Document:

exv10w3

 

Exhibit
10.3

TRANSITION SERVICES AGREEMENT

     This TRANSITION SERVICES AGREEMENT (the “Agreement”), dated April 23, 2007, is
entered into between COG Operating LLC, a Delaware limited liability company (“COG”),
acting for itself and COG Oil & Gas LP, a Texas limited partnership (“COG LP”), each with a
mailing address of 550 W. Texas Avenue, Suite 1300, Midland, Texas 79701, (COG and COG LP,
collectively herein, “Concho”), and Mack Energy Corporation, a New Mexico corporation, with
a mailing address of P.O. Box 960, Artesia, New Mexico 88211, (“Contractor”), as follows:

     WHEREAS, COG is the operator of record of certain oil and gas properties described in Exhibit
A attached hereto (the “Properties” or “Contract Area”);

     WHEREAS, Concho and Contractor are parties to that certain Contract Operator Agreement dated
February 24, 2006 (the “COA”), under which Contractor provides the services described
therein with respect to the Properties;

     WHEREAS, Concho and Contractor now desire to immediately terminate the COA in all respects
and, in connection therewith, Concho shall assume and perform all duties and responsibilities as
operator of the Properties, except for such services related thereto that are to be performed by
Contractor under this Agreement; and

     WHEREAS, Concho and Contractor desire that Contractor continue to provide certain services
with respect to the Properties, as provided hereunder (all of the services performed by Contractor
on behalf of Concho under this Agreement, inclusive of the personnel, materials, equipment and
supplies of Contractor provided for performing such services, are herein called the
“Services”).

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     NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, the
parties agree as follows:

     1. Services to be Provided Respecting Producing Wells. During the term hereof,
Contractor shall perform the following Services on or respecting producing or shut-in wells
currently located on or hereafter drilled upon the Properties:

	 	(a)	 	Manage and oversee the day-to-day routine supervision and maintenance of each
of the wells and Properties associated therewith, including, without limitation,
maintenance, supervision, management and minor repairs and up-keep of existing wells
(including pumping services), structures, equipment and facilities associated with each
well. Contractor shall give prior notice to and obtain consent from Concho for any
individual Service on or respecting any well or Property that Contractor reasonably
expects will cost in excess of $75,000.00, except that such prior notice shall not be
required for emergency Services necessary for the protection of the public safety and
health or the environment. Contractor shall promptly report any such emergency and
responsive Services to Concho.
	 
	 	(b)	 	Supervise subcontractors, suppliers, vendors and any other contract personnel
retained by Concho or retained by Contractor at the request of Concho as required to
perform and fully satisfy its obligations under this Agreement.
	 
	 	(c)	 	Monitor production from the Properties and provide to Concho daily production
volumes from the Properties and, as requested, conduct and report on well tests.

     2. Quarterly Development Plan. At least fifteen (15) days prior to the first day of
each calendar quarter during the term hereof, commencing with the quarter beginning July 1, 2007,
Concho shall provide Contractor a development plan for such following quarter listing the wells to
be drilled, reworked, recompleted, plugged and abandoned, or subject to other operations (the
“Quarterly Development Plan”) for which Contractor’s Services will be required under
Section 3 below during such quarter. Concho, after consultation with Contractor, shall have the
right to propose the drilling, recompletion, workover, plugging and abandonment or other operation
for wells not made a part of the Quarterly Development Plan, and Concho shall have final authority
concerning the content and implementation of the Quarterly Development Plan. The Quarterly
Development Plan shall also set forth in reasonable detail the sequence in

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which all of such operations are to be conducted. Contractor will not deviate from the sequence of
operations specified in the Quarterly Development Plan, except as agreed to by Concho. For each
well to be drilled pursuant to the Quarterly Development Plan, Concho shall specify in reasonable
detail the total depth to be drilled, the objective zones, well design and drilling procedures for
such well. For each well to be worked-over or recompleted, Concho shall specify in the Quarterly
Development Plan the objective zones to be completed and the designated completion procedures. For
workover and completion operations specified in the Quarterly Development Plan, Contractor shall
provide Concho with a continuous fifteen (15) day forecast of the availability of Contractor’s
pulling units to facilitate such workover and completion operations. Contractor’s Services
performed in connection with implementing the Quarterly Development Plan shall in all respects be
subject to the availability of Contractor’s personnel, pulling units, equipment, materials and
supplies necessary to complete and perform such services. Within five (5) days after receipt of
each Quarterly Development Plan, Contractor may provide written notice to Concho listing or
identifying those Services required to implement the Quarterly Development Plan that Contractor
will be unable to perform because of the lack of available personnel, equipment, materials or
supplies needed to perform such Services (“Contractor’s QDP Notice”). Concho may use other service
providers or vendors to ensure implementation of its Quarterly Development Plan if and to the
extent Contractor is unable to perform the services to be provided by such service providers or
vendors as set forth in Contractor’s QDP Notice. Concho and Contractor will operate under the
Quarterly Development Plan adopted for the quarter period ending June 30, 2007 under the COA until
the Quarterly Development Plan for the quarter period beginning July 1, 2007 is adopted according
to this Section 2.

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     3. Services to be Provided Respecting Drilling Operations. At Concho’s request as
identified in each Quarterly Development Plan, Contractor shall perform the following Services with
respect to drilling operations to be conducted on the Properties by Concho:

	 	(a)	 	If and to the extent comparable Services will not be provided
by Contractor under this Agreement, Concho shall retain and contract with
drilling contractors and any other third-party contractors, including any of
Contractor’s Affiliates, which provide labor, materials or services in
connection with any and all drilling, completion, fracing, re-working and all
other operations to be conducted on the Properties by Concho. At Concho’s
request, Contractor may make recommendations to Concho regarding specific
third-party service or material providers and vendors for services, equipment
and materials that will not be provided by Contractor as part of its Services,
including Contractor’s Affiliates, but Concho shall have sole authority to
retain service providers and vendors for such services, equipment and materials
that will not be provided by Contractor as part of its Services; provided,
however, that due consideration shall be given Contractor’s Affiliates if their
costs for services or materials are equal to or less than the costs for such
services or materials offered by other service providers and vendors.
	 
	 	(b)	 	Concho shall obtain all applicable permits for a well and shall
initiate the staking of each proposed well location to be prepared and drilled
hereunder, and Contractor shall provide well site supervision in the staking of
each such well and the preparation of the well site for drilling operations.
All necessary rights-of-way, easements and other surface use agreements will be
negotiated and obtained by Concho.
	 
	 	(c)	 	Contractor shall follow Concho’s designated procedures for
Services to be provided by Contractor for the drilling (including logging
suite), completing, fracing, recompleting, reworking, testing, plugging and
abandoning and otherwise operating wells and shall supervise all other
operations and activities specifically requested to be performed by Contractor
under any Quarterly Development Plan. At Concho’s request, Contractor will
provide recommendations concerning any drilling, completing, fracing,
recompleting, re-working, testing or plugging and abandonment operations
conducted by Concho on the Properties. Contractor shall have direct contact
with drilling contractor(s) during drilling operations, and shall provide to
Concho or cause to be provided by such contractors, such related reports and
information as requested by Concho, including, but not limited to, daily
drilling reports, completion reports, and all information related to formation
evaluation.
	 
	 	(d)	 	Upon reaching the objective depth on any well, Concho shall be
responsible for logging the well, providing cement volumes and types of

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	 	 	 	cement, placement of DV tools and other pre-completion activities prior to
running casing. At Concho’s request, Contractor shall recommend to Concho
whether to complete or plug and abandon the well or to conduct additional
drilling or testing and, if Concho elects to complete a well, completion
procedures. Concho has the sole authority to decide whether to complete or
plug and abandon the well or to conduct additional drilling or testing. If
Concho elects to complete a well, Concho shall provide Contractor with the
designated layout of production facilities and equipment for such well
within five (5) days of the release of the drilling rig.
	 
	 	(e)	 	Concho agrees to provide timely instructions to Contractor
concerning the Services to be provided by Contractor under this Section 3.
Concho shall at all times (i.e., 24 hours a day, 7 days a week) have a
designated representative available to instruct and advise Contractor
concerning its Services to be performed under this Section 3.
	 
	 	(f)	 	Contractor shall provide drilling and completion supervisors
and other Services it performs in connection with the drilling, completion and
plugging and abandonment of wells and other personnel, labor, equipment
(including pulling units), materials and supplies necessary to perform Services
to complete, equip, and connect wells for production or plugged and abandoned
wells.
	 
	 	(g)	 	Contractor shall perform any other reasonable Services and
activities with respect to the operation, management and administration of the
Properties as requested by Concho under a Quarterly Development Plan or
otherwise.

