Document:

Exhibit
10.2

 

UPSIDE
SHARING PAYMENT AGREEMENT

 

This Upside Sharing
Payment Agreement (this “Agreement”) is made this 16th day of
June 2004, but effective as of March 1, 2004, by and between TEXAS
INDEPENDENT EXPLORATION LIMITED, a Texas limited partnership and successor by
conversion of Texas Independent Exploration, Inc., GULFCOAST ACQUISITIONS
LIMITED, a Texas limited partnership and successor by conversion of Gulfcoast
Acquisition Corporation, FREDERICK W. ZIMMERMAN d/b/a ISLAND RESOURCES and
FREDERICK W. ZIMMERMAN, individually, hereinafter collectively referred to as “Seller”
or “Sellers”) and WHITTIER ENERGY COMPANY, a Nevada corporation (hereinafter
referred to as “Buyer”).

 

WITNESSETH:

 

WHEREAS, on even date
herewith, Seller and Buyer consummated the purchase and sale of certain oil and
gas assets pursuant to that certain Offer to Sell Agreement dated effective as
of March 1, 2004 (the “Purchase Agreement”); and

 

WHEREAS,
as additional consideration for the transactions contemplated in the Purchase Agreement,
Buyer agrees to pay to Seller the herein below provided Upside Sharing Payments
(as defined below) accruing to Buyer from the annual sale of production from
the Properties and received by Buyer;

 

NOW, THEREFORE, based
upon the mutual covenants and considerations contained herein, Seller and Buyer
agree as follows:

 

1.                                       Defined Terms.

 

(a)                                  All
capitalized terms not otherwise defined in this Agreement shall have the
meaning contained in the Purchase Agreement.

 

(b)                                 “Agreement”
shall mean this Upside Sharing Payment Agreement.

 

(c)                                  “Buyer’s
Net Revenue Interest” shall mean Buyer’s share of production in the
Properties acquired from Seller pursuant to the Purchase Agreement.

 

(d)                                 “Buyer’s
Upside Sharing Agreement Volumes” shall mean the difference between the
volumes of gas produced, saved and sold attributable to Buyer’s Net Revenue
Interest in production less Scott & Hopper #3 Well Excess Production
Volumes.

 

(e)                                  “Final
Upside Sharing Payment” shall mean the Upside Sharing Payment made to
Seller pursuant to this Agreement for the last “Sharing Year”, if any such
payment is due.

 

 

(f)                                    “MCF”
shall mean thousand cubic feet. “Target Price” is on an MCF basis for
each “Sharing Year” during the term hereof as set forth on Exhibit A
attached hereto and made a part hereof.

 

(g)                                 “Net
Back Price On A Wellhead MCF Basis” is defined as the quotient resulting
from dividing the (1) difference between (i) the sum of actual gas sales
proceeds received by Buyer from all gas purchasers plus plant product proceeds
received by Buyer from all gas plants, attributable to Buyer’s Upside Sharing
Agreement Volumes, less (ii) the sum of any and all (a) Third Party Costs
allocable to Buyer’s Upside Sharing Agreement Volumes plus (b) fuel and
shrinkage losses allocable to Buyer’s Upside Sharing Agreement Volumes that
have not already been deducted from the calculation of such proceeds, plus (c)
hedge settlements from hedges entered into subsequent to the Closing that are
specific to Buyer’s Upside Sharing Agreement Volumes, by (2) the MCF of gas
comprising Buyer’s Upside Sharing Agreement Volumes..

 

(h)                                 “Purchase
Agreement” shall have the meaning given such term above.

 

(i)                                     “Scott
& Hopper #3 Well Excess Production Volumes” shall have the meaning
given such term in the Purchase Agreement.

 

(j)                                     “Sharing
Year” shall mean each of the one year periods identified on Exhibit A
attached hereto and made a part hereof.

 

(k)                                  “Third
Party Costs” shall mean expenses paid by Buyer for actual processing or
transportation charges that occur downstream of the sales meter located on the
leased premises on which the producing well is located.

 

(l)                                     “Upside
Sharing Payments” shall have the meaning given such term in Section 2
below.

 

Other terms defined
elsewhere in this Agreement have the meanings given such terms as set forth in
such other provisions of this Agreement.

