Document:

exv10w22

 

Exhibit 10.22

CARRY AND EARNING AGREEMENT

By and between

ENCANA OIL & GAS (USA) INC.,

And

APPROACH OIL & GAS INC.

Dated

July 13, 2007

 

 

CARRY AND EARNING AGREEMENT

This CARRY AND EARNING AGREEMENT (this “Agreement”), dated the 13th day of July, 2007 (the
“Effective Date”), is by and between ENCANA OIL & GAS (USA) INC., a Delaware corporation (“EnCana”)
and APPROACH OIL & GAS INC., a Delaware corporation (“Approach”). EnCana and Approach may each
also be referred to herein as a “Party” or collectively as the “Parties.”

BACKGROUND

1. EnCana is the current owner and holder of the oil, gas and mineral leases described on
Exhibit A, attached hereto, and the leasehold interest in the lands covered thereby
(individually, a “Lease” and collectively, the “Leases,” as identified by name and EnCana lease
number on Exhibit A).

2. The Parties desire to enter into this Agreement in order to provide the terms and conditions
under which Approach will acquire an interest in the Properties (as hereafter defined) through the
drilling of wells, as further provided herein.

3. Capitalized terms used herein will have the meaning given to such terms herein. A list of the
capitalized terms is set forth in the Schedule of Definitions attached hereto.

NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, the Parties
agree as follows:

ARTICLE I

PROPERTIES SUBJECT TO AGREEMENT

     1.01 Description of Properties. Subject to the Excluded Assets (as hereafter
defined), the following properties (collectively, the “Properties”) are subject to this Agreement:

(a) All interests related to the Leases, including, but not limited to, all oil
and gas leasehold interests, including working, royalty, overriding royalty,
production payment, and other leasehold interests, and all rights resulting from the
pooling, unitizing or communitizing of those interests; and

(b) all other real property interests and rights owned by EnCana and associated
with the Leases, including mineral interests, surface owned in fee, easements and
water rights.

     1.02 Excluded Assets. EnCana reserves to itself, and there is hereby excepted from
this Agreement, the following (collectively, the “Excluded Assets”):

(a) the EnCana — Devon Fee C — 03 wellbore (API#42-293-31707) and all previous
and future production therefrom;

 

 

(b) the EnCana — Devon Fee D — 04 wellbore (API#42-395-31092) and all previous
and future production therefrom;

(c) the EnCana — Devon Fee D — 05 wellbore (API#42-395-31124) and all previous
and future production therefrom;

(d) the EnCana — Devon Fee 01 wellbore (API# 42-293-31654) and all previous and
future production therefrom; and

(e) the oil and gas leases (whether or not portions of the Leases) included in
the proration units associated with the four described wells, as further described and
shown on the plats attached hereto as Exhibit B.

ARTICLE II

DELIVERIES AT EXECUTION

	2.01	 	Payments at Execution. Upon execution of this Agreement, Approach
will pay to EnCana by wire transfer of immediately available funds, to the account
designated on Exhibit C, $350,000.00 (the “Lease Rental Deposit”), to be used
pursuant to Section 6.01(f) to pay
Approach’s 50% share of the delay rentals, shut-in royalties, minimum royalties,
and lease extensions required or permitted under the terms of the Leases.

	2.02	 	Other Deliveries. Simultaneously with the execution of this
Agreement, the Parties and Approach Operating, LLC, as operator (“Approach Operating”)
will each execute and deliver to the other the JOA (as hereafter defined) as to the
Commitment Wells. 

	2.03	 	Letter of Credit. Upon execution of this Agreement, Approach will
cause an irrevocable, unconditional, stand-by letter of credit (the “Letter of
Credit”), substantially in the form of Exhibit J, to be issued:

	 	(i)	 	in the aggregate face amount of $2,600,000.00;
	 
	 	(ii)	 	by a financial institution acceptable to EnCana;
	 
	 	(iii)	 	that is available to be drawn at sight, in full or partial
draws and with draw conditions acceptable to EnCana, including a Default by
Approach;
	 
	 	(iv)	 	that will provide for a reduction in the face amount to
$1,300,000.00 upon the Earning Event for the second Initial Commitment Well;
and
	 
	 	(iv)	 	that will remain valid and in effect until the occurrence of
the Earning Event for the third Initial Commitment Well.

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2.04 Approach Operating. If this Agreement calls for performance of an obligation
by Approach Operating, Approach shall cause the performance thereof, and the failure to do
so will be considered a default hereunder by Approach. Any action, inaction or omission by
Approach Operating that would be a default hereunder if it were the action, inaction or
omission of Approach, shall be deemed to be a default by Approach. Any action hereunder
forbidden to be taken by Approach shall also be forbidden to Approach Resources, Inc. and
its subsidiaries.

ARTICLE III

INFORMATION AND TITLE REVIEW

3.01 Title and Other Information Held By EnCana. Within 30 days of the Effective
Date, EnCana will provide to Approach copies of its oil and gas lease files, including, but
not limited to, all title data, such as broker’s run sheets, title opinions and abstracts,
covering the Leases. EnCana will provide to Approach copies of all other information
relevant to EnCana’s leasehold position in the Properties, including geological,
geophysical and engineering information. All of such information is provided without
warranty of any kind, including as to completeness or accuracy. EnCana will not be
required to make available any information covered by existing agreements of
confidentiality to which it is bound; provided, however, that EnCana will make commercially
reasonable efforts to obtain the release of any such information.

ARTICLE IV

COMMITMENT WELLS

	4.01	 	Number of Commitment Wells and Specifications.

(a) Approach will be responsible for paying 100% of the costs, including drilling
rig stand-by costs (other than drilling rig stand-by costs incurred as a result of
EnCana’s failure to satisfy, on or before July 30, 2007, the conditions set forth in
Section 4.04(c)), of three wells on the Leases in accordance with the provisions of
this Agreement and the AFE’s (each, an “Initial Commitment Well” and collectively, the
“Initial Commitment Wells”), drilled to the Objective Depth on a Drilling Unit and
Completed (each as hereafter defined) (which Completion, upon the mutual consent of
the Parties, may be at a depth shallower than the Objective Depth) or, upon the mutual
consent of the Parties, plugged and abandoned with the drilling rig.

(b) The Parties agree to evaluate the Initial Commitment Wells and the production
therefrom during the Evaluation Period (as hereafter defined). Approach may elect out
of the project contemplated by this Agreement by delivering written notice of such
election (a “Withdrawal Notice”) to EnCana during the Evaluation Period. If Approach
delivers a Withdrawal Notice, Approach shall forfeit its rights to earn an interest in
the Leases except for Leases included in the assigned Drilling Units to the Initial
Commitment Wells, but such

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 forfeiture shall be the only consequence of Approach electing out of the contemplated
project.

     If Approach does not deliver a Withdrawal Notice to EnCana, Approach will be
responsible for paying 100% of the costs, including drilling rig stand-by costs of two
additional wells on the Leases (each a “Subsequent Commitment Well” and collectively, the
“Subsequent Commitment Wells”; the Initial Commitment Wells and the Subsequent Commitment
Wells are sometimes collectively referred to herein as the “Commitment Wells”). Each
Subsequent Commitment Well shall be drilled to the Objective Depth and Completed (which
Completion, upon the mutual consent of the Parties, may be at a depth shallower than the
Objective Depth) or, upon the mutual consent of the Parties, plugged and abandoned with the
drilling rig.

     As used herein, the term “Evaluation Period” means the period of time beginning on the
date that the third Initial Commitment Well is Completed and tied into the flowline and
ending on the earlier to occur of (i) 120 days thereafter and (ii) the date EnCana receives
a Withdrawal Notice.

(c) Approach Operating will be the operator of the Commitment Wells. As
operator, Approach Operating will perform all of the functions of the operator under
the JOA, other than title and curative work on the Drilling Units. EnCana will
perform the title and curative work on the Drilling Units.

(d) If Approach drills a Commitment Well to the Objective Depth but based upon
the logs and other data pertaining to the well Approach recommends plugging and
abandoning the well and the Parties mutually agree that an attempt to complete the
well as a commercial producer is not prudent, then Approach shall proceed to plug and
abandon the well and an Earning Event will be deemed to have occurred with respect to
such Commitment Well.

	4.02	 	AFE’s. 

(a) An authority for expenditure (an “AFE”) for the first Commitment Well is
attached to this Agreement as Exhibit D. Approach must prepare and submit to
EnCana, no later than the date that is 10 days following the commencement of actual
drilling operations on each Commitment Well after the first Commitment Well, an AFE
for the next Commitment Well to be drilled, each such AFE to conform in style and
substance to the AFE attached hereto as Exhibit D.

(b) EnCana will have 7 business days after its receipt of an AFE in which to
provide comments on the elements of the AFE covering operations prior to the casing
point. The Parties will consult on the terms of each AFE, but if the Parties cannot
reach agreement, the final decision will be made by: (i) EnCana for the Initial
Commitment Wells; and (ii) Approach, for the Subsequent Commitment Wells.

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	4.03	 	Completions and Other Procedures.

(a) No fewer than 14 days prior to beginning Completion operations on a
Commitment Well, Approach will provide EnCana with the Completion procedures it
intends to undertake with respect to the Commitment Well. EnCana will have 7 days in
which to provide comments to the Completion procedures.

(b) The Parties will consult on the Completion procedures to be undertaken on
each Commitment Well, but (i) the final decision as to the intervals to be completed
and the procedures to be undertaken with respect to each Initial Commitment Well will
be EnCana’s, so long as such decision is in compliance with the terms of the
applicable AFE, and (ii) the final decision as to the intervals to be completed and
the procedures to be undertaken with respect to each Subsequent Commitment Well, if
any, will be Approach’s.

(c) If EnCana desires to attempt a Completion on an Initial Commitment Well, so
long as such Completion is in compliance with the terms of the AFE, Approach
Operating, as operator, must perform the Completion and the costs of the Completion
will be part of the costs of the Commitment Well for which Approach is responsible.
Notwithstanding the foregoing or anything else in this Agreement to the contrary,
either Party may elect (the “Electing Party”) to conduct seismic surveys or other
geoscientific work or to acquire any geological or geophysical data, processings or
interpretations with respect to the Leases (other than any such work inside a
wellbore) (collectively, “Geoscientific Data”), provided that if the other Party
desires to participate in the Geoscientific Data, such Party shall pay the Electing
Party fifty percent (50%) of the out-of-pocket costs and expenses incurred by the
Electing Party in the acquisition, licensing, generating, processing and interpreting
of such Geoscientific Data.

	4.04	 	Timing of Commitment Wells.

(a) The Commitment Wells will be drilled in the order and at the locations set
forth on Exhibit E, unless the Parties mutually agree otherwise.

