Document:

Exhibit 10.3

 

  

DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,

SECURITY AGREEMENT AND FINANCING STATEMENT

from

_________________________

(Federal Income Tax Identification No. ________________)

(“Grantor,” “Mortgagor” and “Debtor”)

to

the PUBLIC TRUSTEE OF ______________ COUNTY, COLORADO, TRUSTEE

for the benefit of

_________________________________

(Federal Income Tax Identification No. _____________)

(“Grantee,” “Mortgagee” and “Secured Party,” as nominee)

A REPRODUCTION OF THIS INSTRUMENT IS SUFFICIENT AS A FINANCING STATEMENT.  FOR PURPOSES OF FILING THIS INSTRUMENT AS A FINANCING STATEMENT, THE ADDRESS OF THE GRANTOR AND DEBTOR IS:

AND THE ADDRESS OF THE GRANTEE AND SECURED PARTY IS:

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.

THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES.

THIS INSTRUMENT COVERS PROCEEDS OF COLLATERAL.

THIS INSTRUMENT COVERS PRODUCTS OF COLLATERAL.

THIS INSTRUMENT COVERS MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE EXTRACTED FROM THE EARTH (INCLUDING, WITHOUT LIMITATION, OIL AND GAS).  THIS FINANCING STATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS OF THE COUNTY RECORDER OF WELD COUNTY, COLORADO.  THE GRANTOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE CONCERNED, WHICH INTEREST IS DESCRIBED IN EXHIBIT A ATTACHED HERETO.

THIS INSTRUMENT WAS PREPARED BY AND WHEN RECORDED OR FILED SHOULD BE RETURNED TO:

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DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,

SECURITY AGREEMENT AND FINANCING STATEMENT

________________, a _____________ corporation (hereinafter referred to as “Grantor”), for and in consideration of the sum of TEN DOLLARS ($10.00) to Grantor in hand paid by ______________________, a __________ limited liability company, as “Grantee,” “Holder” or “Secured Party” of the obligations as hereinafter recited, and in order to secure the payment and performance of the obligations, covenants, warranties, agreements and undertakings of Grantor hereinafter described, does hereby GRANT, BARGAIN, SELL, CONVEY, MORTGAGE, PLEDGE, TRANSFER, ASSIGN and SET OVER to the Public Trustee of _________ County, Colorado (hereinafter called the “Trustee”) for the benefit of Grantee, and  IN TRUST WITH POWER OF SALE, the following property to the fullest extent such described interests are assignable:

(a)  All of Grantor’s rights, titles, and interests in, under and attributable to the oil and gas leases described in Exhibit A (the “Leases”) including, without limitation, any and all royalty interests and all other interests of whatsoever nature or kind and however characterized in, under or attributable to the Leases;

(b)  All Grantor’s rights, titles and interests in the mineral estate, whether now owned or hereafter acquired, in the Lands described on attached Exhibit A hereto (the “Lands”), including, without limitation, any and all reversionary interests or other interests of whatsoever nature or kind and however characterized in the Lands described on attached Exhibit A, all of which such rights, titles, interests and estates of Grantor and howsoever characterized, together with the rights, title and interests in the Leases described in subparagraph (a) being hereinafter collectively called the “Mineral Interests”;

(c)  All rights, titles, interests and estates now owned or hereafter acquired by Grantor in and to (i) the properties now or hereafter pooled or unitized with any part of the Mineral Interests insofar as they are attributable to or derive from the Mineral Interests; and (ii) all presently existing or future unitization, communitization, pooling agreements and declarations of pooled units and the units created thereby (including, without limitation, all units created under orders, regulations, rules or other official acts of any Federal, State or other governmental body or agency having jurisdiction), insofar as they are attributable to or derive from the Mineral Interests;

(d)  Without limitation, all rights, titles and interests now owned or hereinafter acquired by Grantor in oil and gas wells located on the Lands (the “Wells”);

(e)  All rights, titles, and interests now owned or hereafter acquired by Grantor in and to all oil, gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined therefrom and all other minerals (collectively called the “Hydrocarbons”) in, under and which may be produced and saved from the Lands or attributable to the Mineral Interests, including all oil in tanks and all rents, issues, profits, proceeds, products, revenues and other income and proceeds from the sale or use of Hydrocarbons;

 

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(f)  All tenements, hereditaments, appurtenances and properties in anywise appertaining, belonging, affixed or incidental to the Mineral Interests and properties, rights, titles, interests and estates described above which are now owned or which may hereafter be acquired by Grantor, including, without limitation, any and all property, real or personal, now owned or hereafter acquired and situated upon, used, held for use, or useful in connection with the operating, working or development of the Leases or the Wells or properties including without limitation, easements, servitudes, licenses and other surface use rights;

 (g)  All of the rights, titles and interests of every nature whatsoever now owned or hereafter acquired by Grantor in and to the Mineral Interests, as the same may be enlarged by the removal of any charges or encumbrances to which the Mineral Interests are subject, or otherwise; together with any and all renewals and extensions of the Leases, properties, rights, titles, interests or estates; all contracts and agreements supplemental to or amendatory of or in substitution for the contracts and agreements described or mentioned above; and any and all additional interests of any kind hereafter acquired by Grantor in and to the  Lands, Leases and Wells described on Exhibit A;

(h)  All accounts, contract rights, choses in action and general intangibles as such terms are defined in Article 9 of the Uniform Commercial Code from time to time in effect in the State of Colorado (the “Uniform Commercial Code”)  constituting a part of, relating to, or arising out of the Mineral Interests and collateral described or mentioned above, and all proceeds and products of the property and collateral described or mentioned in this and said preceding paragraphs; and

(i)  All of Grantor’s rights, now owned or hereafter acquired, in and to all records which relate to the Lands, Leases, Mineral Interests, and Wells.

All of the properties, interests and rights described in the preceding subparagraphs (a) through (i) shall be hereinafter sometimes referred to as the “Mortgaged Properties”.  If any of the lands covered by the Leases or other instrument mentioned in Exhibit A are incorrectly described, then nevertheless this Mortgage (as defined herein) shall cover all Grantor’s interest in such Leases or other instrument as to all of the lands and interests covered thereby.

TO HAVE AND TO HOLD the Mortgaged Properties, together with all and singular the rights, estates, hereditaments, powers and privileges appurtenant or incident thereto, unto the Trustee and his successors or substitutes in this trust and to his or their successors and assigns, forever.

BUT IN TRUST, NEVERTHELESS, for the benefit and security of the Holders of the obligations and indebtedness secured hereby and upon the trusts and subject to the terms and provisions herein set forth.

Secured Indebtedness

1.1  This instrument (hereinafter called the “Mortgage”) is made irrevocably in trust, with power of sale to secure and enforce the following obligations and indebtedness:

(a)  All Grantor’s obligations and indebtedness to Holder under that certain Secured Promissory Note, of even date herewith, in the face amount of $_______________ (the “Note”) of every kind and character now or hereafter owing by Grantor to the Holder under, whether direct or indirect, primary or secondary, fixed or contingent, and including, without limitation, all advances, debts and liabilities arising under or out of the warranties, representations, indemnity and other obligations made and assumed by Grantor under the Note,  and any and all fees, expenses or costs (including attorneys’ fees) incurred by Holder to enforce any of  their  rights against Grantor thereunder;

 

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(b)  All Grantor’s express and implied obligations assumed under the Leases identified in Exhibit A, including, but not limited to, warranties of title and all other express and implied obligations of Grantor thereunder;

(c)  All other future advances and sums paid by Holder and its successors and assigns on behalf or for the benefit of Grantor, or in satisfaction of obligations owed by Grantor to Holder under the Note.

(d)  All indebtedness and obligations, whether direct or indirect, primary or secondary, fixed or contingent assumed by Grantor hereunder, or relating to the enforcement of the rights of the “Holder” hereunder.

1.2  The indebtedness and obligations referred to in clauses (a), (b), (c) and (d) of Section 1.1 are hereinafter sometimes referred to as the “Secured Indebtedness.”  Grantee, as designated nominee and agent for and on behalf of the Working Interest Owners and its successors and assigns, is referred to herein  as the “Holder.”

ARTICLE II

Representations, Warranties and Covenants

2.1  Grantor represents, warrants and covenants that Grantor is a corporation in good standing in the State of ________ and has full authority to enter into this Mortgage, that Grantor has good right and authority to grant, bargain, sell, transfer, convey, assign and mortgage all its right, title and interest in the Mortgaged Properties; that Grantor is the lawful owner of an undivided 100% mineral interest in the Lands free and clear from all liens, claims and encumbrances by, through and under Grantor, except the lien evidenced by this Mortgage and the rights of the lessee granted under the Leases; and Grantor does hereby bind itself, its heirs, legal representatives, successors and assigns to forever warrant and defend the title to an undivided 100% mineral interest in the Lands unto the said Trustee and Grantee, and their successors and assigns, against the claims of all persons whomsoever claiming or claim the same or any part thereof by, through or under Grantor.  Any additional rights, title, or interest which Grantor may hereafter acquire or become entitled to in the Lands and properties aforesaid or in the oil, gas or other minerals in, under or produced therefrom shall inure to the benefit of this trust and Grantee, the same as if expressly described and conveyed herein.

2.2  With respect to advances and indebtedness arising out of Grantor’s obligations under the Note that become due, Grantor covenants and agrees:

(a)  That Grantor will make timely payment of sums due or to become due under the Note and will make timely payment of all other Secured Indebtedness hereunder.

 

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(b)  That Grantor will observe and materially comply with all of the terms and provisions, express or implied, of the Note.

(c)  That if the validity or priority of this Mortgage or of any right, titles, liens or interests created or evidenced hereby with respect to the Mortgaged Properties or any part thereof shall be endangered or questioned or shall be attacked directly or indirectly or if any legal proceedings are instituted against Grantor with respect thereto, Grantor will give written notice thereof to the Holder promptly and, at Grantor’s own cost and expense, Grantor will diligently endeavor to cure any defect that may be  claimed, and will take all necessary and proper steps for the defense of such legal proceedings, including, but not limited to, the employment of counsel agreeable to the Holder, the prosecution or defense of litigation and the release or discharge of all adverse claims.  If Grantor fails or refuses to take such action, the Trustee and the Holder, or any of them (whether or not named as parties to legal proceedings with respect thereto), are hereby authorized and empowered to take such additional steps as in their judgment and discretion may be necessary or proper for the defense of any such legal proceedings, including, but not limited to, the employment of independent counsel, the prosecution or defense of litigation, and the compromise or discharge of any adverse claims made with respect to the Mortgaged Properties, and all expense so incurred of every kind and character shall be a demand obligation owing by Grantor and shall bear interest at the rate of 8 percent, compounded annually from the date of expenditure until paid and shall be secured by the lien evidenced by this Mortgage, and the party incurring such expenses shall be subrogated to all rights of the person receiving such payment.

(d)  That Grantor will not, without the prior written consent of the Holder, suffer or permit any lien to be hereafter claimed or created on any of the Mortgaged Properties, and should a lien become attached hereafter in any manner to any part of the Mortgaged Properties without the prior written consent of the Holder, Grantor will cause such lien to be promptly discharged.

(e)  That Grantor will, on request of the Holder, promptly correct any defect, error or omission which may be discovered in the contents of this Mortgage, the Note, or other documents executed in connection herewith or in the execution or acknowledgment of any thereof, and will execute and deliver any and all additional instruments as may be requested by the Holder to correct such defect, error or omission and will execute, acknowledge and deliver such further assurances and instruments as shall be, in the opinion of the Holder, necessary or proper to convey and assign to the Trustee all of the Mortgaged Properties herein conveyed or assigned, or intended so to be.

(f)  Grantor will proceed with reasonable diligence to correct any material defect in title to the Mineral Interest in the Lands arising by, through or under Grantor which, in the reasonable opinion of Holder, constitutes a material defect should any such defect be found to exist after the execution and delivery of this instrument; and in this connection, should it be found after the execution and delivery of this instrument that there exists upon the Mortgaged Properties any lien or encumbrance, equal or superior in rank to the lien created by this instrument arising by, through or under Grantor, or should any such hereafter arise, Grantor will promptly discharge and remove any such lien or encumbrance from said property.

 

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(g)  Holder at all times shall have the right to release any part of the property now or hereafter subject to the lien hereof or any part of the proceeds of production or other income herein or hereafter assigned or pledged or any other security it now has or may hereafter have hereunder, without releasing any other part of said property, proceeds or income, and without affecting the lien hereof as to the part or parts thereof not so released, or the right to receive future proceeds and income.

(h)  That, promptly upon receipt of any written request from the Holder, Grantor will furnish and deliver, pursuant to such request, any information or data possessed by Grantor with respect to the Mortgaged Properties, including all title materials and other records in the possession, custody or control, and all deeds, conveyances, instruments, contracts, documents, title opinions, title abstracts, division orders, and other records concerning said property.

2.3  Grantor agrees that if Grantor fails to perform any act or to take any action which hereunder Grantor is required to perform or take or to pay any money which hereunder Grantor is required to pay, the Holder, in Grantor’s name or its own name, may (but shall not be obligated to) perform or cause to be performed such act or take such action or pay such money, and any expenses so incurred by the Holder and any money so paid by the Holder: (a) shall be a part of the obligations owing by Grantor, (b) shall bear interest from the date of making such payment until paid at the rate of 10 percent compounded annually, (c) shall be a part of the Secured Indebtedness, and (d) shall be secured by the lien evidenced by this Mortgage.  The  Holder, upon making such payment, shall be subrogated to all of the rights of the person, corporation or body politic receiving such payment.

ARTICLE III

Assignment of Production, Accounts,

Contract Rights and Proceeds

3.1  To facilitate the discharge of any and all of Grantor’s indebtedness and obligations under the Note and this Mortgage, and as cumulative of any and all rights and remedies herein provided for, Grantor hereby BARGAINS, SELLS, TRANSFERS, ASSIGNS, SETS OVER and DELIVERS to the Holder, its successors and assigns, all of the following upon the failure of Grantee to promptly fulfill its obligations and discharge and pay any indebtedness under the Note or Mortgage:

(a)  All oil, gas, casinghead gas, distillate and other minerals, produced and to be produced from or attributable to the Mineral Interests of Grantor and any other interests now or hereafter constituting a part of the Mortgaged Properties from and after the Effective Date (as hereafter defined);

(b)  All royalties and proceeds of production hereafter payable to or to become payable to Grantor or to which Grantor is entitled by virtue of its Leases or Mineral Interests, and Grantor authorizes and empowers said Holder to demand, collect and receive said royalties and proceeds;

 

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(c)  All amounts, sums, revenues and income which otherwise become payable to Grantor from any of the Lands or under the Leases; and

(d)  All of Grantor’s contract rights, choses in action, and claims of any kind arising out of the Leases to the extent assignable.

Grantor hereby, irrevocably, authorizes and directs that all parties owing royalties or other sums to Grantor attributable to Grantor’s Mineral Interests pay all such amounts directly to the Holder.  The Holder is authorized to collect such amounts and no party making payment shall have any responsibility to see to the application of any funds paid to the Holder, but shall be fully protected in making such payment to the Holder under the assignments herein contained.  Should the Holder bring suit against any third party for collection of any amounts or sums included within this assignment (and the Holder shall have the right to bring any such suit) it may sue either in its own name or in the name of Grantor.

3.2  Grantor authorizes and empowers the Holder to receive, hold and collect all sums of money paid to the Holder in accordance with this assignment and to apply the same as is hereinafter provided, all without any liability or responsibility on the part of the Holder, save as to good faith in so receiving and applying said sums.  All payments provided for in this assignment shall be paid promptly to the Holder.  It is understood and agreed that should said payments provided for by this assignment be less than the sum or sums then due on said indebtedness, such sum or sums then due shall nevertheless be payable by Holder.  Likewise, neither this assignment nor any provision herein contained shall in any manner be construed to affect the lien, rights and remedies herein granted securing said indebtedness, nor Grantor’s liability therefor.  The rights under this assignment are cumulative of the other rights, remedies and powers granted under this Mortgage and are cumulative of any other security which the Noteholder now holds or may hereafter hold to secure the payment of said indebtedness.

3.3  Nothing herein contained shall detract from or limit the absolute obligation of Grantor to make prompt payment of any indebtedness arising under the Note at the time and in the manner provided for therein or shall detract from or limit the absolute obligation of Grantor to make prompt payment  of all amounts owing hereunder at the time and in the manner provided herein, regardless of whether the proceeds herein assigned are sufficient to pay the same, and the rights under this assignment shall be cumulative of all other security of any and every character now or hereafter existing to secure the payment of sums due under the Note and all other Secured Indebtedness.

ARTICLE IV

Waiver and Partial Release

4.1  The Holder  may at any time and from time to time in writing:

(a)  Waive compliance by Grantor with any covenant herein made by Grantor to the extent and in the manner specified in such writing;

 

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(b)  Consent to Grantor’s doing any act which hereunder Grantor is prohibited from doing, or to Grantor’s failing to do any act which hereunder Grantor is required to do, to the extent and in the manner specified in writing; or,

(c)  Release any part of the Mortgaged Properties, or any interest therein, or any proceeds of Hydrocarbon sales from the lien of this Mortgage, without the joinder of the Trustee.

No such act by Noteholder shall in any way impair the rights of the Holder hereunder except to the extent specifically agreed to by the Holder in such writing.

4.2  The lien and other security rights of the Holder hereunder shall not be impaired by any indulgence, including but not limited to (a) any forbearance, renewal, extension or modification (whether one or more) which the Holder may grant with respect to any Secured Indebtedness, or (b) any surrender, compromise, release, renewal, extension, exchange or substitution which the Holder may grant in respect of any item of the Mortgaged Properties or any part thereof or any interest therein.

ARTICLE V

Possession Until Default; Defeasance and Termination

5.1  Unless a default specified in Section 6.1 hereof shall occur and be continuing, Grantor shall retain full right to the Mortgaged Properties subject, however, to all of the terms and provisions of this Mortgage, including without limitation, the assignments under Article III.

ARTICLE VI

Remedies in Event of Default

6.1  The term “default” as used in this Mortgage shall mean the failure of Grantor to pay any sums due Holder under the Note or under this Mortgage within ten (10) days of receipt by Grantor of demand for payment.

6.2           (a)  If a default shall occur and be continuing, the Mortgagee shall have the right and option to proceed with foreclosure and to sell, to the extent permitted by law, all or any portion of the Mortgaged Property at one or more sales, as an entirety or in parcels, at such place or places and otherwise in such manner and upon such notice as may be required by applicable law or, in the absence of any such requirements, as the Mortgagee may deem appropriate, and to make conveyance to the purchaser or purchasers.

(b)  With regard to any part of the Mortgaged Property, it is agreed that the appraisement of any such properties is expressly waived at the option of the Mortgagee, and any such option may be exercised prior to the time judgment is rendered in any foreclosure hereon.

(c)  Notwithstanding any other provision of this Section 6.2, if any of the Secured Indebtedness is not promptly paid, Mortgagee shall have the right and power to proceed by a suit or suits in equity or at law, whether for the specific performance of any covenant or agreement herein contained or in aid of the execution of any power herein granted, or for any foreclosure hereunder or for the sale of the Mortgaged Property under the judgment or decree of any court or courts of competent jurisdiction.

 

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(d)  Notwithstanding any other provision, Mortgagee shall also have the option to proceed with foreclosure in satisfaction of any Secured Indebtedness which has not been paid when due either through the courts or by proceeding with foreclosure.  It is further agreed that several sales may be made hereunder without exhausting the right of sale for any subsequent Secured Indebtedness, it being the purpose hereof to provide for a foreclosure and sale of the security for any matured portion of the Secured Indebtedness without exhausting the power to foreclose and sell the Mortgaged Property for any subsequently maturing portion of the Secured Indebtedness.

(e)  The Mortgaged Property may be sold in one or more parcels and in such manner and order as Mortgagee, in his sole discretion, may elect, it being expressly understood and agreed that the right of sale arising out of any event of default shall not be exhausted by any one or more sales.

(f)  Grantor agrees to the full extent that it lawfully may, that in the event of a default that has not been remedied, Mortgagee shall have the right and power to enter into and upon and take possession of all or any part of the Mortgaged Property in the possession of Grantor, its successors or assigns, or its or their agents or servants.

(g)  Every right, power and remedy herein given to Mortgagee shall be cumulative and in addition to every other right, power and remedy herein specifically given or now or hereafter existing in equity, at law or by statute (including specifically those granted by the Uniform Commercial Code in effect and applicable to the Mortgaged Property or any portion thereof) each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and so often and in such order as may be deemed expedient by Mortgagee, and the exercise, or the beginning of the exercise, of any such right, power or remedy shall not be deemed a waiver of the right to exercise, at the same time or thereafter any other right, power or remedy.  No delay or omission by Mortgagee in the exercise of any right, power or remedy shall impair any such right, power or remedy or operate as a waiver thereof or of any other right, power or remedy then or thereafter existing.

(h)  Grantor shall not be relieved of any obligation herein by reason of the failure of Mortgagee to comply with any request of Grantor to foreclose the lien of this Mortgage or the release, regardless of consideration, of the Mortgaged Property or any portion thereof or interest therein.

(i)  Mortgagee may release, regardless of consideration, any part of the Mortgaged Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interest created in or evidenced by this Mortgage or its stature as a first and prior lien and security interest in and to the Mortgaged Property, and without in any way releasing or diminishing the liability of any person or entity liable for the repayment of the Secured Indebtedness.  For payment of the Secured Indebtedness, Mortgagee may resort to any other security therefor held by Mortgagee in such order and manner as Mortgagee may elect.

 

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(j)  To the fullest extent permitted by law, Grantor hereby irrevocably and unconditionally waives and releases (a) all benefits that might accrue to Grantor by virtue of any present or future moratorium law or other law exempting the Mortgaged Property from attachment, levy or sale on execution or providing for any appraisement, valuation, stay of execution, exemption from civil process, redemption or extension of time for payment; (b) all notices of any event of default or of Mortgagee’s election to exercise (or his actual exercise of) any right, remedy or recourse provided for hereunder; and (c) any right to a marshaling of assets.

(k)  In case Mortgagee shall have proceeded to invoke any right, remedy or recourse permitted hereunder and shall thereafter elect to discontinue or abandon same for any reason, Mortgagee shall have the unqualified right so to do and, in such an event, Grantor and Mortgagee shall be restored to their former positions with respect to the Secured Indebtedness, this Mortgage, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Mortgagee shall continue as if same had never been invoked.

(l)  The proceeds of any sale of the Mortgaged Property or any part thereof and all other monies received by Mortgagee through any proceedings for the enforcement hereof or otherwise, shall be applied:

FIRST, to the payment of all expenses incurred by Mortgagee incident to the enforcement of this Mortgage, the Note or any of the Secured Indebtedness (including, without limiting the generality of the foregoing, expenses of any entry or taking of possession, of any sale, of advertisement thereof and of conveyances, and court costs, compensation of agents and employees, legal fees and a reasonable commission to the Trustee acting), and to the payment of all other charges, expenses, liabilities and advances incurred or made by Mortgagee under this Mortgage or in executing any power hereunder;

SECOND, to payment of the Secured Indebtedness in such order and manner as Mortgagee may elect; and,

THIRD, to Grantor or as otherwise required by any governmental authority having jurisdiction over the application of such proceeds.

6.3  To foreclose this Mortgage pursuant to the power of public sale contained herein in accordance with the laws of the State of Colorado, in which case Mortgagee/Holder shall (i) deliver to Trustee a written notice of default and election to cause Grantor’s interest in the Mortgaged Properties to be sold, and (ii) deposit with Trustee this Mortgage, and such receipts or evidence of the Secured Indebtedness as Trustee may require.  Upon receipt of such notice from Mortgagee/Holder, Trustee shall give notice of sale and shall sell the Mortgaged Properties according to the laws of the State of Colorado.  The costs and expenses incurred by Mortgagee/Holder in the exercise of any of the remedies provided in this Mortgage shall be secured by this Mortgage.

 

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ARTICLE VII

Security Agreement

7.1  Without limiting any of the provisions of this instrument, Grantor, referred to in this Article VII as “Debtor”  expressly GRANTS unto the Holder (referred to in this Article VII as “Secured Party”, whether one or more), a security interest in all the Mortgaged Properties hereinabove described (including both those now and those hereafter existing) to the full extent that such properties may be subject to the Uniform Commercial Code of the State of Colorado.  The security interest granted hereby also covers and includes all contract rights, general intangibles, choses in actions, and accounts with respect to said properties and all products and proceeds of said properties (said properties, contract rights, choses in action, general intangibles, accounts, products and proceeds thereof being hereinafter collectively referred to as the “Collateral” for the purposes of this paragraph).  Debtor covenants and agrees with Secured Party that:

(a)  In addition to and cumulative of any other remedies granted in this instrument to Secured Party or the Trustee, Secured Party may, in event of default, proceed under said Uniform Commercial Code as to all or any part of the Collateral and shall have and may exercise with respect to the Collateral all the rights, remedies and powers of a secured party under said Uniform Commercial Code, including, without limitation, the right and power to sell, at public or private sale or sales, or otherwise dispose of, lease or utilize the Collateral and any part or parts thereof in any manner authorized or permitted under said Uniform Commercial Code after default by a debtor, and to apply the proceeds thereof toward payment of any costs and expenses and attorneys’ fees and legal expenses thereby incurred by Secured Party, and toward payment of the Secured Indebtedness in such order or manner as Secured Party may elect.

(b)  Upon a default, Secured Party shall have the right (without limitation, subject to said Uniform Commercial Code) to take possession of the Collateral and to enter upon any premises where same may be situated for such purpose without being deemed guilty of trespass and without liability for damages thereby occasioned, and to take any action deemed necessary or appropriate or desirable by Secured Party, at its option and in its discretion, to repair, refurbish or otherwise prepare the Collateral for sale, lease or other use or disposition as herein authorized.

(c)  To the extent permitted by law, Debtor expressly waives any notice of sale or other disposition of the Collateral and any other right or remedies of a debtor or formalities prescribed by law relative to sale or disposition of the Collateral or exercise of any other right or remedy of Secured Party existing after default hereunder; and to the extent any such notice is required and cannot be waived, Debtor agrees that if such notice is mailed, postage prepaid, to Debtor at the address shown with debtor’s signature hereinbelow at least ten days before the time of the sale or disposition, such notice shall be deemed reasonable and shall fully satisfy any requirement for giving of said notice.

(d)  Secured Party is expressly granted the right to receive the monies, income, proceeds or benefits attributable or accruing to the Collateral and to hold the same as security for the Secured Indebtedness or to apply it on the principal and interest or other amounts owing on any of the Secured Indebtedness, in such order or manner as Secured Party may elect.  All rights to marshaling of assets of Debtor, including any such right with respect to the Collateral, are hereby waived.

 

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(e)  All recitals in any instrument of assignment or any other instrument executed by Secured Party incident to sale, transfer, assignment, lease or other disposition or utilization of the Collateral or any part thereof hereunder shall be prima facie evidence of the matter stated therein, no other proof shall be required to establish full legal propriety of the sale or other action or of any fact, condition or thing incident thereto, and all prerequisites of such sale or other action and of any fact, condition or thing incident thereto shall be presumed to have been performed or to have occurred.

(f)  Should Secured Party elect to exercise its right under said Uniform Commercial Code as to part of the personal property described herein, this election shall not preclude Secured Party or the Trustee from exercising the rights and remedies granted by the preceding paragraphs of this instrument as to the remaining personal property.

(g)  Secured Party may, at its election, at any time after delivery of this instrument, sign one or more copies hereof in order that such copies may be used as a financing statement under said Uniform Commercial Code.  Such signature by Secured Party may be placed between the last sentence of this instrument and the Debtor’s acknowledgment or may follow the Debtor’s acknowledgment.  Secured Party’s signature need not be acknowledged and is not necessary to the effectiveness hereof as a deed of trust, mortgage, assignment, or security agreement.

7.2  Any copy of this instrument which is signed by both Debtor and Secured Party may also serve as a financing statement under said Uniform Commercial Code between the DEBTOR, WHOSE ADDRESS IS:

and the SECURED PARTY, WHOSE ADDRESS IS:

This Mortgage secures and shall be security for any and all future advances made by or costs and expenses incurred by Grantee/Holder for the benefit of Grantor, provided, however, that the total unpaid balance secured hereby at any one time shall not exceed $__________.  Nothing contained herein shall be deemed an obligation on the part of Secured Party/Holder Holder to make any further advances or incur any expenses for the benefit of Debtor.

 

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ARTICLE VIII

Miscellaneous

8.1  This instrument is a deed of trust and mortgage of both real and personal property, a security agreement, a financing statement and an assignment, and also covers proceeds and fixtures.

8.2  All options and rights of election herein provided for the benefit of the Holder are continuing, and the failure to exercise any such option or right of election upon a particular default or breach or upon any subsequent default or breach shall not be construed as waiving the right to exercise such option or election at any later date.  By the acceptance of payment of any indebtedness secured hereby after its due date, the Holder does not waive the right either to require prompt payment when due of all other sums so secured or to regard as a default failure to pay any other sums due which are secured hereby.  No exercise of the rights and powers herein granted and no delay or omission in the exercise of such rights and powers shall be held to exhaust the same or be construed as a waiver thereof, and every such right and power may be exercised at any time and from time to time. No release of any part of the Mortgaged Properties shall in anywise alter, vary or diminish the force, effect or lien of this instrument on the balance of Mortgaged Properties.

8.3  Any notice, request, demand or other instrument which may be required or permitted to be given or furnished to or served upon Grantor shall be addressed to it at its address set forth below, or such other address as Grantor may furnish to the Trustee and the Holder in writing:

Notices to the Trustee and the Holder shall be deemed to have been properly given if delivered in like fashion to them at:

(1) _________ County Public Trustee, ___________________, and

(2) ___________________________________

or at such other address as the Trustee or the Noteholder may furnish to Grantor in writing.

8.4 If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect, and the remaining provisions hereof shall be liberally construed in favor of the Trustee, Lender and the Noteholder in order to effectuate the provisions hereof, and the invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any such provision in any other jurisdiction.

8.5 Grantee and Trustee shall at all times have the right to assign and/or transfer any and all of their rights and privileged under this Mortgage.  All of the terms, provisions, covenants and conditions hereof shall be binding upon Grantor and the successors and assigns of Grantor, and the Holder and successors and assigns of Holder, and shall inure to the benefit of the Trustee and the Holder and their respective successors and assigns. Grantor’s covenants shall constitute covenants running with the lands covered by the Mortgaged Properties, but this provision shall not be construed to authorize any sale or other disposition of the Mortgaged Properties contrary to any other provisions hereof.

 

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8.6 The Mortgage may be executed in multiple counterparts, each of which is deemed to be an original for all purposes although all such executed copies shall evidence and constitute one and the same Mortgage.

8.7 The term “Grantor,” “Mortgagor” and “Debtor” herein used shall include their  successor(s) in interest in the Mortgaged Properties.  The number and gender of pronouns used in referring to Grantor shall be construed to mean and correspond with the number and gender of the individuals and/or corporations executing this instrument as Grantor, and, further, the term “Grantor” herein used shall mean and include both all of the parties executing this instrument as Grantor as well as any single one or more of them.

8.8 The “Effective Date” of this instrument is 7:00 a.m. local time at the location of the Mortgaged Properties on the date this Mortgage is executed and delivered to Grantee by Grantor.

8.9 This Mortgage shall be governed by and construed and interpreted under the laws of the State of Colorado (without giving effect to conflicts of laws principles).

THIS WRITTEN AGREEMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[The Next Page is the Signature Page]

 

 

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IN WITNESS WHEREOF, the undersigned have caused this instrument to be executed by their duly authorized undersigned officers effective as of May 13, 2015.

	
 

	
“GRANTOR,” “MORTGAGOR” AND “DEBTOR”

	
 

	
 

	
 

	
 

	
 

 

	
By: ______________________________________

	
 

	
 

 

	
Printed Name: ______________________________

	
 

	
 

 

	
Title: _____________________________________

	
 

This Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement is executed by the undersigned solely for the purpose of acknowledging and accepting the benefits conferred on Grantee and to evidence its agreement with the covenants of Lender set forth herein.

	
 

	
“GRANTEE,”  “MORTGAGEE” AND “SECURED PARTY”

	
 

	
 

	
 

	
 

	
 

 

	
By: ______________________________________

	
 

	
 

 

	
Printed Name: ______________________________

	
 

	
 

 

	
Title: _____________________________________

	
 

 

[The Next Page is the Acknowledgment Page]

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ACKNOWLEDGMENTS

	
STATE OF _____________

	
§

	
 

	
 

	
§

	
 

	
COUNTY OF ___________

	
§

	
 

 

 

This instrument was acknowledged before me on this _____ day of ______________. 2015, by ________________________, _________________ of ______________________, on behalf of said corporation.

Witness my hand and official seal.

__________________________________________

Notary Public, State of _______________________

My commission expires: _________________

	
STATE OF _____________

	
§

	
 

	
 

	
§

	
 

	
COUNTY OF ___________

	
§

	
 

 

 

This instrument was acknowledged before me on this _____ day of _____________, 2015, by ___________ the ____________ of __________________________.

Witness my hand and official seal.

__________________________________________

Notary Public, State of  ______________________

My commission expires: _________________

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EXHIBIT A

ATTACHED TO AND FORMING A PART OF THE

DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,

SECURITY AGREEMENT AND FINANCING STATEMENT

DATED __________________________,  2015

FROM

This Exhibit A contains specific description of the “Lands,” “Leases,” “Mineral Interests”  and Wells comprising a portion of the “Mortgaged Properties”, as those terms are defined in the Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement (the “Mortgage”) to which this Exhibit A is attached.

LANDS

The Mortgage covers all right, title and interest the Mortgagor now owns or subsequently acquires in the following lands situated in ____________ County, Colorado (“Lands”):

 

 

 

 

 

A-1Exhibit 10.4

 

 

PARTICIPATION AGREEMENT

This Participation Agreement (hereinafter “Agreement”) is made and entered into effective May 13, 2015, by and between PetroShare Corp. (“PetroShare”),  and  Providence Energy Operators, LLC (“Participant”).

RECITALS:

		A.	PetroShare represents that it has acquired certain oil and gas leases, being described on Exhibit “A” attached hereto (the “Existing Leases”).

		B.	Participant wishes to participate with PetroShare in the drilling and development of the Leases (defined below) pursuant to the provisions of this Agreement.

		C.	In addition, Participant, as “Lender”, is providing a revolving line of credit facility (“Credit Facility”) for the benefit of PetroShare, as “Borrower”, pursuant to that certain Revolving Line of Credit Facility dated May 13, 2015.

Now, therefore, the parties hereto, for the mutual promises contained herein and other good and valuable consideration, the sufficiency of which is hereby acknowledged, do hereby contract and agree as follows, hereby also incorporating the recitals above:

 

I.  DEFINITIONS

	1.	AMI Acquisition Cost or Costs:  Shall include all Lease Costs and all other expenditures related to the acquisition of the AMI Leases which would be treated as a direct cost under Section II of the Accounting Procedure attached to the Operating Agreement, including but not limited to, expenditures for contract brokers, expenses associated with Exhibit C - Kingdom Resources Service Agreement, abstracts, and outside attorneys, and, in the case of options and contractual rights shall include an assumption by the Non-Acquiring Party of its proportionate share of all burdens imposed on Acquiring Party by the related contract, but shall not include any charges for Acquiring Party’s own personnel or overhead or which would be treated as “indirect costs” under Section III of said Accounting Procedure.

	2.	AMI Lease(s):  Any Lease which the Parties hereto elect to acquire within the AMI.

	3.	Area of Mutual Interest or AMI: The Area of Mutual Interest shall consist of the lands identified on Exhibit “D” attached hereto, plus an additional one mile in diameter surrounding the outer boundaries of the lands identified on Exhibit D.

	4.	Effective Date:  The Effective Date of this Agreement is May 13, 2015.

	5.	Existing Leases:  The oil and gas leases on Exhibit “A” attached hereto.

	6.	Leases:  Collectively, the Existing Leases and AMI Leases.

 

 

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	7.	Net Revenue Interest:  The share of the gross production proceeds net of all royalty interests, overriding royalty interests and similar burdens and also net of applicable production, severance and ad valorem taxes.

	8.	Operator:  As set forth in the applicable JOA.

	9.	Operating Agreement or JOA:  A joint operating agreement in the form attached hereto as Exhibit “B”, as may be modified by the designated Operator at the time of any modification; or, if any of the Leases are subject to an existing joint operating agreement with a third party, such joint operating agreement will be the applicable JOA for such Leases, as to the lands covered by said third party JOA.

	10.	Party or Parties:  Shall refer to Participant and/or PetroShare, individually or collectively.

	11.	Participant Interest:  A Working Interest in any of the Leases on a pro rata basis of 50.0%, having a net revenue interest of not less than 80.00%, unless otherwise mutually agreed to in writing by Participant and PetroShare.

	12.	Project Area:  Shall be any area(s) within the AMI in which there is ongoing operations, including, but not limited to leasing, drilling and completion operations, seismic operations, and/or producing wells.

	13.	Well or Wells: Any well which has been proposed within the Project Area or the AMI.

	14.	Working Interest:  The cost bearing interest created by, through and from oil and gas leases.

	15.	Credit Facility:  That certain revolving line of credit facility (“Credit Facility”) by and between Participant (aka “Lender”) and PetroShare (aka “Borrower”) dated May 13, 2015.

II. EXISTING LEASES AND LEASE EXPENSES

A.   Existing Lease.  Upon full execution of this Agreement, Participant shall be assigned an undivided fifty percent (50.0%) of PetroShare’s right, title and interest in and to the Existing Leases. All assignments hereunder will be subject to all royalties, overriding royalties, production payments, net profits interests and similar burdens existing of record as of the date of this Agreement.

B.   Lease Expenses. With respect to the Existing Leases, and in the event any other Lease is acquired within the AMI and Participant elects to acquire its full 50% share of PetroShare’s right, title and interest in the Lease as outlined herein (an “AMI Lease’), Participant shall pay its pro rata share of lease acquisition expenses and the expenses necessary to maintain the Lease in full force and effect (including without limitation delay rentals, minimum royalties and shut-in payments).  At the outset of this Agreement, PetroShare agrees to and shall grant Participant a onetime credit against Existing Leases’ acquisition expenses equal to $105,000 for Participant’s 50% share of such lease acquisition expenses.

 

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III. DRILLING AND DEVELOPMENT.

A.   Participation Wells.  Participant shall have the right to participate in any Well proposed within the Project Area or on any of the Leases in the AMI, or on lands pooled or to be pooled therewith, in accordance with the associated Operating Agreement and the provisions of this Agreement, with Participant being responsible for its Participant Interest, subject to any elections to not participate in such Well.

IV. OPERATIONS WITHIN PROJECT AREA

A.   Operating Agreement.  All operations within the Project Area shall be conducted pursuant to one or more JOA’s, in the form attached hereto as Exhibit “B”, reference to which is hereby made for all purposes, except as expressly modified by the terms hereof. In the event of a conflict between this Agreement and the Operating Agreement that has been executed by the Parties, the Operating Agreement associated with any proposed Well shall control.  In the event that any of the Leases are subject to a JOA in existence prior to the date of this Agreement which has been disclosed to Participant prior to execution of this Agreement, or are included in units that will be operated by a third party, then the prior JOA’s or the third party operator’s JOA shall control.

B.   Cash Advances.  Cash Advances shall be due and payable and made in accordance with the Operating Agreement governing a Well.

V. AMI

Acquisition of AMI Leases. The Parties hereby establish the AMI, as described on Exhibit D attached hereto. The term of AMI shall be for a period three (3) years from the Effective Date, and as long as thereafter as any well drilled pursuant to this Agreement is producing oil and/or natural gas in paying quantities or any of the Leases are in effect (“AMI Term”). During the AMI Term, if either Party acquires any AMI Leases, the other Party shall have the right to acquire its proportionate 50% interest in and to such AMI Leases, in accordance with the terms and conditions of this Agreement.  The following provisions shall apply to the AMI and AMI Leases:

		1.	Either Party to Acquire.  Either Party shall have the right to lease or otherwise acquire AMI Leases within the AMI.  AMI Leases shall be subject to the AMI and provisions below.

		2.	Notification Upon Acquiring Oil and Gas Rights.  The Party acquiring an AMI Lease (“Acquiring Party”), shall notify the other Party (“Non-Acquiring Party”) in writing within 20 days of such acquisition.  Such lease notice shall include a full description of the AMI Lease so acquired, a copy of the instrument by which such rights were acquired, together with all documentation relevant thereto, including without limitation copies of the leases, abstracts, title memos, assignments, subleases, farm outs or other contracts affecting the AMI Lease, plus an itemized breakdown of the AMI Acquisition Cost (defined below).

 

 

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		3.	Option to Participate.  Within 15 days after the Non-Acquiring Party’s receipt of the notice and information referred to in paragraph A.2. above, the Non-Acquiring Party may elect to acquire its share in the AMI Leases so acquired by notifying the Acquiring Party of such election in writing.  If the Non-Acquiring Party so elects to acquire its proportionate share in the acquired AMI Leases, the interests of the Parties in said AMI Leases shall be:

		Participant:	50.0%

		PetroShare:	50.0%

If the Non-Acquiring Party does not timely elect or elects to not acquire its interest in any such AMI Leases, then it shall have no interest in any such leases.

