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Exhibit 10.5    
    

 
 

PURCHASE AND SALE AGREEMENT
  
    between
  
    KENNEDY OIL
  
    and
  
    PINNACLE GAS RESOURCES, INC.    
    

 
 
 

Table of Contents    
    

	 
	 
	 	Page
 

	 ARTICLE I PURCHASE AND SALE	 	1
	 	1.1	Agreement to Sell and to Purchase.	 	1
	 	1.2	Purchase Price and Earnest Money	 	2
	 	1.3	Adjustments to Purchase Price	 	2
	 	1.4	Closing Statement	 	3
	 	1.5	Allocation of Purchase Price / Allocated Values	 	3
	
  ARTICLE II ACCESS, CERTAIN ACKNOWLEDGEMENTS AND DISCLAIMERS	
 	

3
	 	2.1	Access	 	3
	 	2.2	Disclaimers	 	5
	
  ARTICLE III REPRESENTATIONS AND WARRANTIES OF SELLER	
 	

5
	 	3.1	Authorization; Enforceability	 	5
	 	3.2	Conflicts	 	5
	 	3.3	Bankruptcy	 	6
	 	3.4	Foreign Person	 	6
	 	3.5	Organizational Matters	 	6
	 	3.6	No Violations of Laws	 	6
	 	3.7	Litigation	 	6
	 	3.8	Taxes	 	6
	 	3.9	Contracts	 	6
	 	3.10	Production Status	 	6
	 	3.11	No Imbalances	 	6
	 	3.12	Environmental	 	6
	 	3.13	Licenses	 	7
	 	3.14	Brokers' Fees	 	7
	 	3.15	Plugging and Abandonment	 	7
	 	3.16	Preferential Right	 	7
	 	3.17	Reserve Report	 	7
	 	3.18	Insurance	 	7
	 	3.19	Leases	 	7
	
  ARTICLE IV REPRESENTATIONS AND WARRANTIES OF BUYER	
 	

8
	 	4.1	Organization	 	8
	 	4.2	Authorization; Enforceability	 	8
	 	4.3	Conflicts	 	8
	 	4.4	Bankruptcy	 	8
	 	4.5	Litigation	 	8
	 	4.6	Regulatory	 	8
	 	4.7	Brokers' Fees	 	8
	 	4.8	Independent Investigation	 	9
	 	4.9	Availability of Funds	 	9
	 	 	 	 

i

 

	
  ARTICLE V ADDITIONAL AGREEMENTS	
 	

9
	 	5.1	Confidentiality	 	9
	 	5.2	Conduct of Business	 	9
	 	5.3	Further Assurances	 	9
	 	5.4	Approvals	 	10
	 	5.5	No Public Announcement	 	10
	 	5.6	Governmental Bonds	 	10
	 	5.7	Use of Company Name	 	10
	
  ARTICLE VI BUYER'S CONDITIONS	
 	

10
	 	6.1	Representations, Warranties and Covenants	 	11
	 	6.2	Closing Delivery	 	11
	 	6.3	Governmental Approvals	 	11
	 	6.4	No Injunction or Restraint	 	11
	 	6.5	Title Defects, Environmental Defects	 	11
	 	6.6	Operating Agreement	 	11
	
  ARTICLE VII SELLER'S CONDITIONS	
 	

12
	 	7.1	Representations, Warranties and Covenants	 	12
	 	7.2	Closing Delivery	 	12
	 	7.3	Governmental Approvals	 	12
	 	7.4	No Injunction or Restraint	 	12
	 	7.5	Governmental Bonds	 	12
	 	7.6	Operating Agreement	 	12
	
  ARTICLE VIII TITLE MATTERS AND CASUALTIES	
 	

12
	 	8.1	Title	 	12
	 	8.2	Notice of Title Defects; Defect Adjustments	 	12
	
  ARTICLE IX ENVIRONMENTAL MATTERS	
 	

16
	 	9.1	Environmental Defects	 	16
	
  ARTICLE X ASSUMPTION; INDEMNIFICATION	
 	

18
	 	10.1	Assumption by Buyer	 	18
	 	10.2	Indemnification of the Buyer Indemnified Parties	 	18
	 	10.3	Indemnification of the Seller Indemnified Parties	 	18
	 	10.4	Casing Indemnity	 	19
	 	10.5	Limitation as to Time	 	19
	 	10.6	Sole and Exclusive Remedy	 	19
	 	10.7	Third Party Claims	 	19
	 	10.8	Direct Claims	 	21
	 	10.9	Deductible and Liability Cap	 	21
	 	10.10	Waiver of Certain Damages	 	21
	 	10.11	Express Negligence	 	21
	
  ARTICLE XI SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS	
 	

22
	 	11.1	Survival of Representations and Warranties	 	22
	 	11.2	Survival of Covenants	 	22
	
  ARTICLE XII TERMINATION	
 	

22
	 	12.1	Termination	 	22
	 	12.2	Liability Upon Termination	 	22
	 	 	 	 

ii

 

	
  ARTICLE XIII DEFINITIONS OF CERTAIN TERMS	
 	

23
	
  ARTICLE XIV MISCELLANEOUS	
 	

31
	 	14.1	Notices	 	31
	 	14.2	Assignment and Successors	 	31
	 	14.3	Entire Agreement; Amendment	 	32
	 	14.4	Governing Law	 	32
	 	14.5	Waiver	 	32
	 	14.6	Severability	 	32
	 	14.7	No Third Party Beneficiaries	 	32
	 	14.8	Counterparts	 	32
	 	14.9	Headings	 	32
	 	14.10	Negotiated Transaction	 	32
	 	14.11	Expenses and Taxes	 	32
	 	14.12	Record Retention	 	33
	 	14.13	Disclosure Schedules	 	33

EXHIBITS
AND SCHEDULES 

	Exhibits
 
	 	 

	Exhibit A	 	Assignment, Conveyance, and Bill of Sale
	Exhibit B	 	Allocated Value, Leases, Wells (WI/NRI), Encumbrance
	Exhibit C	 	Access Agreement
	Exhibit D	 	Form of Guaranty Agreement
	Exhibit E	 	Pinnacle Shareholder Commitment Letter
	
Schedules
	
 	

 
	Schedule 1.5	 	Allocation of Purchase Price/Allocated Value
	Schedule 3.7	 	Litigation
	Schedule 3.9	 	Applicable Contracts
	Schedule 3.14	 	Brokers
	Schedule 3.18	 	Insurance

iii

 
 

PURCHASE AND SALE AGREEMENT    
    

        THIS PURCHASE AND SALE AGREEMENT (this "Agreement") is made and entered into as of February 7, 2006, by and
between Kennedy Oil, a Wyoming corporation ("Seller"), and Pinnacle Gas Resources, Inc., a Delaware
corporation ("Buyer"). 

RECITALS:  

        WHEREAS, Seller owns all of the Oil and Gas Assets (as defined herein); 

        WHEREAS,
Seller desires to sell and convey, and Buyer desires to purchase and pay for, the Oil and Gas Assets, on the terms and subject to the conditions provided herein; and 

        WHEREAS,
capitalized terms used but not otherwise defined herein shall have the meaning given such terms in Article XIII; 

        NOW,
THEREFORE, in consideration of the premises, the respective representations, warranties, covenants and agreements contained herein, and other good and valuable consideration, the
sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 

ARTICLE I

PURCHASE AND SALE  

        1.1    Agreement to Sell and to Purchase. 

        (a)   On
the Closing Date, upon the terms and subject to the conditions contained herein, Seller shall transfer, sell, assign and convey to Buyer, and Buyer shall purchase
from Seller, all of the Oil and Gas Assets. 

        (b)   Seller
shall reserve and retain all of the Excluded Assets. 

        (c)   Subject
to the provisions hereof, Seller shall remain entitled to all of the rights of ownership (including, without limitation, the right to all production, proceeds of
production and other proceeds) and shall remain responsible for all Operating Expenses, in each case attributable to the Oil and Gas Assets for the period of time prior to the Effective Time. Subject
to the provisions hereof, and subject to the occurrence of the Closing, Buyer shall be entitled to all of the rights of ownership (including, without limitation, the right to all production, proceeds
of production, and other proceeds), and shall be responsible for all Operating Expenses, in each case, attributable to the Oil and Gas Assets for the period of time on and after the Effective Time.
All Operating Expenses attributable to the Oil and Gas Assets, in each case that are: (i) incurred with respect to operations conducted or production prior to the Effective Time shall be paid
by or allocated to Seller and (ii) incurred with respect to operations conducted or production on and after the Effective Time shall be paid by or allocated to Buyer.  "Operating Expenses" means all
operating expenses (including without limitation employee costs, costs of insurance and ad valorem, property, severance,
production and similar taxes based upon or measured by the ownership or operation of the Oil and Gas Assets or the production of Hydrocarbons therefrom, but excluding any other taxes) and capital
expenditures incurred in the ownership and operation of the Oil and Gas Assets in the ordinary course of business and, where applicable, in accordance with the relevant operating or unit agreement,
if any. 

        (d)   Subject
to the conditions set forth in this Agreement, the closing of such sale and purchase ("Closing") shall take place
at the offices of Kennedy Oil, 222 South Gillette Ave., Suite 302, Gillette, WY 82716 on the earlier of May 15, 2006, or five (5) Business Days after the completion
of Buyer's planned private placement offering, or at such other time, date and place as the parties hereto shall mutually agree upon in writing (the "Closing
Date"). At the Closing, Seller and Buyer shall deliver the items set forth in Section 6.2 and  Section 7.2,
 respectively. 

 

        1.2    Purchase Price and Earnest Money. 

        (a)   In
consideration of the transfer to Buyer of the Oil and Gas Assets and in accordance with this Agreement, Buyer shall pay to Seller Twenty Seven Million Dollars
($27,000,000) (the "Purchase Price"), as adjusted pursuant to the terms of this Agreement, including without limitation  Section 1.3. 

        (b)   Concurrently
with the execution of this Agreement, Buyer shall make a deposit with First Interstate Bank, Missoula, Montana ("Escrow
Agent") in the amount of Five Hundred Thousand Dollars ($500,000), to be held by Escrow Agent as the "Earnest Money" pursuant to
the terms of the Escrow Agreement and this Agreement. All fees payable to the Escrow Agent under the Escrow Agreement shall be borne and paid one-half by Buyer and one-half
by Seller. 

        (c)   If
the transactions contemplated by this Agreement are consummated, then the Earnest Money and any interest earned thereon shall be distributed to Seller (to an
account as shall be directed in writing by Seller in the joint written instructions described in the next sentence) and shall be considered as payment of a portion of the Purchase Price, and the
Purchase Price payable by Buyer at Closing shall be reduced by the amount of the Earnest Money and any interest earned thereon which is so distributed. In such event, at Closing, Seller and Buyer
shall execute and deliver joint written instructions to the Escrow Agent to accomplish the foregoing. 

        (d)   If
(i) all conditions precedent to the obligations of Buyer set forth in Article VI have been met as of the
Outside Termination Date; and (ii) the transactions contemplated by this Agreement are not consummated on or before the Outside Termination Date because of the failure of the conditions set
forth in Section 7.1 or Section 7.2 to be satisfied, then, in such event, Seller
shall have the right to terminate this Agreement pursuant to Section 12.1(d) and receive the Earnest Money and any interest earned thereon
and to the extent Seller's actual damages exceed the Earnest Money, to seek such actual damages from Buyer. Seller and Buyer shall execute and deliver joint written instructions to the Escrow Agent to
accomplish the foregoing. 

        (e)   If
this Agreement is terminated by the mutual written agreement of Buyer and Seller, or if the Closing does not occur for any reason other than as set forth in  Section 1.2(d), then Buyer shall be
entitled to the delivery of the Earnest Money and any interest earned thereon, free of any claims by Seller
with respect thereto. In such event, Seller and Buyer shall execute and deliver joint written instructions to the Escrow Agent to accomplish the foregoing. 

        (f)    At
the Closing, Buyer shall pay the Purchase Price, adjusted as set forth in Section 1.3, less the Earnest Money
(and any interest earned thereon) to Seller in cash in immediately available funds by wire transfer (to an account as shall be set forth in the Closing Statement). 

        1.3    Adjustments to Purchase Price.    The Purchase Price shall be adjusted as follows, and the resulting amount
shall be herein referred to as the "Adjusted Purchase Price": 

        (a)   The
Purchase Price shall be adjusted upward by the following amounts (without duplication): 

        (i)    an
amount equal to all Operating Expenses and other costs and expenses that are attributable to the Oil and Gas Assets during the Interim Period that are paid by or on
behalf of Seller, whether paid before or after the Effective Time, including, without limitation, (A) bond and insurance premiums paid by or on behalf of Seller during the Interim Period,
(B) royalties or other burdens upon, measured by or payable out of proceeds of production, and (C) rentals and other lease maintenance payments; and 

        (ii)   any
other amount otherwise agreed upon by Seller and Buyer. 

2

 

        (b)   The
Purchase Price shall be adjusted downward by the following amounts (without duplication): 

        (i)    an
amount equal to all proceeds received by Seller (other than from the sale of Hydrocarbons produced from or allocable to the Oil and Gas Assets) to which Buyer is
entitled pursuant to Section 1.1(c); 

        (ii)   an
amount equal to all other proceeds received by Seller attributable to the sale of Hydrocarbons produced from or allocable to the Oil and Gas Assets during the
Interim Period; 

        (iii)  the
Title Defect Amount under Section 8.2 with respect to any Title Defect that is not waived by Buyer or cured
prior to Closing; 

        (iv)  if
Seller makes the election under Section 9.1(b)(i) with respect to an Environmental Defect, the Remediation
Amount with respect to such Environmental Defect if the Remediation Amount has been determined prior to Closing or the Remediation Amount claimed by Buyer if the Remediation Amount has not been
determined prior to Closing; 

        (v)   the
amount of any Seller Prorated Taxes; and 

        (vi)  any
other amount otherwise agreed upon by Seller and Buyer. 