     4. Operations – Salt Water Disposal System. Concho, Contractor, Chase Oil Corporation
and Caza Energy LLC (collectively, “Chase”) jointly own certain saltwater disposal wells in the
Contract Area (the “Disposal Wells”) and associated permits, governmental orders, surface use
agreements, right-of-way agreements and other agreements (collectively, the “SWD System”), pursuant
to which saltwater and other fluids are transported from the Properties and other properties not
part of the Contract Area for disposal into the Disposal Wells. Each of Concho and Chase has access
to and use of the SWD System pursuant to the terms of that certain Salt Water Disposal System
Ownership and Operating Agreement dated February 24, 2006. Contractor agrees to perform the
following Services respecting the SWD System (which is

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deemed a Property hereunder) on behalf of Concho and Chase pursuant to the terms of this Agreement:

	 	(a)	 	Under the Services to be provided according to Section 1 of
this Agreement, Contractor shall manage and oversee the day-to-day management
and maintenance of the SWD System, including, without limitation, management
and maintenance of the Disposal Wells and related equipment and facilities, and
notice to Concho of any problems, including system capacity problems, and of
any upgrade and expansion requirements known to Contractor.
	 
	 	(b)	 	Under the Services to be provided according to Section 3 of
this Agreement, and at the direction and designated procedures of Concho and as
specified in the Quarterly Development Plan, Contractor shall conduct such
operations required to drill additional disposal wells (or convert previously
producing wells to disposal wells) to be connected to the SWD System or to
connect additional producing wells to the SWD System, thereby expanding the SWD
System.

     5. Joint Interest Billings and Third-Party Invoices.

	 	(a)	 	Contractor will not and shall not be required to prepare and
collect joint interest billings or other third-party invoices, prepare and
maintain division order records, pay royalties, revenues, delay rentals or shut
in royalties or pay right-of-way damages in connection with any Property.
	 
	 	(b)	 	Third-party invoices for Services conducted on, or materials or
equipment supplied to, the Properties, including the drilling operations
outlined in this Agreement, shall be addressed to Concho c/o Contractor at P.O.
Box 1470, Artesia, New Mexico 88211. Contractor shall review and make
appropriate adjustments to all third-party invoices and inform Concho of any
discrepancies or other problem with such invoices. After making appropriate
adjustments, Contractor shall submit such invoices, together with all
supporting information requested by Concho, to Concho. Concho shall deal
directly with service and material providers and vendors in resolving any
discrepancies, adjustments or problems with invoices.

     6. Term.

	 	(a)	 	The term of this Agreement shall be the period commencing April 23, 2007 (the “Effective Date”) and ending upon the earlier to occur
of (1) February 28, 2011; (2) the date on which Concho Resources Inc. completes
the initial sale of its shares of common stock to the public pursuant to a
registration statement filed under the Securities Act of 1933, as amended; or
(3) a Change of Control, as provided herein, unless terminated sooner as
otherwise provided for in this Agreement or by the mutual written agreement of
both parties.

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	 	(b)	 	Notwithstanding anything herein to the contrary, a party shall
have the right to terminate this Agreement by written notice upon or within
sixty (60) days after a Change of Control of or pertaining to the other party
hereto or its ultimate parent entity (“Change of Control Entity”). As
used herein, “Change of Control” means:

	 	(1)	 	the liquidation, dissolution or winding up of
the affairs of a Change of Control Entity, whether voluntary or
involuntary;
	 
	 	(2)	 	a sale, in one or more related transactions, of
all or essentially all, of the assets of a Change of Control Entity;
	 
	 	(3)	 	any merger, consolidation, reorganization or
other transaction with or into another entity, or other transactions
resulting in the equity owners of a Change of Control Entity, as of the
date hereof, directly or indirectly, holding less than a majority of
the voting power and control of a Change of Control Entity; and
	 
	 	(4)	 	as to the Contractor, neither Mack Chase nor
Robert Chase shall continue to serve as Contractor’s chief operating
officer for the purposes of this Agreement.

	 	(c)	 	Notwithstanding anything herein to the contrary, this Agreement
shall automatically terminate, with respect to each and every Property, upon
the sale, exchange, foreclosure, transfer or other disposition, or upon the
termination, expiration, or forfeiture, of Concho’s entire interest in such
Property.
	 
	 	(d)	 	Notwithstanding anything herein to the contrary, at any time,
Concho may, in its sole discretion, suspend or terminate any Services performed
or to be performed by Contractor on a specific Property hereunder if, in
Concho’s sole judgment, a material event (as defined herein) could result from
Contractor’s operations, until such time as Concho, in its sole judgment,
determines that Contractor shall resume such Services on the affected Property.
A material event is an event or circumstance which, in Concho’s sole judgment,
could have a materially adverse effect on a Property or Concho’s business. As
soon as reasonably practicable following Concho’s written notice of suspension
or termination of any specific Services (which notice shall specify in
reasonable detail the basis for such suspension or termination), Contractor
will cease performing such specified Services as soon as Contractor is able to
secure the affected Properties and vacate the premises with all reasonable
dispatch. Concho will remain obligated to pay Contractor for all compensation
due hereunder to Contractor for suspended or terminated Services up to the
point in time that Contractor vacates the affected premises.

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     7. Concho Representative. For all purposes hereof, the Concho’s representative will be
E. Joseph Wright. The address for all notices hereunder shall be:

COG Operating LLC

550 W. Texas Avenue, Suite 1300

Midland, Texas, 79701

Attn: E. Joseph Wright

Fax: (432) 683-7441

     8. Contractor Representative. For purposes hereof, Contractor’s representative will be
Robert Chase. The address for all notices hereunder shall be:

Mack Energy Corporation

P.O. Box 960

Artesia, New Mexico 88211

Attn: Robert Chase

Fax: (505) 746-9539

     9. Standard of Performance. Contractor shall (a) comply with any and all federal,
state and local laws, rules and regulations (“Laws”) applicable to the Properties, and in
the event of noncompliance with any Laws, immediately notify Concho and, at Concho’s direction,
take whatever steps requested by Concho to bring the subject Property into compliance; and (b)
perform all its obligations under this Agreement as a reasonably prudent operator, in a good and
workmanlike manner, with due diligence and dispatch, in accordance with good oil field practices,
and in compliance with all applicable agreements, Laws and applicable policies and procedures of
Concho that are specifically identified or made known to Contractor. Subject to Section 12, in no
event shall Contractor have liability hereunder for losses sustained or liabilities incurred,
except such losses or liabilities that result from gross negligence or willful misconduct of
Contractor or its Affiliates or its or their employees, agents or representatives.

     10. Consideration.

	 	(a)	 	Amount of Payment. Concho shall pay Contractor for its
Services under this Agreement as follows; provided, however, that all charges
of

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	 	Contractor therefor shall in no event exceed those charged by or among
Contractor and its Affiliates for the same or similar services:
	 
	 	(1)	 	For the Services performed under Section 1 of
this Agreement, a monthly charge in the amount of $375 per well and per
Disposal Well located on the Properties, such amount to be inclusive of
salaries, benefits, costs of vehicles (including depreciation and
fuel), cell phones, payroll taxes, repairs, maintenance and other
administrative costs incurred by Contractor in performing such
Services. All such costs shall only be for Services provided by
Contractor on the Properties according to Section 1 of this Agreement,
shall not include any costs incurred by Contractor in connection with
other properties operated by Contractor, and shall be allocated to the
Properties on a basis reasonably acceptable to the Concho.
	 
	 	(2)	 	For the Services performed under Section 3 of
this Agreement, a monthly charge in the amount calculated at the
average market rates in the area of the Properties for Services for (a)
reworking operations, (b) recompletion operations, (c) plugging and
abandonment operations, (d) site restoration operations, (e) drilling
and completion operations and (f) other Services performed by
Contractor under Section 3 of this Agreement to the extent not
otherwise charged hereunder. The average market rates shall be, during
the period commencing on the Effective Date and ending on September 30,
2007, those rates set forth on the schedule furnished by the Contractor
to Concho on the date hereof, and thereafter shall be mutually
determined from time to time by Concho and Contractor, but at least on
a semi-annual basis.
	 
	 	(3)	 	A monthly overhead charge for Services
performed in connection with drilling operations under Section 3 of
this Agreement at the rate of $2,000 per well per month. Charges for
drilling wells shall begin on the spud date and terminate on the date
the drilling and/or completion equipment is released, whichever occurs
later. No charge shall be made for suspension of drilling operations
for fifteen (15) or more consecutive calendar days.

	 	(b)	 	Invoices. Contractor shall submit monthly invoices,
with all supporting information requested by Concho, to Concho for Services
performed and expenses incurred hereunder during the previous month.
Contractor’s invoices will be deemed approved by Concho unless Concho provides
Contractor written objection to a particular invoice, explaining the items and
amounts in dispute and the basis of such objection, within twenty (20) days
after receipt of such invoice. Notwithstanding Concho’s objection to a
particular invoice, such invoice will be deemed approved as to the undisputed
portion of such invoice as of the end of such period. Concho shall make
payment to Contractor within thirty (30) days after Concho’s

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	 	 	 	receipt of Contractor’s invoice for the full amount of such invoice (or, if
Concho provides a written objection as set forth above, payment shall be
made for the undisputed portion of such invoice). Concho shall make payment
to Contractor of the disputed amounts in an invoice within ten (10) days
after resolution of any written objections to such amounts. Amounts due on
past due amounts shall bear interest at the rate of nine percent (9%) per
annum from the date due until paid. Contractor’s invoices containing all
pertinent information shall be submitted to or as directed by Concho’s
representative named in Section 8.
	 