		4.	Acceptance and Reimbursement. Promptly after the acceptance of an offered AMI Lease, the Acquiring Party shall invoice the Non-Acquiring Party for Non-Acquiring Party’s Share of the AMI Acquisition Costs associated with the acquired AMI Lease.  The Non-Acquiring Party shall promptly reimburse Acquiring Party for the Non-Acquiring Party’s share of the AMI Acquisition Costs, as reflected by the invoice.  Upon receipt of such reimbursement at a closing or otherwise, Acquiring Party shall simultaneously convey the right, title and interest in and to such Non-Acquiring Party’s 50% interest in said AMI Lease(s) through a proper Assignment thereof.  If Acquiring Party does not receive the amount due from the Non-Acquiring Party within thirty (30) days after the receipt by such Non-Acquiring Party of the invoice for its costs, such failure shall constitute a withdrawal by Non-Acquiring Party of its former election to acquire the interest, and Non-Acquiring Party shall no longer have the right to acquire an interest in the offered AMI Lease, unless the Acquiring Party agrees in writing to do so.  The Acquiring Party, at its sole option, may elect by written notice to the Non-Acquiring Party to extend the reimbursement timeframe. During such extension of reimbursement timeframe, if granted, the Non-Acquiring Party shall remain liable for payment.

		5.	Failure to Respond.  If Acquiring Party shall not have received notice of the election of Non-Acquiring Party to acquire its proportionate interest within the fifteen (15) day election period pursuant to the terms of Paragraph A.3. of this Agreement, such failure to respond shall be deemed conclusively to be an election by Non-Acquiring Party to not acquire its interest in the AMI Lease being offered. If the Non-Acquiring Party elects in writing to not participate in any AMI Leases, the Acquiring Party may retain such AMI Leases free and clear of all of the terms of this Agreement, the AMI and any operating agreements among the Parties.

 

 

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		6.	Responsive Notices.  Responsive notices required hereunder, including, but not limited to elections to participate in an acquisition, may be given  verbally by phone or in person, or E-mail but to be effective must be followed by written notice delivered by mail, courier, personally, E-mail or by facsimile within 24 hours of the delivery of the verbal notice.

		7.	Assignee Requirements.  Each Party agrees to require any assignee who acquires an interest in any Leases within the AMI from such Party to agree to be bound by the terms of the AMI set forth herein.

		8.	Participant will have the right on an ongoing basis, to participate for its proportionate share (50%), in the acquisition or construction of any gathering, processing, pipelines or plant facilities that may be necessary or convenient for the production or transmission of any gas produced under the terms of this Agreement and the associated AMI in which Participant has an interest.

VI. PROPORTIONATE REDUCTION

Proportionate Reduction Clause:  If an oil and gas lease or other Mineral Interest covers less than the entire mineral fee estate in the lands covered thereby, or if a party’s interest in the applicable Lease or Mineral Interest is less than a 100% ownership interest, any interest conveyed or reserved pursuant to this Agreement is intended to be proportionately reduced to (i) the proportion of interest covered by the relevant oil and gas lease or other Mineral Interest, and (ii) the proportion of ownership held by the conveying party, in the case of a conveyance, or the burdened party, in the case of a reservation of interest.

VII. REVOLVING CREDIT FACILITY

Loan Agreement: Participant (as Lender) and PetroShare (as Borrower) have entered into a $5,000,000 revolving line of Credit Facility dated May 13, 2015, which is secured by the Leases and resulting production contemplated hereunder. In the event of a conflict between this Participation Agreement and the Credit Facility, the Credit Facility shall control.

VIII. CONFIDENTIALITY

A.    Confidentiality.  The Parties acknowledge that the information that is the subject matter of this Agreement (including but not limited to all well information acquired by operations conducted under an Operating Agreement) is sensitive and confidential proprietary information belonging to the Parties.  Accordingly, each Party, for itself and its Affiliates, agrees not to release or disclose or otherwise make the information available to or to furnish any of said information to any third party without (i) obtaining the agreement of the third party to maintain such information confidential and to not use such information other than in connection with investing in or participating with or purchasing interests from the disclosing party, or (ii) first obtaining the express written consent of the other party.  Any such release or disclosure if approved shall be conditioned upon the third party expressly agreeing to all terms herein and becoming a party to and subject to a Confidentiality Agreement.   Nothing contained above shall restrict or impair any Party’s right to use or disclose any of the information which is:  (1) at the time of disclosure available to the public through no act or omission of that Party; (2) can be shown was lawfully in that Party’s possession prior to the time of this  Agreement; or (3) is independently made available to that Party by a third party who is independently entitled to disclose such information and that party shows that the right of such third party to disclosure existed prior to the date of this Agreement.  Also, nothing contained above shall restrict Participant from providing production results to its investors or lending institutions for the purposes of financing or requisite reporting.

 

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B.   Public Disclosure.  Subject to the exceptions set forth below, and unless otherwise agreed upon by the Parties, prior to substantial leasing completion in the AMI as contemplated by this Agreement, the Parties intend to keep material information concerning the entering into of this Agreement and the location of the Project Area confidential to the extent any disclosure thereof could impair the leasing activities of the Parties.  Notwithstanding such intent, either Party may make any public disclosure to the extent that, upon advice of such Party’s counsel, such disclosure is advisable to comply with United States or state securities laws, rules or regulations. Any proposed press release or other disclosure, shall be provided to the other Party in advance on a confidential basis for its information and comment.

IX. TAX ELECTION

This Agreement is not intended to create, and shall not be construed to create, a relationship of partnership or an association for profit between or among the Parties hereto except as provided herein.  Each Party hereby affected elects to be excluded from the application of all the provisions of Subchapter “K”, Chapter 1, Subtitle “A”, of the Internal Revenue Code of 1986 and all amendments thereto.

X. PAYMENT OF DELAY RENTALS AND LEASE EXTENSIONS

The designated Operator of any Well covered by this Agreement shall be responsible for making any payment of delay rentals, shut in royalties and minimum royalty payments on the Leases.  Participant shall bear and pay its share of such payments. Participant shall be billed and shall pay for said costs in the manner set forth for the billing and paying of direct costs in the COPAS accounting procedures attached to the form of Operating Agreement.  Operator shall not be liable for any loss of a Lease or Leases, unless said loss is due to bad faith, gross negligence or willful misconduct by the Operator.

 

 

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XI. NO JOINT LIABILITY

The rights, duties, obligations and liabilities of the Parties hereto shall be several and not joint or collective.  Each Party hereto shall be responsible only for its obligations as herein set out and shall be liable only for its share of the cost and expense as herein provided; it being the express purpose and intention of the Parties that their interest in this Agreement and the rights and property acquired in connection herewith shall be held by them as tenants-in-common.  Except for the tax election which the Parties may have made, it is not the purpose or intention of this Agreement to create any mining partnership, commercial partnership or other partnership, and it shall be deemed not to have done so.

XII. ASSIGNMENTS OF LEASES

Any assignment of any interest pursuant to this Agreement by and between the Parties hereto shall be made with a special warranty of title by through and under the assignor, but not otherwise and on the form attached hereto as Exhibit “E” which shall be for recording in the official records of the county in which the Lease lies.  Where applicable, separate assignments of operating rights shall likewise be made on such State and Federal forms as required by rule or regulation.  Any assignment hereafter executed shall specifically refer to, and be made subject to, the terms and conditions hereof, and shall convey a working interest equal to the Participant Interest.

XIII. FORCE MAJEURE

Should any Party be prevented or hindered from complying with any obligation created under this Agreement, other than the obligation to pay money, by reason of fire, flood, storm, act of God, governmental authority, governmental action or inaction, failure or delay in obtaining any necessary permits, labor disputes, war, the inability to secure qualified labor, geoscience data, title abstracts, curative title work, lease brokers, entry onto the land, drilling equipment and drilling rig(s) at prevailing market rates, drilling tools, materials or transportation, or any other cause not enumerated herein but which is beyond the normal control of the Party whose performance is affected, then the performance of any such obligation shall be suspended during the period of such prevention or hindrance, provided the affected Party promptly notifies the other Party of such force majeure circumstances and exercises all reasonable diligence to remove the cause of force majeure.

XIV. EXHIBITS

The following exhibits are attached to this Agreement and incorporated herein by reference:

Exhibit “A” – List of Existing Leases

Exhibit “B” – Form of Joint Operating Agreement

Exhibit “C” – Kingdom Resources LLC Service Agreement

Exhibit “D” – AMI Plat

Exhibit “E” – Form of Assignment

 

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If the terms or provisions of any of these Exhibits conflict with the terms of this Agreement, this Agreement shall control.

XV. MISCELLANEOUS

A.    Assignment:  Either Party may assign its interest under this Agreement provided that the assigning Party remains liable for or guarantees the performance of its assignee and provided that the assigning Party gives the non-assigning Party appropriate documentation evidencing such assignment.

B.    Governing Law:  This Agreement and other instruments executed in accordance with it, except for assignments of lands, or the execution hereof shall be governed by and interpreted according to the laws of the State of Colorado.  Forum and venue shall be exclusively in Denver, Colorado.  As to assignments of lands, they shall be governed by the laws of the State of Colorado, unless otherwise agreed to in writing by the Parties.

C.    Entire Agreement:  This Agreement, the documents to be executed hereunder and the Exhibits attached hereto constitute the entire agreement between the Parties, supersedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the parties, and there are no warranties, representations or other agreements between the Parties as to the substance and matters referenced in and made a part of this Agreement, except as specifically set forth herein.  No supplement, amendment, alteration, modification, waiver or termination of the Agreement shall be binding unless executed in writing by the parties hereto.

D.    Waiver:  No waiver of any of the provisions of the Agreement shall be deemed or shall constitute a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.

E.    Captions; Definition of “Including”:  The captions in this Agreement are for convenience only and shall not be considered a part of or affect the construction or interpretation of any provision of this Agreement.  The term “including” or “includes”, as used herein, shall mean “including, without limitation,” and “includes, without limitation”.

F.    Binding:  This Agreement shall be binding upon and inure to the benefit of the Parties hereto and their respective permitted successors, assigns and legal representatives.

G.    Notices:  Any notice hereunder shall be given in writing by mail, courier, personally, E-mail or by facsimile and shall be effective when delivered to the party intended to be notified.  The contact information for each Party is as follows:

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If to PetroShare:

PetroShare Corp.

7200 So. Alton Way, Ste B220

Centennial, CO 80112

Attn: Frederick J. Witsell

(303) 500-1168 Office

(303) 770-6885 fax

(303) 881-2157 cell

fwitsell@petrosharecorp.com

 

If to Participant:

Providence Energy Operators, LLC

Attn:  Jim Sinclair

16400 N Dallas Parkway, Ste 400

Dallas, TX 75248

Phone:   214.522.9131

Email: jsinclair@providence-energy.com

With a copy to:

Providence Energy Operators, LLC

Attn:  Mark L. Nastri

16400 N Dallas Parkway, Ste 400

Dallas, Texas 75248

Phone:   214.522.9131

Email: mnastri@providence-energy.com

(Any Party may change their foregoing contact information by notice to the other Party.)

H.    Expenses:  Except as otherwise provided herein, each Party shall be solely responsible for all expenses incurred by it in connection with this transaction (including fees and expenses of its own counsel and accountants), other than those otherwise agreed to and allocated herein.

I.    Execution:  This Agreement may be executed in multiple original counterparts, all of which shall together constitute a single agreement and each of which, when executed, shall be binding for all purposes thereof on the executed Party, its successors and assigns.

 

  

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J.     Severability:  If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the transactions contemplated hereby is not affected in any materially adverse manner to either Party.

K.   Arbitration:  Any dispute arising under this Agreement (“Arbitrable Dispute”) shall be referred to and resolved by binding arbitration in Denver, Colorado, to be administered by and in accordance with the Commercial Arbitration Rules of the American Arbitration Association.  Arbitration shall be initiated within the applicable time limits set forth in this Agreement and not thereafter or if no time limit is given, within the time period allowed by the applicable statute of limitations, by one party (“Claimant”) giving written notice to the other party (“Respondent”) and to the Denver Regional Office of the American Arbitration Association (“AAA”), that the Claimant elects to refer the Arbitrable Dispute to arbitration.  All arbitrators must be neutral parties who have never been officers, directors or employees of the parties or any of their Affiliates, must have not less than ten (10) years’ experience in the oil and gas industry, and must have a formal financial/accounting, engineering and/or legal education.  The hearing shall be commenced within sixty (60) days after the selection of the arbitrator.  The Parties and the arbitrators shall proceed diligently and in good faith in order that the arbitral award shall be made as promptly as possible.  The interpretation, construction and effect of this Agreement shall be governed by the Laws of Colorado, and to the maximum extent allowed by law, in all arbitration proceedings the Laws of Colorado shall be applied, without regard to any conflicts of laws principles.  All statutes of limitation and of repose that would otherwise be applicable shall apply to any arbitration proceeding.  The tribunal shall not have the authority to grant or award indirect or consequential damages, punitive damages or exemplary damages.

L.    Further Assurances:  During the time in which this Agreement is in effect, the Parties shall, at any time and from time to time, and without further consideration, execute and deliver or use reasonable efforts to cause to be executed and delivered such other instruments of conveyance and contract, and to take such other actions as either Party may reasonably may request effect the intent of this Agreement.

M.    Not to be Construed Against Drafter: The Parties acknowledge that they have had an adequate opportunity to review each and every provision contained in this Agreement, that they have participated equally in the drafting hereof and that they have had adequate time to submit same to legal counsel for review and comment.  Based on said review and consultation, the parties agree with each and every term contained in this Agreement.  Based on the foregoing, the parties agree that the rule of construction that a contract be construed against the drafter, if any, shall not be applied in the interpretation and construction of this Agreement.

N.   Laws and Regulations:  Any reference to any federal, state, local, or foreign statute or law will be deemed also to refer to all rules and regulations promulgated thereunder, unless the context otherwise requires.

 

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O.   Third-Party Beneficiaries:  This Agreement is not intended to confer any rights or remedies upon any Person other than the parties and their respective successors and permitted assigns.

P.    Investment Representations:  Participant understands that the interests evidenced by this Agreement have not been registered under the Securities Act of 1933, the Colorado Securities Act or any other state securities laws (the “Securities Acts”).

Q.    Preferential Rights:  Notwithstanding anything contained in this Agreement to the contrary, each Party shall have a first right of refusal to acquire any interest in the Wells, Leases or AMI which a party (“Selling Party”) decides to sell or otherwise transfer to a unrelated third party, other than an affiliate, under the same terms and conditions as are being offered by the third party.  The non-selling Party (“Non-Selling Party”) shall notify the Selling Party of its election to participate in any additional interest or project under this provision within thirty (30) days of its receipt of notice of the availability of said interest and the terms related thereto. If the Non-Selling Party does not elect to acquire the rights or interest being offered within said thirty (30) day period, then the Selling Party shall be free to sell or transfer the interest to the unrelated third party at the terms so tendered to the Selling Party. In the event the sale of the interest is not closed under the same terms and conditions as originally proposed within 120 days from the written notice to the Non-Selling Party of the proposed sale, then the Preferential Right as set forth herein shall be reinstated. Notwithstanding anything to the contrary herein, this Preferential Right shall expire in its entirety on the maturity date of the Credit Facility or any extension thereof.

R.    Tag-Along Rights:  In the event that PetroShare elects to transfer to any third party in a transaction or series of related transactions all or substantially all of PetroShare’s interests in the AMI, then Participant (at its sole discretion) may require that PetroShare cause the third party to include all or a portion of Participant’s corresponding interest in the AMI for the terms, conditions and consideration as PetroShare’s intended sale.

IN WITNESS WHEREOF, this Agreement is executed effective as of the date hereinabove provided.

Parties:

	
PETROSHARE CORP.

 

By:    /s/ Stephen J. Foley     

Name: Stephen J. Foley, CEO

 

	
PROVIDENCE ENERGY OPERATORS, LLC

 

By:      /s/ Jim Sinclair          

Name: Jim Sinclair, COO

 

 

  

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EXHIBIT “A”

EXISTING LEASES

Those certain leases Pursuant to the Lease Acceptance Letter dated February 27, 2015, by and between PetroShare Corp. and Kingdom Resources LLC, as amended and Extended to May 13, 2015, comprising the general area described below:

Township 1 South, Range 67 West, Adams Co., CO 6th PM

Section 10: various parcels covering 203 net acres

Section 15: various parcels covering approx. 128 net acres

(detailed lease descriptions to be attached)

 

 

 

 

 

 

	
C S M K F

	

CARVER SCHWARZ McNAB 

KAMPER & FORBES, LLC

	
LAWYERS

 

HUDSON'S  BAY CENTRE

1600 STOUT STREET, SUITE 1700

DENVER, COLORADO 80202

MAIN LINE:  303.893.1815

FACSIMILE: 303.893.1829

 

	

PETER C. FORBES PFORBES@CSMKF.COM

303.893.1827

 

May 6, 2015

VIA EMAIL

 

Frederick J. Witsell President 

PetroShare Corp.

7200 South AltonWay Suite B220

Centennial, CO 80111

 

	
Re:

	
Kingdom Resources/Todd Creek Farms

 

Dear Fred:

 

TCF has cleared title to an additional approximately 22 acres of mineral interests acres in Filings 1, 2 and 5, as reflected in the attached updated spreadsheet. I have also enclosed copies of the lease amendments adding this additional acreage to the TCF/Kingdom Lease. To the extent you think a modification of the Kingdom/Petroshare lease assignment is necessary to include these amendments, let me know and we can prepare one.

Because TCF's total net mineral acreage has increased to 333.24 net acres, I have enclosed a revised Bonus Payment order and a revised Contractor’s Fee invoice. Finally, I have included the additional invoices from our firm for charges incurred after our original submission that arc payable pursuant to the Contractor’s Agreement.

Therefore, assuming the closing goes forward on May 15, 2015 as scheduled, the total amount payable (including the Borders  invoices and the CSMKF invoices included with our original  submission) will be $785,630.10, broken down as follows:

	
Payee

	
Item

	 	
Amount 

	 	 	 		 
	
TCF

	
Bonus

	 	
$

	
683,142.00

	 
	
Kingdom

	
Contractor's Fee

	 	
$

	
68,314.20

	 
	
Kingdom

	
Borders Invoices

	 	
$

	
15,110.90

	 
	
Kingdom

	
CSMKF Invoices

	 	
$

	
19,063.00

	 

 

  

Frederick J. Witsell

May 6, 2015

Page 2

CSMKF

Lawyers

Also, there is one additional lot in Filing 5 where TCF obtained a QCMD, but where the homeowner had already executed a lease with Ward.  Therefore, TCF’s interest in that lot is limited to the 17.5% landowner royalty provided by the Ward lease. Kingdom has not included any net acreage for that lot in this submission, because that lease does not comply with the parameters set forth in the Contractor’s Agreement.  If that royalty is of interest to Ward, however, let us know and we can discuss an appropriate payment arrangement for that lot.

Thanks much, and as always let me know if you have any questions.

Very truly yours,

  /s/ Peter C. Forbes

Peter C. Forbes

cc:  Gene Osborne

Enclosure

 

 

Todd Creek Farms

	
SUMMARY OF NET ACREAGE ALL FILINGS 

	 	
Homeowner 

Leases

	
Summary 

Judgments

	
Defaults

	
Quit

claims

	
ROW

	
TOTALS

	
Filling 1

	
1.86

	
3.635

	
35.96

	
30.72

	
12.12

	
84.29

	
Filing 2

	
0

	
13.79

	
39.51

	
6.58

	
18.68

	
64.77

	
Filing 3

	
0

	
0

	
0.00

	
0.00

	
0.00

	
0.00

	
Filing 4

	
0

	
0

	
24.10

	
3.29

	
67.06

	
94.45

	
Filings

	
0

	
0

	
32.99

	
14.02

	
28.93

	
75.94

	
    TOTAL

	
1.860

	
17.425

	
132.560

	
54.605

	
126.790

	
333.240

TOTAL NET ACRES:   333.240

 

 

Page 1 of 9

 

 

Todd Creek Farms

	
FILING 1

	
Defaults

	 	
Quit Claim Mineral Deeds

 

	
Lot

	
Block

	
Total Acres

	
Net Acres

	
Comments

	
Lot

	
Block

	
Total Acres

	
Net Acres

	
Comments

	
15

	
3

	
1.57

	
1.570

	 	
5

	
2

	
1.74

	
0.870

	
50% Reduction - Tract 1

	
4

	
4

	
1.5

	
1.500

	 	
8

	
2

	
2.18

	
1.090

	
50% Reduction - Tract 1

	
2

	
1

	
1.59

	
1.590

	 	
11

	
3

	
1.73

	
1.730

	 
	
6

	
4

	
1.5

	
1.500

	 	
10

	
3

	
1.75

	
1.750

	 
	
15

	
2

	
2

	
1.000

	
50% Reduction - Tract 1

	
16

	
3

	
2.43

	
2.430

	 
	
8

	
4

	
1.5

	
1.500

	 	
7

	
3

	
1.86

	
0.930

	
50% Reduction - Tract 1

	
12

	
2

	
2

	
1.000

	
50% Reduction - Tract 1

	
1

	
2

	
1.68

	
1.680

	 
	
3

	
4

	
1.5

	
1.500

	 	
5

	
3

	
1.99

	
0.995

	
50% Reduction - Tract 1

	
2

	
5

	
1.97

	
1.970

	 	
19

	
3

	
1.94

	
0.970

	
50% Reduction - Tract 1

	
5

	
4

	
1.5

	
1.500

	 	
6

	
3

	
1.82

	
0.910

	
50% Reduction- Tract 1

	
10

	
2

	
2.49

	
1.245

	
50% Reduction - Tract 1

	
3

	
3

	
1.78

	
1.780

	 
	
14

	
3

	
1.63

	
1.630

	 	
7

	
2

	
2.87

	
1.435

	
50% Reduction - Tract 1

	
13

	
3

	
1.94

	
1.940

	 	
1

	
3

	
1.86

	
1.860

	 
	
13

	
2

	
2

	
1.000

	
50% Reduction - Tract 1

	
16

	
2

	
2

	
1.000

	
50% Reduction - Tract 1

	
22

	
3

	
2.09

	
1.045

	
50% Reduction - Tract 1

	
12

	
3

	
2.18

	
2.180

	 
	
1

	
5

	
1.62

	
1.620

	 	
9

	
3

	
1.86

	
1.860

	 
	
17

	
3

	
2.32

	
2.320

	 	
8

	
3

	
1.82

	
1.820

	 
	
14

	
2

	
2

	
1.000

	
50% Reduction - Tract 1

	
3

	
5

	
2.26

	
2.260

	 
	
21

	
3

	
2.09

	
1.045

	
50% Reduction - Tract 1

	
11

	
2

	
2.13

	
1.065

	
50% Reduction - Tract 1

	
4

	
5

	
2.64

	
2.640

	 	
4

	
3

	
2.1

	
2.100

	 
	
7

	
4

	
1.5

	
1.500

	 	
TOTALS

	
39.98

	
30.72

	 
	
1

	
4

	
1.5

	
1.500

	 	 
	
9

	
2

	
2.07

	
1.035

	
50% Reduction - Tract 1

	
1

	
1

	
1.81

	
1.810

	 
	
TOTALS

	
44.330

	
35.960

	 

	
 

	
TOTAL ACREAGE FOR FILING NO. 1 LOTS:

		
84.31

	
 

	
 

	
REDUCTIONS:

		
17.64

	
 

	
 

	
TOTAL NET ACREAGE FOR FILING NO. 1 LOTS

		
66.68

	
 

	
 

	
 

		
 

	
 

  

Page 2 of 9

 

Todd Creek Farms

	
FILING 2

	
Defaults

	 	
Quit Claim Mineral Deeds

	
Lot

	
Block

	
Total Acres

	
Net Acres

	
Plat

	
Comments

	
Lot

	
Block

	
Total Acres

	
Net Acres

	
Plat

	
Comments

	
1

	
5

	
1.69

	
1.69

	
Original

	 	
2

	
1

	
1.89

	
1.89

	
Amended

	 
	
3

	
5

	
1.96

	
1.96

	
Original

	 	
7

	
3

	
2.90

	
1.45

	
Original

	
50% Reduction - Tract 1

	
6

	
5

	
1.51

	
1.51

	
Original

	 	
1

	
1

	
1.94

	
0.97

	
Original

	
50% Reduction - Tract 1

	
3

	
3

	
2.05

	
2.05

	
Original

	 	
3

	
1

	
1.87

	
1.87

	
Original

	 
	
8

	
7

	
2.01

	
2.01

	
Original

	 	
Tract D

	
0.40

	
0.40

	 	 
	
4

	
3

	
2.15

	
2.15

	
Original

	 	
TOTALS

	
9.00

	
6.58

	 
	
2

	
4

	
1.69

	
1.69

	
Original

	 	 
	
2

	
7

	
1.96

	
1.96

	
Original

	 
	
1

	
4

	
1.49

	
1.49

	
Original

	 
	
2

	
5

	
2.29

	
2.29

	
Original

	 
	
5

	
1

	
2.15

	
2.15

	
Amended

	 
	
5

	
3

	
2.25

	
2.25

	
Original

	 
	
5

	
5

	
2.18

	
2.18

	
Original

	 
	
4

	
5

	
2.14

	
2.14

	
Original

	 
	
1

	
2

	
1.68

	
1.68

	
Amended

	 
	
3

	
2

	
1.54

	
0.77

	
Original

	
50% Reduction - Tract 1

	
7

	
7

	
2.28

	
2.28

	
Original

	 
	
1

	
3

	
2.29

	
2.29

	
Original

	 
	
1

	
1

	
2.96

	
2.96

	
Amended

	 
	
3

	
9

	
2.01

	
2.01

	
Original

	 
	
TOTALS

	
40.28

	
39.51

	 	 

 

 

	
TOTAL ACREAGE FOR FILING NO. 2

		
49.28

	
REDUCTIONS:

		
3.19

	
TOTAL NET ACREAGE FOR FILING NO. 2

		
46.09

 

  

Page 3 of 9

 

 

Todd Creek Farms

	
Filing 3

	
Default

s

	 	 	 	 	 	
Quit Claim Mineral Deeds

	
Lot

	
Block

	
Total Acres

	
Net Acres

	
Comments

	Lot	Block	Total Acres	Net Acres	
Comments

	
11

	
4

	
1.73

	
0.00

	
HBP Issue (1.73)

	6	3	1.81	0.00	
HBP Issue (1.81)

	
TOTALS

	
1.73

	
0.00

	 	TOTALS		1.81	0.00	

 

 

	
TOTAL ACREAGE FOR FILING NO. 3

		
3.54

	
REDUCTIONS:

		
0.00

	
TOTAL NET ACREAGE FOR FILING NO.

		
0.00

 

 

 

 

Page 4 of 9

 

Todd Creek Farms

	
Filing 4

	
Defaults

	 	
Quit Claim Mineral Deeds

 

	
Lot

	
Block

	
Total Acres

	
Net Acres

	
Comments

	
Lot    

	Block	
Total Acres

	
Net Acres

	
Comments

	
7

	
5

	
2.13

	
2.13

	
Guard Lease (void)

	
26

	2	
1.72

	
1.72

	 
	
5

	
5

	
1.81

	
1.81

	 	
6

	3	
1.57

	
1.57

	 
	
14

	
4

	
1.79

	
1.79

	 	
TOTAL ACREAGE

		
3.29

	
3.29

	 
	
9

	
7

	
1.95

	
1.95

	 	 
	
37

	
2

	
1.53

	
1.53

	 
	
33

	
2

	
1.61

	
1.61

	 
	
12

	
4

	
1.59

	
1.59

	
Extraction Lease (void)

	
23

	
2

	
1.51

	
1.51

	 
	
16

	
3

	
1.54

	
1.54

	
Guard Lease {void)

	
40

	
4

	
1.88

	
1.88

	 
	
38

	
4

	
1.78

	
1.78

	 
	
9

	
4

	
1.88

	
1.88

	
Extraction Lease (void)

	
34

	
2

	
1.60

	
1.60

	 
	
21

	
2

	
1.50

	
1.50

	 
	
TOTAL ACREAGE

	
24.10

	
24.10

	 

 

 

	
TOTAL ACREAGE FOR FILING NO. 4

		
27.39

	
REDUCTIONS:

		
0

	
TOTAL NET ACREAGE FOR FILING NO. 4 LOTS:

		
27.39

Page 5 of 9

 

Todd Creek Farms

	
Filing 5

	
Defaults

	 	
Quit Claim Mineral Deeds

 

	
Lot

	
Block

	
Total Acres

	
Net Acres

	
Comments

	
Lot

	
Block

	
Total Acres

	
Net Acres

	
Comments

	
25

	
1

	
1.67

	
1.67

	 	
38

	
1

	
1.67

	
1.67

	 
	
30

	
1

	
1.80

	
1.80

	 	
3

	
3

	
1.52

	
0.00

	
Lease prior to QCMD

	
12

	
2

	
2.10

	
2.10

	 	
12

	
1

	
1.98

	
1.98

	 
	
35

	
4

	
2.00

	
2.00

	 	
24

	
1

	
1.52

	
1.52

	 
	
6

	
3

	
1.76

	
1.76

	 	
25

	
4

	
2.46

	
2.46

	 
	
30

	
2

	
1.80

	
1.80

	 	
26

	
4

	
1.98

	
1.98

	 
	
14

	
2

	
1.80

	
1.80

	 	
38

	
1

	
1.67

	
1.67

	 
	
29

	
3

	
1.53

	
1.53

	 	
40

	
4

	
2.11

	
2.11

	 
	
4

	
2

	
1.56

	
1.56

	 	
Outlots A, B, C, D. E

	
0.63

	
0.63

	 
	
13

	
1

	
1.86

	
1.86

	 	
TOTALS

	
15.54

	
14.02

	 
	
12

	
4

	
1.67

	
1.67

	 	 
	
31

	
1

	
1.80

	
1.80

	 
	
10

	
2

	
1.69

	
1.69

	 
	
36

	
1

	
1.61

	
1.61

	 
	
18

	
3

	
1.60

	
1.60

	 
	
29

	
2

	
1.72

	
1.72

	 
	
8

	
3

	
1.63

	
1.63

	
Guard Lease (void)

	
35

	
3

	
1.50

	
0.00

	
Title transfer issue (1.50)-Montano

	
10

	
3

	
1.71

	
1.71

	 
	
17

	
1

	
1.68

	
1.68

	 
	
TOTALS

	
34.49

	
32.99

	 

 

 

 

 

	
TOTAL ACREAGE FOR FILING NO. 5

		
50.03

	
REDUCTIONS:

		
  4.58

	
TOTAL NET ACREAGE FOR FILING NO. 5 LOTS:

		
47.01

Page 6 of 9

 

Todd Creek Farms

	
ROW

	 	
Total Acres

	
Reduction

	
Net Acreage

	
Comments

	
Filing 1

	
14.49

	
2.37

	
12.12

	
50% Reduction - Tract 1

	
Filing 2

	
18.92

	
0.24

	
18.68

	
50% Reduction - Tract 1

	
Filing 3

	
20.72

	
20.72

	
0.00

	
HBP Issue

	
Filing 4

	
67.06

	
0

	
67.06

	 
	
Filing 5

	
28.93

	
0

	
28.93

	 
	
TOTALS

	
150.12

	
23.33

	
126.79

	 

Page 7 of 9

Todd Creek Farms

	
Amendment No. 1 - Summary Judgments

 

	
Filing

	
Lot

	
Block

	
Total

Acres

	
Net

Acres

	
Comments

	
1

	
2

	
2

	
1.64

	
1.64

	 
	
1

	
20

	
3

	
2.12

	
1.06

	
50% Reduction Tract 1

	
1

	
6

	
2

	
1.87

	
0.935

	
50% Reduction Tract 1

	
2

	
1

	
2

	
2.31

	
2.31

	 
	
2A

	
2

	
2

	
1.89

	
1.89

	 
	
2A

	
3

	
1

	
2.2

	
1.100

	
50% Reduction Tract 1

	
2

	
2

	
3

	
2.11

	
2.11

	 
	
2

	
2

	
2

	
2.29

	
2.29

	 
	
2

	
6

	
4

	
1.91

	
1.91

	 
	
2

	
3

	
7

	
2.18

	
2.18

	 
	 	
TOTALS

	
20.520

	
17.425

	 

 

 

Page 8 of 9

 

Todd Creek Farms

	
Amendment No. 2 -  Homeowner Leases

	
Filing

	
Lot  

	Block	
Total

Acres

	
Net Acres

	
Comments

	
1

	
2

	3	
1.86

	
1.86

	
85/15 Lease

	 	
TOTALS

	
1.860

	
1.860

	 

 

 

  

Page 9 of 9

 

KINGDOM RESOURCES, LLC

7501 Village Square Drive Suite 205

Castle Pines, CO 80108

ORDER OF PAYMENT

May 5, 2015

On approval of the Oil and Gas Lease associated herewith and on approval of the title to same, Kingdom Resources, LLC will make or cause to be made the payment indicated herein by check no later than May 15, 2015.  Payment is deemed complete upon mailing or dispatch. No default shall be declared for failure to make payment until 10 days after receipt of written notice from payee of intention to declare such default.

If the Oil and Gas Lease referenced herein covers less than the entire undivided interest in the oil and gas or other rights in such land, then the dollar amount listed herein shall be paid to the Lessor only in the proportion which the interest in said lands covered by this Agreement bears to the entire undivided interest therein. Further, should Lessor own more or less than the net interest defined herein, Lessee shall increase or reduce the dollar amount payable hereunder proportionately.

PAY TO:  Todd Creek Farms, LLC

THE AMOUNT OF:  Six Hundred Eighty Three Thousand One Hundred Forty Two and No/100 Dollars ($683,142.00)

 

ADDRESS: 7501 Village Square Drive, Suite 205, Castle Pines, CO 80108 

 

Consideration for execution of a new Paid Up Oil and Gas Lease dated November 28, 2014 covering portions of Sections 10 and 15, Township 1 South, Range 67 West of the 6th  P.M, as amended.

 

	
KINGDOM  RESOURCES, LLC 

 

LESSOR

	
TODD CREEK FARMS, LLC

 

LESSEE

	
 

	
 

	
By:  /s/ Gene Osborne

Name:  Gene Osborne

Title:  Manager

	
By:  /s/ Gene Osborne

Name:  Gene Osborne

Title:  Authorized Agent

	
 

	
 

 

 

INVOICE

 

	
Date

	
Invoice #

	
5/5/2015

	
101

Kingdom Resources, LLC

7501 Village Square Dr.#205 

Castle Pines, CO 80108

 

Bill to:

PetroShare Corp.

Frederick J. Witsell

7200 South Albion Way, Suite B220

Centennial, CO  80111

 

	
Description

	
Amount

	
 

	
 

	
Contract Fee pursuant to Article 1 of Exhibit B of the "Services Agreement"

	
$68,314.20

	
 

 

TOTAL

	
 

 

 

 

 

 

$68,134.20

 

 

 

 

AMENDMENT NO. 1 TO PAID UP OIL AND GAS LEASE

 

 

The terms of that certain Paid-Up Oil and Gas Lease dated as of November 24, 2014 by and between Todd Creek Farms, LLC and Kingdom Resources, LLC, as recorded with the Clerk and Recorder of Adams County, Colorado on or about January 13, 2015 at Reception No.

2015000002735 (the "Lease") are hereby amended as follows:

The description of the property subject to the Lease is amended to include the property in Exhibit A-4 to this Amendment, which is incorporated into the Lease, and the description of the acreage covered by the Lease is amended to read "containing 373.16 acres more or less."

Other than as set forth above, the terms of the Lease are not amended in any way.

TODD CREEK FARMS, LLC

  

By:  /s/ Gene Osborne

Name:  Gene Osborne

Title:  Authorized Agent

 

	
STATE OF COLORADO

	
)

	
 

	
 

	
) ss.

	
 

	
COUNTY OF DENVER

	
)

	
 

 

The foregoing instrument was acknowledged before me on this 14th day of April, 2015, by Gene Osborne, as Authorized Agent for Todd Creek Farms, LLC, a Colorado limited liability company, on behalf of said entity.

 

	

[SEAL]

MARY BAYER

NOTARY PUBLIC      

STATE OF COLORADO

NOTARY ID 20044029804

MY COMMISSION EXPIRES 02/27/2017

	

/s/ Mary Bayer

  Notary Public – State of Colorado

My Commission Expires: 2/27/2017

	
 

	
 

	
 

	
 

  

Consented and Agreed To:

KINGDOM RESOURCES, LLC

	By: /s/ Gene Osborne	

Name:  Gene Osborne

Title:  Manager

 

	
STATE OF COLORADO

	
)

	
 

	
 

	
) ss.

	
 

	
COUNTY OF DENVER

	
)

	
 

 

The foregoing instrument was acknowledged before me on this 14th day of April, 2015, by Gene Osborne, as Manager of Todd Creek Farms, LLC, a Colorado limited liability company, on behalf of said entity.

 

	

[SEAL]

MARY BAYER

NOTARY PUBLIC      

STATE OF COLORADO

NOTARY ID 20044029804

MY COMMISSION EXPIRES 02/27/2017

	

/s/ Mary Bayer

  Notary Public – State of Colorado

My Commission Expires: 2/27/2017

	
 

	
 

	
 

	
 

  

EXHIBIT "A-4"

TODD CREEK FARMS SUBDIVISION

 

 Attached to and made part of that certain oil and gas lease dated November 24, 2014 by and between Todd Creek Farms, LLC as Lessor and Kingdom Resources, LLC as Lessee:

 

	
1.

	
Lot 2, Block 2 of Filing No. 1 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on March 22, 1996, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and also known as 9195 E. 159th Avenue, Brighton, CO 80602 and containing 1.64 acres more or less.

	
2.

	
Lot 20, Block 3 of Filing No. 1 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on March 22, 1996, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and also known as 15775 Dallas Street, Brighton, CO 80602 and containing 2.12 acres more or less.

	
3.

	
Lot 6, Block 2 of Filing No. 1 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on March 22, 1996, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and also known as 9395 East 159th Avenue, Brighton, CO 80602 and containing

1.87 acres more or less.

	
4.

	
Lot 1, Block 2 of Filing No. 2 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on May 22, 1997, and, as amended, March 19, 1998, located in Section 10, Township 1 South, Range 67 West of the 61 P.M. and also known as 15600 Boston Street, Brighton, CO 80602 and containing 2.31 acres more or less.

	
5.

	
Lot 2, Block 2 of Filing No. 2 as shown on the amended plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on March 19, 1998, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and also known as 15250 Akron Street, Brighton, CO 80602 and containing 1.89 acres more or less.

	
6.

	
Lot 3, Block 1 of Filing No. 2 as shown on the amended plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on March 19, 1998, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and also known as 9081 East 153rd Avenue, Brighton, CO 80602 and containing 2.2 acres more or less.

	
7.

	
Lot 2, Block 3 of Filing No. 2 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on May 22, 1997, and, as amended, March 19, 1998, located in Section 10, Township 1 South,

 

Range 67 West of the 6th P.M. and also known as 9303 East 155th Drive, Brighton, CO 80602 and containing 2.11 acres more or less.

	
8.

	
Lot 2, Block 2 of Filing No. 2 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on May 22, 1997, and, as amended, March 19, 1998, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and also known as 9453 East 155th Drive,

Brighton, CO 80602 and containing 2.29 acres more or less.

	
9.

	
Lot 6, Block 4 of Filing No. 2 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on May 22, 1997, and, as amended, March 19, 1998, located in Section l 0, Township 1 South, Range 67 West of the 6th P.M. and also known as 9347 East 153rd Avenue, Brighton, CO 80602 and containing 1.91 acres more or less.

	
10.

	
Lot 3, Block 7 of Filing No. 2 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County on May 22, 1997, and, as amended, March 19, 1998, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and also known as 9204 East 153rd Avenue, Brighton, CO 80602 and containing 2.18 acres more or less.

 

AMENDMENT NO. 2 TO PAID UP OIL AND GAS LEASE

 

The terms of that certain Paid-Up Oil and Gas Lease dated as of November 24, 2014 by and between Todd Creek Farms, LLC and Kingdom Resources, LLC, as recorded with the Clerk and Recorder of Adams County, Colorado on or about January 13, 2015 at Reception No. 2015000002735 (the "Lease") are hereby amended as follows:

The description of the property subject to the Lease is amended to include the property in Exhibit A-5 to this Amendment, which is incorporated into the Lease, and the description of the acreage covered by the Lease is amended to read "containing 375.02 acres more or less."

Other than as set forth above, the terms of the Lease are not amended in any way.

 

TODD CREEK FARMS, LLC

 

By:  /s/ Gene Osborne

Name:  Gene Osborne

Title: Authorized Agent

 

	
STATE OF COLORADO

	
)

	
 

	
 

	
) ss.

	
 

	
COUNTY OF DENVER

	
)

	
 

 

The foregoing instrument was acknowledged before me on this 13th day of April, 2015, by Gene Osborne, as Authorized Agent for Todd Creek Farms, LLC, a Colorado limited liability company, on behalf of said entity.