        1.4    Closing Statement.    Not less than four (4) Business Days prior to the Closing, Seller shall prepare
and deliver to Buyer a settlement statement (the "Closing Statement") setting forth each adjustment to the
Purchase Price required under this Agreement, showing the calculation of such adjustments, and setting forth the resulting Adjusted Purchase Price. The Closing Statement shall also set forth wire
transfer instructions for payment of the Adjusted Purchase Price. Within two (2) Business Days of receipt of the Closing Statement, Buyer will deliver to Seller a written report containing all
changes, together with an explanation of each change, that Buyer proposes to be made to the Closing Statement. The Closing Statement, as agreed upon by the parties, will be used to adjust the Purchase
Price at Closing. 

        1.5    Allocation of Purchase Price / Allocated Values.    Buyer and Seller agree that the unadjusted Purchase Price
shall be allocated among the Oil and Gas Assets in accordance with the principles of Section 1060 of the Code and the Treasury Regulations, as set forth in  Schedule 1.5 of this Agreement. The
"Allocated Value" for any Oil and Gas Asset equals the
portion of the unadjusted Purchase Price allocated to such Oil and Gas Asset on Schedule 1.5 and such Allocated Value shall be used in
calculating adjustments to the Purchase Price as provided herein. Buyer and Seller agree (a) that the Allocated Values, as adjusted, shall be used by Seller and Buyer as the basis for reporting
asset values and other items for purposes of all federal, state, and local tax returns, including without limitation Internal Revenue Service Form 8594 and (b) that neither they nor
their Affiliates will take positions inconsistent with such Allocated Values in notices to Governmental Entities, in audit or other proceedings with respect to taxes, or in other documents or notices
relating to the transactions contemplated by this Agreement. 

ARTICLE II

ACCESS, CERTAIN ACKNOWLEDGEMENTS AND DISCLAIMERS  

        2.1    Access. 

        (a)   From
and after the date of this Agreement and up to and including the Closing Date (or earlier termination of this Agreement) but subject to the further
provisions of this Section 2.1 and obtaining any required consents of Third Parties, including Third Party operators of the Oil and Gas
Assets (with respect to which consents Seller shall use commercially reasonable efforts to obtain), Seller shall afford to Buyer and its officers, employees, agents, accountants, attorneys, investment
bankers, contractors, and other authorized representatives ("Buyer's Representatives") reasonable 

3

 

access,
during normal business hours, to the Oil and Gas Assets and all Records and other documents relating to the Oil and Gas Assets. Seller shall also make available to Buyer and Buyer's
Representatives, upon reasonable notice during normal business hours, Seller's personnel knowledgeable with respect to the Oil and Gas Assets in order that Buyer may make such due diligence
investigation as Buyer considers necessary or appropriate. All investigations and due diligence conducted by Buyer or any Buyer's Representative shall be conducted at Buyer's sole risk, cost and
expense and any conclusions made from any examination done by Buyer or any Buyer's Representative shall result from Buyer's own independent review and judgment. 

        (b)   Buyer
(or Buyer's Representative) shall be entitled to conduct and perform (i) an Integrity Test on each Well and (ii) one or more tests on each
Well that is completed and has production facilities to analyze the Btu content of the natural gas produced from such Well and the composition of the water produced from such Well
(the "Gas and Water Analysis Test"). The Integrity Tests will be conducted using a temperature probe test. If for any reason a pressure test is
to be used, Buyer agrees to notify Seller and to reimburse Seller for costs incurred in overseeing and witnessing such pressure test. Seller or its designee shall have the right to accompany Buyer and
Buyer's Representatives whenever they are on site on the Oil and Gas Assets. 

        (c)   Buyer
shall be entitled to conduct an environmental property assessment with respect to the Oil and Gas Assets. Seller or its designee shall have the right to accompany
Buyer and Buyer's Representatives whenever they are on site on the Oil and Gas Assets. Buyer shall not have access to, and shall not be permitted to conduct any environmental due diligence (including
any environmental property assessments) with respect to any Oil and Gas Assets where Seller does not have the authority to grant access for such due diligence
(provided, however, Seller shall use its commercially reasonable efforts to obtain permission from any
Third Party to allow Buyer and Buyer's Representatives such access). 

        (d)   Buyer
shall coordinate its environmental property assessments and physical inspections of the Oil and Gas Assets with Seller to minimize any inconvenience to or
interruption of the conduct of business by Seller. Notwithstanding the provisions of this Section 2.1, Seller shall not be required to grant
access or furnish information to Buyer or any of Buyer's Representatives to the extent that such information is subject to an attorney/client or attorney work product privilege or that such access or
the furnishing of such information is prohibited by Law or an existing contract or agreement,. Buyer agrees that it will not, and will cause Buyer's Representatives not to, use any information
obtained pursuant to this Section 2.1 for any purpose unrelated to the consummation of the transactions contemplated by this Agreement.
Buyer shall abide by Seller's, Seller's Affiliates', and any Third Party operator's safety rules, regulations, and operating policies while conducting its due diligence evaluation of the Oil and Gas
Assets, including any environmental or other inspection or assessment of the Oil and Gas Assets. Buyer hereby defends, indemnifies and holds each of the operators of the Oil and Gas Assets and the
Seller Indemnified Parties harmless from and against any and all Losses (i) arising out of, resulting from or relating to any field visit, environmental assessment, or other due diligence
activity conducted by Buyer or any Buyer's Representative with respect to the Oil and Gas Assets and (ii) asserted by or arising in favor of Buyer or any of Buyer's Representatives,  even if such Losses arise out of or
result from the sole, active, passive, concurrent or comparative negligence, strict liability or other fault or violation of Law of or by a
Seller Indemnified Party, excepting only those Losses actually resulting on the account of the willful misconduct of a Seller Indemnified Party.

        (e)   Buyer
agrees promptly to provide the Companies, but in no less than five (5) days after receipt by Buyer, copies of all written final environmental assessment
reports prepared by or for Buyer which contain information collected or generated with respect to the Oil and Gas Assets. Seller shall not be deemed, by receipt of said documents or otherwise, to have
made any representation or warranty, expressed, implied or statutory, as to the environmental condition to the Oil and Gas Assets 

4

 

or
to the accuracy of said documents or the information contained therein, except as otherwise provided herein. 

        (f)    Upon
completion of Buyer's due diligence, Buyer shall at its sole cost and expense and without any cost or expense to Seller, (i) repair all damage done to the
Oil and Gas Assets in connection with Buyer's due diligence, and (ii) restore the Oil and Gas Assets to the approximate same or better condition than it was prior to commencement of Buyer's
due diligence. 

        (g)   During
all periods that Buyer or any of Buyer's Representatives are conducting due diligence activities on the Oil and Gas Assets, Buyer shall maintain, at its sole
expense and with insurers reasonably satisfactory to the Seller, policies of insurance of the types and in the amounts reasonably requested by the Seller. Coverage under all insurance required to be
carried by Buyer hereunder will (i) be primary insurance, (ii) list the Seller Indemnified Parties as additional insureds, (iii) waive subrogation against the Seller Indemnified
Parties and (iv) provide for five (5) days prior written notice to the Seller in the event of cancellation or modification of the policy or reduction in coverage. Upon request by the
Seller, Buyer shall provide evidence of such insurance to the Seller prior to entering the Oil and Gas Assets. 

        2.2    Disclaimers.    Buyer acknowledges and agrees that, except as otherwise expressly set forth in this Agreement,
neither Seller, nor any Affiliate of Seller, makes any representation or warranty, express, statutory, implied or otherwise with respect to the Oil and Gas Assets, including, without limitation, no
representations regarding any opinion, information, projection or advice that may have been provided to Buyer by any officer, director, employee, agent, consultant, representative or advisor of Seller
or any of its Affiliates, and no representation or warranty regarding: (a) title to the Oil and Gas Assets, (b) any costs, expenses, revenues, receipts, accounts receivable, or accounts
payable, (c) any contractual, economic or financial information and data associated with the Oil and Gas Assets, (d) the continued financial viability or productivity of the Oil and Gas
Assets or transportability of product, (e) the environmental or physical condition of the Oil and Gas Assets, (f) fitness for a particular purpose, and (g) undeveloped acreage,
production rates, recompletion opportunities, decline rates or the quality, quantity or volume of the reserves of Hydrocarbons, if any, attributable to the Oil and Gas Assets. 

ARTICLE III

REPRESENTATIONS AND WARRANTIES OF SELLER  

        As of the date hereof and as of the Closing Date, Seller hereby represents and warrants to Buyer as follows: 

        3.1    Authorization; Enforceability.    Seller has the legal capacity to enter into this Agreement and to consummate
the transactions contemplated hereby. This Agreement and all other agreements and instruments executed by Seller in connection herewith have been duly executed and delivered by Seller, and assuming
this Agreement and such other agreements and instruments constitute the valid and binding obligations of Buyer, constitute legal, valid and binding obligations of Seller, enforceable against Seller in
accordance with their terms, subject, as to enforceability, to bankruptcy, insolvency, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and
to general principles of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 

        3.2    Conflicts.    Seller's execution, delivery, and performance of this Agreement and the transactions contemplated
hereby will not: (a) result in the breach of any term or condition of, or constitute a default or cause the acceleration of any obligation under any agreement or instrument to which Seller is a
party or by which it is bound; or (b) violate or conflict with any applicable Law, except in the case of both clauses (a) and (b) of this sentence, where such breaches,
violations, or conflicts would not, individually or in the aggregate, have a Material Adverse Effect. 

5

 

        3.3    Bankruptcy.    There are no bankruptcy, reorganization, or arrangement proceedings pending, being contemplated
by, or to Seller's Knowledge, threatened against, Seller. 

        3.4    Foreign Person.    Seller is not a "foreign person" within the meaning of Section 1445 of
the Code. 

        3.5    Organizational Matters.    Seller is a corporation, duly organized, validly existing and in good standing under
the Laws of the State of Wyoming, with full corporate power to carry on its business as it is conducted, and to own, lease or operate its assets. Seller is duly authorized to do business and is in
good standing in such other jurisdictions in which Seller is required to be so authorized. 

        3.6    No Violations of Laws.    Seller has owned, operated, and developed the Oil and Gas Assets in compliance with
all Laws, except any instances of non-compliance that would not, individually or in the aggregate, have a Material Adverse Effect. This  Section 3.6 does not cover or include any matters with
respect to Environmental Laws, such matters being addressed exclusively in  Section 3.12. 

        3.7    Litigation.    Except as set forth in Schedule 3.7, as
of the date of this Agreement, there is no claim, demand, suit, action, investigation or other proceeding pending, or to Seller's Knowledge, threatened, against Seller or any of the Oil and Gas
Assets, except any such claim, demand, suit, action, investigation or other proceeding that would not, individually or in the aggregate, have a Material Adverse Effect. 

        3.8    Taxes.    Seller has timely and fully paid all Taxes due and owing in respect of the Oil and Gas Assets, all
returns and reports with respect to such Taxes have duly and timely prepared and filed, and there are no pending proposed deficiencies or other claims for unpaid Taxes in respect of the Oil and
Gas Assets. 

        3.9    Contracts.    As of the date of this Agreement, excluding any Leases,  Schedule 3.9 correctly describes all Applicable Contracts. Seller
has made available to Buyer true, complete, and correct copies of all Leases
and Applicable Contracts. Seller is not in default under, and has not given or received any notice of termination of, any Lease or Applicable Contract. To Seller's Knowledge, no other Person that is a
party to any Lease or Applicable Contract is in default under that Lease or Applicable Contract. Between the Effective Time and the date of this Agreement, there have been no contracts or agreements
added to or deleted from the Applicable Contracts described in Schedule 3.9. 

        3.10    Production Status.    All of the Wells were drilled in compliance with the terms of the Leases and all
applicable Laws. The Wells currently are not producing and are shut-in in compliance with the terms of the Leases and all applicable Laws. 

        3.11    No Imbalances.    No imbalances exist regarding production taken or marketed from any Lease and Seller will
not be obligated, by virtue of any prepayment arrangement, take or pay agreement, or similar arrangement, to deliver Hydrocarbons produced from the Oil and Gas Assets at some future time without then
receiving full payment therefor. 

        3.12    Environmental. 

        (a)   With
respect to the Oil and Gas Assets, Seller has not entered into, and the Oil and Gas Assets are not subject to, any agreements, consents, orders, decrees, judgments,
or other directives of any Governmental Entity based on any Environmental Laws. 

        (b)   Seller
has not received notice from any Person of any release, disposal, event, condition, circumstance, activity, practice or incident concerning compliance with any
Environmental Law or violation of any common law or the terms of any license or permit issued pursuant thereto. 

        (c)   Seller
is in compliance with all Environmental Laws in the ownership, development, and operation of the Oil and Gas Assets, except for any such
non-compliance that would not, individually or in the aggregate, have a Material Adverse Effect. 

6

 

        (d)   True,
correct, and complete copies of all material reports, studies, written notices from environmental Governmental Entities, tests, analyses, and other documents
specifically addressing environmental matters related to Seller's ownership or operation of the Oil and Gas Assets, which are in Seller's possession, have been made available to Buyer. 