(b) Approach must commence actual drilling operations on the first Initial
Commitment Well no later than July 30, 2007, provided that the following conditions
precedent have been satisfied by such date:

(i) EnCana shall have provided a title opinion regarding the applicable drilling
site to Approach in form and substance reasonably satisfactory to Approach;

(ii) EnCana shall have cured, or shall be in the process of curing to Approach’s
reasonable satisfaction, any title defects reflected in the title opinion described
above that could materially affect the Parties’ ability to collect its share of
working interest revenue;

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(iii) A drilling rig shall be available to commence drilling (Approach agrees to
use a drilling rig that has been contracted for or is owned by EnCana, if such rig
is available); and

(iv) EnCana shall have provided Approach evidence in form and substance reasonably
satisfactory to Approach that all requirements set forth in EnCana’s surface use
agreement with TXU Mining have been satisfied with respect to the first Initial
Commitment Well.

(c) Approach must commence operations for the drilling of each other Initial
Commitment Well as soon as reasonably practicable following the release of the
drilling rig from the prior Initial Commitment Well.

(d) As set forth in Section 4.01(a) above, Approach has no obligation to commence
drilling any well during the Evaluation Period. At the end of the Evaluation Period,
so long as Approach has not delivered a Withdrawal Notice, Approach must commence
drilling of the Subsequent Commitment Wells no later than as set forth below:

(i) the first Subsequent Commitment Well will be commenced no later than the date
that is 30 days following the end of the Evaluation Period.

(ii) the second Subsequent Commitment Well, immediately upon release of the
drilling rig from the prior Subsequent Commitment Well.

	4.05	 	Substitute Wells. If Approach Operating spuds a Commitment Well and
thereafter encounters drilling conditions or reservoir conditions in the drilling of
the well which in the opinion of a prudent operator would cause the operator to cease
drilling and abandon the hole prior to Completion, and Approach abandons the hole for
such reasons, Approach shall have the right to spud a substitute well (a “Substitute
Well”) at the closest practicable location either, at Approach’s election, (i) within
30 days following the abandonment or (ii) within 30 days following Completion of the
next scheduled Commitment Well. A Substitute Well if drilled in the same manner as
required by this Agreement and paid for by Approach, shall constitute a Commitment
Well. All of the costs of both the abandoned well and the Substitute Well must be
paid by Approach in order for an Earning Event to occur with respect to the applicable
Drilling Unit.
	 
	4.06	 	Information, Rights.

(a) Approach shall maintain with respect to each Commitment Well, as and when
drilled, all drilling reports, logs, drillstem test data, and geological and
geophysical maps and all other relevant data. EnCana will be entitled, at all
reasonable times, upon reasonable notice, at EnCana’s sole risk and expense, to

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 access to the rig floor and location of all Commitment Wells. Approach will furnish to
EnCana, within 3 days of receipt by Approach, all well information, logs, test results and
other information with respect to all Commitment Wells. Approach will provide EnCana with
daily reports of operations during any period of time when work is being performed on any
Commitment Well.

(b) Approach, at its sole cost and expense, must acquire at least the following
information on each Commitment Well:

(i) mud logging data, including a manned mud logging unit, from
above the Rodessa Formation (as commonly identified in the area) to total
depth in each Commitment Well;

(ii) a suite of logs including a Triple Combo and a Natural Gamma
Ray Spectroscopy log

(iii) a Dipole Sonic log;

(iv) drill cuttings characteristics evaluation;

(v) FMI log on at least one of the Initial Commitment Wells; and

(vi) a pre-frac injection test (also called DFIT) on at least one
of the Initial Commitment Wells.

(c) EnCana will have the right, upon five days notice and during normal business hours, to
audit the books and records of Approach with respect to the Commitment Wells.

	4.07	 	Third Party Interests. The Parties’ aggregate working interest in
each Commitment Well shall be not less than ninety-five percent (95%).
	 
	4.08	 	Certain Defined Terms.

(a) The term “Completed,” “Completing” or “Completion” means, with respect to a
Commitment Well:

	 	(i)	 	running production casing;
	 
	 	(ii)	 	attempting fracture stimulations in the well, generally in
accordance with the procedures in the AFE attached hereto as Exhibit D
and based on generally accepted engineering practices appropriate for the
area;

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(iii) procuring and installing flowlines, wellheads, tanks and other production
equipment, through and including the location well test meter for each
Commitment Well.

(b) The term “Cotton Valley Lime Formation” means the correlative interval identified as
occurring between the depths of 11,400 feet and 12,300 feet as identified on the Dual
Induction log of the Raymond L. Brown Well, located in the G. Gardner Survey, A-217,
Limestone County, Texas (API #42-293-00588).

(c) The term “Objective Depth” means the lesser of:

(i) a total vertical depth of 12,100 feet (measured from the surface of the earth);
or

(ii) a depth at least 500 feet into the Cotton Valley Lime Formation.

ARTICLE V

ASSIGNMENTS

	5.01	 	Rights Earned By Drilling Unit. 

(a) Upon each Earning Event with respect to a Drilling Unit, Approach will earn
an interest in the applicable Drilling Unit equal to 50% of EnCana’s interest in the
Drilling Unit (the “Approach Interest”). Notwithstanding the creation of a pooled
unit larger than 160 acres with respect to a Commitment Well, Approach will only earn
a Drilling Unit for each Commitment Well drilled and Completed (or, upon the mutual
consent of the Parties, plugged and abandoned) until the occurrence of the final
Earning Event.

(b) The term “Drilling Unit” means an acreage block of lands subject to the
Leases consisting of 160 acres, plus or minus 10%, or the largest unit permitted by
the particular Leases on which a well is drilled, if less than 160 acres plus or minus
10%. EnCana will determine, in its sole discretion, the configuration of the Drilling
Units.

	5.02	 	Interest to Be Assigned in Drilling Unit.

(a) Within 30 days of an Earning Event (as hereafter defined) with respect to a
Drilling Unit, EnCana will assign to Approach, by assignment in the form attached
hereto as Exhibit F (the “Assignment”), the Approach Interest. The Assignment
will deliver to Approach the net revenue interest owned by EnCana as of the Effective
Date, reserving no overriding royalty interest not presently existing, and will be
made without warranty of title whatsoever except by, through and under EnCana, but to
no further extent.

(b) The term “Earning Event” means the occurrence of all of (i), (ii) and (iii),
below:

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	 	(i)	 	a Commitment Well or, as the case may be, a Substitute Well,
has been drilled to the Objective Depth;
	 
	 	(ii)	 	such well has been Completed (which Completion, upon the
mutual consent of the Parties, may be at a depth shallower than the Objective
Depth) or, upon mutual consent of the Parties, plugged and abandoned pursuant
to Section 4.01(a) or Section 4.01(d) of this Agreement with the drilling rig
without attempting a Completion; and
	 
	 	(iii)	 	Approach has paid all costs and expenses attributable to
such Commitment Well.

5.03 Final Earning Event. Within 30 days of the occurrence of the Earning Event
with respect to the last of the Commitment Wells (the “Final Earning Event”), EnCana will
assign Approach, in addition to Approach’s proportionate share of the last Drilling Unit,
its proportionate share of the remaining Leases not yet assigned to Approach. The
foregoing shall not be deemed to obligate Approach to commence the Subsequent Commitment
Wells unless Approach elects not to opt out of the project during the Evaluation Period.

ARTICLE VI

JOA; DEVELOPMENT FOLLOWING EVALUATION PHASE

	6.01	 	Heads-Up Operations.

(a) Upon execution of this Agreement, the Parties will execute an operating
agreement in the form attached hereto as Exhibit G (the “JOA”) covering the
proposed Drilling Units with respect to the Commitment Wells, naming Approach
Operating as operator. Following the Final Earning Event, EnCana may elect to become
operator of the Commitment Wells, any subsequent wells drilled under the JOA and for
all the Leases by providing written notice to Approach of such election within 30 days
of the Final Earning Event. In the event EnCana does not provide such a notice to
Approach within 30 days of the Final Earning Event, Approach Operating shall be the
operator for the Commitment Wells, any subsequent wells drilled under the JOA and for
all the Leases.

     Promptly following the delivery of a Withdrawal Notice, if any, Approach Operating
shall resign as operator of the Commitment Wells, and EnCana shall be named as operator.

(b) Leases earned by Approach according to Section 5.03 hereof, will be deemed to
be added to Exhibit “A-2” of the JOA upon the occurrence of the Final Earning Event.

(c) In the event of any conflict or inconsistency between the terms of this
Agreement and any JOA, this Agreement shall prevail to the extent of such conflict.

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(d) Subject to the terms of this Agreement, after the Completion of a Commitment
Well, the JOA will govern all operations on the well and all costs and expenses of
operations with respect to the Commitment Well will be borne and paid by EnCana and
Approach according to their proportionate working interest in the Leases, subject to
the consent and non-consent provisions of the JOA and the terms and conditions of the
JOA relating to subsequent operations.

(e) No Party may propose the drilling of wells (other than a Commitment Well) in
the AMI (as hereafter defined) until after the Final Earning Event.

(f) EnCana shall pay, or cause to be paid, all delay rentals, shut-in royalties,
minimum royalties and lease extensions that may be required or permitted under the
terms of the Leases. Approach shall be responsible for paying, upon invoice, its 50%
share of such payments following the Effective Date. The Parties acknowledge that
Approach has paid the Lease Rental Deposit and that EnCana shall apply the Lease
Rental Deposit to Approach’s 50% share of the costs described in this paragraph. If
the aggregate amount of delay rentals, shut-in royalties, and lease extensions that
may be required or permitted under the terms of the Leases prior to the date of a
Withdrawal Notice, if any, or the Final Earning Event is less than the amount of the
Lease Rental Deposit, EnCana shall, at Approach’s option, either remit such excess
amount to Approach or hold such amount for application towards the payment of
Approach’s 50% share of such future payments. Notwithstanding the payment of the
amounts due under this paragraph, Approach will not earn any interest in the Leases
except as set forth in Section 5.02.

(g) If the Parties form a Drilling Unit by pooling any of the Leases with other
oil and gas leases which are not subject to the JOA, as between the Parties the JOA
will still control operations on the Drilling Unit, even if a Party is also a party to
a separate joint operating agreement on the leases not subject to the JOA; except
that, if any such joint operating agreement with third parties exists or is entered
into, EnCana will be entitled to make all elections thereunder until the Final Earning
Event.

ARTICLE VII

AMI

	7.01	 	Area of Mutual Interest.

(a) There is hereby created an Area of Mutual Interest (the “AMI”) which shall
consist of the lands within the boundary marked on the plat attached as Exhibit
H. If a tract of land is located partially within the AMI and partially outside,
all of such tract will be subject to the terms of this Article VII. There is excluded
from the AMI and not subject to the provisions of this Article VII, whether or not so
marked on Exhibit H, the area of any existing area of mutual interest to which
EnCana is a party.