 

	

[SEAL]

MARY BAYER

NOTARY PUBLIC      

STATE OF COLORADO

NOTARY ID 20044029804

MY COMMISSION EXPIRES 02/27/2017

	

/s/ Mary Bayer

  Notary Public – State of Colorado

My Commission Expires: 2/27/2017

	
 

	
 

	
 

	
 

  

 

Consented and Agreed To:

 

KINGDOM RESOURCES, LLC

	By: /s/ Gene Osborne	

Name:  Gene Osborne

Title:  Manager

 

	
STATE OF COLORADO

	
)

	
 

	
 

	
) ss.

	
 

	
COUNTY OF DENVER

	
)

	
 

 

The foregoing instrument was acknowledged before me on this 14th day of April, 2015, by Gene Osborne, as Manager of Todd Creek Farms, LLC, a Colorado limited liability company, on behalf of said entity.

 

	

[SEAL]

MARY BAYER

NOTARY PUBLIC      

STATE OF COLORADO

NOTARY ID 20044029804

MY COMMISSION EXPIRES 02/27/2017

	

/s/ Mary Bayer

  Notary Public – State of Colorado

My Commission Expires: 2/27/2017

	
 

	
 

	
 

	
 

 

 

 

EXHIBIT "A-5"

TODD CREEK FARMS SUBDIVISION

Attached to and made part of that certain oil and gas lease dated November 24, 2014 by and between Todd Creek Farms, LLC as Lessor and Kingdom Resources, LLC as Lessee:

	
1.

	
Lot 1, Block 3 of Filing No. 1 as shown on the plat of the Todd Creek Farms subdivision, as recorded with the Clerk and Record of Adams County, Colorado on March 22, 1996, located in Section 10, Township 1 South, Range 67 West of the 6th P.M. and also known as 15985 Alton Street, Brighton, CO 80602 and containing 1.86 acres more or less.

 

AMENDMENT NO. 3 TO PAID UP OIL AND GAS LEASE

 

The terms of that certain Paid-Up Oil and Gas Lease dated as of November 24, 2014 by and between Todd Creek Farms, LLC and Kingdom Resources, LLC, as recorded with the Clerk and Recorder of Adams County, Colorado on or about January 13, 2015 at Reception No.

2015000002735 (the "Lease") are hereby amended as follows:

Exhibit A-2 to the Lease is amended to include the following property:

Tract D, Todd Creek Farms Filing No. 2, according to the plat thereof recorded May 22, 1997 in File 17, Map 688, as amended according to the plat thereof recorded March 19, 1998 in File 17, Map 815 at County of Adams, State of Colorado, consisting of 0.40 acres, more or less

Outlots A, B, C, D and E, Todd Creek Farms Filing No. 5, according to the plat thereof recorded May 1, 2000 in File 18, Map 211, at County of Adams, State of Colorado, consisting of 0.63 acres, more or less

And the description of the acreage covered by the Lease is amended to read ''containing 376.05 acres more or less."·

Other than as set forth above, the terms of the Lease are not amended in any way.

 

By:  /s/ Gene Osborne

Name:  Gene Osborne

Title: Authorized Agent

 

	
STATE OF COLORADO

	
)

	
 

	
 

	
) ss.

	
 

	
COUNTY OF DOUGLAS

	
)

	
 

 

The foregoing instrument was acknowledged before me on this 5th day of May, 2015, by Gene Osborne, as Authorized Agent for Todd Creek Farms, LLC, a Colorado limited liability company, on behalf of said entity.

 

	

[SEAL]

KIM T HARRISON

NOTARY PUBLIC      

STATE OF COLORADO

MY COMM EXP 05/23/2016

	

/s/ Kim T. Harrision

  Notary Public – State of Colorado

My Commission Expires: 5/23/16

	
 

	
 

	
 

	
 

 

 

 

 

Consented and Agreed To: 

 

KINGDOM  RESOURCES, LLC

 

By:  /s/ Gene Osborne

Name: Gene Osborne 

Title: Manager

 

 

	
STATE OF COLORADO

	
)

	
 

	
 

	
) ss.

	
 

	
COUNTY OF DOUGLAS

	
)

	
 

 

The foregoing instrument was acknowledged before me on this 5th day of May, 2015, by Gene Osborne, as Manager of Kingdom Resources, LC, a Colorado limited liability company, on behalf of said entity.

 

	

[SEAL]

KIM T HARRISON

NOTARY PUBLIC      

STATE OF COLORADO

MY COMM EXP 05/23/2016

	

/s/ Kim T. Harrision

  Notary Public – State of Colorado

My Commission Expires: 5/23/16

	
 

	
 

	
 

	
 

 

CARVER SCHWARZ McNAB KAMPER & FORBES, LLC

ATTORNEYS AT LAW

EIN No. 20-0509232

 

HUDSON'S BAY CENTRE

1600 STOUT STREET. SUITE 1700

DENVER. COLORADO 80202-3164

 

TELEPHONE 303.893.1815

FAX 303.893.1829

March 06, 2015

Kingdom Resources, LLC 

Attn: Gene A. Osborne

7501 Village Square Dr. #205 

Castle Rock, CO 80108

 

Invoice Number 19419

In Reference  To:  Kingdom Resources, LLC - Lease Matters - 33030.002

Professional Services

	 				Hours			Amount	
	
 2/6/2015

	
PCF

	
Drafting correspondence to Petroshare concerning lease assignment.

	 	
0.60

	 	 	
255.00

	 
	
2/10/2015

	
PCF

	
Work on matters concerning finalization of lease assignment;

	 	 	
2.60

	 	 	 	
1,105.00

	 
	
2/11/2015

	
PCF

	
Work on resolution of various issues concerning lease   submission;

	 	 	
1.00

	 	 	 	
425.00

	 
	
2/12/2015

	
MB

	
Review exhibits with deed information per P. Forbes.

	 	 	
1.70

	 	 	 	
178.50

	 
	
 

	
 PCF

	
Reconciliation of matters for submission to Petroshare; revise and finalize documents for Petroshare.

	 	 	
1.10

	 	 	 	
467.50

	 
	
2/13/2015

	
MB

	
Review lot information on map and lease exhibits per P. Forbes.

	 	 	
2.40

	 	 	 	
252.00

	 
	
 

	PCF	
Follow up on information request from Mr. Witsell.

	 	 	
1.30

	 	 	 	
552.50

	 
	
2/24/2015

	
PCF

	
Follow up on questions from  Mr. Witsell.

	 	 	
0.20

	 	 	 	
85.00

	 
	
2/26/2015

	
PCF

	
Prepare for and attend meeting with Mr. Osborne, Mr. Witsell, Mr. Foley at Petroshare.

	 	 	
3.80

	 	 	 	
1,615.00

	 
	
2/27/2015

	
PCF

	
Draft acceptance letter for Petroshare and correspondence concerning same; telecon  Mr. Osborne.

	 	 	
1.20

	 	 	 	
510.00

	 
		 	 	 	 	 	 	 	 
	
For professional services rendered

	 	 	
15.90

	 	 	
$

	
5,445.50

	 
	
Previous balance

	 	 	 	 	 	
$

	
11,790.00

	 

 

CARVER SCHWARZ McNAB KAMPER & FORBES, LLC

 

Page 2

Kingdom Resources, LLC 

 

	 			Amount
	 		 	 
			
 

	
Balance due

	 	
$17,235.50

 

 

 

  

CARVER SCHWARZ McNAB KAMPER & FORBES, LLC

ATTORNEYS AT LAW

EIN No. 20-0509232

 

HUDSON'S BAY CENTRE

1600 STOUT STREET. SUITE 1700

DENVER. COLORADO 80202-3164

 

TELEPHONE 303.893.1815

FAX 303.893.1829

April 08, 2015

Kingdom Resources, LLC 

Attn: Gene A. Osborne

7501 Village Square Dr. #205 

Castle Rock, CO 80108

Invoice Number 19478

In Reference  To:  Kingdom Resources, LLC - Lease Matters - 33030.002

Professional Services

	 		Hours	Amount
	
    3/2/2015 PCF

	
  Research issues concerning ownership of mineral rights under E-470

	
1.10

	
467.50

	 	
and condemnation  issues; begin work on Filing No. 2 MSJ Response.

	 	 
	
3/6/2015 PCF

	
Follow up on various matters raised by Mr. Wltsel and various emails.

	
0.80

	
340.00

	
3/16/2015  PCF

	
Review documents, office conferences Ms. Bayer; draft letter concerning

	
0.30

	
127.50

	 	
supplemental acreage and various emails regarding  same.

	 	 
	
For professional services rendered

	
2.20

	
$935.00

	
Previous balance

	 	
$17,235.50

	
Balance due

	 	
$18,170.50

CARVER SCHWARZ McNAB KAMPER & FORBES, LLC

ATTORNEYS AT LAW

EIN No. 20-0509232

 

HUDSON'S BAY CENTRE

1600 STOUT STREET. SUITE 1700

DENVER. COLORADO 80202-3164

 

TELEPHONE 303.893.1815

FAX 303.893.1829

May 6, 2015

Kingdom Resources, LLC 

Attn: Gene A. Osborne

7501 Village Square Dr. #205 

Castle Rock, CO 80108

Invoice Number 19523

In Reference  To:  Kingdom Resources, LLC - Lease Matters - 33030.002

Professional Services

 

	
4/14/2015 PCF

	
Work on matters relating to additional lots to add to lease; office conferences Ms. Bayer; letter to Mr. Witsell regarding extending closing

	
1.10

	
467.50

	 	
date; letter to Mr. Witsell regarding additional lots added to lease.

	 	 
	
5/5/2015 PCF

	
Prepare additional lease amendment; review matters concerning title transfer issues; revise and finalize net acreage spreadsheet; various

	
1.00

	
425.00

	 	
emails Mr. Osborne; draft letter to Mr. Witsell.

	 	 
	
For professional services rendered

	
2.10

	
$892.50

	
Previous balance

	 	
$18,170.50

	
Balance due

	 	
$19,063.00

 

 

 

 

EXHIBIT B

(There is no Exhibit B)

 

 

FORM OF DEED TO NOTE

DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,

SECURITY AGREEMENT AND FINANCING STATEMENT

from

_________________________

(Federal Income Tax Identification No. ________________)

(“Grantor,” “Mortgagor” and “Debtor”)

to

the PUBLIC TRUSTEE OF ______________ COUNTY, COLORADO, TRUSTEE

for the benefit of

_________________________________

(Federal Income Tax Identification No. _____________)

(“Grantee,” “Mortgagee” and “Secured Party,” as nominee)

A REPRODUCTION OF THIS INSTRUMENT IS SUFFICIENT AS A FINANCING STATEMENT.  FOR PURPOSES OF FILING THIS INSTRUMENT AS A FINANCING STATEMENT, THE ADDRESS OF THE GRANTOR AND DEBTOR IS:

AND THE ADDRESS OF THE GRANTEE AND SECURED PARTY IS:

THIS INSTRUMENT CONTAINS AFTER-ACQUIRED PROPERTY PROVISIONS.

THIS INSTRUMENT SECURES PAYMENT OF FUTURE ADVANCES.

THIS INSTRUMENT COVERS PROCEEDS OF COLLATERAL.

THIS INSTRUMENT COVERS PRODUCTS OF COLLATERAL.

THIS INSTRUMENT COVERS MINERALS AND OTHER SUBSTANCES OF VALUE WHICH MAY BE EXTRACTED FROM THE EARTH (INCLUDING, WITHOUT LIMITATION, OIL AND GAS).  THIS FINANCING STATEMENT IS TO BE FILED FOR RECORD, AMONG OTHER PLACES, IN THE REAL ESTATE RECORDS OF THE COUNTY RECORDER OF WELD COUNTY, COLORADO.  THE GRANTOR HAS AN INTEREST OF RECORD IN THE REAL ESTATE CONCERNED, WHICH INTEREST IS DESCRIBED IN EXHIBIT A ATTACHED HERETO.

THIS INSTRUMENT WAS PREPARED BY AND WHEN RECORDED OR FILED SHOULD BE RETURNED TO:

DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,

SECURITY AGREEMENT AND FINANCING STATEMENT

________________, a _____________ corporation (hereinafter referred to as “Grantor”), for and in consideration of the sum of TEN DOLLARS ($10.00) to Grantor in hand paid by ______________________, a __________ limited liability company, as “Grantee,” “Holder” or “Secured Party” of the obligations as hereinafter recited, and in order to secure the payment and performance of the obligations, covenants, warranties, agreements and undertakings of Grantor hereinafter described, does hereby GRANT, BARGAIN, SELL, CONVEY, MORTGAGE, PLEDGE, TRANSFER, ASSIGN and SET OVER to the Public Trustee of _________ County, Colorado (hereinafter called the “Trustee”) for the benefit of Grantee, and  IN TRUST WITH POWER OF SALE, the following property to the fullest extent such described interests are assignable:

(a)  All of Grantor’s rights, titles, and interests in, under and attributable to the oil and gas leases described in Exhibit A (the “Leases”) including, without limitation, any and all royalty interests and all other interests of whatsoever nature or kind and however characterized in, under or attributable to the Leases;

(b)  All Grantor’s rights, titles and interests in the mineral estate, whether now owned or hereafter acquired, in the Lands described on attached Exhibit A hereto (the “Lands”), including, without limitation, any and all reversionary interests or other interests of whatsoever nature or kind and however characterized in the Lands described on attached Exhibit A, all of which such rights, titles, interests and estates of Grantor and howsoever characterized, together with the rights, title and interests in the Leases described in subparagraph (a) being hereinafter collectively called the “Mineral Interests”;

(c)  All rights, titles, interests and estates now owned or hereafter acquired by Grantor in and to (i) the properties now or hereafter pooled or unitized with any part of the Mineral Interests insofar as they are attributable to or derive from the Mineral Interests; and (ii) all presently existing or future unitization, communitization, pooling agreements and declarations of pooled units and the units created thereby (including, without limitation, all units created under orders, regulations, rules or other official acts of any Federal, State or other governmental body or agency having jurisdiction), insofar as they are attributable to or derive from the Mineral Interests;

(d)  Without limitation, all rights, titles and interests now owned or hereinafter acquired by Grantor in oil and gas wells located on the Lands (the “Wells”);

(e)  All rights, titles, and interests now owned or hereafter acquired by Grantor in and to all oil, gas, casinghead gas, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons and all products refined therefrom and all other minerals (collectively called the “Hydrocarbons”) in, under and which may be produced and saved from the Lands or attributable to the Mineral Interests, including all oil in tanks and all rents, issues, profits, proceeds, products, revenues and other income and proceeds from the sale or use of Hydrocarbons;

 

(f)  All tenements, hereditaments, appurtenances and properties in anywise appertaining, belonging, affixed or incidental to the Mineral Interests and properties, rights, titles, interests and estates described above which are now owned or which may hereafter be acquired by Grantor, including, without limitation, any and all property, real or personal, now owned or hereafter acquired and situated upon, used, held for use, or useful in connection with the operating, working or development of the Leases or the Wells or properties including without limitation, easements, servitudes, licenses and other surface use rights;

 (g)  All of the rights, titles and interests of every nature whatsoever now owned or hereafter acquired by Grantor in and to the Mineral Interests, as the same may be enlarged by the removal of any charges or encumbrances to which the Mineral Interests are subject, or otherwise; together with any and all renewals and extensions of the Leases, properties, rights, titles, interests or estates; all contracts and agreements supplemental to or amendatory of or in substitution for the contracts and agreements described or mentioned above; and any and all additional interests of any kind hereafter acquired by Grantor in and to the  Lands, Leases and Wells described on Exhibit A;

(h)  All accounts, contract rights, choses in action and general intangibles as such terms are defined in Article 9 of the Uniform Commercial Code from time to time in effect in the State of Colorado (the “Uniform Commercial Code”)  constituting a part of, relating to, or arising out of the Mineral Interests and collateral described or mentioned above, and all proceeds and products of the property and collateral described or mentioned in this and said preceding paragraphs; and

(i)  All of Grantor’s rights, now owned or hereafter acquired, in and to all records which relate to the Lands, Leases, Mineral Interests, and Wells.

All of the properties, interests and rights described in the preceding subparagraphs (a) through (i) shall be hereinafter sometimes referred to as the “Mortgaged Properties”.  If any of the lands covered by the Leases or other instrument mentioned in Exhibit A are incorrectly described, then nevertheless this Mortgage (as defined herein) shall cover all Grantor’s interest in such Leases or other instrument as to all of the lands and interests covered thereby.

TO HAVE AND TO HOLD the Mortgaged Properties, together with all and singular the rights, estates, hereditaments, powers and privileges appurtenant or incident thereto, unto the Trustee and his successors or substitutes in this trust and to his or their successors and assigns, forever.

BUT IN TRUST, NEVERTHELESS, for the benefit and security of the Holders of the obligations and indebtedness secured hereby and upon the trusts and subject to the terms and provisions herein set forth.

Secured Indebtedness

1.1  This instrument (hereinafter called the “Mortgage”) is made irrevocably in trust, with power of sale to secure and enforce the following obligations and indebtedness:

(a)  All Grantor’s obligations and indebtedness to Holder under that certain Secured Promissory Note, of even date herewith, in the face amount of $_______________ (the “Note”) of every kind and character now or hereafter owing by Grantor to the Holder under, whether direct or indirect, primary or secondary, fixed or contingent, and including, without limitation, all advances, debts and liabilities arising under or out of the warranties, representations, indemnity and other obligations made and assumed by Grantor under the Note,  and any and all fees, expenses or costs (including attorneys’ fees) incurred by Holder to enforce any of  their  rights against Grantor thereunder;

 

(b)  All Grantor’s express and implied obligations assumed under the Leases identified in Exhibit A, including, but not limited to, warranties of title and all other express and implied obligations of Grantor thereunder;

(c)  All other future advances and sums paid by Holder and its successors and assigns on behalf or for the benefit of Grantor, or in satisfaction of obligations owed by Grantor to Holder under the Note.

(d)  All indebtedness and obligations, whether direct or indirect, primary or secondary, fixed or contingent assumed by Grantor hereunder, or relating to the enforcement of the rights of the “Holder” hereunder.

1.2  The indebtedness and obligations referred to in clauses (a), (b), (c) and (d) of Section 1.1 are hereinafter sometimes referred to as the “Secured Indebtedness.”  Grantee, as designated nominee and agent for and on behalf of the Working Interest Owners and its successors and assigns, is referred to herein  as the “Holder.”

ARTICLE II

Representations, Warranties and Covenants

2.1  Grantor represents, warrants and covenants that Grantor is a corporation in good standing in the State of ________ and has full authority to enter into this Mortgage, that Grantor has good right and authority to grant, bargain, sell, transfer, convey, assign and mortgage all its right, title and interest in the Mortgaged Properties; that Grantor is the lawful owner of an undivided 100% mineral interest in the Lands free and clear from all liens, claims and encumbrances by, through and under Grantor, except the lien evidenced by this Mortgage and the rights of the lessee granted under the Leases; and Grantor does hereby bind itself, its heirs, legal representatives, successors and assigns to forever warrant and defend the title to an undivided 100% mineral interest in the Lands unto the said Trustee and Grantee, and their successors and assigns, against the claims of all persons whomsoever claiming or claim the same or any part thereof by, through or under Grantor.  Any additional rights, title, or interest which Grantor may hereafter acquire or become entitled to in the Lands and properties aforesaid or in the oil, gas or other minerals in, under or produced therefrom shall inure to the benefit of this trust and Grantee, the same as if expressly described and conveyed herein.

2.2  With respect to advances and indebtedness arising out of Grantor’s obligations under the Note that become due, Grantor covenants and agrees:

(a)  That Grantor will make timely payment of sums due or to become due under the Note and will make timely payment of all other Secured Indebtedness hereunder.

 

(b)  That Grantor will observe and materially comply with all of the terms and provisions, express or implied, of the Note.

(c)  That if the validity or priority of this Mortgage or of any right, titles, liens or interests created or evidenced hereby with respect to the Mortgaged Properties or any part thereof shall be endangered or questioned or shall be attacked directly or indirectly or if any legal proceedings are instituted against Grantor with respect thereto, Grantor will give written notice thereof to the Holder promptly and, at Grantor’s own cost and expense, Grantor will diligently endeavor to cure any defect that may be  claimed, and will take all necessary and proper steps for the defense of such legal proceedings, including, but not limited to, the employment of counsel agreeable to the Holder, the prosecution or defense of litigation and the release or discharge of all adverse claims.  If Grantor fails or refuses to take such action, the Trustee and the Holder, or any of them (whether or not named as parties to legal proceedings with respect thereto), are hereby authorized and empowered to take such additional steps as in their judgment and discretion may be necessary or proper for the defense of any such legal proceedings, including, but not limited to, the employment of independent counsel, the prosecution or defense of litigation, and the compromise or discharge of any adverse claims made with respect to the Mortgaged Properties, and all expense so incurred of every kind and character shall be a demand obligation owing by Grantor and shall bear interest at the rate of 8 percent, compounded annually from the date of expenditure until paid and shall be secured by the lien evidenced by this Mortgage, and the party incurring such expenses shall be subrogated to all rights of the person receiving such payment.

(d)  That Grantor will not, without the prior written consent of the Holder, suffer or permit any lien to be hereafter claimed or created on any of the Mortgaged Properties, and should a lien become attached hereafter in any manner to any part of the Mortgaged Properties without the prior written consent of the Holder, Grantor will cause such lien to be promptly discharged.

(e)  That Grantor will, on request of the Holder, promptly correct any defect, error or omission which may be discovered in the contents of this Mortgage, the Note, or other documents executed in connection herewith or in the execution or acknowledgment of any thereof, and will execute and deliver any and all additional instruments as may be requested by the Holder to correct such defect, error or omission and will execute, acknowledge and deliver such further assurances and instruments as shall be, in the opinion of the Holder, necessary or proper to convey and assign to the Trustee all of the Mortgaged Properties herein conveyed or assigned, or intended so to be.

(f)  Grantor will proceed with reasonable diligence to correct any material defect in title to the Mineral Interest in the Lands arising by, through or under Grantor which, in the reasonable opinion of Holder, constitutes a material defect should any such defect be found to exist after the execution and delivery of this instrument; and in this connection, should it be found after the execution and delivery of this instrument that there exists upon the Mortgaged Properties any lien or encumbrance, equal or superior in rank to the lien created by this instrument arising by, through or under Grantor, or should any such hereafter arise, Grantor will promptly discharge and remove any such lien or encumbrance from said property.

 

(g)  Holder at all times shall have the right to release any part of the property now or hereafter subject to the lien hereof or any part of the proceeds of production or other income herein or hereafter assigned or pledged or any other security it now has or may hereafter have hereunder, without releasing any other part of said property, proceeds or income, and without affecting the lien hereof as to the part or parts thereof not so released, or the right to receive future proceeds and income.

(h)  That, promptly upon receipt of any written request from the Holder, Grantor will furnish and deliver, pursuant to such request, any information or data possessed by Grantor with respect to the Mortgaged Properties, including all title materials and other records in the possession, custody or control, and all deeds, conveyances, instruments, contracts, documents, title opinions, title abstracts, division orders, and other records concerning said property.

2.3  Grantor agrees that if Grantor fails to perform any act or to take any action which hereunder Grantor is required to perform or take or to pay any money which hereunder Grantor is required to pay, the Holder, in Grantor’s name or its own name, may (but shall not be obligated to) perform or cause to be performed such act or take such action or pay such money, and any expenses so incurred by the Holder and any money so paid by the Holder: (a) shall be a part of the obligations owing by Grantor, (b) shall bear interest from the date of making such payment until paid at the rate of 10 percent compounded annually, (c) shall be a part of the Secured Indebtedness, and (d) shall be secured by the lien evidenced by this Mortgage.  The  Holder, upon making such payment, shall be subrogated to all of the rights of the person, corporation or body politic receiving such payment.

ARTICLE III

Assignment of Production, Accounts,

Contract Rights and Proceeds

3.1  To facilitate the discharge of any and all of Grantor’s indebtedness and obligations under the Note and this Mortgage, and as cumulative of any and all rights and remedies herein provided for, Grantor hereby BARGAINS, SELLS, TRANSFERS, ASSIGNS, SETS OVER and DELIVERS to the Holder, its successors and assigns, all of the following upon the failure of Grantee to promptly fulfill its obligations and discharge and pay any indebtedness under the Note or Mortgage:

(a)  All oil, gas, casinghead gas, distillate and other minerals, produced and to be produced from or attributable to the Mineral Interests of Grantor and any other interests now or hereafter constituting a part of the Mortgaged Properties from and after the Effective Date (as hereafter defined);

(b)  All royalties and proceeds of production hereafter payable to or to become payable to Grantor or to which Grantor is entitled by virtue of its Leases or Mineral Interests, and Grantor authorizes and empowers said Holder to demand, collect and receive said royalties and proceeds;

 

(c)  All amounts, sums, revenues and income which otherwise become payable to Grantor from any of the Lands or under the Leases; and

(d)  All of Grantor’s contract rights, choses in action, and claims of any kind arising out of the Leases to the extent assignable.

Grantor hereby, irrevocably, authorizes and directs that all parties owing royalties or other sums to Grantor attributable to Grantor’s Mineral Interests pay all such amounts directly to the Holder.  The Holder is authorized to collect such amounts and no party making payment shall have any responsibility to see to the application of any funds paid to the Holder, but shall be fully protected in making such payment to the Holder under the assignments herein contained.  Should the Holder bring suit against any third party for collection of any amounts or sums included within this assignment (and the Holder shall have the right to bring any such suit) it may sue either in its own name or in the name of Grantor.

3.2  Grantor authorizes and empowers the Holder to receive, hold and collect all sums of money paid to the Holder in accordance with this assignment and to apply the same as is hereinafter provided, all without any liability or responsibility on the part of the Holder, save as to good faith in so receiving and applying said sums.  All payments provided for in this assignment shall be paid promptly to the Holder.  It is understood and agreed that should said payments provided for by this assignment be less than the sum or sums then due on said indebtedness, such sum or sums then due shall nevertheless be payable by Holder.  Likewise, neither this assignment nor any provision herein contained shall in any manner be construed to affect the lien, rights and remedies herein granted securing said indebtedness, nor Grantor’s liability therefor.  The rights under this assignment are cumulative of the other rights, remedies and powers granted under this Mortgage and are cumulative of any other security which the Noteholder now holds or may hereafter hold to secure the payment of said indebtedness.

3.3  Nothing herein contained shall detract from or limit the absolute obligation of Grantor to make prompt payment of any indebtedness arising under the Note at the time and in the manner provided for therein or shall detract from or limit the absolute obligation of Grantor to make prompt payment  of all amounts owing hereunder at the time and in the manner provided herein, regardless of whether the proceeds herein assigned are sufficient to pay the same, and the rights under this assignment shall be cumulative of all other security of any and every character now or hereafter existing to secure the payment of sums due under the Note and all other Secured Indebtedness.

ARTICLE IV

Waiver and Partial Release

4.1  The Holder  may at any time and from time to time in writing:

(a)  Waive compliance by Grantor with any covenant herein made by Grantor to the extent and in the manner specified in such writing;

 

(b)  Consent to Grantor’s doing any act which hereunder Grantor is prohibited from doing, or to Grantor’s failing to do any act which hereunder Grantor is required to do, to the extent and in the manner specified in writing; or,

(c)  Release any part of the Mortgaged Properties, or any interest therein, or any proceeds of Hydrocarbon sales from the lien of this Mortgage, without the joinder of the Trustee.

No such act by Noteholder shall in any way impair the rights of the Holder hereunder except to the extent specifically agreed to by the Holder in such writing.

4.2  The lien and other security rights of the Holder hereunder shall not be impaired by any indulgence, including but not limited to (a) any forbearance, renewal, extension or modification (whether one or more) which the Holder may grant with respect to any Secured Indebtedness, or (b) any surrender, compromise, release, renewal, extension, exchange or substitution which the Holder may grant in respect of any item of the Mortgaged Properties or any part thereof or any interest therein.

ARTICLE V

Possession Until Default; Defeasance and Termination

5.1  Unless a default specified in Section 6.1 hereof shall occur and be continuing, Grantor shall retain full right to the Mortgaged Properties subject, however, to all of the terms and provisions of this Mortgage, including without limitation, the assignments under Article III.

ARTICLE VI

Remedies in Event of Default

6.1  The term “default” as used in this Mortgage shall mean the failure of Grantor to pay any sums due Holder under the Note or under this Mortgage within ten (10) days of receipt by Grantor of demand for payment.

6.2           (a)  If a default shall occur and be continuing, the Mortgagee shall have the right and option to proceed with foreclosure and to sell, to the extent permitted by law, all or any portion of the Mortgaged Property at one or more sales, as an entirety or in parcels, at such place or places and otherwise in such manner and upon such notice as may be required by applicable law or, in the absence of any such requirements, as the Mortgagee may deem appropriate, and to make conveyance to the purchaser or purchasers.

(b)  With regard to any part of the Mortgaged Property, it is agreed that the appraisement of any such properties is expressly waived at the option of the Mortgagee, and any such option may be exercised prior to the time judgment is rendered in any foreclosure hereon.

(c)  Notwithstanding any other provision of this Section 6.2, if any of the Secured Indebtedness is not promptly paid, Mortgagee shall have the right and power to proceed by a suit or suits in equity or at law, whether for the specific performance of any covenant or agreement herein contained or in aid of the execution of any power herein granted, or for any foreclosure hereunder or for the sale of the Mortgaged Property under the judgment or decree of any court or courts of competent jurisdiction.

 

(d)  Notwithstanding any other provision, Mortgagee shall also have the option to proceed with foreclosure in satisfaction of any Secured Indebtedness which has not been paid when due either through the courts or by proceeding with foreclosure.  It is further agreed that several sales may be made hereunder without exhausting the right of sale for any subsequent Secured Indebtedness, it being the purpose hereof to provide for a foreclosure and sale of the security for any matured portion of the Secured Indebtedness without exhausting the power to foreclose and sell the Mortgaged Property for any subsequently maturing portion of the Secured Indebtedness.

(e)  The Mortgaged Property may be sold in one or more parcels and in such manner and order as Mortgagee, in his sole discretion, may elect, it being expressly understood and agreed that the right of sale arising out of any event of default shall not be exhausted by any one or more sales.

(f)  Grantor agrees to the full extent that it lawfully may, that in the event of a default that has not been remedied, Mortgagee shall have the right and power to enter into and upon and take possession of all or any part of the Mortgaged Property in the possession of Grantor, its successors or assigns, or its or their agents or servants.

(g)  Every right, power and remedy herein given to Mortgagee shall be cumulative and in addition to every other right, power and remedy herein specifically given or now or hereafter existing in equity, at law or by statute (including specifically those granted by the Uniform Commercial Code in effect and applicable to the Mortgaged Property or any portion thereof) each and every right, power and remedy whether specifically herein given or otherwise existing may be exercised from time to time and so often and in such order as may be deemed expedient by Mortgagee, and the exercise, or the beginning of the exercise, of any such right, power or remedy shall not be deemed a waiver of the right to exercise, at the same time or thereafter any other right, power or remedy.  No delay or omission by Mortgagee in the exercise of any right, power or remedy shall impair any such right, power or remedy or operate as a waiver thereof or of any other right, power or remedy then or thereafter existing.

(h)  Grantor shall not be relieved of any obligation herein by reason of the failure of Mortgagee to comply with any request of Grantor to foreclose the lien of this Mortgage or the release, regardless of consideration, of the Mortgaged Property or any portion thereof or interest therein.

(i)  Mortgagee may release, regardless of consideration, any part of the Mortgaged Property without, as to the remainder, in any way impairing, affecting, subordinating or releasing the lien or security interest created in or evidenced by this Mortgage or its stature as a first and prior lien and security interest in and to the Mortgaged Property, and without in any way releasing or diminishing the liability of any person or entity liable for the repayment of the Secured Indebtedness.  For payment of the Secured Indebtedness, Mortgagee may resort to any other security therefor held by Mortgagee in such order and manner as Mortgagee may elect.

 

(j)  To the fullest extent permitted by law, Grantor hereby irrevocably and unconditionally waives and releases (a) all benefits that might accrue to Grantor by virtue of any present or future moratorium law or other law exempting the Mortgaged Property from attachment, levy or sale on execution or providing for any appraisement, valuation, stay of execution, exemption from civil process, redemption or extension of time for payment; (b) all notices of any event of default or of Mortgagee’s election to exercise (or his actual exercise of) any right, remedy or recourse provided for hereunder; and (c) any right to a marshaling of assets.

(k)  In case Mortgagee shall have proceeded to invoke any right, remedy or recourse permitted hereunder and shall thereafter elect to discontinue or abandon same for any reason, Mortgagee shall have the unqualified right so to do and, in such an event, Grantor and Mortgagee shall be restored to their former positions with respect to the Secured Indebtedness, this Mortgage, the Mortgaged Property and otherwise, and the rights, remedies, recourses and powers of Mortgagee shall continue as if same had never been invoked.

(l)  The proceeds of any sale of the Mortgaged Property or any part thereof and all other monies received by Mortgagee through any proceedings for the enforcement hereof or otherwise, shall be applied:

FIRST, to the payment of all expenses incurred by Mortgagee incident to the enforcement of this Mortgage, the Note or any of the Secured Indebtedness (including, without limiting the generality of the foregoing, expenses of any entry or taking of possession, of any sale, of advertisement thereof and of conveyances, and court costs, compensation of agents and employees, legal fees and a reasonable commission to the Trustee acting), and to the payment of all other charges, expenses, liabilities and advances incurred or made by Mortgagee under this Mortgage or in executing any power hereunder;

SECOND, to payment of the Secured Indebtedness in such order and manner as Mortgagee may elect; and,

THIRD, to Grantor or as otherwise required by any governmental authority having jurisdiction over the application of such proceeds.

6.3  To foreclose this Mortgage pursuant to the power of public sale contained herein in accordance with the laws of the State of Colorado, in which case Mortgagee/Holder shall (i) deliver to Trustee a written notice of default and election to cause Grantor’s interest in the Mortgaged Properties to be sold, and (ii) deposit with Trustee this Mortgage, and such receipts or evidence of the Secured Indebtedness as Trustee may require.  Upon receipt of such notice from Mortgagee/Holder, Trustee shall give notice of sale and shall sell the Mortgaged Properties according to the laws of the State of Colorado.  The costs and expenses incurred by Mortgagee/Holder in the exercise of any of the remedies provided in this Mortgage shall be secured by this Mortgage.

 

ARTICLE VII

Security Agreement

7.1  Without limiting any of the provisions of this instrument, Grantor, referred to in this Article VII as “Debtor”  expressly GRANTS unto the Holder (referred to in this Article VII as “Secured Party”, whether one or more), a security interest in all the Mortgaged Properties hereinabove described (including both those now and those hereafter existing) to the full extent that such properties may be subject to the Uniform Commercial Code of the State of Colorado.  The security interest granted hereby also covers and includes all contract rights, general intangibles, choses in actions, and accounts with respect to said properties and all products and proceeds of said properties (said properties, contract rights, choses in action, general intangibles, accounts, products and proceeds thereof being hereinafter collectively referred to as the “Collateral” for the purposes of this paragraph).  Debtor covenants and agrees with Secured Party that:

(a)  In addition to and cumulative of any other remedies granted in this instrument to Secured Party or the Trustee, Secured Party may, in event of default, proceed under said Uniform Commercial Code as to all or any part of the Collateral and shall have and may exercise with respect to the Collateral all the rights, remedies and powers of a secured party under said Uniform Commercial Code, including, without limitation, the right and power to sell, at public or private sale or sales, or otherwise dispose of, lease or utilize the Collateral and any part or parts thereof in any manner authorized or permitted under said Uniform Commercial Code after default by a debtor, and to apply the proceeds thereof toward payment of any costs and expenses and attorneys’ fees and legal expenses thereby incurred by Secured Party, and toward payment of the Secured Indebtedness in such order or manner as Secured Party may elect.

(b)  Upon a default, Secured Party shall have the right (without limitation, subject to said Uniform Commercial Code) to take possession of the Collateral and to enter upon any premises where same may be situated for such purpose without being deemed guilty of trespass and without liability for damages thereby occasioned, and to take any action deemed necessary or appropriate or desirable by Secured Party, at its option and in its discretion, to repair, refurbish or otherwise prepare the Collateral for sale, lease or other use or disposition as herein authorized.

(c)  To the extent permitted by law, Debtor expressly waives any notice of sale or other disposition of the Collateral and any other right or remedies of a debtor or formalities prescribed by law relative to sale or disposition of the Collateral or exercise of any other right or remedy of Secured Party existing after default hereunder; and to the extent any such notice is required and cannot be waived, Debtor agrees that if such notice is mailed, postage prepaid, to Debtor at the address shown with debtor’s signature hereinbelow at least ten days before the time of the sale or disposition, such notice shall be deemed reasonable and shall fully satisfy any requirement for giving of said notice.

(d)  Secured Party is expressly granted the right to receive the monies, income, proceeds or benefits attributable or accruing to the Collateral and to hold the same as security for the Secured Indebtedness or to apply it on the principal and interest or other amounts owing on any of the Secured Indebtedness, in such order or manner as Secured Party may elect.  All rights to marshaling of assets of Debtor, including any such right with respect to the Collateral, are hereby waived.

 

(e)  All recitals in any instrument of assignment or any other instrument executed by Secured Party incident to sale, transfer, assignment, lease or other disposition or utilization of the Collateral or any part thereof hereunder shall be prima facie evidence of the matter stated therein, no other proof shall be required to establish full legal propriety of the sale or other action or of any fact, condition or thing incident thereto, and all prerequisites of such sale or other action and of any fact, condition or thing incident thereto shall be presumed to have been performed or to have occurred.

(f)  Should Secured Party elect to exercise its right under said Uniform Commercial Code as to part of the personal property described herein, this election shall not preclude Secured Party or the Trustee from exercising the rights and remedies granted by the preceding paragraphs of this instrument as to the remaining personal property.

(g)  Secured Party may, at its election, at any time after delivery of this instrument, sign one or more copies hereof in order that such copies may be used as a financing statement under said Uniform Commercial Code.  Such signature by Secured Party may be placed between the last sentence of this instrument and the Debtor’s acknowledgment or may follow the Debtor’s acknowledgment.  Secured Party’s signature need not be acknowledged and is not necessary to the effectiveness hereof as a deed of trust, mortgage, assignment, or security agreement.

7.2  Any copy of this instrument which is signed by both Debtor and Secured Party may also serve as a financing statement under said Uniform Commercial Code between the DEBTOR, WHOSE ADDRESS IS:

and the SECURED PARTY, WHOSE ADDRESS IS:

This Mortgage secures and shall be security for any and all future advances made by or costs and expenses incurred by Grantee/Holder for the benefit of Grantor, provided, however, that the total unpaid balance secured hereby at any one time shall not exceed $__________.  Nothing contained herein shall be deemed an obligation on the part of Secured Party/Holder Holder to make any further advances or incur any expenses for the benefit of Debtor.

 

ARTICLE VIII

Miscellaneous

8.1  This instrument is a deed of trust and mortgage of both real and personal property, a security agreement, a financing statement and an assignment, and also covers proceeds and fixtures.

8.2  All options and rights of election herein provided for the benefit of the Holder are continuing, and the failure to exercise any such option or right of election upon a particular default or breach or upon any subsequent default or breach shall not be construed as waiving the right to exercise such option or election at any later date.  By the acceptance of payment of any indebtedness secured hereby after its due date, the Holder does not waive the right either to require prompt payment when due of all other sums so secured or to regard as a default failure to pay any other sums due which are secured hereby.  No exercise of the rights and powers herein granted and no delay or omission in the exercise of such rights and powers shall be held to exhaust the same or be construed as a waiver thereof, and every such right and power may be exercised at any time and from time to time. No release of any part of the Mortgaged Properties shall in anywise alter, vary or diminish the force, effect or lien of this instrument on the balance of Mortgaged Properties.

8.3  Any notice, request, demand or other instrument which may be required or permitted to be given or furnished to or served upon Grantor shall be addressed to it at its address set forth below, or such other address as Grantor may furnish to the Trustee and the Holder in writing:

Notices to the Trustee and the Holder shall be deemed to have been properly given if delivered in like fashion to them at:

(1) _________ County Public Trustee, ___________________, and

(2) ___________________________________

or at such other address as the Trustee or the Noteholder may furnish to Grantor in writing.

8.4 If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect, and the remaining provisions hereof shall be liberally construed in favor of the Trustee, Lender and the Noteholder in order to effectuate the provisions hereof, and the invalidity or unenforceability of any provision hereof shall not affect the validity or enforceability of any such provision in any other jurisdiction.

8.5 Grantee and Trustee shall at all times have the right to assign and/or transfer any and all of their rights and privileged under this Mortgage.  All of the terms, provisions, covenants and conditions hereof shall be binding upon Grantor and the successors and assigns of Grantor, and the Holder and successors and assigns of Holder, and shall inure to the benefit of the Trustee and the Holder and their respective successors and assigns. Grantor’s covenants shall constitute covenants running with the lands covered by the Mortgaged Properties, but this provision shall not be construed to authorize any sale or other disposition of the Mortgaged Properties contrary to any other provisions hereof.