        3.13    Licenses.    Seller holds all licenses, permits, or other authorizations necessary to own and carry on
operations connected with the Oil and Gas Assets as currently conducted, except where the failure to obtain such licenses, permits, or other authorizations would not, individually or in the aggregate,
have a Material Adverse Effect. Such licenses, permits, and other authorizations are in full force and effect and there are no material violations in respect thereof. 

        3.14    Brokers' Fees.    Except as set forth on Schedule 3.14,
Seller has not incurred any liability, contingent or otherwise, for brokers' or finders' fees in respect of transactions contemplated hereby. 

        3.15    Plugging and Abandonment.    As of the date of this Agreement, there are no Wells that are required by any
Governmental Entity to be plugged, abandoned and reclaimed by Seller that have not been plugged, abandoned and reclaimed by Seller. 

        3.16    Preferential Right.    No Person has any call upon, option to purchase, preferential right to purchase or
similar rights with respect to the Oil and Gas Assets or to the production therefrom that, in each case, arises as a result of or becomes exercisable upon the execution of this Agreement or the
consummation of the transactions contemplated hereby. 

        3.17    Reserve Report.    Seller has delivered to Buyer a copy of Seller's oil and gas reserve report as of
September 1, 2005, prepared by Netherland, Sewell & Associates, Inc. The factual information provided to Netherland, Sewell & Associates, Inc. by Seller regarding
the Oil and Gas Assets for preparation of such report consisting of production volumes, Btu gas content, water analysis, sales prices for production, contractual pricing provisions under oil or gas
sales or marketing contracts under hedging arrangements, costs of operations and development, and working interest and net revenue information relating to Seller's ownership interests in properties
was derived from the books and records of Seller and was accurate in all material respects when furnished; provided,  however, that (a) the reserves
included in such report are estimates only and should not be construed as exact quantities, (b) such
reserves may or may not be recovered and, if recovered, the revenues therefrom and the costs related thereto could be more or less than the estimated amounts, (c) the sales rates, prices
received for the reserves, and costs incurred in recovering such reserves may vary from assumptions included in such report due to governmental policies and uncertainties of supply and demand, and
(d) estimates of such reserves may increase or decrease as a result of future operations. 

        3.18    Insurance.    Set forth in Schedule 3.18, as of the
date of this Agreement, is a true, correct and complete list of all fire, general liability, theft and other policies of insurance held by Seller and covering the Oil and Gas Assets. All material
premiums due with respect to all such insurance policies have been paid and, to Seller's Knowledge, as of the date of this Agreement, all such policies are in full force and effect. 

        3.19    Leases.    The Leases have been developed and maintained by Seller in accordance with their terms and
applicable Laws. 

        3.20    Casing Integrity.    Each Well has been drilled and cased with all-new API or BLM/WOGCC approved
casing in accordance with the requirements of the governing body having jurisdiction and applicable Laws and the casing in each Well is in good mechanical condition. 

7

 

ARTICLE IV

REPRESENTATIONS AND WARRANTIES OF BUYER  

        As of the date hereof and as of the Closing Date, Buyer hereby represents and warrants to Seller as follows: 

        4.1    Organization.    Buyer is a corporation, duly organized, validly existing and in good standing under the Laws
of the State of Delaware, with full corporate power to carry on its business as it is conducted and to own, lease, and operate its assets. 

        4.2    Authorization; Enforceability.    Buyer has the legal capacity to enter into this Agreement and to consummate
the transactions contemplated hereby. The execution and delivery of this Agreement and the performance of Buyer's obligations hereunder have been duly and validly authorized by Buyer. This Agreement
and all other agreements and instruments executed by Buyer in connection herewith have been duly executed and delivered by Buyer, and assuming this Agreement and such other agreements and instruments
constitute the valid and binding obligations of the other parties hereto and thereto, constitute legal, valid and binding obligations of Buyer, enforceable against Buyer in accordance with their
terms, subject, as to enforceability, to bankruptcy, insolvency, reorganization, moratorium and other laws of general applicability relating to or affecting creditors' rights and to general principles
of equity (regardless of whether such enforceability is considered in a proceeding in equity or at law). 

        4.3    Conflicts.    Buyer's execution, delivery, and performance of this Agreement and the transactions contemplated
hereby will not: (a) violate or conflict with any provision of such Buyer's organizational documents; (b) result in the breach of any term or condition of, or constitute a default or
cause the acceleration of any obligation under any agreement or instrument to which Buyer is a party or by which it is bound; or (c) violate or conflict with any applicable Law, except in the
case of clause (b) and (c) above, where such breaches, violations, or conflicts would not have a material adverse effect upon the ability of Buyer to consummate the transactions
contemplated by this Agreement. 

        4.4    Bankruptcy.    There are no bankruptcy, reorganization, or arrangement proceedings pending, being contemplated
by, or, to Buyer's knowledge, threatened against Buyer. 

        4.5    Litigation.    There is no suit, action, investigation or inquiry by any Person or by or before any
Governmental Entity, and no legal, administrative, or arbitration proceedings pending, or to Buyer's knowledge, threatened against Buyer, or to which Buyer is a party, that would have a material
adverse effect upon the ability of Buyer to consummate the transactions contemplated in this Agreement. 

        4.6    Regulatory.    Buyer is now, and hereafter shall continue to be, qualified to own and assume operatorship of
federal and state oil, gas and mineral leases in all jurisdictions where the Oil and Gas Assets are located, and the consummation of the transactions contemplated in this Agreement will not cause
Buyer to be disqualified as such an owner or operator. To the extent required by any applicable Laws, Buyer currently has, and will hereafter continue to maintain, lease bonds, area-wide
bonds or any other surety bonds as may be required by, and in accordance with, all applicable Laws governing the ownership and operation of such leases and has filed any and all required reports
necessary for such operations with all Governmental Entities having jurisdiction over such operations. 

        4.7    Brokers' Fees.    Neither Buyer nor any Affiliate of Buyer has incurred any liability, contingent or otherwise,
for brokers' or finders' fees in respect of the transactions contemplated hereby for which any Seller or any Affiliate of a Seller will be responsible. 

8

 

        4.8    Independent Investigation.    Buyer is sophisticated in the evaluation, purchase, ownership and operation of
oil and gas properties and related facilities. In making its decision to enter into this Agreement and to consummate the transactions contemplated herein, Buyer (a) has relied or shall rely on
the representations, warranties, covenants, and indemnities of Seller in this Agreement, the agreements executed and delivered in connection herewith and its own independent investigation and
evaluation of the Oil and Gas Assets, and the advice of its own legal, tax, economic, environmental, engineering, geological and geophysical advisors and not on any comments, statements, projections
or other materials made or given by any representatives of or consultants or advisors engaged by Seller and (b) has satisfied or shall satisfy itself, during the Interim Period, as to the
title, environmental and physical condition of and contractual arrangements affecting the Oil and Gas Assets. 

        4.9    Availability of Funds.    As of the date hereof, Buyer has a $15 million equity commitment from a major
shareholder and as of the Closing shall have sufficient available funds with which to pay the Purchase Price and consummate the transactions contemplated by this Agreement. Buyer's shareholders shall
have executed a financial commitment letter in the form attached hereto as Exhibit E. 

ARTICLE V

ADDITIONAL AGREEMENTS  

        5.1    Confidentiality.    The parties hereto agree that the Confidentiality Agreement shall remain in full force and
effect at all times in accordance with its terms; provided that, the Confidentiality Agreement shall terminate as of the Closing. 

        5.2    Conduct of Business.    From and after the date of this Agreement until Closing, as expressly consented to in
writing by Buyer (which consent shall not be unreasonably withheld or delayed): 

        (a)   Seller
will operate the Oil and Gas Assets as a reasonably prudent operator, in accordance with the terms of the Leases and applicable Laws, and consistent with
past practices; 

        (b)   Seller
shall timely pay all costs and expenses related to the ownership and operation of the Oil and Gas Assets, including maintaining in effect all insurance coverage
now maintained by Seller for the Oil and Gas Assets; 

        (c)   Seller
shall promptly notify Buyer of any proposal from a Third Party to engage in any transaction in an amount exceeding $25,000 in connection with the Oil and
Gas Assets; 

        (d)   Seller
shall not engage in any operation or make any commitment in respect of the Oil and Gas Assets in an amount exceeding $25,000 or enter into, amend, modify, or
terminate any Lease or material Applicable Contract; 

        (e)   Seller
shall not convey, sell, create an Encumbrance on, or dispose of any Oil and Gas Asset; and 

        (f)    Seller
shall make all filings and reports with, and obtain all consents and approvals from, all Governmental Entities required of Seller under applicable Laws prior to
the Closing Date. 

        5.3    Further Assurances.    Seller shall execute, acknowledge and deliver or cause to be executed, acknowledged and
delivered to Buyer such assignments and other instruments of transfer, assignment and conveyance, as shall be necessary to vest in Buyer all the right, title and interest in and to the Oil and Gas
Assets. If any party hereto receives monies belonging to the other, such amount shall immediately be paid over to the proper party. If an invoice or other evidence of an obligation is received by a
party, which is partially an obligation of both a Seller and Buyer, then the parties shall consult with each other, and each shall promptly pay its portion of such obligation to the obligee. 

9

 

        5.4    Approvals.    Promptly following the execution of this Agreement, Seller and Buyer shall proceed to prepare and
file with the appropriate Governmental Entities and other Third Parties such authorizations, consents, notifications, certifications, registrations, declarations and filings that are necessary in
order to consummate the transactions contemplated by this Agreement and shall diligently and expeditiously prosecute, and shall cooperate fully with each other in the prosecution of,
such matters. 

        5.5    No Public Announcement.    None of Buyer, Seller, or any of their respective Affiliates shall, without the
written approval of the other parties, make any press release or other public announcement concerning the transactions contemplated by this Agreement, except as and to the extent that any such Person
shall be so obligated by Law or the rules of any securities exchange or transaction reporting system, in which case the other parties to this Agreement shall be advised and the parties shall use their
reasonable efforts to cause a mutually agreeable release or announcement to be issued; provided,  however, that the foregoing shall not preclude
communications or disclosures necessary to implement the provisions of this Agreement (including
communications or disclosures to lenders or rating agencies or in connection with the receipt of any consents or contractual notices), to comply with applicable accounting, tax and disclosure
obligations of any Governmental Entity or in connection with disclosures about the Oil and Gas Assets in any offering memorandums or prospectuses prepared by Buyer. 

        5.6    Governmental Bonds.    Buyer acknowledges that none of the bonds, letters of credit and guarantees, if any,
posted by Seller or its Affiliates with Governmental Entities relating to the Oil and Gas Assets (the "Governmental Bonds") are transferable to
Buyer. On or before the Closing Date, Buyer shall obtain, or cause to be obtained in the name of Buyer or its designee, replacements for such Governmental Bonds, to the extent such replacements are
necessary to permit the cancellation of the Governmental Bonds and the release of Seller and its Affiliates in full from all obligations and liabilities arising under the Governmental Bonds. At or
prior to the Closing, Buyer shall deliver to Seller evidence of the posting of bonds or other security with all applicable Governmental Entities meeting the requirements of such authorities with
respect to the Oil and Gas Assets. 

        5.7    Use of Company Name.    As soon as practicable after the Closing, Buyer shall remove or cause to be removed the
name of Kennedy Oil and all variations and derivations thereof from the Oil and Gas Assets and shall not thereafter make any use whatsoever of such name. 

ARTICLE VI

BUYER'S CONDITIONS  

        The obligation of Buyer to purchase the Oil and Gas Assets as contemplated hereby is subject to the satisfaction on or before the Closing Date of the conditions
set forth below, any of which may be waived by Buyer in writing. 

10

   
        6.1    Representations, Warranties and Covenants.    (a) The representations
and
warranties of Seller contained herein shall be true and correct in all material respects (except for such representations and warranties that are qualified by materiality or Material Adverse Effect,
which representations and warranties shall be true and correct in all respects) at and as of the Closing as though then made (except to the extent such representations and warranties shall have been
expressly made as of an earlier date) and (b) Seller shall have performed or caused to have been performed in all material respects all of the covenants and agreements required by this
Agreement to be performed by Seller on or prior to the Closing; 

        6.2    Closing Delivery.    Seller shall have delivered, or be standing ready to deliver, to
Buyer at Closing: 

        (a)   counterparts
to the Assignment in sufficient number to facilitate recording in the applicable counties; 

        (b)   the
joint written instructions to the Escrow Agent described in Section 1.2(c); 

        (c)   transfer
orders or letters in lieu thereof (on forms supplied by Buyer and reasonably acceptable to Seller) directing all purchasers of production to make payment
to Buyer of proceeds attributable to production from the Oil and Gas Assets from and after the Effective Time, for delivery by Buyer to the purchasers of production; 

        (d)   to
the extent applicable and required under Applicable Laws, for any state and/or federal lease included in the Oil and Gas Assets, designation of operator forms; 

        (e)   assignments,
on appropriate forms of Assignment of Record Title (Federal) or Assignment of Leasehold Interest (State), of One Hundred Percent of Seller's right title and
interest in and to the state and federal leases comprising all of the leases included in the Oil and Gas Assets; 

        (f)    an
executed statement described in Treasury Regulation Section 1.1445-2(b)(2) from Seller certifying that Seller is not a foreign person within the
meaning of the Code; and 

        (g)   counterparts
of the Operating Agreement; 

        (h)   counterparts
of an Assignment of Contracts assigning the Applicable Contracts; and 

        (i)    executed
originals of the Guaranty Agreement. 