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(b) If, during the period of time beginning June 1, 2007 and ending on the date
that is 2 years later (the “Initial Term”) and, as to any lands in the AMI subject to
the JOA as of the end of the Initial Term, thereafter, for so long as the JOA remains
in effect, either Party acquires an oil, gas and mineral lease, mineral interest,
overriding royalty interest, royalty interest or any other interest in oil or gas or
any contractual right to acquire interests in oil and gas leases, such as through
farmin agreements (any of which is referred to herein as an “Interest” or collectively
as “Interests”) within the AMI, the acquiring Party shall, within sixty (60) days of
finalizing the acquisition, offer to the non-acquiring Party the right to purchase 50%
of such Interest by paying 50% of the acquiring Party’s costs (such costs to include,
but are not necessarily limited to, the acquiring Party’s land work with respect to
the Interest, the lease bonus, option payments, broker fees, filing fees and cost of
third party title examination). If an acquisition of Interests includes Interests in
lands both within the AMI as well as outside the AMI, the acquisition will be
considered to be entirely within the AMI. If two or more Interests are included in a
single notice, the non-acquiring Party will have the right to make separate elections
as to each of the acquired Interests. Notwithstanding the foregoing, EnCana will not
offer any Interests until the end of the Evaluation Period, if Approach has not
submitted a Withdrawal Notice, EnCana will offer to Approach all Interests acquired in
the AMI prior to the date of such offering.

(c) An offer made pursuant to this AMI must be in writing and include sufficient
information for the non-acquiring Party to reasonably evaluate the offer, including a
complete description of the acquired Interest and information specifying the number of
gross and net lease acres, existing overriding royalties or other burdens affecting
the Interest, the purchase price and the terms of the acquisition, as well as the
actual acquisition costs, the obligations required to earn such interest, including
bonus considerations or equivalent if other than cash, broker’s fees, recording fees,
and rentals, and any other information the acquiring Party deems relevant to the
acquisition of the Interest. The offer should be made in the manner for giving any
other notices under this Agreement. The Party receiving the offer shall have 30 days
(the “Acceptance Period”) following receipt of such notice in which to elect to
participate in the acquisition and to submit payment for its share.

(d) If the non-acquiring Party elects to participate, the acquiring Party shall
assign the applicable percentage interest in the Interest to the non-acquiring Party
within ten (10) business days of receiving the non-acquiring Party’s payment, free and
clear of any burdens other than those arising under the terms and provisions of the
applicable agreements and instruments giving rise to the Interest and any intervening
transfers thereof up to the time of acquisition by the acquiring Party. Any Interest
in which both Parties participate shall be subject to the provisions of this Agreement
and the JOA. Failure of the non-acquiring Party to (i) respond in writing to an
acquisition notice within the Acceptance Period, or (ii) pay for its share of costs
within the Acceptance Period will be deemed an election not to acquire a share of the
Interest.

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(e) If an Interest is to be earned by drilling wells or shooting seismic, the
non-acquiring Party must ratify all appropriate agreements within the Acceptance
Period and agree to participate in and pay for such required operations. If the
non-acquiring Party turns down any Interest or fails to pay for its share of such
Interest, the acquiring Party shall hold such interest free and clear of any further
obligations under this Agreement and the JOA.

(f) Notwithstanding anything herein to the contrary, the provisions set forth in
this Article will not apply to any acquisitions which (i) result from a merger,
consolidation, reorganization with, by, or between a Party and another party, or (ii)
result from a merger or acquisition of the stock of another company or all of an
entity or partnership or an acquisition of all or substantially all of the assets of
an entity by the acquiring Party, whether by cash, like-kind exchange, stock purchase
or otherwise.

ARTICLE VIII

DEFAULTS AND REMEDIES

	8.01	 	Defaults.

(a) It will be a default under this Agreement (a “Default”) if Approach:

(i) fails to pay, when due, any of the costs and expenses of the
Commitment Wells;

(ii) allows a lien to placed against any of the Leases;

(iii) fails to Complete a Commitment Well, unless the Parties have
agreed to the plugging and abandonment of such Commitment Well;

(iv) fails or refuses to timely cause the drilling of a Commitment
Well in accordance with the provisions of Section 4.04.; or

(v) fails to cause the Letter of Credit to be maintained in
accordance with the provisions of Section 2.03.

(b) Approach may cure a Default if Approach, after receiving written notice from
EnCana demanding cure of such Default, (i) cures the Default within 30 days; or (ii)
if the cure requires more than 30 days, immediately initiates steps which EnCana deems
in its reasonable judgment to be sufficient to cure the Default and thereafter
continues and completes all reasonable steps sufficient to produce compliance as soon
as reasonably practicable. If Approach fails to cure a Default within the applicable
grace period set forth above, this Agreement will terminate in its entirety and:

	 	(i)	 	Approach will have no further right to earn any Leases, other
than Leases included in Drilling Units, the Earning Event with respect to
which occurred prior to the termination under this Section 8.01; and

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(ii) Approach will owe EnCana $1,000,000.00 per Initial Commitment
Well not yet drilled and Completed as of the date of termination (the “Early
Termination Fee”), if this Agreement terminates prior to the completion of the
third Initial Commitment Well, which amount may be drawn from the remaining
balance of the Letter of Credit.

     THE PARTIES HEREBY ACKNOWLEDGE THAT THE EXTENT OF DAMAGES TO ENCANA OCCASIONED BY THE
FAILURE OF APPROACH TO DRILL ALL OF THE INITIAL COMMITMENT WELLS WOULD BE IMPOSSIBLE OR
EXTREMELY DIFFICULT TO ASCERTAIN AND THAT THE AMOUNT OF THE EARLY TERMINATION FEE IS A FAIR
AND REASONABLE ESTIMATE OF SUCH DAMAGES UNDER THE CIRCUMSTANCES AND DOES NOT CONSTITUTE A
PENALTY AND ENCANA AGREES THAT THE EARLY TERMINATION FEE IS ITS SOLE AND EXCLUSIVE REMEDY
AGAINST APPROACH THEREFOR.

8.02 Other Defaults. In the event of a Default or any other breach of this
Agreement by either Party, the non-breaching Party may pursue dispute resolution as set
forth in Article X.

8.03 General Survival. The termination of this Agreement shall not relieve any
Party from any expense, liability, or other obligation, or any remedy which has accrued or
attached or which is related to or attributable to the period prior to such termination.

ARTICLE IX

REPRESENTATIONS AND WARRANTIES

9.01 Mutual Representations. Each Party, with respect to itself only, hereby
represents and warrants to the other Party the following:

(a) it is duly organized, validly existing and in good standing under the
applicable laws of its state of incorporation or formation, and is qualified to do
business and is in good standing in the State of Texas and in every other jurisdiction
where the failure to so qualify would have a material adverse effect on its ability to
execute, deliver and perform this Agreement and the other agreements contemplated
herein;

(b) it has all requisite power and authority to (i) own, lease or operate its
assets and properties and to carry on the business as now conducted, and (ii) enter
into and perform its obligations under this Agreement and to carry out the
transactions contemplated hereby;

(c) it has taken (or caused to be taken) all acts and other proceedings required
to be taken by such Party to authorize the execution, delivery and performance by such
Party of this Agreement and the other agreements contemplated herein. This Agreement
has been duly executed and delivered by

13

 

 such Party and constitutes the valid and binding obligation of such Party, enforceable
against such Party in accordance with its terms, except as enforceability may be limited by
applicable bankruptcy, moratorium, reorganization or similar laws affecting the rights of
creditors generally and by principles of equity, whether considered in a proceeding at law
or in equity;

(d) there are no actions, suits or proceedings pending or, to such Party’s
knowledge, threatened against such Party which if decided unfavorably to such Party
could have a material adverse effect on the ability of such Party to execute, deliver
or perform this Agreement or the other agreements contemplated herein or have a
material adverse effect on the Properties;

(e) it has not incurred any obligation or liability, contingent or otherwise, for
any fee payable to a broker or finder with respect to the matters provided for in this
Agreement or the other agreements contemplated herein which could be attributable to
or charged to any other Party. Each Party shall indemnify, defend and hold harmless
the other Party from any claims, damages, liabilities, costs and expenses, including
reasonable attorney’s fees in the event the prior sentence should be or become untrue
as to such Party; and

(f) it is not a “consumer” within the meaning of such term in the Texas Deceptive
Trade Practices Consumer Protection Act, by virtue of being a corporation which seeks
or acquires by purchase or lease, goods for commercial or business use and which has
assets of $25 million or more, or is owned or controlled by a corporation or entity
with assets of $25 million or more.

9.02 Approach Representations. Approach represents and warrants to EnCana that it
has, as of the Effective Date, unencumbered assets or the unconditional right to funds in
an amount sufficient to satisfy its obligations under this Agreement.

9.03 No Other Representations. Other than the representations and warranties
expressly set forth in this Agreement and the Assignment, neither Party makes any
representations or warranties to the other concerning the subject matter of this Agreement.

ARTICLE X

DISPUTE RESOLUTION

10.01 Disputes. Any dispute under this Agreement must be submitted to the dispute
resolution procedures of this Article X and the resolution will be final and binding upon
the Parties. Any dispute may be submitted to these procedures upon the written request of
the Party seeking resolution.

10.02 Arbitration Panel. The arbitration panel must consist of two members who are
familiar by training and experience with the operation of oil and gas wells and business
and land title issues common in the oil and gas industry (individually, a “Layman,”
collectively, the “Laymen”). The third member must be an attorney

14

 

 whose practice deals with oil and gas issues (whether from a regulatory, operational or
business perspective). Each Party will choose one Layman, and the Laymen will choose the
attorney member of the panel.

	10.03	 	Submission to Arbitration.

(a) Either Party may request arbitration by submitting a written request to the
other Party. The written request for arbitration must include the requesting Party’s
choice of a Layman to serve as arbitrator.

(b) The Party receiving the notice must respond to the requesting Party within 15
days of the receipt of the notice. The response must include its own choice of a
Layman to serve as arbitrator.

(c) The two Laymen must meet within 15 days of the date of the response letter to
choose an attorney to serve as the third arbitrator. The two Laymen must use
reasonable efforts to choose a third arbitrator who will be impartial and independent
of the Parties. The arbitration will commence within 30 days after the third member
of the arbitration panel is selected.

(d) If the responding Party fails or refuses to appoint an arbitrator, or the
Laymen are unable to agree upon a third arbitrator, either Party may request the Chief
U.S. District Court Judge for the Northern District of Texas or such other person
designated by such judge to select an arbitrator as soon as possible.