 

8.6 The Mortgage may be executed in multiple counterparts, each of which is deemed to be an original for all purposes although all such executed copies shall evidence and constitute one and the same Mortgage.

8.7 The term “Grantor,” “Mortgagor” and “Debtor” herein used shall include their  successor(s) in interest in the Mortgaged Properties.  The number and gender of pronouns used in referring to Grantor shall be construed to mean and correspond with the number and gender of the individuals and/or corporations executing this instrument as Grantor, and, further, the term “Grantor” herein used shall mean and include both all of the parties executing this instrument as Grantor as well as any single one or more of them.

8.8 The “Effective Date” of this instrument is 7:00 a.m. local time at the location of the Mortgaged Properties on the date this Mortgage is executed and delivered to Grantee by Grantor.

8.9 This Mortgage shall be governed by and construed and interpreted under the laws of the State of Colorado (without giving effect to conflicts of laws principles).

THIS WRITTEN AGREEMENT REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES WITH RESPECT HERETO AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.  THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.

[The Next Page is the Signature Page]

 

 

IN WITNESS WHEREOF, the undersigned have caused this instrument to be executed by their duly authorized undersigned officers effective as of May 13, 2015.

	
 

	
“GRANTOR,” “MORTGAGOR” AND “DEBTOR”

	
 

	
 

	
 

	
 

	
 

 

	
By: ______________________________________

	
 

	
 

 

	
Printed Name: ______________________________

	
 

	
 

 

	
Title: _____________________________________

	
 

This Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement is executed by the undersigned solely for the purpose of acknowledging and accepting the benefits conferred on Grantee and to evidence its agreement with the covenants of Lender set forth herein.

	
 

	
“GRANTEE,”  “MORTGAGEE” AND “SECURED PARTY”

	
 

	
 

	
 

	
 

	
 

 

	
By: ______________________________________

	
 

	
 

 

	
Printed Name: ______________________________

	
 

	
 

 

	
Title: _____________________________________

	
 

 

[The Next Page is the Acknowledgment Page]

ACKNOWLEDGMENTS

	
STATE OF _____________

	
§

	
 

	
 

	
§

	
 

	
COUNTY OF ___________

	
§

	
 

 

 

This instrument was acknowledged before me on this _____ day of ______________. 2015, by ________________________, _________________ of ______________________, on behalf of said corporation.

Witness my hand and official seal.

__________________________________________

Notary Public, State of _______________________

My commission expires: _________________

	
STATE OF _____________

	
§

	
 

	
 

	
§

	
 

	
COUNTY OF ___________

	
§

	
 

 

 

This instrument was acknowledged before me on this _____ day of _____________, 2015, by ___________ the ____________ of __________________________.

Witness my hand and official seal.

__________________________________________

Notary Public, State of  ______________________

My commission expires: _________________

EXHIBIT A

ATTACHED TO AND FORMING A PART OF THE

DEED OF TRUST, MORTGAGE, ASSIGNMENT OF PRODUCTION,

SECURITY AGREEMENT AND FINANCING STATEMENT

DATED __________________________,  2015

FROM

This Exhibit A contains specific description of the “Lands,” “Leases,” “Mineral Interests”  and Wells comprising a portion of the “Mortgaged Properties”, as those terms are defined in the Deed of Trust, Mortgage, Assignment of Production, Security Agreement and Financing Statement (the “Mortgage”) to which this Exhibit A is attached.

LANDS

The Mortgage covers all right, title and interest the Mortgagor now owns or subsequently acquires in the following lands situated in ____________ County, Colorado (“Lands”):

 

 

 

 

EXHIBIT “B”

FORM OF JOINT OPERATING AGREEMENT

(form of JOA to be attached)

 

 

 

 

 

 

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

MODEL FORM OPERATING AGREEMENT

 

OPERATING AGREEMENT 

DATED

 

	 	                                              ,    	  ,      2015      ,	 
	 	 	         year	 

 

 

	OPERATOR	PETROSHARE CORP.	
	
 

	
 

	
 

	
CONTRACT AREA

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	 		

 

	COUNTY OR PARISH OF		  , STATE OF	COLORADO

 

	 	
COPYRIGHT 1989 – ALL RIGHTS RESERVED 

AMERICAN ASSOCIATION OF PETROLEUM 

LANDMEN, 4100 FOSSIL CREEK BLVD. FORT 

WORTH, TEXAS, 76137, APPROVED FORM.

A.A.P.L. NO. 610 – 1989

 

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

 

TABLE OF CONTENTS

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

                                                       

i

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

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

 

ii

 

	
1

	
OPERATING AGREEMENT

	
2

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

	
3

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

	
4

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

	
5

	
WITNESSETH:

	
6

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

	
7

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

	
8

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

	
9

	
NOW, THEREFORE, it is agreed as follows:

	
10

	
ARTICLE I.

	
11

	
DEFINITIONS

	
12

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

	
13

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

	
14

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

	
15

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

	
16

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

	
17

	
and production testing conducted in such operation.

	
18

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

	
19

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

	
20

	
Interests are described in Exhibit "A."

	
21

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

	
22

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

	
23

	
lesser.

	
24

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

	
25

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

	
26

	
F.   The term "Drilling Unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal

	
27

	
body  having  authority.   If  a  Drilling  Unit  is  not fixed by any such  rule  or  order,  a  Drilling  Unit  shall  be  the  drilling  unit  as

	
28

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

	
29

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

	
30

	
located.

	
31

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

	
32

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

	
33

	
provided in Article VI.B.2.

	
34

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

	
35

	
proposed operation.

	
36

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

	
37

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

	
38

	
specifically stated.

	
39

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

	
40

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

	
41

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

	
42

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

	
43

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

	
44

	
Completion in a shallower Zone.

	
45

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

	
46

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

	
47

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

	
48

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

	
49

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

	
50

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

	
51

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

	
52

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

	
53

	
mechanical difficulties.

	
54

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

	
55

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

	
56

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

	
57

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

	
58

	
ARTICLE II.

	
59

	
EXHIBITS

	
60

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

	
61 

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

	
62

	
(1) Description of lands subject to this agreement,

	
63

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

	
64

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

	
65

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

	
66

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

	
67

	
(6) Burdens on production.

	
68 

	
             B.  Exhibit "B," Form of Lease.

	
69 

	
    X     C.   Exhibit "C," Accounting Procedure.

	
70 

	
    X      D.  Exhibit "D," Insurance.

	
71 

	
             E.   Exhibit "E," Gas Balancing Agreement.

	
72 

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

	
73 

	
             G.  Exhibit "G," Tax Partnership.

	
74 

	
             H.  Other:     Memorandum of Operating Agreement and Financing Statement

 

1

 

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

 

	
1

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

	
2

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

	
3

	
ARTICLE III.

	
4

	
INTERESTS OF PARTIES

	
5

	
A. Oil and Gas Interests:

	
6

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

	
7

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

	
8

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

	
9

	
B. Interests of Parties in Costs and Production:

	
10

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

	
11

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

	
12

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

	
13

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

	
14

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

	
15

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

	
16

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

	
17

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

	
18

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

	
19 

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

	
20 

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

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

	
28

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

	
29

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

	
30

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

	
31

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

	
32

	
C.  Subsequently Created Interests:

	
33

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

	
34

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

	
35

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

	
36

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

	
37

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

	
38

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

	
39

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

	
40

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

	
41

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

	
42

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

	
43

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

	
44

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

	
45

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

	
46

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

	
47

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

	
48

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

	
49

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

	
50

	
ARTICLE IV.

	
51

	
TITLES

	
52

	
A.  Title Examination:

	
53

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

	
54

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

	
55

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

	
56

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

	
57

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

	
58

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

	
59

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

	
60

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

	
61

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

	
62

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

	
63

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

	
64 

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

	
65

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

	
66

	
in the performance of the above functions.

	
67 

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

	
68

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

	
69

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

	
70

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

	
71

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

	
72

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

	
73

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

	
74

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

 

 

2

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

 

	
1  

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

	
2  

	
functions.

	
3

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

	
4  

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

	
5  

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

	
6 

	
B. Loss or Failure of Title:

	
7

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

	
8  

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

	
9  

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

	
10  

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

	
11  

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

	
12  

	
Leases and Interests; and,

	
13  

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

	
14  

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

	
15  

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

	
16  

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

	
17  

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

	
18  

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

	
19  

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

	
20  

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

	
21  

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

	
22  

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

	
23  

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

	
24  

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

	
25  

	
attributable to such failed Lease or Interest;

	
26  

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

	
27  

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

	
28  

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

	
29  

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

	
30  

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

	
31  

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

	
32  

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

	
33  

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

	
34  

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

	
35  

	
it shall bear all expenses in connection therewith; and

	
36  

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

	
37  

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

	
38  

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

	
39  

	
is reflected on Exhibit "A."

	
40  

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

	
41  

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

	
42  

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

	
43  

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

	
44  

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

	
45  

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

	
46  

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

	
47  

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

	
48  

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

	
49

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

	
50  

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

	
51  

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

	
52  

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

	
53  

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

	
54  

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

	
55  

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

	
56  

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

	
57  

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

	
58  

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

	
59  

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

	
60  

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

	
61  

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

	
62  

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

	
63  

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

	
 64 

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

	
65  

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

	
66  

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

	
67  

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

	
68  

	
and  the  loss  of  any  Lease  by  expiration  at  the  end  of  its  primary  term  if  it  is  not  renewed  or  extended.    There  shall  be  no

	
69  

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

	
70 

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

	
71  

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

	
72  

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

	
73  

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

	
74  

	
shall not apply to such acquisition.

 

 

 

3

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

 

 

 

	
1

	
ARTICLE V.

	
2

	
OPERATOR

	
3

	
A. Designation and Responsibilities of Operator:

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

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

	
11

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

	
12

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

	
13

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

	
14

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

	
15

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

	
16

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

	
17

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

	
18

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

	
19

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

	
20

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

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

	
28

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

	
29

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

	
30

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

	
31

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

	
32

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

	
33

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

	
34

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

	
35

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

	
36

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

	
37

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

	
38

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

	
39

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

	
40

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

	
41

	
account.

	
42

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

	
43

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

	
44

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

	
45

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

	
46

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

	
47

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

	
48

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

	
49

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

	
50

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

	
51

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

	
52

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

	
53

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

	
54

	
C.  Employees and Contractors:

	
55

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

	
56

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

	
57

	
contractors shall be the employees or contractors of Operator.

	
58

	
D.  Rights and Duties of Operator:

	
59

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

	
60

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

	
61

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

	
62

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

	
63

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

	
64

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

	
65

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

	
66

	
standards prevailing in the industry.

	
67

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

	
68

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

	
69

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

	
70

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

	
71

	
made and received.

	
72

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

	
73

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

	
74

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

 

 

4

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

 

	
1

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

	
2

	
materials supplied.

	
3

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

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

	
parties otherwise specifically agree.

	
11

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

	
12

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

	
13

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

	
14

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

	
15

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

	
16

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

	
17

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

	
18

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

	
19

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

	
20

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

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

	
28

	
limited to the Initial Well:

	
29

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

	
30

	
drilling operations are commenced.

	
31

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

	
32

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

	
33

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

	
34

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

	
35

	
hereunder.

	
36

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

	
37

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

	
38

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

	
39

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

	
40

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

	
41

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

	
42

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

	
43

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

	
44

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

	
45

	
and to maintain such other insurance as Operator may require.

	
46

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

	
47

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

	
48

	
equipment.

	
49

	
ARTICLE VI.

	
50

	
DRILLING AND DEVELOPMENT

	
51

	
A.  Initial Well:

	
52

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

	
53

	
Well at  the following location: There is no Initial Well.  All wells hereunder will be proposed in Article VI.B.

	
54

	
 

	
55

	
 

	
56

	
 

	
57

	
 

	
58

	
 

	
59

	
 

	
60 

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

	
61

	
 

	
62

	
 

	
63

	
 

	
64

	
 

	
65

	
 

	
66

	
 

	
67

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

	
68

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

	
69

	
B.Subsequent Operations:

	
70

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

	
71 

	
if  any party should  desire to  /  Rework,  Sidetrack,  Deepen,  Recomplete or Plug Back  a  dry hole  or  a  well  no  longer  capable of

	
72

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

	
73

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

	
74

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

 

 

5

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

 

 

	
1

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

	
2

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

	
3

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

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

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

	
11

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

	
12

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

	
13

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

	
14

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

	
15

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

	
16

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

	
17

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

	
18

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

	
19

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

	
20

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

	
2. Operations by Less Than All Parties:

	
27

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

	
28

	
VI.C.1. (Option No. 2) elects not to participate in the proposed operation, then, in order to be entitled to the benefits of this

	
29

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

	
30

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

	
31

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

	
32

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

	
33

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

	
34

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

	
35

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

	
36

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

	
37

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

	
38

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

	
39

	
agreement.

	
40

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

	
41

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

	
42

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

	
43

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

	
44

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

	
45

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

	
46

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

	
47

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

	
48

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

	
49

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

	
50

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

	
51

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

	
52

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

	
53

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

	
54

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

	
55

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

	
56

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

	
57

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

	
58

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

	
59

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

	
60

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

	
61

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

	
62

	
in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the Consenting Parties shall plug and abandon the well and restore

	
63

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

	
64

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

	
65

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

	
66

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

	
67

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

	
68

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

	
69

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

	
70

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

	
71

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

	
72

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

	
73

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

	
74

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

 

 

 

6

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

 

	
1

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

	
2

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

	
3

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

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

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

	
11

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

	
12

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

	
13

	
of the operations; and

	
14

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

	
15

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

	
16

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

	
17

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

	
18

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

	
19

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

	
20

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

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

	
28

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

	
29

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

	
30

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

	
31

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

	
32

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

	
33

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

	
34

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

	
35

	
cost of operation of said well and there shall be added to the sums to be recouped by the Consenting Parties 400% of

	
36

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

	
37

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

	
38

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

	
39

	
Parties in said well.

	
40

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

	
41

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

	
42

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

	
43

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

	
44

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

	
45

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

	
46

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

	
46

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

	
48

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

	
49

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

	
50

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

	
51

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

	
52

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

	
53

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

	
54

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

	
55

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

	
56

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

	
57

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

	
58

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

	
59

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

	
60

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

	
61

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

	
62

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

	
63

	
Consenting Party.

	
64

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

	
65

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

	
66

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

	
67

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

	
68

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

	
69

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

	
70

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

	
71

	
agreement and Exhibit "C" attached hereto.

	
72

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

	
73

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

	
74

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

 

 

7

 

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

 

	
1

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

	
2

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

	
3

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

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

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

	
11

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

	
12

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

	
13

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

	
14

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

	
15

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

	
16

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

	
17

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

	
18

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

	
19

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

	
20

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

	
21

	
in the Deepening operation.

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

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

	
28

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

	
29

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

	
30

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

	
31

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

	
32

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

	
33

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

	
34

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

	
35

	
sole account of Consenting Parties.

	
36

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

	
37

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

	
38

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

	
39

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

	
40

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

	
41

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

	
42

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

	
43

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

	
44

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

	
45

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

	
46

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

	
47

	
well for Deepening

	
48

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

	
49

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

	
50

	
VI.F.

	
51

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

	
52

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

	
53

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

	
54

	
to be utilized as follows:

	
55

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

	
56

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

	
57

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

	
58

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

	
59

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

	
60

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

	
61

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

	
62

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

	
63

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

	
64

	
party shall have fifteen (15) days from delivery of the initial proposal, in the case of a proposal to drill a well or to perform

	
65

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

	
66

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

	
67

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

	
68

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

	
69

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

	
70

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

	
71

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

	
72

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

	
73

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

	
74

	
 

 

 

-8 -

8

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

 

	
1

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

	
2

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

	
3

	
and legal holidays, if a drilling rig is on location).  Each party shall then have two (2) days (or twenty-four (24) hours if a rig

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

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

	
11

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

	
12

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

	
13

	
C. Completion of Wells; Reworking and Plugging Back:

	
14

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

	
15

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

	
16

	
Deepening or Sidetracking shall include:

	
17

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

	
18

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

	
19

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

	
20

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

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

	
28

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

	
29

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

	
30

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

	
31

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

	
32

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

	
33

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

	
34

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

	
35

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

	
36

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

	
37

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

	
38

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

	
39

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

	
40

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

	
41

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

	
42

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

	
43

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

	
44

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

	
45

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

	
46

	
Completion attempt.

	
47

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

	
48

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

	
49

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

	
50

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

	
51

	
D. Other Operations:

	
52

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

	
53

	
  Fifty thousand           Dollars ($ 50,000.00) except in connection with the

	
54

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

	
55

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

	
56

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

	
57

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

	
58

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

	
59

	
requesting an information copy thereof for any single project costing in excess of   Fifty thousand      Dollars

	
60

	
($ 50,000.00 ). Any party who has not relinquished its interest in a well shall have the right to propose that

	
61

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

	
62

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

	
63

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

	
64

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

	
65

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

	
66

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

	
67

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

	
68

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

	
69

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

	
70

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

	
71

	
of the proposal.

	
72

	
E. Abandonment of Wells:

	
73

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

	
74

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

 

9

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

 

	
1

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

	
2 

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

	
3

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

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

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

	
11

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

	
12

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

	
13

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

	
14

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

	
15

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

	
16

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

	
17

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

	
18

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

	
19

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

	
20

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

	
of such well and plug and abandon the well.

	
28

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

	
29

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

	
30

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

	
31

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

	
32

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

	
33

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

	
34

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

	
35

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

	
36

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

	
37

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

	
38

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

	
39

	
one (1) year and so long thereafter as Oil and/or Gas is produced from the Zone covered thereby, such lease to be on the form

	
40

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

	
41

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

	
42

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

	
43

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

	
44

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

	
45

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

	
46

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

	
47

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

	
48

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

	
49

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

	
50

	
further operations therein subject to the provisions hereof.

	
51

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

	
52

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

	
53

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

	
54

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

	
55

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

	
56

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

	
57

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

	
58

	
F. Termination of Operations:

	
59

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

	
60

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

	
61

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

	
62

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

	
63

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

	
64

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

	
65

	
G. Taking Production in Kind:

	
66

	
☐   Option No. 1: Gas Balancing Agreement Attached

	
67

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

	
68

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

	
69

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

	
70

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

	
71

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

	
72

	
Operator's surface facilities which it uses.

	
73 

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

	
74

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

 

 

-10 -

 

10

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

  

	
1

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

	
2

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

	
3

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

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

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

	
11

	
period in excess of one (1) year.

	
12

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

	
13

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

	
14

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

	
15

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

	
16

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

	
17

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

	
18

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

	
19

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

	
20

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

	
☑ Option No. 2: No Gas Balancing Agreement:

	
28

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

	
29

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

	
30

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

	
31

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

	
32

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

	
33

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

	
34

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

	
35

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

	
36

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

	
37

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

	
38

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

	
39

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

	
40

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

	
41

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

	
42

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

	
43

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

	
44

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

	
45

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

	
46

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

	
47

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

	
48

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

	
49

	
year.

	
50

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

	
51

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

	
52

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

	
53

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

	
54

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

	
55

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

	
56

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

	
57

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

	
58

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

	
59

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

	
60

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

	
61

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

	
62

	
ARTICLE VII.

	
63

	
EXPENDITURES AND LIABILITY OF PARTIES

	
64

	
A. Liability of Parties:

	
65

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

	
66

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

	
67

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

	
68

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

	
69

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

	
70

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

	
71

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

	
72

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

	
73

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

	
74

	
with respect to activities hereunder.

 

 

11

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

 

	
1

	
B. Liens and Security Interests:

	
2

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

	
3

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

	
4

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

	
5

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

	
6

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

	
7

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

	
8

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

	
9

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

	
10

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

	
11

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

	
12

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

	
13

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

	
14

	
foregoing.

	
15

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

	
16

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

	
17

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

	
18

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

	
19

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

	
20

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

	
21

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

	
22

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

	
23

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

	
24

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

	
25

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

	
26

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

	
27

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

	
28

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

	
29

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

	
30

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

	
31

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

	
32

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

	
33

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

	
34

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

	
35

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

	
36

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

	
37

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

	
38

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

	
39

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

	
40

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

	
41

	
this paragraph.

	
42

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

	
43

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

	
44

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

	
45

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

	
46

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

	
47

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

	
48

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

	
49

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

	
50

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

	
51

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

	
52

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

	
53

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

	
54

	
manner and upon reasonable notice.

	
55

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

	
56

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

	
57

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

	
58

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

	
59

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

	
60

	
C. Advances:

	
61

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

	
62

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

	
63

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

	
64

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

	
65

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

	
66

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

	
67

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

	
68

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

	
69

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

	
70

	
D. Defaults and Remedies:

	
71

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

	
72

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

	
73

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

	
74

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

 

 

 

12

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

 

	
1

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

	
2

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

	
3

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

	
4

	
below or otherwise available to a non-defaulting party.

	
5

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

	
6

	
specify the action to be taken to cure the default, and specify that failure to take such action will result in the exercise of one

	
7

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

	
8

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

	
9

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

	
10

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

	
11

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

	
12

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

	
13

	
party that may be suspended hereunder at the election of the non-defaulting parties shall include, without limitation, the right

	
14

	
to receive information  as to any operation  conducted  hereunder during the period  of such  default, the right to elect to

	
15

	
participate in an operation proposed under Article VI.B. of this agreement, the right to participate in an operation being

	
16

	
conducted under this agreement even if the party has previously elected to participate in such operation, and the right to

	
17

	
receive proceeds of production from any well subject to this agreement.

	
18

	
2.  Suit  for  Damages:  Non-defaulting  parties  or  Operator  for  the  benefit  of  non-defaulting  parties  may  sue  (at  joint

	
19

	
account expense) to collect the amounts in default, plus interest accruing on the amounts recovered from the date of default

	
20

	
until the date of collection at the rate specified in Exhibit "C" attached hereto.  Nothing herein shall prevent any party from

	
21

	
suing any defaulting party to collect consequential damages accruing to such party as a result of the default.

	
22

	
3.  Deemed  Non-Consent:  The  non-defaulting  party  may  deliver  a  written  Notice  of  Non-Consent  Election  to  the

	
23

	
defaulting party at any time after the expiration of the thirty-day cure period following delivery of the Notice of Default, in

	
24

	
which event if the billing is for the drilling a new well or the Plugging Back, Sidetracking, Reworking or Deepening of a

	
25

	
well which is to be or has been plugged as a dry hole, or for the Completion or Recompletion of any well, the defaulting

	
26

	
party will be conclusively deemed to have elected not to participate in the operation and to be a Non-Consenting Party with

	
27

	
respect  thereto  under  Article  VI.B.  or  VI.C.,  as  the  case  may  be,  to  the  extent  of  the  costs  unpaid  by  such  party,

	
28

	
notwithstanding any election to participate theretofore made. If election is made to proceed under this provision, then the

	
29

	
non-defaulting parties may not elect to sue for the unpaid amount pursuant to Article VII.D.2.

	
30

	
Until the delivery of such Notice of Non-Consent Election to the defaulting party, such party shall have the right to cure

	
31

	
its default by paying its unpaid share of costs plus interest at the rate set forth in Exhibit "C," provided, however, such

	
32

	
payment shall not prejudice the rights of the non-defaulting parties to pursue remedies for damages incurred by the non-

	
33

	
defaulting parties as a result of the default.  Any interest relinquished pursuant to this Article VII.D.3. shall be offered to the

	
34

	
non-defaulting parties in proportion to their interests, and the non-defaulting parties electing to participate in the ownership

	
35

	
of such interest shall be required to contribute their shares of the defaulted amount upon their election to participate therein.

	
36

	
4. Advance Payment: If a default is not cured within thirty (30) days of the delivery of a Notice of Default, Operator, or

	
37

	
Non-Operators  if  Operator  is  the  defaulting  party,  may  thereafter  require  advance  payment  from  the  defaulting

	
38

	
party of such defaulting party's anticipated share of any item of expense for which Operator, or Non-Operators, as the case may

	
39

	
be, would be entitled to reimbursement under any provision of this agreement, whether or not such expense was the subject of

	
40

	
the previous default.  Such right includes, but is not limited to, the right to require advance payment for the estimated costs of

	
41

	
drilling a well or Completion of a well as to which an election to participate in drilling or Completion has been made.  If the

	
42

	
defaulting party fails to pay the required advance payment, the non-defaulting parties may pursue any of the remedies provided

	
43

	
in the Article VII.D. or any other default remedy provided elsewhere in this agreement.  Any excess of funds advanced remaining

	
44

	
when the operation is completed and all costs have been paid shall be promptly returned to the advancing party.

	
45

	
5. Costs and Attorneys' Fees: In the event any party is required to bring legal proceedings to enforce any financial

	
46

	
obligation of a party hereunder, the prevailing party in such action shall be entitled to recover all court costs, costs of

	
47

	
collection, and a reasonable attorney's fee, which the lien provided for herein shall also secure.

	
48

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

	
49

	
Rentals, shut-in well payments and minimum royalties which may be required under the terms of any lease shall be paid

	
50

	
by the party or parties who subjected such lease to this agreement at its or their expense.  In the event two or more parties

	
51

	
own and have contributed interests in the same lease to this agreement, such parties may designate one of such parties to

	
52

	
make said payments for and on behalf of all such parties.  Any party may request, and shall be entitled to receive, proper

	
53

	
evidence of all such payments.  In the event of failure to make proper payment of any rental, shut-in well payment or

	
54

	
minimum royalty through mistake or oversight where such payment is required to continue the lease in force, any loss which

	
55

	
results from such non-payment shall be borne in accordance with the provisions of Article IV.B.2.

	
56

	
Operator  shall  notify Non-Operators  of  the  anticipated  completion  of  a  shut-in  well,  or  the  shutting  in  or  return  to

	
57

	
production of a producing well, at least five (5) days (excluding Saturday, Sunday, and legal holidays) prior to taking such

	
58

	
action, or at the earliest opportunity permitted by circumstances, but assumes no liability for failure to do so.  In the event of

	
59

	
failure by Operator to so notify Non-Operators, the loss of any lease contributed hereto by Non-Operators for failure to make

	
60

	
timely payments of any shut-in well payment shall be borne jointly by the parties hereto under the provisions of Article 61

	
61 

	
IV.B.3.

	
62

	
F. Taxes:

	
63

	
Beginning with the first calendar year after the effective date hereof, Operator shall render for ad valorem taxation all

	
64

	
property subject to this agreement which by law should be rendered for such taxes, and it shall pay all such taxes assessed

	
65

	
thereon before they become delinquent.  Prior to the rendition date, each Non-Operator shall furnish Operator information as

	
66

	
to burdens (to include, but not be limited to, royalties, overriding royalties and production payments) on Leases and Oil and

	
67

	
Gas Interests contributed by such Non-Operator. If the assessed valuation of any Lease is reduced by reason of its being

	
68

	
subject  to  outstanding  excess  royalties,  overriding  royalties  or  production  payments,  the  reduction  in  ad  valorem  taxes

	
69

	
resulting therefrom shall inure to the benefit of the owner or owners of such Lease, and Operator shall adjust the charge to

	
70

	
such owner or owners so as to reflect the benefit of such reduction.  If the ad valorem taxes are based in whole or in part

	
71

	
upon separate valuations of each party's working interest, then notwithstanding anything to the contrary herein, charges to

	
72

	
the joint account shall be made and paid by the parties hereto in accordance with the tax value generated by each party's

	
73

	
working interest. Operator shall bill the other parties for their proportionate shares of all tax payments in  the manner

	
74

	
provided in Exhibit "C."

 

 

13

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

 

	
1

	
If Operator considers any tax assessment improper, Operator may, at its discretion, protest within the time and manner

	
2

	
prescribed by law, and prosecute the protest to a final determination, unless all parties agree to abandon the protest prior to final

	
3

	
determination.  During the pendency of administrative or judicial proceedings, Operator may elect to pay, under protest, all such taxes

	
4

	
and any interest and penalty.  When any such protested assessment shall have been finally determined, Operator shall pay the tax for

	
5

	
the joint account, together with any interest and penalty accrued, and the total cost shall then be assessed against the parties, and be

	
6

	
paid by them, as provided in Exhibit "C."

	
7

	
Each party shall pay or cause to be paid all production, severance, excise, gathering and other taxes imposed upon or with respect

	
8

	
to the production or handling of such party's share of Oil and Gas produced under the terms of this agreement.

	
9

	
ARTICLE VIII.

	
10

	
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST

	
11

	
A. Surrender of Leases:

	
12

	
The Leases covered by this agreement, insofar as they embrace acreage in the Contract Area, shall not be surrendered in whole

	
13

	
or in part unless all parties consent thereto.

	
14

	
However, should any party desire to surrender its interest in any Lease or in any portion thereof, such party shall give written

	
15

	
notice of the proposed surrender to all parties, and the parties to whom such notice is delivered shall have thirty (30) days after

	
16

	
delivery of the notice within which to notify the party proposing the surrender whether they elect to consent thereto.  Failure of a

	
17

	
party to whom such notice is delivered to reply within said 30-day period shall constitute a consent to the surrender of the Leases

	
18

	
described in the notice.  If all parties do not agree or consent thereto, the party desiring to surrender shall assign, without express or

	
19

	
implied warranty of title, all of its interest in such Lease, or portion thereof, and any well, material and equipment which may be

	
20

	
located thereon and any rights in production thereafter secured, to the parties not consenting to such surrender.  If the interest of the

	
21

	
assigning party is or includes an Oil and Gas Interest, the assigning party shall execute and deliver to the party or parties not

	
22

	
consenting to such surrender an oil and gas lease covering such Oil and Gas Interest for a term of one (1) year and so long

	
23

	
thereafter as Oil and/or Gas is produced from the land covered thereby, such lease to be on the form attached hereto as Exhibit "B."

	
24

	
Upon such assignment or lease, the assigning party shall be relieved from all obligations thereafter accruing, but not theretofore

	
25

	
accrued, with respect to the interest assigned or leased and the operation of any well attributable thereto, and the assigning party

	
26

	
shall have no further interest in the assigned or leased premises and its equipment and production other than the royalties retained

	
27

	
in any lease made under the terms of this Article.  The party assignee or lessee shall pay to the party assignor or lessor the

	
28

	
reasonable salvage value of the latter's interest in any well's salvable materials and equipment attributable to the assigned or leased

	
29

	
acreage.  The value of all salvable materials and equipment shall be determined in accordance with the provisions of Exhibit "C," less

	
30

	
the estimated cost of salvaging and the estimated cost of plugging and abandoning and restoring the surface.  If such value is less

	
31

	
than such costs, then the party assignor or lessor shall pay to the party assignee or lessee the amount of such deficit.  If the

	
32

	
assignment or lease is in favor of more than one party, the interest shall be shared by such parties in the proportions that the

	
33

	
interest of each bears to the total interest of all such parties.  If the interest of the parties to whom the assignment is to be made

	
34

	
varies according to depth, then the interest assigned shall similarly reflect such variances.

	
35

	
Any assignment, lease or surrender made under this provision shall not reduce or change the assignor's, lessor's or surrendering

	
36

	
party's interest as it was immediately before the assignment, lease or surrender in the balance of the Contract Area; and the acreage

	
37

	
assigned, leased or surrendered, and subsequent operations thereon, shall not thereafter be subject to the terms and provisions of this

	
38

	
agreement but shall be deemed subject to an Operating Agreement in the form of this agreement.

	
39

	
B. Renewal or Extension of Leases:

	
40

	
If any party secures a renewal or replacement of an Oil and Gas Lease or Interest subject to this agreement, then all other parties

	
41

	
shall be notified promptly upon such acquisition or, in the case of a replacement Lease taken before expiration of an existing Lease,

	
42

	
promptly upon expiration of the existing Lease.  The parties notified shall have the right for a period of thirty (30) days following

	
43

	
delivery of such notice in which to elect to participate in the ownership of the renewal or replacement Lease, insofar as such Lease

	
44

	
affects lands within the Contract Area, by paying to the party who acquired it their proportionate shares of the acquisition cost

	
45

	
allocated to that part of such Lease within the Contract Area, which shall be in proportion to the interest held at that time by the

	
46

	
parties in the Contract Area.  Each party who participates in the purchase of a renewal or replacement Lease shall be given an

	
47

	
assignment of its proportionate interest therein by the acquiring party.

	
48

	
If some, but less than all, of the parties elect to participate in the purchase of a renewal or replacement Lease, it shall be owned

	
49

	
by the parties who elect to participate therein, in a ratio based upon the relationship of their respective percentage of participation in

	
50

	
the Contract Area to the aggregate of the percentages of participation in the Contract Area of all parties participating in the

	
51

	
purchase of such renewal or replacement Lease.  The acquisition of a renewal or replacement Lease by any or all of the parties hereto

	
52

	
shall not cause a readjustment of the interests of the parties stated in Exhibit "A," but any renewal or replacement Lease in which

	
53

	
less than all parties elect to participate shall not be subject to this agreement but shall be deemed subject to a separate Operating

	
54

	
Agreement in the form of this agreement.

	
55

	
If the interests of the parties in the Contract Area vary according to depth, then their right to participate proportionately in

	
56

	
renewal or replacement Leases and their right to receive an assignment of interest shall also reflect such depth variances.

	
57

	
The provisions of this Article shall apply to renewal or replacement Leases whether they are for the entire interest covered by

	
58

	
the expiring Lease or cover only a portion of its area or an interest therein.  Any renewal or replacement Lease taken before the

	
59

	
expiration of its predecessor Lease, or taken or contracted for or becoming effective within six (6) months after the expiration of the

	
60

	
existing Lease, shall be subject to this provision so long as this agreement is in effect at the time of such acquisition or at the time

	
61

	
the renewal or replacement Lease becomes effective; but any Lease taken or contracted for more than six (6) months after the

	
62

	
expiration of an existing Lease shall not be deemed a renewal or replacement Lease and shall not be subject to the provisions of this

	
63

	
agreement.

	
64

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

	
65

	
C. Acreage or Cash Contributions:

	
66

	
While this agreement is in force, if any party contracts for a contribution of cash towards the drilling of a well or any other

	
67

	
operation on the Contract Area, such contribution shall be paid to the party who conducted the drilling or other operation and shall

	
68

	
be applied by it against the cost of such drilling or other operation.  If the contribution be in the form of acreage, the party to whom

	
69

	
the contribution is made shall promptly tender an assignment of the acreage, without warranty of title, to the Drilling Parties in the

	
70

	
proportions said Drilling Parties shared the cost of drilling the well. Such acreage shall become a separate Contract Area and, to  the

	
71

	
extent possible, be governed by provisions identical to this agreement.  Each party shall promptly notify all other parties of any

	
72

	
acreage or cash contributions it may obtain in support of any well or any other operation on the Contract Area.  The above

	
73

	
provisions shall also be applicable to optional rights to earn acreage outside the Contract Area which are in support of well drilled

	
74

	
inside Contract Area.

  

 

14

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

 

	
1

	
If any party contracts for any consideration relating to disposition of such party's share of substances produced hereunder,

	
2

	
such consideration shall not be deemed a contribution as contemplated in this Article VIII.C.

	
3

	
D. Assignment; Maintenance of Uniform Interest:

	
4

	
For the purpose of maintaining uniformity of ownership in the Contract Area in the Oil and Gas Leases, Oil and Gas

	
5

	
Interests, wells, equipment and production covered by this agreement no party shall sell, encumber, transfer or make other

	
6

	
disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests embraced within the Contract Area or in wells,

	
7

	
equipment and production unless such disposition covers either:

	
8

	
1. the entire interest of the party in all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production; or

	
9

	
2. an equal undivided percent of the party's present interest in all Oil and Gas Leases, Oil and Gas Interests, wells,

	
10

	
equipment and production in the Contract Area.

	
11

	
Every sale, encumbrance, transfer or other disposition made by any party shall be made expressly subject to this agreement

	
12

	
and shall be made without prejudice to the right of the other parties, and any transferee of an ownership interest in any Oil and

	
13

	
Gas Lease or Interest shall be deemed a party to this agreement as to the interest conveyed from and after the effective date of

	
14

	
the  transfer  of  ownership;  provided,  however,  that  the  other  parties  shall  not  be  required  to  recognize  any  such  sale,

	
15

	
encumbrance, transfer or other disposition for any purpose hereunder until thirty (30) days after they have received a copy of the

	
16

	
instrument of transfer or other satisfactory evidence thereof in writing from the transferor or transferee.  No assignment or other

	
17

	
disposition of interest by a party shall relieve such party of obligations previously incurred by such party hereunder with respect

	
18

	
to the interest transferred, including without limitation the obligation of a party to pay all costs attributable to an operation

	
19

	
conducted hereunder in which such party has agreed to participate prior to making such assignment, and the lien and security

	
20

	
interest granted by Article VII.B. shall continue to burden the interest transferred to secure payment of any such obligations.

	
21

	
If, at any time the interest of any party is divided among and owned by four or more co-owners, Operator, at its discretion,

	
22

	
may require such co-owners to appoint a single trustee or agent with full authority to receive notices, approve expenditures,

	
23

	
receive billings for and approve and pay such party's share of the joint expenses, and to deal generally with, and with power to

	
24

	
bind, the co-owners of such party's interest within the scope of the operations embraced in this agreement; however, all such co-

	
25

	
owners shall have the right to enter into and execute all contracts or agreements for the disposition of their respective shares of

	
26

	
the Oil and Gas produced from the Contract Area and they shall have the right to receive, separately, payment of the sale

	
27

	
proceeds thereof.

	
28

	
E. Waiver of Rights to Partition:

	
29

	
If permitted by the laws of the state or states in which the property covered hereby is located, each party hereto owning an

	
30

	
undivided interest in the Contract Area waives any and all rights it may have to partition and have set aside to it in severalty its

	
31

	
undivided interest therein.

	
23

	
F. Preferential Right to Purchase:

	
33

	
☐ (Optional; Check if applicable.)

	
34

	
Should any party desire to sell all or any part of its interests under this agreement, or its rights and interests in the Contract

	
35

	
Area, it shall promptly give written notice to the other parties, with full information concerning its proposed disposition, which

	
36

	
shall include the name and address of the prospective transferee (who must be ready, willing and able to purchase), the purchase

	
37

	
price, a legal description sufficient to identify the property, and all other terms of the offer.  The other parties shall then have an

	
38

	
optional prior right, for a period of ten (10) days after the notice is delivered, to purchase for the stated consideration on the

	
38

	
same terms and conditions the interest which the other party proposes to sell; and, if this optional right is exercised, the

	
40

	
purchasing parties shall share the purchased interest in the proportions that the interest of each bears to the total interest of all

	
41

	
purchasing parties.  However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage

	
42

	
its interests, or to transfer title to its interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage of its interests,

	
43

	
or to dispose of its interests by merger, reorganization, consolidation, or by sale of all or substantially all of its Oil and Gas assets

	
44

	
to any party, or by transfer of its interests to a subsidiary or parent company or to a subsidiary of a parent company, or to any

	
45

	
company in which such party owns a majority of the stock.

	
46

	
ARTICLE IX.

	
47

	
INTERNAL REVENUE CODE ELECTION

	
48

	
If, for federal income tax purposes, this agreement and the operations hereunder are regarded as a partnership, and if the

	
49

	
parties have not otherwise agreed to form a tax partnership pursuant to Exhibit "G" or other agreement between them, each

	
50

	
party thereby affected elects to be excluded from the application of all of the provisions of Subchapter "K," Chapter 1, Subtitle

	
51

	
"A," of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and authorized by Section 761 of the Code and

	
52

	
the regulations promulgated thereunder.  Operator is authorized and directed to execute on behalf of each party hereby affected

	
53

	
such evidence of this election as may be required by the Secretary of the Treasury of the United States or the Federal Internal

	
54

	
Revenue Service, including specifically, but not by way of limitation, all of the returns, statements, and the data required by

	
55

	
Treasury Regulation §1.761.   Should there be any requirement that each party hereby affected give further evidence of this

	
56

	
election, each such party shall execute such documents and furnish such other evidence as may be required by the Federal Internal

	
57

	
Revenue Service or as may be necessary to evidence this election.  No such party shall give any notices or take any other action

	
58

	
inconsistent with the election made hereby.  If any present or future income tax laws of the state or states in which the Contract

	
59

	
Area is located or any future income tax laws of the United States contain provisions similar to those in Subchapter "K," Chapter

	
60

	
1, Subtitle "A," of the Code, under which an election similar to that provided by Section 761 of the Code is permitted, each party

	
61

	
hereby affected shall make such election as may be permitted or required by such laws.  In making the foregoing election, each

	
62

	
such party states that the income derived by such party from operations hereunder can be adequately determined without the

	
63

	
computation of partnership taxable income.

	
64

	
ARTICLE X.

	
65

	
CLAIMS AND LAWSUITS

	
66

	
Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure

	
67

	
does not exceed Fifty thousand Dollars ($ 50,000.00) and if the payment is in complete settlement

	
68

	
of such claim or suit.  If the amount required for settlement exceeds the above amount, the parties hereto shall assume and take over

	
69

	
the further handling of the claim or suit, unless such authority is delegated to Operator.  All costs and expenses of handling settling,

	
70

	
or otherwise discharging such claim or suit shall be a the joint expense of the parties participating in the operation from which the

	
71

	
claim or suit arises.  If a claim is made against any party or if any party is sued on account of any matter arising from operations

	
72

	
hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall

	
73

	
immediately notify all other parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. 74

	
74

	
 

 

 

15

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

 

 

	
1

	
ARTICLE XI.