 

2.                                       Upside Sharing Payments.  As additional consideration for the
transactions contemplated in the Purchase Agreement, for each Sharing Year
during the term hereof in which the actual weighted average Net Back Price On A
Wellhead MCF Basis received for that Sharing Year exceeds the Target Price for
that Sharing Year, Buyer shall pay to Seller a payment determined by first,
multiplying 50% of the amount of Buyer’s Upside Sharing Agreement Volumes for
that Sharing Year times the difference between the actual weighted average Net
Back Price On A Wellhead MCF Basis for that Sharing Year less the Target Price
for that Sharing Year, and second, subtracting from such product severance and
ad valorem taxes that are allocable to such product.  The payments made pursuant to this Paragraph 2 shall be referred
to hereinafter as “Upside Sharing Payments”.

 

2

 

3.                                       Time and Method of Payment.  Buyer shall pay to Seller the Upside
Sharing Payments on or before 120 days following the end of the Sharing Year in
which any such payment accrued.  All
payments hereunder shall be made by wire transfer of immediately available
funds to an account designated by Seller, which designation shall be made not
later than two (2) Business Days prior to the date such payment is due.

 

4.                                       Reports.  During the term hereof, Buyer shall provide
Seller with monthly and annual production, hedging and revenue reports and
other relevant information to allow Seller to determine the amount of Seller’s
Upside Sharing Payments to be received from Buyer.

 

5.                                       Term.  This Agreement shall terminate on the date of
payment by Buyer to Seller of the Final Upside Sharing Payment or, in the event
no such payment is due, on June 30, 2008, whichever is the later.  Upon the expiration of this Agreement,
Seller shall furnish Buyer an executed recordable release of this Agreement and
Buyer’s obligations hereunder in the form attached hereto as Exhibit C.

 

6.                                       Subsequent Transfers.  The Upside Sharing Payments
required hereunder shall constitute covenants running with the land.  Any transfer by Buyer of the Properties, or
any Property, shall be made expressly subject to this Agreement, and the transferee
of Buyer shall expressly agree to be bound by this Agreement and to assume all
of Buyer’s obligations hereunder with respect to the Property or Properties
purchased.  Notwithstanding the
foregoing, Buyer shall not be relieved of any of its obligations under this
Agreement, including, but not limited to, computing and making the Upside
Sharing Payments, without the express prior written agreement by Seller.

 

7.                                       Access to Records.  During the term of this Agreement, Buyer
shall give Seller reasonable access to all relevant documents, data and other
information necessary to audit Buyer’s obligations hereunder, including the
calculation of the Upside Sharing Payments.

 

8.                                       Recording.  Buyer shall record a memorandum of this
Agreement in the form attached hereto as Exhibit B (the “Memorandum”) in
each county or parish where the Properties are located.  Within forty-five (45) days following the
execution hereof, Buyer shall furnish Seller with a statement setting forth the
recording information for each county or parish wherein such Memorandum was
recorded.

 

9.                                       Governing Law.  This Agreement is governed under the laws of
the State of Texas excluding any conflicts of law rules or principal that might
apply the law of another jurisdiction. All disputes shall be submitted to the
jurisdiction of the courts in the State of Texas and venue shall be in Harris
County, Texas.

 

10.                                 Notices.  All notices, requests, demands and other
communications shall be provided in accordance with the terms of the Purchase
Agreement.

 

11.                                 Other Agreements.  If there is a conflict between the terms of
the Purchase Agreement and terms of this Agreement, the terms of the Purchase
Agreement shall

 

3

 

control the rights and
obligations of the Parties, but only to the extent necessary to resolve the
conflict.

 

12.                                 Payment to TIE.  Each of the Sellers  (i)
hereby instructs and authorizes Buyer to make all payments due Sellers under
this Agreement, including, without limitation, payments of their portion of the
Upside Sharing Payments, to Texas Independent Exploration Limited (“TIE”) and
(ii) agrees to hold Buyer harmless and indemnify Buyer, to the extent and
amount of such payments, from and against any claim made by Sellers concerning
such payments made by Buyer to TIE.

 

IN WITNESS WHEREOF, the
undersigned parties have executed this Agreement on the day and year first set
forth above, but effective as of March 1, 2004.