(e) Any arbitration hearing, if one is desired by the arbitration panel, must be
held at a place acceptable to the arbitration panel. The arbitration panel may elect
to conduct the proceeding by written submissions from the Parties with exhibits,
including interrogatories, supplemented with appearances by the Parties as the
arbitration panel may desire. The arbitration proceeding, subject only to the terms
hereof, should be conducted informally and expeditiously and in such a manner as to
result in a good faith resolution as soon as reasonably possible under the
circumstances.

(f) The award, and any other decision by the arbitration panel, must be by
majority vote of the arbitrators. The decision of the arbitration panel with respect
to any disputed matters submitted to the arbitration panel will be reduced to writing,
signed by each arbitrator and binding on the parties. Judgment upon the award(s)
rendered by the arbitration panel may be entered and execution had in any court of
competent jurisdiction, or application may be made to such court for a judicial
acceptance of the award and an order of enforcement.

(g) Each Party will bear their own legal fees and other costs incurred in
presenting their respective cases, and the fees and expenses of the arbitrator
appointed by that Party. The charges and expenses of the third arbitrator will be
shared equally by the Parties.

	10.04	 	Procedure.

15

 

(a) In fulfilling its duties hereunder, the arbitration panel may consult with
and engage disinterested third parties to advise the arbitration panel including,
without limitation, engineers, attorneys, accountants and consultants, and the fees
and expenses of such third parties will be considered to be charges and expenses of
the arbitration panel.

(b) The arbitration panel may not award punitive, consequential, special or
incidental damages.

10.05 Replacement Arbitrator. Any replacement arbitrator, should one become
necessary, will be selected in the same manner as the original arbitrators were selected.

10.06 Exclusivity. No lawsuit based on a dispute under this Agreement may be
instituted by either Party, other than to compel arbitration proceedings or enforce the
award of the arbitration panel.

10.07 Privileges. All privileges under Texas and federal law, including
attorney-client and work-product privileges, will be preserved and protected to the same
extent that such privileges would be protected in a federal or state court proceeding
applying Texas or federal law, as the case may be.

ARTICLE XI

MISCELLANEOUS

11.01 Force Majeure. If any Party is rendered unable, wholly or in part by force
majeure, to carry out its obligations under this Agreement, other than any obligation to
make any money payments (which obligation will never be extended due to force majeure),
such Party must give to the other Party prompt written notice of the force majeure, with
reasonably full particulars, and thereupon the obligations of the Party giving the notice,
so far as they are affected by the act of force majeure, will be suspended, and the running
of all time periods within which certain actions must be completed will be tolled, during,
but not longer, than the continuance of the force majeure, plus such reasonable further
period of time, if any, required to resume the suspended operation. The affected Party
must use all reasonable diligence to remove the force majeure situation as quickly as
practicable; provided, that it will not be required to settle strikes, lockouts or other
labor difficulty contrary to its wishes. All such difficulties are to be handled entirely
within the discretion of the Party concerned. “Force majeure” means an act of nature,
strike, lock-out or other industrial disturbance, act of the public enemy, war, blockade,
public riot, lightning, fire, storm, flood or other adverse weather condition, explosion,
inability to obtain surface access, governmental action, governmental inaction, restraint
or delay, or any other cause, whether of the kind specifically enumerated above or
otherwise, which is not reasonably within the control of the Party claiming force majeure,
but not the unavailability of drilling rigs or equipment.

16

 

11.02 Monetary Amounts. All monetary amounts stated in this Agreement are cited
in, and must be paid in, United States dollars.

11.03 Further Assurances. As necessary, the Parties shall execute any other
documents including, but not limited to, any documents, forms, etc. required by any
governmental organization or authority, and take such other action necessary to effectuate
the terms and provisions of this Agreement and/or the JOA, whichever is applicable
including, but not limited to, designation of operator forms and other similar matters.

11.04 Tax Partnership. The rights, duties, obligations and liabilities of the
Parties shall be several, not joint or collective. It is not the purpose or intention to
create any mining partnership, joint venture, general partnership or other partnership
relation and none shall be inferred. Notwithstanding the foregoing, the Parties agree that
the undertakings herein will be treated as a partnership for purposes of federal income
taxation. Therefore, the Parties agree to be governed, for federal income tax purposes
only, by the tax partnership provisions attached hereto as Exhibit I. For every
purpose other than the above described income tax purposes, however, and notwithstanding
any other provision of this Agreement to the contrary, the parties understand and agree
that their relationship hereunder is not one of partnership, association, trust, joint
venture, mining partnership or entity of any kind.

11.05 Press Releases. A Party to this Agreement shall not issue any media release
or make a public announcement regarding the existence of this Agreement without the prior
written approval of the other Party, which approval shall not be unreasonably withheld;
provided, however, that any Party may make any public disclosure it believes in good faith
is required by applicable law or any listing or trading agreement concerning its publicly
traded securities or securities for which it has filed a registration statement with the
Securities and Exchange Commission (in which case the disclosing Party agrees to use its
reasonable efforts to advise and obtain the consent of the other Party prior to making the
disclosure).

11.06 Taxes and Recording Fees. Any sales taxes, transfer taxes, documentary taxes
and recording fees relating to an assignment hereunder shall be paid by the assignee.
Subject to the terms of any JOA, each Party shall be responsible for its own local, state
and federal income tax reporting, recognition of gain or loss, if any, and the taxes, if
any, payable with respect to the transaction. All taxes, including Ad Valorem taxes,
imposed with respect to periods or portions of periods prior to the date of this Agreement
shall be the burden of EnCana and all such taxes imposed with respect to periods or
portions of periods after the Effective Date shall be the burden of EnCana and Approach in
proportion to their interests. Any Party which pays any such taxes which are the
responsibility of the other Party shall be entitled to prompt reimbursement upon evidence
of such payment. EnCana shall be entitled to all refunds or rebates of taxes paid
pertaining to those taxable periods ending on or prior to the Effective Date.

17

 

11.07 Governing Law. This Agreement shall be governed, construed, and enforced in
all respects, including validity, interpretation, and effect, according to the laws of the
State of Texas, excluding any conflicts of law rule or principle that might apply the law
of another jurisdiction .

11.08 Waiver of Consequential Damages. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN
THIS AGREEMENT, THE PARTIES EXPRESSLY AGREE THAT NO PARTY SHALL BE LIABLE FOR ANY
EXEMPLARY, PUNITIVE, SPECIAL, INDIRECT, CONSEQUENTIAL, REMOTE, OR SPECULATIVE DAMAGES
SUFFERED BY THE OTHER PARTY IN CONNECTION WITH THIS AGREEMENT.

11.09 Inherent Risk. Each Party hereby acknowledges its understanding and
acceptance of the inherent risks associated with the exploration for oil and gas.

11.10 Confidentiality. Except as expressly set forth herein and except as required
by applicable laws or rules and regulations of any administrative or governmental agency or
entity, the Parties hereto acknowledge and agree that this Agreement, their negotiations in
connection herewith and all information obtained by or provided to any of them in
connection with the matters contemplated herein or as it relates to the Properties will be
maintained as confidential, except for disclosures to representatives of the Parties, their
respective legal and financial advisors, and as otherwise consented to by the Parties, such
consent not to be unreasonably withheld.

	11.11	 	Notices.

(a) All notices required or permitted under this Agreement shall be in writing
and delivered in person, by overnight courier, by certified or registered mail return
receipt requested, by facsimile, or by electronic transmission, delivered or addressed
to the persons and at the addresses as provided below. A notice shall be deemed given
when received by the Party to whom it is directed. When a response to the other Party
is required, each Party’s response shall be in writing to the other Party.

(b) A notice is deemed to have been received as follows:

	 	(i)	 	if a notice is delivered in person, upon receipt as indicated
by the date on the signed receipt;
	 
	 	(ii)	 	if a notice is sent by Registered or Certified Mail, upon the
earlier of (1) receipt as indicated by the date on the signed receipt or (2)
five days after such notice is deposited in the mail;
	 
	 	(iii)	 	if a notice is sent by nationally recognized overnight
courier, upon receipt as indicated by the date on the signed receipt;

18

 

	 	(iv)	 	if a notice is sent by facsimile, upon receipt by the party
giving or making such notice of an acknowledgment or transmission report
generated by the machine from which the facsimile was sent indicating that the
facsimile was sent in its entirety to the addressee’s facsimile number;
	 
	 	(v)	 	if a notice involving an item that causes a response period
or other time period set forth in this Agreement (a “time-sensitive matter”)
to commence is sent by electronic transmission, upon the notifying party’s
receipt of a response from the addressee by electronic transmission or other
written or facsimile recognition of receipt of such electronic transmission;
	 
	 	(vi)	 	if a notice involving an item other than a time-sensitive
matter is sent by electronic transmission, when transmitted if transmitted
prior to 9:00 a.m. on a business day, and otherwise on the next business day
following transmission; and
	 
	 	(vii)	 	if the addressee rejects or otherwise refuses to accept a
notice, or if the notice cannot be delivered because of a change in address
for which no notice was given to the Party attempting to give or make such
notice, then upon the rejection, refusal, or inability to deliver.

(c) Notwithstanding the foregoing subsections (i) through (vii) above, except as
expressly provided to the contrary in subsection (vi) above, if a notice is received
after 5:00 P.M. on a business day where the addressee is located, or on a day that is
not a business day where the addressee is located, such notice is deemed received at
9:00 A.M. on the next business day where the addressee is located.

ADDRESSES

Approach Oil & Gas Inc.

6300 Ridglea Place, Suite 1107

Fort Worth, TX 76116-5737

Telephone: 817-989-9000

Fax: 817-989-9001

ENCANA OIL & GAS (USA) INC.

14001 N. Dallas Parkway, Suite1000

Dallas, Texas 75240

Telephone: 214-987-7156

Fax: 214-691-1415

Attn: Team Lead/Land

19

 

11.12 Headings for Convenience. All captions, numbering sequences, and headings
used in this Agreement are inserted for convenience only and shall in no way define, limit
or describe the scope or intent of this Agreement or any part thereof, nor have any legal
effect other than to aid a reasonable interpretation of this Agreement. A reference to
“Article” or “Section” is to an Article or Section of this Agreement.

11.13 Amendment. No provision of this Agreement shall be modified or amended
except by the written agreements for the Parties.