	 	(c)	 	Records. Contractor shall keep full and accurate
records and accounts of or relating to the Services consistent with its
historical record keeping and accounting methods. Additionally, Contractor
shall maintain a system of internal controls sufficient to provide reasonable
assurance that records of such activities are properly maintained. All such
records will, at all reasonable times during the term hereof, and for a period
of seven (7) years following the termination hereof, be kept and available for
inspection and copying by Concho or any agent designated by Concho upon at
least seventy-two (72) hours prior notice and during normal business hours.
	 
	 	(d)	 	Semi-Annual Survey of Rates. Contractor shall prepare
and provide Concho a semi-annual survey (commencing July 1, 2007) of the
prevailing rates charged in the Contract Area for the types of Services
performed by Contractor under this Agreement.

     11. Equipment Relocation. After notice and approval from Concho, Contractor may move
or relocate Concho’s equipment from the Properties to other properties operated by Contractor,
including properties not owned by Concho. Any such relocation shall be conducted in conformity with
the requirements for material transfers of the Accounting Procedure for Joint Operations included
in the relevant or applicable joint operating agreement. To the extent no joint operating agreement
is applicable to the subject Property, then the value of the equipment relocated should generally
reflect the market value on the date of the physical transfer of the equipment. Contractor shall
make available to Concho sufficient documentation to verify the valuation of the equipment to be
relocated, and shall provide to Concho materials transfer documentation consistent with Concho’s
existing procedures. Relocated equipment shall be priced using one of the following pricing
methods; provided, however, the Contractor shall use

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consistent pricing methods, and not alternate between methods for the purpose of choosing the
method most favorable to the Contractor for a specific relocation:

	 	(a)	 	using published prices in effect on the date of relocation as
adjusted by the appropriate COPAS Historical Price Multiplier (HPM) or prices
provided by the COPAS Computerized Equipment Pricing System: (i) for oil
country tubulars and line pipe, the published price shall be based upon eastern
mill carload base prices (Houston, Texas, for special end) adjusted as of date
of movement plus transportation costs and (ii) for other equipment, the
published price shall be the published list price in effect at date of
movement, as listed by a supply store nearest the Properties where like
equipment is normally available, or point of manufacture plus transportation
costs;
	 
	 	(b)	 	based on a price quotation from a vendor that reflects a
current realistic acquisition cost;
	 
	 	(c)	 	based on the amount paid by the Contractor for like equipment
in the area of the Properties within the previous six (6) months from the date
of physical transfer; or
	 
	 	(d)	 	as agreed to by Concho for equipment being relocated to the
Properties, and by the parties owning the equipment being relocated from the
Properties.

     12. Indemnification. Notwithstanding Section 9, but subject to Section 16, Contractor
shall indemnify, defend and hold harmless Concho, its parent corporations, subsidiaries,
Affiliates, successors and assigns, and its and their respective directors, officers, shareholders,
agents, subcontractors, representatives and employees (each, individually, an “Indemnified
Party”), against and from any and all losses, claims, damages, liabilities, fines, penalties,
actions, suits, expenses and/or costs (including court costs and reasonable attorneys’ fees), for
or on account of injury, bodily or otherwise, to or death of persons, damage to or destruction of
property belonging to Concho, other parties that own interest in the Properties, or others, arising
out of, or in any way connected with (a) the presence of Contractor, its subcontractors, agents,
servants, representatives and/or employees on the Properties; (b) Contractor’s performance under
this Agreement; and/or (c) the breach of any provisions hereof, but shall not apply to claims (i)

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for damages or losses to any property relating to drilling, testing, fracing, completing,
repairing or other operations or (ii) solely attributable to any operations by third parties on
adjacent or contiguous properties. If indemnification is sought pursuant to this section, the
Indemnified Party shall give written notice to Contractor of an event giving rise to the obligation
to indemnify, describing in reasonable detail the factual basis for such claim, and shall allow
Contractor to assume and conduct the defense of the claim or action with counsel reasonably
satisfactory to the Indemnified Party, and cooperate with Contractor in the defense thereof;
provided, however, that the omission to give such notice to Contractor shall not relieve Contractor
from any liability which it may have to the Indemnified Party, except to the extent that Contractor
is prejudiced by the failure to give such notice. The Indemnified Party shall have the right to
employ separate counsel to represent the Indemnified Party at its sole cost. THE INDEMNITY
OBLIGATION PROVIDED HEREIN SHALL APPLY REGARDLESS OF ANY CAUSE OR OF ANY NEGLIGENT ACTS OR
OMISSIONS OF ANY INDEMNIFIED PARTY, EXCEPT TO THE EXTENT ARISING FROM THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF ANY INDEMNIFIED PARTY. THESE COVENANTS OF INDEMNITY SHALL SURVIVE
CANCELLATION, TERMINATION, OR EXPIRATION OF THIS AGREEMENT.

     13. Insurance. Contractor and each subcontractor of Contractor shall, at all times
during the progress of the operations, maintain with insurance providers reasonably acceptable to
Concho: (A) Worker’s Compensation Insurance in statutory amounts, including Employer’s Excess
Liability coverage in an amount in compliance with applicable law; (B) Commercial General Liability
Insurance, with limits of not less than $1,000,000 per occurrence for bodily injury and property
damage combined; (C) Automobile Liability Insurance in an amount not less than $1,000,000 combined
single limit per occurrence; and (D) Employer’s Liability Insurance,

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with limits not less than $500,000. Contractor shall provide Owner with certificates of
insurance which contain 30-day Notice of Cancellation, Material Change or Intent to Non-Renew
clauses in favor of Concho. The certificate of insurance pertaining to general liability coverage
shall name Concho as an additional insured. All insurance carried by Contractor and each
subcontractor of Contractor shall contain endorsements stating that Contractor’s coverage is
primary to any coverage Concho may elect to carry for its own account. Each policy shall be
endorsed to provide waiver of subrogation rights in favor of Concho. In the event that any
applicable joint operating agreement imposes a different insurance obligation on Concho, then
Contractor shall comply with whichever obligation imposes the greater amount of insurance coverage.
Concho agrees to maintain insurance coverage in respect of the Properties (including in respect of
its operations and personnel thereon) that is in amounts and insures against such losses and risks
that Concho believes are adequate to protect Concho and shall provide Contractor with certificates
of insurance in respect of such insurance coverage.

     14. Liens. Contractor will keep the Properties free and clear of mechanic’s liens,
materialmen’s liens, and other liens threatened, asserted or created by Contractor’s employees,
agents and representatives, and those vendors, suppliers and/or subcontractors to whom Contractor
is responsible for payment, arising from or relating to Services performed by Contractor hereunder
(a “Lien”); provided, however, that the foregoing shall not apply to any Liens filed or
asserted against the Properties because of Concho’s failure to pay amounts due or claimed to be due
to the applicable Lien claimant, including Contractor.

     15. Independent Contractor. Contractor will carry out all Services performed under
this Agreement as an independent contractor. Neither Contractor nor any of its agents, employees,
or servants are to be considered an agent or employee of Concho in any respect.

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Likewise, neither Concho nor any of its agents, employees, or servants are to be considered an
agent or employee of Contractor in any respect.