 

	
   

  	
  TEXAS INDEPENDENT EXPLORATION LIMITED

  
	
   

  	
  By: Independent
  Operating, L.L.C., a Texas limited

  liability company, its general partner

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Frederick W.
  Zimmerman

  	
   

  
	
   

  	
   

  	
  Frederick
  W. Zimmerman, Manager

  
	
   

  	
   

  	
   

  
	
   

  	
  GULFCOAST ACQUISITIONS LIMITED

  
	
   

  	
  By: Blanco Minerals,
  L.L.C., a Texas limited

  liability company, its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Frederick W.
  Zimmerman

  	
   

  
	
   

  	
   

  	
  Frederick
  W. Zimmerman, Manager

  
	
   

  	
   

  	
   

  
	
   

  	
  Frederick W. Zimmerman

  d/b/a ISLAND RESOURCES

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Frederick W.
  Zimmerman

  	
   

  
	
   

  	
   

  	
  Frederick
  W. Zimmerman

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
  /s/ Frederick W.
  Zimmerman

  	
   

  
	
   

  	
   

  	
  Frederick
  W. Zimmerman

  
	
   

  	
   

  	
   

  
	
   

  	
  WHITTIER
  ENERGY COMPANY

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Daniel H. Silverman

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   Daniel H. Silverman

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
  Chief Operating Officer

  
					

 

4

 

EXHIBIT
A

 

Attached
to and made a part of that certain Upside Sharing Payment Agreement

dated effective as of March 1, 2004 by and between Texas Independent
Exploration

Limited, et al., collectively as Seller

and Whittier Energy Corporation, as Buyer.

 

 

TARGET PRICE AND SHARING YEAR
SCHEDULE

 

 

	
  Sharing Year

  	
   

  	
  TARGET
  PRICE

  PER MCF

  	
   

  
	
  07/01/2004
  – 06/3/2005

  	
   

  	
  $

  	
  6.25

  	
   

  
	
  07/01/2005
  - 06/30/2006

  	
   

  	
  $

  	
  6.50

  	
   

  
	
  07/01/2006
  - 06/30/2007

  	
   

  	
  $

  	
  6.75

  	
   

  
	
  07/01/2007
  - 06/30/2008

  	
   

  	
  $

  	
  7.00

  	
   

  

 

 

EXHIBIT B

 

MEMORANDUM OF UPSIDE SHARING PAYMENT
AGREEMENT

 

	
  STATE
  OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTIES OF BROOKS,
  LIVE OAK & STARR

  	
  §

  
	
   

  	
   

  
	
   

  	
   

  
	
  KNOW ALL MEN BY THESE
  PRESENTS THAT:

  	
   

  

 

TEXAS INDEPENDENT EXPLORATION LIMITED, a Texas limited partnership and
successor by conversion of Texas Independent Exploration, Inc., GULFCOAST
ACQUISITIONS LIMITED, a Texas limited partnership and successor by conversion
of Gulfcoast Acquisition Corporation, FREDERICK W. ZIMMERMAN d/b/a ISLAND
RESOURCES and FREDERICK W. ZIMMERMAN, individually (hereinafter collectively
referred to as “Seller”) and WHITTIER ENERGY COMPANY, a Nevada
corporation (hereinafter referred to as “Buyer”) executed an Upside
Sharing Payment Agreement dated effective March 1, 2004.  Such Upside Sharing Payment Agreement will
terminate on the date of payment of the Final Upside Sharing Payment, which, if
such payment is due, must be paid on or before 120 days following June 30,
2008; provided, however, in the event no such payment is due, the Upside
Sharing Agreement will terminate on June 30, 2008.

 

This Memorandum of Upside Sharing Payment Agreement is placed of record
to serve as notice of the execution and existence of said Upside Sharing
Payment Agreement, and is in no way to supercede same or to abrogate, change,
alter, or modify any of the terms and conditions or any of the rights and
obligations of any of the parties, all of which are set forth in detail in said
Upside Sharing Payment Agreement, which is made a part hereof by reference for
all purposes to the same effect as though written in extenso herein.

 

THUS DONE AND
SIGNED  as
of this the       day of
          , 2004.