11.14 Severance of Invalid Provisions. In case of a conflict between the
provisions of this Agreement and the provisions of any applicable laws or regulations, the
provisions of the laws or regulations shall govern over the provisions of this Agreement.
If, for any reason and for so long as, any clause or provision of this Agreement is held by
a court of competent jurisdiction to be illegal, invalid, unenforceable or unconscionable
under any present or future law (or interpretation thereof), the remainder of this
Agreement shall not be affected by such illegality or invalidity. Any such invalid
provision shall be deemed severed from this Agreement as if this Agreement had been
executed with the invalid provisions eliminated. The surviving provisions of this
Agreement shall remain in full force and effect unless the removal of the invalid
provisions destroys the legitimate purposes of this Agreement; in which event this
Agreement shall no longer be of any force or effect. The Parties shall negotiate in good
faith for any required modifications to this Agreement required as a result of this
provision.

11.15 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the Parties and their respective heirs, successors and assigns and shall
constitute a covenant running with the Properties.

11.16 Entire Agreement. This Agreement and the documents referred to herein and to
be delivered pursuant hereto constitute the entire agreement between the parties pertaining
to the subject matter hereof, and supersede all prior and contemporaneous agreements,
understandings, negotiations and discussions of the parties, whether oral or written, and
there are no warranties, representations or other agreements between the parties in
connection with the subject matter hereof, except as specifically set forth herein or
therein.

11.17 Counterparts; Facsimile Signature. The Parties may execute this Agreement in
any number of duplicate originals, each of which constitutes an original, and all of which,
collectively, constitute only one Agreement. The Parties may execute this Agreement in
counterparts, each of which constitutes an original, and all of which, collectively,
constitute only one Agreement. Delivery of an executed counterpart signature page by
facsimile is as effective as executing and delivering this Agreement in the presence of the
other Party hereto. This Agreement is effective upon delivery of one executed counterpart
from each Party

20

 

 to the other Party. In proving this Agreement, a Party must produce or account only for
the executed counterpart of the Party to be charged.

11.18 Binding on Successors and Assigns. This Agreement will extend to, inure to
the benefit of, and be binding upon the Parties and each of their successors and assigns.
Any Party may assign this Agreement, provided, however, that no such assignment will
relieve the assigning Party of its obligations hereunder without the express written
consent of the other Party.

[REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]

21

 

IN WITNESS WHEREOF, this Agreement is executed and effective as of the date first above written.

	 	 	 	 	 
	 	APPROACH OIL & GAS INC.

 	 
	 	By:  	/s/  J. Ross Craft
 	 
	 	 	     J. Ross Craft 	 
	 	 	      President 	 
	 
	 	ENCANA OIL & GAS (USA) INC.

 	 
	 	By:  	/s/  Paul Sander
 	 
	 	 	      Paul Sander 	 
	 	 	      Vice President 	 
	 

Approach Operating executes this Agreement as of the date first above written to evidence its
consent to the provisions of Section 6.01.

	 	 	 	 	 
	 	APPROACH OPERATING, LLC

 	 
	 	By:  	s/  J. Ross Craft
 	 
	 	 	     J. Ross Craft 	 
	 	 	     President 	 

22

 

	 	 	 	 	 

SCHEDULE OF DEFINITIONS

	 	 	 
	Defined Term	 	Section Where Defined
	Acceptance Period
	 	7.01(c)
	AFE
	 	4.02(a)
	AMI
	 	7.01(a)
	Approach
	 	Introductory Paragraph
	Approach Operating
	 	2.02
	Approach Interest
	 	5.01(a)
	Assignment
	 	5.02(a)
	Commitment Wells
	 	4.01(a)
	Complete, Completed, Completion
	 	4.08(a)
	Cotton Valley Lime Formation
	 	4.08(a)
	Default
	 	8.01(a)
	Drilling Unit
	 	5.01(b)
	Earning Event
	 	5.02(b)
	Effective Date
	 	Introductory Paragraph
	Electing Party
	 	4.03(c)
	EnCana
	 	Introductory Paragraph
	Evaluation Period
	 	4.01(b)
	Excluded Assets
	 	1.02
	Final Earning Event
	 	5.03
	Force Majeure
	 	11.01
	Geoscientific Data
	 	4.03(c)
	Initial Commitment Well
	 	4.01(a)
	Initial Term
	 	7.01(b)
	Interests
	 	7.01(b)
	JOA
	 	6.01(a)
	Layman, Laymen
	 	10.02
	Lease, Leases
	 	Background 1.
	Lease Rental Deposit
	 	2.01
	Letter of Credit
	 	2.03
	Objective Depth
	 	4.08(c)
	Operator
	 	6.01(a)
	Party, Parties
	 	Introductory Paragraph
	Properties
	 	1.01(a)
	Section
	 	11.12
	Subsequent Commitment Well
	 	4.01(b)
	Substitute Well
	 	4.05
	Withdrawal Notice
	 	4.01(b)

23

 

LIST OF EXHIBITS

	 	 	 
	Exhibit A
	 	Leases
	Exhibit B
	 	Excluded Assets
	Exhibit C
	 	Wire Transfer Instructions
	Exhibit D
	 	First AFE
	Exhibit E
	 	Commitment Well Locations
	Exhibit F
	 	Form of Assignment
	Exhibit G
	 	JOA
	Exhibit H
	 	AMI Map
	Exhibit I
	 	Tax Partnership Agreement
	Exhibit J
	 	Letter of Credit

24exv10w23

 

Exhibit 10.23

Form 342P

Producer’s 88

OIL & GAS LEASE

     THIS AGREEMENT made this 27 day of February, 2007 between Robert B. Rowling, William C.
Dunlap, Thomas Hassen, Minerva Partners, LTD., a Texas limited partnership, Recklaw Ventures, Ltd.,
and Michael T. Popejoy, whose address is 600 East Las Colinas Boulevard, Suite 1900, Irving, Texas
75039-5601 herein called Lessor (whether one or more) and Lynx Production Company, Inc. whose
address is 2121 San Jacinto, Suite 860, Dallas, Texas 75201, Lessee:

     1. Lessor, in consideration of TEN AND OTHER DOLLARS in hand paid, receipt of which is here
acknowledged, and of the royalties herein provided and of the agreements of the Lessee herein
contained, hereby grants, leases and lets exclusively unto Lessee for the purpose of investigating,
exploring, prospecting, drilling, and operating for and producing oil and gas, injecting gas,
waters, other fluids, and air into subsurface strata laying pipelines, storing oil, building tanks,
roadways, telephone lines, and other structures and things thereon to produce, save, take care of,
treat, process, store and transport said minerals, the following described land in Rio Arriba
County, New Mexico, to wit:

90,357.544 acres, more or less, out of the Tierra Amarilla Grant, Rio Arriba County, New Mexico
more fully described on Exhibit A attached hereto.

Said land is estimated to comprise 90,357.544 acres, whether it actually comprises more or less.

     2. Subject to the other provisions herein contained, this lease shall remain in force from the
first date above until April 2, 2009 (called primary term) and as long thereafter as oil or gas is
produced from said land or from land with which said land is pooled.

     3. The royalties to be paid by Lessee are: (a) on oil, and other liquid hydrocarbons saved at
the well, 1/8 of that produced and saved from said land, same to be delivered at the wells or to
the credit of Lessor in the pipeline to which the wells may be connected; (b) on gas, including
casing head gas or other gaseous substance produced from said land and used off the premises or
used in the manufacture of gasoline or other products, the market value at the well of 1/8 of the
gas used, provided that on gas sold on or off the premises, the royalties shall be 1/8 of the
amount realized from such sale; (c) and at any time when this lease is not validated by other
provisions hereof and there is a gas and/or condensate well on said land, or land pooled therewith,
but gas or condensate is not being so sold or used and such well is shut in, either before or after
production therefrom, then on or before 90 day after said well is shut in, and thereafter at annual
intervals, Lessee may pay or tender an advance shut-in royalty equal to $1.00 per net acre of
Lessor’s gas acreage then held under this lease by the party making such payment or tender, and so
long as said shut-in royalty is paid or tendered this lease shall not terminate and it shall be
considered under all clauses hereof that gas is being produced from the leased premises in paying
quantities. Each such payment shall be paid or tendered to the party or parties who at the time of
such payment would be entitled to receive the royalties which would be paid under this lease if the
well were in fact producing. The payment or tender of royalties

1

 

and shut-in royalties may be made by check or draft. Any timely payment or tender of shut-in
royalty which is made in a bona fide attempt to make proper payment, but which is erroneous in
whole or in part as to parties or amounts, shall nevertheless be sufficient to prevent termination
of this lease in the same manner as though a proper payment had been made if Lessee shall correct
such error within 30 days after Lessee has received written notice thereof by certified mail from
the party or parties entitled to receive payment together with such written instruments (or
certified copies thereof) as are necessary to enable Lessee to make proper payment. The amount
realized from the sale of gas on or off the premises shall be the price established by the gas
sales contract entered into in good faith by Lessee and gas purchaser for such term and under such
conditions as are customary in the industry. Price shall mean the net amount received by 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 leases 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.

     4. This is a paid-up lease and Lessee shall not be obligated during the primary term hereof to
commence or continue any operations of whatsoever character or to make any payments hereunder in
order to maintain this lease in force during the primary term; however, this provision is not
intended to relieve Lessee of the obligation to pay royalties on actual production pursuant to the
provisions or Paragraph 3 hereof.

     5. Lessee is hereby granted the right and power, from time to time, to pool or combine this
lease, the land covered by it or any part or horizon thereof with any other land, leases, mineral
estates or parts thereof for the production of oil or gas. Units pooled hereunder shall not exceed
the standard proration unit fixed by law or by the Oil Conservation Division of the Energy and
Minerals Department of the State of New Mexico or by any other lawful authority for the pool or
area in which said land is situated, plus a tolerance of ten percent. Lessee shall file written
unit designation in the County in which the premises are located and such units may be designated
from time to time and either before or after the completion of wells. Drilling operations on or
production from any part of any such unit shall be considered for all purposes, except the payment
of royalty, as operations conducted upon or production from the land described in this lease.
There shall be allocated to the land covered by this lease included in any such unit that portion
of the total production of pooled minerals from wells in the unit, after deducting any used in
lease or unit operations, which the net oil or gas acreage in the land covered by this lease
included in the unit bears to the total number of surface acres in the unit. The production so
allocated shall be considered for all purposes, including the payment or delivery of royalty, to be
the entire production of pooled minerals from the portion of said land covered hereby and included
in said unit in the same manner as though produced from said land under the terms of this lease.
Any pooled unit designated by Lessee, as provided herein, may be dissolved by Lessee by recording
an appropriate instrument in the County where the land is situated at any time after the completion
of a dry hole or the cessation of production on said unit.