     16. Access and Consultation. Concho and its representatives and consultants shall have
full and free access at all reasonable times to all operations of every kind and character being
conducted in the Contract Area and Contractor agrees to consult with Concho and its representatives
and consultants with respect to all Services to be performed hereunder. IF CONCHO EXERCISES RIGHTS
OF ACCESS UNDER THIS SECTION 16 THEN (a) SUCH ACCESS SHALL BE AT CONCHO’S SOLE RISK, COST AND
EXPENSE AND CONCHO WAIVES AND RELEASES ALL CLAIMS AGAINST CONTRACTOR (AND ITS AFFILIATES AND THE
RESPECTIVE DIRECTORS, OFFICERS, EMPLOYEES, ATTORNEYS, CONTRACTORS AND AGENTS OF SUCH PARTIES) FOR
INJURY OR DAMAGE TO CONCHO OR ITS EMPLOYEES, REPRESENTATIVES AND CONTRACTORS OR ITS OR THEIR
PROPERTY ATTRIBUTABLE TO CONCHO’S OR SUCH PERSONS’ ACTIVITIES WHILE PRESENT DURING ANY SUCH
OPERATION AND (b) CONCHO SHALL INDEMNIFY, DEFEND AND HOLD HARMLESS CONTRACTOR (AND ITS AFFILIATES
AND THE RESPECTIVE OFFICERS, DIRECTORS, EMPLOYEES, ATTORNEYS, CONTRACTORS AND AGENTS OF SUCH
PARTIES) FROM ANY AND ALL CLAIMS, ACTIONS, CAUSES OF ACTION, LIABILITIES, DAMAGES, LOSSES, COSTS OR
EXPENSES (INCLUDING, WITHOUT LIMITATION, COURT COSTS AND ATTORNEYS FEES), OR LIENS OR ENCUMBRANCES
FOR LABOR OR MATERIALS, ARISING OUT OF SUCH ACCESS AND ACTIVITIES, EXCEPT, IN THE CASE OF (a) OR
(b) ABOVE, AS MAY RESULT FROM GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF CONTRACTOR (OR ITS
AFFILIATES AND THE RESPECTIVE DIRECTORS,

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OFFICERS, EMPLOYEES, ATTORNEYS, CONTRACTORS AND AGENTS OF SUCH PARTIES). THESE COVENANTS OF
INDEMNITY SHALL SURVIVE CANCELLATION, TERMINATION, OR EXPIRATION OF THIS AGREEMENT. If
indemnification is sought pursuant to this Section 16, the indemnified party shall give written
notice to the indemnifier of an event giving rise to the obligation to indemnify, describing in
reasonable detail the factual basis for such claim, and shall allow indemnifier to assume and
conduct the defense of the claim or action with counsel reasonably satisfactory to the indemnified
party, and cooperate with indemnifier in the defense thereof; provided, however, that the omission
to give such notice to the indemnifier shall not relieve the indemnifier from any liability which
it may have to the indemnified party, except to the extent that the indemnifier is prejudiced by
the failure to give such notice. The indemnified party shall have the right to employ separate
counsel to represent the indemnified party at its sole cost.

     17. Assignment and Delegation. This Agreement is personal and neither Concho nor
Contractor may assign any rights nor delegate any duties incurred by this Agreement, or any part
thereof, without the prior written consent of the other party.

     18. Affiliate Defined. The term “Affiliate” shall mean for a person, another person
that controls, is controlled by, or is under common control with that person. In this definition,
(a) control means the ownership of one person, directly or indirectly, of more than fifty percent
(50%) of the voting securities of a corporation or, for other persons, the equivalent ownership
interest (such as partnership interests) and (b) “person” means an individual, corporation,
partnership, trust, estate, unincorporated organization, association, or other legal entity.

     19. Non-Waiver. The failure by either party to insist upon or enforce any term of this
Agreement or to exercise any right herein granted shall not be construed as a waiver or

Page 15 of 18

 

relinquishment to any extent of its right to assert or rely upon such term or right on any
future occasion.

     20. Force Majeure. Contractor shall not be considered in default because of any delays
in Services to be performed hereunder due to causes beyond the control and without the fault or
negligence of Contractor, including, but not restricted to an act of God or of a public enemy,
fire, flood, epidemic quarantine restriction, area wide strike, freight embargo, unusually severe
weather, or delay of Contractor’s subcontractors or suppliers due to such cause; provided that
Contractor shall immediately notify Concho in writing of the causes of delay and its probable
extent. In the event of a claim of force majeure by Contractor which continues for a period in
excess of ten (10) consecutive days and which causes Contractor to cease all Services hereunder
during such 10-day period, Concho shall have the right to terminate this Agreement. With respect
to any Properties for which there is an applicable joint operating agreement, the force majeure
provisions of such joint operating agreement are hereby incorporated in this Agreement and shall
apply to each Property covered by such joint operating agreement instead of the foregoing force
majeure provision.

     21. Audit. Not more than once during any consecutive six-month period, Concho shall
have the right to audit the records and accounts of Contractor and its Affiliates upon thirty (30)
days prior notice to the Contractor.

     22. Governing Law. This Agreement shall be governed, construed, and interpreted in
accordance with the laws of the State of New Mexico.

     23. Notices. All notices authorized or required between the parties by this Agreement
shall be in writing and delivered in person or by mail, courier service or by telecopy which
provides written confirmation of complete transmission, and addressed to the designated
representative of the party addressed.

Page 16 of 18

 

     23. Confidentiality. Contractor shall keep confidential and not disclose to any third
party or use for any purpose, other than in connection with, and solely to the extent necessary to,
the performance of operations hereunder, any information disclosed to it by Concho or which it
develops or learns in the course of performance of operations hereunder, except such confidential
or non-proprietary information as (A) is disclosed to Contractor by third parties not in violation
of any confidentiality obligation, or (B) is then or thereafter published or otherwise becomes
generally available to the public through no breach of this Agreement by Contractor, or any of its
Affiliates, employees, agents or representatives.

     24. Headings. Paragraph headings are used herein for convenience of reference only and
shall not affect the construction of any provision hereof.

     25. Entire Agreement; Termination of COA. This writing is intended by the parties to
be the final, complete and exclusive statement of their agreement about the matters covered herein.
There are no oral understandings, representations or warranties affecting it. All exhibits hereto
are incorporated herein and are an integral part of this Agreement. Effective as of the Effective
Date, the COA is terminated and no longer of force and effect; provided, Concho’s rights under
Section 23 of the COA shall terminate one (1) year after the Effective Date hereof; provided that
Concho must provide thirty (30) days prior written notice to Contractor to exercise such rights.

Page 17 of 18

 

     EXECUTED on the day, month and year first herein written:

CONCHO

COG OPERATING LLC

	 	 	 	 	 
	By:
	 	/s/ E. JOSEPH WRIGHT 	 	 
	 

	 	 

E. Joseph Wright, Vice President –
	 	 
	 

	 	Engineering and Operations	 	 

CONTRACTOR

MACK ENERGY CORPORATION

	 	 	 	 	 
	By:
	 	/s/ ROBERT C. CHASE 	 	 
	 

	 	 

Robert C. Chase, Vice President	 	 
	 

	 	 	 	 

Page 18 of 18exv10w4

 

Exhibit
10.4

THIS CONTRACT CONTAINS PROVISIONS RELATING TO INDEMNITY,

RELEASE OF LIABILITY, AND ALLOCATION OF RISK

SEE PARAGRAPHS 4.9, 6.3 (c), 10, 12, AND 14

This Contract is made and entered into on the date hereinafter set forth by and between the parties herein designated as “Operator” and Contractor.”

	 	 	 
	OPERATOR:

	 	COG Operating LLC.
	 
	 	 
	 

	 	Attn: Joe Wright
	 
	 	 
	Address:

	 	Fasken Center II, 550 W. Texas Ave., Suite 1300, Midland, TX 79701
	 
	 	 
	CONTRACTOR:

	 	Silver Oak Drilling LLC.
	 
	 	 
	 

	 	Attn: Johnny Knorr
	 
	 	 
	Address:

	 	PO Box 1370, Artesia, NM 88211-1370

IN CONSIDERATION of the mutual promises, conditions and agreements herein contained and the
specifications and special provisions set forth in Exhibit “A” and Exhibit “B” attached hereto and
made a part hereof (the “Contract”), Operator engages Contractor as an independent contractor to
drill the hereinafter designated well or wells in search of oil or gas on a Daywork Basis.

For purposes hereof, the term “Daywork” or “Daywork Basis” means Contractor shall furnish
equipment, labor, and perform services as herein provided, for a specified sum per day under the
direction, supervision and control of Operator (inclusive of any employee, agent, consultant or
subcontractor engaged by Operator to direct drilling operations). When operating on a Daywork
Basis, Contractor shall perform in a good and workmanlike manner, with due diligence and dispatch,
in accordance with good oilfield practices and shall be fully paid at the applicable rates of
payment and assumes only the obligations and liabilities stated herein. Except for such obligations
and liabilities specifically assumed by Contractor, Operator shall be solely responsible and
assumes liability for all consequences of operations by both parties while on a Daywork Basis,
including results and all other risks or liabilities incurred in or incident to such operations.

	1.	 	LOCATION OF WELLS:
	 
	 	 	Well Name and Number: To be specified by Operator. This is a term contract for utilization of
Silver Oak Drilling Rig # 1 for the drilling of multiple wells, as designated by Operator,
within New Mexico; provided, that Contractor, with Operator’s written approval, may from time
to time substitute another of Contractor’s rigs acceptable to Operator for Rig #1 hereunder.
	 
	 	 	Well location and land description: To be specified by Operator.
	 
	 	 	1.1  Additional Well Locations or Areas: To be named
	 
	 	 	Locations described above are for well and Contract identification only and Contractor assumes
no liability whatsoever for a proper survey or location stake on Operator’s lease.
	 
	2.	 	COMMENCEMENT DATE: Commencement date is the date when the rig is ready to spud the first
well. The commencement date for the first rig shall be by the 1st  day of August,
2006.
	 
	3.	 	DEPTH:
	 
	 	 	3.1  Well Depth: The well (s) shall be drilled to a various depths, but the Contractor shall
not be required hereunder to drill any well(s) below a maximum depth of ___feet, unless
Contractor and Operator mutually agree to drill to a greater depth.
	 
