGA PARTNERS 1, LLC

OFFICER'S CERTIFICATE OF PURCHASER

	
TO: 
	
MEGAWEST ENERGY MISSOURI CORP. ("Vendor")

The undersigned,                                           , being
an officer of MEGA PARTNERS 1, LLC ("Purchaser"), does hereby certify, for and on behalf of Purchaser and not in his/her personal capacity, as follows:

	
1.
	
The undersigned is personally familiar, in his/her capacity as an officer of Purchaser, with the matters hereinafter mentioned.

	
2.
	
This certificate is made pursuant to an Agreement of Purchase and Sale made as of the 27th day of August, 2009 between Vendor and Purchaser (the "Sale Agreement").

	
3.
	
The definitions contained in the Sale Agreement are herein adopted and wherever used shall have the meanings ascribed to them in the Sale Agreement.

	
4.
	
Except for representations qualified by "material" or "materiality" in which case such representations must be true and accurate in all respects, the representations and warranties of Purchaser contained in the Sale Agreement were true in all material respects when made and are true in all material respects as of the date hereof.

	
5.
	
Except for obligations qualified by "material" or "materiality" in which case compliance must be performed and complied with in all respects, all obligations of Purchaser contained in the Sale Agreement to be performed prior to or at Closing have been timely performed in all material respects.

DATED as of the 27th day of August, 2009.

	  	___________________________________________________

 

 

 

 

 

 

 

 

 

 

32exhibit_10-2.htm

EXHIBIT 10.2

 

OPERATING AGREEMENT

DATED

August 27, 2009

	
OPERATOR:
	
MEGAWEST ENERGY MISSOURI CORP.

 

	
CONTRACT AREA:
	
Sections 4 thru 9 inclusive, Township 33N, Range 32W; Sections 1 thru 12 inclusive, Township 33N, Range 33W in Barton County, Missouri;

 

	
  
	
The westernmost 18 sections of Township 34N, Range 32W; the westernmost 24 sections of each of Townships 35N, 36N, 37N, Range 32W; Sections 27 thru 34 inclusive, Township 38N, Range 32W; Townships 34N, 35N, 36N, 37N, Range 33W; and Sections 25 thru 36 inclusive, Township 38N, Range 33W all in Vernon County, Missouri;

 

	
  
	
Sections 3 thru 10 inclusive and Sections 15 thru 22 inclusive, Township 38N, Range 32W; Sections 1 thru 24 inclusive, Township 38N, Range 33W in Bates County, Missouri;

 

	
  
	
Sections 11 thru 14 inclusive, Township 23S, Range 24E; Sections 7 thru 18 inclusive, Township 23S, Range 25E, Linn County, Kansas;

 

	
  
	
Sections 23, 24, 25, 26, 35, 36, Township 23S, Range 24E; the easternmost 12 sections of each of Townships 24S, 25S, 26S, Range 24E; Sections 1, 2, 11, 12, 13, 14, 23, 24, Township 27S, Range 24E; Sections 19 thru 36 inclusive, Township 23S, Range 25E; Townships 24S, 25S, 26S, Range 25E; Sections 1 thru 24 inclusive, Township 27S, Range 25E all in Bourbon County, Kansas

 

	
  
	
BARTON, VERNON and BATES COUNTIES, STATE OF MISSOURI,

 

	
  
	
AND LINN and BOURBON COUNTY, STATE OF KANSAS

 

 

1

 

OPERATING AGREEMENT

(continued)

TABLE OF CONTENTS

 

	 	Page
	 	 
	
Article I. DEFINITIONS
	4
	  	  
	
Article II. EXHIBITS
	8
	  	  
	
Article III. INTERESTS OF PARTIES
	8
	
A.          Oil and Gas Interests:
	8
	
B.           Interests of Parties in Costs and Production: 
	9
	
C.           Subsequently Created Interests: 
	9
	  	  
	
Article IV. TITLES 
	  
	
A.          Title Examination: 
	10
	
B.           Loss or Failure of Title: 
	10
	  	  
	
Article V. OPERATOR 
	13
	
A.          Designation and Responsibilities of Operator: 
	13
	
B.           Resignation or Removal of Operator and Selection of Successor: 
	13
	
C.           Employees and Contractors: 
	14
	
D.           Rights and Duties of Operator: 
	15
	  	  
	
Article VI. DRILLING AND DEVELOPMENT
	17
	
A.          Pre-Project Wells: 
	17
	
B.           Initial Phase: 
	19
	
C.           Subsequent Phases: 
	21
	
D.           Funding of Operations: 
	23
	
E.           Adjustment of Project Ownership: 
	24
	
F.           Resuming Operations at Existing Projects 
	25
	
G.           Future Projects - Third Project: 
	27
	
H.           Future Projects - Fourth Project: 
	27
	
I.            Future Projects - Projects Subsequent to Fourth Project: 
	28
	
J.            Non-Operator's Option to Acquire Additional Interests in Future Projects:
	
28

	
K.           Construction of Facilities: 
	29
	
L.           Taking Production in Kind: 
	30
	
M.          Marketing: 
	31
	  	  
	
Article VII. EXPENDITURES AND LIABILITY OF PARTIES 
	31
	
A.           Liability of Parties: 
	31
	
B.           Advances: 
	34
	
C.           Defaults and Remedies: 
	35
	
D.           Rentals, Shut-in Well Payments and Minimum Royalties:
	36
	
E.           Taxes: 
	36
	  	  
	
Article VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST 
	37
	
A.           Surrender of Leases: 
	37
	
B.           Renewal or Extension of Leases:
	38

 

 

 

2

 

OPERATING AGREEMENT

(continued)

 

	
C.           Acreage or Cash Contributions: 
	39
	
D.           Assignment; Maintenance of Uniform Interest: 
	40
	
E.           Waiver of Rights to Partition: 
	40
	
F.           All Transfers Subject to this Agreement:
	41
	  	  
	
Article IX. INTERNAL REVENUE CODE ELECTION 
	41
	  	  
	
Article X. CLAIMS AND LAWSUITS 
	41
	  	  
	
Article XI. FORCE MAJEURE 
	42
	  	  
	
Article XII. NOTICES
	42
	  	  
	
Article XIII. TERM OF AGREEMENT
	43
	  	  
	
Article XIV. COMPLIANCE WITH LAWS AND REGULATIONS 
	44
	
A.           Laws, Regulations and Orders: 
	44
	
B.           Governing Law: 
	44
	
C.           Regulatory Agencies: 
	44
	  	  
	
Article XV. MISCELLANEOUS
	44
	
A.           Execution: 
	44
	
B.           Successors and Assigns: 
	45
	
C.           Counterparts: 
	45
	
D.           Severability: 
	45
	
E.            Preparation: 
	45
	  	  
	
Article XVI. OTHER PROVISIONS 
	45
	
A.           Definitions: 
	45
	
B.           Technical Committee 
	46
	
C.           Lease Payments 
	47
	
D.          Operator’s Employees 
	47
	
E.           Pipeline/Gathering Line Construction or Acquisition 
	48
	
F.           Assignment 
	48
	
G.           Right of First Offer 
	49
	
H.           Governing Document
	49

 

 

  

3

  

OPERATING AGREEMENT

(continued)

 

OPERATING AGREEMENT

 

THIS AGREEMENT, entered into by and between MEGAWEST ENERGY MISSOURI CORP., hereinafter designated and referred to as "Operator", and the signatory party or parties other than Operator, sometimes hereinafter referred to individually as "Non-Operator", and collectively as "Non-Operators"
(Operator and Non-Operators, collectively, hereinafter referred to as the “Parties”, and each individually referred to as a “Party”) .

 

WITNESSETH:

 

WHEREAS, the Parties  are owners of Oil and Gas Leases and/or Oil and Gas Interests in the land identified in Exhibit "A", and the Parties have reached an agreement to explore and develop these Leases and/or Oil and Gas Interests for the production of Oil and Gas to the extent and as hereinafter provided,

 

NOW, THEREFORE, it is agreed as follows:

 

Article I.

DEFINITIONS

 

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

 

	
(A)
	
The term "Agreement", "herein", "hereto", "hereof" and similar expressions shall mean and refer to this Operating Agreement.

 

	
(B)
	
The term "Business Day" shall mean a day other than a Saturday, a Sunday or a Statutory Holiday.

 

	
(C)
	
The term "Completion" or "Complete" shall mean all operations conducted upon the Contract Area intended to complete a well or wells, as a producer of Oil and Gas in one or more Zones, including, but not limited to, the setting of production casing, perforating, well stimulation and production testing conducted in such operation.

 

	
(D)
	
The term "Contract Area" shall mean all of the lands governed by this Agreement as set out in Exhibit "A" attached hereto.

 

	
(E)
	
The term "Deepen" shall mean a single operation whereby a well is drilled to an objective Zone below the deepest Zone in which the well was previously drilled.

 

	
(F)
	
The term "Drilling Unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal body having authority contained within the Contract Area.  If a Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be the drilling unit as established by the pattern of drilling in the Contract Area unless fixed by express agreement of the Drilling Parties.

 

	
(G)
	
The term "Drillsites" shall mean the Oil and Gas Lease or Oil and Gas Interest in the Contract Area on which proposed wells are to be located in accordance with the Program.

 

 

 

 

4

 

OPERATING AGREEMENT

(continued)

 

	
(H)
	
The term “Existing Projects” shall mean the Grassy Creek Project and the Marmaton River Project.

 

	
(I)
	
The term “Existing Project” shall mean any one of the Existing Projects.

 

	
(J)
	
The term "Facility" shall mean the facilities and infrastructure located on the lands within a Project Area, typically including but not limited to water management facilities, steam generation facilities, production facilities, water and gas pipelines, steam injection facilities, water injection facilities, power lines, creek crossings, access roads, compressor stations, ponds or other facilities required or desirable
to produce, operate, transport and treat Oil and Gas within a given Project Area.

 

	
(K)
	
The term "Fourth Project” shall mean a Project other than the Existing Projects and the Third Project, proposed for construction and operation by the Parties within the Contract Area during the term of this Agreement.

 

	
(L)
	
The term “Future Projects” shall mean any Projects other than the Existing Projects which may be proposed for construction and operation by one or more of the Parties within the Contract Area during the term of this Agreement.

 

	
(M)
	
The term “Future Project" shall mean any one of the Future Projects.

 

	
(N)
	
The term “Grassy Creek Project” shall mean the existing land and production project (including gathering system, water source well, and water disposal well, injection wells, steam injection equipment, tanks and associated equipment and materials) in the Grassy Creek area of Missouri, currently comprised of an Initial Phase, made up of 15 steam injection wells and 46 production wells, all of which are
fully equipped and tied in.  The Project Area for the Grassy Creek Project is the W1/2 Section 16, Township 35N, Range 33W, Vernon County, Missouri, containing 312 acres, more or less.

 

	
(O)
	
The term "Initial Phase" means the first Phase developed by the Operator within a given Project.

 

	
(P)
	
The term “Joint Venture Accountant" shall mean an individual certified as a joint venture auditor by the Petroleum Joint Venture Association.

 

	
(Q)
	
The term “Marmaton River Project” shall mean the existing land and production project (including gathering system, water source well, and water disposal well, injection wells, steam injection equipment, tanks and associated equipment and materials) in the Marmaton area of Missouri, currently comprised of an Initial Phase, made up of 13 steam injection wells and 40 production wells, all of which are fully
equipped and tied in, and a Subsequent Phase, made up of 10 steam injection wells and 24 production wells, all of which have been drilled but which are not yet completed or tied in.  The Project Area for the Marmaton River Project is that portion of the NE1/4 Section 7 south of Highway 54 (containing 121 acres, more or less); the N1/2 SE Section 7 (containing 80 acres, more or less) the easternmost 30 acres in the SESE Section 7; and that portion of the NWNW Section 8 south of Highway 54 (containing
25 acres, more or less), all in Township 35N, Range 33W, Vernon County, Missouri.

 

 

 

5

 

OPERATING AGREEMENT

(continued)

 

	
(R)
	
The term "Non-Consent Well" shall mean a well in which less than all Parties have conducted an operation as provided in Article VI.

 

	
(S)
	
The term "Non-Participating Party" shall mean a Party who elects not to participate in a proposed operation in accordance with a Program.

 

	
(T)
	
The term "Oil and Gas" shall mean oil, gas, casing head gas, gas condensate, and/or all other liquid or gaseous hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is specifically stated.

 

	
(U)
	
The term "Oil and Gas Interests" or "Interests" shall mean unleased fee and mineral interests in Oil and Gas in tracts of land lying within the Contract Area which are owned by the Parties.

 

	
(V)
	
The terms "Oil and Gas Lease", "Lease" and "Leasehold" shall mean the oil and gas leases or interests therein covering tracts of land lying within the Contract Area which are owned by the Parties.

 

	
(W)
	
The term "Participating Party" shall mean a Party who agrees to join in and pay its share of the cost of any operation conducted under the provisions of this agreement.

 

	
(X)
	
The term “PASC” shall mean the Petroleum Accountants Society of Canada’s Joint Venture Audit Committee.

 

	
(Y)
	
The term "Phase" shall mean a series or package of wells drilled in furtherance of a Project and designated as such by the Operator. Typically, but not necessarily, a Phase will be comprised of a number of production wells and steam injection wells, as well as the downhole and surface equipment
necessary to produce and connect such wells to the Facility.

 

	
(Z)
	
The term "Plug Back" shall mean a single operation whereby a deeper Zone is abandoned in order to attempt a Completion in a shallower Zone.

 

	
(AA)
	
The term “Pre-Project Program” shall mean a Program comprised entirely of Pre-Project Wells and related costs and activities.

 

	
(BB)
	
The term "Pre-Project Well" shall mean each and every well drilled pursuant to this Agreement that is located within the Contract Area but not within an already-designated Project Area.

 

	
(CC)
	
The term "Pre-Project Work" means those actions or activities undertaken with the goal of determining the feasibility of implementing a Project including, but not limited to, surface or subsurface studies and evaluations in respect of locating a Program (this may include the drilling of test holes to take cores or samples and to obtain well logs); assessment of the kind, quality and quantity of Oil and Gas to be
exploited by the Program; the prospects for marketing the produced substances; the availability of utilities and other services required by a Project, the acquisition of the surface rights upon which the facilities of a Project will be situated; the Licensing or Permitting of the Project; and all other actions or activities required to make a final decision in respect of incurring the costs of  a Project.

 

 

6

 

OPERATING AGREEMENT

(continued)

 

	
(DD)
	
The term "Program" shall mean a description of the proposed operation or series of operations, and related budget, to be conducted within the Contract Area, or lands pooled or spaced therewith.  The description of a Program shall include sufficient detail to allow the Non-Operator to make an informed decision whether or not it wishes to participate as a Participating Party in such Program, including, without
limitation:

 

	
  
	
(1)
	
An itemized budget of all planned expenditures to be charged to the joint account.

 

	
  
	
(2)
	
A forecast of the production profile and the costs to drill, complete and develop the primary objectives of the Program, including an analysis of the costs of any necessary wells and facilities to be drilled or built, if then known.

 

	
  
	
(3)
	
To the extent known, a description of, and the number of wells to be drilled detailing the primary objective(s) including the surface location, proposed bottomhole location, proposed depth and any other information relevant to the evaluation of the well(s).

 

	
  
	
(4)
	
Any other information in Operator's possession relevant to an evaluation of the Program or which Non-Operator may reasonably request.

 

	
(EE)
	
The term "Project" shall mean a development including a Facility and one or more Phases serviced by such Facility.

 

	
(FF)
	
The term "Project Area" shall mean an area not to exceed 640 acres intended to be serviced in whole or in part by a Facility, an Initial Phase, and Subsequent Phases and designated by the Operator at the time a notice is delivered to the Non-Operators pursuant to Article VI.B hereof in respect of the development of a Project.

 

	
(GG)
	
The term "Recompletion" or "Recomplete" shall mean an operation whereby a Completion in one Zone is abandoned in order to attempt a Completion in a different Zone within the existing wellbore.

 

	
(HH)
	
The term "Rework" shall mean an operation conducted in the wellbore of a well after it is Completed to secure, restore, or improve production in a Zone which is currently open to production in the wellbore.  Such operations include, but are not limited to, well stimulation operations but exclude any routine repair or maintenance work or drilling.  Sidetracking, Deepening, Completing, Recompleting,
or Plugging Back of a well.

 

	
(II)
	
The term "Sidetrack" shall mean the directional control and intentional deviation of a well from vertical so as to change the bottom hole location unless done to straighten the hole or drill around junk in the hole to overcome other mechanical difficulties.

 

	
(JJ)
	
The term "Statutory Holiday" shall means any day that is either or both of:

 

	
  
	
(a)
	
a statutory holiday in the Province of Alberta; or

 

 

 

7

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(b)
	
a statutory holiday in the State of Missouri.

 

	
(KK)
	
The term "Subsequent Phase" shall means any Phase that is not an Initial Phase.

 

	
(LL)
	
The term “Third Project” shall mean the first Project other than the Existing Projects, proposed for construction and operation by the Parties within the Contract Area during the term of this Agreement.

 

	
(MM)
	
The term "Zone" shall mean a stratum of earth containing or thought to contain a common accumulation of Oil and Gas separately producible from any other common accumulation of Oil and Gas.

 

Unless the context otherwise clearly indicates, words used in the singular include the plural, the word "person" includes natural and artificial persons, the plural includes the singular, and any gender includes the masculine, feminine, and neuter.

 

Article II.

EXHIBITS

 

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

 

	
(A)
	
Exhibit "A", shall include the following information:

 

	
  
	
(1)
	
Mineral Property Report, detailing a description of lands subject to this agreement, including restrictions, if any, as to depths, formations, or substances, participating interests of the Parties, and burdens on production

	
  
	
(2)
	
Plat indicating the Contract Area

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

 

	
(B)
	
Exhibit "B", Form of Lease

	
(C)
	
Exhibit "C", Accounting Procedure

	
(D)
	
Exhibit "D", Insurance

	
(E)
	
Exhibit "E", Non-Discrimination and Certification of Non-Segregated Facilities

	
(F)
	
Exhibit "F", Model Form Recording Supplement

	
(G)
	
Exhibit "G", Well Data Requirement Sheet

 

If any provision of any exhibit, except Exhibits "E" and "F", is inconsistent with any provision contained in the body of this agreement, the provisions in the body of this agreement shall prevail.

 

Article III.

INTERESTS OF PARTIES

 

	
A.
	
Oil and Gas Interests:

 

If any Party owns an Oil and Gas Interest in the Contract Area, such Interest shall be treated for all purposes of this agreement and during the term hereof as if it were covered by the form of Oil and Gas Lease attached hereto as Exhibit "B", and the owner thereof shall be deemed to own both royalty interest in such lease and the interest
of the lessee thereunder.

 

 

8

 

OPERATING AGREEMENT

(continued)

 

 

	
B. 
	
Interests of Parties in Costs and Production:

 

Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the Parties as their interests are set forth in Exhibit "A".  In the same manner, the Parties shall also
own all production of Oil and Gas from the Contract Area subject, however, to the payment of royalties and other burdens on production as described hereafter.  Regardless of which Party has contributed any Oil and Gas Lease or Oil and Gas Interest on which royalty or other burdens may be payable and except as otherwise expressly provided in this agreement, each Party shall pay or deliver, or cause to be paid or delivered, all burdens on its share of the production from the Contract Area, and shall indemnify,
defend and hold the other Parties free from any liability therefor.

 

No Party shall ever be responsible, on a price basis higher than the price received by such Party, to any other Party's lessor or royalty owner, and if such other Party's lessor or royalty owner should demand and receive settlement on a higher price basis, the Party contributing the affected Lease shall bear the additional royalty burden
attributable to such higher price.  Nothing contained in this Article III.B shall be deemed an assignment or cross-assignment of interests covered hereby, and in the event two or more Parties contribute to this agreement jointly owned Leases, the Parties' undivided interests in said Leaseholds shall be deemed separate leasehold interests for the purposes of this agreement.

 

	
C.
	
Subsequently Created Interests:

 

If any Party has contributed hereto a Lease or Interest that is burdened with an assignment of production given as security for the payment of money, or if, after the date of this agreement, any Party creates an overriding royalty, production payment, net profits interest, assignment of production or other burden payable out of production
attributable to its working interest hereunder, such burden shall be deemed a "Subsequently Created Interest". Further, if any Party has contributed hereto a Lease or Interest burdened with an overriding royalty, production payment, net profits interests, or other burden payable out of production created prior to the date of this agreement, and such burden is not shown on Exhibit "A", such burden also shall be deemed a Subsequently Created Interest.

 

The Party whose interest is burdened with the Subsequently Created Interest (the "Burdened Party") shall assume and alone bear, pay and discharge the Subsequently Created Interest and shall indemnify, defend and hold harmless the other Parties from and against any liability therefor.  Further, if the Burdened Party fails to pay,
when due, its share of expenses chargeable hereunder, all provisions of Article VII.B shall be enforceable against the Subsequently Created Interest in the same manner as they are enforceable against the working interest of the Burdened Party.  If the Burdened Party is required under this agreement to assign or relinquish to any other Party, or Parties, all or a portion of its working interest and/or the production attributable thereto, said other Party, or Parties, shall receive said assignment and/or
production free and clear of said Subsequently Created Interest, and the Burdened Party shall indemnify, defend and hold harmless said other Party, or Parties, from any and all claims and demands for payment asserted by owners of the Subsequently Created Interest.

 

 

 

 

9

 

OPERATING AGREEMENT

(continued)

Article IV.

TITLES

 

	
A.
	
Title Examination:

 

Title examination shall be made on the Drillsite of any proposed well prior to commencement of drilling operations and, if Operator so elects, title examination shall be made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of the well or on the entire Project Area of which such Drillsite forms part, at Operator's discretion.  The
opinion will include the ownership of the working interest, minerals, royalty, overriding royalty and production payments under the applicable Leases.   Each Party contributing Leases and/or Oil and Gas Interests to be included in the Drillsite, Drilling Unit or Project Area, if appropriate, shall furnish to Operator all abstracts (including federal lease status reports), title opinions, title papers and curative material in its possession free of charge.  All such information not in
the possession of or made available to Operator by the Parties, but necessary for the examination of the title, shall be obtained by Operator.  Operator shall cause title to be examined by attorneys on its staff or by outside attorneys.  Copies of all title opinions shall be furnished to each Participating Party.  Costs incurred by Operator in procuring abstracts, fees paid outside attorneys for title examination (including preliminary, supplemental, shut-in royalty opinions and
division order title opinions) and other direct charges as provided in Exhibit "C" shall be borne by the Participating Parties in the proportion that the interest of each Participating Party bears to the total interest of all Participating Parties as such interests appear in Exhibit "A".  Operator shall make no charge for services rendered by its staff attorneys or other personnel in the performance of the above functions.

 

Each Party shall be responsible for securing curative matter and pooling amendments or agreements required in connection with Leases or Oil and Gas Interests contributed by such Party.  Operator shall be responsible for the preparation and recording of pooling designations or declarations and communitization agreements as well
as the conduct of hearings.  Costs incurred by Operator, including fees paid to outside attorneys or field landmen, which are associated with hearings before governmental agencies, and which costs are necessary and proper for the activities contemplated under this agreement, shall be direct charges to the joint account and shall not be covered by the administrative overhead charges as provided in Exhibit "C".  Operator shall make no charge for services rendered by its staff attorneys or other
personnel in the performance of the above functions.