        6.3    Governmental Approvals.    All Governmental Approvals necessary or required for the
transfer of the Oil and Gas Assets to Buyer shall have been obtained. 

        6.4    No Injunction or Restraint.    No preliminary or permanent injunction or other order of
any Governmental Entity shall be in effect that prevents or makes illegal the consummation of the transactions contemplated by this Agreement. 

        6.5    Title Defects, Environmental Defects.    The sum of (a) all amounts that have
been asserted by Buyer pursuant to Section 8.2(a)(v) and that have either been determined prior to Closing pursuant to  Section 8.2(e)
or are still being asserted by Buyer but disputed by Seller, which dispute has not been resolved prior to the Closing plus
(b) all Remediation Amounts for Environmental Defects that either have been determined under Article IX prior to the Closing or are
still being asserted by Buyer but disputed by Seller, which dispute has not been resolved prior to the Closing shall be less than ten percent (10%) of the Purchase Price. 

        6.6    Operating Agreement.    Buyer and Seller shall have agreed upon the terms and
conditions of the Operating Agreement. 

11

 

ARTICLE VII

SELLER'S CONDITIONS  

        The obligation of Seller to transfer the Oil and Gas Assets as contemplated hereby is subject to the satisfaction on or before the Closing Date of the conditions
set forth below, any of which may be waived by Seller in writing. 

        7.1    Representations, Warranties and Covenants.    (a) The representations and
warranties of Buyer contained in Article IV shall be true and correct in all material respects (except for such representations and warranties
that are qualified by materiality or material adverse effect, which representations and warranties shall be true and correct in all respects) at and as of the Closing as though then made (except to
the extent such representations and warranties shall have been expressly made as of an earlier date); and (b) Buyer shall have performed or caused to have been performed in all material
respects all of the covenants and agreements required by this Agreement to be performed by Buyer on or prior to the Closing (provided that the covenants
of Buyer relating to the payment of consideration hereunder shall have been fully complied with in all respects); 

        7.2    Closing Delivery.    Buyer (a) shall have delivered, or be standing by ready to
deliver to Seller at the Closing, (i) the Adjusted Purchase Price, (ii) counterparts to the Assignment in sufficient number to facilitate recording in the applicable counties,
(iii) counterparts to the Operating Agreement, and (iv) assignments, on appropriate forms of Transfer of Operating Rights (Federal) or Assignment of Operating/Working Interest (State),
dated the day after closing, of Thirty-Five Percent of Buyer's operating rights interest in and to the state and federal leases comprising all of the leases included in the Oil and Gas
Assets, insofar as said leases cover operating rights/working interest in depths below the base of the Fort Union Formation, and (b) shall have executed the joint written instructions to the
Escrow Agent described in Section 1.2(c). 

        7.3    Governmental Approvals.    All Governmental Approvals necessary or required for the
transfer of the Oil and Gas Assets to Buyer shall have been obtained. 

        7.4    No Injunction or Restraint.    No preliminary or permanent injunction or other order of
any Governmental Entity shall be in effect that prevents or makes illegal the consummation of the transactions contemplated by this Agreement. 

        7.5    Governmental Bonds.    Seller shall have been released in full from all obligations and
liabilities arising under the Governmental Bonds. 

        7.6    Operating Agreement.    Buyer and Seller shall have agreed upon the terms and
conditions of the Operating Agreement. 

ARTICLE VIII

TITLE MATTERS AND CASUALTIES  

        8.1    Title.    Without limiting Buyer's remedies for Title Defects set forth in this  Article VIII and except as set forth in this Agreement and the Assignment, Seller makes no warranty or representation, express, implied,
statutory or otherwise, with respect to Seller's title to any of the Oil and Gas Assets. 

        8.2    Notice of Title Defects; Defect Adjustments.    

        (a)   Title Defect Notices.    On or before the earlier of April 17, 2006 or 5 days prior to the
Closing Date (the "Buyer Claim Date"), Buyer may deliver claim notices to Seller meeting the requirements of this  Section 8.2(a) (collectively
the "Title Defect Notices" and individually a
"Title Defect Notice") setting forth any matter that, in Buyer's reasonable opinion, constitutes a Title Defect and that Buyer 

12

 

intends
to assert as a Title Defect pursuant to this Article VIII. For all purposes of this Agreement and notwithstanding anything herein
to the contrary, Buyer shall be deemed to have waived, and Seller shall have no liability for, any Title Defect that Buyer fails to assert as a Title Defect by a Title Defect Notice received by Seller
on or before the Buyer Claim Date. To be effective, each Title Defect Notice shall be in writing, and shall include (i) a description of the alleged Title Defect(s), (ii) the Wells
and/or other Oil and Gas Assets affected by the Title Defect (each a "Title Defect Property"), (iii) the Allocated Value of each Title Defect
Property, (iv) supporting documents reasonably necessary for Seller to verify the existence of the alleged Title Defect(s), and (v) the amount by which Buyer reasonably believes the
Allocated Value of each Title Defect Property is reduced by the alleged Title Defect(s) and the computations upon which Buyer's belief is based. To give Seller an opportunity to commence reviewing and
curing Title Defects, Buyer agrees to use reasonable efforts to give Seller, on or before the end of each calendar week prior to the Buyer Claim Date, written notice of all Title Defects discovered by
Buyer during the preceding calendar week, which notice may be preliminary in nature and supplemented prior to the Buyer Claim Date. 

        (b)   Seller's Right to Cure.    Seller shall have the right, but not the obligation, to attempt, at its sole cost,
to cure at any time prior to Closing (the "Cure Period"), any Title Defects of which it has been advised by Buyer. 

        (c)   Remedies for Title Defects.    Subject to Seller's continuing right to dispute the existence of a Title Defect
and/or the Title Defect Amount asserted with respect thereto and subject to the Individual Title Defect Threshold and the Threshold Deductible, in the event that any Title Defect timely asserted by
Buyer in accordance with this Section 8.2 is not waived in writing by Buyer or cured on or before Closing, Seller may, at its option, elect as to
each Title Defect to: 

        (i)    reduce
the Purchase Price by an amount ("Title Defect Amount") determined pursuant to  Section 8.2(e) as being the value of such Title Defect;

        (ii)   if
the aggregate value of all Title Defects timely asserted by Buyer under this Section 8.2 exceeds ten percent
(10%) of the Purchase Price, terminate this Agreement pursuant to Section 12.1(d). 

        (d)   Exclusive Remedy.    Except for Buyer's rights in respect of  Article III and the Assignment, Section 8.2(c)
 shall be the exclusive right and
remedy of Buyer with respect to the Seller's failure to have Defensible Title with respect to any Purchased Asset. Buyer shall not be entitled to recover from Seller under  Article III or the
Assignment for any Title Defect for which the Purchase Price is reduced under  Section 8.2(c). 

        (e)   Title Defect Amount.    The Title Defect Amount resulting from a Title Defect shall be the amount by which the
Allocated Value of the affected Title Defect Property is reduced as a result of the existence of such Title Defect and shall be determined in accordance with the following terms and conditions: 

        (i)    if
Buyer and Seller agree on the Title Defect Amount, then that amount shall be the Title Defect Amount; 

        (ii)   if
the Title Defect is an Encumbrance that is undisputed and liquidated in amount, then the Title Defect Amount shall be the amount necessary to be paid to remove the
Title Defect from the Title Defect Property; 

        (iii)  if
the Title Defect represents a discrepancy between (A) the Net Revenue Interest for any Title Defect Property and (B) the Net Revenue Interest stated
in Exhibit B, then the Title Defect Amount shall be the product of the Allocated Value of such Title Defect Property multiplied by a fraction,
the numerator of which is the Net Revenue Interest decrease and the denominator of which is the Net Revenue Interest stated in Exhibit B; 

13

 

        (iv)  if
(A) a Title Defect Property is not a Well or Lease shown on Exhibit B, (B) such Title Defect
Property does not have an Allocated Value, (C) the Title Defect with respect to such Title Defect Property causes a loss of title to such Title Defect Property, and (D) the loss of such
title to such Title Defect Property will prevent the continued operation or production of a Well shown in Exhibit B (such Well being referred to
as the "Affected Well") and the other Oil and Gas Assets are not capable of providing an alternative means to support, in all material respects, the
continued operation or production of the Affected Well, then such Title Defect Property (a "Defective Support Property") and such Affected Well
shall collectively be considered a single Title Defect Property for purposes of this Article VIII;  provided, however, that the Title Defect Amount resulting from the Title Defect affecting such Defective
Support Property shall be the lesser of (1) the reasonable cost to replace such Defective
Support Property (not to exceed the current fair market value of such Defective Support Property in its current depreciated condition), if such Defective Support Property is reasonably capable
of being replaced, (2) the reasonable cost of providing an alternative means to support in all material respects the continued operation or production of the Affected Well, or (3) the
Title Defect Amount that would otherwise be applicable to such Title Defect under this Article VIII. 

        (v)   if
the Title Defect represents an obligation or Encumbrance upon or other defect in title to the Title Defect Property of a type not described above, the Title Defect
Amount shall be determined by taking into account the Allocated Value of the Title Defect Property, the portion of the Title Defect Property affected by the Title Defect, the legal effect of the Title
Defect, the potential economic effect of the Title Defect over the life of the Title Defect Property, the values placed upon the Title Defect by Buyer and Seller and such other reasonable factors as
are necessary to make a proper evaluation; provided, however, that if such Title Defect is reasonably
capable of being cured, the Title Defect Amount shall not be greater than the reasonable cost and expense of curing such Title Defect; 

        (vi)  the
Title Defect Amount with respect to a Title Defect Property shall be determined without duplication of any costs or losses included in another Title Defect Amount
hereunder; and 

        (vii) the
aggregate Title Defect Amounts attributable to the effects of all Title Defects upon any Title Defect Property shall not exceed the Allocated Value of the Title
Defect Property. 

        (f)    Title Deductibles.    In no event shall there be any adjustments to the Purchase Price or other remedies
provided by Seller (i) for any individual Title Defect for which the Title Defect Amount does not exceed Twenty Five Thousand Dollars ($25,000.00) ("Individual Title
Defect Threshold") and (ii) for any Title Defect that exceeds the Individual Title Defect Threshold unless the Title Defect Amounts of all such Title Defects that exceed
the Individual Title Defect Threshold, in the aggregate, excluding any Title Defects cured by Seller, exceed the Threshold Deductible, after which point Buyer shall be entitled to adjustments to the
Purchase Price or other remedies only with respect to such Title Defects in excess of such Threshold Deductible. 

        (g)   Title Dispute Resolution.    Seller and Buyer shall attempt to agree on all Title Defects and Title Defect
Amounts prior to the Closing. If Seller and Buyer are unable to agree by the Closing, such matters in dispute shall be exclusively and finally resolved pursuant to this  Section 8.2(g). There shall
be a single arbitrator, who shall be a title attorney with at least ten (10) years of experience in oil and
gas titles involving properties in the regional area in which the Title Defect Properties are located, as selected by mutual agreement of Buyer and Seller within fifteen (15) days after the end
of the Cure Period, and absent such agreement, by the Denver, Colorado office of the American Arbitration Association (the "Title Arbitrator").
The arbitration proceeding shall be held in Denver, Colorado and shall be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association, to the extent such
rules do not conflict with the terms of this Section 8.2(g). The Title Arbitrator's determination shall be made within twenty (20) days
after submission of the matters in 

14

 

dispute
and shall be final and binding upon both parties, without right of appeal. In making his determination, the Title Arbitrator shall be bound by the rules set forth in  Section 8.2(e) and, subject to
the foregoing, may consider such other matters as in the opinion of the Title Arbitrator are necessary to make a
proper determination. The Title Arbitrator, however, may not award the Buyer a greater Title Defect Amount than the Title Defect Amount claimed by Buyer in its applicable Title Defect Notice. The
Title Arbitrator shall act as an expert for the limited purpose of determining the specific disputed Title Defect and Title Defect Amounts submitted by either party and may not award damages, interest
or penalties to any party with respect to any matter. Seller, on one hand, and Buyer, on the other hand, shall each bear its own legal fees and other costs of presenting its case. Seller, on one hand,
and Buyer, on the other hand, shall bear one-half of the costs and expenses of the Title Arbitrator. If the Title Arbitrator does not make his determination regarding a disputed matter
prior to the Closing, then the Purchase Price pursuant to Section 1.3 shall be reduced by the Title Defect Amount for the Title Defect Property,
the Title Defect Property will be conveyed to Buyer at Closing, and the Title Defect Amount for that Title Defect Property shall be deposited by Buyer with the Escrow Agent at Closing to be held by
the Escrow Agent under the Escrow Agreement and this Agreement. To the extent that the award of the Title Arbitrator does not occur before Closing, then within ten (10) days after the Title
Arbitrator delivers written notice to Buyer and Seller of his award with respect to a Title Defect Amount, Seller and Buyer shall deliver joint written instructions to the Escrow Agent to pay
(i) to Buyer the amount, if any, awarded by the Title Arbitrator to Buyer (and any interest earned thereon) and (ii) to Seller the amount, if any, awarded by the Title Arbitrator
to Seller (and any interest earned thereon). 

        (h)   Casualty or Condemnation Loss.    From and after the Closing, Buyer shall assume all risk of loss with respect
to (i) the production of Hydrocarbons, including losses through normal depletion (including the watering out of any well, collapsed casing or sand infiltration of any well) and (ii) the
depreciation of personal property due to ordinary wear and tear, in each case, with respect to the Oil and Gas Assets. 