	4.	 	DAYWORK RATES: Contractor shall be paid at the following rates for the work performed
hereunder
	 
	 	 	4.1  Mobilization: Operator shall pay Contractor a mobilization fee of            ACTUAL THIRD PARTY
COSTS plus a mobililzation fee of $12,000 per day, without duplication of other amounts paid
hereunder. This sum shall be due and payable in full at the time the rig is rigged up or
positioned at the well site ready to spud. Mobilization shall include: MIRU AND RIG TIME
UNTIL 1ST COLLAR IS PICKED UP TO GO INTO THE HOLE.
	 
	 	 	4.2  Omitted
	 
	 	 	4.3  Moving Rate: During the time the rig is in transit to or from a drill site, or between
drill sites, commencing AFTER RIG RELEASE, Operator shall pay Contractor a sum of
$12,000.00  per twenty-four (24) hour day plus actual, third party moving costs
incurred by Contractor, without duplication of other amounts paid hereunder.

 

 

	 	 	4.4  Operating Day Rate: For work performed per twenty-four (24) hour day with FOUR (4) man crew
The operating day rate shall commence at the time the 1st collar is picked up to go
into the hole and be:

          Depth Intervals

	 	 	 	 	 	 	 
	From	 	To	 	Without Drill Pipe	 	With Drill Pipe
	0

	 	TD
	 	$14,500.00 per day
	 	$14,500.00 per day

The rate will begin when the drilling unit is rigged up at the drilling location, and ready to
commence operations; and will cease when the rig is ready to be moved off location.

If under the above column “With Drill Pipe” no rates are specified, the rate per twenty-dour
hour day when drill pipe is in use shall be the applicable rate specified in the column
“Without Drill Pipe” plus compensation for any drill pipe actually used at the rates specified
below, computed on the basis of the maximum drill pipe in use at any time during each
twenty-four hour day.

DRILL PIPE RATE PER 24-HOUR DAY

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	Straight Hole	 	 	Size	 	 	Grade	 	 	Directional or	 	 	Size	 	 	Grade	 
	 	 	 	 	 	 	 	 	 	 	 	 	Uncontrollable Deviated Hole	 	 	 	 	 	 	 	 	 
	$	  
	 per ft.	 	 	 	 	 	 	 	 	 	$		per ft	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	$	  
	per ft.	 	 	 	 	 	 	 	 	 	 $		per ft	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	$	  
	per ft.	 	 	 	 	 	 	 	 	 	 $		 per ft	 	 	 	 	 	 	 	 
	 	 
	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 

Directional or uncontrolled deviated hole will be deemed to exist when deviation exceeds
                     degrees or when the change of angle exceeds                     

degrees per hundred feet.

4.5 Repair Time: In the event it is necessary to shut down Contractor’s rig for repairs,
excluding routine rig servicing, Contractor shall be allowed compensation at the applicable rate
for such shut down time up to a maximum of 4 hours for any one rig repair job but not to
exceed 12 hours of such compensation during the drilling of EACH WELL OR THIRTY (30) DAY
PERIOD, WHICHEVER IS LESS. Thereafter, Contractor shall be compensated at a rate of
$0.00 per twenty-four (24) hour day. Routine rig servicing shall include, but not be
limited to, cutting and slipping drilling line, changing pump or swivel expendables, testing BOP
equipment, lubricating rig, and                                                                             
    .

4.6 Standby Time Rate: $14,500.00 per twenty-four (24) day. Standby time shall
be defined to include time when the rig is shut down although in readiness to begin or resume
operations but Contractor is waiting on orders of Operator or on materials, services or other
items to be furnished by Operator.

4.7 Drilling Fluid Rates: When drilling fluids of a type and characteristic that increases
Contractor’s cost of performance hereunder, including, but not limited to, oil-based mud or
potassium chloride, are in use, Operator shall pay Contractor in addition to the operating
rate specified above:

	 	(a)	 	$ N/A per man per day for Contractor’s rig-site personnel.
	 
	 	(b)	 	$ N/A per day additional operating rate; and
	 
	 	(c)	 	Cost of all labor, material and services plus  N/A hours operating rate to
clean rig and related equipment.

4.8 Force Majeure Rate:  $12,000.00  per twenty-four (24) hour day for any
continuous period that normal operations are suspended or cannot be carried on due to conditions
of Force Majeure as defined in Paragraph 17 hereof. It is, however, understood that subject to
Subparagraph 6.3 below, Operator can release the rig in accordance with Operator’s right to
direct stoppage of the work, effective when conditions will permit the rig to be moved from the
location.

4.9 Reimbursable Costs: Operator shall reimburse Contractor for the costs of material or
equipment which are to be furnished by Operator as provided for herein but which for convenience
are actually furnished by Contractor at Operator’s request, plus  0%  percent for such
cost of handling. When, at Operator’s request and with Contractor’s agreement, the Contractor
furnishes or subcontracts for certain items or services which Operator is required herein to
provide, for purposes of the indemnity and release provisions of this Contract, said items or
services shall be deemed to be Operator furnished items or services. Any subcontractors so hired
shall be deemed to be Operator’s contractor, and Operator shall not be relieved of any of its
liabilities in connection therewith.

4.10 Revision in Rates:The rates and/or payments herein set forth due to Contractor from
Operator shall be revised to reflect the change in costs if the costs of any of the items
hereinafter listed shall vary by more than 5% percent from the costs thereof on the
date of this Contract or by the same percent after the date of any revision pursuant to this
Subparagraph:

	 	(a)	 	Labor costs, including all benefits, of Contractor’s field level personnel;
	 
	 	(b)	 	Contractor’s cost of insurance premiums;
	 
	 	(c)	 	Contractor’s cost of fuel, including all taxes and fees;
	 
	 	(d)	 	If Operator requires Contractor to increase or decrease the number of Contractor’s
personnel;

 

 

	5.	 	TIME OF PAYMENT
	 
	 	 	Payment is due by Operator to Contractor as follows:
	 
	 	 	5.1  Payment for mobilization, drilling and other work performed at applicable rates, and all
other applicable charges shall be due, upon presentation of invoice therefore, upon completion
of mobilization and rig release or at the end of the month in which such work was performed or
other charges are incurred, whichever shall first occur. All invoices may be mailed to Operator
at the address hereinabove shown.
	 
	 	 	5.2  Disputed Invoices and Late Payment: Operator shall pay all invoices within 30 days
after receipt except that if Operator disputes an invoice or any part thereof, Operator shall,
within thirty (30) days after receipt of the invoice, notify Contractor of the item disputed,
specifying the reason there for, and payment of the disputed item may be withheld until
settlement of the dispute, but timely payment shall be made of any undisputed portion. Any sums
(including amounts ultimately paid with respect to a disputed invoice) not paid within the
above specified days shall bear interest at the rate of 0.75 percent per month or the
maximum legal rate, whichever is less, per month from the due date until paid. If Operator does
not pay undisputed items within the above stated time, Contractor may suspend operations or
terminate this Contract as specified under Subparagraph 6.3.
	 
	6.	 	TERM:
	 
	 	 	6.1  Duration of the Contract: This Contract shall remain in full force and effect until
drilling operations are completed on the well or wells specified in Paragraph 1 above, or for a
term of  1 year, for commencing on the date specified in Paragraph 2 above.
Should any well commenced during the term of this Contract be drilling at the expiration of the
one (1) year primary term of this Contract, drilling shall continue under the terms of this
Contract until drilling operations for that well have been completed.
	 
	 	 	6.2  Extension of Term: Operator may extend the term of this Contract for  NA 
well(s) or for a period of  N /A  by giving notice to Contractor at least 
N/A  days prior to completion of the well then being drilled or by  N/A .
	 
	 	 	6.3  Early Termination:

	 	(a)	 	By Either Party: Upon giving of written notice, either party may terminate this
Contract without further liability when total loss or destruction of the rig, or a
major breakdown with indefinite repair time necessitates stopping operations hereunder.
	 
	 	(b)	 	By Operator: Notwithstanding the provisions of Paragraph 3 with respect to the
depth to be drilled, Operator shall have the right to direct the stoppage of the work
to be performed by Contractor hereunder on any well at any time prior to reaching the
specified depth, and even though Contractor has made no default hereunder.
	 