 

No well shall be drilled on the Contract Area until after (1) the title to the Drillsite or Drilling Unit or Project Area, if appropriate, has been examined as above provided, and (2) the title has been approved by the examining attorney or title has been accepted by the Operator.

 

	
B.
	
Loss or Failure of Title:

 

	
  
	
(1)
	
Failure of Title: Should any Oil and Gas Interest or Oil and Gas Lease be lost through failure of title, which results in a reduction of interest from that shown on Exhibit "A", the Party credited with contributing the affected Lease or Interest (including, if applicable, a successor in interest to such Party) shall have ninety (90) days from final
determination of title failure to acquire a new lease or other instrument curing the entirety of the title failure, which acquisition will not be subject to Article VIII.B, and failing to do so, this agreement, nevertheless, shall continue in force as to all remaining Oil and Gas Leases and Interests; and,

 

 

10

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(a)
	
The Party credited with contributing the Oil and Gas Lease or Interest affected by the title failure (including, if applicable, a successor in interest to such Party) shall bear alone the entire loss and it shall not be entitled to recover from Operator or the other Parties any development or operating costs which it may have previously paid or incurred, but there shall be no additional liability on its part to the
other Parties by reason of such title failure;

 

	
  
	
(b)
	
There shall be no retroactive adjustment of expenses incurred or revenues received from the operation of the Lease or Interest which has failed, but the interests of the Parties contained on Exhibit "A" shall be revised on an acreage basis, as of the time it is determined finally that title failure has occurred, so that the interest of the Party whose Lease or Interest is affected by the title failure will thereafter
be reduced in the Contract Area by the amount of the Lease or Interest failed;

 

	
  
	
(c)
	
If the proportionate interest of the other Parties in any producing well previously drilled on the Contract Area is increased by reason of the title failure, the Party who bore the costs incurred in connection with such well attributable to the Lease or Interest which has failed shall receive the proceeds attributable to the increase in such interest (less costs and burdens attributable thereto) until it has been
reimbursed for unrecovered costs paid by it in connection with such well attributable to such failed Lease or Interest;

 

	
  
	
(d)
	
Should any person not a party to this agreement, who is determined to be the owner of any Lease or Interest which has failed, pay in any manner any part of the cost of operation, development, or equipment, such amount shall be paid to the Party or Parties who bore the costs which are so refunded;

 

	
  
	
(e)
	
Any liability to account to a person not a party to this agreement for prior production of Oil and Gas which arises by reason of title failure shall be borne severally by each Party (including a predecessor to a current Party) who received production for which such accounting is required based on the amount of such production received, and each such Party shall severally indemnify, defend and hold harmless all other
Parties for any such liability to account;

 

	
  
	
(f)
	
No charge shall be made to the joint account for legal expenses, fees or salaries in connection with the defence of the Lease or Interest claimed to have failed, but if the Party contributing such Lease or Interest hereto elects to defend its title it shall bear all expenses in connection therewith; and

 

	
  
	
(g)
	
If any Party is given credit on Exhibit "A" to a Lease or Interest which is limited solely to ownership of an interest in the wellbore of any well or wells and the production therefrom, such Party's absence of interest in the remainder of the Contract Area shall be considered a Failure of Title as to such remaining Contract Area unless that
absence of interest is reflected on Exhibit "A".

 

 

 

11

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(2)
	
Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake or oversight, any rental, shut-in well payment, minimum royalty or royalty payment, or other payment necessary to maintain all or a portion of an Oil and Gas Lease or interest is not paid or is erroneously paid, and as a result a Lease or Interest terminates, there shall be
no monetary liability against the Party who failed to make such payment.   Unless the Party who failed to make the required payment secures a new Lease or Interest covering the same interest within ninety (90) days from the discovery of the failure to make proper payment, which acquisition will not be subject to Article VIII.B, the interests of the Parties reflected on Exhibit "A" shall be revised on an acreage basis, effective as of the date of termination of the Lease or Interest involved, and
the Party who failed to make proper payment will no longer be credited with an interest in the Contract Area on account of ownership of the Lease or Interest which has terminated.  If the Party who failed to make the required payment shall not have been fully reimbursed, at the time of the loss, from the proceeds of the sale of Oil and Gas attributable to the lost Lease or Interest, calculated on an acreage basis, for the development and operating costs previously paid on account of such Lease or Interest,
it shall be reimbursed for unrecovered actual costs previously paid by it (but not for its share of the cost of any dry hole previously drilled or wells previously abandoned) from so much of the following as is necessary to effect reimbursement:

 

	
  
	
(a)
	
Proceeds of Oil and Gas produced prior to termination of the Lease or Interest, less operating expenses and lease burdens chargeable hereunder to the person who failed to make payment, previously accrued to the credit of the lost Lease or Interest, on an acreage basis, up to the amount of unrecovered costs;

 

	
  
	
(b)
	
Proceeds of Oil and Gas, less operating expenses and lease burdens chargeable hereunder to the person who failed to make payment, up to the amount of unrecovered costs attributable to that portion of Oil and Gas thereafter produced and marketed (excluding production from any wells thereafter drilled) which, in the absence of such Lease or Interest termination, would be attributable to the lost Lease or Interest on
an acreage basis and which as a result of such Lease or Interest termination is credited to other Parties, the proceeds of said portion of the Oil and Gas to be contributed by the other Parties in proportion to their respective interests reflected on Exhibit "A"; and,

 

	
  
	
(c)
	
Any monies, up to the amount of unrecovered costs, that may be paid by any Party who is, or becomes, the owner of the Lease or Interest lost, for the privilege of participating in the Contract Area or becoming a Party to this agreement.

 

	
  
	
(3)
	
Other Losses: All losses of Leases or Interests committed to this agreement, other than those set forth in Article IV.B(1) and Article IV.B(2) above, shall be joint losses and shall be borne by all Parties in proportion to their interests shown on Exhibit "A".  This
shall include but not be limited to the loss -of any Lease or Interest through failure to develop or because express or implied covenants have not been performed (other than performance which requires only the payment of money), and the loss of any Lease by expiration at the end of its primary term if it is not renewed or extended.  There shall be no readjustment of interests in the remaining portion of the Contract Area on account of any joint loss.

 

 

12

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(4)
	
Curing Title: In the event of a Failure of Title under Article IV.B(1) or a loss of title under Article IV.B(2) above, any Lease or Interest acquired by any Party (other than the Party whose interest has failed or was lost) during the ninety (90) day period provided by Article IV.B(1) and Article IV.B(2) above covering all or a portion of the interest
that has failed or was lost shall be offered at cost to the Party whose interest has failed or was lost, and the provisions of Article VIII.B shall not apply to such acquisition.

 

Article V.

OPERATOR

 

	
A.
	
Designation and Responsibilities of Operator:

 

MegaWest Energy Missouri Corp. shall be the Operator of the Contract Area, and shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement.   In its performance of services hereunder for the Non-Operators, Operator shall be an
independent contractor not subject to the control or direction of the Non-Operators except as to the type of operation to be undertaken in accordance with the election procedures contained in this agreement.  Operator shall not be deemed, or hold itself out as, the agent of the Non-Operators with authority to bind them to any obligation or liability assumed or incurred by Operator as to any third party.  Operator shall conduct its activities under this agreement as a reasonable prudent operator,
in a good and workmanlike manner, with due diligence and dispatch, in accordance with good oilfield practice, and in compliance with applicable law and regulation, but in no event shall it have any liability as Operator to the other Parties or their officers, employees or agents for losses sustained or liabilities incurred, whether or not due to the negligence of Operator, except such as may result from gross negligence or wilful misconduct.

 

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

 

	
  
	
(1)
	
Resignation or Removal of Operator: Operator may resign at any time by giving written notice thereof to Non-Operators.  If Operator terminates its legal existence, no longer owns an interest hereunder in the Contract Area, or is no longer capable of serving as Operator, Operator shall be deemed to have resigned without any action by Non-Operators,
except the selection of a successor.  Operator may be removed only for good cause by the affirmative vote of Non-Operators owning a majority interest based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of Operator; such vote shall not be deemed effective until a written notice has been delivered to the Operator by a Non-Operator detailing the alleged default and Operator has failed to cure the default within thirty (30) days from its receipt of the notice or, if
the default concerns an operation then being conducted, within forty-eight (48) hours of its receipt of the notice.  For purposes hereof, "good cause" shall mean not only gross negligence or wilful misconduct but also the material breach of or inability to meet the standards of operation contained in Article V.A or material failure or inability to perform its obligations under this agreement.

 

 

13

 

OPERATING AGREEMENT

(continued)

 

Subject to Article VII.D(1), such resignation or removal shall not become effective until 7:00 o'clock A.M. on the first day of the calendar month following the expiration of ninety (90) days after the giving of notice of resignation by Operator or action by the Non-Operators to remove Operator, unless a successor Operator has been selected
and assumes the duties of Operator at an earlier date.  Operator, after effective date of resignation or removal, shall be bound by the terms hereof as a Non-Operator.  A change of a corporate name or structure of Operator or transfer of Operator's interest to any single affiliate, subsidiary, parent or successor corporation shall not be the basis for removal of Operator.

 

	
  
	
(2)
	
Selection of Successor Operator: Upon the resignation or removal of Operator under any provision of this agreement, a successor Operator shall be selected by the Parties.   The successor Operator shall be selected from the Parties owning an interest in the Contract Area at the time such successor Operator is selected.  The successor
Operator shall be selected by the affirmative vote of two (2) or more Parties owning a majority interest based on ownership as shown on Exhibit "A"; provided, however, if an Operator which has been removed or is deemed to have resigned fails to vote or votes only to succeed itself, the successor Operator shall be selected by the affirmative vote of the Party or Parties owning a majority interest based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of the Operator that was removed
or resigned.   The former Operator shall promptly deliver to the successor Operator all records and data relating to the operations conducted by the former Operator to the extent such records and data are not already in the possession of the successor operator.   Any cost of obtaining or copying the former Operator's records and data shall be charged to the joint account.

 

	
  
	
(3)
	
Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is placed in receivership, it shall be deemed to have resigned without any action by Non-Operators, except the selection of a successor.  If a petition for relief under the federal bankruptcy laws is filed by or against Operator, and the removal of Operator is prevented by the
federal bankruptcy court, all Non-Operators and Operator shall comprise an interim operating committee to serve until Operator has elected to reject or assume this agreement pursuant to the Bankruptcy Code, and an election to reject this agreement by Operator as a debtor in possession, or by a trustee in bankruptcy, shall be deemed a resignation as Operator without any action by Non-Operators, except the selection of a successor.  During the period of time the operating committee controls operations,
all actions shall require the approval of two (2) or more Parties owning a majority interest based on ownership as shown on Exhibit "A". In the event there are only two (2) Parties, during the period of time the operating committee controls operations, a third party acceptable to Operator, Non-Operator and the federal bankruptcy court shall be selected as a member of the operating committee, and all actions shall require the approval of two (2) members of the operating committee without regard for their interest
in the Contract Area based on Exhibit "A".

 

	
C.
	
Employees and Contractors:

 

 

 

14

 

OPERATING AGREEMENT

(continued)

 

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

 

	
D.
	
Rights and Duties of Operator:

 

	
  
	
(1)
	
Competitive Rates and Use of Affiliates: All wells drilled on the Contract Area shall be drilled on a competitive contract basis at the usual rates prevailing in the area.  If it so desires, Operator may employ its own tools and equipment in the drilling of wells, but its charges therefor shall not exceed the prevailing rates in the area and
such work shall be performed by Operator under the same terms and conditions as are customary and usual in the area in contracts of independent contractors who are doing work of a similar nature.  All work performed or materials supplied by affiliates or related parties of Operator shall be performed or supplied at competitive rates, pursuant to written agreement, and in accordance with customs and standards prevailing in the industry.

 

	
  
	
(2)
	
Discharge of Joint Account Obligations: Except as herein otherwise specifically provided, Operator shall promptly pay and discharge expenses incurred in the development and operation of the Contract Area pursuant to this agreement and shall charge each of the Parties with their respective proportionate shares upon the expense basis provided in Exhibit
"C" and as allocated by Project Area and each Party’s interest in such Project Areas of the date such expense was incurred.  Operator shall keep an accurate record of the joint account hereunder, showing expenses incurred and charges and credits made and received.

 

	
  
	
(3)
	
Protection from Liens: Operator shall pay, or cause to be paid, as and when they become due and payable, all accounts of contractors and suppliers and wages and salaries for services rendered or performed, and for materials supplied on, to or in respect of the Contract Area or any operations for the joint account thereof and shall keep the Contract
Area free from liens and encumbrances resulting therefrom except for those resulting from a bona fide dispute as to services rendered or materials supplied.

 

	
  
	
(4)
	
Custody of Funds: Operator shall hold for the account of the Non-Operators any funds of the Non-Operators advanced or paid to the Operator, either for the conduct of operations hereunder or as a result of the sale of production from the Contract Area, and such funds shall remain the funds of the Non-Operators on whose account they are advanced or paid
until used for their intended purpose or otherwise delivered to the Non-Operators or applied toward the payment of debts as provided in Article VII.B.   Nothing in this paragraph shall be construed to establish a fiduciary relationship between Operator and Non-Operators for any purpose other than to account for Non-Operator funds as herein specifically provided.   Nothing in this paragraph shall require the maintenance by Operator of separate accounts for the funds of Non-Operators
unless the Parties otherwise specifically agree.

 

 

 

 

15

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(5)
	
Access to Contract Area and Records: As to each Project Area separately, Operator shall, except as otherwise provided herein, permit each Participating Party or its duly authorized representative, at the Participating Party's sole risk and cost, full and free access at all
reasonable times to all operations of every kind and character being conducted for the joint account on the Contract Area and to the records of operations conducted thereon or production therefrom, including Operator's books and records relating thereto.  Such access rights shall not be exercised in a manner interfering with Operator's conduct of an operation hereunder and shall not obligate Operator to furnish any geologic or geophysical data of an interpretive nature unless the cost of preparation
of such interpretive data was charged to the requesting Party.  As to each Project Area separately, Operator will furnish to each Participating Party upon request copies of any and all reports and information obtained by Operator in connection with production and related items, including, without limitation, meter and chart reports, production purchaser statements, run tickets and monthly gauge reports, but excluding purchase contracts and pricing information to the extent not applicable to the production
of the Participating Party seeking the information.  Any audit of Operator's records relating to amounts expended and the appropriateness of such expenditures shall be conducted in accordance with the audit protocol specified in Exhibit "C".

 

	
  
	
(6)
	
Filing and Furnishing Governmental Reports:  Operator will file, and upon written request promptly furnish copies to each requesting Non-Operator, all operational notices, filings, reports and applications required to be filed by local, State, Federal or Indian agencies or authorities having jurisdiction over operations hereunder.  Each
Non-Operator shall provide to Operator on a timely basis all information necessary for Operator to make such filings.  Operator shall use its best judgment in making any of the filings, and preparing any of the notices, reports and applications referred to above.  However, in no event shall Operator have any liability to any Non-Operator in making and prosecuting any such filing or in rendering any notice, report or application, absent bad faith, gross negligence or wilful misconduct.  Any
penalties incurred as a result of any incorrect filing, notice, report or application shall, in absence of bad faith, gross negligence or wilful misconduct, be charged to the Parties owning the production to which the penalty pertains.

 

	
  
	
(7)
	
Drilling and Testing Operations: As to each Project Area separately, the following provisions shall apply to each well drilled hereunder:

 

	
  
	
(a)
	
Operator will promptly advise Participating Parties of the date on which the well is spudded, or the date on which drilling operations are commenced.

 

	
  
	
(b)
	
Operator will send to Participating Parties such reports, test results and notices regarding the progress of operations on the well as the Non-Operators shall reasonably request, including, but not limited to, daily drilling reports, completion reports, and well logs.

 

	
  
	
(c)
	
Operator shall adequately test all Zones encountered which may reasonably be expected to be capable of producing Oil and Gas in paying quantities as a result of examination of the electric log or any other logs or cores or tests conducted hereunder.

 

 

 

 

16

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(8)
	
Cost Estimates: As to each Project Area separately, upon request of any Participating Party, Operator shall furnish estimates of current and cumulative costs incurred for the joint account at reasonable intervals during the conduct of any operation pursuant to this agreement.  Operator shall not be held liable for errors in such estimates
so long as the estimates are made in good faith.

 

	
  
	
(9)
	
Insurance: At all times while operations are conducted hereunder.  Operator shall comply with the workers compensation law of the state where the operations are being conducted; provided, however, that Operator may be a self-insurer for liability under said compensation laws in which event the only charge that shall be made to the joint account
shall be as provided in Exhibit "C".  Operator shall also carry or provide insurance for the benefit of the joint account of the Parties as outlined in Exhibit "D" attached hereto and made a part hereof Operator shall require all contractors engaged in work on or for the Contract Area to comply with the workers compensation law of the state where the operations are being conducted and to maintain such other insurance as Operator may require.  In the event automobile liability insurance is
specified in said Exhibit "D", or subsequently receives the approval of the Parties, no direct charge shall be made by Operator for premiums paid for such insurance for Operator's automotive equipment.

 

Each Non-Operator shall indemnify and hold Operator harmless against any and all liability in excess of insurance coverage carried for the joint account for injury to each such Non-Operator's officers, employees and/or agents, resulting from or in any way relating to such officers, employees and/or agents presence on a drilling rig on
the Contract Area or from such person traveling to such drilling rig.  Such indemnity to Operator shall also apply when any Non-Operator requests any other person to be present on the rig or transported to or from such rig is at the instance of such Non-Operator.

 

Article VI.

DRILLING AND DEVELOPMENT

 

	
A.
	
Pre-Project Wells:

 

	
  
	
(1)
	
Notice of New Well

 

Either Party to this Agreement may propose any Pre-Project Well or Pre-Project Program prior to commencing operations for the drilling of such Pre-Project Well or Pre-Project Program. The proposing Party shall deliver to all other Parties notice of its intent to commence such operations.  Such notice shall include sufficient
detail to allow each Party to make an informed decision as to whether or not it desires to participate in the drilling of such Pre-Project Well or Pre-Project Program, including, without limitation:

 

	
  
	
(a)
	
an itemized budget of all planned expenditures in respect of the proposed operations;

 

	
  
	
(b)
	
a forecast of the costs to drill, Complete and develop the proposed operations, including an analysis of the costs of any necessary wellsite facilities to be used, if then known; and

 

 

 

 

17

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(c)
	
the surface location, proposed bottom hole location, proposed depth and any other information relevant to the evaluation of all wells to be drilled.

 

If Operator is the proposing Party, such notice shall also include any other information in Operator's possession relevant to an evaluation of the Pre-Project Well or Pre-Project Program which Non-Operator may reasonably request.

 

A notice delivered by a Party in accordance with this Article VI.A(1) shall be validly issued so long as all information contained therein is accurate and correct to the knowledge, information and belief of such Party, and shall not be rendered invalid by the fact that the operations conducted in respect of the proposed operation or the
expenditures in respect of such operation may differ from those set forth in the notice delivered by such Party, so long as all such operations are conducted by such Party, and all such expenditures made by such Party, are made on a bona fide basis and in accordance with good oilfield practice.

 

	
  
	
(2)
	
Deadline for Response to Notice

 

Upon any proposal pursuant to Article VI.A(1), each non proposing Party shall, within twenty (20) Business Days of receipt of the notification provided for in Article VI.A(1), advise the Operator and the proposing Party in writing as to its election to participate or not participate
in the proposed operation.  If any Party does not deliver such written election to Operator and the proposing Party within the twenty (20) Business Day period, then the proposing Party shall deliver to such Party, via facsimile and email,  a written notice of pending deemed non election.  If such Party fails to deliver an election on or before five (5) Business Days after receipt of such notice, such Party shall be deemed to have elected not to participate in the proposed operation.

 

If a Non-Operator is the proposing Party, and the Operator is a participating Party, the Operator shall, on behalf of the participating Parties, conduct the proposed operation.  In the event the Operator is not a participating Party, the proposing Party shall become the Operator for the proposed operation and, in respect of the
Project Area apposite to the subject Pre-Project Well or Pre-Project Program, henceforth be recognized as the Operator and shall do and be responsible for all things required of the Operator in respect of the affected Project Area.

 

If a Non-Operator desires to propose a Pre-Project Well or Pre-Project Program pursuant to Article VI.A(1) the Operator shall, upon Non-Operator’s request, assist such Non-Operator with the development of the Program associated with such Pre-Project Well or Pre-Project Program within forty-five (45) days of its receipt of such request.
Further, if operations are not substantially undertaken by the Participating Parties within ninety (90) days of the receipt of notice of the proposing Party’s intent to commence operations for the development of such Pre-Project Well or Pre-Project Program, said proposal shall be deemed void and Operator and/or the proposing Party shall resubmit said proposal to all Parties in accordance with Article VI.A(1).

 

	
  
	
(3)
	
Implications of Non-Participation in Pre-Project Well or Pre-Project Program

 

In the event any Party elects to not participate in a proposed operation for the drilling of a Pre-Project Well or Pre-Project Program or is deemed to have elected not to participate in such operation for the drilling of a Pre-Project Well or Pre-Project Program, such
Party shall forfeit its working interest ownership in the Pre-Project Well or Wells  to the proposing Party from the surface of the earth down to the stratigraphic equivalent of the base of the formation to be penetrated by the proposed wells in the Project and its working interest ownership in any Initial Phase of which such Pre-Project Well may eventually form part and its working interest ownership in any Project Area which may be designated (in good faith for the standard development of Project
Areas) as including any such Initial Phase and its working interest ownership in any Facility which may form part of such Project and its working interest ownership in any Subsequent Phases which may, in whole or in part, be serviced by such Facility, along with any right to participate in such Pre-Project Well, such Initial Phase or such Facility. Such forfeited working interest shall be transferred to the proposing Party in accordance with the provisions of Article VI.E hereof.  Further, such Non-Participating
Party shall forfeit any rights it would otherwise have pursuant to Article V.D(5) hereof to access such Pre-Project Well, such Initial Phase or such Facility, as applicable, or to access records in relation thereto.

 

 

18

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(4)
	
Equalization Opportunity

 

Notwithstanding the provisions of subclause (3) above, in the event a Project Area that is selected for development contains a Pre-Project Well, or a well or wells forming a part of a Pre-Project Program, in which a Party previously elected not to participate, or was deemed to not have participated, such Non-Participating Party will be
afforded a one-time opportunity to participate in such subsequently chosen Project Area by paying to the Participating Parties, in proportion to their respective Participating Interests, a penalty amount of 300% of the cost incurred by the Participating Parties to drill such well(s) (“Penalty Amount”).  The previous Non-Participating Party will receive notice of its Equalization Opportunity coincidentally with the notice of Initial Phase and, if such Party elects to participate in the proposed
Initial Phase, such Party will enclose its Penalty Amount with its written election to participate in the Initial Phase.  Such Party shall thereafter be considered a Participating Party in the affected Project Area as if it had originally participated in the Pre-Project Well or Pre-Project Program, to the extent such Pre-Project Program affects only the Project Area related to the proposed Initial Phase.

 

	
B.
	