     6. If at the expiration of the primary term there is no well upon said land capable of
producing oil or gas, but Lessee has commenced operations for drilling or reworking thereon, this
lease shall remain in force so long as operations are prosecuted with no cessation of more than 60
consecutive days, whether such operations be on the same well or on a different or

2

 

additional well or wells, and if they result in the production of oil or gas, so long
thereafter as oil or gas is produced from said land. If, after the expiration of the primary term,
all wells upon said land should become incapable of producing for any cause, this lease shall not
terminate if Lessee commenced operations for additional drilling or reworking within 60 days
thereafter, if any drilling, additional drilling, or reworking operations hereunder result in
production, then this lease shall remain in full force so long thereafter as oil or gas is produced
hereunder.

     7. Lessee shall have free use of oil, gas and water from said land, except water from Lessor’s
wells and tanks, for all operations hereunder, and the royalty shall be computed after deducting
any so used. Lessee shall have the right at any time during or after the expiration of this lease
to remove all property and fixtures placed by lessee on said land, including the right to draw and
remove all casing. When required by Lessor, Lessee will bury all pipelines on cultivated lands
below ordinary plow depth, and no well shall be drilled within two hundred feet (200 ft.) of any
residence or barn now on said land without Lessor’s consent. Lessor shall have the privilege, at
his risk and expense, of using gas from any gas well on said land for stoves and inside lights in
the principal dwelling thereon, out of any surplus gas not needed for operations hereunder.

     8. The rights of either party hereunder may be assigned in whole or in part and the provisions
hereof shall extend to their heirs, executors, administrators, successors and assigns; but no
change in the ownership of the land or in the ownership of, or rights to receive, royalties or shut
in royalties, however accomplished shall operate to enlarge the obligations or diminish the rights
of Lessee; and no such change or division shall be binding upon Lessee for any purpose until 30
days after Lessee has been furnished by certified mail at Lessee’s principal place of business with
acceptable instruments or certified copies thereof constituting the chain of title from the
original Lessor. If any such change in ownership occurs through death of the owner, Lessee may, at
its option, pay or tender any royalties or shut-in royalties in the name of the deceased or to his
estate or to his heirs, executor or administrator until such time as Lessee has been furnished with
evidence satisfactory to lessee as to the persons entitled to such sums. An assignment of this
lease in whole or in part shall, to the extent of such assignment, relieve and discharge Lessee of
any obligations hereunder and, if Lessee or assignee of part or parts hereof shall fail or make
default in the payment of the proportionate part of royalty or shut-in royalty due from such Lessee
or assignee or fail to comply with any of the provisions of this lease, such default shall not
affect this lease insofar as it covers a part of said lands upon which Lessee or any assignee
thereof shall properly comply or make such payments.

     9. Should Lessee be prevented from complying with any express or implied covenant of this
lease, or from conducting drilling or reworking operations hereunder, or from producing oil or gas
hereunder by reason of scarcity or inability to obtain or use equipment or material, or by
operation of force majeure, or by Federal or state law or any order, rule or regulation of
governmental authority, then while so prevented, Lessee’s duty shall be suspended and Lessee duly
shall not be liable for failure to comply therewith; and this lease shall be extended while and so
long as Lessee if prevented by any such cause from conducting drilling or reworking operations or
from producing oil or gas hereunder; and the time while Lessee is so prevented shall not be counted
against Lessee, anything in this lease to the contrary notwithstanding.

3

 

     10. Lessor hereby warrants and agrees to defend the title to said land and agrees that Lessee
at its option may discharge any tax, mortgage or other lien upon said land, and in the event Lessee
does so it shall be subrogated to such lien with the right to enforce same and to apply royalties
and shut-in royalties payable hereunder toward satisfying same. Without impairment of Lessee’s
rights under the warranty, if this lease covers a less interest in the oil or gas in all or any
part of said land than the entire and undivided fee simple estate (whether Lessor’s interest is
herein specified or not) then the royalties, shut-in royalty, and other payments, if any, accruing
from any part as to which this lease covers less than such full interest, shall be paid only in the
proportion which the interest therein, if any, covered by this lease, bears to the whole and
undivided fee simple estate therein. Should any one or more of the parties named above as Lessors
fail to execute this lease, it shall nevertheless be binding upon the party or parties executing
the same.

     11. Lessee, its or his successors, heirs and assigns, shall have the right at any time to
surrender this lease, in whole or in part, to Lessor or his heirs, successors and assigns by
delivering or mailing a release thereof to the Lessor, or by placing a release thereof of record in
the County in which said land is situated; thereupon Lessee shall be relieved from all obligations,
expressed or implied of this agreement as to acreage so surrendered, and thereafter the shut-in
royalty payable hereunder shall be reduced in the proportion that the acreage covered hereby is
reduced by said release or releases.

SEE
ATTACHED ADDENDUM “A” FOR ADDITIONAL PROVISIONS (1 through 21)

4

 

     IN WITNESS WHEREOF, this instrument is executed on the date first above written.

	 	 	 	 	 
	Lessor:

	 	 	 	Lessee:
	 
	 	 	 	 
	/s/ Robert B. Rowling

	 	 	 	/s/ Robert S. Crain
	 	 	 	 	 
	Robert B. Rowling

	 	 	 	Lynx Production Company
	 
	 	 	 	 
	 

	 	 	 	By: Robert S. Craine, President
	 
	 	 	 	 
	Lessor:
	 	 	 	 
	 
	 	 	 	 
	/s/ William C. Dunlap
	 	 	 	 
	 	 	 	 	 
	William C. Dunlap
	 	 	 	 
	 
	 	 	 	 
	Lessor:
	 	 	 	 
	 
	 	 	 	 
	/s/ Thomas E. Hassen
	 	 	 	 
	 	 	 	 	 
	Thomas Hassen
	 	 	 	 
	 
	 	 	 	 
	Lessor:
	 	 	 	 
	 
	 	 	 	 
	/s/ Matthew Malouf
	 	 	 	 
	 	 	 	 	 
	Minerva Partners, LTD., A Texas Limited
	 	 	 	 
	Partnership
	 	 	 	 
	 
	 	 	 	 
	By: Malouf Interests, Inc.

Its General Partner,

By its President, Matthew
Malouf

	 	 	 	 
	 
	 	 	 	 
	Lessor:
	 	 	 	 
	 
	 	 	 	 
	/s/ E.E. Treadway
	 	 	 	 
	 	 	 	 	 
	Recklaw Ventures, Ltd.
	 	 	 	 
	By its General Partner, E. E. Treadaway
	 	 	 	 
	Recklaw Management Co., Inc.
	 	 	 	 
	 
	 	 	 	 
	Lessor:
	 	 	 	 
	 
	 	 	 	 
	/s/ Michael T. Popejoy
	 	 	 	 
	 	 	 	 	 
	Michael T. Popejoy
	 	 	 	 

5

 

	 	 	 	 	 
	STATE OF TEXAS

	 	§
	 	 
	 
	 	 	 	 
	COUNTY OF DALLAS

	 	§	 	 

     The foregoing instrument was acknowledged before me on this 28 day of February, 2007 by Robert
B. Rowling, an Individual.

	 	 	 	 	 
	 	 	 
	 	                                              /s/ Lynn Zengler
 	 
	 	Notary Public, State of Texas 	 
	 
	 	Commission Expires:  9/25/2008 	 
	 

[NOTARY SEAL]

	 	 	 	 	 
	STATE OF TEXAS

	 	§
	 	 
	 
	 	 	 	 
	COUNTY OF DALLAS

	 	§	 	 

     The foregoing instrument was acknowledged before me on this 28th day of February, 2007 by
William C. Dunlap, an Individual.

	 	 	 	 	 
	 	 	 
	 	                                              /s/ Lynn Zengler
 	 
	 	Notary Public, State of Texas 	 
	 	

Commission Expires:  9/25/2008 	 
	 

[NOTARY SEAL]

	 	 	 	 	 
	STATE OF TEXAS

	 	§
	 	 
	 
	 	 	 	 
	COUNTY OF DALLAS

	 	§	 	 

     The foregoing instrument was acknowledged before me on this 2 day of March, 2007 by Thomas
Hansen, an Individual.

	 	 	 	 	 
	 	 	 
	 	                                              /s/ Lynn Zengler
 	 
	 	Notary Public, State of Texas 	 
	 	

Commission Expires:  9/25/2008 	 
	 

[NOTARY SEAL]

6

 

	 	 	 	 	 
	STATE OF TEXAS

	 	§
	 	 
	 
	 	 	 	 
	COUNTY OF DALLAS

	 	§	 	 

     The foregoing instrument was acknowledged before me on this 27 day of February, 2007 Minerva
Partners, LTD, a Texas Limited Partnership by Malouf Interests, Inc., Its General Partner, by its
President, Matthew Malouf.

	 	 	 	 	 
	 	 	 
	 	                                              /s/ Jay C. House
 	 
	 	Notary Public, State of Texas 	 
	 	

Commission Expires: 9/22/2010 	 
	 

[NOTARY SEAL]

	 	 	 	 	 
	STATE OF TEXAS

	 	§
	 	 
	 
	 	 	 	 
	COUNTY OF DALLAS

	 	§	 	 

     The foregoing instrument was acknowledged before me on this 27th day of February, 2007 by E.E.
Treadaway, General Partner of Recklaw Ventures, Ltd.

	 	 	 	 	 
	 	 	 
	 	                                              /s/ Lynn Zengler
 	 
	 	Notary Public, State of Texas 	 
	 	

Commission Expires: 9/25/2008 	 
	 

[NOTARY SEAL]

	 	 	 	 	 
	STATE OF TEXAS

	 	§
	 	 
	 
	 	 	 	 
	COUNTY OF DALLAS

	 	§	 	 

     The foregoing instrument was acknowledged before me on this 28th day of February, 2007 by
Michael T. Popejoy, an Individual.

	 	 	 	 	 
	 	 	 
	 	                                              /s/ Lynn Zengler
 	 
	 	Notary Public, State of Texas 	 
	 	

Commission Expires: 9/25/2008 	 
	 

[NOTARY SEAL]

7

 

	 	 	 	 	 
	STATE OF TEXAS

	 	§
	 	 
	 
	 	 	 	 
	COUNTY OF DALLAS

	 	§	 	 

     The foregoing instrument was acknowledged before me on this 7th day of March, 2007 by Robert
S. Craine, President Lynx Production Company.

	 	 	 	 	 
	 	 	 
	 	                                              /s/ Steven C. Haworth
 	 
	 	Notary Public, State of Texas 	 
	 	

Commission Expires: 3/12/2010 	 
	 

[NOTARY SEAL]

8

 

ADDENDUM “A”

Attached to and made a part of that certain oil and gas lease dated 27 February 2007 by and between
Robert B. Rowling, et al. as Lessor, and Lynx Production Company, Inc., as Lessee.