        (i)    If,
after the date of this Agreement but prior to the Closing Date, any portion of the Purchased Assets is destroyed by fire, flood, freezing, storms, mudslides, or
similar casualty (collectively, a "Casualty") or is taken in condemnation or under right of eminent domain, and the aggregate loss or losses as a result
of such Casualty or taking exceeds five percent (5%) of the Purchase Price based on the Allocated Value of the affected Oil and Gas Assets, Buyer shall nevertheless be required to close and Seller
shall elect by written notice to Buyer prior to the Closing either (i) to cause the Oil and Gas Assets affected by such Casualty or taking to be repaired or restored to at least their condition
prior to such casualty or taking, at Seller's sole cost, as promptly as reasonably practicable (which work may extend after the Closing Date), or (ii) to treat such Casualty or taking as a
Title Defect with respect to the affected Oil and Gas Assets under this Section 8.2. In each case, Seller shall have all rights to insurance,
condemnation awards and other claims against third parties with respect to the Casualty or taking except to the extent the parties otherwise agree in writing. 

        (j)    If,
after the date of this Agreement but prior to the Closing Date, any portion of the Oil and Gas Assets is destroyed by Casualty or is taken in condemnation or under
right of eminent domain, and the aggregate loss or losses to the Oil and Gas Assets as a result of such Casualty or taking is five percent (5%) of the Purchase Price or less based on the Allocated
Value of the affected Oil and Gas Assets, Buyer shall nevertheless be required to close and Buyer shall, post-Closing, have the benefit of all sums paid to the Seller by Third Parties by
reason of such Casualty or taking insofar as with respect to the Oil and Gas Assets and all right, title and interest (if any) in insurance claims, unpaid awards, and other rights against Third
Parties (excluding any liabilities, other than insurance claims, of or against any Seller Indemnified Parties) arising out of such Casualty or taking insofar as with respect to the Oil and
Gas Assets. 

15

 

        (k)   If
any action for condemnation or taking under right of eminent domain is pending or threatened with respect to any Oil and Gas Asset or portion thereof after the date
of this Agreement, but no taking of such Oil and Gas Asset or portion thereof occurs prior to the Closing Date, Buyer shall nevertheless be required to close and Seller, at Closing, shall assign,
transfer and set over to Buyer or subrogate Buyer to all of Seller's right, title and interest (if any) in such condemnation or eminent domain action, including any future awards therein,
insofar as they are attributable to the Oil and Gas Assets threatened to be taken, except that Seller shall reserve and retain (and Buyer shall assign to Seller) all rights, titles, interests
and claims against Third Parties for the recovery of Seller's costs and expenses incurred prior to the Closing in defending or asserting rights in such action with respect to the Oil and
Gas Assets. 

ARTICLE IX

ENVIRONMENTAL MATTERS  

        9.1    Environmental Defects.    

        (a)   Assertions of Environmental Defects.    Buyer may deliver claim notices to Seller meeting the requirements of
this Section 9.1(a) (collectively the "Environmental Defect Notices" and individually an
"Environmental Defect Notice") not later than the Buyer Claim Date setting forth any matters which, in Buyer's reasonable opinion, constitute
Environmental Defects and that Buyer intends to assert as Environmental Defects pursuant to this Section 9.1. For all purposes of this
Agreement, Buyer shall be deemed to have waived any Environmental Defect that Buyer fails to assert as an Environmental Defect by an Environmental Defect Notice received by Seller on or before the
Buyer Claim Date. To be effective, each Environmental Defect Notice shall be in writing and shall include (i) a description of the matter constituting the alleged Environmental Defect,
(ii) a description of each Oil and Gas Asset (or portion thereof) that is affected by the alleged Environmental Defect, (iii) Buyer's assertion of the Allocated Value of the
portion of the Oil and Gas Assets affected by the alleged Environmental Defect, (iv) supporting documents reasonably necessary for Seller to verify the existence of the alleged Environmental
Defect, and (v) a calculation of the Remediation Amount (itemized in reasonable detail) that Buyer asserts is attributable to such alleged Environmental Defect. Buyer's calculation of the
Remediation Amount included in the Environmental Defect Notice must describe in reasonable detail the Remediation proposed for the Environmental Condition that gives rise to the asserted Environmental
Defect and identify all assumptions used by Buyer in calculating the Remediation Amount, including the standards that Buyer asserts must be met to comply with Environmental Laws. Seller shall have the
right, but not the obligation, to cure any claimed Environmental Defect on or before Closing. 

        (b)   Remedies for Environmental Defects.    Subject to Seller's continuing right to dispute the existence of a
Environmental Defect and/or the Remediation Amount asserted with respect thereto, in the event that any Environmental Defect timely asserted by Buyer in accordance with  Section 9.1(a) is not waived
in writing by Buyer or cured on or before Closing, Seller may, at its sole option, elect to: 

        (i)    reduce
the Purchase Price by the Remediation Amount; or 

        (ii)   assume
responsibility for the Remediation of such Environmental Defect. 

        If
Seller elects the option set forth in clause (i) above, Buyer shall be deemed to have assumed responsibility for Remediation of such Environmental Defect. If Seller elects the
option set forth in clause (ii) above, Seller shall use all commercially reasonable efforts to implement such Remediation in a manner which is consistent with the requirements of Environmental
Laws in a timely fashion for the type of Remediation that Seller elect to undertake and shall have access to the affected Oil and Gas Assets after the Closing Date to implement and complete such
Remediation in accordance with an Access Agreement in substantially the form attached hereto as Exhibit C. Seller will be deemed to have 

16

 

adequately
completed the Remediation required in the immediately preceding sentence upon receipt of a certificate or approval from the applicable Governmental Entity that the Remediation has been
implemented to the extent necessary to comply with existing regulatory requirements. 

        (c)   Exclusive Remedy.    Except for Buyer's rights under this Agreement in respect of  Section 3.12, this Section 9.1(b)
 shall be the exclusive right and remedy of Buyer with
respect to any Environmental Defect. 

        (d)   Environmental Deductibles.    In no event shall there be any adjustments to the Purchase Price or other
remedies provided by Seller for any individual Environmental Defect (i) for which the Remediation Amount does not exceed Twenty Five Thousand Dollars ($25,000.00)
("Individual Environmental Threshold"); and (ii) for which the Remediation Amount exceeds the Individual Environmental Threshold unless the
Remediation Amounts of all such Environmental Defects that exceed the Individual Environmental Threshold, in the aggregate, excluding any Environmental Defects cured by Seller, exceed the Threshold
Deductible, after which point Buyer shall be entitled to adjustments to the Purchase Price or other remedies only with respect to such Environmental Defects in excess of such
Threshold Deductible. 

        (e)   Environmental Dispute Resolution.    Seller and Buyer shall attempt to agree on all Environmental Defects and
Remediation Amounts prior to the Closing. If Seller and Buyer are unable to agree by the Closing, such matters in dispute shall be exclusively and finally resolved by arbitration pursuant to this  Section 9.1(e)
. There shall be a single arbitrator, who shall be an environmental attorney with at least ten (10) years experience in
environmental matters involving oil and gas producing properties in the regional area in which the affected Oil and Gas Assets are located, as selected by mutual agreement of Buyer and Seller within
fifteen (15) days after the Closing Date, and absent such agreement, by the Denver, Colorado office of the American Arbitration Association (the "Environmental
Arbitrator"). The arbitration proceeding shall be held in Denver, Colorado, and shall be conducted in accordance with the Commercial Arbitration Rules of the American
Arbitration Association, to the extent such rules do not conflict with the terms of this Article. The Environmental Arbitrator's determination shall be made within twenty (20) days after
submission of the matters in dispute and shall be final and binding upon both parties, without right of appeal. In making his determination, the Environmental Arbitrator shall be bound by the rules
set forth in this Section 9.1 and, subject to the foregoing, may consider such other matters as in the opinion of the Environmental Arbitrator
are necessary or helpful to make a proper determination. The Environmental Arbitrator, however, may not award the Buyer a greater Remediation Amount than the Remediation Amount claimed by Buyer in its
applicable Environmental Defect Notice. The Environmental Arbitrator shall act as an expert for the limited purpose of determining the specific disputed Environmental Defects and/or Remediation
Amounts submitted by either party and may not award damages, interest or penalties to any party with respect to any matter. Seller, on one hand, and Buyer, on the other hand, shall each bear its own
legal fees and other costs of presenting its case. Seller, on one hand, and Buyer, on the other hand, shall bear one-half of the costs and expenses of the Environmental Arbitrator. If the
Environmental Arbitrator does not make his determination regarding a disputed matter prior to the Closing, then the Purchase Price pursuant to  Section 1.3 shall be reduced by the Remediation Amount
claimed by Buyer for the disputed matter and the Remediation Amount claimed by Buyer shall
be deposited by Buyer with the Escrow Agent at Closing to be held by the Escrow Agent under the terms of the Escrow Agreement and this Agreement. To the extent that the award of the Environmental
Arbitrator with respect to any Remediation Amount does not occur before Closing, then within ten (10) days after the Environmental Arbitrator delivers written notice to Buyer and Seller of his
award with respect to a Remediation Amount, Seller and Buyer shall deliver joint written instructions to the Escrow Agent to (i) pay to Buyer the amount, if any, so awarded by the Environmental
Arbitrator to Buyer (and any interest earned thereon) and (ii) to pay to Seller the amount, if any, so awarded by the Environmental Arbitrator to Seller (and any interest
earned thereon). 

17

 

        (f)    NORM, Wastes and Other Substances.    Without limiting the provisions hereof, Buyer acknowledges that the Oil
and Gas Assets have been used for exploration, development, and production of oil and gas and that there may be petroleum, produced water, wastes, or other substances or materials located in, on or
under the Oil and Gas Assets or associated with the Oil and Gas Assets. Equipment and sites included in the Oil and Gas Assets may contain asbestos, NORM or other Hazardous Substances. NORM may affix
or attach itself to the inside of wells, materials, and equipment as scale, or in other forms. The wells, materials, and equipment located on the Oil and Gas Assets or included in the Oil and Gas
Assets may contain NORM and other wastes or Hazardous Substances. NORM containing material and/or other wastes or Hazardous Substances may have come in contact with various environmental media,
including without limitation, water, soils or sediment. Special procedures may be required for the assessment, remediation, removal, transportation, or disposal of environmental media, wastes,
asbestos, NORM and other Hazardous Substances from the Oil and Gas Assets. 

ARTICLE X

ASSUMPTION; INDEMNIFICATION  

        10.1    Assumption by Buyer.    Without limiting Buyer's rights to indemnity under this
Agreement or Buyer's rights under any agreement executed or delivered in connection herewith, from and after the Closing, Buyer assumes and hereby agrees to fulfill, perform, pay and discharge
(or cause to be fulfilled, performed, paid or discharged) all obligations and Liabilities, known or unknown, contingent or otherwise, with respect to the Oil and Gas Assets that relate to
periods of time from and after the Closing Date, including but not limited to obligations and Liabilities relating in any manner to the use, ownership or operation of the Oil and Gas Assets from and
after Closing, including but not limited to obligations to (a) furnish makeup gas and/or settle imbalances according to the terms of applicable gas sales, processing, gathering or
transportation Contracts, and, (b) pay working interests, royalties, overriding royalties and other interests, owners revenues or proceeds attributable to sales of Hydrocarbons relating to the
Oil and Gas Assets, including those held in suspense, (c) properly plug and abandon any and all Wells, including inactive Wells or temporarily abandoned Wells, drilled on the Oil and Gas
Assets, (d) replug any well, wellbore, or previously plugged Well on the Oil and Gas Assets to the extent required or necessary, (e) dismantle or decommission and remove any personal
property and other property of whatever kind related to or associated with operations and activities conducted by whomever on the Oil and Gas Assets, (f) clean up, restore and/or remediate the
premises covered by or related to the Oil and Gas Assets in accordance with applicable agreements and Laws, and (g) perform all obligations applicable to or imposed on the lessee, owner, or
operator under the Leases and the Applicable Contracts, or as required by Laws (all of said obligations and Liabilities, subject to the exclusions below, herein being referred to as the
"Assumed Obligations"); provided, Buyer does not assume any obligations or Liabilities of Seller to the extent that they are not attributable to or do
not arise out of the ownership, use or operation of the Oil and Gas Assets and the periods of time from and after the Closing Date. 

        10.2    Indemnification of the Buyer Indemnified Parties.    Subject to the limitations on
recourse and recovery set forth in this Article X, from and after the Closing, Seller shall indemnify, defend and hold harmless the Buyer Indemnified Parties from and against any and all
Losses imposed upon or incurred by any Buyer Indemnified Party after the Closing, in connection with, arising out of or resulting from (i) the inaccuracy or breach of any representation or
warranty made by Seller in this Agreement, (ii) the breach of any covenant by Seller in this Agreement, or (iii) the Excluded Assets (any of such Losses, a
"Buyer Indemnification Claim"). 