Initial Phase:

 

	
  
	
(1)
	
Notice of Initial Phase

 

Regardless of whether or not Pre-Project Work has been conducted, either Party to this Agreement shall, prior to commencing operations for the development of an Initial Phase, deliver to all Parties that are entitled to participate, notice of its intent to commence operations for the development of such Initial Phase.  Such notice
shall include sufficient detail to allow each Party to make an informed decision as to whether or not it desires to participate in the development of such Initial Phase, including, without limitation:

 

	
  
	
(a)
	
an itemized budget of all planned expenditures in respect of such Initial Phase;

 

	
  
	
(b)
	
a forecast of the costs to drill, Complete and develop all wells forming part  of such Initial Phase, including an analysis of the costs of any necessary wellsite facilities to be used, if then known;

 

 

 

 

 

 

 

 

19

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(c)
	
the surface location, proposed bottom hole location, proposed depth and any other information relevant to the evaluation of all wells to form part of such Initial Phase;

 

	
  
	
(d)
	
the surface location and any other information relevant to the evaluation of the Facility to form part of such Initial Phase;

 

	
  
	
(e)
	
a forecast of the costs to acquire, build and develop the Facility to form part of such Initial Phase;

 

	
  
	
(f)
	
a designation of the Project Area to be serviced, in whole or in part, by the Facility forming part of such Initial Phase;

 

	
  
	
(g)
	
a notice from the Operator in respect of an Equalization Opportunity, if appropriate; and

 

	
  
	
(h)
	
if Operator is the proposing Party, such notice shall also include any other information in Operator's possession relevant to an evaluation of the Initial Phase or which Non-Operator may reasonably request.

 

A notice delivered by a Party in accordance with this Article VI.B(1) shall be validly issued so long as all information contained therein is accurate and correct to the knowledge, information and belief of such Party, and shall not be rendered invalid by the fact that the operations conducted in respect of the development of the Initial
Phase or the expenditures in respect of such Initial Phase may differ from those set forth in the notice delivered by such Party, so long as all such operations are conducted by such Party, and all such expenditures made by such Party, are made on a bona fide basis and in accordance with good oilfield practice.

 

	
  
	
(2)
	
Deadline for Response to Notice of Initial Phase

 

Upon any proposal pursuant to Article VI.B(1), each non proposing Party shall, within thirty (30) Business Days of receipt of the notification provided for in Article VI.B(1), advise the Operator and the proposing Party in writing as to its election to participate or not participate in the proposed operation.  If any Party does
not deliver such written election to Operator and the proposing Party within the thirty (30) Business Day period, then the proposing Party shall deliver to such Party, via facsimile and email, a written notice of pending deemed non election.  If such Party fails to delver an election on or before five (5) Business Days after receipt of such notice, then such Party shall be deemed to have elected not to participate in the proposed operation.

 

If a Non-Operator is the proposing Party, and the Operator is a participating Party, the Operator shall, on behalf of the participating Parties, conduct the proposed operation.  In the event the Operator is not a participating Party, the proposing Party shall become the Operator for the proposed operation and, in respect of the
Project Area apposite to the subject Initial Phase, henceforth be recognized as the Operator and shall do and be responsible for all things required of the Operator in respect of the affected Project Area.

 

If a Non-Operator desires to propose an Initial Phase pursuant to Article VI.B(1) the Operator shall, upon Non-Operator’s request, assist such Non-Operator with the development of the Program associated with such Initial Phase within forty-five (45) days of
its receipt of such request including the Equalization Opportunity amount set forth in Article VI.B(1)(g). Further, if operations are not substantially undertaken by the Participating Parties within ninety (90) days of the receipt of notice of the proposing Party’s intent to commence operations for the development of such Initial Phase, said proposal shall be deemed void and Operator and/or the proposing Party shall resubmit said proposal to all Parties in accordance with Article VI.B(1).

 

 

 

20

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(3)
	
Implications of Non-Participation in Initial Phase

 

In the event any Party elects to not participate in the development of an Initial Phase or is deemed to have elected not to participate in the development of an Initial Phase, such Party shall forfeit its working interest ownership in the Initial Phase to the proposing Party from the surface of the earth down to the stratigraphic equivalent
of the base of the formation to be penetrated by the proposed wells in the Project and its working interest ownership in any Project Area which may be designated as including any such Initial Phase and its working interest ownership in any Facility which may form part of such Initial Phase and its working interest ownership in any Subsequent Phases which may, in whole or in part, be serviced by such Facility, along with any right to participate in such Initial Phase or such Facility.  Such forfeited
working interest shall be transferred to the proposing Party in accordance with the provisions of Article VI.E hereof.  Further, such Party shall forfeit any rights it would otherwise have pursuant to Article V.D(5) hereof to access such Initial Phase or such Facility, as applicable, or to access records in relation thereto.

 

	
C.
	
Subsequent Phases:

 

	
  
	
(1)
	
Notice of Subsequent Phase

 

In the event that an Initial Phase has been developed in accordance with Article VI.B hereof and one or more Parties has elected to participate in such Initial Phase pursuant to Article VI.B hereof, either Party to this Agreement shall, prior to commencing operations for the development of any Subsequent Phase within the same Project Area,
deliver to the all Parties that participated in the development of the relevant Initial Phase notice of such proposing Party’s intent to commence operations for the development of such Subsequent Phase.  Such notice shall include sufficient detail to allow each Party to make an informed decision as to whether or not it desires to participate in the development of such Subsequent Phase, including, without limitation:

 

	
  
	
(a)
	
an itemized budget of all planned expenditures in respect of such Subsequent Phase;

 

	
  
	
(b)
	
a forecast of the costs to drill, Complete and develop all wells forming part  of such Subsequent Phase, including an analysis of the costs of any necessary wellsite facilities to be used, if then known;

 

	
  
	
(c)
	
the surface location, proposed bottom hole location, proposed depth and any other information relevant to the evaluation of all wells to form part of such Subsequent Phase;

 

	
  
	
(d)
	
the surface location and any other information relevant to the evaluation of the applicable Facility to service, in whole or in part, such Subsequent Phase; and

 

 

21

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(e)
	
a forecast of the costs to alter the applicable Facility to service, in whole or in part,  such Subsequent Phase.

 

If Operator is the proposing Party, such notice shall also include any other information in the Operator’s possession relevant to an evaluation of the Subsequent Phase or which Non-Operator may reasonably request.

 

A notice delivered by any Party in accordance with this Article VI.C(1) shall be validly issued so long as all information contained therein is accurate and correct to the knowledge, information and belief of such Party, and shall not be rendered invalid by the fact that the operations conducted in respect of the development of the Subsequent
Phase or the expenditures in respect of such Subsequent Phase may differ from those set forth in the notice delivered by such Party, so long as all such operations are conducted by such Party, and all such expenditures made by such Party, are made on a bona fide basis and in accordance with good oilfield practice.

 

For greater certainty, any Party which has elected to not participate in the  subsequent development of an Initial Phase or which has been deemed to have elected not to participate in the development of an Initial Phase shall not be entitled to receive any notice pursuant to this Article VI.C(1) for the development of a Subsequent
Phase to be serviced, in whole or in part, by a Facility forming part of such Initial Phase, as such Party shall have forfeited its working interest ownership in the entire Project Area encompassing said Initial Phase and Facility and any further participation in any Subsequent Phases which may, in whole or in part, be serviced by such Facility, all in accordance with the provisions of Article VI.A(3) hereof.

 

	
  
	
(2)
	
Deadline for Response to Notice of Subsequent Phase

 

Upon any proposal pursuant to Article VI.C(1), each non proposing Party shall, within thirty (30) Business Days of receipt of the notification provided for in Article VI.C(1), advise the Operator and the proposing Party in writing as to its election to participate or not participate in the proposed operation.  If any Party does
not deliver such written election to Operator and the proposing Party within the thirty (30) Business Day period, then the proposing Party shall deliver to such Party, via facsimile and email, a written notice of pending deemed non election.  If such Party fails to deliver an election on or before five (5) Business Days after receipt of such notice, then such Party shall be deemed to have elected not to participate in the proposed operation.

 

If a Non-Operator is the proposing Party, and the Operator is a participating Party, the Operator shall, on behalf of the participating Parties, conduct the proposed operation.  In the event the Operator is not a participating Party, the proposing Party shall become the Operator for the proposed operation and, in respect of the
Project Area apposite to the subject Subsequent Phase, henceforth be recognized as the Operator and shall do and be responsible for all things required of the Operator in respect of the affected Project Area.

 

If a Non-Operator desires to propose a Subsequent Phase pursuant to Article VI.C(1) the Operator shall, upon Non-Operator’s request, assist such Non-Operator with the development of the Program associated with such Subsequent Phase within forty-five (45)
days of its receipt of such request. Further, if operations are not substantially undertaken by the Participating Parties within ninety (90) days of the receipt of notice of the proposing Party’s intent to commence operations for the development of such Subsequent Phase, said proposal shall be deemed void and Operator and/or the proposing Party shall resubmit said proposal to all Parties in accordance with Article VI.B(1).

 

 

 

 

22

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(3)
	
Implications of Non-Participation in Subsequent Phase

 

In the event any Party elects to not participate in the development of a Subsequent Phase or is deemed to have elected not to participate in the development of a Subsequent Phase, the working interest of such Party from the surface of the earth down to the stratigraphic equivalent of the base of the formation to be penetrated by the proposed
wells in the entirety of the Project Area containing such Subsequent Phase shall be adjusted in accordance with the provisions of Article VI.E hereof.

 

	
D.
	
Funding of Operations:

 

	
  
	
(1)
	
Invoicing

 

With regard to any and all activities conducted pursuant to this Agreement affecting the joint account, the Operator will invoice the Parties on a monthly basis for the fees, expenses and other charges and expenditures incurred by the Operator in accordance with the Accounting Procedure attached hereto as Exhibit "C". Each Party shall
have ten (10) Business Days from the receipt of such invoice to provide Operator with written notice of any dispute of fees, expenses or other charges.

 

	
  
	
(2)
	
Payment

 

Unless an invoice is subject to a dispute by any Party, the Non-Operator(s) will pay Operator the full amount specified in the invoice within thirty (30) Business Days after receiving Operator's invoice. If an invoice is subject to a dispute, the Non-Operator(s) shall not be obligated to pay Operator the disputed portion of such invoice
and the Parties will work together to agree on a payment of the disputed items within thirty (30) from the receipt of the notice of dispute. If the Parties can not resolve the disputed items, such items shall be resolved by submitting the same to a Joint Venture Accountant agreed to by all Parties; in the event that all Parties are unable to agree on a Joint Venture Accountant to whom the matter shall be submitted, the selection of an appropriate Joint Venture Accountant shall be referred to a member of PASC
selected by the Operator, and the unresolved items shall be resolved by submitting the same to a Joint Venture Accountant selected by such PASC member. The Joint Venture Accountant so selected shall be instructed to decide on a resolution of the dispute(s) regarding the invoice within thirty (30) days after having the relevant materials submitted for review.  The Parties hereby agree that decision of such Joint Venture Accountant shall be binding and non-appealable by the Parties.  The fees
and expenses associated with the resolution of the invoice dispute shall be borne equally by the Operator and the Party(ies) disputing the invoice. Any amounts owed by any Party to Operator as a result of a decision by such Joint Venture Accountant shall be paid to Operator by the disputing Party(ies) within ten (10) Business Days from the decision of such Joint Venture Accountant.

 

 

 

 

23

 

OPERATING AGREEMENT

(continued)

 

(3)           Implications of Failure to Make Timely Payment

 

In the event that any Non-Operator fails to pay any invoice not in dispute within thirty (30) Business Days after receipt of such invoice, Operator shall deliver to such Party, via facsimile and email, written notice of default.  If such Party fails to cure such default on or before five (5) Business Days after receipt of such
notice of default, then the working interest of such Party in and to the entirety of the Project Area to which the unpaid invoice relates shall be adjusted in accordance with the provisions of Article VI.E hereof.

 

	
E.
	
Adjustment of Project Ownership:

 

	
  
	
(1)
	
Ownership to be Consistent Throughout Any Given Project

 

The parties acknowledge and agree that it is impractical and undesirable to have inconsistent working interest ownership within any given Project, and agree that this Agreement shall at all times be interpreted so as to require and result in the working interest ownership of all Parties in all portions or aspects of any given Project to
be absolutely uniform and consistent within such Project.

 

	
  
	
(2)
	
Mechanism for Adjustment of Project Ownership

 

In the event that any provision of this Agreement requires that the working interest ownership within any given Project Area be adjusted so as to maintain absolutely uniform and consistent working interest ownership of all Parties in all portions or aspects of such Project Area, the working interest ownership of each Party in all portions
or aspects of such Project Area shall be adjusted as follows:

 

	
  
	
(a)
	
the working interest ownership of each Party in all portions or aspects of such Project Area shall equal a fraction, the numerator of which is the sum of all amounts contributed by such Party toward all portions or aspects of such Project Area and the denominator of which is the total of all amounts expended by the Operator toward all portions or aspects of such Project Area;

 

all fractions calculated in accordance with the preceding paragraph shall be expressed as a percentage, multiplied by one hundred and rounded to four decimal places; and

 

if required in order that all percentages calculated in accordance with the preceding paragraph shall total one hundred (100.0000%) per cent, all percentages calculated in accordance with the preceding paragraph shall be rounded, by the smallest cumulative amount possible, such that such percentages total one hundred (100.0000%) per cent.

 

	
  
	
(3)
	
Effective Dates for any Adjustment of Project Ownership

 

For the purposes of determining when adjustments of ownership made in accordance with the provisions of this Article VI.E become effective, the Parties agree with the following:

 

	
  
	
(a)
	
in the event that an adjustment occurs as a result of an election by a Non-Operator not to participate, as of the date of such election;

 

 

 

 

24

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(b)
	
in the event that an adjustment occurs as a result of a deemed election as set out in Article VI.A(2), Article VI.B(2) or Article VI.C(2), not to participate, as of the date for such deemed election, or

 

	
  
	
(c)
	
in the event that an adjustment occurs as a result of a failure by a Non-Operator to make timely payment of amounts due to Operator as set out in Article VI.D, as of the date such payment was due.

 

	
  
	
(4)
	
Transfer of Ownership

 

In order to effectuate the adjustments set forth in this Article VI.E, Operator shall, not more than 90 days following the most recent adjustment of project ownership pursuant to this Article VI.E, prepare all transfer documents relating to the adjustment of project ownership by Project Area and submit such documents for review by all
Parties. Unless any Party objects to said transfer document within fifteen (15) days of its receipt of same, Operator shall distribute the transfer documents to each Party subject to the adjustment of ownership.  Each such Party shall be obligated to properly execute and deliver said documents to Operator, within thirty (30) days of its receipt of the same, unless (i) they give notice to the Operator regarding an alleged error in said document, or (ii) the proposal for such Project has been deemed void
pursuant to Article VI.A(2), Article VI.B(2) or Article VI.C(2).

 

	
F.
	
Resuming Operations at Existing Projects

 

	
  
	
(1)
	
The Parties acknowledge that the Existing Projects are not operational as of the date of this Agreement.

 

	
  
	
(2)
	
Prior to taking any material steps to resuming operations at either Existing Project, Operator shall give ten (10) Business Days written notice to Non-Operator of its intent to resume operations at either or both Existing Projects.  Such notice shall specify, (i) the Existing Project at which Operator proposes to resume operations, (ii) the date on which Operator proposes to resume operations at such Existing
Project (which shall be no less than thirty (30) Business Days from the date of this Agreement), and (iii) Operator's good faith estimate of the cost of resuming operations at such Existing Project.

 

	
  
	
(3)
	
In the event that Operator has not provided Non-Operator with notice of its intent to resume operations within thirty (30) Business Days from the date of this Agreement, Non-Operator shall have the right to propose either or both Existing Projects by serving notice of its intent to resume operations of either or both Existing Projects pursuant to this Article VI.F, which Article shall govern such proposed Existing
Project(s)

 

	
  
	
(4)
	
If the Operator is the proposing Party, any Non-Operator may, at least five (5) Business Days prior to the date proposed for the resumption of operations at either or both Existing Projects in Operator's written notice pursuant to Article VI.F(2) hereof, give written notice to Operator of its election to fund its participating interest share of the costs of resuming operations at such Existing Project(s). Such election
shall obligate such Non-Operator to fund its participating interest share of the costs of resuming operations at such Existing Project(s) but the Parties hereby agree that such Non-Operator’s share of costs shall only be recouped from such Non-Operator’s participating interest share of net production revenue from such Grassy Creek or Marmaton River Project (as applicable), and such Non-Operator shall not be obligated to advance
any portion of the costs or to reimburse Operator for any said costs other than through the offset provisions of this section.

 

 

25

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(5)
	
If the Non-Operator is the proposing Party, Operator and any other Non-Operator may, at least five (5) Business Days prior to the date proposed for the resumption of operations at either or both Existing Projects in Non-Operator’s written notice pursuant to Article VI.F(2) hereof, give written notice to Non-Operator of its election to participate in such Existing Project(s). If the Operator elects to participate
in such Existing Project(s), the Operator shall, on behalf of the participating Parties, conduct the proposed operation.  In the event the Operator is not a participating Party, the Non-Operator shall become the Operator for the proposed operation and henceforth be recognized as the Operator and shall do and be responsible for all things required of the Operator in respect of the affected Project Area.

 

	
  
	
(6)
	
If a Non-Operator desires to propose an Existing Project pursuant to Article VI.F(1) the Operator shall, upon Non-Operator’s request, assist such Non-Operator with the development of the Program associated with such Existing Project within forty-five (45) days of its receipt of such request. If operations are not substantially undertaken by the Participating Parties within ninety (90) days of the receipt of
notice of the proposing Party’s intent to resume operations at either or both Existing Projects, said proposal shall be deemed void and Operator and/or the proposing Party shall resubmit said proposal to all Parties in accordance with Article VI.F(1).

 

	
  
	
(7)
	
The maximum amount payable by Non-Operator from Non-Operator's participating interest share of net production revenue from both Existing Projects in accordance with subsection Article VI.F(3) hereof shall be the sum of US $300,000.00.  If Operator gives notice to Non-Operator that Non-Operator's participating interest share of the cost of resuming operations at the Existing Project exceeds the aggregate
sum of US $300,000.00, the amount by which Non-Operator's participating interest share of the cost of resuming operations at such Existing Project(s) exceeds the sum of US $300,000.00 shall be payable to operator by Non-Operator in accordance with Article VI.F(9) hereof.

 

	
  
	
(8)
	
If any Party fails to make a timely election in accordance with Article VI.F(4) hereof then the proposing Party shall deliver to such Party, via facsimile and email, written notice of default.  If such Party fails to cure such default on or before five (5) Business Days after receipt of such notice, such Party shall be deemed to have elected not to participate in such Existing Project. In the event any
Party elects to not participate in the costs of resuming operations at an Existing Project, such Party shall forfeit to the proposing Party, in accordance with the provisions set forth in Article VI.E hereof, its working interest ownership in the Existing Project, from the surface of the earth down to the stratigraphic equivalent of the base of the formation to be penetrated by the proposed wells in such Existing Project. Further, the proposing Party shall fund such Non-Participating Party’s participating
interest share of the costs of resuming operations at such Existing Project by way of cash payment to the proposing Party.

 

 

 

26

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(9)
	
Any sums payable to Operator or the proposing Party pursuant to Article VI.F (7) or (8) hereof shall be payable within thirty (30) Business Days of receipt by the Participating Parties from Operator or the proposing Party of an invoice for such sums. The Participating Parties shall have ten (10) Business Days from the receipt of such invoice to provide Operator or the proposing Party with written notice of any dispute
of fees, expenses or other charges. In the event that any Party fails to pay any invoice not in dispute within thirty (30) Business Days after receipt of such invoice, Operator or the proposing Party shall deliver to such Party, via facsimile and email, written notice of default. If such Party fails to cure such default on or before five (5) days Business Days after receipt of such notice of default, then the working interest of such Party in and to the entirety of the Project Area to which the unpaid invoice
relates shall be adjusted in accordance with the provisions of Article VI.E hereof. The payment of any invoice that is subject to dispute shall be handled in accordance with the provisions of Article VI.D(2) hereof.

 

	
G.
	
Future Projects - Third Project:

 

	
  
	
(1)
	
Upon or after the first date upon which the following conditions having been met:

 

	
  
	
(a)
	
at least six (6) months having elapsed from the date of this Agreement; and

 

	
  
	
(b)
	
the gross oil production from the Contract Area having exceeded 15,000 barrels during elapsed consecutive thirty (30) day period,

 

Operator and Non-Operator may commit to the development and construction of a Third Project. If Operator does not provide Non-Operator(s) with notice of its intent to initiate such Third Project within thirty (30) days after the conditions of Article VI.G(1) have been met, Non-Operator(s) may propose such Third Project by serving notice
of its intent to construct such Third Project pursuant to Section B of this Article VI, which Article shall govern such proposed Third Project.  Any Party receiving such notice shall respond according to the provisions of said Section B of this Article VI.

 

	
  
	
(2)
	
Each Party shall pay its participating interest share of all costs of the design, construction and operation of the Third Project, which shall be constructed, owned and operated pursuant to and in accordance with the terms of this Agreement.

 

	
H.
	
Future Projects - Fourth Project:

 

	
  
	
(1)
	
Upon or after the first date upon which the following conditions having been met:

 

	
  
	
(a)
	
at least twelve (12) months having elapsed from the date of this Agreement;

 

	
  
	
(b)
	
the gross oil production from the Contract Area having exceeded 15,000 barrels during elapsed consecutive thirty (30) day period; and

 

 

 

 

27

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(c)
	
the Third Project having been constructed and being fully operational

 

Operator and Non-Operator may commit to the development and construction of a Fourth Project. If Operator does not provide Non-Operator(s) with notice of its intent to initiate such Fourth Project within thirty (30) days after the conditions of Article VI.H(1) have been met, Non-Operator(s) may propose such Fourth Project by serving notice
of its intent to construct such Fourth Project pursuant to Section B of this Article VI, which Article shall govern such proposed Fourth Project.  Any Party receiving such notice shall respond according to the provisions of said Section B of this Article VI.

 

	
  
	
(2)
	
Each Party shall pay its participating interest share of all costs of the design, construction and operation of the Fourth Project, which shall be constructed, owned and operated pursuant to and in accordance with the terms of this Agreement.

 

	
I.
	
Future Projects - Projects Subsequent to Fourth Project:

 

	
  
	
(1)
	
Until the Projects pursuant to Articles VI.F, VI.G and VI.H are complete, no Party can propose any Future Project pursuant to the terms of Article VI.B hereof. With respect to any Future Project subsequent to the Fourth Project, either Party to this Agreement may propose such Future Project by serving notice of its intent to construct such Future Project pursuant to Section B of this Article VI, which Article shall
govern such proposed Future Project. Any Party receiving such notice shall advise the Operator and the proposing Party in writing as to its election to participate or not participate in such Future Project within ninety (90) days from the receipt of such notice.  In the event the Operator is the proposing Party, in addition to its notice of intent, Operator shall deliver to Non-Operator, via facsimile or email, a written request for Non-Operators’ election of its option to acquire an additional
undivided ten percent (10%) interest in such Future Project pursuant to Article VI.J hereof (said request shall include an unexecuted copy of the assignment of said ten percent (10%) interest to be delivered upon exercise of said option). In the event a Non-Operator is the proposing Party, and the Operator is a participating Party, the Operator shall, on behalf of the participating Parties, conduct the proposed operation.  In the event the Operator is not a participating Party, the proposing Party shall
become the Operator for the proposed operation and, in respect of the Project Area apposite to the subject Future Project, henceforth be recognized as the Operator and shall do and be responsible for all things required of the Operator in respect of the affected Project Area.