ADDITIONAL PROVISIONS OF LEASE

Notwithstanding any provisions to the contrary contained elsewhere in this lease, in the event of a
conflict or inconsistency between the printed portion of this lease and this Addendum, the terms,
provisions, covenants, limitations, exceptions, reservations and conditions of this Addendum shall
govern and prevail over the terms, provisions, covenants, limitations, exceptions, reservations and
conditions of the printed portion of this lease (and any insertions therein or deletions thereto).
Notwithstanding anything to the contrary in the foregoing portion of this lease, this lease is
executed and delivered by Lessor and is accepted by Lessee subject to the following provisions:

	1.	 	The royalties to be paid or delivered by Lessee to Lessor and which are hereby expressly
reserved by Lessor shall by 16.25% of all minerals produced, saved and sold from said land,
and whenever the fractions 1/8 appear herein, the fraction 16.25% shall be substituted in lieu
thereof.

	2.	 	It is also understood and agreed that any shut in royalty shall not be due during the primary
tem or during the time Lessee is continuously drilling as described in item 8.c below. When
payable, it shall be paid as to each unit containing a well as defined in item 8. below rather
than as to all land on ally covered by this lease. After that time, Lessee’s right to maintain
this lease in force after the later of the expiration of the primary term hereof or the end of
any continuous development by payment of shut-in gas royalty under paragraph 3. shall be
limited to recurring periods not to exceed three (3) years in the aggregate. In the even that
the cause of shutting in is a lack of infrastructure for marketing of gas or oil, such as
pipelines or other facilities necessary for the transportation, compression or marketing of
production, but Lessee or parties to whom Lessee will sell production are in the process of
actually constructing such lines or facilities, that period of time during which construction
is taking place shall not be counted in calculating the three year aggregate limit for
shutting in.

	3.	 	Lessor shall have the right at all reasonable times, personally or by representative, to
inspect the accounts, records, and data of Lessee pertaining to the development and production
of the oil, gas and associated minerals from the leased premises. Lessee agrees to provide
Lessor with any well information, such as logs, etc., within a reasonable time following
receipt of same.

	4.	 	It is hereby agreed between Lessor and Lessee that this lease covers only oil, gas and all
other hydrocarbons and/or substances, whether elements, mixtures or compounds in liquid,
gaseous or vaporous forms or states, which can or may be

1

 

	 	 	produced through the bore of a well producing oil or gas including, but not limited to,
crude oil, condensate, natural gas, coal gas or coal bed methane.
	 
	5.	 	No assignment by Lessee, or any successor to Lessee, shall be valid and binding upon Lessor
until furnished with a copy of such assignment or assignments as filed in the Rio Arriba
County records. Each assignee of this Lease expressly assumes the obligation to furnish to
Lessor copies of its assignment, but upon its failure to do so, it shall be conclusively
presumed that such assignee has appointed the last party in its chain of title who has given
such notice to Lessor, as that assignee’s agent and attorney-in-fact as to all matters
pertaining to this Lease, including the service, receipt, and acceptance of citation in any
suit flied by Lessor with respect to this lease.
	 
	6.	 	Lessor appoints Michael T. Popejoy as its agent for service of any notice to be made to
Lessor and notice shall be made via certified mail with return receipt requested, or personal
delivery, facsimile with confirmation or email with confirmation to:

Michael
T. Popejoy

600 East Las Colinas Blvd; Suite 1900

Irving, Texas 75039-5601

Phone: 214-283-8617

Fax: 214-283-8515

Email: mpopejoy@trtholdings.com

	7.	 	No pooling of the leased premises is allowed or permitted without the prior written consent
of Lessor.

	8.	 	This lease, if not sooner terminated whole or in part, shall terminate at the end of the
primary term, subject to any extension or continuous drilling program which may occur in
accordance with provisions found later in this addendum, as to all of said land expect the
following units of earned or retained acreage:

	 	(i)	 	$0 acres around each oil well then producing in paying quantities, or capable
of producing in paying quantities and shut-in, or being re-worked, or
	 
	 	(ii)	 	160 acres around each gas well then producing, or capable of producing, in
paying quantities, or capable of producing in paying quantities and shut-in or being
re-worked, from depths at or above 8,000 feet beneath the surface, or
	 
	 	(iii)	 	320 acres around each gas well the producing, capable of producing in paying
quantities, or capable of producing in paying quantities and shut-in, or being
re-worked, from depths below 8,000 feet beneath the surface
	 
	 	(iv)	 	In the event any governmental authority or jurisdiction prescribes or permits
the allocation of a larger unit to any well in order to obtain the

2

 

maximum production allowable, then this lease shall continue in force and effect as
to the amount of acreage to be so allocated.

In the event Lessee desires to hold and retain more acres than that described above for a
producing unit, it may do so subject to the following terms and conditions:

	 	A.	 	No producing unit shall exceed 640 acres
	 
	 	B.	 	Lessee shall timely and properly designate said producing unit as set forth
in 8.b below
	 
	 	C.	 	On an annual basis, using the effective date of the designated unit as the
starting date, Lessee shall pay to Lessor, a minimum annual royalty, the difference
between the royalties and shut ins actually received during this annual period and the
sum of seventy five dollars ($75) for each net acre held by said unit or units. Should
Lessor consider that Lessee is not in compliance with respect to the payment of such
minimum royalty payment, lessor shall notify Lessee in writing via certified mail of
the facts relied upon as constituting a breach, hereof, and Lessee, if in default,
shall have 60 days after receipt of said notice in which to make said payments, if
due.

In addition, three (3) years the later of the end of the primary term or the end of continuous
development as described in item c. below, this lease shall terminate as to all depths below 100
feet beneath the base of the deepest formation (or its stratigraphic equivalent) producing or
capable of producing in each unit.

Partial termination shall be subject to the following conditions:

	a.	 	The overlapping of one unit of earned acreage with another unit of earned acreage shall not
entitle Lessee to retain any acreage not in either unit.

	b.	 	Lessee shall file of record in the appropriated governmental office an instrument releasing
said lease as to acreage not held in accordance with the terms of this provision. The retained
tracts shall be in as near the form of a square, as is practicable, but conforming as nearly
as practicable with lease lines, with the well(s) located therein teeing a sufficient distance
from boundary lines of such tracts to comply with regulatory requirements. Such a filing shall
be made by Lessee within 60 days after the later of (i) the end of the primary term or any
extension thereof: or (ii) the end of continuous development as described later its these
special provisions. If Lessee fails or refuses to execute and file such a release or releases
as described, Lessee shall be liable to Lessor for any and all costs and expenses, including
attorney’s fees, incurred by Lessor in attempting to secure such releases.

	c.	 	If at the expiration of the primary term or any extensions of the primary term, Lessee is
then engaged in the actual drilling of a well in search of oil or gas on the

3

 

	 	 	covered land or land pooled therewith or has drilled a producing well or a dry hole thereon
during the primary term, or any extensions to the primary tem, then the lease termination
provisions of this paragraph 8 shall be postponed so long as Lessee continuously drills on
the covered land or land pooled therewith with no more than one
hundred eighty (180) days
elapsing between the completion of a well as a producer or a dry hole and the commencement
of actual drilling of the next succeeding well.
	 
	d.	 	In the event of a partial termination of this lease as contemplated in this special
provision, it is agreed that Lessee shall have and retain such easements of ingress and egress
over the covered land as shall be necessary to enable Lessee to explore (including seismic
operations), develop, operate and produce and transport products from or on portions of this
Lease then in effect. Further, it shall not be necessary for Lessee to remove or relocate any
roads, pipelines, surface facilities, tank batteries or other installations from any portions
of this lease which may have terminated for so long as they are used for the development and
operation of such portions of this lease which continue in force and effect.
	 
	9.	 	Lessee shall protect the oil and gas in and under the leased premises from drainage by wells
on adjoining or adjacent land or leases in a manner of a reasonable, prudent operator.
	 
	10.	 	Prior to the commencement of any operations on the leased premises, Lessee shall give Lessor
notice of Lessee’s intention to commence operations, and the approximate date and location of
them. Except in eases of emergency, this notice to Lessor shall be given with in a reasonable
time prior to the commencement of operations. Lessor shall have the right, personally or by
representative, at Lessor’s sole risk, to have access to the derrick floor with the right to
observe all operations on all wells including the right to inspect and take samples of all
cores and cuttings, and the right to witness the taking of logs and drill stem tests, and
Lessee agrees to promptly furnish Lessor with copies of all logs and surveys within sixty (60)
days of receipt of Lessor’s written request therefor. Lessee agrees to share with lessor true
and correct information as requested by Lessor for each well, the production therefrom and
such technical information as Lessee may acquire and which is readily available with respect
to the sands and formations encountered. Lessor shall have the right to be present when wells
and or tanks are gauged and production metered and shell have the right to examine all run
tickets and to have full information as to production and runs. In addition, Lessee shall
furnish to Lessor, upon Lessor’s written request, true copies of all applications, reports,
and test made by Lessee to any governmental authority. Nothing in this provision shall be
interpreted as dictating which operations or tests shall be conducted by Lessee. All
operations and tests shall be conducted at Lessee’s sole discretion.

	11.	 	Lessor hereby binds Lessor and Lessor’s heirs, successors and assigns to WARRANT AND FOREVER
DEFEND all and singular the leased premises unto Lessee and Lessee’s heirs, successors and
assigns, against every person

4

 

	 	 	whomsoever lawfully claiming or to claim the same or any part thereof by, through or under
Lessor, inn riot otherwise. Lessor agrees that Lessee, at Lessee’s option, may discharge
any tax, mortgage, or other line or lines upon any interest or interests leased hereby, and
in the event Lessee does so, Lessee shall be subrogated to such lien with the right to
enforce the same and apply royalties, shut-in gas well royalties minimum royalties and
other payments accruing hereunder to the interest or interests against which any such line
applies, toward satisfying the same. It is agreed that if this lease covers a less interest
in the oil and gas in all or any part of the leased premises than the entire undivided fee
simple estate, then royalties, delay rentals, shut-in royalties, minimum royalties and
other monies accruing from any part as to which this lease covers less that such full
interest shall be paid only in the proportion which the interest therein covered by this
lease bears to the whole and undivided fee simple estate therein.
	 