        10.3    Indemnification of the Seller Indemnified Parties.    Subject to the limitations on
recourse and recovery set forth in this Article X, from and after the Closing, Buyer shall indemnify, defend and hold 

18

 

harmless
the Seller Indemnified Parties from and against any and all Losses imposed upon or incurred by any Seller Indemnified Party after the Closing in connection with, arising out of or
resulting from: 

        (a)   the
inaccuracy or breach of any representation, warranty, or covenant made by Buyer in this Agreement; 

        (b)   any
breach of or default by Buyer in the performance of any of its covenants or agreements herein; 

        (c)   the
Assumed Obligations; or 

        (d)   from
and after 181 days following the Closing Date, any Environmental Condition or other environmental matter related or attributable to the Oil and Gas Assets,
regardless of whether such Losses arose prior to, on or after the Closing, including the presence, disposal of or exposure to any Hazardous Substance or other material of any kind in, on or under the
Oil and Gas Assets or other property (whether neighboring or otherwise) and including any liability of any Seller Indemnified Party with respect to the Oil and Gas Assets under Environmental Laws, but
excluding any Environmental Condition or other environmental matter at or on any off-site location that is caused by materials generated or removed from the Oil and Gas Assets that were
transported away from the Oil and Gas Assets and disposed of, handled, or transported to such off-site locations prior to Closing. 

        Any
of the foregoing Losses in this Section 10.3, a "Seller Indemnification Claim."

        10.4    Casing Indemnity.    Seller shall indemnify, defend, and hold harmless the Buyer
Indemnified Parties from and against any and all Losses imposed upon or incurred by any Buyer Indemnified Party after Closing as a result of any Well failing an Integrity Test conducted by Buyer prior
to the Closing Date. 

        10.5    Limitation as to Time.    No Indemnifying Party shall be liable for any Losses that
are indemnifiable under this Article X unless a written claim for indemnification under this Agreement is delivered by the Indemnified Party to
the Indemnifying Party with respect thereto prior to the expiration of the applicable survival period set forth in Article XI. 

        10.6    Sole and Exclusive Remedy.    Buyer and Seller acknowledge and agree that, after the
Closing, notwithstanding any other provision of this Agreement to the contrary, the sole and exclusive remedy of the Buyer Indemnified Parties and the Seller Indemnified Parties with respect to claims
for Losses or otherwise, in connection with, arising out of or resulting from a breach of this Agreement shall be in accordance with, and limited solely to indemnification under, the provisions of
this Article X. Without limiting any of Buyer's rights under this Agreement or in any agreement executed in connection with the transaction
contemplated hereunder, effective as of Closing, Buyer, on its own behalf and on behalf of its Affiliates, hereby releases, remises and forever discharges Seller and all such parties' stockholders,
partners, members, directors, officers, employees, agents and representatives from any and all suits, legal or administrative proceedings, claims, demands, damages, Losses, costs, liabilities,
interest, or causes of action whatsoever, in Law or in equity, known or unknown, which Buyer or its Affiliates might now or subsequently may have, based on, relating to or arising out of this
Agreement, information provided by Seller or their designees relating to the Oil and Gas Assets, the ownership, use or operation of the Oil and Gas Assets, or the condition, quality, status or nature
of the Oil and Gas Assets, including rights to contribution under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended, any analogous provisions of state law,
breaches of statutory or implied warranties, nuisance or other tort actions, rights to punitive damages, common law rights of contribution, and rights under insurance maintained by Seller. 

        10.7    Third Party Claims.    

        (a)   Promptly
after receipt by any Indemnified Party of notice of the commencement or assertion of any action, proceeding, demand, claim or investigation by a third party or
circumstances which, with 

19

 

the
lapse of time, such Indemnified Party believes is likely to give rise to an action, proceeding, demand, claim or investigation by a third party (an "Asserted
Liability") that may result in a Loss, such Indemnified Party shall give written notice thereof (the "Claims Notice") to
the Indemnifying Parties. The Claims Notice shall describe the Asserted Liability in reasonable detail, and shall indicate the amount (estimated, if necessary) of the Loss that has been or may
be suffered. 

        (b)   The
Indemnifying Parties shall be, subject to the limitations set forth in this Section 10.7, entitled
to assume control of and appoint lead counsel for such defense; provided, however, that the
Indemnifying Parties shall not have the right to assume control of the defense of any Asserted Liability (i) to the extent that the object of such Asserted Liability is to obtain an injunction,
restraining order, declaratory relief or other non-monetary relief against the Indemnified Party which, if successful, would materially adversely affect the business, operations, assets,
or financial condition of the Indemnified Party, or (ii) if the named parties to any such action or proceeding (including any impleaded parties) include both the Indemnified Party and an
Indemnifying Party and the former shall have been advised in writing by counsel (with a copy to the Indemnifying Parties) that there are one or more legal or equitable defenses available to them that
are different from or additional to those available to the Indemnifying Party; provided, further, that
to exercise such rights an Indemnifying Party must give notice to the Indemnified Party within 30 days after receipt of any such Claims Notice whether it is assuming control of and appointing
lead counsel for such defense. If an Indemnifying Party does not give such notice within such 30-day period or either proviso in this  Section 10.7 applies, then the Indemnified Party shall have the
right to assume control of the defense thereof at the cost and expense of the
Indemnifying Parties, subject to the limitations of liability and other limits set forth in this Article X.

        (c)   If
the Indemnifying Parties shall assume the control of the defense of the Asserted Liability in accordance with the provisions of this  Section 10.7, (i) the Indemnifying Parties shall obtain the
prior written consent of the Indemnified Party (which shall not be
unreasonably withheld, conditioned or delayed) before entering into any settlement, compromise, admission or acknowledgement of the validity of such Asserted Liability if the settlement does not
unconditionally release the Indemnified Party from all liabilities and obligations with respect to such Asserted Liability or the settlement imposes injunctive or other equitable relief against the
Indemnified Party and (ii) the Indemnified Party shall be entitled to participate, at its own cost and expense, in the defense of such Asserted Liability and to employ separate counsel of its
choice for such purpose. The fees, costs and expenses of any such separate counsel to the Indemnified Party pursuant to this Section 10.7 shall
be paid by the Indemnified Party; provided, however, that the Indemnifying Parties shall pay the fees,
costs and expenses of such counsel if (x) the employment of separate counsel shall have been authorized in writing by the Indemnifying Parties in connection with the defense of such Asserted
Liability or (y) the Indemnified Party's legal counsel shall have advised the Indemnified Party in writing, with a copy delivered to the Indemnifying Parties, that a material conflict of
interest exists that would make it inappropriate under applicable standards of professional conduct to have common counsel, subject to the limitations of liability and other limits set forth in this  Article X. 

        (d)   If
the Indemnified Party shall assume the control of the defense of any Asserted Liability in accordance with the provisions of this  Section 10.7, (i) the Indemnified Party shall obtain the prior
written consent of the Indemnifying Parties before entering into any
settlement, compromise, admission or acknowledgement of the validity of such Asserted Liability and (ii) any Indemnifying Party shall be entitled to participate, at its cost and expense, in the
defense of such Asserted Liability and to employ separate counsel of its choice for such purpose. 

        (e)   Each
party shall cooperate, and cause their respective Affiliates to cooperate, in the defense or prosecution of any Asserted Liability and shall furnish or cause to be
furnished such records, information and testimony (subject to any applicable confidentiality agreement), and attend such conferences, discovery proceedings, hearings, trials or appeals as may be
reasonably requested in connection therewith. 

20

 

        10.8    Direct Claims.    In any case in which an Indemnified Party seeks indemnification
hereunder which is not subject to Section 10.7 because no Asserted Liability is involved (a "Direct
Action"), the Indemnified Party shall notify the Indemnifying Parties in writing of any Losses that such Indemnified Party claims are subject to indemnification under the terms
hereof. Subject to the limitations set forth in this Article X, the failure of the Indemnified Party to exercise promptness in such notification
shall not amount to a waiver of such claim unless and only to the extent that the resulting delay materially and adversely prejudices the position of the Indemnifying Parties with respect to
such claim. 

        10.9    Deductible and Liability Cap.    Notwithstanding anything herein to the contrary,
Seller shall have no liability to indemnify the Buyer Indemnified Parties under Section 10.2(i) until the aggregate Losses for which the Buyer
Indemnified Parties seek indemnity under Section 10.2(i) exceed one and one-half percent (1.5%) of the Purchase Price and then only
to the extent such Losses exceed such amount. In no event shall Seller have any liability or obligation under Section 10.2(i) with respect to any
Losses suffered by the Buyer Indemnified Parties, in the aggregate, in excess of the Cap Amount, except for any such Losses under Section 3.8
which shall not be subject to such Cap Amount. 

        10.10    Waiver of Certain Damages.    Each of the parties hereto expressly waives and agrees
not to, and to cause it Affiliates not to, seek indirect, consequential, punitive or exemplary damages or damages for lost profits of any kind with respect to any dispute arising under, related to, or
in connection with this Agreement or breach hereof or the transactions contemplated hereby, except to the extent any party or its Affiliates suffers such damages (including costs of defense and
reasonable attorneys' fees incurred in connection with defending against such damages) to a Third Party in connection with a claim by a Third Party, which damages (including costs of defense and
reasonable attorneys' fees incurred in connection with defending against such damages) shall not be excluded by this provision as to the recovery hereunder. 

        10.11    Express Negligence.    Without limiting or enlarging the scope of the indemnification
obligations set forth in this Agreement, to the fullest extent permitted by Law, an Indemnified Party shall be entitled to indemnification hereunder in accordance with the terms hereof, regardless of
whether the indemnifiable loss giving rise to any such indemnification obligation arises out of or results from the sole, active, passive, concurrent or comparative negligence, strict liability or
other fault or violation of any Law of or by any such Indemnified Party. 

21

  

 
 

ARTICLE XI
  SURVIVAL OF REPRESENTATIONS, WARRANTIES,
  COVENANTS AND AGREEMENTS    
    

        11.1    Survival of Representations and Warranties. The representations and warranties contained in 
Article III herein shall expire and have no further force and effect on the 180th day following the Closing Date, except
that the representations and warranties in Section 3.8 shall survive for the applicable statute of limitations. The representations and
warranties contained in Article IV herein shall survive the Closing without any contractual limitation of survival. 

        11.2    Survival of Covenants. The post-closing covenants and agreements of Buyer and Seller contained in this
Agreement hereof shall survive Closing for (a) the time period(s) set forth in the respective Sections contained in this Agreement, or (b) if no time period is specified, without any
contractual limitation on the period of survival. 

 
 

ARTICLE XII
  TERMINATION    
    

        12.1    Termination. This Agreement may be terminated and the transactions contemplated hereby may be
abandoned prior to the Closing by: 

        (a)   mutual
written consent of Seller and Buyer; 

        (b)   Seller
if there shall have been a breach by Buyer of any of the representations, warranties, covenants or agreements of Buyer set forth in this Agreement, which breach
would result in the failure to satisfy the conditions set forth in Section 7.1, and such breach shall be incapable of being cured or, if capable
of being cured, shall not have been cured by the earlier to occur of the Outside Termination Date or twenty (20) days after written notice thereof shall have been received by Buyer; 

        (c)   Buyer
if there shall have been a breach of any of the representations, warranties, covenants or agreements of Seller set forth in this Agreement, which breach would
result in the failure to satisfy the conditions set forth in Section 6.1, and such breach shall be incapable of being cured or, if capable of
being cured, shall not have been cured by the earlier to occur of the Outside Termination Date or twenty (20) days after written notice thereof shall have been received by Seller; 

        (d)   Seller
or Buyer if the Closing shall not have occurred on or before June 15, 2006 (the "Outside
Termination Date"); 

provided, however, that no party shall have the right to terminate this Agreement pursuant to
clause (b), (c) or (d) above if such party is at such time in material breach of any provision of this Agreement; provided,  further, that
Seller shall not be deemed in breach of any representations or warranties under this Agreement for the purposes of the foregoing if the
condition set forth in Section 6.1 is capable of being satisfied, and Buyer shall not be deemed in breach of any representations or warranties
under this Agreement for purposes of the foregoing if the condition set forth in Section 7.1 is capable of being satisfied. 

        12.2    Liability Upon Termination. If this Agreement is terminated pursuant to any provision of  Section 12.1 hereof, then, except as provided in Section 1.2, and except for the last
sentence of Section 2.1(d) and the provisions of Section 5.1,  Section 12.2 and
Article XIV, this Agreement shall forthwith become void and the parties
shall have no liability or obligation hereunder; provided, however, that no such termination shall
relieve any party from liability for any willful breach of any covenant provided herein (except as provided in Section 2.1(d). 

22

 

 
 

ARTICLE XIII
  DEFINITIONS OF CERTAIN TERMS    
    

        In addition to terms defined elsewhere in this Agreement, the following terms shall have the meanings assigned to them herein, both for purposes of this Agreement
and all Exhibits hereto and any Disclosure Schedule: 

        "Affected Well" shall have the meaning given such term in Section 8.2(e)(iv). 

        "Affiliate" shall mean, with respect to any specified Person, any Person that directly or indirectly controls, is controlled by or is
under common control with such specified Person. For the purpose of the immediately preceding sentence, the term "control" means the power to direct or cause the direction of the management of such
Person, whether through the ownership of voting securities or by contract or agency or otherwise. 

        "Agreement" shall have the meaning given such term in the introduction to this Agreement. 

        "Allocated Value," with respect to any Oil and Gas Asset, shall mean the amount set forth on  Exhibit B under the column "Allocated Value" for such Oil and
Gas Asset. 

        "Applicable Contracts" shall mean all Leases; joint operating agreements; oil, gas, liquids, casinghead gas and condensate purchase,
sales, processing, gathering, treatment, compression, and transportation agreements; farm-out or farm-in agreements; joint venture, limited or general partnerships; dry hole,
bottom hole, acreage contribution, purchase and acquisition agreements; area of mutual interest agreements; water treatment, water disposal, and other water management agreements; servicing contracts,
easement and right-of-way agreements; easements, rights-of-way, permits, licenses, servitudes or other interests appertaining to the Leases; and all
other executory contracts and agreements relating, in each case listed above, to the Oil and Gas Assets. Applicable Contracts include all contracts set forth on  Schedule 3.9. 