	
2

	
FORCE MAJEURE

	
3

	
If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other

	
4

	
than the obligation to indemnify or make money payments or furnish security, that party shall give to all other parties

	
5

	
prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the

	
6

	
party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the

	
7

	
continuance of the force majeure.  The term "force majeure," as here employed, shall mean an act of God, strike, lockout, or

	
8

	
other industrial disturbance, act of the public enemy, war, blockade, public riot, lightening, fire, storm, flood or other act of

	
9

	
nature, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other

	
10

	
cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party

	
11

	
claiming suspension.

	
12

	
The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The

	
13

	
requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes,

	
14

	
lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handled shall

	
15

	
be entirely within the discretion of the party concerned.

	
16

	
ARTICLE XII.

	
17

	
NOTICES

	
18

	
All  notices  authorized  or  required  between  the  parties  by any of  the  provisions  of  this  agreement,  unless  otherwise

	
19

	
specifically provided, shall be in writing and delivered in person or by United States mail, courier service, telegram, telex,

	
20

	
telecopier or any other form of facsimile, postage or charges prepaid, and addressed to such parties at the addresses listed on

	
21

	
Exhibit "A."  All telephone or oral notices permitted by this agreement shall be confirmed immediately thereafter by written

	
22

	
notice.  The originating notice given under any provision hereof shall be deemed delivered only when received by the party to

	
23

	
whom such notice is directed, and the time for such party to deliver any notice in response thereto shall run from the date

	
24

	
the originating notice is received.  "Receipt" for purposes of this agreement with respect to written notice delivered hereunder

	
25

	
shall be actual delivery of the notice to the address of the party to be notified specified in accordance with this agreement, or

	
26

	
to the telecopy, facsimile or telex machine of such party.  The second or any responsive notice shall be deemed delivered when

	
27

	
deposited in the United States mail or at the office of the courier or telegraph service, or upon transmittal by telex, telecopy

	
28

	
or facsimile, or when personally delivered to the party to be notified, provided, that when response is required within 24 or

	
29 

	
48 hours, such response shall be given orally or by telephone, telex, telecopy or other facsimile within such period. Each party

	
30

	
shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other

	
31

	
parties.  If a party is not available to receive notice orally or by telephone when a party attempts to deliver a notice required

	
32

	
to be delivered within 24 or 48 hours, the notice may be delivered in writing by any other method specified herein and shall

	
33

	
be deemed delivered in the same manner provided above for any responsive notice.

	
34

	
ARTICLE XIII.

	
35

	
TERM OF AGREEMENT

	
36

	
This agreement shall remain in full force and effect as to the Oil and Gas Leases and/or Oil and Gas Interests subject

	
37

	
hereto for the period of time selected below; provided, however, no party hereto shall ever be construed as having any right, title

	
38

	
or interest in or to any Lease or Oil and Gas Interest contributed by any other party beyond the term of this agreement.

	
39

	
☐ Option No. 1: So long as any of the Oil and Gas Leases subject to this agreement remain or are continued in

	
40

	
force as to any part of the Contract Area, whether by production, extension, renewal or otherwise.

	
41

	
☑ Option No. 2: In the event the well described in Article VI.A., or any subsequent well drilled under any provision

	
42

	
of this agreement, results in the Completion of a well as a well capable of production of Oil and/or Gas in paying

	
43

	
quantities, this agreement shall continue in force so long as any such well is capable of production, and for an

	
44

	
additional  period  of     90     days  thereafter;  provided,  however,  if,  prior  to  the  expiration  of  such

	
45

	
additional period, one or more of the parties hereto are engaged in drilling, Reworking, Deepening, Sidetracking,

	
46

	
Plugging Back, testing or attempting to Complete or Re-complete a well or wells hereunder, this agreement shall

	
47

	
continue  in  force  until  such  operations  have  been  completed  and  if  production  results  therefrom,  this  agreement

	
48

	
shall continue in force as provided herein.  In the event the well described in Article VI.A., or any subsequent well

	
49

	
drilled  hereunder,  results  in  a  dry  hole,  and  no  other  well  is  capable  of  producing  Oil  and/or  Gas  from  the

	
50

	
Contract  Area,  this  agreement  shall  terminate  unless  drilling,  Deepening,  Sidetracking,  Completing,  Re-

	
51

	
completing, Plugging Back or Reworking operations are commenced within   180    days from the

	
52

	
date of abandonment of said well.  "Abandonment" for such purposes shall mean either (i) a decision by all parties

	
53

	
not  to  conduct  any  further  operations  on  the  well  or  (ii)  the  elapse  of  180  days  from  the  conduct  of  any

	
54

	
operations on the well, whichever first occurs.

	
55

	
The termination of this agreement shall not relieve any party hereto from any expense, liability or other obligation or any

	
56

	
remedy therefor which has accrued or attached prior to the date of such termination.

	
57

	
Upon termination of this agreement and the satisfaction of all obligations hereunder, in the event a memorandum of this

	
58

	
Operating Agreement has been filed of record, Operator is authorized to file of record in all necessary recording offices a

	
59

	
notice of termination, and each party hereto agrees to execute such a notice of termination as to Operator's interest, upon

	
60

	
request of Operator, if Operator has satisfied all its financial obligations.

	
61

	
ARTICLE XIV.

	
62

	
COMPLIANCE WITH LAWS AND REGULATIONS

	
63

	
A. Laws, Regulations and Orders:

	
64

	
This agreement shall be subject to the applicable laws of the state in which the Contract Area is located, to the valid rules,

	
65

	
regulations,  and  orders  of  any  duly  constituted  regulatory  body  of  said  state;  and  to  all  other  applicable  federal,  state,

	
66

	
and local laws, ordinances, rules, regulations and orders.

	
67

	
B. Governing Law:

	
68

	
This  agreement  and  all  matters  pertaining  hereto,  including  but  not  limited  to  matters  of  performance,  non-

	
69

	
performance,  breach,  remedies, procedures,  rights,  duties, and interpretation or  construction,  shall  be  governed and

	
70

	
determined by the law of the state in which the Contract Area is located.  If the Contract Area is in two or more states,

	
71

	
the law of the state of   Colorado shall govern.

	
72

	
C. Regulatory Agencies:

	
73

	
Nothing herein contained shall grant, or be construed to grant, Operator the right or authority to waive or release any

	
74

	
rights, privileges, or obligations which Non-Operators may have under federal or state laws or under rules, regulations or

 

 

16

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

 

 

	
1

	
orders promulgated under such laws in reference to oil, gas and mineral operations, including the location, operation, or

	
2

	
production of wells, on tracts offsetting or adjacent to the Contract Area.

	
3

	
With respect to the operations hereunder, Non-Operators agree to release Operator from any and all losses, damages,

	
4

	
injuries, claims and causes of action arising out of, incident to or resulting directly or indirectly from Operator's interpretation

	
5

	
or application of rules, rulings, regulations or orders of the Department of Energy or Federal Energy Regulatory Commission

	
6

	
or predecessor or successor agencies to the extent such interpretation or application was made in good faith and does not

	
7

	
constitute  gross  negligence.   Each  Non-Operator  further  agrees  to  reimburse  Operator  for  such  Non-Operator's  share  of

	
8

	
production or any refund, fine, levy or other governmental sanction that Operator may be required to pay as a result of such

	
9

	
an incorrect interpretation or application, together with interest and penalties thereon owing by Operator as a result of such

	
10 

	
incorrect interpretation or application.

	
11

	
ARTICLE XV.

	
12

	
MISCELLANEOUS

	
13

	
A. Execution:

	
14

	
This  agreement  shall  be  binding  upon  each  Non-Operator  when  this  agreement  or  a  counterpart  thereof  has  been

	
15

	
executed by such Non-Operator and Operator notwithstanding that this agreement is not then or thereafter executed by all of

	
16

	
the parties to which it is tendered or which are listed on Exhibit "A" as owning an interest in the Contract Area or which

	
17

	
own, in fact, an interest in the Contract Area.   Operator may, however, by written notice to all Non-Operators who have

	
18

	
become bound by this agreement as aforesaid, given at any time prior to the actual spud date of the Initial Well but in no

	
19

	
event later than five days prior to the date specified in Article VI.A. for commencement of the Initial Well, terminate this

	
20

	
agreement  if Operator in its sole discretion  determines that there is insufficient participation to justify commencement of

	
21

	
drilling operations.  In the event of such a termination by Operator, all further obligations of the parties hereunder shall cease

	
22

	
as  of  such  termination.  In  the  event  any  Non-Operator  has  advanced  or  prepaid  any  share  of  drilling  or  other  costs

	
23

	
hereunder, all sums so advanced shall be returned to such Non-Operator without interest.In the event Operator proceeds

	
24

	
with drilling operations for the Initial Well without the execution hereof by all persons listed on Exhibit "A" as having a

	
25

	
current  working  interest  in  such  well,  Operator  shall  indemnify Non-Operators  with  respect  to all costs  incurred  for  the

	
26

	
Initial Well which would have been charged to such person under this agreement if such person had executed the same and

	
27

	
Operator shall receive all revenues which would have been received by such person under this agreement if such person had

	
28

	
executed the same.

	
29

	
B. Successors and Assigns:

	
30

	
This agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective heirs,

	
31

	
devisees, legal representatives, successors and  assigns, and  the terms hereof shall be deemed  to  run  with the Leases  or

	
32

	
Interests included within the Contract Area.

	
33

	
C. Counterparts:

	
34

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

	
35

	
purposes.

	
36

	
D. Severability:

	
37

	
For the purposes of assuming or rejecting this agreement as an executory contract pursuant to federal bankruptcy laws,

	
38

	
this agreement shall not be severable, but rather must be assumed or rejected in its entirety, and the failure of any party to

	
39

	
this agreement to comply with all of its financial obligations provided herein shall be a material default.

	
40

	
ARTICLE XVI.

	
41

	
OTHER PROVISIONS

42

	
43

	
SEE ATTACHED PAGE 17

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

 

 

17

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

 

	
1

	
IN WITNESS WHEREOF, this agreement shall be effective as of the _________   day of _____________    ,

	
2

	
 ________.

	
3

	
_____________________, who has prepared and circulated this form for execution, represents and warrants that the form was printed from and, with the exception(s) listed below, is identical to the AAPL Form 610-1989 Model Form

	
4

	
Operating Agreement, as published in computerized form by Forms On-A-Disk, Inc. No changes, alterations, or modifications, other than those made by strikethrough and/or insertion and that are clearly recognizable as changes

in Articles

	
5

	
, have been made to the form.

 

	
6

	
ATTEST OR WITNESS:

	
 

	
 

	
OPERATOR

 

	
7

	
 

	
 

	
 

	
 

PETROSHARE CORP.

 

	
 

8

	
/s/ Fredrick J. Witsell

	
 

	
 

By:

	 
	
 

9

	
Secretary

	
 

	
 

	
 

 

	
 

10

	
 

	
 

	
 

	
Type or print name

 

	
11

	
 

	
 

	
 

	
Title

	 
	
12

	
 

	
 

	
 

	
 

Date

	 
	
13

	
 

	
 

	
 

	
Tax ID or S.S. No.

	 
	
 

14

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
15

	
NON-OPERATORS

	
16

	
 

	
 

	
 

	
 

 

	
17

	
 

	
 

	
 

	
Providence Energy Corp.

	
 

 

	
 

 

	
 

	
 

By:

	 
	
 

18

	
 

	
 

	
 

	
Jim Sinclair

	
 

19

	
 

	
 

	
 

	
Type or print name

 

	
20

	
 

	
 

	
 

	
Title

	
COO

	
21

	
 

	
 

	
 

	
Date

	 
	
22

	
 

	
 

	
 

	
Tax ID or S.S. No.

	
 

	
 

23

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
24

	
 

	
 

	
 

	
.

	
25

	
 

	
 

	
 

	
 

	
 

 

	
 

	
 

	
By:

	 
	
 

26

	
 

	
 

	
 

	 
	
 

 

27

	
 

	
 

	
 

	
Type or print name

 

	
28

	
 

	
 

	
 

	
 

Title

	
 

 

	
29

	
 

	
 

	
 

	
Date

	 
	
30

	
 

	
 

	
 

	
Tax ID or S.S. No.

	 
	
 

31

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
 

	
32

	
 

	
 

	
 

	 
	
 

	
 

	
 

	
 

	
 

	
 

 

	
 

	
 

	
By:

	 
	
 

33

	
 

	
 

	
 

	 
	
 

 

34

	
 

	
 

	
 

	
Type or print name

 

	
35

	
 

	
 

	
 

	
 

Title

	
 

	
36

	
 

	
 

	
 

	
Date

	
 

	
37

	
 

	
 

	
 

	
Tax ID or S.S. No.

	
 

	
 

	
 

	
 

	
 

	
 

 

 

 

18

 

A.A.P.I. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989

	
1

	
ACKNOWLEDGMENTS

	
2

	
Note: The following forms of acknowledgment are the short forms approved by the Uniform Law on Notarial Acts.

	
3

	
The validity and effect of these forms in any state will depend upon the statutes of that state.

	
4

	
 

	
5

	
Individual acknowledgment:

	
6

	
State of                               )

	
7

	
State of _______________ ) ss.

	
8

	
County of                           )

	
9

	
This instrument was acknowledged before me on

	
10

	
                     ,              by 

	
11

	
 

	
12

	
(Seal, if any) ___ _                              ____

	
13

	
NOTARY PUBLIC                                                                                Title (and Rank) Notary Public

	
14

	
STATE OF                                                                                              My commission expires:

	
15

	
NOTARY ID                            / MY COMMISSION EXPIRES

	
16

	
Acknowledgment in representative capacity:

	
17

	
State of                                )

	
18

	
State of _______________ ) ss.

	
19

	
County of                             )

	
20

	
This instrument was acknowledged before me on

	
21

	
                                       by                                     as

	
22

	
                        of ________________________

	
23

	
_________ (Seal, if any) __________________________________________            _ ___________________________

	
24

	
_________ (Seal, if any) ____________________________________Title (and Rank) ___________________________

	
25

	
_________ (Seal, if any) ____________________________________My commission expires:  ______________

	
26

	 
	
27

	
NOTARY PUBLIC, STATE OF  ______________

	
28

	 
	
29

	 
	
30

	
MY COMMISSION EXPIRES ______________

31

32

33

34

35

36

37

 

 

 

19

ARTICLE XVI. OTHER PROVISIONS

Notwithstanding the foregoing provisions:

	
A.

	
When a well which has been authorized under the terms of this Agreement as a vertical well shall have been drilled to the objectives authorized in the AFE ("authorized depthn), and all tests have been comleted and the results thereof furnished to the participating parties, and after the Operator has attempted in good faith to reach a mutual agreement with Non-Operator(s) regarding further operations, but sch parties cannot agree upon the sequence and timing of further operations regarding said well, the following proposals shall control in the order enumerated hereafter: (1) a proposal to do additional logging, coring, or testing; (2) a proposal to attempt to complete the well at the authorized depth in the manner set forth in the AFE (i.e., in accordance with the casing, stimulation and other completion programs as set forth in the AFE); (3) a proposal to attempt to complete the well at the authorized depth in a manner different than as set forth in the AFE; (4) a proposal to plug back and attempt to complete the well at a depth shallower than the authorized depth, with priority given to objectives in ascending order up the hole; (5) a proposal to drill the well to a depth below the authorized depth, with priority given to objectives in descending order; (6) a proposal to sidetrack the well to a new target objective for a vertical or deviated hole, with priority given first in ascending order to targets above the authorized depth, and then in descending order to targets below the authorized depth; and (7) a proposal to drill a horizontal well, with priority given first to a lateral drain hole at the authorized depth, and then to objectives in ascending order above the authorized depth, and then to objectives in descending order below the authorized depth.

When a well which has been authorized under the terms of this Agreement as a horizontal well shall have been drilled to the authorized depth, and all tests have been completed and the results thereof furnished to the participating parties, and such parties cannot agree upon the sequence and timing of further operations regarding said well, the following proposals shall control in the order enumerated hereafter: (1) a proposal to do additional logging, coring, or testing; (2) a proposal to attempt to complete the well at the authorized depth in the manner set forth in the AFE (i.e. , in accordance with casing, stimulation and other completion programs set forth in the AFE); (3) a proposal to attempt to complete the well at the authorized depth in a manner different than as set forth in the AFE; (4) a proposal to extend the length of the lateral drain hole for a specified number of feet in the direction it is drilling, with priority given to the shortest additional length proposed by any of the participating parties; (5) a proposal to drill a new lateral drain hole in a different direction at the authorized depth; (6) a proposal to drill a new lateral drain hole at a different depth, with priority given in ascending order to objectives above the authorized depth, and then in descending order to objectives below the authorized depth; (7) a proposal to plug back and attempt to complete the well at a depth shallower than the authorized depth, with priority given to objectives in ascending order up the hole; (8) a proposal to deepen the well below the authorized depth; and (9) a proposal to sidetrack the well to a new target objective, with priority given first in ascending order to objectives above the authorized depth, and then in descending order to objectives below the authorized depth.

In a horizontal well, the Operator shall have the right to cease drilling at any time, for any reason, after it has drilled a well to the objective formation and has drilled laterally for a distance which is at least equal to fifty percent (50%) of the length of the total horizontal displacement (displacement from true vertical) proposed for the operation; if in such event the well will be deemed to be at its "authorized depthh as that term is used in this Agreement.

If at the time the parties are considering a proposed operation, the well is in such condition, in the Operator's judgment, that a reasonably prudent operator would not conduct such operation for fear of mechanical difficulties, placing the hole, equipment or personnel in danger of loss or injury, or fear of loss of the well for any reason without being able to attempt a completion at the authorized depth, then the proposal shall be given no priority to any proposed operation except for plugging and abandoning the well.

	
B.

	
In the event any Consenting Party desires to deepen a Non-Consent Well to a depth below the authorized depth, such party shall give notice thereof, complying with the requirements of Article Vl.8.1., to all parties (including Non-Consenting Parties). Thereupon Articles Vl.8.1. and 2. shall apply and all parties receiving such notice shall have the right to participate or not participate in the deepening of such well pursuant to said Articles Vl.8.1. and 2 . If a deepening operation is approved pursuant to such provisions, and if any Non-Consenting Party elects to participate in the deepening operation, such Non­ Consenting Party shall pay or make reimbursement (as the case may be) of the following costs and expenses:

	
(i)

	
If the proposal to deepen is made prior to the completion of such well as a well capable of producing in paying quantities, such Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the case may be) that share of costs and expenses incurred in connection with the drilling of said well from the surface to the authorized depth which Non-Consenting Party would have paid had such Non­ Consenting Party agreed to participate therein, plus the Non-Consenting Party's share of the cost of deepening and of participating in any further operations on the well in accordance with the other provisions of this Agreement; provided, however, all costs for testing and completion or attempted completion of the well incurred by Consenting Parties prior to the point of actual operations to deepen beyond the authorized depth shall be for the sole account of Consenting Parties. Notwithstanding the foregoing, if the Non-Consent well was drilled as a horizontal well, the Non-Consenting Party will be obligated to pay or reimburse the Consenting

 

17 -A

 Parties only that share of the costs and expenses of drilling the vertical portion of the well from the surface to the point that the well is deviated from the vertical.

	
(ii)

	
If the proposal is made for a Non-Consent Well that has been previously completed as a well capable of producing in paying quantities. but is no longer capable of producing in paying Quantities. such Non-Consenting Party shall pay (or reimburse Consenting Parties for. as the case may be) its proportionate share of all costs of drilling, completing, and equipping said well from the surface to the authorized depth. calculated in the manner provided in paragraph (i) above, less those costs recouped by the Consenting Parties from the sale of production from the well. The Non-Consenting Party shall also pay its proportionate share of all costs of re­ entering said well. The Non-Consenting Parties' proportionate part (based on the percentage of such well Non-Consenting Party would have owned had it previously participated in such Non-Consent Well) of the costs of salvable materials and equipment remaining in the hole and salvable surface equipment used in connection with such well shall be determined in accordance with Exhibit "C". If the Consenting Parties have recouped the cost of drilling, completing, and equipping the well at the time such deepening operation is conducted, then a Non-Consenting Party may participate in the deepening of the well with no payment for costs incurred prior to re-entering the well for deepening.  Notwithstanding the foregoing, if the Non-Consent well was drilled as a horizontal well. the Non-Consenting Party will be obligated to pay or reimburse the Consenting Parties only that share of the costs and expenses of drilling the vertical portion of the well from the surface to the point that the well is deviated from the vertical.

	
C.

	
Gas production attributable to any Non-Consenting Party's relinquished interest which was committed to a gas sales contract prior to the date of the relinquishment shall, upon such party's election, be sold to its purchaser, if the purchaser elects to take such production under the terms of its existing gas sales contract. Such Non-Consenting Party shall direct its purchaser to remit the proceeds received from such sale directly to the Consenting Parties until the amounts provided in Article VI.B.2 are recovered from the Non-Consenting Party's relinquished interest. If such Non-Consenting Party has not contracted for sale of its gas at the time such gas is available for delivery, or does not elect to have its gas delivered to its purchaser as provided above, the Consenting Party shall be entitled to receive and sell such Non-Consenting Party's share of gas during the recoupment period.

	
D.

	
If operations (including a completion attempt) are necessary to maintain lease acreage which would otherwise expire under the terms of the lease or leases covering such acreage. or are required as a result of a demand for drilling by a lessor, or are necessary to earn leasehold interests or acreage under a farmout or other exploration agreement. the Non-Consent provision shall be changed from that set forth in Article VI to require a non-reversionary assignment of all rights, title. and interest by the party or parties not participating in such operations as to that portion of the acreage (but not any mineral interests owned by a party hereto except to the extent of the lessee's interest under a lease effected under Article Ill.A hereof) and/or leasehold interest which would otherwise have been lost or not earned without such operations. The provisions of Article VI shall. however. continue to apply to any portion of the Contract Area which is not so jeopardized or not to be earned and which is within the same drilling, production or proration unit. The interests of the parties in said unit shall be adjusted on a surface acreage basis after recovery by the Consenting Parties of the costs to be recouped pursuant to Articles VI.B (2) (a) and (b) and/or VII.D (I), as applicable, with respect to the Non-Consenting Party's interest in the unit subject thereto, and, for avoidance of doubt, the reversion as to such interests not in jeopardy or not to be earned shall occur at the same point in time as such reversion would have occurred absent the forfeiture and assignment. The leasehold interests and oil and gas interests so required to be forfeited and assigned (and the unit, should it contain both forfeiture and reversionary interests) to the Consenting Parties by the Non-Consenting Parties shall no longer be subject to this agreement but shall be subject to an operating agreement) identical to this agreement changed only to reflect the names and new interests of the parties. If operations are proposed on a lease, or on lands pooled therewith, within the last six (6) months of the primary term of a lease not otherwise maintained by other operations or production, such proposed operations will be considered as operations necessary to maintain the lease.

	
E.

	
If the parties hereto into an agreement between themselves and/or with any third party covering drilling and/or operations on the Contract Area or on other land and leases which are pooled or unitized therewith. then such operating agreement shall supersede this Agreement as to the rights and obligations of the parries with respect to such land and operations. During the term of such other operating agreement, this Agreement shall continue to govern the rights and obligations of the parties as to the balance of the land and depths covered by this Agreement. At such time. if ever, that such other operating agreement shall terminate, or any portion of the Contract Area is released therefrom, then this Agreement shall again become effective as to such land and depths, it being the intent of the parties that there shall never be a time during the term of this Agreement when a portion of the Contract Area is not subject to an operating agreement between the parties hereto.

	
F.

	
In the event it is evident in any party's reasonable judgment that AFE overruns of more than ten percent (10%) of the total AFE for such operations are likely to occur prior to the completion of the approved operations. then such party shall notify the other parties and Operator shall immediately furnish to Non-Operators a revised a AFE for approval of the parties. All parties who wish to consent to the revised AFE shall notify Operator of such fact within forty-eight (48) hours after receipt of the revised AFE and Operator shall advise the consenting parties of the total interest of parties approving such AFE and its recommendation as to whether the consenting parties should proceed with the operation as proposed. Each consenting party, within forty-eight (48) hours inclusive of Saturday. Sunday and legal holidays after eceipt of such notice, shall advise the proposing party of its desire to {a) limit participation to such party's interest as shown on Exhibit "A" or (b) carry its proportionate part of non-consenting party's interest and failure to advise the proposing party shall be deemed an election under (a) or (c) only during the drilling and completion operations  originally proposed, reduce its percentage interest so its total expenditures would be equal to the amount committed to the original AFE.  The proposing party, at its election, may withdraw  such  proposal if there is insufficient participation and shall promptly notify all parties of such decision.  Should less than all parties consent to the revised AFE, and at least one consenting party commences operation under the revised AFE within forty-eight (48) hours after expiration of the original forty-eight (48) hour notice period, the non-consenting parties shall be subject to the non-consent penalties prescribed herein. Provided however, Operator shall have the responsibility and authority to take any actions deemed necessary to conduct continuous operations of a well until such time as Operator receives the required approval mentioned hereinabove.  In this event, a party that does not  wish  to participate in such operation shall remain liable for its share of such operation unless and until such time as its interest is assumed by the participating parties.  In the event no party elects to proceed under any such revised AFE, Operator shall immediately proceed to abandon the applicable operation in accordance with the terms set forth herein.

 

17 -B

 

	
G.

	
Each Non-Operator will have the right, on an ongoing basis, to participate for its proportionate share as set out on Exhibit "A" to this Agreement, in the acquisition or construction of any gathering, processing. or plant facilities that may be necessary or convenient for the production or transmission of any gas produced under the terms of this Agreement, in which the Non-Operator has an interest.

	
H.

	
In addition to the terms set forth in Exhibit "C" COPAS Accounting Procedure, Joint Operations, in the event Operator receives a volume discount or other price reduction for any operations conducted or for any goods purchased, Non-Operator shall also be entitled to such discount or reduction.

	
I.

	
If at any time after one (1) year after oil and/or gas is found in commercial quantities on said Contract Area, any Non-Operator, owning at least a twenty-percent (20%) interest in the unit or having the approval from thirty-five percent (35%) of the working interest owners in the Contract Area (including Non-Operator's percent interest). considers the cost of operating the Contract Area to be excessive and is willing to operate the same for a period of one (1) year at a cost which is at least ten percent (10%) less than the cost or operating under the direct control of Operator, such Non-Operator shall deliver to Operator a written statement detailing the items of expense contributing to the alleged excessive costs proposing that such Non-Operator assume such operations, and specifying the proposed economics. Within ten (10) days of such statement, Operator shall elect in writing delivered to such Non­ Operator to either (a) surrender operations to the proposing Non-Operator for a period of one (1) year upon the terms contained in Non-Operator's proposal, or (b) agree to operate the Contract Area for such period of one (1) year at a cost consistent with the economics proposed by Non-Operator. If Operator elects to surrender operations, then such proposing Non-Operator forthwith shall become Operator for a minimum period on one (1) year as fully as though such Non-Operator had been herein designated Operator under the terms hereof as modified by his proposed economics. If the Non-Operator fails to reduce operating costs by at least ten percent (10%) during such one (1) year period, operations shall automatically transfer to Operator within thirty (30) days of Operator's written request and such transfer will be evidenced by filing a statement with the appropriate state authority.

17 -C

 

EXHIBIT A

 

 

Attached to that certain Operating Agreement dated effective __________________, _____, 2015, between PetroShare Corp, as Operator, and Providence Energy Corp., as Non-Operator.

	
I.

	
Oil and Gas Leases Subject to Agreement:

The Oil and Gas Leases more particularly described on Exhibit "A-1" attached hereto.

	
II.

	
Participants and Addresses:

	
 

	
 

	
Expense Interest

	
 

	
PetroShare Corp

7200 S. Alton Way, Suite B220

Centennial, CO 80111

Attn: Frederick J. Witsell

(303) 500-1168 Office

(303) 881-2157 Cell

fwitsell@petrosharecorp.com

	
 

	
 

	
50.0000%

	
 

	
 

	
 

	
 

	
 

	
 

	
Providence Energy Corp.

	
 

	
 

	
50.0000%

	
 

	
16400 North Dallas Pkwy., Ste. 400

Dallas, TX 75248

Attn: Jim Sinclair

(214) 522-9131 Office

	
 

	
 

	
 

	
 

	
(972) 934-2310 Fax

jsinclair@providence-energy.com

	
 

	
 

	
 

	
 

 

 

 

	
 

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

Exhibit  “C”

ACCOUNTING PRODECURE

JOINT OPERATIONS

	
1

	
 

	
 

	
2

	
Attached to and made part of that certain Operating Agreement dated                                      , 2015, between PetroShare Corp, as Operator, and

	
3

	
Providence Energy Corp., as Non-Operator.

	
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5

	
 

	
 

	
6

	
 

	
 

	
7

	
 

	
 

	
8

	
 

	
I. GENERAL PROVISIONS

	
9

	
 

	
 

	
10

	
IF THE PARTIES FAIL TO SELECT EITHER ONE OF COMPETING "ALTERNATIVE'' PROVISIONS, OR SELECT ALL THE

	
11

	
COMPETING "ALTERNATIVE" PROVISIONS, ALTERNATIVE 1 IN EACH SUCH INSTANCE SHALL BE DEEMED TO HAVE

	
12

	
BEEN ADOPTED BY THE PARTIES AS A RESULT OF ANY SUCH OMISSION OR DUPLICATE NOTATION.

	
13

	
 

	
 

	
14

	
IN THE EVENT THAT ANY "OPTIONAL" PROVISION OF THIS ACCOUNTING PROCEDURE IS NOT ADOPTED BY THE

	
15

	
PARTIES TO THE AGREEMENT BY A TYPED, PRINTED OR HANDWRITTEN INDICATION, SUCH PROVISION SHALL NOT

	
16

	
FORM A PART OF THIS ACCOUNTING PROCEDURE, AND NO INFERENCE SHALL BE MADE CONCERNING THE INTENT

	
17

	
OF THE PARTIES IN SUCH EVENT.

	
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19

	
1.

	
DEFINITIONS

	
20

	
 

	
 

	
21

	
 

	
All terms used in this Accounting Procedure shall have the following meaning, unless otherwise expressly defined in the Agreement:

	
22

	
 

	
 

	
23

	
 

	
"Affiliate'' means for a person, another person that controls, is controlled by, or is under common control with that person. In this

	
24

	
 

	
definition, (a) control means the ownership by one person, directly or indirectly, of more than fifty percent (50%) of the voting securities

	
25

	
 

	
of a corporation or, for other persons, the equivalent ownership interest (such as partnership interests), and (b) "person" means an

	
26

	
 

	
individual, corporation, partnership, trust, estate, unincorporated organization, association, or other legal entity.

	
27

	
 

	
 

	
28

	
 

	
"Agreement" means the operating agreement, farmout agreement, or other contract between the Parties to which this Accounting

	
29

	
 

	
Procedure is attached.

	
30

	
 

	
 

	
31

	
 

	
"Controllable Material" means Material that, at the time of acquisition or disposition by the Joint Account, as applicable, is so classified

	
32

	
 

	
in the Material Classification Manual most recently recommended by the Council of Petroleum Accountants Societies (COPAS).

	
33

	
 

	
 

	
34

	
 

	
"Equalized Freight" means the procedure of charging transportation  cost to the Joint Account based upon the distance from the nearest

	
35

	
 

	
Railway Receiving Point to the property.

	
36

	
 

	
 

	
37

	
 

	
"Excluded Amount" means a specified excluded trucking amount most recently recommended by COPAS.

	
38

	
 

	
 

	
39

	
 

	
"Field Office" means a structure, or portion of a structure, whether a temporary or permanent installation, the primary function of which is

	
40

	
 

	
to directly serve daily operation and maintenance activities of the Joint Property and which serves as a staging area for directly chargeable

	
41

	
 

	
field personnel.

	
42

	
 

	
 

	
43

	
 

	
"First Level Supervision" means those employees whose primary function in Joint Operations is the direct oversight of the Operator's

	
44

	
 

	
field employees and/or contract labor directly employed  On-site in a field operating  capacity.  First Level Supervision functions may

	
45

	
 

	
include, but are not limited to:

	
46

	
 

	
 

	
47

	
 

	
▪  Responsibility for field employees and contract labor engaged in activities that can include field operations, maintenance,

	
48

	
 

	
construction, well remedial work, equipment movement and drilling

	
49

	
 

	
▪  Responsibility for day-to-day direct oversight of rig operations

	
50

	
 

	
▪  Responsibility for day-to-day direct oversight of construction operations

	
51

	
 

	
▪  Coordination of job priorities and approval of work procedures

	
52

	
 

	
▪  Responsibility for optimal resource utilization (equipment, Materials, personnel)

	
53

	
 

	
▪  Responsibility for meeting production and field operating expense targets

	
54

	
 

	
▪  Representation of the Parties in local matters involving community, vendors, regulatory agents and landowners, as an incidental

	
55

	
 

	
part of the supervisor’s operating responsibilities

	
56

	
 

	
▪  Responsibility for all emergency responses with field staff

	
57

	
 

	
▪  Responsibility for implementing safety and environmental practices

	
58

	
 

	
▪  Responsibility for field adherence to company policy

	
59

	
 

	
▪  Responsibility for employment decisions and performance appraisals for field personnel

	
60

	
 

	
▪  Oversight of sub-groups for field functions such as electrical, safety, environmental, telecommunications, which may have group

	
61

	
 

	
or team leaders.

	
62

	
 

	
 

	
63

	
 

	
"Joint Account" means the account showing the charges paid and credits received in the conduct of the Joint Operations that are to be

	
64

	
 

	
shared by the Parties, but does not include proceeds attributable to hydrocarbons and by-products produced under the Agreement.

	
65

	
 

	
 

	
66

	
 

	
"Joint Operations" means all operations necessary or proper for the exploration, appraisal, development, production, protection, maintenance, repair, abandonment, and restoration of the Joint Property.

 

 

 

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COPAS 2005 Accounting Procedure

Recommended by COPAS

 

	
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COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

	
1

	
 

	
"Joint Property" means the real and personal property subject to the Agreement.

	
2

	
 

	
 

	
3

	
 

	
"Laws" means any laws, rules, regulations, decrees, and orders of the United States of America or any state thereof and all other

	
4

	
 

	
goverenental bodies, agencies, and other authorities having jurisdiction over or affecting the provisions contained in or the transactions

	
5

	
 

	
contemplated by the Agreement or the Parties and their operations, whether such laws now exist or are hereafter amended, enacted,

	
6

	
 

	
promulgated or issued.

	
7

	
 

	
 

	
8

	
 

	
"Material" means personal property, equipment, supplies, or consumables acquired or held for use by the Joint Property.

	
9

	
 

	
 

	
10

	
 

	
"Non-Operators" means the Parties to the Agreement other than the Operator.

	
11

	
 

	
 

	
12

	
 

	
"Offshore Facilities" means platforms, surface and subsea development and production systems, and other support systems such as oil and

	
13

	
 

	
gas handling facilities, living quarters, offices, shops, cranes, electrical supply equipment and systems, fuel and water storage and piping,

	
14

	
 

	
heliport, marine docking installations, communication facilities, navigation aids, and other similar facilities necessary in the conduct of

	
15

	
 

	
offshore operations, all of which are located offshore.

	
16

	
 

	
 

	
17

	
 

	
"Off-site" means any location that is not considered On-site as defined in this Accounting Procedure.

	
18

	
 

	
 

	
19

	
 

	
"On-site" means on the Joint Property when in direct conduct of Joint Operations. The term "On-site" shall also include that portion of

	
20

	
 

	
Offshore Facilities, Shore Base Facilities, fabrication yards, and staging areas from which Joint Operations are conducted, or other

	
21

	
 

	
facilities that directly control equipment on the Joint Property, regardless of whether such facilities are owned by the Joint Account.

	
22

	
 

	
 

	
23

	
 

	
"Operator" means the Party designated pursuant to the Agreement to conduct the Joint Operations.

	
24

	
 

	
 

	
25

	
 

	
"Parties" means legal entities signatory to the Agreement or their successors and assigns. Parties shall be referred to individually as

	
26

	
 

	
"Party."

	
27

	
 

	
 

	
28

	
 

	
"Participating Interest" means the percentage of the costs and risks of conducting an operation under the Agreement that a Party agrees,

	
29

	
 

	
or is otherwise obligated, to pay and bear.

	
30

	
 

	
 

	
31

	
 

	
"Participating Party" means a Party that approves a proposed operation or otherwise agrees, or becomes liable, to pay and bear a share of

	
32

	
 

	
the costs and risks of conducting an operation under the Agreement.

	
33

	
 

	
 

	
34

	
 

	
"Personal Expenses" means reimbursed costs for travel and temporary living expenses.

	
35

	
 

	
 

	
36

	
 

	
"Railway Receiving Point" means the railhead nearest the Joint Property for which freight rates are published, even though an actual

	
37

	
 

	
railhead may not exist.

	
38

	
 

	
 

	
39

	
 

	
"Shore Base Facilities" means onshore support facilities that during Joint Operations provide such services to the Joint Property as a

	
40

	
 

	
receiving and transshipment point for Materials; debarkation point for drilling and production personnel and services; communication,

	
41

	
 

	
scheduling and dispatching center; and other associated functions serving the Joint Property.

	
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43

	
 

	
"Supply Store" means a recognized source or common stock point for a given Material item.

	
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"Technical Services" means services providing specific engineering, geoscience, or other professional skills, such as those performed by

	
46

	
 

	
engineers, geologists, geophysicists, and technicians, required to handle specific operating conditions and problems for the benefit of Joint

	
47

	
 

	
Operations; provided, however, Technical Services shall not include those functions specifically identified as overhead under the second

	
48

	
 

	
paragraph of the introduction of Section III (Overhead). Technical Services may be provided by the Operator, Operator's Affiliate, Non-

	
49

	
 

	
Operator, Non-Operator Affiliates, and/or third parties.

	
50

	
 

	
 

	
51

	
2.

	
STATEMENTS AND BILLINGS

	
52

	
 

	
 

	
53

	
 

	
The Operator shall bill Non-Operators on or before the last day of the month for their proportionate share of the Joint Account for the

	
54

	
 

	
preceding month. Such bills shall be accompanied by statements that identify the AFE (authority for expenditure), lease or facility, and all

	
55

	
 

	
charges and credits summarized by appropriate categories of investment and expense. Controllable Material shall be separately identified

	
56

	
 

	
and fully described in detail, or at the Operator's option, Controllable Material may be summarized by major Material classifications.

	
57

	
 

	
Intangible drilling costs, audit adjustments, and unusual charges and credits shall be separately and clearly identified.

	
58

	
 

	
 

	
59

	
 

	
The Operator may make available to Non-Operators any statements and bills required under Section I.2 and/or Section I.3.A (Advances

	
60

	
 

	
and Payments by the Parties) via email, electronic data interchange, internet websites or other equivalent electronic media in lieu of paper

	
61

	
 

	
copies. The Operator shall provide the Non-Operators instructions and any necessary information to access and receive the statements and

	
62

	
 

	
bills within the timeframes specified herein. A statement or billing shall be deemed as delivered twenty-four (24) hours (exclusive of

	
63

	
 

	
weekends and holidays) after the Operator notifies the Non-Operator that the statement or billing is available on the website and/or sent via

	
64

	
 

	
email or electronic data interchange transmission. Each Non-Operator individually shall elect to receive statements and billings

	
65

	
 

	
electronically, if available from the Operator, or request paper copies. Such election may be changed upon thirty (30) days prior written

	
66

	
 

	
notice to the Operator.

 

 

 

 

3

 

	

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

	
1

	
3.

	
ADVANCES AND PAYMENTS BY THE PARTIES

	
2

	
 

	
 

	
3

	
 

	
A.   Unless otherwise provided for in the Agreement, the Operator may require the Non-Operators to advance their share of the estimated

	
4

	
 

	
cash outlay for the succeeding month's operations within fifteen (15) days after receipt of the advance request or by the first day of

	
5

	
 

	
the month for which the advance is required, whichever is later. The Operator shall adjust each monthly billing to reflect advances

	
6

	
 

	
received from the Non-Operators for such month. If a refund is due, the Operator shall apply the amount to be refunded to the

	
7

	
 

	
subsequent month's billing or advance, unless the Non-Operator sends the Operator a written request for a cash refund. The Operator

	
8

	
 

	
shall remit the refund to the Non-Operator within fifteen (15) days of receipt of such written request.

	
9

	
 

	
 

	
10

	
 

	
B.    Except as provided below, each Party shall pay its proportionate share of all bills in full within fifteen (15) days of receipt date. If

	
11

	
 

	
payment is not made within such time, the unpaid balance shall bear interest compounded monthly at the prime rate published by the

	
12

	
 

	
Wall Street Journal on the first day of each month the payment is delinquent plus three percent (3%), per annum, or the maximum

	
13

	
 

	
contract rate permitted by the applicable usury Laws governing the Joint Property, whichever is the lesser, plus attorney's fees, court

	
14

	
 

	
costs, and other costs in connection with the collection of unpaid amounts. If the Wall Street Journal ceases to be published or

	
15

	
 

	
discontinues publishing a prime rate, the unpaid balance shall bear interest compounded monthly at the prime rate published by the

	
16

	
 

	
Federal Reserve plus three percent (3%), per annum. Interest shall begin accruing on the first day of the month in which the payment

	
17

	
 

	
was due. Payment shall not be reduced or delayed as a result of inquiries or anticipated credits unless the Operator has agreed.