 

 

	
   

  	
  TEXAS INDEPENDENT EXPLORATION LIMITED

  
	
   

  	
  By: Independent
  Operating, L.L.C., a Texas limited

  liability company, its general partner

  
	
   

  	
   

  
	
   

  	
  By: 

  	
   

  	
   

  
	
   

  	
   

  	
  Frederick W. Zimmerman, Manager

  

 

 

	
   

  	
  GULFCOAST ACQUISITIONS LIMITED

  
	
   

  	
  By: Blanco Minerals,
  L.L.C., a Texas limited

  liability company, its general partner

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Frederick W. Zimmerman, Manager

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Frederick W. Zimmerman

  
	
   

  	
  d/b/a ISLAND RESOURCES

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
  Frederick W. Zimmerman

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  
	
   

  	
   

  	
  Frederick W. Zimmerman

  
	
   

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  WHITTIER
  ENERGY COMPANY

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						

 

 

ACKNOWLEDGMENTS

 

	
  STATE
  OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY
  OF HARRIS

  	
  §

  

 

This instrument was
acknowledged before me on this     day of
         , 2004, by Frederick W.
Zimmerman, Manager of Independent Operating, L.L.C., the general partner of
Texas Independent Exploration Limited, on behalf of said Texas limited
partnership.

 

 

	
   

  	
   

  	
   

  
	
   

  	
  Notary Public, State of Texas

  

 

2

 

	
  STATE
  OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY
  OF HARRIS

  	
  §

  

 

This instrument was
acknowledged before me on this     day of
         , 2004, by Frederick W.
Zimmerman, Manager of Blanco Minerals, L.L.C., the general partner of GulfCoast
Acquisitions Limited, on behalf of said Texas limited partnership.

 

 

	
   

  	
   

  	
   

  
	
   

  	
  Notary Public, State of Texas

  

 

 

	
  STATE
  OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY
  OF HARRIS

  	
  §

  

 

This instrument was
acknowledged before me on this     day of
         , 2004, by Frederick
Zimmerman d/b/a Island Resources, a sole proprietorship, individually and on
behalf of said sole proprietorship.

 

 

	
   

  	
   

  	
   

  
	
   

  	
  Notary Public, State of Texas

  

 

 

	
  STATE
  OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY
  OF HARRIS

  	
  §

  

 

This instrument was
acknowledged before me on this     day of
         , 2004, by Frederick W. Zimmerman.

 

 

	
   

  	
   

  	
   

  
	
   

  	
  Notary Public, State of Texas

  

 

 

	
  STATE
  OF TEXAS

  	
  §

  
	
   

  	
  §

  
	
  COUNTY
  OF HARRIS

  	
  §

  

 

 

This instrument was
acknowledged before me on this     day of
         , 2004, by
                            ,
                               
of Whittier Energy Company, on behalf of said Nevada corporation.

 

 

	
   

  	
   

  	
   

  
	
   

  	
  Notary Public, State of Texas

  

 

3

 

EXHIBIT
C

 

Attached
to and made a part of that certain Upside Sharing Payment Agreement

dated effective as of March 1, 2004 by and between Texas Independent
Exploration

Limited, et al., collectively as Seller

and Whittier Energy Company, as Buyer.

 

 

[FORM OF RELEASE – TO BE DRAFTED]Exhibit
10.3

 

EXHIBIT “C”

 

Attached to and
made a part of that certain Offer to Sell Letter Agreement dated

June 7th, 2004 by and between Texas Independent Exploration Limited, et
al, as Seller

and Whittier Energy Company, as Buyer

 

As
additional consideration from Buyer to Seller for the transactions contemplated
in the Agreement to which this Exhibit “C” is attached, Buyer shall carry (at
no cost, risk or expense to Seller) to Casing Point (as hereinafter defined)
Seller in the drilling of the first two (2) wells drilled on the Cameron 137
lease (see Exhibit “A” to said Agreement for description of said lease) after
Closing and in the drilling of the first two (2) wells drilled on the Scott
& Hopper leases (see said Exhibit “A” for descriptions of said leases)
after Closing to the extent of the Retained Interest of Seller (as hereinafter
defined) in the Cameron 137 lease and in the Scott & Hopper leases.

 

As
used herein:

 

(a)                                  The term “Casing Point” shall mean that point
in time after a carried well has reached its required depth as provided below,
all logs and tests required to make a decision regarding completion of such
well have been completed and the logs and results thereof have been furnished
to Seller by Buyer/Operator.