        "Asserted Liability" shall have the meaning given such term in Section 10.7. 

        "Assignment" means the Assignment, Conveyance, and Bill of Sale from Seller to Buyer, conveying the Oil and Gas Assets, substantially in
the form attached to this Agreement as Exhibit A. 

        "Assignment of Contracts" means an instrument transferring and assigning Seller's rights in the Applicable Contracts to Buyer, in a form
acceptable to Seller and Buyer. 

        "Assumed Obligations" shall have the meaning given such term in Section 10.1. 

        "BLM" shall mean the Bureau of Land Management. 

        "Business Day" shall mean any day other than a Saturday, Sunday or other day on which commercial banks in Gillette, Wyoming are authorized
by Law to close. 

        "Buyer" shall have the meaning given such term in the introduction to this Agreement. 

        "Buyer Claim Date" shall have the meaning given such term in Section 8.2(a). 

        "Buyer Indemnification Claim" shall have the meaning given such term in  Section 10.1. 

        "Buyer Indemnified Parties" shall mean (a) Buyer; (b) its Affiliates, assigns and successors in interest; and
(c) with respect to the Persons set forth in clauses (a) and (b) of this definition, each of their respective stockholders, members, partners, directors, officers, employees,
agents, attorneys and representatives. 

        "Buyer's Representatives" shall have the meaning given such term in Section 2.1. 

        "Cap Amount" shall mean an amount equal to fifteen percent (15.0%) of the Purchase Price. 

23

 

        "Casualty" shall have the meaning given such term in Section 8.2(i). 

        "Claims Notice" shall have the meaning given such term in Section 10.7. 

        "Closing" shall have the meaning given such term in Section 1.1(d). 

        "Closing Date" shall have the meaning given such term in Section 1.1(d). 

        "Closing Statement" shall have the meaning given such term in Section 1.4. 

        "Code" shall mean the Internal Revenue Code of 1986, as amended. 

        "Confidentiality Agreement" shall mean that certain Confidentiality Agreement between Buyer and Seller. 

        "Cure Period" shall have the meaning given such term in Section 8.2(b). 

        "Defective Support Property" shall have the meaning given such term in  Section 8.2(e)(iv). 

        "Defensible Title" shall mean such title of Seller with respect to the Oil and Gas Assets that, subject to Permitted Encumbrances: 

        (a)   with
respect to each Well shown in or Lease shown on Exhibit B, entitles Seller to receive the Net Revenue
Interest shown in Exhibit B for such Well or Lease, with respect to a Well, throughout the duration of the productive life of such Well or
with respect to a Lease throughout the term of such Lease, except for (i) decreases in connection with those operations in which a Company may from and after the date of this Agreement be a
non-consenting co-owner and (ii) as otherwise stated in Exhibit B; 

        (b)   with
respect to each Well or Lease shown on Exhibit B obligates Seller to bear the Working Interest shown in  Exhibit B for such Well or for such
Lease not greater than the Working Interest shown in  Exhibit B for such Well or Lease, with respect to a Well without increase throughout the productive life of such Well and with respect to
a Lease during the term of the Lease, except (i) increases to the extent that they are accompanied by a proportionate increase in Seller's Net Revenue Interest, and (ii) as otherwise
stated in Exhibit B; 

        (c)   with
respect to Oil and Gas Assets other than the Leases or Wells, (i) does not restrict the ability of Seller to use such property as currently intended, and
(ii) is free and clear of all Encumbrances; and 

        (d)   is
free and clear of all Encumbrances. 

        "Direct Action" shall have the meaning given such term in Section 10.8. 

        "Disclosure Schedules" shall mean the schedules attached to this Agreement. 

        "Earnest Money" shall have the meaning given such term in Section 1.2(b). 

        "Effective Time" shall mean 7:00 a.m. (Mountain Time) on January 1, 2006. 

        "Employee" shall have the meaning given such term in Section 1.1. 

        "Encumbrances" shall mean pledges, liens, claims, charges, mortgages, security interests or other legal or equitable encumbrances,
limitations or restrictions of any nature whatsoever. 

        "Environmental Arbitrator" shall have the meaning given such term in  Section 9.1(e). 

        "Environmental Condition" shall mean (a) a condition existing with respect to the air, soil, subsurface, surface waters, ground
waters and/or sediments that causes a Oil and Gas Asset (or Seller with respect to an Oil and Gas Asset) not to be in compliance with any Environmental Law or (b) the existence with
respect to the Oil and Gas Assets or the operation thereof of any environmental 

24

 

pollution,
contamination, degradation, damage or injury for which remedial or corrective action is presently required (or if known, would be presently required) under Environmental Laws. 

        "Environmental Defect" shall mean an Environmental Condition with respect to a Oil and Gas Asset discovered by Buyer prior to the Buyer
Claim Date. 

        "Environmental Defect Notice" shall have the meaning given such term in  Section 9.1(a). 

        "Environmental Laws" shall mean all Laws relating to (a) the control of any potential pollutant or protection of the air, water or
land, (b) solid, gaseous or liquid waste generation, handling, treatment, storage, disposal or transportation and (c) the regulation of or exposure to hazardous, toxic or other
substances alleged to be harmful. 

        "Escrow Agent" shall have the meaning set forth in Section 1.2(b). 

        "Escrow Agreement" shall mean the Escrow Agreement entered into among Seller, Buyer and Escrow Agent of even date herewith. 

        "Excluded Assets" shall mean (a) all of Seller's corporate minute books, financial records, and other business records that relate
to Seller's business generally (including the ownership and operation of the Oil and Gas Assets); (b) all trade credits, all accounts, receivables and all other proceeds, income or revenues
attributable to the Oil and Gas Assets with respect to any period of time prior to the Effective Time; (c) all rights and interests of Seller that relate to periods of time prior to the
Effective Time (i) under any policy or agreement of insurance or indemnity, (ii) under any bond or (iii) to any insurance or condemnation proceeds or awards arising, in each case,
from acts, omissions or events, or damage to or destruction of property; (d) all personal computers and associated peripherals and all personal radio and telephone equipment; (e) all of
Seller's proprietary computer software, patents, trade secrets, copyrights, names, trademarks, logos and other intellectual property; (f) documents prepared or received by Seller with respect
to (i) lists of prospective purchasers for such transactions compiled by Seller, (ii) bids submitted by other prospective purchasers of the Oil and Gas Assets, (iii) analyses by
Seller of any bids submitted by any prospective purchaser, (iv) correspondence between or among Seller, its representatives, and any prospective purchaser other than Buyer and
(v) correspondence between Seller or any of its representatives with respect to any of the bids, the prospective purchasers, or the transactions contemplated in this Agreement; (g) any
offices, office leases or personal property located on such sites which are not directly related to any one or more of the Oil and Gas Assets; and (h) all of Seller's Employee Benefit Plans,
including all rights and assets related thereto. 

        "Governmental Bonds" shall have the meaning given such term in Section 5.6. 

        "Governmental Entity" shall mean any national, state or local government or any subdivision thereof or any arbitrator, court,
administrative or regulatory agency, commission, department, board or bureau or body or other government or authority or instrumentality or any entity or Person exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government. 

        "Guaranty Agreement" means a Guaranty Agreement in the form of Exhibit D from M.
John Kennedy guaranteeing the obligations of Seller under this Agreement. 

        "Hazardous Substances" shall mean any pollutants, contaminants, toxics or hazardous or extremely hazardous substances, materials, wastes,
constituents, compounds, or chemicals that are regulated by, or may form the basis of liability under, any Environmental Laws, including NORM and other substances referenced in  Section 9.1(f).

        "Hydrocarbons" shall mean oil and gas and other hydrocarbons produced or processed in association therewith. 

25

 

        "Indemnified Party" means the Buyer Indemnified Parties or the Seller Indemnified Parties, as the case may be. 

        "Indemnifying Party" means Buyer in the case of any Seller Indemnification Claim, or Seller in the case of any Buyer
Indemnification Claim. 

        "Individual Environmental Threshold" shall have the meaning given such term in  Section 9.1(d). 

        "Individual Title Defect Threshold" shall have the meaning given such term in  Section 8.2(f). 

        "Integrity Test" means, with respect to a Well, a test conducted by Buyer or its designee during the Interim Period to confirm the
integrity of the casing and wellbore of such Well in accordance with the rules and regulations of the Wyoming Oil and Gas Commission and good industry practice. 

        "Interim Period" shall mean that period of time commencing with the Effective Time and ending at 11:59 p.m. (Mountain Time) on the
day immediately preceding the Closing Date. 

        "Knowledge" shall mean the actual knowledge after reasonable inquiry of M. John Kennedy, Ruth M. Reile and Juli Pierce. 

        "Law" shall mean any applicable federal, state, municipal, local or foreign statute, law, ordinance, rule, regulation, order, judgment,
writ, injunction or decree enacted, adopted, issued or promulgated by any Governmental Entity. 

        "Leases" shall have the meaning given such term in the definition of Oil and Gas Assets in this  Article XIII. 

        "Liabilities" shall mean any and all claims, causes of actions, payments, charges, judgments, assessments, liabilities, losses, damages,
penalties, fines or costs and expenses, including any attorneys' fees, legal or other expenses incurred in connection therewith and including liabilities, costs, losses and damages for personal injury
or death or property damage. 

        "Losses" shall mean any and all claims, demands, suits, proceedings, judgments, losses, charges, penalties, and fees, costs and expenses
(including reasonable attorneys' fees and expenses) sustained, suffered or incurred by any Indemnified Party in connection with, or related to, any matter which is the subject of indemnification under  Article X
provided, however, that in computing the amount of any Losses for purposes of
determining the liability of any Indemnifying Party under Article X, the amount of any Tax benefit actually used by the Indemnified Party in the
calendar year in which such Loss is asserted to reduce Taxes arising from the incurrence or payment of any such Losses shall be deducted from such Losses. 

        "Material Adverse Effect" shall mean a material adverse effect on the ownership, operations, or value of any of the Oil and Gas Assets or
a material adverse effect on the ability of a Seller to consummate the transactions contemplated by this Agreement; provided,  however, that none of the
following shall be deemed to constitute a Material Adverse Effect: (a) any effect resulting from entering into this
Agreement or the announcement of the transactions contemplated by this Agreement, including any termination of, reduction in or similar negative impact on relationships, contractual or otherwise, with
any customers, suppliers, distributors, partners or employees of Seller due to the announcement or pendency of the transactions contemplated by this Agreement; (b) any effect resulting from
changes in general industry, market, economic, capital markets or financial conditions in the area in which the Oil and Gas Assets are located, the United States or worldwide; (c) any
effect resulting from a change in Laws from and after the date of this Agreement; (d) any reclassification or recalculation of reserves in the ordinary course of business; (e) any
changes in the prices of Hydrocarbons; (f) natural declines in well performance; and (g) the outbreak or escalation of hostilities or war, the declaration of a national emergency or war
or the occurrence of any other calamity or crisis, including acts of terrorism. 

26

 

        "MMS" shall mean the Minerals Management Service. 

        "Net Revenue Interest", with respect to any Well, shall mean the interest in and to all Hydrocarbons produced, saved, and sold from or
allocated to such Well, after giving effect to all royalties, overriding royalties, production payments, carried interests, net profits interests, reversionary interests, and other burdens upon,
measured by, or payable out of production therefrom. 

        "NORM" shall mean naturally occurring radioactive material. 

        "Oil and Gas Assets" shall mean (other than the Excluded Assets) all of Seller's rights, titles and interests in, to and under lands,
leases and wells, including all of Seller's working interests, operating rights, mineral interests, overriding royalty interests, reversionary interests, net profits interests, net revenue interests,
and any other similar or dissimilar interests, the undivided interests therein and the underlying oil, gas and mineral leasehold estates associated therewith, as to all depths from the surface of the
earth to the base of the Fort Union formation, and sixty-five percent (65%) of Seller's rights, titles and interests in, to and under lands, leases and wells, including all of Seller's
working interests, operating rights, mineral interests, overriding royalty interests, reversionary interests, net profits interests, net revenue interests, and any other similar or dissimilar
interests, the undivided interests therein and the underlying oil, gas and mineral leasehold estates associated therewith as to all depths below the base of the Fort Union Formation, together with
rights in any pooled or unitized acreage by virtue of any lands covered by the Leases being a part thereof, in each case as described in  Exhibit B hereto including, but not limited to, all of
Seller's rights, titles and interests in, to, under and derived from: 

        (d)   the
oil, gas, and mineral leases and other mineral leases and the leasehold estates created thereby described in  Exhibit B hereto (collectively, the "Leases"), together with corresponding interests in
and to all the property and rights incident thereto, including all rights in any pooled or unitized acreage by virtue of the Leases being a part thereof, all production from the pool or unit allocated
to any such Leases, and all interests in any wells within the pool or unit associated with the Leases; 

        (e)   the
equipment and other personal and mixed property (including liquid hydrocarbon inventory in tanks), improvements, easements, rights-of-way,
permits, licenses, servitudes and any other estates situated in or upon, or used or useful, or held for future use in connection with the exploration, development and production of oil, gas and other
minerals, sulfur, associated gas from any of the Leases, or the treatment, storage or transportation of such substances therefrom, including wells, casing, tubing, derricks, tanks, batteries, boilers,
separators, rods, dehydrators, compressors, pumps, flow lines, water lines, gas lines, buildings, field offices, fixtures, machinery, gas production, gathering or processing equipment, systems or
pipelines, gas marketing systems or pipelines, power lines, telephone and telegraph lines, and all other fixtures and improvements, located on or used in connection with the Leases or lands pooled
therewith or located thereon as of the Effective Time; 

        (f)    all
Applicable Contracts; 

        (g)   to
the extent they may be assigned, all easements, rights-of-way, licenses, authorizations, permits, and similar rights and interests exclusively
applicable to, or exclusively used in connection with, any or all of the above-described interests; 

        (h)   all
Records; 

        (i)    all
oil, gas and associated liquid and gaseous hydrocarbons stored upon or produced from the Leases from and after the Effective Time; 

        (j)    all
seismic, geological and geophysical data relating to the Oil and Gas Assets, if any. 