	 	(c)	 	By Either Party: Notwithstanding the provisions of Paragraph 3 with respect to
the depth to be drilled, in the event a party hereto shall become insolvent, or be
adjudicated a bankrupt, or file, by way of petition or answer, a debtor’s petition or
other pleading seeking adjustment of it’s debts, under any bankruptcy or debtor’s
relief laws now or hereafter prevailing, or if any such be filed against it, or in case
a receiver be appointed of that party or that party’s property, or any part thereof, or
that party’s affairs be placed in the hands of a Creditor’s Committee, or, following
fifteen (15) business days prior written notice to Operator if Operator does not pay
Contractor within the time specified in Subparagraph 5.2 all undisputed items due and
owing, the other party may, at its option, (1) elect to terminate further performance
of any work under this Contract and the terminating party’s right to compensation shall
be as set forth herein or (2) Contractor may suspend operations until payment is made
by Operator in which event the standby time rate contained in Subparagraph 4.6 shall
apply until payment is made by Operator and operations are resumed. In addition to
Contractor’s rights to suspend operations or terminate performance under this clause
(c), Operator hereby expressly agrees to protect, defend and indemnify Contractor from
and against any claims, demands and causes of action, including all costs of defense,
in favor of Operator, Operator’s co-venturers, co-lessees and joint owners, or any
other parties arising out of any drilling commitments or obligations contained in any
lease, farmout agreement or other agreement, which may be affected by such suspension
of operations or termination of performance hereunder.

	7.	 	CASING PROGRAM
	 
	 	 	Operator shall have the right to designate the points at which casing will be set and the
manner of setting, cementing and testing. Operator may modify the casing program, however, any
such modification which materially increases Contractor’s hazards or costs can only be made by
mutual consent of Operator and Contractor and upon agreement as to the additional compensation
to be paid Contractor as a result thereof.
	 
	8.	 	DRILLING METHODS AND PRACTICES:

     8.1 Contractor shall maintain well control equipment in good condition at all times and shall
use all reasonable means to prevent and control fires and blowouts and to protect the hole.

     8.2 Subject to the terms hereof, and at Operator’s cost, at all times during the drilling of
the well, Operator shall have the right to control the mud program, and the drilling fluid must be
of a type and have characteristics and be maintained by Contractor in accordance with the
specifications shown in Exhibit “A”.

 

 

     8.3 Each party hereto agrees to comply with all laws, rules, and regulations of any federal,
state or local governmental authority which are now or may become applicable to that party’s
operations covered by or arising out of the performance of this Contract. When required by law, the
terms of Exhibit “B” shall apply to this Contract. In the event any provision of this Contract is
inconsistent with or contrary to any applicable federal, state or local law, rule or regulation,
said provision shall be deemed to be modified to the extent required to comply with said law, rule
or regulation, and as so modified said provision and this Contract shall continue in full force and
effect. Provided, if there is a change in applicable legislation or regulations as materially
increases the costs and/or other burdens of a party hereto, or otherwise causes this Contract to be
uneconomic, said party may terminate this Contract.

     8.4 Contractor shall keep and furnish to Operator an accurate record of the work performed
and formations drilled on the IADC-API Daily Drilling Report Form or other form acceptable to
Operator. A legible copy of said form signed by Contractor’s representative shall be furnished by
Contractor to Operator.

     8.5 If requested by Operator, Contractor shall furnish Operator with a copy of delivery
tickets covering any material or supplies provided by Operator and received by Contractor.

	9.	 	INGRESS, EGRESS, AND LOCATION:

Operator hereby assigns to Contractor all necessary rights of ingress and egress with respect to
the tract on which, the well is to be located for the performance by Contractor of all
work contemplated by this Contract. Should Contractor be denied free access to the location for any
reason not reasonably within Contractor’s control, any time lost by Contractor as a result of such
denial shall be paid for at the standby time rate. Operator agrees at all times to maintain the
road and location in such a condition that will allow free access and movement to and from the
drilling site in an ordinarily equipped highway type vehicle. If Contractor is required to use
bulldozers, tractors, four-wheel drive vehicles, or any other specialized transportation equipment
for the movement of necessary personnel, machinery, or equipment over access roads or on the
drilling location, Operator shall furnish the same at its expense and without cost to Contractor.
The actual cost of repairs to any transportation equipment furnished by Contractor or its personnel
damaged as a result of improperly maintained access roads or location will be charged to Operator.
Operator shall reimburse Contractor for all amounts reasonably expended by Contractor for repairs
and/or reinforcement of roads, bridges and related or similar facilities (public and private)
required as a direct result of a rig move pursuant to performance hereunder. Operator shall be
responsible for any costs associated with leveling the rig because of location settling.

	10.	 	SOUND LOCATION:

     Operator shall prepare a sound location adequate in size and capable of properly supporting
the drilling rig, and shall be responsible for a casing and cementing program adequate to prevent
soil and subsoil wash out. In the event subsurface conditions cause a cratering or shifting of the
location surface, and loss or damage to the rig or its associated equipment results therefrom,
Operator shall, without regard to other provisions of this Contract, including Subparagraph 14.1
hereof, reimburse Contractor for all such loss or damage including removal of debris and payment of
Standby Time Rate during repair and/or demobilization if applicable.

	11.	 	EQUIPMENT CAPACITY

     Operations shall not be attempted under any conditions which exceed the capacity of the
equipment specified to be used hereunder or where canal or water depths are in excess of
NA feet. Without prejudice to the provisions of Paragraph 14 hereunder, Contractor
shall have the right to make the final decision as to when an operation or attempted operation
would exceed the capacity of specified equipment.

	12.	 	TERMINATION OF LOCATION LIABILITY:

     When Contractor has left a well location after rig release, Operator shall thereafter be
liable for damage to property, personal injury or death of any person which occurs as a result of
conditions of the location and Contractor shall be relieved of such liability; provided, however,
if Contractor shall subsequently reenter upon the location for any reason, including removal of the
rig, any term of the Contract relating to such reentry activity shall become applicable during such
period.

	13.	 	INSURANCE

     To support the indemnification provisions and during the life of this Contract, but as a
separate and independent obligation, each party shall at each party’s own expense maintain, with an
insurance company or companies authorized to do business in the state where the work is to be
performed or through a self-insurance program, insurance coverages of the kind and in the minimum
amounts set forth in Exhibit “A”, insuring the liabilities specifically assumed by the parties in
Paragraph 14 of this Contract. Each party shall provide the other with certificates of insurance
which contain 30-day notice of Cancellation, Material Change or Intent to Non-Renew clauses in
favor of the recipient.

     By written contract, all required insurance shall be maintained in full force and effect
during the term of this Contract, and shall not be canceled, altered, or amended without thirty
(30) days prior written notice to Operator. Operator and Contractor shall cause their respective
underwriters to name the other additional insured (except Worker’s Compensation or any Physical
Damage (Property) coverage) but only to the extent of the mutual indemnification obligations
assumed herein. Contractor agrees to have its insurance carrier furnish Operator a certificate or
certificates evidencing insurance coverage in accordance with the above requirements, and all such
insurance shall be primary to any insurance of Operator that may apply to any occurrence, accident,
or claim.

     For liabilities assumed hereunder by Contractor, its insurance shall be endorsed to provide
that the underwriters waive their right of subrogation against Operator. Operator will, as well,
cause its insurer to waive subrogation against Contractor for liability it assumes and shall
maintain, at Operator’s expense, or shall self

 

 

insure, insurance coverage as set forth in Exhibit “A” of the same kind and in the same amount
as is required of Contractor, insuring the liabilities specifically assumed by Operator in
Paragraph 14 of this Contract. Operator shall procure from the company or companies writing said
insurance a certificate or certificates that said insurance is in full force and effect and that
the same shall not be canceled or materially changed without thirty (30) days prior written notice
to Contractor. Operator and Contractor shall cause their respective underwriters to name the other
additionally insured but only to the extent of the indemnification obligations assumed herein.

	14.	 	RESPONSIBILITY FOR LOSS OR DAMAGE, INDEMNITY, RELEASE OF LIABILITY AND ALLOCATION OF RISK:

     14.1 Contractor’s Surface Equipment: Contractor shall assume liability at all times, for
damage to or destruction of Contractor’s surface equipment for use above the surface, regardless
of when or how such damage and destruction occurs, and Contractor shall release and protect, defend
and indemnify Operator from any liability for any such loss, except loss or damage under the
provisions of Paragraph 10 or Subparagraph 14.3.

     14.2 Contractor’s In-Hole Equipment: Operator shall assume liability at all times for damage
to or destruction of Contractor’s in-hole equipment, including, but not limited to, drill pipe,
drill collars, and tool joints, and Operator shall reimburse Contractor for the value of any such
loss or damage; the value to be determined by agreement between Contractor and Operator as current
repair costs or the fair market value of such equipment as of the date of the loss
delivered to the well site.

     14.3 Contractor’s Equipment — Environmental Loss or Damage: Notwithstanding the provisions of
Subparagraph 14.1 above, Operator shall assume liability at all times for damage to or destruction
of Contractor’s equipment resulting from the presence of H2S, CO2 or other
corrosive elements that enter the drilling fluids from subsurface formations or the use
of corrosive, destructive or abrasive additives in the drilling fluids.