 

(b)                                 The term “Retained Interest of Seller” shall
mean, (i) 25% of the leasehold working (cost bearing) interest of Seller in the
Cameron 137 lease immediately prior to the Closing (being not more than 98.5%)
and (ii) 20% of the leasehold working (cost bearing) interest of Seller in the
Scott & Hopper leases immediately prior to Closing (being not more than
53.089751% on a unit basis, see Gas Unit Designation dated August 29, 1977
and recorded in the Brooks County Deed Records at Book 90, Page 49).

 

(c)                                  The term “Carried Wells” shall mean
collectively the first two wells drilled after Closing on the Cameron 137 lease
and the first two (2) wells drilled after Closing on the Scott & Hopper
leases. Each of such Carried Wells are hereinafter sometimes individually
referred to as a “Carried Well.”

 

(d)                                 The term “Substitute Well” shall mean any
well that is drilled as a replacement for a Carried Well under the terms
hereof.  Any such Substitute Well when
so drilled shall qualify as the Carried Well for which it is a replacement.

 

The
additional terms and conditions governing the carrying by Buyer of the Retained
Interest of Seller in the Carried Wells, including the reassignment of certain
portions of the Properties from Buyer to Seller if Buyer fails to perform as
herein provided, are as follows:

 

Carrying of Retained Interest of
Seller on the Cameron 137 lease

 

i.                                          Buyer shall carry the Retained Interest of
Seller (at no cost, risk or expense to Seller) for any and all costs required
for operations to Casing Point of the first two (2) wells drilled

 

1

 

on
the Cameron 137 lease after Closing, and Seller shall be responsible for all
costs, risk and expense associated with or pertaining to such Retained Interest
of Seller at and after Casing Point in each well.

 

ii.                                       Buyer commits to drill each of said Carried
Wells on the Cameron 137 lease to a minimum total vertical depth of 9,304’
beneath the surface of the earth with the first Carried Well being spud no
later than 12 months after Closing and the second Carried Well being spud no
later than 24 months after Closing. 
Seller agrees that Seller will not propose any wells on the Cameron 137
lease until the earlier to occur of either (i) thirty (30) days following the
date the first Carried Well on the Cameron 137 lease has been tested after the
drilling and completion of such well or (ii) 12 months after the Closing and so
long thereafter as Buyer takes to drill and complete such first Carried Well
located on the Cameron 137 lease if same is timely spud.

 

iii.                                    If Buyer fails to timely spud and thereafter
drill the first such Carried Well to its required depth with the due diligence
of a prudent operator, then, as the only consequence to Buyer for such failure
and as the sole remedy of Seller against Buyer for such failure, Buyer shall
immediately reassign to Seller all rights that Seller assigned to Buyer in the
Cameron 137 lease, save and except for Buyer’s rights in (i) any of the
wellbores then located on the Cameron 137 lease and (ii) forty (40) acres surrounding
each of such wellbores then producing or capable of producing, such acreage to
be in the form of a square as is reasonably practicable with each side of such
square being equidistant from the particular wellbore surrounded by such
acreage.

 

iv.                                   If Buyer timely spuds and drills the first
Carried Well to its required depth, but Buyer then fails to timely spud and
thereafter drill the second Carried Well to its required depth with the due
diligence of a prudent operator, then, as the only consequence to Buyer for
such failure and as the sole remedy of Seller against Buyer for such failure,
Buyer shall immediately reassign to Seller 50% of the rights that Seller
assigned to Buyer in the Cameron 137 lease, save and except for Buyer’s
rights in (i) any of the wellbores then located on the Cameron 137 lease and
(ii) forty (40) acres surrounding each of such wellbores then producing or
capable of producing, such acreage to be in the form of a square as is
reasonably practicable with each side of such square being equidistant from the
particular wellbore surrounded by such acreage.

 

v.                                      As to any wells drilled on the Cameron 137
lease subsequent to the two Carried Wells, each party will be responsible for
paying its share of costs based on its leasehold interest in the Cameron 137
lease at that time.

 

Carrying of Retained Interest of
Seller on Scott & Hopper leases

 

i.                                          Buyer shall carry the Retained Interest of
Seller (at no cost, risk or expense to Seller) for any and all costs required
for operations to Casing Point of the first two (2) wells drilled on the Scott
& Hopper leases after Closing, and Seller shall be responsible for all
cost, risk and expense associated with or pertaining to such Retained Interest
of Seller at and after Casing Point in each well.