 

	
  
	
(2)
	
If a Non-Operator desires to propose a Future Project pursuant to Article VI.I(1) the Operator shall, upon Non-Operator’s request, assist such Non-Operator with the development of the Program associated with such Future Project within forty-five (45) days of its receipt of such request. If operations are not substantially undertaken by the Participating Parties within ninety (90) days of the receipt of notice
of the proposing Party’s intent to commence operations for the development of such Future Project, said proposal shall be deemed void and Operator and/or the proposing Party shall resubmit said proposal to all Parties in accordance with Article VI.B(1).

 

	
J.
	
Non-Operator's Option to Acquire Additional Interests in Future Projects:

 

 

 

 

28

 

OPERATING AGREEMENT

(continued)

 

	 	
(1)
	
At any time prior to the commencement of construction of any particular Future Project (including, without limitation, the Third Project or the Fourth Project), Non-Operator may give written notice to operator of Non-Operator's election to acquire an additional participating interest of up to, but not more than, 10% in such Future Project in addition to the participating share of such Future
Project to which Non-Operator is entitled in accordance with the terms of this Agreement.

 

	
  
	
(2)
	
Upon Non-Operator giving written notice to Operator of Non-Operator's election to acquire an additional participating interest in any Future Project in accordance with subsection Article VI.J(1)  hereof, Non-Operator shall be liable to pay to Operator an equalization fee equal to US $300,000 if Non-Operator elects to acquire an additional 10% participating interest, and a proportionate equalization fee
if Non-Operator elects to acquire an additional participating interest of less than 10%; and

 

	
  
	
(3)
	
Upon Non-Operator having paid to Operator the equalization fee provided for in Article VI.J(2)(a)  hereof, Non-Operator shall have acquired its entire increased participating interest share in such Future Facility.  Until such time as Non-Operator has paid to Operator the equalization fee provided for in Article VI.J(2)(a) hereof, Non-Operator shall not have acquired any increased participating
interest share in such Future Facility.

 

	
  
	
(4)
	
For greater certainty, a separate equalization fee shall be payable by Non-Operator in respect of each and every election by Non-Operator to acquire an additional participating interest of up to, but not more than, 10% in any Future Project in accordance with Article VI.J(1) hereof.

 

	
K.
	
Construction of Facilities:

 

As to any Facilities included in a Project, Operator shall be obligated to timely build and place into operation in a good and workmanlike manner the Facilities approved for any given Project Area.  The Program for any such Facilities, (including without limitation, water management facilities, steam generation facilities, production
facilities, steam injection facilities and water injection facilities) shall include sufficient detail to allow the Participating Parties to approve or disapprove the proposed construction, and without limitation the following:

 

	
  
	
(1)
	
Description of the Facility including (i) size and capacity and (ii) the manufacturer of the equipment to be installed with copies of the manufacturer’s descriptive material for such equipment.

 

	
  
	
(2)
	
Opinion of engineer as to volumes of water and/or steam needed to recover efficient levels of production from the Phase, ability of the proposed Facility to deliver those volumes and availability of sufficient water and other utilities to generate the water and/or steam needed.

 

	
  
	
(3)
	
Name and qualifications of contractor proposed to build the Facility.

 

	
  
	
(4)
	
As to material portions of each Facility, proposed construction contract(s) with contractor(s) which shall include, without limitation, (i) a budget matching itemized costs to progress of work on specific parts of the recovery facility, and (ii) periodic inspections of the progress of work and holdback of payments for defective work.

 

 

 

29

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(5)
	
As to material portions of each Facility, copies or descriptions of warranties and service contracts provided by the contractor or manufacturer of the equipment.

 

	
L.
	
Taking Production in Kind:

 

Each Party shall take in kind or separately dispose of its proportionate share of all Oil and Gas produced from the Contract Area, exclusive of production which may be used in development and producing operations and in preparing and treating Oil and Gas for marketing purposes and production unavoidably lost.  Any extra expenditures
incurred in the taking in kind or separate disposition by any Party of its proportionate share of the production shall be borne by such Party.  Any Party taking its share of production in kind shall be required to pay for only its proportionate share of such part of Operator's surface facilities which it uses.

Each Party shall execute such division orders and contracts as may be necessary for the sale of its interest in production from the Contract Area, and, except as provided in Article VII.B, shall be entitled to receive payment directly from the purchaser thereof for its share of all production.

 

If any Party fails to make the arrangements necessary to take in kind or separately dispose of its proportionate share of the Oil and/or Gas produced from the Contract Area, Operator shall have the right, subject to the revocation at will by the Party owning it, but not the obligation, to purchase such Oil and/or Gas or sell it to others
at any time and from time to time, for the account of the non-taking Party.  Any such purchase or sale by Operator may be terminated by Operator upon at least ten (10) days written notice to the owner of said production and shall be subject always to the right of the owner of the production upon at least ten (10) days written notice to Operator to exercise its right to take in kind, or separately dispose of, its share of all Oil and/or Gas not previously delivered to a purchaser; provided, however,
that the effective date of any such revocation may be deferred at Operator's election for a period not to exceed ninety (90) days if Operator has committed such production to a purchase contract having a term extending beyond such ten (10)-day period.  Any purchase or sale by Operator of any other Party's share of Oil and/or Gas shall be only for such reasonable periods of time as are consistent with the minimum needs of the industry under the particular circumstances, but in no event for a period in
excess of one (1) year.

 

Any such sale by Operator shall be in a manner commercially reasonable under the circumstances, but Operator shall have no duty to share any existing market or transportation arrangement or to obtain a price or transportation fee equal to that received under any existing market or transportation arrangement.  The sale or delivery
by Operator of a non-taking Party's share of production under the terms of any existing contract of Operator shall not give the non-taking Party any interest in or make the non-taking Party a party to said contract.  No purchase of Oil and Gas and no sale of Gas shall be made by Operator without first giving the non-taking Party ten days written notice of such intended purchase or sale and the price to be paid or the pricing basis to be used.  Operator shall give notice to all Parties of the
first sale of Gas from any well under this Agreement.  All Parties shall give timely written notice to Operator of their Gas marketing arrangements for the following month, excluding price, and shall notify Operator immediately in the event of a change in such arrangements.  Operator shall maintain records of all marketing arrangements and of volumes actually sold or transported, which records shall be made
available to Non-Operators upon reasonable request.

 

 

 

30

 

OPERATING AGREEMENT

(continued)

 

	
M.
	
Marketing:

 

Notwithstanding the provisions of Article VI.L above, upon Non-Operator’s request, Operator shall have the obligation to provide arrangements for Non-Operator to market all oil, gas, and other production (including such arrangements for the treating and processing as may be necessary or appropriate) from any well drilled pursuant
to the terms of this agreement for itself and on behalf of all Non-Operators at the same price (or weighted average price if production is sold for more than one price) for all production sold each month by Operator or its affiliates. Operator cause the purchaser(s) of production to disburse to each party its proportionate share of proceeds remaining after the payment of royalties.  The proceeds for production during each month shall be disbursed to all Parties no later than 60 days after the end of
such month. Operator shall not deduct any other sums from the proceeds of production disbursed to the Non-Operators.

 

Operator shall not enter into any agreement in connection with the marketing of the Non-Operator’s share of production without giving the Non-Operator at least 15 days prior written notice of such act and a copy of the proposed agreement.   The terms of any agreement between Operator and any Affiliate of Operator with
respect to the marketing of such production or otherwise shall contain terms and conditions that are not less favorable to Operator and the Non-Operators than those contained in arms length transactions in the area of production involved at least at the rates obtained by Operator or any Affiliate.

 

Article VII.

EXPENDITURES AND LIABILITY OF PARTIES

 

	
A.
	
Liability of Parties:

 

The liability of the Parties shall be several, not joint or collective.  Each Party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area.  Accordingly, the liens granted among the Parties in Article VII.B are given
to secure only the debts of each severally, and no Party shall have any liability to third parties hereunder to satisfy the default of any other Party in the payment of any expense or obligation hereunder.  It is not the intention of the Parties to create, nor shall this agreement be construed as creating, a mining or other partnership, joint venture, agency relationship or association, or to render the Parties liable as partners, co-venturers, or principals.   In their relations with
each other under this agreement, the Parties shall not be considered fiduciaries or to have established a confidential relationship but rather shall be free to act on an arm's-length basis in accordance with their own respective self-interest, subject, however, to the obligation of the Parties to act in good faith in their dealings with each other with respect to activities hereunder.  Notwithstanding anything contained herein to the contrary, it is specifically agreed and understood that any Party
who elects not to participate in any proposed operation, all as set out in this Agreement, shall not be relieved of any obligation accruing prior to the election not to participate.

 

 

 

31

 

OPERATING AGREEMENT

(continued)

 

Liens and Security Interests:

 

Each Party grants to the other Parties a lien upon any interest it now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in the Contract Area, and a security interest and/or purchase money security interest in any interest it now owns or hereafter acquires in the personal property' and fixtures on or used or obtained
for use in connection therewith, to secure performance of all of its obligations under this agreement including but not limited to payment of expense, interest and fees, the proper disbursement of all monies paid hereunder, the assignment or relinquishment of interest in Oil and Gas Leases as required hereunder, and the proper performance of operations hereunder.  Such lien and security interest and fees, the proper disbursement of all monies paid hereunder, the assignment or relinquishment of interest
in Oil and Gas Leases as required hereunder, and the proper performance of operations hereunder.  Such lien and security interest granted by each Party shall include such Party's leasehold interests, working interests, operating rights, and royalty and overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or otherwise becoming subject to this agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or used
or obtained for use in connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts (including, without limitation, accounts arising from gas imbalances or from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the foregoing.

 

To perfect the lien and security agreement provided herein, each Party shall execute and acknowledge the recording supplement and/or any financing statement prepared and submitted by any Party in conjunction herewith or at any time following execution hereof, and any Party is authorized to file this agreement or the recording supplement
executed herewith as a lien or mortgage in the applicable real estate records and as a financing statement with the proper officer under the Uniform Commercial Code in the state in which the Contract Area is situated and such other states as such Party shall deem appropriate to perfect the security interest granted hereunder.  Any Party may file this agreement, the recording supplement executed herewith, or such other documents as it deems necessary as a lien or mortgage in the applicable real estate
records and/or a financing statement with the proper officer under the Uniform Commercial Code.

 

Each Party represents and warrants to the other Parties that the lien and security interest granted by such Party to the other Parties shall be a first and prior lien, and each Party hereby agrees to maintain the priority of said lien and security interest against all persons acquiring an interest in Oil and Gas Leases and Interests covered
by this agreement by, through or under such Party.  All Parties acquiring an interest in Oil and Gas Leases and Oil and Gas Interests covered by this agreement, whether by assignment, merger, mortgage, operation of law, or otherwise, shall be deemed to have taken subject to the lien and security interest granted by this Article VII.B as to all obligations attributable to such interest hereunder whether or not such obligations arise before or after such interest is acquired.

 

 

 

32

 

OPERATING AGREEMENT

(continued)

 

To the extent that Parties have a security interest under the Uniform Commercial Code of the state in which the Contract Area is situated, they shall be entitled to exercise the rights and remedies of a secured party under the Code.  The bringing of a suit and the obtaining of judgment by a Party for the secured indebtedness
shall not be deemed an election of remedies or otherwise affect the lien rights or security interest as security for the payment thereof.  In addition, upon default by any Party in the payment of its share of expenses, interests or fees, or upon the improper use of funds by the Operator, the other Parties shall have the right, without prejudice to other rights or remedies, to collect from the purchaser the proceeds from the sale of such defaulting Party's share of Oil and Gas until the amount owed by
such Party, plus interest as provided in "Exhibit C", has been received, and shall have the right to offset the amount owed against the proceeds from the sale of such defaulting Party's share of Oil and Gas.  All purchasers of production may rely on a notification of default from the non-defaulting Party or Parties stating the amount due as a result of the default, and all Parties waive any recourse available against purchasers for releasing production proceeds as provided in this paragraph.

 

Except for the non-payment of funds addressed in Article VI, if any Party fails to pay its share of cost within one hundred twenty (120) days after rendition of a statement therefor by Operator, the non-defaulting Parties, including Operator, shall upon request by Operator, pay the unpaid amount in the proportion that the interest of each
such Party bears to the interest of all such Parties.  The amount paid by each Party so paying its share of the unpaid amount shall be secured by the liens and security rights described in Article VII.B, and each paying Party may independently pursue any remedy available hereunder or otherwise.

 

If any Party does not perform all of its obligations hereunder, and the failure to perform subjects such Party to foreclosure or execution proceedings pursuant to the provisions of this agreement, to the extent allowed by governing law, the defaulting Party waives any available right of redemption from and after the date of judgment, any
required valuation or appraisement of the mortgaged or secured property prior to sale, any available right to stay execution or to require a marshalling of assets and any required bond in the event a receiver is appointed.  In addition, to the extent permitted by applicable law, each Party hereby grants to the other Parties a power of sale as to any property that is subject to the lien and security rights granted hereunder, such power to be exercised in the manner provided by applicable law or otherwise
in a commercially reasonable manner and upon reasonable notice.

 

Each Party agrees that the other Parties shall be entitled to utilize the provisions of Oil and Gas lien law or other lien law of any state in which the Contract Area is situated to enforce the obligations of each Party hereunder.   Without limiting the generality of the foregoing, to the extent permitted by applicable law,
Non-Operators agree that Operator may invoke or utilize the mechanics' or materialmen's lien law of the state in which the Contract Area is situated in order to secure the payment to Operator of any sum due hereunder for services performed or materials supplied by Operator.

 

The lien and security interest granted by each Non-Operator to Operator and by Operator to the Non-Operator under Article VII.B shall extend not only to such Party's oil and gas rights in the Contract Area (which for greater certainty shall include all of each Party's leasehold interest and leasehold estate in the Contract Area), the oil
and/or gas when extracted and equipment (as mentioned in said Article) but also to all accounts, contract rights, inventory and general intangibles constituting a part of, relating or arising out of said oil and gas rights, extracted oil and gas and said equipment or which are otherwise owned or held by any such Party in the Contract Area.  Further, the lien and security interest of each of said Parties shall extend
to all proceeds and products of all of the property and collateral described in this paragraph and in Article VII.B as being subject to said lien and security interest.

 

 

 

33

 

OPERATING AGREEMENT

(continued)

 

	
B.
	
Advances:

 

Operator shall not demand payment, from any Party, in advance of such Party’s respective share of the estimated amount of the expense to be incurred in operations hereunder during the next succeeding month.

 

Notwithstanding anything to the contrary contained herein, or in the accounting procedure attached hereto as Exhibit "C", the Parties specifically agree that in no event during the term of this contract shall Operator be required to make more than one billing for the entire interest credited to each Party on Exhibit "A" unless such assignment
is approved in accordance with Article XVI.F(1) herein. It is further agreed that if any Party (hereinafter referred to as "Selling Party") disposes of part of the interest credited to it on Exhibit "A", the Selling Party will be solely responsible for billing its assignee(s), and shall remain primarily liable to the other Parties, until such assignment is approved in accordance with Article XVI.F(1) herein, for the interest or interests assigned and shall make prompt payment to Operator for the entire amount
of statements and billing rendered to it or accountable to it by virtue of such interests as shown on Exhibit "A".  It is further understood and agreed that if Selling Party disposes of all its interests as set out on Exhibit "A", whether to one or to several assignees, Operator shall continue to issue statements and billings to the Selling Party for the entire interest conveyed until such time as Selling Party has designated and qualified one assignee to receive the billings for the entire interest
and such designated assignee has been approved and accepted by Operator.

 

In order to qualify one assignee to receive the billing for the entire interest credited to Selling Party on Exhibit "A", Selling Party shall furnish to Operator such information as may be requested, including, but not limited to, the following:

 

	
  
	
(1)
	
Written notice to operator of the conveyance followed by photostatic or certified copies of the recorded assessments as soon as available.

 

	
  
	
(2)
	
The name of the assignee to be billed along with such assignee's written consent to receive statements and billings for the entire interest credited to Selling Party on Exhibit "A", hereto, and further, agreeing to handle any necessary sub-billings attributable to such interest in the event such designated assignee does not own the entire interest credited to Selling Party on Exhibit "A".

 

The Parties agree that the sale of any interest in the leases covered by this Agreement shall be made specifically subject to the provisions of this section.  All expenses, including salaries, wages and expenses of personnel, legal or consultant fees, and administrative filing fees and court costs, shall be a direct charge, borne
by the Joint Account as provided in Exhibit "C" and shall not be included in administrative overhead Part III on Exhibit "C" if incurred for obtaining spacing, pooling or other orders or rulings from state regulatory bodies or courts deemed by the Operator, in its sole judgment, as necessary.

 

 

 

34

 

OPERATING AGREEMENT

(continued)

 

	
C.
	
Defaults and Remedies:

 

If any Party fails to discharge any financial obligation under this agreement, including without limitation the failure to make any advance under the preceding Article VII.C or any other provision of this agreement, within the period required for such payment hereunder, then in addition to the remedies provided in Article VII.B or elsewhere
in this agreement, the remedies specified below shall be applicable.  For purposes of this Article VII.D, all notices and elections shall be delivered only by Operator, except that Operator shall deliver any such notice and election requested by a non-defaulting Non-Operator, and when Operator is the Party in default, the applicable notices and elections can be delivered by any Non-Operator.  Election of any one or more of the following remedies shall not preclude the subsequent use of any
other remedy specified below or otherwise available to a non-defaulting Party.

 

	
  
	
(1)
	
Suspension of Rights: Any Party may deliver to the Party in default a Notice of Default, which shall specify' the default, specify the action to be taken to cure the default, and specify' that failure to take such action will result in the exercise of one or more of the remedies provided in this Article.   If the default is not cured
within thirty (30) days of the delivery of such Notice of Default, all of the rights of the defaulting Party granted by this agreement may upon notice be suspended until the default is cured, without prejudice to the right of the non-defaulting Party or Parties to continue to enforce the obligations of the defaulting Party previously accrued or thereafter accruing under this agreement.   If Operator is the Party in default, the Non-Operators shall have in addition the right, by vote of Non-Operators
owning a majority in interest in the Contract Area after excluding the voting interest of Operator, to appoint a new Operator effective immediately.   The rights of a defaulting Party that may be suspended hereunder at the election of the non-defaulting Parties shall include, without limitation, the right to receive information as to any operation conducted hereunder during the period of such default, the right to elect to participate in an operation proposed under Article VI of this agreement,
the right to participate in an operation being conducted under this agreement even if the Party has previously elected to participate in such operation, and the right to receive proceeds of production from any well subject to this agreement.

 

	
  
	
(2)
	
Suit for Damages: Non-defaulting Parties or Operator for the benefit of non-defaulting Parties may sue (at joint account expense) to collect the amounts in default, plus interest accruing on the amounts recovered from the date of default until the date of collection at the rate specified in Exhibit "C" attached hereto.  Nothing herein shall
prevent any Party from suing any defaulting Party to collect consequential damages accruing to such Party as a result of the default.

 

	
  
	
(3)
	
Advance Payment: If a default is not cured within thirty (30) days of the delivery of a Notice of Default, Operator, or Non-Operators if Operator is the defaulting Party, may thereafter require advance payment from the defaulting Party of such defaulting Party's anticipated share of any item of expense for which Operator, or Non-Operators, as the case
may be, would be entitled to reimbursement under any provision of this agreement, whether or not such expense was the subject of the previous default.  Such right includes, but is not limited to, the right to require advance payment for the estimated costs of drilling a well or Completion of a well as to which an election to participate in drilling or Completion has been made.  If the defaulting Party fails to pay
the required advance payment, the non-defaulting Parties may pursue any of the remedies provided in the Article VII.D or any other default remedy provided elsewhere in this agreement.  Any excess of funds advanced remaining when the operation is completed and all costs have been paid shall be promptly returned to the advancing Party.

 

 

 

 

35

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(4)
	
Costs and Attorneys' Fees: In the event any Party is required to bring legal proceedings to enforce any financial obligation of a Party hereunder, the prevailing Party in such action shall be entitled to recover all court costs, costs of collection, and a reasonable attorney's fee, which the lien provided for herein shall also secure.

 

	
D.
	
Rentals, Shut-in Well Payments and Minimum Royalties:

 

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

 

Operator shall notify Non-Operators of the anticipated completion of a shut-in well, or the shutting in or return to production of a producing well, at least five (5) Business Days prior to taking such action, or at the earliest opportunity permitted by circumstances, but assumes no liability for failure to do so.

 

	
E.
	
Taxes:

 

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

 

 

 

 

 

36

 

OPERATING AGREEMENT

(continued)

 

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

 

Each Party shall pay or cause to be paid all production, severance, excise, gathering and other taxes imposed upon or with respect to the production or handling of such Party's share of Oil and Gas produced under the terms of this agreement.

 

Operator shall pay or be responsible for payment of all applicable severance (unless paid by purchaser), production and similar taxes due on all production for which Operator is disbursing one hundred percent (100%) of the proceeds.  Any Non-Operator separately producing or taking delivery of oil or gas in kind shall be responsible
for the payment of all applicable severance, production and similar taxes due on production that Operator is not disbursing in accordance with Article VII.F.  Where any Party is separately producing or taking delivery of oil and gas in kind, Operator shall have the right to render to the taxing authority the ad valorem taxes on wells within the Contract Area in the name of each Party and to provide in such rendition for direct payment by each Party of its share of such ad valorem tax.  In
rendering the property for ad valorem tax purposes, Operator shall base its values for such purpose upon the price received for the sale of oil and gas by each Party taking or separately disposing of its share of oil and gas.

 

The above is subject to any applicable laws or regulations imposing different obligations on Operator or Non-Operator with respect to the responsibility for reporting and payment of severance taxes.

 

Article VIII.

ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

 

	
A.
	
Surrender of Leases:

 

The Leases covered by this agreement, insofar as they embrace acreage in the Contract Area, shall not be surrendered in whole or in part unless all Parties consent thereto; however, no consent shall be necessary to release or surrender a Lease which has expired or otherwise terminated in accordance with its terms.  However, should
any Party desire to surrender its interest in any Lease or in any portion thereof, such Party shall give written notice of the proposed surrender to all Parties, and the Parties to whom such notice is delivered shall have thirty (30) days after delivery of the notice within which to notify the Party proposing the surrender whether they elect to consent thereto.  Failure of a Party to whom such notice is delivered to reply within said 30-day period shall constitute a consent to the surrender of the Leases
described in the notice.  If all Parties do not agree or consent thereto, the Party desiring to surrender shall assign, without express or implied warranty of title, all of its interest in such Lease, or portion thereof, and any well, material and equipment which may be located thereon and any rights in production thereafter secured, to the Parties not consenting to such surrender.