	12.	 	If, at any time while this lease is in force Lessee’s drilling operations are delayed or
prevented by reason of Lessee’s inability to obtains fuel for operations or Lessee’s inability
to obtain the service of a drilling rig or completion rig, or Lessee is delayed by mechanical
failure in the drilling or completion of a well or Lessee is delayed by virtue of any
litigation, injunction or restraining order, governmental or regulatory order or regulation or
by failure to obtain permits, then all the provisions and covenants contained in this lease
concerning the operations during the primary term or after the expiration of the primary term
of this lease, in whole or in part, shall be extended until 60 days after the removal of such
delaying cause; delaying cause provided, that Lessee must give written notice to Lessor of the
existence and cause of such delay with appropriate supporting evidence within 15 days
thereafter, therein identifying the portion or portions of the leased premises reasonably
affected by such circumstances. The provisions of this item 13 excusing timely performance by
Lessee will be applicable only to the portion or portions of the leased premises identified in
Lessee’s written notice to Lessor as being reasonably affected by the existence and cause of
the delay. The provisions of this item 13 will not be applicable to any and all portions of
the leased premises not identified in Lessee’s written notice to Lessor. In no event shall
this provision allow an extension of this lease or its term, in whole or in part, past a four
(4) year period of time or reaming periods not to exceed four (4) years in she aggregate if
the delay is caused by litigation, injunction, retraining order, governmental or regulatory
order or by failure to obtain permits, and past a two (2) year period of time or recurring
periods not to exceed two (2) years in the aggregate for all other causes.

	13.	 	Lessee agrees to defend, indemnify and hold harmless Lessor, their heirs, successors,
representatives, agents and assigns, from and against any and all claims, demands and causes
of action, including, without limitation, claims for injury (including death) or damage to
persons or property arising out of, incidental to or resulting from the operations of or for
Lessee, its servants, agents, employs, guests, licensees, invitees or independent contractors,
and, from and against all costs and expenses incurred by Lessor by reason of any such claim or
claims, including attorneys’ and expert witnesses; fees; and each assignee of this

5

 

	 	 	lease, or an interest therein, agrees to defend, indemnify and hold harmless Lessor in the
same manner provided above. Such indemnity shall apply to any claim arising out of
operations conducted under or pursuant to this lease, howsoever caused, INCLUDING, BUT NOT
BY WAY OF LIMITATION, ANY NEGLIGENT ACT OR OMISSION OF LESSOR EXCEPTING ONLY LESSOR’S GROSS
NEGLIGENCE AND WILLFUL MISCONDUCT. LESSOR’S REPRESENTATIVES, AGENTS OR EMPLOYEES, LESSEE,
LESSEE’S AGENTS, SERVANTS, EMPLOYEES OR INDEPENDENT CONTRACTORS, LESSEE’S OBLIGATION TO
DEFEND AND INDEMNIFY LESSOR SHALL APPLY WHETHER OR NOT LESSOR MAY BE GUILTY OF ANY
NEGLIGENT ACT OR OMISSION WHICH RESULTED IN OR CONTRIBUTED TO THE COST, EXPENSE OR
LIABILITY AGAINST WHICH LESSEE IS OBLIGATED TO INDEMNIFY LESSOR HEREUNDER AND WHETHER OR
NOT LESSOR’S LIABILITY IS IMPOSED BY ANY STATUTORY OR COMMON-LAW THEORY OR STRICT
LIABILITY.
	 
	14.	 	Lessor owns minerals only. The surface estate is owned according to the records of Rio Arriba
County, New Mexico. Lessee agents that to the extent legally required to do so, Lessee shall
make reasonable commercial efforts to obtain appropriate agreement with surface owners prior
to conducting operations.
	 
	15.	 	In the event Lessee conducts, or causes to be conducted, seismic operations, Lessee shall
furnish Lessor with a shot point map and one full scale (5 inches per second) paper record of
all seismic sections. Such sections shall contain processed data (including final normal
move-out corrections, static corrections stacking, and any other deconvolution or processing
utilized by Lessee) of normal polarity, shall identify the traces by shot point, and shall
contain a label which includes general line details, recording and field data, a spread
diagram, processing information, and display parameters. If a migrated section is available,
then, in addition to the un-migrated section, Lessor shall be provided with a copy of the
migrated section which conforms to the requirements listed above. Each such seismic section
shall include all data within one mile beyond the exterior boundaries of the leased premises
if shot in that way. If such line shall run from (i) the leased premises, (ii) other lands for
which Lessee owns a lease from Lessor, or (iii) any lands pooled therewith onto other such
lands, then Lessee shall furnish Lessor the entire length of such connecting line. For 3-D
seismic operations, Lessee shall furnish Lessor with both a final post plot of the source and
receiver positions and a final post plot of all 3-D bins over the leased premises. Lessee
shall furnish Lessor with a SEG-Y format tape (or comparable format output) compatible with
industry-available PC-based or workstation-based 3-D interpretation packages, in a format
acceptable to Lessor. The SEG-Y format output will contain processed full record length,
binned data of all 3-D data resulting from seismic processing of acquired data which cover the
licensed premises and the area within one mile of the boundaries of the leased premises. If
more than one SEG-Y format output of the processed 3-D binned data is generated by Lessee or
by the contractor for Lessee, Lessee shall furnish Lessor with that portion of that additional
processed 3-D binned data which covers the

6

 

	 	 	leased premises. Lessor shall have access to and the light to review and examine all
interpretations of seismic data utilized by Lessee in Lessee’s development of the leased
premises. Lessee agrees to allow, for a period not to extend 15 business days, a
geoscientist representing Lessor to examine. Nothing in this provision shall be
interpreted as dictating if or which seismic operations, processing or interpretation are
conducted by Lessee nor which processes are utilized or reports generated. Any seismic
operations, if undertaken, shall be conducted at the sole discretion of Lessee.
	 
	16.	 	Lessee commits to drill eight (8) wells on the lands covered and subject to this oil and gas
lease during the primary term (on or before April 2, 2009). Each will be drilled to a depth
and at a location of Lessee’s sole choice, except that one of the eight wells shall be drilled
to a depth of 8,500 feet beneath the surface or to the basement (granite), whichever is
shallower. Lessee may offset the commitment to drill up to three (3) wells by shooting seismic
of a type and a location of its choosing. If seismic is shot, the offset to the drilling
obligation shall apply dollar for dollar by matching the amount spent; by Lessee for the
seismic program(s) with Lessee’s good faith estimate for the completed well costs for the
three wells. If the seismic costs (including shooting, permits, surface damages, processing,
interpretation and related costs) exceed the estimate costs for the three wells to be offset,
no additional offset credit will be given. A maximum of three wells may be offset. The only
penalty for Lessor’s failure to drill the commitment wells and/or shoot seismic shall be the
termination of this oil and gas lease at the end of its primary term as to all lands not
theretofore earned by Lessee, and Lessee agrees to promptly release of record to Lessor any
and all rights to this oil and gas lease as to all unearned lands. In the event of Lessee’s
retention of earned lands due to partial fulfillment of this drilling commitment, Lessee shall
retain as to each well which it has earned the applicable retained acreage specified in
Paragraph 8 (i) through (iv), except that any potential enlargement of the retained acreage
shall be limited to that amount of acreage required or prescribed in orders to obtain maximum
production, and not merely permitted. If Lessee has drilled all but the last commitment well
which it is obligated to drill under this provision and is conducting
drilling operations on the last commitment well, and if within thirty (30) days of the expiration of the primary
term, Lessee encounters impenetrable substances or other conditions beyond its control making
further drilling of said well impracticable by generally accepted industry standards, Lessee
may, at its option, commence drilling operations of a substitute well at a legal location on
the leased premises within sixty (60) days of drilling rig release from the abandoned well
(but in the event beyond June 2, 2009). If the substitute well is drilled in its full
compliance with all of the terms and provisions of this paragraph, the substitute well shall
be treated, for all purposes, as the well for which it is substituted; and the time within
which Lessee is obligated to drill the commitment wells shall be extended for so long as such
drilling operations were conducted with reasonable diligence and in a good and workmanlike
manner until said substitute well is completed or plugged and abandoned.

7

 

	17.	 	If Lessee fulfills its drilling commitment as described in 16 above, Lessee may at its
election and option extend the primary term of this lease, or if after the primary term delay
the continuous development of this lease, for a period of one (1) year in exchange for the
payment of fifteen dollars ($15.00 per net mineral acre for the amount of acres to be
extended. This option may be exercised two (2) times, such that acreage could eventually be
extended for two (2) years in exchange for the payment of thirty dollars ($30.00) per net
mineral acre.

	18.	 	Lessor and Lessee acknowledge and agree that this oil and gas lease replaces and supersedes
the following oil and gas leases previously entered into:
	 
	 	 	Oil and Gas Lease dated January 1, 2006, between Rowling, as Lessor, and Lynx, as Lessee,
covering 68,847.64 acres of land, more or less, situated in Rio Arriba County, New Mexico,
recorded in Book 529 at Page 2150 of the records of Rio Arriba County, New Mexico; and
	 
	 	 	Oil and Gas Lease dated April 1, 2006, between Rowling, as Lessor, and Lynx, as Lessee,
covering 21,401.00 acres of land more or less, situated in Rio Arriba County, New Mexico,
recorded in Book 529 at Page 4585 of the records of Rio Arriba County, New Mexico.
	 
	 	 	Lessee agrees at its cost to promptly execute and record a release of the superseded leases
to further evidence that this lease has mined and superseded such leases.

	19.	 	If this Lease now or hereafter covers separate tracts, no pooling, communization or
unitization of royalty interests as between or among any such separate tracts is Intended or
shall be implied from the inclusion of such separate tracts within this lease, it being
intended to expressly negate, any presumption that this lease creates a community lease. As
used in this paragraph, the words “separate tract” shall mean any tract with royalty or
non-executive interests or ownership differing, now or hereafter, either as to parties or
amounts, from that as to any other part of the leased premises. Further, the execution hereof
shall not amount to an offer to any owner of an executive or non-executive interest or royalty
interest to effect such a pooling or communitization by execution or ratification of this
instrument. In the absence of pooling in accordance with the other provisions of this lease,
royalties will be paid exclusively to the applicable royalty owners within the individual well
unit or spacing unit upon which a well is situated and from which a well is situated and from
which a well is producing, to the total exclusion of the royalty owners of all other separate
tarts covered by this lease.

	20.	 	With respect to the information which Lessee provides Lessor in accordance with the
provisions of paragraphs 3, 10 and 15 of this Addendum, Lessor agrees to keep confidential all
such information. This confidentiality provision shall not apply to (a) any information of
public record; (b) disclosures by Lessor to its agents, servants, employees or attorneys
provided such third parties agree in writing in advance to keep such information confidential
in accordance with this

8

 

	 	 	paragraph; (c) disclosure to proper taxing authorities for purposes of determining the
value of the properties for ad valorem taxes or other taxes assessed by virtue of ownership
of the minerals and/or royalties; or (d) if Lessor brings legal action for the enforcing of
the provisions of this lease.
	 
	21.	 	This instrument may be executed in multiple counterpart with each counterpart being
considered an original for all purposes herein and binding upon the party executing provided
this instrument or a counterpart thereof is executed by all parties hereto, and the signature
and acknowledgment pages of the various counterparts hereto may be combined into one
instrument for the purposes of recording this instrument in the property records of the County
Clerk’s office.

9

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