 

2

 

ii.                                       Buyer commits to drill each of said Carried
Wells on the Scott & Hopper leases to a minimum total vertical depth of
10,000’ beneath the surface of the earth with the first Carried Well being spud
no later than 9 months after Closing and the second Carried Well being spud no
later than 18 months after Closing. 
Seller agrees that Seller will not propose any wells on the Scott &
Hopper leases until the earlier to occur of either (i) thirty (30) days following
the date the first Carried Well on the Scott & Hopper leases has been
tested after the drilling and completion of such well or (ii) 9 months after
the Closing and so long thereafter as Buyer takes to drill and complete such
first Carried Well on the Scott & Hopper leases if same is timely spud.

 

iii.                                    If Buyer fails to timely spud and thereafter
drill the first such Carried Well to its required depth with the due diligence
of a prudent operator, then, as the only consequence to Buyer for such failure and
as the sole remedy of Seller against Buyer for such failure, Buyer shall
immediately reassign to Seller all rights that Seller assigned to Buyer in the
Scott & Hopper leases, save and except for Buyer’s rights in (i) any
of the wellbores then located on the Scott & Hopper leases and (ii) forty
(40) acres surrounding each of such wellbores then producing or capable of
producing, such acreage to be in the form of a square as is reasonably
practicable with each side of such square being equidistant from the particular
wellbore surrounded by such acreage.

 

iv.                                   If Buyer timely spuds and drills the first
Carried Well to its required depth, but Buyer then fails to timely spud and
thereafter drill the second Carried Well to its required depth with the due
diligence of a prudent operator, then, as the only consequence to Buyer for
such failure and as the sole remedy of Seller against Buyer for such failure,
Buyer shall immediately reassign to Seller 50% of the rights that Seller
assigned to Buyer in the Scott & Hopper leases, save and except for
Buyer’s rights in (i) any of the wellbores then located on the Scott &
Hopper leases and (ii) forty (40) acres surrounding each of such wellbores then
producing or capable of producing, such acreage to be in the form of a square
as is reasonably practicable with each side of such square being equidistant
from the particular wellbore surrounded by such acreage.

 

v.                                      As to any wells drilled on the Scott &
Hopper leases subsequent to the two Carried Wells, each party will be responsible
for paying its share of costs based on its leasehold interest in the Scott
& Hopper leases at that time.

 

vi.                                   Within 60 days after the Closing of the
transactions contemplated in the Agreement to which this Exhibit “C” is
attached, Buyer shall file an application with the Texas Railroad Commission
for temporary field rules of 40 acres surrounding each of the wellbores
producing or capable of producing located on the Scott & Hopper
Leases.  Buyer and Seller further agree
that neither of them shall oppose an application for a Statewide Rule 37
exception and/or a Statewide Rule 38 density exception filed by either Buyer or
Seller with respect to wells drilled or to be drilled on the Scott & Hopper
leases.

 

If
while drilling any Carried Well, mechanical difficulties arise or conditions in
such Carried Well render further drilling by ordinary tools impossible or
impractical and such conditions

 

3

 

would
cause a prudent operator to cease drilling, then Buyer shall have the option to
stop drilling operations on such Carried Well and thereafter elect to drill a
Substitute Well.  Operations for the
drilling of a Substitute Well shall be commenced within thirty (30) days from
the date of plugging and abandonment of such Carried Well due to such
conditions in the hole. The Substitute Well shall be drilled, at a mutually
acceptable location between the Seller and Buyer, in the same manner and to the
same required depth as provided for such Carried Well.

 

In the event a reassignment from
Buyer to Seller is due Seller pursuant to the above terms, and Buyer or its
assigns fails or refuses for any reason after receiving written notice from
Seller to execute and deliver such reassignment to Seller within 45 days from
the date of receipt of such written notice by Buyer, then, in such event and
only in such event, at any time subsequent to such 45 day period, Seller may,
at its election, deem itself agent for Buyer or its assigns with the limited
and specific authority to execute and place of record such reassignment.

 

Seller and Buyer agree that Buyer’s
Carried Well and Reassignment obligations described in the this Exhibit “C”
shall be covenants running with the land and Buyer shall require any transferee
of either the Cameron 137 or the Scott & Hoppers leases to expressly assume
such obligations.

 

4

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