     14.4 Operator’s Equipment: Operator shall assume liability at all times for damage to or
destruction of Operator’s or its co-venturers’, co-lessees’ or joint owners’ equipment, including,
but not limited to, casing, tubing, well head equipment, and platform if applicable, regardless of
when or how such damage or destruction occurs, and Operator shall release Contractor/ of any
liability for any such loss or damage

     14.5 The Hole: In the event the hole should be lost or damaged, Operator shall be solely
responsible for such damage to or loss of the hole, including the casing therein. Operator shall
release Contractor / and its suppliers, contractors and subcontractors of any tier of any liability
for damage to or loss of the hole, and shall protect, defend and indemnify Contractor and its
suppliers, contractors and subcontractors of any tier from and against any and all claims,
liability, and expense relating to such damage to or loss of the hole,

     14.6 Underground Damage: Operator shall release Contractor / and its suppliers, contractors
and subcontractors of any tier of any liability for, and shall protect, defend and indemnify
Contractor and its suppliers, contractors and subcontractors of any tier from and against any and
all claims, liability, and expense resulting from operations under this Contract on account of
injury to, destruction of, or loss or impairment of any property right in or to oil, gas, or other
mineral substance or water, if at the time of the act or omission causing such injury, destruction,
loss, or impairment said substance had not been reduced to physical possession above the surface of
the earth, and for any loss or damage to any formation, strata, or reservoir beneath the surface of
the earth.

     14.7 Inspection of Materials Furnished by Operator: Contractor agrees to visually inspect all
materials furnished by Operator before using same and to notify Operator of any apparent defects
therein. Contractor shall not be liable for any loss or damage resulting from such defects in
material furnished by Operator, and Operator shall release Contractor from, and shall protect,
defend and indemnify Contractor from and against, any such liability.

     14.8 Contractor’s Indemnification of Operator: Contractor shall release Operator and
Operator’s employees or Operator’s subcontractors of any tier (inclusive of any agent or consultant
engaged by Operator) or their employees, or Operator’s invitees of any liability for, and shall
protect, defend and indemnify Operator from and against all claims, demands, and causes of action
of every kind and character, without limit and without regard to the cause or causes thereof or the
negligence of any party or parties, arising in connection herewith in favor of Contractor’s
employees or Contractor’s subcontractors of any tier (inclusive of any agent or consultant engaged
by Contractor) or their employees, or Contractor’s invitees, on account of bodily injury, death or
damage to property. Contractor’s indemnity under this Paragraph shall be without regard to and
without any right to contribution from any insurance maintained by Operator pursuant to Paragraph
13. If it is judicially determined that the monetary limits of insurance required hereunder or of
the indemnities voluntarily assumed under Subparagraph 14.8 (which Contractor and Operator hereby
agree will be supported by available liability insurance, under which the insurer has no right of
subrogation against the indemnities) exceed the maximum limits permitted under applicable law, it
is agreed that said insurance requirements or indemnities shall automatically be amended to conform
to the maximum monetary limits permitted under such law.

     14.9 Operator’s Indemnification of Contractor: Operator shall release Contractor and
Contractor’s employees or Contractor’s subcontractors of any tier (inclusive of any agent or
consultant engaged by Contractor) or their employees, or Contractor’s invitees of any liability
for, and shall protect, defend and indemnify Contractor from and against all claims, demands, and
causes of action of every kind and character, without limit and without regard to the cause or
causes thereof or the negligence of any party or parties, arising in connection herewith in favor
of Operator’s employees or Operator’s contractors of any tier (inclusive of any agent, consultant
or subcontractor engaged by Operator) or their employees, or Operator’s invitees, other than those
parties identified in Subparagraph 14.8 on account of bodily injury, death or damage to property.
Operator’s indemnity under this Paragraph shall be without regard to and without any right to
contribution from any insurance maintained by Contractor pursuant to Paragraph 13. If it is
judicially determined that the monetary limits of insurance required hereunder or of the
indemnities voluntarily assumed under Subparagraph 14.9 (which Contractor and Operator hereby agree
will be supported by available liability insurance, under which the insurer has no right of
subrogation against the indemnities, in part or whole) exceed the maximum limits permitted under
applicable law, it is agreed that said insurance requirements or indemnities shall automatically be
amended to conform to the maximum monetary limits permitted under such law.

 

 

     14.10 Liability for Wild Well: Operator shall be liable for the cost of regaining control of
any wild well, as well as for cost of removal of any debris and cost of property remediation and
restoration, and Operator shall release, protect, defend and indemnify Contractor and its
suppliers, contractors and subcontractors of any tier from and against any liability for such cost,

     14.11 Pollution or Contamination: Notwithstanding anything to the contrary contained herein,
except the provisions of Paragraphs 10 and 12, it is understood and agreed by and between
Contractor and Operator that the responsibility for pollution or contamination shall be as follows:

     (a) Contractor shall assume all responsibility for, including control and removal of, and
shall protect, defend and indemnify Operator / from and against all claims, demands and causes of
action of every kind and character arising from pollution or contamination, which originates above
the surface of the land or water from spills of fuels, lubricants, motor oils, pipe dope, paints,
solvents, ballast, bilge and garbage, except unavoidable pollution from reserve pits, wholly in
Contractor’s possession and control and directly associated with Contractor’s equipment and
facilities.

     (b) Operator shall assume all responsibility for, including control and removal of, and shall
protect, defend and indemnify Contractor and its suppliers, contractors and subcontractors of any
tier from and against all claims, demands, and causes of action of every kind and character arising
directly or indirectly from all other pollution or contamination which may occur during the conduct
of operations hereunder, including, but not limited to, that which may result from fire, blowout,
catering, seepage or any other uncontrolled flow of oil, gas, water or other substance, as well as
the use or disposition of all drilling fluids, including, but not limited to, oil emulsion, oil
base or chemically treated drilling fluids, contaminated cuttings or cavings, lost circulation and
fish recovery materials and fluids. Operator shall release Contractor and its suppliers,
contractors and subcontractors of any tier of any liability for the foregoing

     (c) In the event a third party commits an act or omission which results in pollution or
contamination for which either Contractor or Operator, for whom such party is performing work, is
held to be legally liable, the responsibility therefor shall be considered, as between Contractor
and Operator, to be the same as if the party for whom the work was performed had performed the same
and all of the obligations respecting protection, defense, indemnity and limitation of
responsibility and liability, as set forth in (a) and (b) above, shall be specifically applied.

     14.12 Consequential Damages: Subject to and without affecting the provisions of this Contract
regarding the payment rights and obligations of the parties or the risk of loss, release and
indemnity rights and obligations of the parties, each party shall at all times be responsible for
and hold harmless and indemnify the other party from and against its own special, indirect or
consequential damages, and the parties agree that special, indirect or consequential damages shall
be deemed to include, without limitation, the following: loss of profit or revenue; costs and
expenses resulting from business interruptions; punitive and exemplary damages; loss of or delay in
production; loss of or damage to the leasehold; loss of or delay in drilling or operating rights;
cost of or loss of use of property, equipment, materials and services, including without limitation
those provided by contractors or subcontractors of every tier or by third parties. Operator shall
at all times be responsible for and hold harmless and indemnify Contractor and its suppliers,
contractors and subcontractors of any tier from and against all claims, demands and causes of
action of every kind and character in connection with such special, indirect or consequential
damages suffered by Operator’s co-owners, co-venturers, co-lessees, farmors, farmees, partners and
joint owners.

     14.13 Indemnity Obligation: Except as otherwise expressly limited in this Contract, it is the
intent of parties hereto that all releases, indemnity obligations and/or liabilities assumed by
such parties under terms of this Contract, including, without limitation, Subparagraphs 4.9 and
6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1 through 14.12 hereof, be without limit and
without regard to the cause or causes thereof, including, but not limited to, pre-existing
conditions, defect or ruin of premises or equipment, strict liability, regulatory or statutory
liability, products liability, breach of representation or warranty (express or implied), breach of
duty (whether statutory, contractual or otherwise) any theory of tort, breach of contract, fault,
the negligence of any degree or character (regardless of whether such negligence is sole, joint or
concurrent, active or passive) of any party or parties, including the party seeking the benefit of
the release, indemnity or assumption of liability, or any other theory of legal liability.
Provided, however, notwithstanding anything to the contrary in this Contract, in no event shall
either party have any obligation to pay, reimburse, defend or indemnify the other from or for the
consequences of the other’s gross negligence or willful misconduct. The indemnities, and releases
and assumptions of liability extended by the parties hereto under the provisions of Subparagraphs
4.9 and 6.3 and Paragraphs 10, 12, and 14 shall inure to the benefit of such parties, their
co-venturers, co-lessees, joint owners, their parent, holding and affiliated companies and the
officers, directors, stockholders, partners, managers, representatives, employees, consultants,
agents, servants and insurers of each. Except as otherwise provided herein, such indemnification
and assumptions of liability shall not be deemed to create any rights to indemnification in any
person or entity not a party to this Contract, either as a third party beneficiary or by reason of
any agreement of indemnity between one of the parties hereto and another person or entity not a
party to this Contract.