	
18

	
 

	
Notwithstanding the foregoing, the Non-Operator may reduce payment, provided it furnishes documentation and explanation to the

	
19

	
 

	
Operator at the time payment is made, to the extent such reduction is caused by:

	
20

	
 

	
 

	
21

	
 

	
(1)   being billed at an incorrect working interest or Participating Interest that is higher than such Non-Operator's actual working

	
22

	
 

	
interest or Participating Interest, as applicable; or

	
23

	
 

	
(2)   being billed for a project or AFE requiring approval of the Parties under the Agreement that the Non-Operator has not approved

	
24

	
 

	
or is not otherwise obligated to pay under the Agreement; or

	
25

	
 

	
(3)   being billed for a property in which the Non-Operator no longer owns a working interest, provided the Non-Operator has

	
26

	
 

	
furnished the Operator a copy of the recorded assignment or letter in-lieu. Notwithstanding the foregoing, the Non-Operator

	
27

	
 

	
shall remain responsible for paying bills attributable to the interest it sold or transferred for any bills rendered during the thirty

	
28

	
 

	
(30) day period following the Operator's receipt of such written notice; or

	
29

	
 

	
(4)   charges outside the adjustment period, as provided in Section I.4 (Adjustments).

	
30

	
 

	
 

	
31

	
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ADJUSTMENTS

	
32

	
 

	
 

	
33

	
 

	
A.    Payment of any such bills shall not prejudice the right of any Party to protest or question the correctness thereof; however, all bills

	
34

	
 

	
and statements, including payout statements, rendered during any calendar year shall conclusively be presumed to be true and correct,

	
35

	
 

	
with respect only to expenditures, after twenty-four (24) months following the end of any such calendar year, unless within said

	
36

	
 

	
period a Party takes specific detailed written exception thereto making a claim for adjustment. The Operator shall provide a response

	
37

	
 

	
to all written exceptions, whether or not contained in an audit report, within the time periods prescribed in Section I.5 (Expenditure

	
38

	
 

	
Audits).

	
39

	
 

	
 

	
40

	
 

	
B.    All adjustments initiated by the Operator, except those described in items (1) through (4) of this Section I.4.B, are limited to the

	
41

	
 

	
twenty-four (24) month period following the end of the calendar year in which the original charge appeared or should have appeared

	
42

	
 

	
on the Operator's Joint Account statement or payout statement. Adjustments that may be made beyond the twenty-four (24) month

	
43

	
 

	
period are limited to adjustments resulting from the following:

	
44

	
 

	
 

	
45

	
 

	
(1)   a physical inventory of Controllable Material as provided for in Section V (Inventories of Controllable Material), or

	
46

	
 

	
(2)   an offsetting entry (whether in whole or in part) that is the direct result of a specific joint interest audit exception granted by the

	
47

	
 

	
Operator relating to another property, or

	
48

	
 

	
(3)   a government/regulatory audit, or

	
49

	
 

	
(4)   a working interest ownership or Participating Interest adjustment.

	
50

	
 

	
 

	
51

	
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EXPENDITURE AUDITS

	
52

	
 

	
 

	
53

	
 

	
A.   A Non-Operator, upon written notice to the Operator and all other Non-Operators, shall have the right to audit the Operator's

	
54

	
 

	
accounts and records relating to the Joint Account within the twenty-four (24) month period following the end of such calendar year in

	
55

	
 

	
which such bill was rendered; however, conducting an audit shall not extend the time for the taking of written exception to and the

	
56

	
 

	
adjustment of accounts as provided for in Section I.4 (Adjustments). Any Party that is subject to payout accounting under the

	
57

	
 

	
Agreement shall have the right to audit the accounts and records of the Party responsible for preparing the payout statements, or of

	
58

	
 

	
the Party furnishing information to the Party responsible for preparing payout statements. Audits of payout accounts may include the

	
59

	
 

	
volumes of hydrocarbons produced and saved and proceeds received for such hydrocarbons as they pertain to payout accounting

	
60

	
 

	
required under the Agreement. Unless otherwise provided in the Agreement, audits of a payout account shall be conducted within the

	
61

	
 

	
twenty-four (24) month period following the end of the calendar year in which the payout statement was rendered.

	
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63

	
 

	
Where there are two or more Non-Operators, the Non-Operators shall make every reasonable effort to conduct a joint audit in a

	
64

	
 

	
manner that will result in a minimum of inconvenience to the Operator. The Operator shall bear no portion of the Non-Operators'

	
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audit cost incurred under this paragraph unless agreed to by the Operator. The audits shall not be conducted more than once each year

	
66

	
 

	
without prior approval of the Operator, except upon the resignation or removal of the Operator, and shall be made at the expense of

 

 

 

 

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COPAS 2005 Accounting Procedure

Recommended by COPAS

 

	
1

	
 

	
those Non-Operators approving such audit.

	
2

	
 

	
 

	
3

	
 

	
The Non-Operator leading the audit (hereinafter "lead audit company") shall issue the audit report within ninety (90) days after

	
4

	
 

	
completion of the audit testing and analysis; however, the ninety (90) day time period shall not extend the twenty-four (24) month

	
5

	
 

	
requirement for taking specific detailed written exception as required in Section I.4.A (Adjustments) above. All claims shall be

	
6

	
 

	
supported with sufficient documentation.

	
7

	
 

	
 

	
8

	
 

	
A timely filed written exception or audit report containing written exceptions (hereinafter "written exceptions") shall, with respect to

	
9

	
 

	
the claims made therein, preclude the Operator from asserting a statute of limitations defense against such claims, and the Operator

	
10

	
 

	
hereby waives its right to assert any statute of limitations defense against such claims for so long as any Non-Operator continues to

	
11

	
 

	
comply with the deadlines for resolving exceptions provided in this Accounting Procedure. If the Non-Operators fail to comply with

	
12

	
 

	
the additional deadlines in Section I.5.B or I.5.C, the Operator's waiver of its rights to assert a statute of limitations defense against

	
13

	
 

	
the claims brought by the Non-Operators shall lapse, and such claims shall then be subject to the applicable statute of limitations,

	
14

	
 

	
provided that such waiver shall not lapse in the event that the Operator has failed to comply with the deadlines in Section I.5.B or

	
15

	
 

	
I.5.C.

	
16

	
 

	
 

	
17

	
 

	
B.    The Operator shall provide a written response to all exceptions in an audit report within one hundred eighty (180) days after Operator

	
18

	
 

	
receives such report. Denied exceptions should be accompanied by a substantive response. If the Operator fails to provide substantive

	
19

	
 

	
response to an exception within this one hundred eighty (180) day period, the Operator will owe interest on that exception or portion

	
20

	
 

	
thereof, if ultimately granted, from the date it received the audit report. Interest shall be calculated using the rate set forth in Section

	
21

	
 

	
I.3.B (Advances and Payments by the Parties).

	
22

	
 

	
 

	
23

	
 

	
C.    The lead audit company shall reply to the Operator's response to an audit report within ninety (90) days of receipt, and the Operator

	
24

	
 

	
shall reply to the lead audit company's follow-up response within ninety (90) days of receipt; provided, however, each Non-Operator

	
25

	
 

	
shall have the right to represent itself if it disagrees with the lead audit company's position or believes the lead audit company is not

	
26

	
 

	
adequately fulfilling its duties. Unless otherwise provided for in Section I.5.E, if the Operator fails to provide substantive response

	
27

	
 

	
to an exception within this ninety (90) day period, the Operator will owe interest on that exception or portion thereof, if ultimately

	
28

	
 

	
granted, from the date it received the audit report. Interest shall be calculated using the rate set forth in Section I.3.B (Advances and

	
29

	
 

	
Payments by the Parties).

	
30

	
 

	
 

	
31

	
 

	
D.    If any Party fails to meet the deadlines in Sections I.5.B or I.5.C or if any audit issues are outstanding fifteen (15) months after

	
32

	
 

	
Operator receives the audit report, the Operator or any Non-Operator participating in the audit has the right to call a resolution

	
33

	
 

	
meeting, as set forth in this Section I.5.D or it may invoke the dispute resolution procedures included in the Agreement, if applicable.

	
34

	
 

	
The meeting will require one month's written notice to the Operator and all Non-Operators participating in the audit. The meeting

	
35

	
 

	
shall be held at the Operator's office or mutually agreed location, and shall be attended by representatives of the Parties with

	
36

	
 

	
authority to resolve such outstanding issues. Any Party who fails to attend the resolution meeting shall be bound by any resolution

	
37

	
 

	
reached at the meeting. The lead audit company will make good faith efforts to coordinate the response and positions of the

	
38

	
 

	
Non-Operator participants throughout the resolution process; however, each Non-Operator shall have the right to represent itself.

	
39

	
 

	
Attendees will make good faith efforts to resolve outstanding issues, and each Party will be required to present substantive information

	
40

	
 

	
supporting its position. A resolution meeting may be held as often as agreed to by the Parties. Issues unresolved at one meeting may

	
41

	
 

	
be discussed at subsequent meetings until each such issue is resolved.

	
42

	
 

	
 

	
43

	
 

	
If the Agreement contains no dispute resolution procedures and the audit issues cannot be resolved by negotiation, the dispute shall

	
44

	
 

	
shall choose a mutually acceptable mediator and share the costs of mediation services equally. The Parties shall each have present

	
45

	
 

	
be submitted to mediation. In such event, promptly following one Party's written request for mediation, the Parties to the dispute

	
46

	
 

	
at the mediation at least one individual who has the authority to settle the dispute. The Parties shall make reasonable efforts to

	
47

	
 

	
ensure that the mediation commences within sixty (60) days of the date of the mediation request. Notwithstanding the above, any

	
48

	
 

	
Party may file a lawsuit or complaint (1) if the Parties are unable after reasonable efforts, to commence mediation within sixty (60)

	
49

	
 

	
days of the date of the mediation request, (2) for statute of limitations reasons, or (3) to seek a preliminary injunction or other

	
50

	
 

	
provisional judicial relief, if in its sole judgment an injunction or other provisional relief is necessary to avoid irreparable damage or

	
51

	
 

	
to preserve the status quo. Despite such action, the Parties shall continue to try to resolve the dispute by mediation.

	
52

	
 

	
 

	
53

	
 

	
E.    ☐ (Optional Provision- Forfeiture Penalties)

	
54

	
 

	
If the Non-Operators fail to meet the deadline in Section I.5.C, any unresolved exceptions that were not addressed by the Non­

	
55

	
 

	
Operators within one (1) year following receipt of the last substantive response of the Operator shall be deemed to have been

	
56

	
 

	
withdrawn by the Non-Operators. If the Operator fails to meet the deadlines in Section I.5.B or I.5.C, any unresolved exceptions that

	
57

	
 

	
were not addressed by the Operator within one ( 1) year following receipt of the audit report or receipt of the last substantive response

	
58

	
 

	
of the Non-Operators, whichever is later, shall be deemed to have been granted by the Operator and adjustments shall be made,

	
59

	
 

	
without interest, to the Joint Account.

	
60

	
 

	
 

	
61

	
6.

	
APPROVAL BY PARTIES

	
62

	
 

	
 

	
63

	
 

	
A.    GENERAL MATTERS

	
64

	
 

	
 

	
65

	
 

	
Where an approval or other agreement of the Parties or Non-Operators is expressly required under other Sections of this Accounting

	
66

	
 

	
Procedure and if the Agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, the

 

 

 

 

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COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

 

	
1

	
 

	
Operator shall notify all Non-Operators of the Operator's proposal and the agreement or approval of a majority in interest of the

	
2

	
 

	
Non-Operators shall be controlling on all Non-Operators.

	
3

	
 

	
 

	
4

	
 

	
This Section I.6.A applies to specific situations of limited duration where a Party proposes to change the accounting for charges from

	
5

	
 

	
that prescribed in this Accounting Procedure. This provision does not apply to amendments to this Accounting Procedure, which are

	
6

	
 

	
covered by Section I.6.B.

	
7

	
 

	
 

	
8

	
B.

	
AMENDMENTS

	
9

	
 

	
 

	
10

	
 

	
If the Agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, this Accounting

	
11

	
 

	
Procedure can be amended by an affirmative vote of    One     (  1  ) or more Parties, one of which is the Operator,

	
12

	
 

	
having a combined working interest of at least     Seventy Six      percent   ( 76 %), which approval shall be binding on all Parties,

	
13

	
 

	
provided, however, approval of at least one (1) Non-Operator shall be required.

	
14

	
 

	
 

	
15

	
C.

	
AFFILIATES

	
16

	
 

	
 

	
17

	
 

	
For the purposes of administering the voting procedures in Section I.6.A and I.6.B, if Parties to this Agreement are Affiliates of each

	
18

	
 

	
other, then such Affiliates shall be combined and treated as a single Party having the combined working interest or Participating

	
19

	
 

	
Interest of such Affiliates.

	
20

	
 

	
 

	
21

	
 

	
For the purposes of administering the voting procedures in Section I.6.A, if a Non-Operator is an Affiliate of the Operator, votes

	
22

	
 

	
under Section I.6.A shall require the majority in interest of the Non-Operator(s) after excluding the interest of the Operator's

	
23

	
 

	
Affiliate.

	
24

	
 

	
 

	
25

	
 

	
 II. DIRECT CHARGES

	
26

	
 

	
 

	
27

	
 

	
The Operator shall charge the Joint Account with the following items:

	
28

	
 

	
 

	
29

	
1.

	
RENTALS AND ROYALTIES

	
30

	
 

	
 

	
31

	
 

	
Lease rentals and royalties paid by the Operator, on behalf of all Parties, for the Joint Operations.

	
32

	
 

	
 

	
33

	
2.

	
LABOR

	
34

	
 

	
 

	
35

	
 

	
A.    Salaries and wages, including incentive compensation programs as set forth in COPAS MFI-37 ("Chargeability of Incentive

	
36

	
 

	
Compensation Programs"), for

	
37

	
 

	
 

	
38

	
 

	
(1)   Operator's field employees directly employed On-site in the conduct of Joint Operations,

	
39

	
 

	
 

	
40

	
 

	
(2)   Operator's employees directly employed on Shore Base Facilities, Offshore Facilities, or other facilities serving the Joint

	
41

	
 

	
Property if such costs are not charged under Section II.6 (Equipment and Facilities Furnished by Operator) or are not a

	
42

	
 

	
function covered under Section III (Overhead),

	
43

	
 

	
 

	
44

	
 

	
(3)   Operator's employees providing First Level Supervision,

	
45

	
 

	
 

	
46

	
 

	
(4)   Operator's employees providing On-site Technical Services for the Joint Property if such charges are excluded from the

	
47

	
 

	
overhead rates in Section III (Overhead),

	
48

	
 

	
 

	
49

	
 

	
(5)   Operator's employees providing Off-site Technical Services for the Joint Property if such charges are excluded from the

	
50

	
 

	
overhead rates in Section III (Overhead).

	
51

	
 

	
 

	
52

	
 

	
Charges for the Operator's employees identified in Section II.2.A may be made based on the employee's actual salaries and wages,

	
53

	
 

	
or in lieu thereof, a day rate representing the Operator's average salaries and wages of the employee's specific job category.

	
54

	
 

	
 

	
55

	
 

	
Charges for personnel chargeable under this Section II.2.A who are foreign nationals shall not exceed comparable compensation paid

	
56

	
 

	
to an equivalent U.S. employee pursuant to this Section II.2, unless otherwise approved by the Parties pursuant to Section

	
57

	
 

	
I.6.A (General Matters).

	
58

	
 

	
 

	
59

	
 

	
B.     Operator's cost of holiday, vacation, sickness, and disability benefits, and other customary allowances paid to employees whose

	
60

	
 

	
salaries and wages are chargeable to the Joint Account under Section II.2.A, excluding severance payments or other termination

	
61

	
 

	
allowances. Such costs under this Section II.2.B may be charged on a "when and as-paid basis" or by "percentage assessment" on the

	
62

	
 

	
amount of salaries and wages chargeable to the Joint Account under Section II.2.A. If percentage assessment is used, the rate shall

	
63

	
 

	
be based on the Operator's cost experience.

	
64

	
 

	
 

	
65

	
 

	
C.    Expenditures or contributions made pursuant to assessments imposed by governmental authority that are applicable to costs

	
66

	
 

	
chargeable to the Joint Account under Sections II.2.A and B

 

 

 

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COPAS 2005 Accounting Procedure

Recommended by COPAS

	
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D.    Personal Expenses of personnel whose salaries and wages are chargeable to the Joint Account under Section II.2.A when the

	
2

	
 

	
expenses are incurred in connection with directly chargeable activities.

	
3

	
 

	
 

	
4

	
 

	
E.    Reasonable relocation costs incurred in transferring to the Joint Property personnel whose salaries and wages are chargeable to the

	
5

	
 

	
Joint Account under Section 11.2.A. Notwithstanding the foregoing, relocation costs that result from reorganization or merger of a

	
6

	
 

	
Party, or that are for the primary benefit of the Operator, shall not be chargeable to the Joint Account. Extraordinary relocation

	
7

	
 

	
costs, such as those incurred as a result of transfers from remote locations, such as Alaska or overseas, shall not be charged to the

	
8

	
 

	
Joint Account unless approved by the Parties pursuant to Section I.6.A (General Matters).

	
9

	
 

	
 

	
10

	
 

	
F.    Training costs as specified in COPAS MFI-35 ("Charging of Training Costs to the Joint Account") for personnel whose salaries and

	
11

	
 

	
wages are chargeable under Section II.2.A. This training charge shall include the wages, salaries, training course cost, and Personal

	
12

	
 

	
Expenses incurred during the training session. The training cost shall be charged or allocated to the property or properties directly

	
13

	
 

	
benefiting from the training. The cost of the training course shall not exceed prevailing commercial rates, where such rates are

	
14

	
 

	
available.

	
15

	
 

	
 

	
16

	
 

	
G.   Operator's current cost of established plans for employee benefits, as described in COPAS MFI-27 ("Employee Benefits Chargeable

	
17

	
 

	
to Joint Operations and Subject to Percentage Limitation"), applicable to the Operator's labor costs chargeable to the Joint Account

	
18

	
 

	
under Sections II.2.A and B based on the Operator's actual cost not to exceed the employee benefits limitation percentage most

	
19

	
 

	
recently recommended by COPAS.

	
20

	
 

	
 

	
21

	
 

	
H.    Award payments to employees, in accordance with COPAS MFI-49 ("Awards to Employees and Contractors") for personnel whose

	
22

	
 

	
salaries and wages are chargeable under Section II.2.A.

	
23

	
 

	
 

	
24

	
3.

	
MATERIAL

	
25

	
 

	
 

	
26

	
 

	
Material purchased or furnished by the Operator for use on the Joint Property in the conduct of Joint Operations as provided under Section

	
27

	
 

	
IV (Material Purchases, Transfers, and Dispositions). Only such Material shall be purchased for or transferred to the Joint Property as

	
28

	
 

	
may be required for immediate use or is reasonably practical and consistent with efficient and economical operations. The accumulation

	
29

	
 

	
of surplus stocks shall be avoided.

	
30

	
 

	
 

	
31

	
4.

	
TRANSPORTATION

	
32

	
 

	
 

	
33

	
 

	
A.   Transportation of the Operator's, Operator's Affiliate's, or contractor's personnel necessary for Joint Operations.

	
34

	
 

	
 

	
35

	
 

	
B.    Transportation of Material between the Joint Property and another property, or from the Operator's warehouse or other storage point

	
36

	
 

	
to the Joint Property, shall be charged to the receiving property using one of the methods listed below. Transportation of Material

	
37

	
 

	
from the Joint Property to the Operator's warehouse or other storage point shall be paid for by the Joint Property using one of the

	
38

	
 

	
methods listed below:

	
39

	
 

	
 

	
40

	
 

	
(1)   If the actual trucking charge is less than or equal to the Excluded Amount the Operator may charge actual trucking cost or a

	
41

	
 

	
theoretical  charge from the Railway  Receiving  Point to the Joint Property.  The basis for the theoretical  charge is the per

	
42

	
 

	
hundred  weight  charge plus  fuel surcharges from the Railway Receiving  Point to  the Joint Property. The Operator  shall

	
43

	
 

	
consistently  apply the selected alternative.

	
44

	
 

	
 

	
45

	
 

	
(2)   If the actual trucking charge is greater than the Excluded Amount the Operator shall charge Equalized Freight. Accessorial

	
46

	
 

	
charges such as loading and unloading costs, split pick-up costs, detention, call out charges, and permit fees shall be charged

	
47

	
 

	
directly to the Joint Property and shall not be included when calculating the Equalized Freight.

	
48

	
 

	
 

	
49

	
5.

	
SERVICES

	
50

	
 

	
 

	
51

	
 

	
The cost of contract services, equipment, and utilities used in the conduct of Joint Operations, except for contract services, equipment, and

	
52

	
 

	
utilities covered by Section III (Overhead), or Section II.7 (Affiliates), or excluded under Section II.9 (Legal Expense). Awards paid to

	
53

	
 

	
contractors shall be chargeable pursuant to COPAS MFl-49 ("Awards to Employees and Contractors").

	
54

	
 

	
 

	
55

	
 

	
The costs of third party Technical Services are chargeable to the extent excluded from the overhead rates under Section III (Overhead).

	
56

	
 

	
 

	
57

	
6.

	
EQUIPMENT AND FACILITIES FURNISHED BY OPERATOR

	
58

	
 

	
 

	
59

	
 

	
In the absence of a separately negotiated agreement, equipment and facilities furnished by the Operator will be charged as follows:

	
60

	
 

	
 

	
61

	
 

	
A.   The Operator  shall charge the Joint Account  for use of  Operator-owned  equipment  and facilities, including but  not limited to

	
62

	
 

	
production facilities, Shore Base Facilities, Offshore Facilities, and Field Offices, at rates commensurate with the costs of ownership

	
63

	
 

	
and operation. The cost of Field Offices shall be chargeable to the extent the Field Offices provide direct service to personnel who

	
64

	
 

	
are chargeable pursuant  to Section II.2.A (Labor). Such rates may include labor, maintenance,  repairs, other operating expense,

	
65

	
 

	
insurance, taxes, depreciation using straight line depreciation method, and interest on gross investment less accumulated depreciation

	
66

	
 

	
not to exceed       ten          percent (    10   %) per annum; provided, however, depreciation shall not be charged when the

 

 

 

 

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COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

 

	
1

	
 

	
equipment and facilities investment have been fully depreciated. The rate may include an element of the estimated cost for

	
2

	
 

	
abandonment, reclamation, and dismantlement. Such rates shall not exceed the average commercial rates currently prevailing in the

	
3

	
 

	
immediate area of the Joint Property.

	
4

	
 

	
 

	
5

	
 

	
B.    In lieu of charges in Section II.6.A above, the Operator may elect to use average commercial rates prevailing in the immediate area

	
6

	
 

	
of the Joint Property, less twenty percent (20%). If equipment and facilities are charged under this Section II.6.B, the Operator shall

	
7

	
 

	
adequately document and support commercial rates and shall periodically review and update the rate and the supporting

	
8

	
 

	
documentation. For automotive equipment, the Operator may elect to use rates published by the Petroleum Motor Transport

	
9

	
 

	
Association (PMTA) or such other organization recognized by COPAS as the official source of rates.

	
10

	
 

	
 

	
11

	
7.

	
AFFILIATES

	
12

	
 

	
 

	
13

	
 

	
A.   Charges for an Affiliate's goods and/or services used in operations requiring an AFE or other authorization from the Non-Operators

	
14

	
 

	
may be made without the approval of the Parties provided (i) the Affiliate is identified and the Affiliate goods and services are

	
15

	
 

	
specifically detailed in the approved AFE or other authorization, and (ii) the total costs for such Affiliate's goods and services billed

	
16

	
 

	
to such individual project do not exceed     $  200.000.00          If the total costs for an Affiliate's goods and services charged to such

	
17

	
 

	
individual project are not specifically detailed in the approved AFE or authorization or exceed such amount, charges for such

	
18

	
 

	
Affiliate shall require approval of the Parties, pursuant to Section I.6.A (General Matters).

	
19

	
 

	
 

	
20

	
 

	
B.    For an Affiliate's goods and/or services used in operations not requiring an AFE or other authorization from the Non-Operators,

	
21

	
 

	
charges for such Affiliate's goods and services shall require approval of the Parties, pursuant to Section I.6.A (General Matters), if the

	
22

	
 

	
charges exceed   $  200.000.00       in a given calendar year.

	
23

	
 

	
 

	
24

	
 

	
C.   The cost of the Affiliate's goods or services shall not exceed average commercial rates prevailing in the area of the Joint Property,

	
25

	
 

	
unless the Operator obtains the Non-Operators' approval of such rates. The Operator shall adequately document and support

	
26

	
 

	
commercial rates and shall periodically review and update the rate and the supporting documentation; provided, however,

	
27

	
 

	
documentation of commercial rates shall not be required if the Operator obtains Non-Operator approval of its Affiliate's rates or

	
28

	
 

	
charges prior to billing Non-Operators for such Affiliate's goods and services. Notwithstanding the foregoing, direct charges for

	
29

	
 

	
Affiliate-owned communication facilities or systems shall be made pursuant to Section II.12 (Communications).

	
30

	
 

	
 

	
31

	
 

	
If the Parties fail to designate an amount in Sections II.7.A or II.7.B, in each instance the amount deemed adopted by the Parties as a

	
32

	
 

	
result of such omission shall be the amount established as the Operator's expenditure limitation in the Agreement. If the Agreement

	
33

	
 

	
does not contain an Operator's expenditure limitation, the amount deemed adopted by the Parties as a result of such omission shall be

	
34

	
 

	
zero dollars ($ 0.00).

	
35

	
 

	
 

	
36

	
8.

	
DAMAGES AND LOSSES TO JOINT PROPERTY

	
37

	
 

	
 

	
38

	
 

	
All costs or expenses necessary for the repair or replacement of Joint Property resulting from damages or losses incurred, except to the

	
39

	
 

	
extent such damages or losses result from a Party's or Parties' gross negligence or willful misconduct, in which case such Party or Parties

	
40

	
 

	
shall be solely liable.

	
41

	
 

	
 

	
42

	
 

	
The Operator shall furnish the Non-Operator written notice of damages or losses incurred as soon as practicable after a report has been

	
43

	
 

	
received by the Operator.

	
44

	
 

	
 

	
45

	
9.

	
LEGAL EXPENSE

	
46

	
 

	
 

	
47

	
 

	
Recording fees and costs of handling, settling, or otherwise discharging litigation, claims, liens and /title and regulatory work incurred in or resulting from

	
48

	
 

	
operations under the Agreement, or necessary to protect or recover the Joint Property, to the extent permitted under the Agreement. Costs

	
49

	
 

	
of the Operator's or Affiliate's legal staff or outside attorneys, including fees and expenses, are not chargeable unless approved by the

	
50

	
 

	
Parties pursuant to Section I.6.A (General Matters) or otherwise provided for in the Agreement.

	
51

	
 

	
 

	
52

	
 

	
Notwithstanding the foregoing paragraph, costs for procuring abstracts, fees paid to outside attorneys for title examinations (including

	
53

	
 

	
preliminary, supplemental, shut-in royalty opinions, division order title opinions), and curative work shall be chargeable to the extent

	
54

	
 

	
permitted as a direct charge in the Agreement.

	
55

	
 

	
 

	
56

	
 

	
 

	
57

	
10.

	
TAXES AND PERMITS

	
58

	
 

	
 

	
59

	
 

	
All taxes and permitting fees of every kind and nature, assessed or levied upon or in connection with the Joint Property, or the production

	
60

	
 

	
therefrom, and which have been paid by the Operator for the benefit of the Parties, including penalties and interest, except to the extent the

	
61

	
 

	
penalties and interest result from the Operator's gross negligence or willful misconduct.

	
62

	
 

	
 

	
63

	
 

	
If ad valorem taxes paid by the Operator are based in whole or in part upon separate valuations of each Party's working interest, then

	
64

	
 

	
notwithstanding any contrary provisions, the charges to the Parties will be made in accordance with the tax value generated by each Party's

	
65

	
 

	
working interest.

	
66

	
 

	
 

 

 

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Recommended by COPAS

 

 

	
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Costs of tax consultants or advisors, the Operator's employees, or Operator's Affiliate employees in matters regarding ad valorem or other

	
2

	
 

	
tax matters, are not permitted as direct charges unless approved by the Parties pursuant to Section I.6.A (General Matters).

	
3

	
 

	
 

	
4

	
 

	
Charges to the Joint Account resulting from sales/use tax audits, including extrapolated amounts and penalties and interest, are permitted,

	
5

	
 

	
provided the Non-Operator shall be allowed to review the invoices and other underlying source documents which served as the basis for

	
6

	
 

	
tax charges and to determine that the correct amount of taxes were charged to the Joint Account. If the Non-Operator is not permitted to

	
7

	
 

	
review such documentation, the sales/use tax amount shall not be directly charged unless the Operator can conclusively document the

	
8

	
 

	
amount owed by the Joint Account.

	
9

	
 

	
 

	
10

	
11.

	
INSURANCE

	
11

	
 

	
 

	
12

	
 

	
Net premiums paid for insurance required to be carried for Joint Operations for the protection of the Parties. If Joint Operations are

	
13

	
 

	
conducted at locations where the Operator acts as self-insurer in regard to its worker's compensation and employer's liability insurance

	
14

	
 

	
obligation, the Operator shall charge the Joint Account manual rates for the risk assumed in its self-insurance program as regulated by the

	
15

	
 

	
jurisdiction governing the Joint Property. In the case of offshore operations in federal waters, the manual rates of the adjacent state shall be

	
16

	
 

	
used for personnel performing work On-site, and such rates shall be adjusted for offshore operations by the U.S. Longshoreman and

	
17

	
 

	
Harbor Workers (USL&H) or Jones Act surcharge, as appropriate.

	
18

	
 

	
 

	
19

	
12.

	
 COMMUNICATIONS

	
20

	
 

	
 

	
21

	
 

	
Costs of acquiring, leasing, installing. operating. repairing. and maintaining communication facilities or systems, including satellite, radio

	
22

	
 

	
and microwave facilities, between the Joint Property and the Operator's office(s) directly responsible for field operations in accordance

	
23

	
 

	
with the provisions of COPAS MFI-44 ("Field Computer and Communication Systems"). If the communications facilities or systems

	
24

	
 

	
serving the Joint Property are Operator-owned, charges to the Joint Account shall be made as provided in Section II.6 (Equipment and

	
25

	
 

	
Facilities Furnished by Operator). If the communication facilities or systems serving the Joint Property are owned by the Operator's

	
26

	
 

	
Affiliate, charges to the Joint Account shall not exceed average commercial rates prevailing in the area of the Joint Property. The Operator

	
27

	
 

	
shall adequately document and support commercial rates and shall periodically review and update the rate and the supporting

	
28

	
 

	
documentation.

	
29

	
 

	
 

	
30

	
13.

	
ECOLOGICAL, ENVIRONMENTAL, AND SAFETY

	
31

	
 

	
 

	
32

	
 

	
Costs incurred for Technical Services and drafting to comply with ecological, environmental and safety Laws or standards recommended by

	
33

	
 

	
Occupational Safety and Health Administration (OSHA) or other regulatory authorities. All other labor and functions incurred for

	
34

	
 

	
ecological, environmental and safety matters, including management, administration, and permitting, shall be covered by Sections II.2

	
35

	
 

	
(Labor), II.5 (Services), or Section III (Overhead), as applicable.

	
36

	
 

	
 

	
37

	
 

	
Costs to provide or have available pollution containment and removal equipment plus actual costs of control and cleanup and resulting

	
38

	
 

	
responsibilities of oil and other spills as well as discharges from permitted outfalls as required by applicable Laws, or other pollution

	
39

	
 

	
containment and removal equipment deemed appropriate by the Operator for prudent operations, are directly chargeable.

	
40

	
 

	
 

	
41

	
14.

	
ABANDONMENT AND RECLAMATION

	
42

	
 

	
 

	
43

	
 

	
Costs incurred for abandonment and reclamation of the Joint Property, including costs required by lease agreements or by Laws.

	
44

	
 

	
 

	
45

	
15.

	
OTHER EXPENDITURES

	
46

	
 

	
 

	
47

	
 

	
Any other expenditure not covered or dealt with in the foregoing provisions of this Section II (Direct Charges), or in Section III

	
48

	
 

	
(Overhead) and which is of direct benefit to the Joint Property and is incurred by the Operator in the necessary and proper conduct of the

	
49

	
 

	
Joint Operations. Charges made under this Section II.1.5 shall require approval of the Parties, pursuant to Section I.6.A (General Matters).

	
50

	
 

	
 

	
51

	
 

	
 

	
52

	
 

	
III. OVERHEAD

	
53

	
 

	
 

	
54

	
 

	
As compensation for costs not specifically identified as chargeable to the Joint Account pursuant to Section II (Direct Charges), the Operator

	
55

	
 

	
shall charge the Joint Account in accordance with this Section III.

	
56

	
 

	
 

	
57

	
 

	
Functions included in the overhead rates regardless of whether performed by the Operator, Operator's Affiliates or third parties and regardless

	
58

	
 

	
of location, shall include, but not be limited to, costs and expenses of:

	
59

	
 

	
 

	
60

	
 

	
▪  warehousing, other than for warehouses that are jointly owned under this Agreement

	
61

	
 

	
▪  design and drafting (except when allowed as a direct charge under Sections II.13, III..I.A.(ii), and III.2, Option B)

	
62

	
 

	
▪  inventory costs not chargeable under Section V (Inventories of Controllable Material)

	
63

	
 

	
▪  procurement

	
64

	
 

	
▪  administration

	
65

	
 

	
▪  accounting and auditing

	
66

	
 

	
▪  gas dispatching and gas chart integration

 

 

9

 

 

	

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

 

	
1

	
 

	
▪  human resources

	
2

	
 

	
▪  management

	
3

	
 

	
▪  supervision not directly charged under Section II.2 (Labor)

	
4

	
 

	
▪  legal services not directly chargeable under Section II.9 (Legal Expense)

	
5

	
 

	
▪  taxation, other than those costs identified as directly chargeable under Section II.10 (Taxes and Permits)

	
6

	
 

	
▪  preparation and monitoring of permits and certifications; preparing regulatory reports; appearances before or meetings with

	
7

	
 

	
governmental agencies or other authorities having jurisdiction over the Joint Property, other than On-site inspections; reviewing,

	
8

	
 

	
interpreting, or submitting contents on or lobbying with respect to Laws or proposed Laws.

	
9

	
 

	
 

	
10

	
 

	
Overhead charges shall include the salaries or wages plus applicable payroll burdens, benefits, and Personal Expenses of personnel performing

	
11

	
 

	
overhead functions, as well as office and other related expenses of overhead functions.

	
12

	
 

	
 

	
13

	
1.

	
OVERHEAD-DRILLING AND PRODUCING OPERATIONS

	
14

	
 

	
 

	
15

	
 

	
As compensation for costs incurred but not chargeable under Section II (Direct Charges) and not covered by other provisions of this

	
16

	
 

	
Section III, the Operator shall charge on either:

	
17

	
 

	
 

	
18

	
 

	
 ☑   (Alternative 1) Fixed Rate Basis, Section III.1.B.

	
19

	
 

	
 ☐   (Alternative 2) Percentage Basis, Section III.1.C.

	
20

	
 

	
 

	
21

	
A.

	
TECHNICAL SERVICES

	
22

	
 

	
 

	
23

	
 

	
(i)     Except as otherwise provided in Section II.13 (Ecological Environmental and Safety) and Section III.2 (Overhead - Major

	
24

	
 

	
Construction and Catastrophe), or by approval of the Parties pursuant to Section I.6.A (General Matters), the salaries, wages,

	
25

	
 

	
related payroll burdens and benefits, and Personal Expenses for On-site Technical Services, including third party Technical

	
26

	
 

	
Services:

	
27

	
 

	
 

	
28

	
 

	
☑   (Alternative 1- Direct) shall be charged direct to the Joint Account.

	
29

	
 

	
 

	
30

	
 

	
 ☐  (Alternative 2 - Overhead) shall be covered by the overhead rates.

	
31

	
 

	
 

	
32

	
 

	
(ii)    Except as otherwise provided in Section II.13 (Ecological, Environmental, and Safety) and Section III.2 (Overhead - Major

	
33

	
 

	
Construction and Catastrophe), or by approval of the Parties pursuant to Section I.6.A (General Matters), the salaries, wages,

	
34

	
 

	
related payroll burdens and benefits, and Personal Expenses for Off-site Technical Services, including third party Technical

	
35

	
 

	
Services:

	
36

	
 

	
 

	
37

	
 

	
☐   (Alternative 1 - All Overhead) shall be covered by the overhead rates.

	
38

	
 

	
 

	
39

	
 

	
☐   (Alternative 2 - All Direct) shall be charged direct to the Joint Account.

	
40

	
 

	
 

	
41

	
 

	
☑   (Alternative 3 - Drilling Direct) shall be charged direct to the Joint Account, only to the extent such Technical Services

	
42

	
 

	
are directly attributable to drilling, redrilling, deepening, or sidetracking operations, through completion, temporary

	
43

	
 

	
abandonment, or abandonment if a dry hole. Off-site Technical Services for all other operations, including workover,

	
44

	
 

	
recompletion, abandonment of producing wells, and the construction or expansion of fixed assets not covered by Section

	
45

	
 

	
III.2 (Overhead · Major Construction and Catastrophe) shall be covered by the overhead rates.

	
46

	
 

	
 

	
47

	
 

	
Notwithstanding anything to the contrary in this Section III, Technical Services provided by Operator's Affiliates are subject to limitations

	
48

	
 

	
set forth in Section II.7 (Affiliates). Charges for Technical personnel performing non-technical work shall not be governed by this Section

	
49

	
 

	
III.1 .A. but instead governed by other provisions of this Accounting Procedure relating to the type of work being performed.

	
50

	
 

	
 

	
51

	
B.

	
OVERHEAD-FIXED RATE BASIS

	
52

	
 

	
 

	
53

	
 

	
(1)   The Operator shall charge the Joint Account at the following rates per well per month:

	
54

	
 

	
 

	
55

	
 

	
Drilling Well Rate per month $7,500.00 (prorated for less than a full month) / for wells drilled to a TVD of 4,200 feet or more.  5,000.00 for well drilled to a TVD of less than 4,200 feet

	
56

	
 

	
 

	
57

	
 

	
Producing Well Rate per month $750.00  for wells drilled to a TVD of 4,200 feet or more.  500.00 for wells drilled to a TVD of less than 4,200 feet.

	
58

	
 

	
 

	
59

	
 

	
(2)  Application of Overhead-Drilling Well Rate shall be as follows:

	
60

	
 

	
 

	
61

	
 

	
(a)    Charges for onshore drilling wells shall begin on the spud date /location work begins and terminate on the date the drilling and/or completion

	
62

	
 

	
equipment used on the well is released, whichever occurs later. Charges for offshore and inland waters drilling wells shall

	
63

	
 

	
begin on the date the drilling or completion equipment arrives on location and terminate on the date the drilling or completion

	
64

	
 

	
equipment moves off location, or is released, whichever occurs first. No charge shall be made during suspension of drilling

	
65

	
 

	
and/or completion operations for fifteen (15) or more consecutive calendar days.

	
66

	
 

	
 

 

 

10

 

	

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

 

	
1

	
 

	
(b)   Charges for any well undergoing any type of workover, recompletion, and/or abandonment for a period of five (5) or more

	
2

	
 

	
consecutive work-days shall be made at the Drilling Well Rate. Such charges shall be applied for the period from date

	
3

	
 

	
operations, with rig or other units used in operations, commence through date of rig or other unit release, except that no charges

	
4

	
 

	
shall be made during suspension of operations for fifteen (15) or more consecutive calendar days.

	
5

	
 

	
 

	
6

	
 

	
(3)  Application of Overhead-Producing Well Rate shall be as follows:

	
7

	
 

	
 

	
8

	
 

	
(a)   An active well that is produced, injected into for recovery or disposal, or used to obtain water supply to support operations for

	
9

	
 

	
any portion of the month shall be considered as a one-well charge for the entire month.

	
10

	
 

	
 

	
11

	
 

	
(b)   Each active completion in a multi-completed well shall be considered as a one-well charge provided each completion is

	
12

	
 

	
considered a separate well by the governing regulatory authority.

	
13

	
 

	
 

	
14

	
 

	
(c)   A one-well charge shall be made for the month in which plugging and abandonment operations are completed on any well,

	
15

	
 

	
unless the Drilling Well Rate applies, as provided in Sections III.1.B.(2)(a) or (b). This one-well charge shall be made whether

	
16

	
 

	
or not the well has produced.