 

 

 

 

37

 

OPERATING AGREEMENT

(continued)

 

If the interest of the assigning Party is or includes an Oil and Gas Interest, the assigning Party shall execute and deliver to the Party or Parties not consenting to such surrender an oil and gas lease covering such Oil and Gas Interest for a term of one (1) year and so long thereafter as Oil and/or Gas is produced from the land covered
thereby, such lease to be on the form attached hereto as Exhibit "B" Upon such assignment or lease, the assigning Party shall be relieved from all obligations thereafter accruing, but not theretofore accrued, with respect to the interest assigned or leased and the operation of any well attributable thereto, and the assigning Party shall have no further interest in the assigned or leased premises and its equipment and production other than the royalties retained in any lease made under the terms of this Article.  The
Party assignee or lessee shall pay to the Party assignor or lessor the reasonable salvage value of the latter's interest in any well's salvable materials and equipment attributable to the assigned or leased acreage.  The value of all salvable materials and equipment shall be determined in accordance with the provisions of Exhibit "C", less the estimated cost of salvaging and the estimated cost of plugging and abandoning and restoring the surface.  If such value is less than such costs, then
the Party assignor or lessor shall pay to the Party assignee or lessee the amount of such deficit.  If the assignment or lease is in favour of more than one Party, the interest shall be shared by such Parties in the proportions that the interest of each bears to the total interest of all such Parties.  If the interest of the Parties to whom the assignment is to be made varies according to depth, then the interest assigned shall similarly reflect such variances.

 

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

 

	
B.
	
Renewal or Extension of Leases:

 

If any Party secures a renewal or replacement of an Oil and Gas Lease or Interest subject to this agreement, then all other Parties shall be notified promptly upon such acquisition or, in the ease of a replacement Lease taken before expiration of an existing Lease, promptly upon expiration of the existing Lease.  The Parties
notified shall have the right for a period of thirty (30) days following delivery of such notice in which to elect to participate in the ownership of the renewal or replacement Lease, insofar as such Lease affects lands within the Contract Area, by paying to the Party who acquired it their proportionate shares of the acquisition cost allocated to that part of such Lease within the Contract Area, which shall be in proportion to the interest held at that time by the Parties in the Contract Area.  Each
Party who participates in the purchase of a renewal or replacement Lease shall be given an assignment of its proportionate interest therein by the acquiring Party, without warranty of title, except as to acts by, through or under the acquiring Party.

 

If some, but less than all, of the Parties elect to participate in the purchase of a renewal or replacement Lease, it shall be owned by the Parties who elect to participate therein, in a ratio based upon the relationship of their respective percentage of participation in the Contract Area to the aggregate of the percentages of participation
in the Contract Area of all Parties participating in the purchase of such renewal or replacement Lease.  The acquisition of a renewal or replacement Lease by any or all of the Parties shall not cause a readjustment of the interests of the Parties stated in Exhibit "A", but any renewal or replacement Lease in which less than all Parties elect to participate shall not be subject to this agreement but shall be deemed subject
to a separate Operating Agreement in the form of this agreement.

 

 

 

38

 

OPERATING AGREEMENT

(continued)

 

If the interests of the Parties in the Contract Area vary according to depth, then their right to participate proportionately in renewal or replacement Leases and their right to receive an assignment of interest shall also reflect such depth variances.  The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by the expiring Lease or cover only a portion of its area or an interest therein.  Any renewal or replacement Lease taken before the expiration of its predecessor Lease, or taken or contracted for or becoming effective within six (6) months after the expiration of the existing Lease, shall be subject to this provision so long as this agreement is in effect at the time of such acquisition or at the time the renewal or replacement Lease becomes effective;
but any Lease taken or contracted for more than six (6) months after the expiration of an existing Lease shall not be deemed a renewal or replacement Lease and shall not be subject to the provisions of this agreement.

 

Notwithstanding anything to the contrary herein, each Party committing a lease or leases to this Agreement shall have the option upon the expiration of each lease to renew or extend such lease and to bear the renewal or extension costs and expenses and thereby retain its original interest and title in said lease.  By exercising
such option, the Parties' working interest shall remain unchanged.  If the original lease owner does not exercise its option within sixty (60) days after the expiration date of the original lease, the renewal or extension lease will then be subject to the terms of Article VIII.B as written above.  If any working interest owner other than the original lease owner renews or extends the lease, the renewing or extending Party shall furnish the original lease owner an itemized statement of the
complete renewal or extension costs and expenses of such lease.  The original lease owner shall have sixty (60) days after the receipt of such itemized statement to reimburse the renewing or extending Party in full.  Failure of the original lease owner to do so shall result in the forfeiture of its option hereunder.  The provisions hereof shall only apply to leases or portions of leases located in the Contract Area.

 

The provisions in this Article shall also be applicable to extensions of Oil and Gas Leases.

 

	
C.
	
Acreage or Cash Contributions:

 

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

 

 

 

39

 

OPERATING AGREEMENT

(continued)

 

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

 

	
D.
	
Assignment; Maintenance of Uniform Interest:

 

For the purpose of maintaining uniformity of ownership in the Contract Area in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production covered by this agreement no Party shall sell, encumber, transfer or make other disposition of its interest in the Oil and Gas Leases and Oil and Gas interests embraced within the
Contract Area or in wells, equipment and production unless such disposition covers either:

 

	
  
	
(1)
	
the entire interest of the Party in all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production; or

 

	
  
	
(2)
	
an equal undivided percent of the Party's present interest in all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production in the Contract Area.

 

Every sale, encumbrance, transfer or other disposition made by any Party shall be made expressly subject to this agreement and shall be made without prejudice to the right of the other Parties, and any transferee of an ownership interest in any Oil and Gas Lease or Interest shall be deemed a Party to this agreement as to the interest conveyed
from and after the effective date of the transfer of ownership; provided, however, that the other Parties shall not be required to recognize any such sale, encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee.  No assignment or other disposition of interest by a Party shall relieve such Party of obligations previously
incurred by such Party hereunder with respect to the interest transferred, including without limitation the obligation of a Party to pay all costs attributable to an operation conducted hereunder in which such Party has agreed to participate prior to making such assignment, and the lien and security interest granted by Article VII.B shall continue to burden the interest transferred to secure payment of any such obligations.  If, at any time the interest of any Party is divided among and owned by four
or more co-owners.  Operator, at its discretion, may require such co-owners to appoint a single trustee or agent with full authority to receive notices, approve expenditures, receive billings for and approve and pay such Party's share of the joint expenses, and to deal generally with, and with power to bind, the co-owners of such Party's interest within the scope of the operations embraced in this agreement; however, all such co-owners shall have the right to enter into and execute all contracts or
agreements for the disposition of their respective shares of the Oil and Gas produced from the Contract Area and they shall have the right to receive, separately, payment of the sale proceeds thereof.

 

	
E.
	
Waiver of Rights to Partition:

 

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

 

 

 

40

 

OPERATING AGREEMENT

(continued)

 

	
F.
	
All Transfers Subject to this Agreement:

 

Each Party covenants and agrees for itself, its successors and assigns, that any sale, assignment, sublease, mortgage, pledge or other instrument affecting the leases and lands subject to this instrument (whether of an operating or non-operating interest or a mortgage, pledge or other security interest) will be made and accepted subject
to this instrument and the Party acquiring the interest or security shall expressly agree to be bound by all its terms and provisions.  Any Party who executes any instrument in favor of any Party without complying with the provisions of this paragraph shall indemnify, defend and hold the other Parties harmless from and against any and all claims or causes of action by any person whomsoever and for any expenses and losses sustained as a result of the failure of such Party to comply with these provisions.

 

Article IX.

INTERNAL REVENUE CODE ELECTION

 

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 pursuant to Exhibit "G" or other agreement between them, 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 Internal Revenue Code of 1986, as amended ("Code"), as permitted and authorized by Section 761 of the Code and the regulations promulgated thereunder.  Operator is authorized and directed to execute on behalf of each Party hereby affected such evidence of this election as may be required by the Secretary' of the Treasury of the United States or the Federal Internal Revenue Service, including specifically, but not by way of limitation, all of the returns,
statements, and the data required by Treasury Regulation §1.761.  Should there be any requirement that each Party hereby affected 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 or states in which the Contract Area 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 hereby affected shall make such election as may be permitted or required by such laws.  In making the foregoing election, each such Party states that the income derived by
such Party from operations hereunder can be adequately determined without the computation of partnership taxable income.

 

Article X.

CLAIMS AND LAWSUITS

 

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

 

 

 

41

 

OPERATING AGREEMENT

(continued)

 

Article XI.

FORCE MAJEURE

 

If any Party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other than the obligation to indemnify or make money payments or furnish security, that Party shall give to all other Parties prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon,
the obligations of the Party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the continuance of the force majeure.  The term "force majeure", as here employed, shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightening, fire, storm, flood or other act of nature, explosion, governmental action, governmental delay, restraint or inaction, unavailability of
equipment, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the Party claiming suspension.

 

The affected Party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable.  The requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or other labour difficulty by the Party involved, contrary to its wishes;
how all such difficulties shall be handled shall be entirely within the discretion of the Party concerned.

 

Article XII.

NOTICES

 

All notices authorized or required between the Parties by any of the provisions of this agreement, unless otherwise specifically provided, shall be in writing and delivered in person or by United States mail, courier service, telegram, telex, telecopier or any other form of facsimile, postage or charges prepaid, and addressed to such Parties
at the addresses listed on Exhibit "A".  All telephone, oral or electronic notices via email permitted by this agreement shall be confirmed immediately thereafter by written notice.  The originating notice given under any provision hereof shall be deemed delivered only when received by the Party to whom such notice is directed, and the time for such Party to deliver any notice in response thereto shall run from the date the originating notice is received.  "Receipt" for purposes
of this agreement with respect to written notice delivered hereunder shall be actual delivery of the notice to the address of the Party to be notified specified in accordance with this agreement, or to the telecopy, facsimile or telex machine of such Party.  The second or any responsive notice shall be deemed delivered when deposited in the United States mail or at the office of the courier or telegraph service, or upon transmittal by telex, telecopy or facsimile, or when personally delivered to the
Party to be notified, provided, that when response is required within 24 or 48 hours, such response shall be given orally, electronically through email or by telephone, telex, telecopy or other facsimile within such period.  Each Party shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other Parties.   If a Party is not available to receive notice orally or by telephone when a Party attempts to deliver a notice required
to be delivered within 24 or 48 hours, the notice may be delivered in writing by any other method specified herein and shall be deemed delivered in the same manner provided above for any responsive notice.

 

 

 

42

 

OPERATING AGREEMENT

(continued)

 

All notices required in this Agreement should be delivered at the following addresses:

 

	 	
If to Operator: 
	
MegaWest Energy Missouri Corp.

c/o

MegaWest Energy Corp.

800, 926- 5th Ave. SW

Calgary, AB, Canada

T2P 0N7

Attention: Land Department

Fax: (403) 984-6343

Email: Wayne.Sampson@megawestenergy.com

 

	 	
If to Non-Operator:  
	
Mega Partners 1, LLC

641 Lexington Ave, 26th Floor,

New York, NY 10022

Telephone 212-974-3070

Fax 212-207-3452

email: jsnodgrass@icofund.com

           kpage@icfund.com

Attention:    Jay Snodgrass, Associate

                       Kimberly Page, Controller 

 

Article XIII.

TERM OF AGREEMENT

 

Unless terminated by mutual written consent of the Parties, this agreement shall remain in fall force and effect as to the Oil and Gas Leases and/or Oil and Gas Interests subject hereto for the period of time selected below; provided, however, no Party shall ever be construed as having any right, title or interest in or to any Lease or
Oil and Gas Interest contributed by any other Party beyond the term of this agreement.

 

In the event any well described in Article VI, or any subsequent well drilled under any provision of this agreement, results in the Completion of a well as a well capable of production of Oil and/or Gas in paying quantities, this agreement shall continue in force so long as any such well is capable of production, and for an additional period
of 180 days thereafter; provided, however, if, prior to  the  expiration  of such additional period, one or more of the Parties are engaged in drilling, Reworking, Deepening, Sidetracking, Plugging Back, testing or attempting to Complete or Re-complete a well or wells hereunder, this agreement shall continue in force until such operations have been completed and if production results therefrom, this agreement shall continue in force as provided herein.  In the event any
well described in Article VI, or any subsequent well drilled hereunder, results in a dry hole, and no other well is capable of producing Oil and/or Gas from the Contract Area, this agreement shall terminate unless drilling, Deepening, Sidetracking, Completing, Re-completing, Plugging Back or Reworking operations are commenced within 180 days from the date of abandonment of said well.  "Abandonment" for such purposes shall mean either (i) a decision by all Parties not to conduct any further operations
on the well or (ii) the elapse of 180 days from the conduct of any operations on the well, whichever first occurs.

 

The termination of this agreement shall not relieve any Party from any expense, liability or other obligation or any remedy therefor which has accrued or attached prior to the date of such termination.  Upon termination of this agreement and the satisfaction of all obligations hereunder, in the event a memorandum of this Operating
Agreement has been filed of record,  Operator is authorized to file of record in all necessary recording offices a notice of termination and each Party agrees to execute such a notice of termination as to Operator's interest, upon request of Operator, if Operator has satisfied all its financial obligations.

 

 

43

 

OPERATING AGREEMENT

(continued)

 

Article XIV.

COMPLIANCE WITH LAWS AND REGULATIONS

 

	
A.
	
Laws, Regulations and Orders:

 

All of the provisions of this Agreement are expressly subject to all applicable laws, orders, rules and regulations of any governmental body or agency having jurisdiction in the premises, and all operations contemplated hereby shall be conducted in conformity therewith.  Any provision of this Agreement which is inconsistent
with any such laws, orders, rules or regulations is hereby modified so as to conform therewith, and this Agreement, as so modified, shall continue in full force and effect.

 

	
B.
	
Governing Law:

 

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

 

	
C.
	
Regulatory Agencies:

 

Nothing herein contained shall grant, or be construed to grant.  Operator the right or authority to waive or release any rights, privileges, or obligations which Non-Operators may have under federal or state laws or under rules, regulations or orders promulgated under such laws in reference to oil, gas and mineral operations,
including the location, operation, or production of wells, on tracts offsetting or adjacent to the Contract Area.  With respect to the operations hereunder, Non-Operators agree to release Operator from any and all losses, damages, injuries, claims and causes of action arising out of, incident to or resulting directly or indirectly from Operator's interpretation or application of rules, rulings, regulations or orders of the Department of Energy or Federal Energy Regulatory Commission or predecessor or
successor agencies to the extent such interpretation or application was made in good faith and does not constitute gross negligence.   Each Non-Operator further agrees to reimburse Operator for such Non-Operator's share of production or any refund, fine, levy or other governmental sanction that Operator may be required to pay as a result of such an incorrect interpretation or application, together with interest and penalties thereon owing by Operator as a result of such incorrect interpretation
or application.

 

Article XV.

MISCELLANEOUS

 

	
A.
	
Execution:

 

This agreement shall be binding upon each Non-Operator when this agreement or a counterpart thereof has been executed by such Non-Operator and Operator notwithstanding that this agreement is not then or thereafter executed by all of the Parties to which it is tendered or which are listed on Exhibit "A" as owning an interest in the Contract
Area or which own, in, fee, an interest in the Contract Area.  Operator may, however, by written notice to all Non-Operators who have become bound by this agreement as aforesaid, terminate this agreement if Operator in its sole discretion determines that there is insufficient participation to justify commencement of drilling operations.  In the event of such a termination by Operator, all further obligations
of the Parties hereunder shall cease as of such termination.  In the event any Non-Operator has advanced or prepaid any share of drilling or other costs hereunder, all sums so advanced shall be returned to such Non-Operator without interest.

 

 

44

 

OPERATING AGREEMENT

(continued)

 

	
B.
	
Successors and Assigns:

 

This agreement shall be binding upon and shall inure to the benefit of the Parties and their respective heirs, devisees, legal representatives, successors and assigns, and the terms hereof shall be deemed to run with the Leases or Interests included within the Contract Area.

 

	
C.
	
Counterparts:

 

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

 

	
D.
	
Severability:

 

For the purposes of assuming or rejecting this agreement as an execution contract pursuant to federal bankruptcy laws, this agreement shall not be severable, but rather must be assumed or rejected in its entirety, and the failure of any Party to comply with all of its financial obligations provided herein shall be a material default.

 

	
E.
	
Preparation:

 

The Parties further acknowledge and agree that each has been represented or had the opportunity to be represented by attorneys of their own choosing and therefore, for the purposes of construing this Agreement, each Party shall be deemed to have participated equally in the preparation and drafting of this Agreement.

 

Article XVI.

OTHER PROVISIONS

 

	
A.
	
Definitions:

 

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

 

	
  
	
(1)
	
“Affiliate” shall mean a company, partnership or other legal entity which controls, or is controlled by, a party to this agreement.  The term “control” as used in the definition of “affiliate” means the ownership directly or indirectly of more than forty percent (40%) of the shares or voting rights in a
company, partnership or legal entity.

 

	
  
	
(2)
	
“Election Period” shall have the meaning assigned to such term in Article XVI.G.

 

	
  
	
(3)
	
“Mega Partners Members” shall have the meaning assigned to such term in Article XVI.B(2).

 

 

 

45

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(4)
	
“Mega Partners” shall mean Mega Partners 1, LLC, a Delaware limited liability company.

 

	
  
	
(5)
	
“Members” shall have the meaning assigned to such term in Article XVI.B(2).

 

	
  
	
(6)
	
“Offeree” shall have the meaning assigned to such term in Article XVI.G.

 

	
  
	
(7)
	
“Operator Members” shall have the meaning assigned to such term in Article XVI.B(2).

 

	
  
	
(8)
	
“Selling Party” shall have the meaning assigned to such term in Article XVI.G.

 

	
  
	
(9)
	
“Technical Committee” shall have the meaning assigned to such term in Article XVI.B(1).

 

	
  
	
(10)
	
“Third Party Purchaser” shall have the meaning assigned to such term in Article XVI.F.

 

	
B.
	
Technical Committee

 

	
  
	
(1)
	
The Parties hereby establish a Technical Committee (the “Technical Committee”). While the Technical Committee shall have the responsibilities and powers set forth in Article XVI.B(4) of this Agreement, it shall not have any right to conduct or directly supervise operations.  Operations are solely the responsibility of Operator.

 

	
  
	
(2)
	
The Technical Committee shall consist of a shall consist of a maximum of five (5) members (the “Members”), of which three (3) Members shall be elected by the Operator (the “Operator Members”) and two (2) Members shall be elected from Mega Partners (the “Mega Partners Members”). A quorum shall consist of at least one Operator Member and one Mega Partners Member. The senior Operator
Member or his/her appointed alternate will serve as the chairman of the Technical Committee.  Each Member shall serve until his or her respective successor is chosen and until his or her earlier death, or resignation.  Any vacancies on the Technical Committee need not be filled.  Notwithstanding the foregoing, if any vacancies are chosen to be filled, any vacancies of an Operator Member shall be filled by a representative from the Operator and any vacancies of an Mega Partners Member
shall be filled by a representative from Mega Partners.

 

	
  
	
(3)
	
No Member shall be able to sell, assign, transfer or otherwise dispose of his or her seat on the Technical Committee.

 

	
  
	
(4)
	
The Technical Committee is empowered (through action initiated by any Member) to:

 

	
  
	
(a)
	
review and discuss Proposal Terms and request and receive any operational or Project information from the Operator;

 

	
  
	
(b)
	
review available commercial and emerging technologies related to the recovery and field processing of heavy oil;

 

 

 

46

 

OPERATING AGREEMENT

(continued)

 

	
  
	
(c)
	
make recommendations as to the optimum commercial technology for the Contract Area;

 

	
  
	
(d)
	
make recommendations regarding the testing of emerging technologies for the Contract Area;

 

	
  
	
(e)
	
review and make recommendations regarding the safe, operable and effective design of the equipment practices and procedures related to application of technology to the Contract Area;

 

	
  
	
(f)
	
review operating data from the Contract Area and make recommendations regarding operational changes to optimize the application of technology; and

 

	
  
	
(g)
	
report significant developments and events relative to the application of technology to the Contract Area to the Non-Operators.

 

	
  
	
(5)
	
The Members shall not be liable, responsible or accountable in damages or otherwise to the Parties to this Agreement for any acts or omission in their capacity as a Technical Committee Member that do not constitute gross negligence, willful misconduct or a breach of the express terms of this Agreement.  The Parties to this Agreement shall indemnify to the maximum extent permitted under law and save harmless
the Members from all liabilities for which indemnification is permitted.

 

	
  
	
(6)
	
The Technical Committee shall hold a meeting on at least a monthly basis. Such meetings may be held at such places and at such times as the Technical Committee may determine. A special meeting of the Technical Committee may be called by any Member. Any Member may participate in a monthly or special meeting in person or by telephone or similar electronic communication.

 

	
  
	
(7)
	
Operator shall regularly, but no less than quarterly, communicate all information (including the information requested pursuant to Article XVI.B(4) concerning operations, expenses, and planned operations within the Contract Area to all members of the Technical Committee. Further, Operator shall respond to any written request for information submitted to Operator by the Technical Committee within thirty (30) days
of Operator’s receipt of such request.

 

	
  
	
(8)
	
Operator shall submit an annual budget for operations on the Contract Area, including the proposed Projects, to the Technical Committee for its review.

 

	
C.
	
Lease Payments

 

MegaWest (and any entities affiliated therewith if such entity becomes an operator under this agreement) shall calculate royalties, payable due to lease burdens existing as of the date of this agreement, and upon request by any other party to this Agreement, if Operator is selling production on behalf of such requesting party, withhold
the proportionate share of such royalties from such requesting party’ proceeds and timely and properly distribute the royalties to the proper parties.

 

	
D.
	
Operator’s Employees

 

 

 

47

 

OPERATING AGREEMENT

(continued)

 

	
  
	
Operator shall indemnify and hold the Non-Operators (and their partners and Affiliates, and the respective directors, officers, employees, and agents of such parties) harmless from and against any and all claims, actions, causes of action, liabilities, damages, losses, costs or expenses (including, without limitation, court costs and attorneys’ fees), of any kind or character, arising out
of or otherwise relating to the death of or injury to any employee or contractor of Operator arising out of or in connection with this agreement.  THE FOREGOING INDEMNIFICATION SHALL APPLY WHETHER OR NOT SUCH CLAIMS, ACTIONS, CAUSES OF ACTION, LIABILITIES, DAMAGES, LOSSES, COSTS OR EXPENSES ARISE OUT OF OR ARE BASED UPON THE NEGLIGENCE (INCLUDING SOLE NEGLIGENCE, SINGLE NEGLIGENCE, CONCURRENT NEGLIGENCE, ACTIVE OR PASSIVE NEGLIGENCE, OR STRICT LIABILITY OF ONE OR MORE OF THE INDEMNIFIED PARTIES.

 

	
E.
	
Pipeline/Gathering Line Construction or Acquisition

 

No party to this agreement shall construct or acquire a pipeline and/or gathering line to gather production exclusively from the Contract Area unless such party shall first offer each of the other Parties to this agreement, in the proportions set forth in Exhibit “A”, the right to participate in the construction or acquisition
of the pipeline/gathering line, including the right of gathering production from the Contract Area.  Should one or more non-proposing Parties elect to participate then between such participating Parties, to the extent permitted, by governmental rules, regulations and laws, there shall never be a gathering charge for oil and/or gas owned by a participant and gathered from the Contract Area through such pipeline/gathering line regardless if any or all other participants own such oil or gas or if all of
the participants own such oil or gas but not in the same proportion as the participation in such pipeline/gathering line.