	15.	 	AUDIT

     If any payment provided for hereunder is made on the basis of Contractor’s costs, Operator
shall have the right to audit Contractor’s books and records relating to such costs. Contractor
agrees to maintain such books and records for a period of two (2) years from the last day of the
year in which the termination or expiration of this contract occurred, and to make such books and
records readily available to Operator at any reasonable time or times within the period.

	16.	 	NO WAIVER EXCEPT IN WRITING

     It is fully understood and agreed that none of the requirements of this Contract shall be
considered as waived by either party unless the same is done in writing, and then only by the
persons executing this Contract or other duly authorized agent or representative of the party.

 

 

	17.	 	FORCE MAJEURE

     Except as provided in this Paragraph 17, and without prejudice to the risk of loss, release
and indemnity obligations under this Contract, each party to this Contract shall be excused from
complying with the terms of this Contract, except for the payment of monies when due, if and for so
long as such compliance is hindered or prevented by a Force Majeure Event. As used in this
Contract, “Force Majeure Event” includes: acts of God, action of the elements, wars (declared or
undeclared), insurrection, revolution, rebellions or civil strife, piracy, civil war or hostile
action, terrorist acts, riots, strikes, differences with workmen, acts of public enemies, federal
or state laws, rules, regulations dispositions or orders of any governmental authorities having
jurisdiction in the premises or of any other group, organization or informal association (whether
or not formally recognized as a government), inability to procure material, equipment, fuel or
necessary labor in the open market, acute and unusual labor or material, equipment or fuel
shortages, or any other causes (except financial) beyond the control of either party. Neither
Operator nor Contractor shall be required against its will to adjust any labor or similar disputes
except in accordance with applicable law. In the event that either party hereto is rendered unable,
wholly or in part, by any of these causes to carry out its obligation under this Contract, it is
agreed that such party shall give notice and details of Force Majeure in writing to the other party
as promptly as possible after its occurrence. In such cases, the obligations of the party giving
the notice shall be suspended during the continuance of any inability so caused except that
Operator shall be obligated to pay to Contractor the Force Majeure Rate provided for in
Subparagraph 4.8 above for events of force majeure noticed by Operator and affecting Operator’s
ability to carry out its obligations under this Contract, but not otherwise.

	18.	 	GOVERNING LAW:

     This Contract shall be construed, governed, interpreted, enforced and litigated, and the
relations between the parties determined in accordance with the laws of New Mexico 
without regard to any conflict of laws provisions or principles, whether statutory or common law,
which would have the effect of applying the law of another state or jurisdiction..

	19.	 	INFORMATION CONFIDENTIAL:

     Information obtained by Contractor in the conduct of drilling operations under this Contract,
including, but not limited to, depth, formations penetrated, the results of coring, testing and
surveying, shall be considered confidential and shall not be divulged by Contractor or its
employees, to any person, firm, or corporation other than Operator’s designated representatives.

	20.	 	SUBCONTRACTS

     Operator may employ other contractors to perform any of the operations or services to be
provided or performed by it according to Exhibit ”A”.

	21.	 	ATTORNEY’S FEES

     If this Contract is placed in the hands of an attorney for collection of any sums due
hereunder, or suit is brought on same, or sums due hereunder are collected through bankruptcy or
arbitration proceedings, then the prevailing party shall be entitled to recover reasonable
attorney’s fees and costs. Provided, however, that the determination of which party is the
prevailing party shall be determined from the totality of the circumstances (including the amount
of the claim relative to the amount of any award) and the prevailing party may or may not be the
party in whose favor judgment was entered.

	22.	 	CLAIMS AND LIENS

     Contractor agrees to pay all valid claims for labor, material, services, and supplies to be
furnished by Contractor hereunder, and agrees to allow no lien by such third parties to be fixed
upon the lease, the well, or other property of the Operator or the land upon which said well is
located.

	23.	 	ASSIGNMENT:

     Eeither party may assign this Contract, and prompt notice of any such intent to assign shall
be given to the other party. In the event of such assignment, the assigning party shall remain
liable to the other party as a guarantor of the performance by the assignee of the terms of this
Contract. If any assignment is made that materially alters Contractor’s financial burden,
Contractor’s compensation shall be adjusted to give effect to any increase or decrease in
Contractor’s operating costs. Provided further, with the mutual consent of Operator and
Contractor, the rig the subject of this Contract may, during the term of this Contract, be
temporarily released from this Contract to be used to drill for third parties, without affecting or
extending the term of this Contract. If and to the extent such occurs, Operator shall have no
obligations from rig release of the prior well drilled for Operator until the rig arrives at the
wellsite for the next well to be drilled for Operator and rig up has begun.

	24.	 	NOTICES AND PLACE OF PAYMENT:

     All notices to be given with respect to this Contract unless otherwise provided for shall be
given to the Contractor and to the Operator respectively at the address hereinabove shown. All
sums payable hereunder to Contractor shall be payable at its address hereinabove shown unless
otherwise specified herein.

	25.	 	CONTINUING OBLIGATIONS:

Notwithstanding the termination of this Contract, the parties shall continue to be bound by the
provisions of this Contract that reasonably require some action or forbearance after such
termination.

 

 

	26.	 	ENTIRE AGREEMENT:

This Contract constitutes the full understanding of the parties, and a complete and exclusive
statement of the terms of their agreement, and shall exclusively control and govern all work
performed hereunder. All representations, offers, and undertakings of the parties made prior to the
effective date hereof, whether oral or in writing, are merged herein, and no other contracts,
agreements or work orders, executed prior to the execution of this Contract, shall in any way
modify, amend, alter or change any of the terms or conditions set out herein.

	27.	 	SPECIAL PROVISIONS:

27.1 Operator agrees to furnish all drillpipe to be used in the lateral and horizontal sections
of the hole for wells drilled as horizontal wells.Contractor will furnish all drillpipe to be
used in tension and in the vertical section of the hole. At no time will Contractor’s drill pipe
be used in compression.

27.2 Notwithstanding anything to the contrary contained herein, it is specifically understood
that this shall be a “take or pay” contract wherein Operator shall pay the full Operating Day
Rate amount for each day during the contract term. The only reduction in such amount shall be
for:

	 	A)	 	Repair time in excess of the amount permitted to Contractor or in paragraph 4.5
	 
	 	B)	 	Mobilization and Moving Rate paid by Operator as per paragraph 4.1 and 4.3
	 
	 	C)	 	Force Majeure Rate paid by Operator as per paragraph 4.7 which shall not exceed a
cumulative 30 days combined during the term of this Contract.

               Provided, however, Contractor shall have a duty to mitigate damages by reasonably
attempting to secure replacement contracts for the subject rig if it is released by Operator or
if the Contract is terminated by Contractor prior to the expiration of the term of this
Contract, and Operator shall be entitled to 75% credit for any revenues received by Contractor
incident thereto. Even if finally released by Operator, Operator, with 20 days notice, may
withdraw its release and reactivate this Contract for the remainder of its term to the extent
the rig has not been committed to a third party in mitigation of Operator’s damages.

27.3     Contractor shall be responsible to schedule all equipment and services required for rigging
down, moving and rigging up. Operator shall be responsible for all mobilization costs to move
and rig up the rig and all ancillary equipment on the initial location and for all such moves
from location to location during the term of the contract.

27.4     It is anticipated that Operator will utilize the rig for drilling wells in Chavez, Eddy or
Lea Counties of New Mexico. Operator may specify that the rig be used in other locations. Should
Operator move the rig out of Chavez, Eddy or Lea Counties, New Mexico, all effective Daywork
Rates will be increased by an additional $2000.00 per day.

28. ACCEPTANCE OF CONTRACT:

The foregoing Contract, including the provisions relating to indemnity, release of liability and
allocation of risk of Subparagraphs 4.9 and 6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1
through 14.12, is acknowledged, agreed to and accepted by Operator this                     day of                                         , 2006.

	 	 	 	 	 	 	 	 	 
	 	 	OPERATOR:	 	COG OPERATING LLC	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/ E. Joseph Wright	 	 
	 

	 	 	 	 	 	 

      E. Joseph Wright, Vice President
	 	 

     The foregoing Contract, including the provisions relating to indemnity, release of liability
and allocation of risk of Subparagraphs 4.9, 6.3(c), Paragraphs 10 and 12, and Subparagraphs 14.1
through 14.12, is acknowledged, agreed to and accepted by Contractor this                                         day of
                                                            , 2006, with the understanding that it will not be
binding upon Operator until Operator has noted its acceptance, and with the further understanding
that unless said Contract is executed by Operator within                                         days of the above date
Contractor shall be in no manner bound by its signature thereto.

	 	 	 	 	 	 	 	 	 
	 	 	CONTRACTOR:	 	SILVER OAK DRILLING LLC	 	 
	 
	 	 	 	 	 	 	 	 
	 

	 	 	 	By:	 	/s/ John A. Knorr	 	 
	 

	 	 	 	 	 	 

     John A. Knorr, President

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