	
17

	
 

	
 

	
18

	
 

	
(d)  An active gas well shut in because of overproduction or failure of a purchaser, processor, or transporter to take production shall

	
19

	
 

	
be considered as a one-well charge provided the gas well is directly connected to a permanent sales outlet.

	
20

	
 

	
 

	
21

	
 

	
(e)   Any well not meeting the criteria set forth in Sections III.1.B.(3) (a), (b), (c), or (d) shall not qualify for a producing overhead

	
22

	
 

	
charge.

	
23

	
 

	
 

	
24

	
 

	
(4)  The well rates shall be adjusted on the first day of April each year following the effective date of the Agreement; provided,

	
25

	
 

	
however, if this Accounting Procedure is attached to or otherwise governing the payout accounting under a farmout agreement, the

	
26

	
 

	
rates shall be adjusted on the first day of April each year following the effective date of such farmout agreement. The adjustment

	
27

	
 

	
shall be computed by applying the adjustment factor most recently published by COPAS. The adjusted rates shall be the initial or

	
28

	
 

	
amended rates agreed to by the Parties increased or decreased by the adjustment factor described herein, for each year from the

	
29

	
 

	
effective date of such rates, in accordance with COPAS MFI-47 ("Adjustment of Overhead Rates").

	
30

	
 

	
 

	
31

	
C.

	
OVERHEAD-PERCENTAGE BASIS

	
32

	
 

	
 

	
33

	
 

	
(1)  Operator shall charge the Joint Account at the following rates:

	
34

	
 

	
 

	
35

	
 

	
(a)   Development Rate ______ percent (_____ ) % of the cost of development of the Joint Property, exclusive of costs

	
36

	
 

	
provided under Section II.9 (Legal Expense) and all Material salvage credits.

	
37

	
 

	
 

	
38

	
 

	
(b)   Operating Rate _________percent (_____%) of the cost of operating the Joint Property, exclusive of costs

	
39

	
 

	
provided under Sections II.1 (Rentals and Royalties) and II.9 (Legal Expense); all Material salvage credits; the value

	
40

	
 

	
of substances purchased for enhanced recovery; all property and ad valorem taxes, and any other taxes and assessments that

	
41

	
 

	
are levied, assessed, and paid upon the mineral interest in and to the Joint Property.

	
42

	
 

	
 

	
43

	
 

	
(2)  Application of Overhead-Percentage Basis shall be as follows:

	
44

	
 

	
 

	
45

	
 

	
(a)   The Development Rate shall be applied to all costs in connection with:

	
46

	
 

	
 

	
47

	
 

	
[i]     drilling, redrilling, sidetracking, or deepening of a well

	
48

	
 

	
[ii]    a well undergoing plugback or workover operations for a period of five (5) or more consecutive work-days

	
49

	
 

	
[iii]   preliminary expenditures necessary in preparation for drilling

	
50

	
 

	
[iv]   expenditures incurred in abandoning when the well is not completed as a producer

	
51

	
 

	
[v]    construction or installation of fixed assets, the expansion of fixed assets and any other project clearly discernible as a

	
52

	
 

	
 fixed asset, other than Major Construction or Catastrophe as defined in Section lli.2 (Overhead-Major Construction

	
53

	
 

	
 and Catastrophe).

	
54

	
 

	
 

	
55

	
 

	
(b)   The Operating Rate shall be applied to all other costs in connection with Joint Operations, except those subject to Section III.2

	
56

	
 

	
(Overhead-Major Construction and Catastrophe).

	
57

	
 

	
 

	
58

	
2.

	
OVERHEAD-MAJOR CONSTRUCTION AND CATASTROPHE

	
59

	
 

	
 

	
60

	
 

	
To compensate the Operator for overhead costs incurred in connection with a Major Construction project or Catastrophe, the Operator

	
61

	
 

	
shall either negotiate a rate prior to the beginning of the project, or shall charge the Joint Account for overhead based on the following

	
62

	
 

	
rates for any Major Construction project in excess of the Operator's expenditure limit under the Agreement, or for any Catastrophe

	
63

	
 

	
regardless of the amount. If the Agreement to which this Accounting Procedure is attached does not contain an expenditure limit, Major

	
64

	
 

	
Construction Overhead shall be assessed for any single Major Construction project costing in excess of $100,000 gross.

	
65

	
 

	
 

	
66

	
 

	
 

 

 

 

 

11

 

	

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

 

 

 

	
1

	
 

	
Major Construction shall mean the construction and installation of fixed assets, the expansion of fixed assets, and any other project clearly

	
2

	
 

	
discernible as a fixed asset required for the development and operation of the Joint Property, or in the dismantlement, abandonment,

	
3

	
 

	
removal, and restoration of platforms, production equipment, and other operating facilities.

	
4

	
 

	
 

	
5

	
 

	
Catastrophe is defined as a sudden calamitous event bringing damage, loss, or destruction to property or the environment, such as an oil

	
6

	
 

	
spill, blowout, explosion, fire, storm, hurricane, or other disaster. The overhead rate shall be applied to those costs necessary to restore the

	
7

	
 

	
Joint Property to the equivalent condition that existed prior to the event.

	
8

	
 

	
 

	
9

	
 

	
A.  If the Operator absorbs the engineering, design and drafting costs related to the project:

	
10

	
 

	
 

	
11

	
 

	
(1)  5.0 % of total costs if such costs are less than $!00,000; plus

	
12

	
 

	
 

	
13

	
 

	
(2)   3.0 % of total costs in excess of $100,000 but less than $1,000,000; plus

	
14

	
 

	
 

	
15

	
 

	
(3)   2.0 % of total costs in excess of $1,000,000.

	
16

	
 

	
 

	
17

	
 

	
B.   If the Operator charges engineering, design and drafting costs related to the project directly to the Joint Account:

	
18

	
 

	
 

	
19

	
 

	
(1)   5.0 % of total costs if such costs are less than $!00,000; plus

	
20

	
 

	
 

	
21

	
 

	
(2)   3.0 % of total costs in excess of $100,000 but less than $1,000,000; plus

	
22

	
 

	
 

	
23

	
 

	
(3)   2.0 % of total costs in excess of $1,000,000.

	
24

	
 

	
 

	
25

	
 

	
Total cost shall mean the gross cost of any one project. For the purpose of this paragraph, the component parts of a single Major

	
26

	
 

	
Construction project shall not be treated separately, and the cost of drilling and workover wells and purchasing and installing pumping

	
27

	
 

	
units and downhole artificial lift equipment shall be excluded. For Catastrophes, the rates shall be applied to all costs associated with each

	
28

	
 

	
single occurrence or event.

	
29

	
 

	
 

	
30

	
 

	
On each project, the Operator shall advise the Non-Operator(s) in advance which of the above options shall apply.

	
31

	
 

	
 

	
32

	
 

	
For the purposes of calculating Catastrophe Overhead, the cost of drilling relief wells, substitute wells, or conducting other well operations

	
33

	
 

	
directly resulting from the catastrophic event shall be included. Expenditures to which these rates apply shall not be reduced by salvage or

	
34

	
 

	
insurance recoveries. Expenditures that qualify for Major Construction or Catastrophe Overhead shall not qualify for overhead under any

	
35

	
 

	
other overhead provisions.

	
36

	
 

	
 

	
37

	
 

	
In the event of any conflict between the provisions of this Section III.2 and the provisions of Sections II.2 (Labor), II.5 (Services), or II.7

	
38

	
 

	
(Affiliates), the provisions of this Section III.2 shall govern.

	
39

	
 

	
 

	
40

	
3.

	
AMENDMENT OF OVERHEAD RATES

	
41

	
 

	
 

	
42

	
 

	
The overhead rates provided for in this Section III may be amended from time to time if, in practice, the rates are found to be insufficient

	
43

	
 

	
Or excessive, in accordance with the provisions of Section I.6.B (Amendments).

	
44

	
 

	
 

	
45

	
 

	
 

	
46

	
 

	
IV. MATERIAL PURCHASES, TRANSFERS, AND DISPOSITIONS

	
47

	
 

	
 

	
48

	
 

	
The Operator is responsible for Joint Account Material and shall make proper and timely charges and credits for direct purchases, transfers, and

	
49

	
 

	
dispositions. The Operator shall provide all Material for use in the conduct of Joint Operations; however, Material may be supplied by the Non-

	
50

	
 

	
Operators, at the Operator's option. Material furnished by any Party shall be furnished without any express or implied warranties as to quality,

	
51

	
 

	
fitness for use, or any other matter.

	
52

	
 

	
 

	
53

	
1.

	
DIRECT PURCHASES

	
54

	
 

	
 

	
55

	
 

	
Direct purchases shall be charged to the Joint Account at the price paid by the Operator after deduction of all discounts received. The

	
56

	
 

	
Operator shall make good faith efforts to take discounts offered by suppliers, but shall not be liable for failure to take discounts except to

	
57

	
 

	
the extent such failure was the result of the Operator's gross negligence or willful misconduct A direct purchase shall be deemed to occur

	
58

	
 

	
when an agreement is made between an Operator and a third party for the acquisition of Material for a specific well site or location.

	
59

	
 

	
Material provided by the Operator under "vendor stocking programs," where the initial use is for a Joint Property and title of the Material

	
60

	
 

	
does not pass from the manufacturer, distributor, or agent until usage, is considered a direct purchase. If Material is found to be defective

	
61

	
 

	
or is returned to the manufacturer, distributor, or agent for any other reason, credit shall be passed to the Joint Account within sixty (60)

	
62

	
 

	
days after the Operator has received adjustment from the manufacturer, distributor, or agent.

	
63

	
 

	
 

	
64

	
 

	
 

	
65

	
 

	
 

	
66

	
 

	
 

	
 

	
 

	
 

 

 

12

 

	

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

 

	
1

	
2.

	
 TRANSFERS

	
2

	
 

	
 

	
3

	
 

	
A transfer is determined to occur when the Operator (i) furnishes Material from a storage facility or from another operated property, (ii) has

	
4

	
 

	
assumed liability for the storage costs and changes in value, and (iii) has previously secured and held title to the transferred Material.

	
5

	
 

	
Similarly, the removal of Material from the Joint Property to a storage facility or to another operated property is also considered a transfer;

	
6

	
 

	
provided, however, Material that is moved from the Joint Property to a storage location for safe-keeping pending disposition may remain

	
7

	
 

	
charged to the Joint Account and is not considered a transfer. Material shall be disposed of in accordance with Section IV.3 (Disposition of

	
8

	
 

	
Surplus) and the Agreement to which this Accounting Procedure is attached.

	
9

	
 

	
 

	
10

	
 

	
A.   PRICING

	
11

	
 

	
 

	
12

	
 

	
The value of Material transferred to/from the Joint Property should generally reflect the market value on the date of physical transfer.

	
13

	
 

	
Regardless of the pricing method used, the Operator shall make available to the Non-Operators sufficient documentation to verify the

	
14

	
 

	
Material valuation. When higher than specification grade or size tubulars are used in the conduct of Joint Operations, the Operator

	
15

	
 

	
shall charge the Joint Account at the equivalent price for well design specification tubulars, unless such higher specification grade or

	
16

	
 

	
sized tubulars are approved by the Parties pursuant to Section l.6.A (General Matters). Transfers of new Material will be priced

	
17

	
 

	
using one of the following pricing methods; provided, however, the Operator shall use consistent pricing methods, and not alternate

	
18

	
 

	
between methods for the purpose of choosing the method most favorable to the Operator for a specific transfer:

	
19

	
 

	
 

	
20

	
 

	
(1)   Using published prices in effect on date of movement as adjusted by the appropriate COPAS Historical Price Multiplier (HPM)

	
21

	
 

	
or prices provided by the COPAS Computerized Equipment Pricing System (CEPS).

	
22

	
 

	
 

	
23

	
 

	
(a)    For oil country tubulars and line pipe, the published price shall be based upon eastern mill carload base prices (Houston,

	
24

	
 

	
Texas, for special end) adjusted as of date of movement, plus transportation cost as defined in Section IV.2.B (Freight).

	
25

	
 

	
 

	
26

	
 

	
(b)   For other Material, the published price shall be the published list price in effect at date of movement, as listed by a Supply

	
27

	
 

	
Store nearest the Joint Property where like Material is normally available, or point of manufacture plus transportation

	
28

	
 

	
costs as defined in Section IV.2.B (Freight).

	
29

	
 

	
 

	
30

	
 

	
(2)   Based on a price quotation from a vendor that reflects a current realistic acquisition cost.

	
31

	
 

	
 

	
32

	
 

	
(3)   Based on the amount paid by the Operator for like Material in the vicinity of the Joint Property within the previous twelve (12)

	
33

	
 

	
months from the date of physical transfer.

	
34

	
 

	
 

	
35

	
 

	
(4)   As agreed to by the Participating Parties for Material being transferred to the Joint Property, and by the Parties owning the

	
36

	
 

	
Material for Material being transferred from the Joint Property.

	
37

	
 

	
 

	
38

	
 

	
B.  FREIGHT

	
39

	
 

	
 

	
40

	
 

	
Transportation costs shall be added to the Material transfer price using the method prescribed by the COPAS Computerized

	
41

	
 

	
Equipment Pricing System (CEPS). If not using CEPS, transportation costs shall be calculated as follows:

	
42

	
 

	
 

	
43

	
 

	
(1)  Transportation costs for oil country tubulars and line pipe shall be calculated using the distance from eastern mill to the

	
44

	
 

	
Railway Receiving Point based on the carload weight basis as recommended by the COPAS MFI-38 ("Material Pricing

	
45

	
 

	
Manual") and other COPAS MFIs in effect at the time of the transfer.

	
46

	
 

	
 

	
47

	
 

	
(2)  Transportation costs for special mill items shall be calculated from that mill's shipping point to the Railway Receiving Point.

	
48

	
 

	
For transportation costs from other than eastern mills, the 30,000-pound interstate truck rate shall be used. Transportation costs

	
49

	
 

	
for macaroni tubing shall be calculated based on the interstate truck rate per weight of tubing transferred to the Railway

	
50

	
 

	
Receiving Point.

	
51

	
 

	
 

	
52

	
 

	
(3)  Transportation costs for special end tubular goods shall be calculated using the interstate truck rate from Houston, Texas, to the

	
53

	
 

	
Railway Receiving Point.

	
54

	
 

	
 

	
55

	
 

	
(4)  Transportation costs for Material other than that described in Sections IV.2.B.(l) through (3), shall be calculated from the

	
56

	
 

	
Supply Store or point of manufacture, whichever is appropriate, to the Railway Receiving Point

	
57

	
 

	
 

	
58

	
 

	
Regardless of whether using CEPS or manually calculating transportation costs, transportation costs from the Railway Receiving Point

	
59

	
 

	
to the Joint Property are in addition to the foregoing, and may be charged to the Joint Account based on actual costs incurred. All

	
60

	
 

	
transportation costs are subject to Equalized Freight as provided in Section II.4 (Transportation) of this Accounting Procedure.

	
61

	
 

	
 

	
62

	
 

	
C.  TAXES

	
63

	
 

	
 

	
64

	
 

	
Sales and use taxes shall be added to the Material transfer price using either the method contained in the COPAS Computerized

	
65

	
 

	
Equipment Pricing System (CEPS) or the applicable tax rate in effect for the Joint Property at the time and place of transfer. In either

	
66

	
 

	
case, the Joint Account shall be charged or credited at the rate that would have governed had the Material been a direct purchase.

 

 

13

 

	

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

 

	
1

	
D.

	
CONDITTON

	
2

	
 

	
 

	
3

	
 

	
(1)   Condition "A" - New and unused Material in sound and serviceable condition shall be charged at one hundred percent (100%)

	
4

	
 

	
of the price as determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes). Material transferred from the

	
5

	
 

	
Joint Property that was not placed in service shall be credited as charged without gain or loss; provided, however, any unused

	
6

	
 

	
Material that was charged to the Joint Account through a direct purchase will be credited to the Joint Account at the original

	
7

	
 

	
cost paid less restocking fees charged by the vendor. New and unused Material transferred from the Joint Property may be

	
8

	
 

	
credited at a price other than the price originally charged to the Joint Account provided such price is approved by the Parties

	
9

	
 

	
owning such Material, pursuant to Section I.6.A (General Matters). All refurbishing costs required or necessary to return the

	
10

	
 

	
Material to original condition or to correct handling, transportation, or other damages will be borne by the divesting property.

	
11

	
 

	
The Joint Account is responsible for Material preparation, handling, and transportation costs for new and unused Material

	
12

	
 

	
charged to the Joint Property either through a direct purchase or transfer. Any preparation costs incurred, including any internal

	
13

	
 

	
or external coating and wrapping, will be credited on new Material provided these services were not repeated for such Material

	
14

	
 

	
for the receiving property.

	
15

	
 

	
 

	
16

	
 

	
(2)   Condition "B" - Used Material in sound and serviceable condition and suitable for reuse without reconditioning shall be priced

	
17

	
 

	
by multiplying the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes) by seventy-five percent

	
18

	
 

	
(75%).

	
19

	
 

	
 

	
20

	
 

	
Except as provided in Section IV.2.0(3), all reconditioning costs required to return the Material to Condition "B" or to correct

	
21

	
 

	
handling, transportation or other damages will be borne by the divesting property.

	
22

	
 

	
 

	
23

	
 

	
If the Material was originally charged to the Joint Account as used Material and placed in service for the Joint Property, the

	
24

	
 

	
Material will be credited at the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C (Taxes) multiplied

	
25

	
 

	
by sixty-five percent (65%).

	
26

	
 

	
 

	
27

	
 

	
Unless otherwise agreed to by the Parties that paid for such Material, used Material transferred from the Joint Property that was

	
28

	
 

	
not placed in service on the property shall be credited as charged without gain or loss.

	
29

	
 

	
 

	
30

	
 

	
(3)   Condition "C" - Material that is not in sound and serviceable condition and not suitable for its original function until after

	
31

	
 

	
reconditioning shall be priced by multiplying the price determined in Sections IV.2.A (Pricing), IV.2.B (Freight), and IV.2.C

	
32

	
 

	
(Taxes) by fifty percent (50%).

	
33

	
 

	
 

	
34

	
 

	
The cost of reconditioning may be charged to the receiving property to the extent Condition "C" value, plus cost of

	
35

	
 

	
reconditioning, does not exceed Condition "B" value.

	
36

	
 

	
 

	
37

	
 

	
(4)   Condition ''D" - Material that (i) is no longer suitable for its original purpose but useable for some other purpose, (ii) is

	
38

	
 

	
obsolete, or (iii) does not meet original specifications but still has value and can be used in other applications as a substitute for

	
39

	
 

	
 items with different specifications, is considered Condition "D" Material. Casing, tubing, or drill pipe used as line pipe shall be

	
40

	
 

	
priced as Grade A and B seamless line pipe of comparable size and weight. Used casing, tubing, or drill pipe utilized as line

	
41

	
 

	
pipe shall be priced at used line pipe prices. Casing, tubing, or drill pipe used as higher pressure service lines than standard line

	
42

	
 

	
pipe, e.g., power oil lines, shall be priced under normal pricing procedures for casing, tubing, or drill pipe. Upset tubular goods

	
43

	
 

	
shall be priced on a non-upset basis. For other items, the price used should result in the Joint Account being charged or credited

	
44

	
 

	
with the value of the service rendered or use of the Material, or as agreed to by the Parties pursuant to Section 1.6.A (General

	
45

	
 

	
Matters).

	
46

	
 

	
 

	
47

	
 

	
(5)   Condition "E" -Junk shall be priced at prevailing scrap value prices.

	
48

	
 

	
 

	
49

	
E.

	
OTHER PRICING PROVISIONS

	
50

	
 

	
 

	
51

	
 

	
(1)   Preparation Costs

	
52

	
 

	
 

	
53

	
 

	
Subject to Section II (Direct Charges) and Section III (Overhead) of this Accounting Procedure, costs incurred by the Operator

	
54

	
 

	
in making Material serviceable including inspection, third party surveillance services, and other similar services will be charged

	
55

	
 

	
to the Joint Account at prices which reflect the Operator's actual costs of the services. Documentation must be provided to the

	
56

	
 

	
Non-Operators upon request to support the cost of service. New coating and/or wrapping shall be considered a component of

	
57

	
 

	
the Materials and priced in accordance with Sections IV.l (Direct Purchases) or IV.2.A (Pricing), as applicable. No charges or

	
58

	
 

	
credits shall be made for used coating or wrapping. Charges and credits for inspections shall be made in accordance with

	
59

	
 

	
COPAS MFl-38 ("Material Pricing Manual").

	
60

	
 

	
 

	
61

	
 

	
(2)   Loading and Unloading Costs

	
62

	
 

	
 

	
63

	
 

	
Loading and unloading costs related to the movement of the Material to the Joint Property shall be charged in accordance with

	
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the methods specified in COPAS MFI-38 ("Material Pricing Manual").

	
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14

 

 

	

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

	
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3.

	
DISPOSITION OF SURPLUS

	
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Surplus Material is that Material, whether new or used, that is no longer required for Joint Operations. The Operator may purchase, but

	
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shall be under no obligation to purchase, the interest of the Non-Operators in surplus Material.

	
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Dispositions for the purpose of this procedure are considered to be the relinquishment of title of the Material from the Joint Property to

	
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either a third party, a Non-Operator, or to the Operator. To avoid the accumulation of surplus Material, the Operator should make good

	
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faith efforts to dispose of surplus within twelve (12) months through buy/sale agreements, trade, sale to a third party, division in kind, or

	
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other dispositions as agreed to by the Parties.

	
10

	
 

	
 

	
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Disposal of surplus Materials shall be made in accordance with the terms of the Agreement to which this Accounting Procedure is

	
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attached. If the Agreement contains no provisions governing disposal of surplus Material, the following terms shall apply:

	
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▪     The Operator may, through a sale to an unrelated third party or entity, dispose of surplus Material having a gross sale value that

	
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is less than or equal to the Operator's expenditure limit as set forth in the Agreement to which this Accounting Procedure is

	
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attached without the prior approval of the Parties owning such Material.

	
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▪      If the gross sale value exceeds the Agreement expenditure limit, the disposal must be agreed to by the Parties owning such

	
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Material.

	
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▪      Operator may purchase surplus Condition "A" or "B" Material without approval of the Parties owning such Material, based on

	
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the pricing methods set forth in Section IV.2 (Transfers).

	
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▪      Operator may purchase Condition "C' Material without prior approval of the Parties owning such Material if the value of the

	
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Materials, based on the pricing methods set forth in Section IV.2 (Transfers), is less than or equal to the Operator's expenditure

	
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limitation set forth in the Agreement. The Operator shall provide documentation supporting the classification of the Material as

	
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Condition C.

	
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▪      Operator may dispose of Condition "D" or "E" Material under procedures normally utilized by Operator without prior approval

	
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of the Parties owning such Material.

	
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SPECIAL PRICING PROVISIONS

	
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A.    PREMIUM PRICING

	
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Whenever Material is available only at inflated prices due to national emergencies, strikes, government imposed foreign trade

	
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restrictions, or other unusual causes over which the Operator has no control, for direct purchase the Operator may charge the Joint

	
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Account for the required Material at the Operator's actual cost incurred in providing such Material, making it suitable for use, and

	
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moving it to the Joint Property. Material transferred or disposed of during premium pricing situations shall be valued in accordance

	
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with Section IV.2 (Transfers) or Section IV.3 (Disposition of Surplus), as applicable.

	
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B.     SHOP-MADE ITEMS

	
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Items fabricated by the Operator's employees, or by contract laborers under the direction of the Operator, shall be priced using the

	
45

	
 

	
value of the Material used to construct the item plus the cost of labor to fabricate the item. If the Material is from the Operator's

	
46

	
 

	
scrap or junk account, the Material shall be priced at either twenty-five percent (25%) of the current price as determined in Section

	
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IV.2.A  (Pricing)  or  scrap  value,  whichever  is  higher.  In  no  event  shall  the  amount  charged  exceed  the  value  of  the  item

	
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commensurate with its use.

	
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C.     MILL REJECTS

	
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Mill rejects purchased as "limited service" casing or tubing shall be priced at eighty percent (80%) of K-55/J-55 price as determined in

	
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Section IV.2 (Transfers). Line pipe converted to casing or tubing with casing or tubing couplings attached shall be priced as K-55/J-

	
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55 casing or tubing at the nearest size and weight.

	
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V. INVENTORIES OF CONTROLLABLE MATERIAL

	
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The Operator shall maintain records of Controllable Material charged to the Joint Account, with sufficient detail to perform physical inventories.

	
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Adjustments to the Joint Account by the Operator resulting from a physical inventory of Controllable Material shall be made within twelve (12)

	
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months following the taking of the inventory or receipt of Non-Operator inventory report. Charges and credits for overages or shortages will be

	
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valued for the Joint Account in accordance with Section IV.2 (Transfers) and shall be based on the Condition "B" prices in effect on the date of

	
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physical inventory unless the inventorying Parties can provide sufficient evidence another Material condition applies.

	
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15

 

	

	
COPAS 2005 Accounting Procedure

Recommended by COPAS

 

 

	
1

	
1.

	
DIRECTED INVENTORIES

	
2

	
 

	
 

	
3

	
 

	
Physical inventories shall be performed by the Operator upon written request of a majority in working interests of the Non-Operators

	
4

	
 

	
(hereinafter, "directed inventory"); provided, however, the Operator shall not be required to perform directed inventories more frequently

	
5

	
 

	
than once every five (5) years. Directed inventories shall be commenced within one hundred eighty (180) days after the Operator receives

	
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written notice that a majority in interest of the Non-Operators has requested the inventory. All Parties shall be governed by the results of

	
7

	
 

	
any directed inventory.

	
8

	
 

	
 

	
9

	
 

	
Expenses of directed inventories will be borne by the Joint Account; provided, however, costs associated with any post-report follow-up

	
10

	
 

	
work in settling the inventory will be absorbed by the Party incurring such costs. The Operator is expected to exercise judgment in keeping

	
11

	
 

	
expenses within reasonable limits. Any anticipated disproportionate or extraordinary costs should be discussed and agreed upon prior to

	
12

	
 

	
commencement of the inventory. Expenses of directed inventories may include the following:

	
13

	
 

	
 

	
14

	
 

	
A.   A per diem rate for each inventory person, representative of actual salaries, wages, and payroll burdens and benefits of the personnel

	
15

	
 

	
performing the inventory or a rate agreed to by the Parties pursuant to Section I.6.A (General Matters). The per diem rate shall also

	
16

	
 

	
 be applied to a reasonable number of days for pre-inventory work and report preparation.

	
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B.   Actual transportation costs and Personal Expenses for the inventory team

	
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C.   Reasonable charges for report preparation and distribution to the Non-Operators.

	
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NON-DIRECTED INVENTORIES

	
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A.   OPERATOR INVENTORIES

	
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Physical inventories that are not requested by the Non-Operators may be performed by the Operator, at the Operator's discretion. The

	
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expenses of conducting such Operator-initiated inventories shall not be charged to the Joint Account.

	
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B.    NON-OPERATOR INVENTORIES

	
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Subject to the terms of the Agreement to which this Accounting Procedure is attached, the Non-Operators may conduct a physical

	
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inventory at reasonable times at their sole cost and risk after giving the Operator at least ninety (90) days prior written notice. The

	
33

	
 

	
Non-Operator inventory report shall be furnished to the Operator in writing within ninety (90) days of completing the inventory

	
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fieldwork.

	
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C.   SPECIAL INVENTORIES

	
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The expense of conducting inventories other than those described in Sections V.1 (Directed Inventories), V.2.A (Operator

	
39

	
 

	
Inventories), or V.2.B (Non-Operator Inventories), shall be charged to the Party requesting such inventory; provided, however,

	
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inventories required due to a change of Operator shall be charged to the Joint Account in the same manner as described in Section

	
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V.1 (Directed Inventories).

	
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16

EXHIBIT  "D"

Attached to and made a part of that certain Operating Agreement dated effective May 15, 2015, by and between PetroShare Corp as Operator, and Providence Energy Operators LLC as Non-Operator.

INSURANCE

As to all operations hereunder, Operator shall carry for the benefit and protection of the parties hereto the following insurance coverage:

	
    (i) 

	
Worker's Compensation or Employer's Liability Insurance as required by the laws of the states in which the operations are conducted.

	
    (ii)

	
Comprehensive General Liability Insurance, including contractual liability, with a combined single limit per occurrence of not less than $1,000,000 for bodily injury and property damage and a combined occurrence limit of $2,000,000.

	
   (iii)

	
Comprehensive Automobile Insurance, including hired and non-owned vehicles, with a combined single limit per occurrence of not less than $1,000,000 for bodily injury and property damage.

	
   (iv)

	
Liability Umbrella Insurance (excess of underlying insurance coverage mentioned above) with a combined limit per occurrence coverage of not less than $5,000,000.

The cost of the foregoing insurance coverage shall be charged to the parties pursuant to the Accounting Procedure (Exhibit "C") as follows: item (i) will be included in labor rates, items (ii) and (iv) will be charged to the joint account, and item (iii) is included in mileage rates.

If a Non-Operator wishes to obtain its own insurance coverage for any of the above categories, such party shall provide Operator with a certificate evidencing such coverage. In such event, Operator shall not invoice such party for its share of the cost of that particular coverage. Additionally, all such insurance coverages and all of the insurance coverages described above shall contain a waiver of subrogation in favor of all other parties hereto.

Each party may obtain its own well control or OEE insurance for its proportionate share of such obligation and provide Operator with a certificate evidencing such coverage. In the event a Non-Operator wishes to be covered under Operators OEE insurance, it shall give the Operator its written election to be covered under Operators policy and it shall be responsible for its proportionate share of such premiums and associated deductible expense and receive the coverage benefits as provided under such policy.

To the extent not covered by the aforementioned insurance, the liability of the parties hereto for damages or claims arising out of illness or personal injury to or death of any person or damage to or destruction or loss of property of any person or entity resulting from operations conducted hereunder shall be borne by the parties hereto in the proportions in which they bear the costs of such operations. Additionally, Operator shall not be liable to Non-Operator for damage to or for loss or destruction of jointly owned property from operations hereunder, unless such damage, loss, or destruction arises solely out of the gross negligence or willful misconduct of Operator.

 

 

 

EXHIBIT “C”

KINGDOM RESOURCES LLC SERVICES AGREEMENT

(copy to be attached)

 

 

  

14

EXHIBIT C TO PA

 

AGREEMENT FOR SERVICES

This Agreement for Services ("Agreement") is entered into as of this 12th day of November, 2014 between PetroShare Corp., a Colorado corporation ("Company"), and Kingdom Resources, LLC, a Colorado limited liability ("Contractor"), each of whom is sometimes referred to as a "Party" and both of whom are sometimes collectively referred to as the "Parties. " The purpose of this Agreement is to set forth the terms under which Contractor shall perform services for Company in acquiring oil and gas interests and the consideration that shall be given by Company to Contractor for performing those services.

ARTICLE  I-CONTRACTOR SERVICES

Contractor shall pursue the acquisition of oil and gas leases and/or other oil and gas interests in the Contract Area defined on Exhibit A to this Agreement, including but not limited to gathering title and leasehold information, securing the acquisition of fee, leasehold and other interests in oil and gas rights, ordering necessary abstracts of title, promptly submitting all necessary documentation concerning any acquisition or lease of such mineral rights to Company, and performing or obtaining all other services needed to secure such leases or other acquisitions of oil and gas mineral rights within the Contract Area, pursuant to Company's guidance.

Contractor further agrees to use reasonable efforts to assist Company with surface use negotiations on land located within the Contract Area that Company intends to operate, which assistance shall include without limitation securing potential drill sites and access to water for drilling operations based on ordinary, reasonable and customary arm's length terms.

ARTICLE II-RELATIONSHIP OF PARTIES

The relationship of Contractor to Company throughout the term of this Agreement shall be that of an Independent Contractor only, and it is understood and agreed that nothing in this Agreement makes, or shall be construed to make, Contractor an employee, agent or representative of the Company. Therefore, this Agreement does not give Company any authority or right to direct or control Contractor's actions and Contractor is fully responsible for determining when and how the services being provided pursuant to this Agreement will be performed. Contractor is also responsible for furnishing all supplies, equipment, and materials necessary to provide the services set forth in this Agreement. All persons engaged by Contractor to assist it in providing such services shall be employees or subcontractors of Contractor.

ARTICLE III - SUBCONTRACTORS

If Contractor determines that subcontractors are necessary to assist it in performing the services set forth herein, it may engage such subcontractors at its sole cost and expense, subject to the reimbursement provisions set forth herein. Contractor shall obtain from any such subcontractor a written agreement containing, at a minimum, terms substantially similar to those set forth herein, other than those relating to compensation to Contractor, and shall furnish an executed copy of any such agreement to Company upon request. Notwithstanding its decision to engage one or more subcontractors to assist it in performing services hereunder, Contractor shall remain primarily liable to Company for all of Contractor's obligations hereunder.

 

  

1

ARTICLE IV-STANDARD OF CARE

Contractor shall perform its services under this Agreement in accordance with the highest standards within the industry for the type of services provided herein, and shall comply with all applicable laws, regulations, orders and standards in providing services under this Agreement.

ARTICLE V-CONTRACTOR INSURANCE

Contractor shall be solely responsible for all of its own insurance and shall at all times maintain such types and amounts of insurance, including without limitation automobile, general liability and worker’s compensation insurance, as may be reasonably be required by Company. Contractor shall furnish to Company proof of required insurance upon request.

ARTICLE VI-CONFIDENTIALITY

Because the services contemplated by this Agreement relate to information that is highly proprietary and of considerable value to Company, Contractor agrees to hold all work­ related information, title information, areas of interest, maps, letters, memoranda, negotiations with companies or persons and all other materials, plans and conversations concerning the services performed hereunder strictly confidential while this Agreement is in effect and for a period of two (2) years after termination hereof.  Contractor shall obtain a like agreement from any subcontractors it retains to assist it in providing services under this Contract.

ARTICLE VII-PAYMENT AND AUDIT OF CONTRACTOR EXPENSES

Contractor agrees to pay all claims for labor, material, services and supplies furnished by Contractor and to take all reasonable precautions to ensure that no lawful lien or similar encumbrance is fixed upon any lease or other property of Company as a result of Contractor's negligence, willful misconduct, intentional act or misrepresentation. Company shall reimburse Contractor for such actual expenses it incurs with respect to any leases or other acquisitions approved and consummated under this Agreement, as set forth in Exhibit "B" hereto. Company shall have the right at any time within six (6) months after making any payment pursuant to this Article to audit any and all records, books and invoices related thereto, and this audit right shall survive the termination of this agreement.

ARTICLE VIII-PAYMENT OF ACQUISITION COSTS

Unless otherwise agreed by the Parties, all lease bonus or similar payments necessary to acquire fee, leasehold, royalty or other oil and gas interests under this Agreement shall be paid by means of Company sight drafts payable to the proper owner of the interest involved, by time drafts payable to such owners, or by such other method as may be agreed upon in writing by the Parties hereto. Any lease bonus or similar payments necessary to acquire fee, leasehold, royalty or other oil and gas interests under this Agreement advanced by Contractor shall be reimbursed as set forth in Exhibit C hereto.

 

  

2

ARTICLE IX-ACQUISITION DOCUMENTS

Company agrees that the form of lease attached hereto as Exhibit C, the form of lease assignment attached hereto as Exhibit D, and the form of Access and Damage Settlement Agreement attached hereto as Exhibit E may be used to lease oil and gas mineral rights in the Contract Area, and that any lease obtained using those forms shall be acceptable to Company, subject to the other provisions of this Agreement, including without limitation those concerning the acceptability of title to the mineral rights identified in any such lease. Company shall have the right to approve in advance of execution the form and terms of any agreement concerning the acquisition of oil and gas mineral rights by Contractor in the Contract Area not in the forms attached hereto as Exhibits C, D and E, subject to the other provisions of this Agreement, including without limitation those concerning the acceptability of title to the mineral rights identified in any such lease.

ARTICLE X–COMPENSATION

Contractor shall be entitled to compensation tor the acquisition of any lease or other oil and gas mineral rights in the Contract Area pursuant to the terms set forth in Exhibit "B" hereto.

ARTICLE X-CONTRACTOR TAX INDEMNITY

Contractor agrees to indemnify and hold Company, its parent, subsidiaries, and affiliates harmless from payment of all federal, state and local taxes, as well as the preparation and submission of all reports, returns and monies which may be imposed or required under Unemployment Insurance, Social Security, Workmen's Compensation, Federal or State Income Tax. Law and all other applicable laws, regulations and orders relative to any payments that Company makes to Contractor pursuant to this contract. If required by federal or state taxing laws, Company is authorized to withhold monies due to Contractor and remit same to such taxing authority.

ARTICLE XII-MUTUAL LIABILITY INDEMNITY

To the full extent permitted by applicable law, Contractor and Company shall indemnify, defend and hold each other, and their parents, subsidiaries, affiliates and all members, officers and employees thereof; harmless against all losses, expenses or judgments, including reasonable attorneys’ fees, arising out of or related to claims made by any third-parties as a result of actions taken by either of them in connection with the performance of this Agreement.  This obligation shall survive the termination of this Agreement.

3

ARTICLE XIII- CONTRACTOR ASSIGNMENT AND POST-TERMINATION

OBLIGATIONS

During the term of this Agreement and for a period of six (6) months after this Agreement terminates Contractor shall not acquire directly or indirectly for itself or anyone other than Company any fee interest, leasehold, royalty or other interest in or options upon lands or mineral rights within the Contract Area, without first obtaining the Company’s written consent, provided that if Company does not accept any lease obtained by Contractor within the Contract Area within five (S)business days of being offered such lease by Contractor, subject only to such standard conditions as acceptability of title to Company, then notwithstanding this provision Contractor shall have the right to offer that lease to other parties. If Contractor acquires any such interest in violation of this paragraph, upon Company's demand it shall assign such interest to Company on such form as Company may approve.

ARTICLE XIV-COMPANY POST-TERMINATION OBLIGATIONS

Following termination of this Agreement, whether upon the expiration of its Term or for cause, Company shall pay Contractor compensation, and shall reimburse Contractor for all lease acquisition expenses, as set forth in Exhibit B hereto, for all leases and other interests within the Contract Area that were identified to Company by Contractor prior to such termination and that are acquired by Company, either directly or indirectly, within six (6) months after the effective date of such termination.

ARTICLE XV-AUDIT OF CONTRACTOR

Company shall have the right to audit Contractor’s books and records relating to services performed hereunder. To facilitate such audit, Contractor shall retain its books and records made in any calendar year during the term of Agreement, for a period of two (2) years from the end of such calendar year. This obligation survives termination of this Agreement.  For the purpose of audit, Company and its authorized representatives or agents shall have the right to examine during business hours at Contractor's office and for a reasonable length of time all books, records, accounts, correspondence, instructions, specification, maps, receipts and memoranda insofar as they are pertinent to this Agreement.

ARTICLE XVI-AUDIT OF COMPANY

Contractor shall have the right to audit Company's books and records relating to any amounts payable to Contractor or that Contractor contends are payable pursuant to the terms of this Agreement  To facilitate such audit, Company shall retain its books and records made in any calendar year during the term of Agreement, for a period of two (2) years from the end of such calendar year. This obligation survives termination of this Agreement.  For the purpose of audit, Contractor and its authorized representatives or agents shall have the right to examine during business hours at Company’s office and for a reasonable length of time all books, record, accounts, correspondence, instructions, specification, maps, receipts and memoranda insofar as they are pertinent to this Agreement.

4

ARTICLE XVII-TERM AND TERMINATION

This Agreement shall commence on the Effective Date and shall expire on December 31, 2015, unless earlier terminated for cause pursuant to the terms hereof. Thereafter, the Parties may, each in its sole discretion, decide whether to renew this Agreement on the same or different terms. During the term of this Agreement it may be terminated for cause, consisting of actions by either Company or Contractor in material breach of this Agreement, provided that written notice of any such alleged breach is provided by the non-breaching party to the breaching party pursuant to the notice provisions of this Agreement, which notice shall set forth the alleged material breach or breaches insufficient detail to allow the breaching party to attempt to cure the alleged breach or breaches and (b) the non-breaching party fails to cure the breach or breaches within thirty (30) days of such notice or, in the case of a breach or breaches that cannot reasonably be cured within such thirty (30) day period, within a reasonable time for curing such breach or breaches.

ARTICLE XVIII-NOTICES

Unless otherwise provided herein, any notice given pursuant to the terms of this Agreement shall be in writing and shall be delivered by fax or email, with a copy in writing sent by regular mail, to the addresses set forth below, which addresses may be changed by notice sent to the addresses set forth below, with such changes to be effective only when actually received:

To Company:

PetroShare Corp.

7200 South Alton Way, Suite 8220

Centennial, CO 80112

Attn: Stephen J. Foley

(303) 770-6885 (Facsimile)

sfoley@PetroShareCorp.com

To Contractor:

Kingdom Resources LLC

7501 Village Square Drive Suite 205

Castle Pines, CO 80108

(303) 600-9695 (Facsimile)

gene@eguinoxland.com

5

With a copy to:

Peter C. Forbes, Esq.