 

	
F.
	
Assignment

 

	
  
	
(1)
	
Upon assignment of a portion or all of its right, title and interest in the properties covered by this Agreement to a party who has a net worth of at least five million dollars at the time of such assignment, the assigning party shall be relieved of all obligations thereafter accruing, but not theretofore accrued, with respect to the interest assigned or leased and the operation of any well attributable thereto.  Upon
any assignment of the properties covered by this agreement, the parties hereby agree that Exhibit “A” shall be updated by Operator within forty-five (45) days of receipt of any assignment document and Operator shall distribute a revised Exhibit “A” to all parties.  If within fifteen (15) days of the distribution of the revised Exhibit “A”, Operator receives no objections to same, it shall be deemed to have been automatically substituted into this Agreement.

 

	
  
	
(2)
	
For a period of three (3) years from the date of this Agreement, MegaWest shall not assign any of its right, title and interest in the Contract Area without the prior written consent of Mega Partners if such assignment (or the aggregate of such assignment along with any other assignments within three (3) years following the date of this Agreement) would result in the transfer of at least an undivided forty-nine percent
(49%) out of MegaWest’s total interest in the Contract Area as of the date of this Agreement. Further, any assignment or transfer by MegaWest shall be made expressly subject to and the transferee shall expressly assume all obligations of this Agreement.  Any assignment or transfer in violation of this Article XVI.F(2) shall be null and void and of no force and effect.

 

 

 

 

48

 

OPERATING AGREEMENT

(continued)

 

	
G.
	
Right of First Offer

 

If either Party (a “Selling Party”) proposes to make any sale or other disposition of all or any portion of its interest in the Contract Area, it shall promptly give written notice to the other party (the “Offeree”) requesting that the Offeree submit an offer to purchase such interest, which notice shall include
a description of the interest (or portion thereof) that is the subject of such proposed disposition.  The Offeree shall thereupon have thirty (30) days after receipt of such notice (“Election Period”) to submit an offer to the Selling Party to purchase the offered interest, which offer shall include the purchase price, and all other material terms of the offer.  Failure by an Offeree to submit an offer as described herein within the Election Period shall be deemed an election by
the Offeree not to submit an offer.  If the Offeree submits an offer in writing to purchase such interest in accordance with this Article XVI.G, the Selling Party shall have the option to:

 

(i)           accept such offer,

 

(ii)           decline the offer and retain its interest, or

 

(iii)          sell such interest to a third party, so long as the sale is consummated within six (6) months after the expiration of the Election Period and the purchase price is at least three percent (3%) higher than the price submitted by the Offeree in its offer. If all or any portion
of the third party purchase price is comprised of stock, MegaWest and Mega Partners hereby agree that solely for the purposes of determining compliance of the three percent (3%) requirement above, such stock shall be valued at the trading price assigned to such stock as of the date of the third party offer.

 

If the Offeree elects not to, or is deemed to not have submitted an offer to, purchase the Selling Party’s interest, the Selling Party shall have the option to sell said interest to a another party without any further obligation under this Article XVI.G and on such terms and conditions as agreed upon between them, so long as any
such sale is consummated within six (6) months after the expiration of the Election Period.

 

If the Selling Party elects to accept an offer of the Offeree to purchase an offered interest as provided above, the Selling Party shall promptly deliver a notice of acceptance to the Offeree and the Parties hereby agree to: (1) close said transaction within six (6) months following the date of delivery of such notice of acceptance, (2)
under forms of agreement containing mutually agreeable terms, and (3) to transfer the properties to the Offeree free of all liens arising by, through and under the Selling Party.

 

	
H.
	
Governing Document

 

This Agreement shall be the governing document between the Parties, and in the event other joint operating agreements are in place covering the Contract Area, the terms of this Agreement shall supersede as to between the Parties hereto. This Agreement may only be superseded or amended by another document if such other document expressly
references this Agreement and the governing terms or amendments intended thereby.

 

 

 

49

 

OPERATING AGREEMENT

(continued)

 

IN WITNESS WHEREOF, this agreement shall be effective as of the 27th day of August, 2009.

 

	  	  	
OPERATOR:

 

MEGAWEST ENERGY MISSOURI CORP.

	  	  	
By
	  
	  	  	  	  
	  	  	  	
Type or print name

	  	  	  	  
	  	  	
Title
	  
	  	  	
 

Date
	
 

August 27, 2009

	  	  	
 

Tax ID or S.S. No.
	  
	  	  	  	  

 

	  	  	
NON-OPERATOR

 

MEGA PARTNERS 1, LLC

	  	  	
By
	  
	  	  	  	  
	  	  	  	
Type or print name

	  	  	  	  
	  	  	
Title
	  
	  	  	
 

Date
	
 

August 27, 2009

	  	  	
 

Tax ID or S.S. No.
	  
	  	  	  	  
	  	  	  
	  	  	
By
	  
	  	  	  	  
	  	  	  	
Type or print name

	  	  	  	  
	  	  	
Title
	  
	  	  	
 

Date
	  
	  	  	
 

Tax ID or S.S. No.
	  
	  	  	  	  

 

 

 

50

 

OPERATING AGREEMENT

(continued)

 

ACKNOWLEDGMENTS

 

Note: The following forms of acknowledgment are the short forms approved by the Uniform Law on Notarial Acts.  The validity and effect of these forms in any state will depend upon the statutes of that state.

	
Individual acknowledgment:

 

 
	  	  	  
	
State of
	  	  	  
	
 

County of
	  	  	  
	  	  	  	  
	  	  	  	  
	
This instrument was acknowledged before me on  August 27, 2009

 
	  	  
	  	
by
	  
	
 

 

 

 

(Seal, if any)
	  	  
	  	  	  	
 

Title (and Rank)
	  
	  	  	  	
 

My commission expires
	  
	  	  	  	  
	  	  	  	  
	
Acknowledgment in representative capacity:

 
	  	  
	
State of
	  	  	  
	
 

Country of
	  	
ss)
	  
	  	  	  	  
	  	  	  	  

 

 

 

51

 

OPERATING AGREEMENT

(continued)

 

	
This instrument was acknowledged before me on August 27, 2009
	  	  
	  	  	
by
	  
	  	
 

as
	  	  
	  	  	  	  
	  	
of
	  	  
	  	  	  	  
	
(Seal, if any)
	  
	  	  	  	
 

Title (and Rank)
	  
	  	  	  	
 

My commission expires
	  

 

 

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SCHEDULE "B"

(continued)

 

THIS FOLLOWING 9 PAGES COMPRISES SCHEDULE "B" ATTACHED TO AND FORMING PART OF THAT CERTAIN JOINT OPERATING AGREEMENT MADE AS OF THE 27th DAY OF AUGUST, 2009 BETWEEN MEGAWEST ENERGY MISSOURI CORP. AND IROQUOIS CAPITAL OPPORTUNITY FUND L.P.

 

 

 

 

 

 

 

 

 

 

 

 

THIS PAGE INTENTIONALLY LEFT BLANK

 

 

 

 

 

 

 

 

 

 

 

 

165

 

SCHEDULE "B"

(continued)

 

 

Form Prod. Pooling 640 Shut-In

OIL AND GAS LEASE

(Paid Up)

 

THIS AGREEMENT, made and entered into this _______ day of _________________ 2007, by and between,   
_________________________________________,   ____________________   of  ________________________________________,  hereinafter called Lessor, and Audubon Oil & Gas, LLC of 119'/
North Main Street, Henderson, KY 42420, hereinafter called Lessee.

 

WITNESSETH:

 

1.That Lessor, for and in consideration of the sum of Ten or more dollars ($10.00), the receipt of which is hereby acknowledged, other good and valuable considerations, and the mutual covenants and agreements contained herein, does hereby grant, demise, bargain, lease and let exclusively unto the Lessee, the land hereinafter described,
with the exclusive right for the purpose of prospecting, exploring by geological, geophysical and other exploratory methods, drilling (whether vertically, directionally or horizontally), and operating for and producing there from oil (including crude oil, shale oil, bitumen, casinghead gasoline, kerosene and other liquid hydrocarbons), gas (including natural gas, gas condensate, casinghead gas, gas distillate, coal gas, carbon dioxide, nitrogen and helium, and any
formation or other naturally occurring gasses contained in or associated with any coal seam and all zones in communication therewith), and all gases and constituent products produced therewith (whether similar or dissimilar to those mentioned), together with the right to make surveys, lay pipe lines, construct roads and bridges, build tanks, power stations, power lines, telephone lines and other structures on said land, necessary, convenient or useful in Lessee's operations alone or con-jointly with neighboring
land to produce, save, take care of, treat, process, and transport such products produced from the land covered hereby and to enter upon said lands for such purposes without additional payments. The land covered hereby, containing a total of ________________ acres, more or less, herein called "said land", is located in the County of Vernon, State of Missouri, and
described as follows:

 

See Exhibit A attached hereto and made a part hereof.

 

together with all accretions, strips, and gores adjacent or contiguous thereto and owned or claimed by Lessor.

 

2. Subject to provisions herein contained, this lease shall remain in full force and effect for each and all of the purposes hereof for a term of Five (5) years from the date hereof (hereinafter called the "primary term"), and as long thereafter as oil or gas of whatsoever nature and kind is produced or operations for oil or gas
are conducted hereunder, or on lands pooled or unitized with all or any part of said land, provided, however, that in no event shall this lease terminate if: a) operations for the production of oil or gas from a well located on said land, or on lands pooled or unitized with all or any part of said land; or, b) operations
for the injection of water, brine, steam, or other fluids into subsurface strata, are ongoing. The word "operations" as used in this lease shall refer to any of the following and any activities related thereto; clearing title to drill site, preparing location for drilling, moving in equipment, drilling, testing, completing, equipping, reworking, re-completing, deepening, plugging back, repairing or other operations on an existing
or new well or the dewatering a reservoir, in search for or in an endeavor to obtain or re-establish production of oil, gas or other minerals and to produce oil or gas, whether or not in paying quantities.

 

 

 

 

 

166

 

SCHEDULE "B"

(continued)

 

3.  This is a Paid Up Lease. In consideration of the cash payment, Lessor agrees that Lessee shall not be obligated, except as otherwise provided herein, to commence or continue any operations during the primary term or any extension thereof.

 

4.  In consideration of the premises, Lessee covenants and agrees:

(a)      To deliver in kind to the Lessor as royalty, free of cost, on the lease, or in the pipe line to which Lessee may connect wells on said land, the equal one-eighth (118) part of all oil (including
crude oil, shale oil, bitumen, casinghead gasoline, condensate, distillate, kerosene and other liquid hydrocarbons) produced and saved from said land, or from time to time at the option of Lessee, may pay Lessor one-eighth (118) of the sales amount realized by Lessee computed at the first point of sale of the product so sold;

(b)         To pay Lessor on gas and its constituent products (including natural gas, casinghead gas, coal gas, carbon dioxide, nitrogen and helium) produced from said land (1) when sold by Lessee, one-
eighth (1/8) of the amount realized by Lessee, computed at the first point of sale of the gas, or (2) when used by Lessee off the leased premises (and lands pooled therewith) or in the manufacture of other products there from, one-eighth (1/8) of the market value of such gas calculated at the nearest
point of sale and based on the regional prevailing gas price as if said gas were sold into the open market as provided in (1) above; and,

(c)         Lessee may pay all taxes and fees levied upon Lessor's royalty share of production of oil, gas and other minerals covered hereby and deduct the amount so paid from any monies payable to Lessor hereunder.

 

5.  If any well, capable of producing oil or gas covered hereby, whether or not in paying quantities, located on said land, or on lands pooled or unitized with all or any part of said land, is at any time shut-in and production there from is not sold or used off the premises, nevertheless such shut-in well shall be considered
a well producing oil and/or gas and this lease will continue in force while such well is shut-in, whether before or after the expiration of the primary term. Lessee shall use reasonable diligence to market oil or gas capable of being produced from such shut-in well, but Lessee shall not be obligated to install or furnish facilities other than well facilities and ordinary lease facilities of flow lines, separator
and lease tanks, and shall not be required to settle labor trouble or to shall be under no obligation to re-inject or recycle gas, or market the oil or gas upon terms unacceptable to Lessee or under conditions or circumstances which in Lessee's judgment are uneconomic or otherwise unsatisfactory. if all wells on said land, or on lands pooled or unitized with all or part of said land, are shut-in, then within sixty (60) days after expiration of each period of one year in length (annual period) during which all
wells are shut- in, Lessee shall be obligated to pay or tender, as substitute royalty, to Lessor, the sum of Two Dollars ($2.00) multiplied by the number of acres subject to this lease, provided, however, that if production from a well or wells is sold or used off said land before the end of any such period or, if at the end of any such annual period this lease is being maintained in force and effect other than
solely by reason of the shut-in well or wells, Lessee shall not be obligated to pay or tender said sum of money for that annual period.

 

 

 

 

 

 

167

 

SCHEDULE "B"

(continued)

The limitation of the shut-in period shall be no longer than 3 years after this lease has expired of its own volition. This substitute royalty payment may be made in currency, draft of Lessee's or check, at the option of Lessee, and the depositing of such payment in any post office, addressed to Lessor, or its designated bank, within
sixty (60) days after the expiration of the annual period shall be deemed sufficient payment as herein provided. Notwithstanding any other provision to the contrary, this lease shall not terminate because of a failure to properly or timely make substitute royalty payments unless Lessor shall have given Lessee written notice of such failure to properly or timely make such substitute royalty payment and Lessee shall have failed for a period of 30 days after receipt of such notice to tender such payment in the proper
amount, together with a late or improper payment penalty of $100.00.

 

6.  If said Lessor owns a lesser interest in said land than the entire and undivided fee simple estate therein, then the bonuses, royalties, shut-in royalties and any other payments, hereunder are to be calculated and paid to said Lessor in proportion to Lessor's interest in the rights with respect to which each payment is made;
that is, if Lessor owns a lesser interest in any of the rights which are subject to this lease than the full and entire interest therein, then the payments in respect to such rights as herein provided for shall be paid to Lessor only in proportion which Lessor's interest in such rights bears to the full and entire interest in such rights. Should the interest of the Lessor in said land increase or decrease during the term hereof by reason of any reversionary interest then future payments in respect to such rights
shall be increased or decrease accordingly, beginning with the next succeeding payment after such reversion.

 

7.  The Lessee shall have the right to use, free of cost, gas, oil and water found on this land for its operations thereon, except water from the wells and ponds or lakes, without permission of the surface owner. The Lessee shall bury its pipe lines below plow depth (using double ditch method — 36") and shall pay for damage
caused by its operations to growing crops on said land. No well shall be drilled nearer than 200 feet to the house or barn on said premises without the written consent of the Lessor. Lessee shall have the right at any time during, upon mutual agreement but will not be unreasonably withheld, or after the expiration of this lease to remove all machinery, fixtures, houses, buildings and other structures placed on said premises, including the right to draw and remove all casing, Upon cessation of all operations,
Lessee will endeavor to restore said lands utilized by its operations to as near as reasonably possible to the original condition existing prior to such operations.

 

8.  If the estate of either party hereto is assigned, and the privilege of assigning in whole or in part is expressly allowed, the covenants hereof shall extend to the heirs, devisees, executors, administrators, successors, and assigns, but no change of ownership in the land, or in the royalties, or in the shut-in royalty payments,
or other payment due under this lease shall be binding on the Lessee until it has been furnished with either the original recorded instrument of conveyance, or a duly certified copy thereof, or a certified copy of the will of any deceased owner and of the probate thereof, or a certified copy of the proceedings showing the appointment of an administrator or executor for the estate of any deceased owner, whichever is appropriate, together with all recorded instruments of conveyance, or duly certified copies thereof
necessary in showing a complete chain of title out of the Lessor to the full interest claimed, and all advance payments made hereunder before receipt of such documents shall be binding on any direct or indirect assignee, grantee, devisee, administrator, executor or heir of Lessor. If any payment to be paid to Lessor under any provision hereof shall be payable to three or more persons, Lessee may, without prejudice to any of its
rights hereunder, defer such payment until Lessor's have appointed a common agent to receive such payment and give receipt for the same.

 

 

 

168

 

SCHEDULE "B"

(continued)

 

9.  No change or division in ownership of the land, shut-in or royalties or any interest therein however accomplished, shall operate to enlarge the obligations or diminish the rights of lessee. If the leased premises are now or shall hereafter be owned in severalty or in separate tracts, the premises shall nevertheless be developed
and operated as one lease and there shall be no obligation on the part of the Lessee to offset wells on separate tracts into which the land covered by this lease may hereafter be divided by sale, devise, descent, or otherwise, or to furnish separate measuring tanks or other devices. it is hereby agreed that in the event this lease shall be assigned as to a part or as to parts of the above described land and the holder or owner of any such part or parts shall default in the payment of the proportionate part of
any amount due from him or them, such default shall not operate to defeat or affect this lease insofar as it covers a part of said land upon which the Lessee or any assignee hereof shall make payments due.

 

10.  Lessor hereby warrants and agrees to defend title conveyed to Lessee hereunder by, through and under Lessor, but not otherwise, and agrees that Lessee at Lessee's option may pay and discharge any taxes, mortgages or liens existing, levied or assessed on or against the leased premises.

 

If Lessee exercises such option, Lessee shall be subrogated to the rights of the party to whom payment is made, and, in addition to its other rights, may reimburse itself out of any royalties or shut-in royalties otherwise payable to Lessor hereunder. In the event Lessee is made aware of any claim inconsistent with Lessor's title,
Lessee may suspend the payment of royalties and shut-in royalties hereunder, without interest, until Lessee has been furnished satisfactory evidence that such claim has been resolved.

 

11.  Lessee may at any time surrender or cancel this lease in whole or in part by delivering or mailing such release to the Lessor, or by placing the release of record in the county where said land is situated. If this lease is surrendered or cancelled as to only a portion of the acreage covered hereby, then all payments and liabilities
thereafter accruing under the terms of this lease as to the portion cancelled, shall cease and terminate, and any shut-in royalty or other payments thereafter paid may be apportioned on an acreage basis, but as to the portion of the acreage not released the terms and provisions of this lease shall continue and remain in full force and effect for all purposes.

 

 

 

 

 

169

 

SCHEDULE "B"

(continued)

 

12.  Lessee, at its option, is hereby given the right and power to voluntarily pool or unitize all or any portion of said land with other lands, lease or leases, or portion or portions thereof, or mineral or horizon thereunder, in the immediate vicinity thereof, such pooling to consist of tracts contiguous to one another and to
be into a unit or units containing approximately 160 surface acres, plus 10% acreage tolerance, in the event of an oil well, or into a unit or units containing approximately 640 surface acres, plus 10% tolerance, in the event of a gas well. If larger units are required, under any governmental rule or order, for the drilling or operation of a well at a regular location, or for obtaining maximum allowable, or for
any well to be drilled, drilling, or already drilled, or for the implementation of any enhanced oil or gas recovery scheme, any such unit may be established or enlarged, to conform to the size required by such governmental order or rule. Lessee may create, enlarge or reform any unit or units at any time and from time to time during the maintenance of the lease, whether before or after production has been established, either on
said land or portion of said land included within any unit or on other land unitized therewith, and any such unit may include any well to be drilled, being drilled, being re-completed or already completed. A unit established hereunder shall be valid and effective for all purposes of this lease even though there may be land or mineral, royalty or leasehold interest in land within the unit, which are not effectively pooled or unitized. Any operations conducted on any part of such pooled or unitized land shall be
considered for all purposes, except the payment of royalty, as operations conducted under this lease. In no event shall Lessee be required to drill more than one well in each unit. Lessee may at any time create, enlarge, reform, reduce, dissolve or terminate each unit by recording a written declaration identifying such unit in the records of the county or counties in which such unit is located and in which the land herein leased is situated. If production is found on the pooled acreage, it shall be treated as
if production is had from this lease whether the well or wells be located on the premises covered by this lease or not. In lieu of the royalties elsewhere herein specified, the Lessor shall receive on production from a unit so pooled only such portion of the royalty stipulated hereinabove as the amount of its acreage placed in the unit, or its royalty interest therein, on an acreage basis, as it bears to the total acreage so pooled in the particular unit involved.

 

13.  All provisions hereof, express or implied, shall be subject to all federal and state laws, and the orders, rules, or regulations of all governmental agencies administering the same, and this lease shall not be in any way terminated wholly or partially, nor shall the Lessee be liable in damages for failure to comply with any
of the express or implied provisions hereof if such failure accords with any such laws, orders, rules or regulations. If Lessee shall be prevented during the last year of the primary term hereof from drilling a well hereunder by the order of any constituted authority having jurisdiction, or if the Lessee shall be unable during said period to drill a well hereunder due to the equipment necessary in the drilling thereof not being available on account
of any cause, the primary term of this lease shall continue until one year after said order is suspended and/or said equipment is available.

 

14.  This lease may be extended, at Lessee's option, as to all or any part of the lands covered hereby for Five (5) years by Lessee tendering or paying to Lessor a bonus amount of $5.00 dollars per acre.

 

Such bonus payment for the extended period will be tendered to Lessor at the address first written above or its designated bank, prior to the expiration of the primary term of this lease. Upon such payment being tendered, the primary term of this lease shall be considered continuous, commencing the date of the lease and continuing
to the end of the extended primary term, and as long thereafter as production or operations are maintained on this lease.

 

15.  In the event that the Lessee shall fail to comply with any term or condition of this lease, or fail to fulfill any rights, duties or obligation hereunder, the Lessor shall notify the Lessee in writing of the alleged nature of the default and the Lessee shall have sixty (60) days to cure said default. if Lessee cures said
default within the time period specified, the Lessee shall not be deemed in default hereunder. However, this clause shall not protect the Lessee or be operative in the event of continual, repeated and deliberate actions causing such default, and this clause shall not protect Lessee in the event of deliberate delays in timely payment of bonus or royalties due.

 

 

 

 

170

 

SCHEDULE "B"

(continued)

 

16.  The undersigned hereby release and relinquish all rights of dower, curtesy and homestead in the premises covered herein, insofar as said right of dower, curtesy and homestead may in any way effect the purposes for which this lease is made as recited herein.

 

17.  Should one or more of the parties hereinabove named as Lessor fail to execute this lease, it shall nevertheless be binding upon all such parties who do execute it as Lessor. The word "Lessor" as used in this lease shall mean any one or more or all of the parties who execute this lease as Lessor. All of the terms, conditions,
stipulations and provisions of this lease shall extend to and be binding upon all heirs, successors and assigns of Lessor and Lessee.

 

SEE EXHIBIT "B" ATTACHED HERETO AND MADE A PART HEREOF;

 

IN WITNESS WHEREOF, this instrument is executed on the day and year first set out hereinabove.

 

	Sign: ______________________________________	Sign: ______________________________________
	 	 
	Print: ______________________________________	Print: ______________________________________

 

STATE OF MISSOURI                               )

                                                                        )

COUNTY OF ____________________ )... SS.

 

Before me, the undersigned, a Notary Public, in and for said County and State personally appeared ______________________________________________________________, on the ___________ day of ____________________________,
2007, to me known to be the identical person  _________ who executed the ____________________________ within and foregoing instrument and acknowledged to me that _________________ executed the same as _____________________ free and voluntary act and deed
for the uses and purposes therein set forth.

 

Given under my hand and seal of office the day and year last above written.

 

 

 

	 	 	 
	 	Notary Public	 

 

My Commission Expires:  ___________________________

 

 

 

 

171

 

SCHEDULE "B"

(continued)

 

EXHIBIT "A"

 

EXHIBIT 'A" attached hereto and made a part hereof to this Oil and Gas Lease between, ____________________________, __________________________, as Lessor, and Audubon Oil & Gas, LLC, as Lessee,
dated the ________________ day of ____________________, 2007.

 

Map Parcel(s): 16-2.0-9-0-0-2.00

 

PUT THE LEGAL DESCRIPTION FROM DEED 

 

Map Parcel(s): 16-2.0-4-0-0-3.00

 

PUT THE LEGAL DESCRIPTION FROM DEED 

 

 

Containing 67.20 acres In Section 4 T35N, R33W

 

Map Parcel(s): 16-2.0-4-0-0-4.00

 

PUT THE LEGAL DESCRIPTINO FROM DEED

 

 

containing ____________________ acres, more or less, it being the purpose and intent of Lessor to lease, and Lessor does hereby lease, all strips or parcels of land including all contiguous or adjacent lands
(including but not limited to those underlying all alleys, street, roads or highways and all riparian or submerged lands along or underlying any rivers, lakes or other bodies of water) adjoining the above described land and (a) owned or claimed by Lessor by limitation, prescription, possession, reversion, other operation of law or unrecorded instrument, or (b) as to which Lessor has a preference
right of acquisition, and all rights and interests therein or appurtenant thereto. In this regard, Lessor agrees to execute any supplemental agreement requested by Lessee to perfect and document this lease on said land or to provide and document a more complete and accurate description of said land. For all purposes of this lease, the
acreage shall be deemed to be as stated above, whether or not it actually comprises more or less.

 

 

 

 

 

 

172

 

SCHEDULE "B"

(continued)

 

EXHIBIT B

 

EXHIBIT (B) attached hereto and made a part hereof to this Oil and Gas Lease between, ___________________________, _______________________, Lessor (s), and Audubon Oil and Gas,
LLC, as Lessee, dated _________________, 2007.

 

 

Crop damages shall be paid on the following schedule, formula, and understanding:

lst Year after drilling: Length times width divided by 43,560 times $500 per acre—pro-rated. 2nd year: 50% of the same above formula.

3rd year: 50% of the previous year's formula.

 

Lessee agrees to work to mutually agree with Lessor on a reasonable path of ingress and egress for operations being conducted on the leased lands, and Lessor's mutual agreement will not be unreasonably withheld.

 

Lessor maintains its normal and customary right to access and use of the surface and it is not the intent of this lease to inhibit the Lessor from general customary use of the surface, other than the rights granted herein for exploration incumbent with the purpose of this Lease for the Lessee.

 

Lessee shall comply with all Environmental Laws in the exercise of any of their rights created by this lease agreement. It is agreed and understood that Lessor shall not be responsible for any loss due to failure to comply with any Environmental Law(s) and Lessee hereby agrees to indemnify, protect and save harmless Lessor from any
and all fines, claims, demands or rights of any third party or parties whether said parties are governmental bodies or otherwise regarding the Lessee's use and occupancy of the premises (this indemnification agreement shall include all costs, including, but not limited to property). "Environmental Law", shall mean any federal, state or local statute, law, ordinance, code, rule, regulation, order or decree regulating, relating to, or imposing liability or standards of conduct concerning any hazardous material,
as may now be or at any time hereafter become to be in effect. "Hazardous Material" shall mean any hazardous, toxic or dangerous waste, substance or material defined as such in, or for the purposes of any environmental law.

 

 

 

 

 

173

 

SCHEDULE "B"

(continued)

 

Lessee will indemnify Lessor from any and all liability for injury of persons or property arising out of Lessee's operations on the leased premises. Lessee will carry and keep in full force, at its own expense, at all time that the lease is in effect, insurance with a reputable insurance company of at least the following as a minimum
coverage's: General Liability in the amount of one million dollars ($1,000,000) for each occurrence and one million dollars ($1,000,000) aggregate for any one accident, and one hundred thousand dollars ($100,000) on property damage. Such insurance shall be in a form satisfactory to Lessor and prior to entering the leased premises or commencing any operations thereon, Lessee shall furnish Lessor with current certificates evidencing
the coverage.

 

 

 

 

 

 

 

 

 

 

 

174

 

OPERATING AGREEMENT

SCHEDULE "C"

 

 

 

175

 

 

 

 

176

 

SCHEDULE "C"

(continued)

 

 

177

 

SCHEDULE "C"

(continued)

 

 

178

 

SCHEDULE "C"

(continued)

 

 

179

 

SCHEDULE "C"

(continued)

 

 

180

 

SCHEDULE "C"

(continued)

 

 

181

 

SCHEDULE "C"

(continued)

 

 

182

 

SCHEDULE "C"

(continued)

 

 

183

 

SCHEDULE "C"

(continued)

 

 

184

 

SCHEDULE "C"

(continued)

 

 

185

 

SCHEDULE "C"

(continued)

 

 

186

 

SCHEDULE "C"

(continued)

 

 

187

 

SCHEDULE "C"

(continued)

 

 

188

 

SCHEDULE "C"

(continued)

 

 

189

 

 

EXHIBIT "D"

 

Attached to and made a part of that certain Operating Agreement dated August 27, 2009,

by and between MegaWest Energy Missouri Corp., as Operator

and those parties

indicated in such agreement as Non-Operators.

 

INSURANCE

 

At all times while operations are conducted under this agreement; Operator shall maintain for the benefit of all parties hereto, insurance of the types and in the maximum amounts as set forth below. Premiums for such insurance shall be charged to the Joint Account.

 

Non-operating working interest owners shall be named as additional insureds on the liability insurance policies, but only with respect to the performance of all work hereunder.

 

Non-operating working interest owners shall be named as additional insureds on any liability insurance policies of any contractor of Operator that names Operator as an additional insured.

 

All such insurance shall be carried in an acceptable company or companies; shall be maintained in full force and effect during the terms of this agreement; and shall not be canceled, altered or amended without thirty (30) days prior written notice. If so required, Operator agrees to have its insurance carrier furnish certificates
of insurance evidencing such insurance coverages.

 

Operator and non-operating working interest owners agree to mutually waive subrogation in favor of each other on all insurance carried by each party and/or to obtain such waiver from the insurance carrier if so required by the insurance contract. If such a waiver is not obtained, the party failing to do so shall indemnify the other
party for any claim by an insurance carrier arising out of subrogation. Operator and non-operating working interest owners further agree that the insurance policies listed herein are primary to, and non-contributory with all other valid and collectible insurance policies of the non-operating working interest owners.

 

	
  
	
A.
	
Worker's Compensation insurance in full compliance with all applicable state and federal laws and regulations.

 

	
  
	
B.
	
Employer's Liability insurance in the limits of $1,000,000 per accident covering injury or death to any employee who may be outside the scope of the Workers' Compensation statute of the state in which the work is performed.

 

	
  
	
C.
	
Commercial General Liability insurance with combined single limits per occurrence/$1,000,000 for bodily injury and property damage, including property damage by blowout and cratering, completed operations and broad form contractual liability as respects any contract into which the Operator may enter under the terms of this Agreement.

 

	
  
	
D.
	
Automobile Liability insurance covering owned, non-owned and hired automotive equipment with limits for Bodily Injury and property Damage of $1,000,000 per accident.

 

	 	
E. 
	
Umbrella Liability insurance with limit of $10,000,000 per occurrence.

 

 

 

 

 

 

  

190

  

EXHIBIT “E”

 

EQUAL EMPLOYMENT OPPORTUNITY AND

NON-DISCRIMINATION SUPPLEMENT

 

Attached  to and made a part of that certain Operating Agreement dated Aug 27/09, by and between MegaWest Energy Missouri Corp., as Operator, and Mega
Partners 1, LLC, as Non-Operator.

The term "Contractor", as used herein shall mean the party designated or acting as contractor, Operator or Seller in the foregoing agreement, of which this supplement is a part.

 

During the performance of this contract, Contractor agrees as follows:

 

1.          The Contractor will not discriminate against any employee or applicant for employment because of race, color, religion, sex or national origin. Contractor will take affirmative action to insure that applicants are employed; and that employees are treated during employment, without
regard to their race, color, religion, sex or national origin. Such action shall include, but not be limited to, the following: employment, upgrading, demotion or transfer; recruitment or recruitment advertising; layoff or termination, rates of pay or other forms of compensation; and selection for training, including apprenticeship. The Contractor agrees to post, in conspicuous places available to employees and applications for employment, notices to be provided by the contracting officer, setting forth the provisions
of this nondiscrimination clause.

 

2.          The Contractor will, in all solicitations or advertisements for employees placed by or on behalf of the Contractor, state that all qualified applicants will receive consideration for employment without regard to race, color, religion, sex or national origin.

 

3.          The Contractor will send to each labor union or representative of workers with which he has a collective bargaining agreement or other contract or understanding, a notice to be provided by the agency contracting officer, advising the labor union or workers' representative of the Contractor's
commitments under Section 202 of Executive Order 11246 of September 24, 1965, and shall post copies of the notice in conspicuous places available to employees and applicants for employment.

 

4.          The Contractor will comply with all provisions of Executive Order 11246 of September 24, 1965, and of the rules, regulations and relevant orders of the Secretary of Labor.

 

5.          The Contractor will furnish all information and reports required by Executive Order 11246 of September 24, 1965, and by the rules, regulations and orders of the Secretary of Labor, or pursuant thereto, and will permit access to his books, records and accounts by the contracting agency
and the Secretary of Labor for purposes of investigation to ascertain compliance with such rules, regulations and orders,

 

6.          In the event of Contractor's noncompliance with the non-discrimination clauses of this contract or with any of such rules, regulations or orders, this contract may be canceled, terminated or suspended in whole or in
part, and the Contractor may be declared ineligible for further Government contracts in accordance with procedures authorized in Executive Order 11246 of September 24, 1965, or by rule, regulation or order of the Secretary of Labor, or as otherwise provided by law.

 

7.          The Contractor will include the provisions of paragraphs (1) though (7) in every subcontract or purchase order unless exempted by rules, regulations or orders of the Secretary of Labor issued pursuant to Section 204 of Executive Order 11246 of September 24, 1965, so that such provisions
will be binding upon each subcontractor or vendor. The Contractor will take such action with respect to any subcontract or purchase order as the contracting agency may direct as a means of enforcing such provision, including sanctions of noncompliance; provided. however, that in the event the Contractor becomes involved
in, or is threatened with, litigation with a subcontractor or vendor as a result of such direction by the contracting agency, the Contractor may request the United States to enter into such litigation to protect the interests of the United States.

  

191

  

EXHIBIT "E"

(continued)

Contractor acknowledges that it may be required to file Standard Form 100 (EEO-1) promulgated jointly by the Office of Federal Contract Compliance, the Equal Employment Opportunity Commission and Plans for Progress, within thirty (30) days of the date of contract award if such report has not been filed for the current year and otherwise comply with or file such other
compliance reports as may be required under Executive Order 11246, as amended, and Rules and Regulations adopted thereunder. Contractor further acknowledges that it may be required to develop a written affirmative action compliance program as required by the Rules and Regulations approved by the Secretary of Labor under authority of Executive Order 11246 and supply the other party or parties to the
foregoing agreement with a copy of such program if they so request.

 

Contractor certifies that it does not and will not maintain or provide for its employees any segregated facilities at any of its establishments, and that it does not and will not permit its employees to perform their services at any location, under its control, where segregated facilities are maintained. For this purpose it is understood
that the phrase "segregated facilities" includes facilities which are in fact segregated on a basis of race, color, religion, or national origin, because of habit, local custom or otherwise. It is further understood and agreed that maintaining or providing segregated facilities for its employees or permitting its employees to perform their services at any location under its control where segregated facilities are maintained is a violation of the equal opportunity clause required by Executive Order 11246 of September
24, 1965. Contractor agrees to obtain similar certification from its subcontractor prior to the award of subcontract which are not exempt from the provisions of the equal opportunity clause.

 

 

 

 

 

 

192

 

 

 

EXHIBIT "F”

 

EQUAL EMPLOYMENT OPPORTUNITY AND

NON-DISCRIMINATION SUPPLEMENT

 

Attached  to and made a part of that certain Operating Agreement dated Aug 27/09, by and between MegaWest Energy Missouri Corp, as Operator, and Mega
Partners 1, LLC, as Non—Operator.

The term "Contractor", as used herein shall mean the party designated or acting as contractor, Operator or Seller in the foregoing agreement, of which this supplement is a part.

 

During the performance of this contract, Contractor agrees as follows:

 

1.          The Contractor will not discriminate against any employee or applicant for employment because of race, color, religion, sex or national origin. Contractor will take affirmative action to insure that applicants are employed; and that employees are treated during employment, without
regard to their race, color, religion, sex or national origin. Such action shall include, but not be limited to, the following: employment, upgrading, demotion or transfer; recruitment or recruitment advertising; layoff or termination, rates of pay or other forms of compensation; and selection for training, including apprenticeship. The Contractor agrees to post, in conspicuous places available to employees and applications for employment, notices to be provided by the contracting officer, setting forth the provisions
of this nondiscrimination clause.

 

2.          The Contractor will, in all solicitations or advertisements for employees placed by or on behalf of the Contractor, state that all qualified applicants will receive consideration for employment without regard to race, color, religion, sex or national origin.

 

3.          The Contractor will send to each labor union or representative of workers with which he has a collective bargaining agreement or other contract or understanding, a notice to be provided by the agency contracting officer, advising the labor union or workers' representative of the Contractor's
commitments under Section 202 of Executive Order 11246 of September 24, 1965, and shall post copies of the notice in conspicuous places available to employees and applicants for employment.

 

4.          The Contractor will comply with all provisions of Executive Order 11246 of September 24, 1965, and of the rules, regulations and relevant orders of the Secretary of Labor.

 

5.          The Contractor will furnish all information and reports required by Executive Order 11246 of September 24, 1965, and by the rules, regulations and orders of the Secretary of Labor, or pursuant thereto, and will permit access to his books, records and accounts by the contracting agency
and the Secretary of Labor for purposes of investigation to ascertain compliance with such rules, regulations and orders,

 

6.           In the event of Contractor's noncompliance with the non-discrimination clauses of this contract or with any of such rules, regulations or orders, this contract may be canceled, terminated or suspended in whole or in
part, and the Contractor may be declared ineligible for further Government contracts in accordance with procedures authorized in Executive Order 11246 of September 24, 1965, or by rule, regulation or order of the Secretary of Labor, or as otherwise provided by law.

 

7.          The Contractor will include the provisions of paragraphs (1) though (7) in every subcontract or purchase order unless exempted by rules, regulations or orders of the Secretary of Labor issued pursuant to Section 204 of Executive Order 11246 of September 24, 1965, so that such provisions
will be binding upon each subcontractor or vendor. The Contractor will take such action with respect to any subcontract or purchase order as the contracting agency may direct as a means of enforcing such provision, including sanctions of noncompliance; provided. however, that in the event the Contractor becomes involved in, or is threatened
with, litigation with a subcontractor or vendor as a result of such direction by the contracting agency, the Contractor may request the United States to enter into such litigation to protect the interests of the United States.

 

 

  

193

  

EXHIBIT "F"

(continued)

MODEL FORM RECORDING SUPPLEMENT TO

OPERATING AGREEMENT AND FINANCING STATEMENT

AND

MEMORANDUM OF INTEREST OPTION AND PURCHASE AND SALE PROVISIONS

 

THIS AGREEMENT, entered into by and between Mega West Energy Missouri Corp____________, hereinafter referred to as "Operator," and

 

the signatory party or parties other than Operator, hereinafter referred to individually as "Non-Operator," and collectively as "Non-Operators."

 

WFIEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or Oil and Gas Interests in the land identified in Exhibit "A" (said land, Leases and Interests being hereinafter called the "Contract Area"), and in any instance in which the Leases or Interests of a party are not of record, the record owner and the party hereto
that outs the interest or rights therein are reflected on Exhibit "A";

 

WHEREAS, the parties hereto have executed an Operating Agreement dated  August 27, 2009 (herein the "Operating Agreement"),

 

covering the Contract Area for the purpose of exploring and developing such lands, Leases and Interests for Oil and Gas; and

 

WHEREAS, the parties hereto have executed this agreement for the purpose of imparting notice to all persons of the rights and obligations of the parties under the Operating Agreement and for the further purpose of perfecting those rights capable of perfection.

 

NOW, THEREFORE, in consideration of the mutual rights and obligations of the parties hereto, it is agreed as follows:

 

	
1. 
	
This agreement supplements the Operating Agreement, which Agreement in its entirety is incorporated herein by reference, and all termsused herein shall have the meaning ascribed to them in the Operating Agreement.

 

	
2. 
	
The parties do hereby agree that:

 

	
  
	
A.
	
The Oil and Gas Leases and/or Oil and Gas Interests of the parties comprising the Contract Area shall be subject to and burdened with the terms and provisions of this agreement and the Operating Agreement, and the parties do hereby commit such Leases and Interests to the performance thereof.

 

	
  
	
B.
	
The exploration and development of the Contract Area for Oil and Gas shall be governed by the terms and provisions of the Operating Agreement, as supplemented by this agreement.

 

	
  
	
C.
	
All costs and liabilities incurred in operations under this agreement and the Operating Agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the parties hereto, as provided in the Operating Agreement.

 

	
  
	
D.
	
Regardless of the record title ownership to the Oil and Gas Leases and/or Oil and Gas Interests identified on Exhibit "A," all production of Oil and Gas from the Contract Area shall be owned by the parties as provided in the Operating Agreement; provided nothing contained in this agreement shall be deemed an assignment or cross-assignment of interests covered hereby.

 

	
  
	
E.
	
Each party shall pay or deliver, or cause to be paid or delivered, all burdens on its share of the production from the Contract Area as provided in the Operating Agreement.

 

	
  
	
F.
	
An overriding royalty, production payment, net profits interest or other burden payable out of production hereafter created, assignments of production given as security for the payment of money and those overriding royalties, production payments and other burdens payable out of production heretofore created and defined as Subsequently Created Interests in the Operating Agreement shall be (i) borne solely by the party
whose interest is burdened therewith, (ii) subject to suspension if a party is required to assign or relinquish to another party an interest which is subject to such burden, and (iii) subject to the lien and security interest hereinafter provided if the party subject to such burden fails to pay its share of expenses chargeable hereunder and under the Operating Agreement, all upon the terms and provisions and in the times and manner provided by the Operating Agreement.

 

	 	
G.
	
The Oil and Gas Leases and/or Oil and Gas Interests which are subject hereto may not be assigned or transferred except in accordance with those terms, provisions and restrictions in the Operating Agreement regulating such transfers.

 

This agreement and the Operating Agreement shall be binding upon and shall inure to the benefit of the parties hereto, and their respective heirs, devisees, legal representatives, and assigns, and the terms hereof shall be deemed to run with the leases or interests included within the lease Contract Area.

 

  

194

  

EXHIBIT "F"

(continued)

	
  
	
H.
	
The parties shall have the right to acquire an interest in renewal, extension and replacement leases, leases proposed to be surrendered, wells proposed to be abandoned, and interests to be relinquished as a result of non-participation in subsequent operations, all in accordance with the terms and provisions of the Operating Agreement.

 

	
  
	
I.
	
The rights and obligations of the parties and the adjustment of interests among them in the event of a failure or loss of title, each party's right to propose operations, obligations with respect to participation in operations on the Contract Area and the consequences of a failure to participate in operations, the rights and obligations of the parties regarding the marketing of production, and the rights
and remedies of the parties for failure to comply with financial obligations shall be as provided in the Operating Agreement.

 

	
  
	
J.
	
Each party's interest under this agreement and tinder the Operating Agreement shall be subject to relinquishment for its failure to participate in subsequent operations and each party's share of production and costs shall be reallocated on the basis of such relinquishment, all upon the terms and provisions provided in the Operating Agreement.

 

	
  
	
K.
	
All other matters with respect to exploration and development of the Contract Area and the ownership and transfer of the Oil and Gas Leases and/or Oil and Gas Interest therein shall be governed by the terms and provisions of the Operating Agreement,

 

	
3.
	
The parties hereby grant reciprocal liens and security interests as follows:

 

	
  
	
A.
	
Each party grants to the other parties hereto a lien upon any interest it now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests in the Contract Area, and a security interest arid/or purchase money security interest in any interest it now owns or hereafter acquires in the personal property and fixtures on or used or obtained for use in connection therewith, to secure performance of all of
its obligations tinder this agreement and the Operating Agreement including but not limited to payment of expense, interest and fees, the proper disbursement of all monies paid under this agreement and the Operating Agreement, the assignment or relinquishment of interest in Oil and Gas Leases as required under this agreement and the Operating Agreement, and the proper performance of operations under this agreement and the Operating Agreement. Such lien and security interest granted by each party hereto shall
include such party's leasehold interests, working interests, operating rights, and royalty and overriding royalty interests in the Contract Area now owned or hereafter acquired and in lands pooled or unitized therewith or otherwise becoming subject to this agreement and the Operating Agreement, the Oil and Gas when extracted therefrom and equipment situated thereon or used or obtained for use in connection therewith (including, without limitation, all wells, tools, and tubular goods), and accounts (including,
without limitation, accounts arising from the sale of production at the wellhead), contract rights, inventory and general intangibles relating thereto or arising therefrom, and all proceeds and products of the foregoing.

 

	
  
	
B.
	
Each party represents and warrants to the other parties hereto that the lien and security interest granted by such party to the other parties shall be a first and prior lien, and each party hereby agrees to maintain the priority of said lien and security interest against all persons acquiring an interest in Oil and Gas Leases and Interests covered by this agreement and the Operating Agreement by, through or under
such party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas Interests covered by this agreement and the Operating Agreement, whether by assignment, merger, mortgage, operation of law, or otherwise, shall be deemed to have taken subject to the lien and security interest granted by the Operating Agreement and this instrument as to all obligations attributable to such interest tinder this agreement and the Operating Agreement whether or not such obligations arise before or after such interest
is acquired.

 

	 	
C.
	
To the extent that the parties have a security interest under the Uniform Commercial Code of the state in which the Contract Area is situated, they shall be entitled to exercise the rights and remedies of a secured party under the Code. The bringing of a suit and the obtaining of judgment by a party for the secured indebtedness shall
not be deemed an election of remedies or otherwise affect the lien rights or security interest as security for the payment thereof. In addition, upon default by any party in the payment of its share of expenses, interest or fees, or upon the improper use of funds by the Operator, the other parties shall have the right, without prejudice to other rights or remedies, to collect from the purchaser the proceeds from the sale of such defaulting party's share of Oil and Gas until the amount owed by such party, plus
interest, has been received, and shall have the right to offset the amount owed against the proceeds from the sale of such defaulting party's share of Oil and Gas. All purchasers of production may rely on a notification of default from the non-defaulting party or parties stating the amount due as a result of the default, and all parties waive any recourse available against purchasers for releasing production proceeds as provided in this paragraph.

 

	
  
	
E.
	