Carver Schwarz McNab Kamper & Forbes, LLC

1600 Stout Street, Suite 1700

Denver.CO 80203

(303) 893-1829

(Facsimile)

pforbes@csmkf.com

ARTICLE XIX-ENTIRE AGREEMENT

All exhibits to this Agreement are expressly made a part of this Agreement, and the parties acknowledge and agreed that the written terms of this Agreement, including the Exhibits incorporated herein constitute the complete agreement of the Parties with respect to the subject matter hereof, that any prior oral agreements or understandings between the Parties concerning the subject matter hereof are merged herein, and that no oral agreements or understandings between the Parties concerning the subject matter hereof including any amendments hereto, shall be binding or enforceable unless agreed to in a writing signed by the Parties or their authorized representatives.

ARTICLE XX-AUTHORIZED SIGNATURES

The persons executing this Agreement below represent that they have been duly authorized to do so by the Party upon whose behalf they are executing this Agreement, and that this Agreement shall accordingly be binding on such Party.

ARTICLE XXI-EFFECTIVE DATE

This Agreement may be executed in counterparts, and shall be effective as of the date first written above upon execution by both Parties.

ARTICLE XXII-GOVERNING LAW

This Agreement shall be interpreted according to the laws of the State of Colorado applicable to contracts made within, and to be performed within, the State of Colorado. Venue for any action between the Parties arising out of or relating to this Agreement shall lie exclusively in the District Court for the City and County of Denver.

IN WITNESS WHEREOF, the Parties have executed this Agreement as of the date first written above.

(Signatures on following page]

6

PETROSHARE CORP

By:  /s/ Stephen J. Foley

Name:  Stephen J. Foley

Title:  CEO

KINGDOM RESOURCES LLC

By:  /s/ Gene Osborne

Name:  Gene Osborne      11/12/14

Title:  Manager

7

EXHIBIT A 

CONTRACT AREA

The project  area  subject to this Agreement shall be as follows:

Sections 1  through 36,  All,

Township 1 South, Range 67 West, 6th PM 

Adams County, Colorado

Any  other  areas  as  may be  added to by mutual agreement by virtue  of a revised Exhibit A.

EXHIBIT B

GUIDELINES FOR OIL & GAS LEASE AND MINERAL INTEREST ACQUISITIONS

It is the intent of these general guidelines to provide the basic terms and conditions which are acceptable to Company for acquisitions made hereunder.  All obligations hereunder will be performed in good faith.

	
I.

	
LEASING OIL & GAS MINERAL INTERESTS

		LESSEE OF RECORD:	Unless agreed otherwise, Contractor shall be the Lessee of record, as provided in the oil and gas lease form at Exhibit C.

		INTEREST TO BE LEASED:	Within the Contract Area, any unleased fee minerals, including fee minerals owned by affiliates of Contractor.·

		MAXIMUM LEASE BONUS:	No less than $2,000 and no more than $3,000 per net acre to Landowner unless agreed to otherwise by the Parties. Contractor shall receive a payment equal to 10% of Landowner Bonus (the "Standard Contractor Fee"), provided that the total of the Landowner Bonus and the Standard Contractor Fee will not exceed $3,000 without Company's consent.

Example No. 1: Landowner Bonus is $2,500. Company pays $2,500 to Landowner as Landowner Bonus and $250 to Contractor as Standard Contractor Fee.

Example No. 2: Landowner Bonus is $2,900. Company pays $2,900 to Landowner as Landowner Bonus. Because total of Landowner Bonus and Standard Contractor Fee would exceed $3,000, Company would only pay $100 to Contractor as Contractor Fee unless Company agrees otherwise.

	OIL & GAS LEASE TERMS:	3 year primary term with a minimum 2 year extension option at up to 75% of original lease bonus per net acre, or 5 + year primary lease term.

	LANDOWNER ROYALTY ("LOR"):	Maximum of 18.75%, unless agreed to otherwise by the Parties.

 

1

	NET REVENUE INTEREST (''NRI"):	Company shall own and/or retain no less than 79.00% NRI, proportionately reduced, except with respect to leases obtained from entities affiliated with Contractor, where Company shall own and/or retain no less than 80.00% NRI, proportionately reduced.

	OVERRIDING  ROYALTY INTEREST:	Company and Contractor agree as to the following overriding royalty interest ("ORRI'') distribution, proportionately reduced:

Unaffiliated  Leases-79. 00% Company NRI

	
•

	
Reign Energy Partners, LLC ("Reign"): 2.00% ORRI

	
•

	
Contractor: ORRI equal to positive difference between existing burdens of record, including Reign ORRI, and 21.00%.

	
•

	
Note: ORRI is subject to change if the Parties agree to an LOR greater than 18.75%, and could result in a net zero ORRI to Reign and/or Contractor.

Affiliated Leases-80. 00% Company NRI

	
•

	
Reign: 1.00% ORRI if LOR equals 18.75%; 2.00% ORRI if LOR is less than 18.75%.

	
•

	
Contractor: ORRI equal to positive difference between existing burdens of record, including Reign ORRI, and 20.00%:

	
•

	
Note: ORRI is subject to change if the Parties agree to an LOR greater than 18.75%, which could result in a net zero ORRI to Reign and/or Contractor.

  

		ORRI DISTRIBUTION METHOD: 	Scenario I-Contractor is Lessee: Contractor acquires and submits oil and gas lease(s) acceptable to the Company for recording, which names Contractor as Lessee. Within ten (10) business days of a return receipt of  recorded lease, Contractor shall assign all its right, title and interest in the subject lease(s) to Company in the form of Exhibit D, and reserve an ORRI into  Contractor. Within a reasonable time thereafter, Contractor shall assign an ORRI in accordance with the distribution amounts agreed to herein.

2

Scenario 2-Company is Lessee: Contractor acquires and submits oil and gas lease(s) acceptable to the Company for recording, which name Company as Lessee. Within ten (10) business days of a return receipt of recorded lease, Company shall execute an Assignment of ORRI to Reign and Contractor in accordance with the distribution amounts agreed to herein.

		NRI/ORRI EXAMPLES:	Example 1-15.00% LOR/Scenario 1-Unaffiliated: Contractor secures an oil and gas lease in the Contract Area in the name of Contractor from an unaffiliated entity, subject to a 15.00% LOR, and files it  of  record. Within ten (10) business days of return receipt of recorded lease, Contractor shall assign  Company all right, title and interest in said lease, delivering a 79.00% NRI, and reserve an ORRI equal to the positive difference between existing lease burdens and 21.00%. Within a reasonable time thereafter, Contractor shall assign a 2.00% ORRI to Reign, and retain a 4.00% ORRI. All interests being proportionately reduced.

Example 2-18.75% LOR/Scenario 1-Unaffiliated: Contractor secures an oil and gas lease in the Contract Area in the name of Contractor from an unaffiliated entity, subject to an 18.75% LOR, and files it of record. Within ten (10) business days of return receipt of recorded lease, Contractor shall assign Company all right, title and interest in said lease, delivering a 79.00% NRI, and reserve an ORRI equal to the positive difference between existing lease burdens and 21.00%. Within a reasonable time thereafter, Contractor shall assign a 2.00% ORRI to Reign, and retain a 0.25% ORRI. All interests being proportionately reduced.

Example 3-21.00% LOR/Scenario  1-Unaffiliated: Subject to prior agreement by the Parties, Contractor secures an oil and gas lease in the Contract Area in the name of Contractor from an unaffiliated party, subject to a 21.00% LOR, and files it of record. Within ten (10) business days of return receipt of recorded lease, Contractor shall assign Company all right, title and interest in said lease, delivering a 79.00% NRI, and reserve an

 

3

ORRI equal to the positive difference between existing lease burdens and 21.00%. Under this scenario, there is no ORRI reserved or distributed. All interests being proportionately reduced.

Example 4-18.75% LOR/Scenario I-Affiliated: Contractor secures an oil and gas lease in the Contract Area in the name of Contractor from an affiliated entity, subject to an 18.75% LOR, and files it of record. Within ten (10) business days of return receipt of recorded lease, Contractor shall assign Company all right, title and interest in said lease, delivering an 80.00% NRI, and reserve an ORRI equal to the positive difference between existing lease burdens and 20.00%. Within a reasonable time thereafter, Contractor shall assign a 1.00% ORRI to Reign, and retain a 0.25% ORRI. All interests being proportionately reduced.

	
II.

	
PURCHASING OIL & GAS MINERAL RIGHTS:

To be negotiated on a property by property basis, pursuant to subsequent parameters established by and between the Parties. If applicable, the above ORRI guidelines and understanding applies.

	
III.

	
PURCHASING OIL & GAS LEASEHOLD INTEREST:

To be negotiated on a property by property basis, pursuant to subsequent parameters established by and between the Parties. If applicable, the above ORRI guidelines and understanding applies.

	
IV.

	
COMPENSATION AND COST REIMBURSEMENT:

Company agrees to reimburse Contractor for actual documented land and title costs related to Company's leasing and mineral acquisition efforts within the Contract Area, based on customary industry standards which shall include, but not be limited to, subcontractor day rates and related costs, related attorney's fees, clerk and recorder fees, and as necessary, reasonable daily stipend for meals, mileage, and office supplies. Contractor shall undertake reasonable best efforts to control costs and work closely and transparently with Company towards that objective, relative to the task that Company has assigned to Contractor. Contractor shall submit an invoice for the costs related to the tasks assigned to Company on a bi-monthly basis, and Company agrees to make payment to Contractor within ten (10) days from receipt of said invoice.

Company and Contractor ·agree that the ORRI and Standard Contractor Fee, if any, as described herein are just and adequate compensation for Contractor's services, paid by Company in lieu of a Contractor day-rate.

 

4

Company further agrees to pay all landowner lease bonus payments, lease option or extension payments, surface use and access fees, and seismic costs associated with leasing or the acquisition of other mineral interests within the Contract Area pursuant to this Agreement

Any costs incurred by Contractor that are unrelated to Company's leasing and mineral acquisition efforts in the Contract Area, specifically costs attributable to the drilling and completion of oil and gas wells that would typically and proportionately be passed through to the Company's working interest partners if Company were the operator of such wells shall not be billed by Contractor to Company. However, in the event Company is the operator of wells being drilled and completed on lands located in the Contract Area and such lands coincide with materials that Contractor has in its possession that are attributable to the drilling and completion of an oil and gas well, but which Contractor has not previously billed to Company, then Company shall have the option to obtain said materials by paying the cost incurred by Contractor to obtain such materials.

5

Producers 88-Paid Up 

PetroShare Standard

 (Colorado Rev. 9/2014)

 

EXHIBIT C -FORM OF PAID-UP 

OIL AND GAS LEASE

This Lease Agreement. made and entered Into thisday of,by and between ---------------------------------- whose mailing address is _____________________________________________, hereinafter called Lessor (whether one or more), and PetroShare Corporation whose mailing address is Corporate 26, 7200 S.  Alton Way #B220, Centennial, Colorado, 80112 hereinafter called Lessee:

WITNESSETH:

1.    That Lessor, for and in consideration of Ten and More dollars ($10.00 & More) cash in hand paid, the receipt of Which Is hereby acknowledged, and the covenants and agreements hereinafter contained, has granted, demised, leased and let, and by these presents does grant, demise, lease and let exclusively unto the said Lessee, for the purpose of mining, exploring for (by geophysical and other methods), developing, producing, and marketing oil, gas and other substances covered hereby on the leased premises as hereinafter described, or lands pooled or unitized therewith, with rights of way and easements for ingress and egress from lands by Lessee, or its assignees, agents or permittees, as may be reasonably necessary to or associated with, but not limited to, the construction and maintenance of pipelines, telephone and electric fines, communication towers, tanks, ponds, pits, roadways, canals, water wells, disposal wells, injection wells, power stations, equipment, structures and other facilities deemed necessary by Lessee to produce, store, maintain, treat and transport said oil, gas, and other substances.

 

Being situated in the County of  Adams State of Colorado, described as follows, to-wit:

See Exhibit A-Contract Area

and containing _______________ acres, more or less.

In addition to the land described above, the term leased premises shall include to the same extent as if specifically described, lands riparian in  nature; lands acquired or retained by avulsion, accretion, relection or ether natural causes that result in changes to any boundaries or centerline of any bodies of water, as commonly defined regardless of size, traversing or adjoining the above described lands;  lands located in and under any road, easement or right-of-way traversing or adjoining the lands described above; any small strips or parcels of land adjacent or contiguous to the lands described above now owned or subsequently acquired, along with; any and all Interests of Lessor now owned or subsequently acquired through other methods regardless of the mineral or gross acreage assumed or stated in this Lease, and if Lessor owns or subsequently acquires more mineral acres than the amount upon which Lessor's bonus payment was calculated, lessor shall notify Lessee and afford Lessee the opportunity to pay Lessor for the additional mineral acres at the same rate of the original bonus payment  In consideration of that additional bonus payment, Lessor agrees to execute at Lessee's request any additional or supplemental instrument required to cure and more accurately describe the leased premises.  The term “1oil” as used herein shall Include and be defined as any liquid hydrocarbon substance that occurs naturally in the earth, including natural condensate recovered from gas without resort to manufacturing process. The term gas as used herein shall include and be defined as any substance which is produced in a natural state from the earth and maintains a gaseous or rarefied state at ordinary temperature and pressure conditions, including but not limited to, helium, carbon dioxide, coal-bed methane, nitrogen, sulphur, casinghead gas and other commercial gases.

2. Subject to the other provisions herein contained, this lease shall remain in force for a primary term of 6 years from the date hereof, and for as long thereafter as oil, gas or other substances covered hereby are produced in paying quantities from said leased promises or lands pooled therewith, or drilling operations are continuously prosecuted. "Drilling Operations" as used herein shall include operations for both the drilling of a new well and such other operations conducted In efforts to establish, resume or re­ establish production of oil and gas including, but not limited to, reworking, deepening or plugging back of a well or hole; such operations shall be considered “continuously prosecuted” if not more than one hundred twenty (120) days shall elapse between the completion and abandonment of one well or hole and the commencement of drilling operations on another well or hole; for a new well, drilling operations shall be deemed to have commenced when construction of the well site location or the road providing access to the wellsite location begins; for such other operations including but not limited to re-working, deepening, and plugging back of a well or hole, drilling operations shall be deemed to have commenced when Lessee has the requisite equipment in place at the wellsite.

3. If at the expiration of the primary term of this lease, oil, gas or other substances covered hereby are not being produced in paying quantities from the leased premises or lands pooled therewith but drilling operations are being continuously prosecuted, and such efforts results in production of oil, gas or other substances therefrom, then this lease shall continue in force for so long thereafter as oil, gas, or other substances continue to be produced from the leased premises or lands pooled therewith.

 

4. This Is a PAID-UP LEASE and all cash consideration first recited above have been paid  to Lessor in advance to keep this lease in full force and effect throughout the primary term. In consideration of the 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 pay any annual

rentals. Lessee may at any time or times during or after the primary tem, surrender this lease as to all or any portion of the lands described above, and as to any strata or stratum, by delivering to Lessor or by filing of record a release or releases, and be relieved of all obligations thereafter accruing to the acreage surrendered.

5. Lessee shall deliver to the credit of Lessor as royalty, free of cost but not applicable taxes, into the tanks or in the pipeline on the leased premises to which lessee may connect its wells the equal one-sixth (116th) part of all oil produced and saved from the leased premises, or Lessee may from time to time at its option purchase any royalty oil in its possession, paying the market price thereof prevailing for oil of like grade and gravity in the field where produced on the date of purchase. The Lessee shall pay Lessor, as royalty, on gas, including casinghead gas or other gaseous substances, produced from the leased premises and sold or used off the premises or used in the manufacture of gasoline or other products, the market value at the well of one-sixth (1/8th) of the gas sold or used, provided that on gas sold the royalty shall be one-sixth (1/6th) of the amount realized from such sale. The amount realized from the sale of gas shall be the price established by the gas sales contract entered into in good faith by lessee and a gas purchaser for such tem, and under such conditions as are customary in the industry. Price shall mean the net amount received by after lessee after giving effect to applicable regulatory orders and after application of any applicable price adjustments specified in such contract or regulatory orders. In the event lessee compresses, treats, purifies or dehydrates such gas (whether on or off the leased premises) or transports gas off the leased premises, lessee in computing royalty hereunder may deduct from such price a reasonable charge for each of such functions performed, including associated fuel.

6. If at any time, either before or after the expiration of the primary tem, of this lease, there is one or more wells capable of producing oil, gas or ether associated substances ln paying quantities on lands covered by this lease, or on other lands with which lands covered by this lease are pooled or unitized therewith, but such well or wells are shut-In, whether before or after production thereof, and this lease is not being maintained otherwise as provided herein, this lease shall not terminate (unless released by Lessee) and it shall nevertheless be considered that oil, gas or other associated substances are being produced from lands covered by this lease during all times while the well is so shut-In. Lessee shall use reasonable diligence to market the oil or gas capable of being produced from such shut-In well, but shall be under no obligation to market the oil or gas under terms, conditions or circumstances which, in Lessee's Judgment exercised in good faith, are unsatisfactory. When the lease is continued in force in this manner, Lessee shall pay or tender to the Lessor or Lessor's successors or assigns, an amount equal to $1.00 per year per net mineral acre covered by the lease. Such payments shall be made on or before the shut-in royalty payment date, as defined below, next occurring after the expiration of one hundred twenty (120) days from the date the well was shut-In, unless prior to such date oil or gas from the well Is sold or used or the lease is otherwise maintained as provided herein. In like manner, on or before each succeeding shut-In royalty payment date while such well remains shut-In, lessee shall make payment of shut-in royalty in the same amount and manner. The tem, shut-In royalty payment date• shall mean the anniversary date of this lease. Any shut-in royalty payment may be made by cash, draft or check, mailed or tendered at Lessor's address on or before the shut-In royalty date. Lessee's failure to pay or tender, or property pay or tender, any such sum shall render Lessee liable for the amount due but it shall not operate to terminate the Lease.

7. If Lessor owns less than the full mineral estate in all or any part of the leased premises, the royalties and shut-In royalties payable hereunder for any well or wells on any part of the leased premises or lands pooled therewith shall be reduced to the proportion that lessor's interest in such part of the leased premises bears to the full mineral estate in such part of the leased premises, calculated on a net acreage basis.

8. Lessee shall have the right to use, free of cost. gas, oil and water produced on said lands for Lessee's operation thereon, except water from wells and reservoirs of Lessor.

9. Lessee shall pay to lessor reasonable amounts for damages caused by its operations on said land.

 

10.  When requested by Lessor, Lessee shall bury its pipelines which traverse cultivated lands below plow depth.

 

11. No well shall be drilled nearer than five hundred (500) feet to an occupied dwelling on said premises, without written consent of Lessor.

12. Lessee shall have the right at any time (but not the obligation), to remove all improvements, machinery. and fixtures placed or erected by Lessee on said premises, including the right to pull and remove casings.

13. The interest of either Lessor or Lessee hereunder may be assigned, devised or otherwise transferred in whole or in part, by area and/or by depth or zone, and the rights and obligations of the parties hereunder shall extend to their respective heirs, devisees, executors, administrators, successors and assigns. No change in Lessor's ownership shall have the effect of reducing the rights or enlarging the obligations of Lessee hereunder. and no change in ownership shall be binding on Lessee until one hundred twenty (120) days after Lessee has been furnished the original or certified or duly authenticated copies of the documents establishing such change of ownership to the satisfaction of Lessee or until Lessor has satisfied the notification requirements contained in Lessee's usual form of division order. In the event of the death of any person entitled to shut-In royalties hereunder, Lessee may pay or tender such shut-In royalties to the credit of decedent or decedents estate in the depository designated above. If at any time two or more persons are entitled to shut-In royalties hereunder, Lessee may pay or tender such shut-In royalties to such persons or to their credit in the depository, either Jointly or separately in proportion to the interest which each owns.  If Lessee transfers its interests hereunder in whole or in part Lessee shall be relieved of all obligations thereafter arising with respect to the transferred Interest, and failure of the transferee to satisfy such obligations with respect to the transferred Interest shall not affect the rights of Lessee with respect to any interest not so transferred. If Lessee transfers a full or undivided Interest i in all or any portion of the area covered by this lease, the obligation to pay or tender shut-in royalties hereunder shall be divided between Lessee and the transferee in proportion to the net acreage interest in this lease then held by each.

14. Lessee, at its option, is hereby given the right and power at any time and from time to time as a recurring right. either before or after production, as to all or any part of the lands described herein and as to any one or more of the formations hereunder, to pool or unitize the leasehold estate and the mineral estate covered by this Lease with other land(s), lease or leases.  In the immediate vicinity for the production of oil and gas, or separately for the production of either, when in Lessee's judgment It is necessary or advisable to do so, and irrespective of other authority similar to this exists with respect to such other land(s), lease, or leases.  Likewise, units previously formed to include formations not producing oil or gas, may be reformed to exclude such non­ producing formations. The fanning or reforming of any unit shall be accomplished by Lessee executing and filing of record a declaration of such unitization or reformation, which declaration shall describe the unit. Any unit may include land upon which a well has theretofore been completed or upon which operations for drilling have therefore been commenced. Production, drilling or reworking operations or a well shut in for want of a market anywhere on a unit which includes all or a part of this lease shall be treated as If it were production, drilling or reworking operations or a well shut in for want of market under this lease.  In lieu of the royalties elsewhere herein specified, including shut-in gas royalties, Lessor shall receive on production from the unit so pooled royalties only on the portion of such production allocated to this lease; such allocation shall be that proportion of the unit production that the total number of surface acres covered by this lease and included in the unit bears to the total number of surface acres in such unit. In addition to the foregoing, lessee shall have the right to unitize, pool, or combine all or any part of the above described lands as to one or more of the formations thereunder with other land(s) in the same general area by entering into a cooperative or unit plan of development or operation approved by any governmental authority and, from time to time, with like approval, to modify, change or terminate any such plan or agreement and, in such event, the terms, conditions, and provisions of this lease shall be deemed modified to conform to the terms, conditions, and provisions of such approved cooperative or unit plan of development or operation and, particularly, all drilling and development requirements of this lease, express or implied, shall be satisfied by compliance with the drilling and development requirements of such plan or agreement. and this lease shall not terminate or expire during the life of such plan or agreement  In the event that said above described lands or any part thereof, shall hereafter be operated under such cooperative or unit plan of development or operation whereby the production therefrom is allocated to different portions of the land covered by said plan, then the production allocated to any particular tract of land shall, for the purpose of computing the royalties to be paid hereunder to Lessor, be regarded as having been produced from the particular tract of land to which it is allocated and not to any other tract of land; and the royalty payments to be made hereunder to Lessor shall be based upon production only as so allocated.

15. In the event that Lessor, during the primary term of this lease, receives a bona fide offer which Lessor is willing to accept from any party offering to purchase from Lessor a lease covering any or all of the substances covered by this lease and covering all or a portion of the land described herein, with the lease becoming effective upon expiration of this lease, Lessor hereby agrees to notify Lessee in writing of said offer immediately, including in the notice the name and address of the offeror, the price offered and all other pertinent terms and conditions of the offer. Lessee, for a period of fifteen (15) days after receipt of the notice, shall have the prior and preferred right and option to purchase the lease or part thereof or interest therein, covered by the offer at the price and according to the terms and conditions specified in the offer.

16. Lessee's obligations and covenants hereunder, whether express or implied, shall be subject to all federal and state, county or municipal laws, executive orders, rules and regulations and Lessee's obligations and covenants by Lessee hereunder, whether express or implied, shall be suspended at the time or from time to time as compliance with such obligations and covenants Is prevented or hindered by or is in conflict with federal, state, county, or municipal laws, rules, regulations or executive orders asserted as official by or under public authority claiming jurisdiction, or Act of God, adverse field, weather, or market conditions, inability to obtain materials in the open market or transportation thereof, wars, strikes, lockouts, riots, or other conditions or circumstances not wholly controlled by Lessee, and this lease shall not be terminated in whole or in part, nor Lessee held liable for damages for failure to comply with any such obligations or covenants if compliance therewith is prevented or hindered by or is in conflict with any of the foregoing eventualities. The time during which Lessee shall be prevented from conducting, drilling or reworking operations during the primary term of this lease, under the contingencies above stated, shall be added to the primary term of the lease.

17. No litigation shall be initiated by Lessor with respect to any breach or default by Lessee hereunder, for a period of at least ninety days (90) days after Lessor has given Lessee written notice fully describing the breach or default, and then only If Lessee fails to remedy the breach or default, within such period. In the event the matter is litigated and there is a final Judicial determination that a breach or default has occurred, this lease shall not be forfeited or canceled in whole or in part unless Lessee is given a reasonable time after said Judicial determination to remedy the breach or default and Lessee fails to do so.

18. Lessor hereby warrants and agrees to defend the title to the lands described above, and agrees that the lessee. at its option, shall have the right at any time to pay for Lessor, any mortgage, taxes or other liens existing, levied or assessed on or against the above described lands in the event of default of payment by Lessor and be subrogated to the rights of the holder thereof, and Lessor hereby agrees that any such payments made by Lessee for the Lessor may be deducted from any amounts of money which may become due the Lessor under the terms of this lease.

IN WITNESS WHEREOF, this lease is executed to be effective as of the date first written above, but upon execution shall be binding on the signatory and the signatory's heirs, devisees, executors, administrators, successors and assigns, whether or not this lease has been executed by all parties herein above named as Lessor.

ACKNOWLEDGMENT

 

	
STATE OF _________________

	
)

	
 

	
) ss.

	
COUNTY OF _______________

	
)

BE IT REMEMBERED, that on this ______ day of ______ day of ______________, 20_____, before me, a Notary Public in and for said County and State, personally appeared _________________, known to me to be the identical person(s) described in and who executed the within and foregoing instrument as his/her free and voluntary act and deed for the uses and purposes therein set forth.

IN WITNESS WHEREOF, I have hereunto set my hand an affixed my Official Seal the day and year first above written.

 

	 		
	
 

	
 

	
Notary Public

	
SEAL

	
 

	
 

	
 

	
 

	
Residing at ____________________________________________

	
 

	
 

	
 

My commission expires: __________________________________

  

WHEN RECORDED, MAIL TO:

Kingdom Resources, LLC

Address:

EXHIBIT D -FORM OF OIL AND GAS LEASE ASSIGNMENT

 

ACKNOWLEDGMENT

 

	
STATE OF COLORADO

	
)

	
 

	
)  KNOW ALL MEN BY THESE PRESENTS:

	
COUNTY OF DOUGLAS

	
)

 

THAT for the sum of Ten Dollars ($10.00) and other good and valuable consideration paid to it, the receipt and sufficiency of which are hereby acknowledged, KINGDOM RESOURCES, LLC, a Colorado limited liability company, whose address is 7501 Village Square Drive, Suite 205, Castle Pines, Colorado 80108 (hereinafter referred to as "Assignor") has GRANTED, SOLD, TRANSFERRED, ASSIGNED, and CONVEYED and by these presents does GRANT, SELL, TRANSFER, ASSIGN, and CONVEY unto PETROSHARE CORPORATION, a Colorado corporation, whose address is Corporate 25, 7200 S. Alton Way, #B220, Centennial, CO 80112 (hereinafter referred to as "Assignee"), all of Assignor's right, title and interest in and to the oil, gas, and mineral lease(s) set forth on Exhibit "A" attached hereto, insofar and only insofar as said lease(s) cover the lands described on Exhibit "A" (the "Leases"), all being located in Adams County, Colorado.

 

Reserving unto Assignor an overriding royalty interest in and to such leases to KINGDOM RESOURCES, LLC equal to the positive difference between existing lease burdens of record and _____ percent (___%) of all oil, gas and other hydrocarbons produced, saved and marketed from the Leases hereby assigned, and further reserving unto REIGN ENERGY PARTNERS, LLC an overriding royalty interest in and to such leases equal to the positive difference between  existing lease burdens of record and _____ percent (___%) of all oil, gas and other hydrocarbons produced, saved and marketed from the Leases hereby assigned. The foregoing reserved overriding royalties and all other terms and conditions of this Assignment shall apply to any and all extensions, renewal and substitute leases obtained by Assignee, its successors or assigns, on the land described herein. If said Leases cover less than the full fee simple estate in the oil, gas and other hydrocarbons under any tract or tracts of the land assigned, with respect to that tract or tracts, the overriding royalty herein reserved by Assignor shall be proportionately reduced.

 

Assignor hereby warrants that the Leases conveyed herein shall be free and clear of any and all claims, liens, and encumbrances created by, through, or under Assignor, but not otherwise. Except for the special warranty of title set forth in the immediately preceding sentence, this Assignment of Oil and Gas Lease is made and delivered to Assignee without any warranty of title, express, implied or statutory.

 

The terms and provisions of this Assignment of Oil and Gas Lease shall be binding upon and inure to the benefit of the parties hereto together with their respective heirs, successors and assigns.

 

Executed and effective thisday of 201___.

 

	
 

	

ASSIGNOR

 

KINGDOM  RESOURCES, LLC

 

By: _________________________________

Name:

Title:

 

 

 

	
STATE OF _________________

	
)

	
 

	
) ss.

	
COUNTY OF _______________

	
)

The  foregoing  instrument  was  acknowledged  before  me  on   this _____  day of 2014, by for Kingdom Resources, LLC, a Colorado limited liability company, on behalf of said entity.

(Seal)

 

	 	
	
 

	

Notary Public – State of Colorado

My Commission Expires: ___________________________

 

 

Exhibit E-Form of Access and Damage Settlement Agreement

KNOW ALL MEN BY THESE PRESENTS THAT:

This Access and Damage Settlement Agreement made and entered into this ______day of ________________, 2014, by and between hereinafter referred to as "Owners" and PetroShare Corporation, whose address is Corporate 25, 7200 S. Alton Way #B220, Centennial, Colorado 80112.

For and in consideration of the sum of Ten and more dollars and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, we, the undersigned each of lawful age, do hereby release acquit and forever discharge PetroShare Corporation, hereinafter referred to as "Operator", its employees, agents and contractors, from any and all losses, liabilities, claims, damages, demands and causes of action for any and all injuries and damage to the surface of the tract of land herein below described and to the appurtenances, improvements and vegetation on said tract of land owned by the undersigned, their respective employees and/or tenants, arising directly or indirectly in connection with the operations of Operator, its employees, agents and contractors, which include but is not limited to i) accessing, ii) building a drillsite, iii) drilling, completing and producing a well or wells, and iv) exercising other contractual, lease, or statutory rights of the Operator on the subject tract of land being more particularly described as follows, to wit:

A strip of land ("Access Road'') in the __________of Section ______, Township 1 South, Range 67 West, 6th P.M., Adams County, Colorado and the tract of land for a Drillsite ("Drillsite") located in the NW of said Section _____, the Drillsite and Access Road to occupy approximately __________ acres more or less.

The parties do hereby further agree as follows:

Operator shall pay the Sum of __________1/4 Thousand and No/100 Dollars ($_,000.00) per acre as surface damages to build the Access Road and Drillsite location, to drill a well(s) for the purposes of developing the minerals underlying the drilling and spacing unit comprised of Section(s) _ and ___, Township 1 South, Range 67 West, or lands pooled therewith or adjacent thereto, and in the event the well(s) is completed as producer or in the effort thereof, then to use, install, construct and maintain gathering lines, transportation lines, and power lines as well as the ability to use, .install, construct and maintain on the Drillsite equipment and facilities for production, storage, transportation and/or marketing of produced substances. Operator shall have the option to drill more than one well from the Drillsite and shall pay Owner the sum of ______Thousand Five Hundred Dollars ($_,500.00) for each additional well drilled therefrom within Thirty (30) days of the date that Operator begins drilling operations on such well(s). Operator shall also have the option to expand the size of the Drillsite and Access Road by paying Owner the Sum of_________ Thousand Dollars {$_,000.00) for each additional acreage, or fraction thereof, which shall not exceed ____________________ (__) total acres for the Drillsite.

It is expressly agreed by the undersigned that if a well is not drilled on said Drillsite, or if the captioned premises are not entered for the purposes described herein in preparation for the drilling of a well, then and in that event, this Access and Damage Settlement Agreement shall be deemed null and void, the

 

1

payment in the amount described above for the surface damages is hereby waived and Operator shall not be required by this agreement to make such payment to the undersigned.

Access to the property shall be limited to Operator and its contractors, personnel and agents involved in the drilling and operation of such well(s) and shall not be open to the general public. Operator shall be responsible for the repair and maintenance of the Access Road and Drillsite constructed hereunder prior to termination of Operator's use. Operator shall leave all cattle guards installed, if any, permanently in place.

Operator shall comply with and be subject to all applicable hazardous materials laws and other applicable regulations or restrictions duly and validly adopted by the State of Colorado or any political subdivision thereof and agrees to indemnify and hold harmless Owner from and against any and all responsibility or liability for violation of the same by Operator's agents or employees, including responsibility for any hazardous waste spills that may be associated with Operator's use of the premises.

Upon the termination of Operator's activities on the Access Road and Drillsite, Operator agrees to restore the surface to its original condition (as nearly as practicable) including reseeding or at Owner's written request, Operator may leave the Access Road and/or Drillsite in place, as is, for Owner's use.

Operator shall indemnify and hold Owner, its officers, employees, agents, successors and assigns harmless from and against any and all liability, loss damage claims, demand actions, causes of actions, including court costs and attorney's fees which may result from property damage for personal injury to, or death to persons whomsoever, including any person using the Access Road and Drillsite when such personal injury, death loss, destruction, or damage arises because of the existence of any of the improvements or the construction, operation, maintenance, repair, removal reconstruction, or use of the roadway and Drillsite or any part thereof, except to the extent that such liability, loss damage, claims, demands actions, causes of actions, including court costs and attorney's fee arise out of the negligence, willful misconduct, or any act or omission of Owner, or its agents, employees, successors or assigns. This indemnity shall cease at such time as (i) Operator completes restoration of the Access Road or Drillsite or (ii) Owner elects in writing to have the Operator leave the Access Road and/or Drillsite in place.

The undersigned Owners, do hereby further agree that payment of the consideration as set forth above shall be full and complete payment, settlement, compromise and satisfaction of any and all of the above mentioned losses, liabilities, claims, damages demands and causes of action accrued or accruing to the undersigned, their respective employees and/or tenants arising directly or indirectly in connection with the above mentioned operations by Operator, its employees, agents and contractors and that such payment is in no way an admission of liability by Operator, its employees, agents or contractors.

Any notice or payment required or permitted to be given hereunder shall be deemed to be delivered when deposited in the U.S. Mail, postage prepaid, certified with return receipt requested, or registered mail, addressed to the party to which it is intended at the address set forth above for such part and that each party may rely on the last known address of the other party until notified by the other part, their successors or assigns.

This instrument may be executed in any number of counterparts and shall be binding upon all parties who have executed such a counterpart with the same force and effect as if all parties have signed the same document.

This Agreement shall inure to the benefit of the Owners and Operator as well as their Successors and Assignees.

 

2

Executed this ___________day of___________, _______.

Name:

____________________

Signature Owner

ACKNOWLEDGEMENT

 

	
STATE OF _________________

	
)

	
 

	
) ss.

	
COUNTY OF _______________

	
)

On this _____ day of ______________, 2014, before me, a Notary Public, personally appeared _______________________ known to me to be the persons described in and who executed the within instrument and acknowledged to me that he executed the same as his free and voluntary act and deed for the uses and purposes therein set forth.

 

IN WITNESS WHEREOF, I have hereunto set my hand and affixed by Notarial seal the day and year first above written.

(SEAL)

 

	 	
	
 

	

Notary Public – State of Colorado

My Commission Expires: ____________________________

 

 

 

PETROSHARE CORPORATION

By its representative, ______________

___________________________

TITLE: Duly Authorized Representative

 

3

 

	
STATE OF _________________

	
)

	
 

	
) ss.

	
COUNTY OF _______________

	
)

Before me, the undersigned, a Notary Public in and for said county and state, on this ______day of ___________________, 2014, personally appeared ___________________________, the Duly Authorized Representative of PetroShare Corporation, and that said instrument was signed on behalf of said corporation and said instrument to be the free act and deed of said corporation.

IN WITNESS WHEREOF, I have hereto set my hand and affixed my notarial seal the day and year last above written.

 

____________________________

Notary Public

My Commission Expires:________________

4

EXHIBIT "D"

AREA OF MUTUAL INTEREST

	
1.

	
All of Township 1 South, Range 67 West, Adams Co., CO 6th PM, comprising approximately 36 square miles, plus a one mile buffer zone around the perimeter of said Township.

	
2.

	
Any other mutually agreeable areas.

 

 

 

 

15

 

EXHIBIT “E”

ASSIGNMENT

 

	
STATE OF COLORADO

	
)

	
 

	
COUNTY OF _________________

	
)

	
 

 

KNOW ALL MEN BY THESE PRESENTS, that PetroShare Corp., with an office at 7200 S. Alton Way, Suite B220, Centennial, CO 80112, hereinafter referred to as “Assignor”, for and in consideration of the sum of TEN AND NO/100 DOLLARS ($10.00), the receipt and adequacy of which is hereby acknowledged and full acquittance granted therefor, has granted, sold, conveyed and delivered and does hereby grant, sell, convey and deliver unto Providence Energy Operators, LLC,  hereinafter referred to as “Assignee”, ______% of Assignor’s right, title and interest in the following properties (real, personal or mixed) and leasehold and/or other rights (contractual or otherwise), unless expressly reserved or excluded herein, the following being referred to herein collectively as the Assets:

		(a)	the oil and gas leases described on Exhibit “A”, attached hereto, in the amounts of the working interests specified thereon (the “Leases”) and the real properties covered by said Leases (the “Properties”);

		(b)	The rights and interests in, to and under, or derived from, all of the presently existing and valid unitization and pooling agreements and units (including all units formed by voluntary agreement and those formed under the rules, regulations, orders or other official acts of any governmental entity having appropriate jurisdiction), if any, to the extent they relate to any of the Leases;

		(c)	The rights and interests in, to and under, or derived from, all of the presently existing and valid joint operating agreements, oil sales contracts, casinghead gas sales contracts, gas sales contracts, processing contracts, gathering contracts, transportation contracts, easements, rights-of-way, servitudes, surface leases and other contracts to the extent they are described on Exhibit “C” attached hereto or relate to the Leases or the Properties (the “Contracts”);

		(d)	The rights and interests in and to all personal property and improvements, including without limitation, tanks, buildings, fixtures, machinery, equipment, pipelines, utility lines, power lines, telephone lines, roads and other appurtenances, to the extent the same are situated upon and/or used or held for use by Seller in connection with the ownership, operation, maintenance and repair of the Leases or on the Properties; and

		(f)	The rights and interests in all permits and licenses of any nature owned, held or operated in connection with operations for the exploration and production of oil, gas or other minerals to the extent the same are used or obtained in connection with any of the Leases or Properties described in Exhibit “A” (the “Permits”);

 

  

16

TO HAVE AND TO HOLD the Assets, together with all and singular the rights and appurtenances thereunto in anywise belonging, unto Assignee, its successors and assigns, forever, subject to the following terms and conditions:

1.    Special Warranty of Title.  Assignor represents and warrants that the Assets are free and clear of all liens, encumbrances, security interests or other adverse claims arising by, through or under Assignor, but not otherwise.  Assignor shall warrant and defend the title to the Assets conveyed to Assignee against every person whomsoever lawfully claims the Assets or any part thereof by, through, or under Assignor, but not otherwise.

2.    Successors and Assigns.  The terms, covenants and conditions contained in this Assignment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, and such terms, covenants and conditions shall be covenants running with the land and with each subsequent transfer or assignment of the Assets, or any part thereof.

3.    Participation Agreement.  This Assignment is made in accordance with and is subject to the terms, covenants and conditions contained in that certain Participation Agreement dated as of May 13, 2015, by and between Assignor and Assignee (“Participation Agreement”), which shall remain in full force and effect in accordance with the terms as set forth therein and shall not be deemed to have been merged with this Assignment.  If there is a conflict between the provisions of the Participation Agreement and this Assignment, the provisions of the Participation Agreement shall control the rights and obligations of the parties.

4.    Further Assurances.  Assignor and Assignee agree to take all such further actions and to execute, acknowledge and deliver all such further documents that are necessary or useful in carrying out the purpose of this Assignment.

5.    Counterparts.  This Assignment is being executed in multiple counterparts each of which shall for all purposes be deemed to be an original and all of which shall constitute one instrument.

ASSIGNOR:

PetroShare Corp.

By:

Name: ______________________________

Title: _______________________________

 

 

17

  

ASSIGNEE:

By: _______________________________________

Name: _____________________________________

Title: ______________________________________

 

18

 

	
STATE OF ___________________

	
)

	
 

	 	)  ss.	
	
COUNTY OF _________________

	
)

	
 

 

The foregoing instrument was acknowledged before me this ____ day of ________, 2015, by _______________, as ___________of PetroShare Corp.

Witness my hand and seal.

My Commission Expires: ___________________________                 ____________________________

Notary Public

 

	
STATE OF ___________________

	
)

	
 

	 	)  ss.	
	
COUNTY OF _________________

	
)

	
 

 

The foregoing instrument was acknowledged before me this ____ day of ________, 2015, by _____________________, as _________________________________.

Witness my hand and seal.

My Commission Expires: ___________________________                 ____________________________

Notary Public

19

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