If any party does not perform all of its obligations under this agreement or the Operating Agreement, and the failure to perform subjects such party to foreclosure or execution proceedings pursuant to the provisions of this agreement or the Operating Agreement, to the extent allowed by governing law, the defaulting party waives any available right of redemption from and after the date of judgment, any required valuation
or appraisement of the mortgaged or secured property prior to sale, any available right to stay execution or to require a marshalling of assets and any required bond in the event a receiver is appointed. In addition, to the extent permitted by applicable law, each party hereby grants to the other parties a power of sale as to any property that is subject to the lien and security rights granted hereunder or tinder the Operating Agreement, such power to be exercised in the manner provided by applicable law or otherwise
in a commercially reasonable manner and upon reasonable notice.

 

	
  
	
F.
	
The lien and security interest granted in this paragraph 3 supplements identical rights granted under the Operating Agreement.

 

	
  
	
G.
	
To the extent permitted by applicable law, Non-Operators agree that Operator may invoke or utilize the mechanics' or materialmen's lien law of the slate in which the Contract Area is situated in order to secure the payment to Operator of any sum due under this agreement and the Operating Agreement for services performed or materials supplied by Operator.

 

	
  
	
H.
	
The above described security will be financed at the wellhead of the well or wells located on the Contract Area and this Recording Supplement may be filed in the land records in the County or Parish in which the Contract Area is located, and as a financing statement in all recording offices required under the Uniform Commercial Code or other applicable state statutes to perfect the above-described security interest,
and any party hereto may file a continuation statement as necessary under the Uniform Commercial Code, or other state laws.

 

195

 

EXHIBIT "F"

(continued)

 

	
4.
	
This agreement shall be effective as of the date of the Operating Agreement as above recited. Upon termination of this agreement and the Operating Agreement and the satisfaction of all obligations thereunder, Operator is authorized to file of record in all necessary recording offices a notice of termination, and each party hereto agrees
to execute such a notice of termination as to Operator's interest, upon the request of Operator, if Operator has complied with all of its financial obligations.

 

	
5.
	
This agreement and the Operating Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs, devisees, legal representatives, successors and assigns. No sale, encumbrance, transfer or other disposition shall
be made by any party of any interest in the Leases or Interests subject hereto except as expressly permitted under the Operating Agreement and, if permitted, shall be made expressly subject to this agreement and the Operating Agreement and without prejudice to the rights of the other parties. If the transfer is permitted, the assignee of an ownership interest in any Oil andGas Lease shall be deemed a party to this agreement
and the Operating Agreement as to the interest assigned from and after the effective date of the transfer of ownership; provided, however, that the other parties shall not be required to recognize any such sale, encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee. No assignment or other disposition of interest by a party shall
relieve such party of obligations previously incurred by such party under this agreement or the Operating Agreement with respect to the interest transferred, including without limitation the obligation of a party to pay all costs attributable to an operation conducted under this agreement and the Operating Agreement in which such party has agreed to participate prior to making such assignment, and the lien and security interest granted by Article VII.B. of the Operating Agreement and hereby shall continue to
burden the interest transferred to secure payment of any such obligations.

 

	
6.
	
In the event of a conflict between the terms and provisions of this agreement and the terms and provisions of the Operating Agreement, then, as between the parties, the terms and provisions of the Operating Agreement shall control.

 

	
7.
	
This agreement shall be binding upon each Non-Operator when this agreement or a counterpart thereof has been executed by such Non-Operator and Operator notwithstanding that this agreement is not then or thereafter executed by all of the parties to which it is tendered or which are listed on Exhibit "A" as owning
an interest in the Contract Area or which 01111, in fact, an interest in the Contract Area. In the event that any provision herein is illegal or unenforceable, the remaining provisions shall not be affected, and shall be enforced as if the illegal or unenforceable provision did not appear herein.

 

	
8.
	
[intentionally omitted]

 

	
9. 
	
The Operating Agreement includes an option granted by the Operator (MegaWest Energy Missouri Corp.) to Non-Operator (Mega Partners 1, LLC) for Non-Operator to acquire an additional undivided 10% interest in each Future Project (as defined in the Operating Agreement) and according to the terms set forth in the Operating Agreement. The
Operating Agreement also includes an agreement by MegaWest Energy Missouri Corp. and Mega Partners 1, LLC for the sale or purchase of such parties' interest, as further described in Article XVI.G of the Operating Agreement

 

 

 

 

196

 

EXHIBIT "F"

(continued)

 

 

 

197

 

EXHIBIT "F"

(continued)

 

 

 

 

198

 

OPERATING AGREEMENT

SCHEDULE "G"

 

WELL DATA REQUIREMENT SHEET

 

	
TO:
	DATE:	 
	 	 	 
	 	 	 
	
WELL NAME:
	  	 
	 	 	 
	
INFORMATION REQUIRED PRIOR TO DRILLING
	
NUMBER OF COPIES
	 
	  	  	 
	
Survey Plan
	
1
	 
	
Application for Well License/Permit
	
1
	 
	
Approved Well License/Permit
	
1
	 
	
Drilling Program and Geological Prognosis
	
1
	 
	
AFE/Cost Estimate
	
1
	 
	 	 	 
	
INFORMATION REQUIRED DURING AND AFTER DRILLING
	  	 
	 	 	 
	
Daily Drilling Reports
	  	 
	
WRS Reports
	
1
	 
	
Logs and Surveys
	
1
	 
	
Cores and Sample Descriptions
	
1
	 
	
Drill Stem Test Reports and Charts
	
1
	 
	
Core Analysis
	
1
	 
	
Oil, Water and Gas Analysis
	
1
	 
	
New Oil Well Report
	
1
	 
	
Final Completion or Abandonment Report
	
1
	 
	
Daily Completion Reports
	
1
	 

Please send all of the above mentioned information to the attention of:

FAX Number:  (403) 984-6343

ADDITIONAL REQUIREMENTS AND REMARKS

Contacts (after hours):

Geologist:                                                                                Office:     (403)

  

199

  

LETTER AGREEMENT

 

[LETTERHEAD OF MEGAWEST ENERGY MISSOURI CORP.]

 

August 27, 2009

Mega Partners 1, LLC

c/o

Iroquois Capital Opportunity Fund L.P.

641 Lexington Ave, 26 FL

New York, NY 10022

Attention:  Jay Snodgrass

 

Dear Sir:

 

RE:           MISSOURI TRANSACTION - SIDE ISSUES

 

The purpose of this letter is to confirm the agreement that has been reached between our companies regarding the matters set forth below.

 

	
1.
	
DEFINITIONS

 

The following terms and expressions shall have the meanings hereinafter assigned to them, namely:

 

	
  
	
(a)
	
“Contract Area” shall have the meaning ascribed thereto in the Operating Agreement;

 

	
  
	
(b)
	
“Existing Properties” shall mean all properties located in any county in the States of Missouri, Kansas, Montana, Kentucky and Texas in which a working interest is owned by MegaWest as at the date hereof; provided, however, that the Existing Properties shall not include any properties within the Contract Area;

 

	
  
	
(c)
	
"Existing Property Cost" shall have the meaning ascribed thereto in Paragraph 3(b)(iii) hereof;

 

	
  
	
(d)
	
“Existing Properties Interest” shall mean any working interest owned by MegaWest as at the date hereof in and to the Existing Properties;

 

	
  
	
(e)
	
“Future Properties” shall mean all properties in which a working interest is acquired by MegaWest at any time subsequent to the date hereof; provided, however, that the Future Properties shall not include any properties within the Contract Area;

 

	
  
	
(f)
	
"Future Property Cost" shall have the meaning ascribed thereto in Paragraph 4(b)(iii) hereof;

 

	
  
	
(g)
	
“Future Properties Interest” shall mean any working interest acquired by MegaWest at any time subsequent to the date hereof in and to the Future Properties;

 

	
  
	
(h)
	
"Iroquois" shall mean Iroquois Capital Opportunity Fund L.P.;

 

  

200

  

LETTER AGREEMENT

	
  
	
(i)
	
“MegaWest” shall mean MegaWest Energy Missouri Corp., a Delaware corporation;

 

	
  
	
(j)
	
“MegaWest Parent” shall mean MegaWest Energy Corp., an Alberta corporation;

 

	
  
	
(k)
	
"MP1" shall mean Mega Partners 1, LLC, a Delaware limited liability company, an affiliate of Iroquois;

 

	
  
	
(l)
	
"Operating Agreement" shall mean the Operating Agreement dated August 27, 2009 between MegaWest and MP1;

 

	
  
	
(m)
	
"Option Period" shall mean the period from the date hereof until the later to occur of:

 

	
  
	
(i)
	
two (2) years having elapsed from the date hereof; and

 

	
  
	
(ii)
	
the entirety of the Preferred Stock having ceased to remain issued and outstanding;

 

	
  
	
(n)
	
"Preferred Stock" shall have the meaning ascribed thereto in the Subscription Agreement;

 

	
  
	
(o)
	
"Sale Agreement" shall mean the Agreement of Purchase and Sale dated August 27, 2009 between MegaWest and MP1;

 

	
  
	
(p)
	
“Subscription Agreement” shall mean the Subscription Agreement dated August 27, 2009 between MegaWest Parent and Iroquois; and

 

	
  
	
(q)
	
"Traditional Operating Agreement" shall mean a form of operating agreement, based upon the AAPL Model Form Operating Agreement and incorporating such elections and revisions as the parties hereto may mutually agree, all to be negotiated, prepared, finalized and executed by the parties hereto pursuant to and in accordance with the terms of Paragraph 2 hereof.

 

	
2.
	
TRADITIONAL OPERATING AGREEMENT

 

	
  
	
(a)
	
The parties hereto recognize and acknowledge:

 

	
  
	
(i)
	
that the Operating Agreement is intended to govern operations within the Contract Area, but only the unique enhanced oil recovery operations utilizing the technology and processes of MegaWest;

 

	
  
	
(ii)
	
that the Operating Agreement would be inappropriate to govern traditional oil and gas operations or any form of operations other than the unique enhanced oil recovery operations utilizing the technology and processes of MegaWest;

 

	
  
	
(iii)
	
that it is the intent of the parties hereto that a separate form of operating agreement, based upon the AAPL Model Form Operating Agreement and incorporating such elections and revisions as the parties hereto may mutually agree, shall be entered into by the parties prior to the initiation of any operations other than the unique enhanced oil recovery operations utilizing the technology and processes of MegaWest; and

 

  

201

  

LETTER AGREEMENT

	
  
	
(iv)
	
that neither of the parties hereto shall be entitled to initiate any operation pursuant to the terms of the Operating Agreement that does not form a part of the unique enhanced oil recovery operations utilizing the technology and processes of MegaWest.

 

	
  
	
(b)
	
The parties hereto agree that they shall, within a reasonable time following the date hereof, enter into good faith negotiations with a view toward preparing, finalizing and executing a Traditional Operating Agreement, to become effective upon the earlier of (i) the cessation of the unique enhanced oil recovery operations utilizing the technology and processes of MegaWest within the Contract Area, and (ii) the end
of the first period of 12 consecutive months within which no new “Project Area” has been established pursuant to the Operating Agreement.

 

	
  
	
(c)
	
The parties hereto further agree that the good faith negotiations described in the preceding paragraph shall commence within thirty (30) days of either party giving notice to the other that it wishes to begin such negotiations, and that upon such notice having been given, such negotiations shall continue with reasonable good faith diligence until the Traditional Operating Agreement has been prepared, finalized and
executed by the parties hereto.

 

	
3.
	
OPTION TO ACQUIRE INTEREST IN EXISTING PROPERTIES

 

	
  
	
(a)
	
During the Option Period, MP1 shall have the right to acquire a working interest in all or any part of the Existing Properties, all pursuant to and in accordance with the terms of this Paragraph 3.

 

	
  
	
(b)
	
Within sixty (60) days of the date hereof, MegaWest shall provide to MP1 a notice detailing:

 

	
  
	
(i)
	
the Existing Properties, broken down by area;

 

	
  
	
(ii)
	
the Existing Properties Interest in respect of each of the Existing Properties;

 

	
  
	
(iii)
	
the total of all costs incurred by MegaWest prior to the date hereof in the acquisition and development of the Existing Properties, in reasonable detail, and broken down by area (the "Existing Property Cost" of each area).

 

	
  
	
(c)
	
At any time following the delivery of the notice contemplated by Paragraph 3(b) hereof, MegaWest may, if it has incurred additional costs in the acquisition and development of the Existing Properties subsequent to the delivery of such notice, provide to MP1 a further notice detailing an updated total of all costs incurred by MegaWest prior to the date hereof in the acquisition and development of the Existing Properties,
in reasonable detail, and broken down by area (the "Existing Property Cost" of each area).

 

	
  
	
(d)
	
At any time during the Option Period, MP1 may give notice to MegaWest of its election to acquire a working interest in all or part of the Existing Properties.  Such notice shall detail:

 

	
  
	
(i)
	
the area (or areas) within which MP1 elects to acquire a working interest in the Existing Properties; and

 

  

202

  

LETTER AGREEMENT

	
  
	
(ii)
	
the size of the working interest which MP1 elects to acquire in each applicable area of the Existing Properties.

 

	
  
	
(e)
	
For greater certainty, the parties acknowledge and agree that:

 

	
  
	
(i)
	
any election made by MP1 to acquire a working interest in Existing Properties within a given area shall be invalid if it does not include an election to acquire the same proportionate size of working interest in all Existing Properties within such given area; and

 

	
  
	
(ii)
	
any election made by MP1 to acquire a working interest in Existing Properties within a given area shall be invalid if it purports to acquire a working interest greater than 20% of the Existing Properties Interest; and

 

	
  
	
(iii)
	
any election made by MP1 to acquire a working interest in Existing Properties within a given area shall be presumed to be based upon the most recent notice of the total costs incurred by MegaWest in the acquisition and development of the Existing Properties, whether delivered pursuant to Paragraph 3(b) hereof or paragraph 3(c) hereof.

 

	
  
	
(f)
	
Upon any election having been made by MP1 pursuant to and in accordance with this Paragraph 3 to acquire a working interest in all or part of the Existing Properties (each such conveyance shall provide that MegaWest warrants and agrees to defend title to such interest against all persons claiming by, through or under MegaWest and no such conveyance shall be a quitclaim);

 

	
  
	
(i)
	
MegaWest shall prepare and execute all necessary conveyances of the working interest which MP1 elects to acquire in each applicable area of the Existing Properties;

 

	
  
	
(ii)
	
MP1 shall tender to MegaWest a certified cheque, bank draft or wire transfer in an amount equal to the total Existing Properties Cost of each applicable area of the Existing Properties which MP1 has elected to acquire MULTIPLIED BY the size of the working interest which MP1 has elected to acquire in
each applicable area of the Existing Properties MULTIPLIED BY four-thirds (4/3)(in order to give MegaWest the benefit of a "third for a quarter" promote);

 

	
  
	
(iii)
	
the parties shall work in good faith and with reasonable diligence to close the conveyance of the working interests which MP1 has elected to acquire in each applicable area of the Existing Properties;

 

	
  
	
(iv)
	
where the working interests which MP1 has elected to acquire in each applicable area of the Existing Properties are governed by an existing form of operating agreement between MegaWest and any third party or third parties, MegaWest will make reasonable efforts to have MP1 recognized as a party to such operating agreement; and

 

	
  
	
(v)
	
where the working interests which MP1 has elected to acquire in each applicable area of the Existing Properties are not governed by an existing form of operating agreement between MegaWest and any third party or third parties, MegaWest and MP1 will enter into good faith negotiations with a view toward preparing, finalizing and executing an operating agreement substantially in the form of the Operating Agreement or
the Traditional Operating Agreement, whichever is appropriate for the operations contemplated within each applicable area of the Existing Properties, to govern operations on such portion of the Existing Properties.

 

  

203

  

LETTER AGREEMENT

 

	
  
	
(g)
	
The closing of each and every conveyance of an interest pursuant to and in accordance with the provisions of paragraph 3(f) (i) above shall be on the same terms and conditions, mutatis mutandis, as those set forth and contained in the Sale Agreement, including, without limitation, all representations, warranties, indemnities, covenants and conditions set forth therein; provided, however, that the defined terms used
in the provisions incorporated from the Sale Agreement shall instead refer to the equivalent provisions of this Agreement.  For example, for purposes of this Agreement, “Assets” shall mean such interests, “Closing Time,” shall mean the date on which the closing of the purchase of such interest occurs, and “Purchase Price” shall mean the purchase price for such interest as determined pursuant to paragraph 3(f)(ii) above.

 

	
4.
	
OPTION TO ACQUIRE INTEREST IN FUTURE PROPERTIES

 

	
  
	
(a)
	
During the Option Period, MP1 shall have the right to acquire a working interest in all or any part of the Future Properties, all pursuant to and in accordance with the terms of this paragraph 4.

 

	
  
	
(b)
	
Within sixty (60) days of acquiring any interest in and to any Future Properties, MegaWest shall provide to MP1 a notice detailing:

 

	
  
	
(i)
	
such Future Properties, broken down by area;

 

	
  
	
(ii)
	
the Future Properties Interest in respect of each of such Future Properties;

 

	
  
	
(iii)
	
the total of all costs incurred by MegaWest prior to the date of the notice in the acquisition and development of such Future Properties, in reasonable detail, and broken down by area (the "Future Property Cost" of each area).

 

	
  
	
(c)
	
At any time that is both during the Option Period and within sixty (60) days of receipt from MegaWest of a notice pursuant to paragraph 4(b) hereof, MP1 may give notice to MegaWest of its election to acquire a working interest in all or part of the Future Properties.  Such notice shall detail:

 

	
  
	
(i)
	
the area (or areas) within which MP1 elects to acquire a working interest in the Future Properties; and

 

	
  
	
(ii)
	
the size of the working interest which MP1 elects to acquire in each applicable area of the Future Properties.

 

	
  
	
(d)
	
For greater certainty, the parties acknowledge and agree that:

 

	
  
	
(i)
	
any election made by MP1 to acquire a working interest in Future Properties within a given area shall be invalid if it does not include an election to acquire the same proportionate size of working interest in all Future Properties within such given area;

 

  

204

  

LETTER AGREEMENT

	
  
	
(ii)
	
any election made by MP1 to acquire a working interest in Future Properties within a given area shall be invalid if it purports to acquire a working interest greater than 20% of the Future Properties Interest; and

 

	
  
	
(iii)
	
any election made by MP1 to acquire a working interest in Future Properties within a given area shall be invalid if notice of such election is not given to MegaWest at a time that is both during the Option Period and within sixty (60) days of receipt from MegaWest of notice pursuant to paragraph 4(b) hereof.

 

	
  
	
(e)
	
Upon any election having been made by MP1 pursuant to and in accordance with this Paragraph 4 to acquire a working interest in all or part of the Future Properties:

 

	
  
	
(i)
	
MegaWest shall prepare and execute all necessary conveyances of the working interest which MP1 elects to acquire in each applicable area of the Future Properties (each such conveyance shall provide that MegaWest warrants and agrees to defend title to such interest against all persons claiming by, through or under MegaWest and no such conveyance shall be a quitclaim);

 

	
  
	
(ii)
	
MP1 shall tender to MegaWest a certified cheque, bank draft or wire transfer in an amount equal to the total Future Properties Cost of each applicable area of the Future Properties which MP1 has elected to acquire MULTIPLIED BY the size of the working interest which Iroquois has elected to acquire
in each applicable area of the Future Properties;

 

	
  
	
(iii)
	
the parties shall work in good faith and with reasonable diligence to close the conveyance of the working interests which MP1 has elected to acquire in each applicable area of the Future Properties;

 

	
  
	
(iv)
	
where the working interests which MP1 has elected to acquire in each applicable area of the Future Properties are governed by an existing form of operating agreement between MegaWest and any third party or third parties, MegaWest will make reasonable efforts to have MP1 recognized as a party to such operating agreement; and

 

	
  
	
(v)
	
where the working interests which MP1 has elected to acquire in each applicable area of the Future Properties are not governed by an existing form of operating agreement between MegaWest and any third party or third parties, MegaWest and MP1 will enter into good faith negotiations with a view toward preparing, finalizing and executing an operating agreement substantially in the form of the Operating Agreement or
the Traditional Operating Agreement, whichever is appropriate for the operations contemplated within each applicable area of the Future Properties, to govern operations on such portion of the Future Properties.

 

	
5.
	
NOTICES

 

The addresses for service of the parties hereto shall be as follows:

 

Mega Partners 1, LLC

c/o

Iroquois Capital Opportunity Fund L.P.

  

205

  

LETTER AGREEMENT

641 Lexington Ave, 26 FL

New York, NY 10022

Attention:  Jay Snodgrass, Associate

    Kimberly Page, Controller

Fax: (212) 207-3452

 

MegaWest Energy Missouri Corp.

c/o

MegaWest Energy Corp.

800, 926- 5th Ave. SW

Calgary, AB, Canada

T2P 0N7

 

Attention: Land Department

Fax: (403) 984-6343

 

All notices, communications and statements required, permitted or contemplated hereunder shall be in writing, and shall be delivered as follows:

 

	
  
	
(a)
	
by personal service on a party at the address of such party set out above, in which case the item so served shall be deemed to have been received by that party when personally served;

 

	
  
	
(b)
	
by facsimile transmission to a party to the fax number of such party set out above, in which case the item so transmitted shall be deemed to have been received by that party when transmitted; or

 

	
  
	
(c)
	
except in the event of an actual or threatened postal strike or other labour disruption that may affect mail service, by mailing first class post, postage prepaid, to a party at the address of such party set out above, in which case the item so mailed shall be deemed to have been received by that party on the fifth day following the date of mailing.

 

Each of MegaWest and Iroquois may from time to time change their respective addresses for service by giving written notice to the other.

 

	
6.
	
RECORDING.  The Parties agree to execute and deliver such acknowledgments, affidavits or other documents as may be necessary to record this agreement or a memorandum of this agreement in the real property records of the counties and states listed in the definition of “Existing Properties” and to give notice of
the contents of this agreement.

 

  

206

  

LETTER AGREEMENT

If the foregoing is in accordance with your understanding of the agreement reached amongst our companies, would you please indicate your acknowledgement and acceptance by signing in the space provided and returning one copy of this letter agreement to this office.

 

Yours very truly,

 

MEGAWEST ENERGY MISSOURI CORP.

 

Per:  _________________________________________

 

 

 

ACKNOWLEDGED AND AGREED TO THIS 27th day of August, 2009.

 

 

MEGA PARTNERS 1, LLC

 

 

Per:  _________________________________________

  

207

  

LETTER AGREEMENT

Acknowledgments

STATE OF  ____________________

COUNTY OF ___________________        

This instrument was acknowledged before me on this ____ day of ___________, 2009, by ____________________ as ___________________ of MegaWest Energy Missouri Corp., a Delaware corporation.

 

	 	
____________________________________

Notary Public, State of ___________________

 

My appointment expires:

___________________

[SEAL, if any]

STATE OF  ______________________

COUNTY OF _____________________

This instrument was acknowledged before me on this ____ day of ___________, 2009, by ____________________ as ___________________ of Mega Partners 1, LLC, a Delaware limited liability company.

 

	 	
____________________________________

Notary Public, State of ___________________

 

My appointment expires:

___________________

[SEAL, if any]

 

 

208

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