27

 

        "Operating Agreement" means a joint operating agreement (using the A.A.P.L. Form 610-1989, Model Form Operating
Agreement) covering the interests of Buyer and Seller in the Leases as they relate to depths below the Ft. Union Coal formation. 

        "Operating Expenses" shall have the meaning give such term in Section 1.1(c). 

        "Transfer of Operating Rights" shall be the approved form of that name used to transfer operating rights under a Federal lease in the oil
and gas records of the Bureau of Land Management. 

        "Outside Termination Date" shall have the meaning given such term in  Section 12.1(d). 

        "Permitted Encumbrances" shall mean: 

        (a)   lessor's
royalties, non-participating royalties, overriding royalties, reversionary interests, and similar burdens upon, measured by, or payable out of
production if the net cumulative effect of such burdens does not operate to reduce the Net Revenue Interest of Seller in any Well to an amount less than the Net Revenue Interest set forth on  Exhibit B for such Well or with respect to a Lease listed therein and do not obligate Seller to bear a Working Interest for such Well in
any amount greater than the Working Interest set forth on Exhibit B for such Well or for such Lease (unless the Net Revenue Interest for
such Oil and Gas Asset is greater than the Net Revenue Interest set forth on Exhibit B in the same proportion as any increase in such
Working Interest); 

        (b)   liens
for Taxes or assessments not yet due or delinquent or, if delinquent, that are being contested in good faith in the normal course of business; 

        (c)   conventional
rights of reassignment; 

        (d)   such
Title Defects as Buyer may have waived; 

        (e)   all
applicable Laws, and rights reserved to or vested in any Governmental Entity; 

        (f)    rights
of a common owner of any interest in rights-of-way or easements currently held by a Company and such common owner as tenants in common or
through common ownership; 

        (g)   easements,
conditions, covenants, restrictions, servitudes, permits, rights-of-way, surface leases and other rights in the Oil and Gas Assets for
the purpose of surface operations, roads, alleys, highways, railways, pipelines, transmission lines, transportation lines, distribution lines, power lines, telephone lines, and removal of timber,
grazing, logging operations, canals, ditches, reservoirs, and other like purposes, or for the joint or common use of real estate, rights-of-way, facilities, and equipment which
do not materially impair the use of any of the Oil and Gas Assets as currently owned and operated; 

        (h)   zoning
and planning ordinances and municipal regulations; 

        (i)    vendors,
carriers, warehousemen's, repairmen's, mechanics, workmen's, materialmen's, construction or other like liens arising by operation of Law in the ordinary course
of business or incident to the construction or improvement of any property in respect of obligations which are not yet due or which are being contested in good faith by appropriate proceedings by or
on behalf of Seller; 

        (j)    liens
created under leases and/or operating agreements or by operation of Law in respect of obligations that are not yet due or that are being contested in good faith by
appropriate proceedings by or on behalf of Seller; 

        (k)   any
encumbrance affecting the Oil and Gas Assets which is expressly assumed, bonded or paid by Buyer at or prior to Closing or which is discharged by Seller at or prior
to Closing; 

        (l)    any
matters referenced on Exhibit B; 

28

 

        (m)  production
sales contracts; division orders; contracts for sale, purchase, exchange, refining or processing of Hydrocarbons; farm-out or farm-in
agreements; participation agreements, unitization and pooling designations, declarations, orders and agreements; operating agreements; agreements of development; area of mutual interest agreements;
gas balancing and deferred production agreements; plant agreements; production handling agreements; processing agreements; pipeline, gathering and transportation agreements; injection, repressuring
and recycling agreements; carbon dioxide purchase or sale agreements; salt water or other disposal agreements, and other contracts and use restrictions (in each case) only to the extent the
same (i) are listed in Schedule 3.9 and are ordinary and customary to the oil, gas and other mineral exploration, development,
processing or extraction business and (ii) do not operate to reduce the "Net Revenue Interest" of the Oil and Gas Assets in and to any Well or Lease to less than the amount set forth in  Exhibit B for such Well or for such Lease or increase the "Working Interest" of the Oil and Gas Assets in and to any Well or Lease to
greater than the amount set forth in Exhibit B for such Well or for such Lease (without a corresponding increase in the "Net Revenue
Interest" for such Well); and 

        (n)   the
Leases and other minor defects and irregularities affecting the Oil and Gas Assets that individually or in the aggregate are not such as to materially interfere with
the operation or use of any of the Oil and Gas Assets (as currently owned and operated), do not reduce the Net Revenue Interest of Seller in any Well or Lease to an amount less than the Net
Revenue Interest set forth on Exhibit B for such Well or for such Lease and do not obligate Seller to bear a Working Interest for such
Well or Lease in any amount greater than the Working Interest set forth on Exhibit B for such Well or for such Lease (unless the Net
Revenue Interest for such Oil and Gas Asset is greater than the Net Revenue Interest set forth on Exhibit B or in the same proportion as
any increase in such Working Interest). 

        "Person" shall mean a corporation, an association, a partnership, an organization, a business, an individual or a
Governmental Entity. 

        "Purchase Price" shall have the meaning such term is given in Section 1.2(a). 

        "Records" shall include, with respect to Seller, all lease files, land files, well files, gas and oil sales contract files, gas processing
files, accounting records and information relating to the production from and expenses attributable to the Oil and Gas Assets, abstracts, title opinions, well logs, cores, production data, and all
other books, files and records, information, and data (including engineering, geophysical and geological data), and all rights thereto, of Seller (and its Affiliates) insofar as the same are
related to any of the Oil and Gas Assets. 

        "Record Title Assignment" shall mean the form approved by BLM and used to assign record title in a Federal Lease in the oil and gas
records of the Bureau of Land Management. 

        "Remediation" shall mean, with respect to an Environmental Condition, the implementation and completion of those remedial, removal,
response, construction, closure, disposal or other corrective actions required under Environmental Laws to correct or remove such Environmental Condition. 

        "Remediation Amount" shall mean, with respect to an Environmental Condition, the present value as of the Closing Date (using an annual
discount rate of ten percent (10%)) of the cost (net to Seller's interest) of the most cost effective Remediation of such Environmental Condition. 

        "Seller" shall have the meaning given such term in the introduction to this Agreement. 

        "Seller" shall have the meaning given such term in the recitals to this Agreement. 

        "Seller Indemnification Claim" shall have the meaning given such term in  Section 10.3. 

29

 

        "Seller Indemnified Parties" shall mean (a) Seller; (b) its Affiliates, family members, assigns and successors in interest;
and (c) with respect to the Persons set forth in clauses (a), (b) and (c) of this definition, each of their respective stockholders, members, partners, directors, officers,
employees, agents, attorneys and representatives. 

        "Seller Prorated Taxes" shall mean an amount equal to any unpaid ad valorem tax liability related to the Oil and Gas Assets for periods
prior to the Effective Time, including assessed pursuant to Sections 39-14-202 and 39-14-207 of the Wyoming Statues 1977 for periods prior
to the Effective Time. 

        "Taxes" shall mean income, profits, franchise, withholding, employment, social security, disability, occupation and similar taxes and
assessments, and ad valorem, property, production, excise, severance, windfall profit and similar taxes and assessments based upon or measured by the ownership or property or the production or removal
of hydrocarbons or the receipt of proceeds therefrom, together with any interest and penalties with respect thereto. 

        "Third Party" shall mean any Person other than a party to this Agreement or an Affiliate of a party to this Agreement. 

        "Threshold Deductible" shall mean an amount equal to $250,000.00. 

        "Title Arbitrator" shall have the meaning given such term in Section 8.2(g). 

        "Title Defect" shall mean any lien, charge, Encumbrance, defect, or other matter that causes Seller not to have Defensible Title in and to
the Oil and Gas Assets as of the Closing; provided that the following shall not be considered Title Defects: 

        (i)    defects
in the chain of title consisting of the failure to recite marital status in a document or omissions of successions of heirship or estate proceedings, unless
Buyer provides reasonable evidence that such failure or omission may result in another Person's superior claim of title to the relevant Oil and Gas Asset; 

        (ii)   defects
arising out of lack of a survey, unless a survey is expressly required by applicable Laws; 

        (iii)  defects
arising out of lack of corporate or other entity authorization unless Buyer provides affirmative evidence that such corporate or other entity action was not
authorized and results in another Person's superior claim of title to the relevant Oil and Gas Asset; 

        (iv)  defects
based on a gap in a Company's chain of title in the BLM or MMS records as to federal Leases, in the state's records as to state Leases, or in the county records
as to other Leases, unless such gap is affirmatively shown to exist in such records by an abstract of title, title opinion or landman's title chain which documents shall be included in a Title
Defect Notice; 

        (v)   defects
that have been cured by applicable Laws of limitations or prescription; and 

        (vi)  any
Encumbrance or loss of title resulting from the Seller's conduct of business after the Closing in compliance with this Agreement. 

        "Title Defect Amount" shall have the meaning given such term in Section 8.2(c). 

        "Title Defect Notice" shall have the meaning given such term in Section 8.2(a). 

        "Title Defect Property" shall have the meaning given such term in Section 8.2(a). 

        "Wells" shall mean the wells included in the Oil and Gas Assets, including those Wells that are set forth in  Exhibit B. 

        "Working Interest," with respect to any Well, shall mean the interest in and to such Well that is burdened with the obligation to bear and
pay costs and expenses of maintenance, development 

30

 

operations
and plugging and abandoning on or in connection with such Well, but without regard to the effect of any royalties, overriding royalties, production payments, net profits interests and other
similar burdens upon, measured by, or payable out of production therefrom. 

 
 

ARTICLE XIV
  
    MISCELLANEOUS    
    

        14.1    Notices. All notices, requests, consents, directions and other instruments and communications
required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given if delivered (a) in person, (b) by courier, (c) by overnight
delivery service with proof of delivery, (d) by prepaid registered or certified first-class mail, return receipt requested, in each such case addressed to the respective party at the address
set forth below, or (e) if sent by facsimile or other similar form of communication (with receipt confirmed) to the respective party at the facsimile number set forth below: 

If to Seller or (before the Closing) to:

700 West
6th Street

Gillette, Wyoming 82716

Attention: M. John Kennedy

Facsimile: (307) 682-6060

Telephone: (307) 682-3107 

With a copy to:

Brown,
Drew & Massey, LLP

159 N. Wolcott, Suite 200

Casper, Wyoming 82601

Attention: Morris R. Massey

Facsimile: (307) 265-8025

Telephone: (307) 234-1000 

If to Buyer, to:

Pinnacle
Gas Resources, Inc.

One East Alger Street, Suite 206

Sheridan, Wyoming 82801

Attention: Peter Schoonmaker

Facsimile: (307) 673-9711

Telephone: (307) 673-9710 

With a copy to:

Andrews
Kurth LLP

600 Travis Street

Houston, Texas 77002

Attention: Hal Haltom

Facsimile: (713) 220-4295

Telephone: (713) 220-4109 

or
to such other address or facsimile number and to the attention of such other Person as either party may designate by written notice. Any notice mailed shall be deemed to have been given and
received on the third Business Day following the day of mailing. 

        14.2    Assignment and Successors. No party hereto shall assign this Agreement or any part hereof without the prior written
consent of the other party. This Agreement shall inure to the benefit of, be 

31

 

binding
upon and be enforceable by the parties hereto and their respective successors and permitted assigns. 

        14.3    Entire Agreement; Amendment. This Agreement, the Exhibits hereto, and the Disclosure Schedules hereto constitute the
entire agreement and understanding between the parties relating to the subject matter hereof and thereof and supersede all prior representations, endorsements, premises, agreements, memoranda
communications, negotiations, discussions, understandings and arrangements, whether oral, written or inferred, between the parties relating to the subject matter hereof. This Agreement (or any
provision hereof) may not be modified, amended, rescinded, canceled, altered or supplemented, in whole or in part, except upon the execution and delivery of a written instrument executed by a duly
authorized representative of each of Buyer and Seller. 

        14.4    Governing Law. This Agreement shall be governed by, construed and interpreted in accordance with the internal laws of
the State of Wyoming, without regard to choice of law rules. 

        14.5    Waiver. The waiver of any breach of any term or condition of this Agreement shall not be deemed to constitute the waiver
of any other breach of the same or any other term or condition. 

        14.6    Severability. Any provision hereof that is prohibited or unenforceable in any jurisdiction shall, as to such
jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 

        14.7    No Third Party Beneficiaries. Buyer Indemnified Parties and Seller Indemnified Parties that are not otherwise parties to
this Agreement shall be third party beneficiaries of this Agreement. Except as provided in the immediately preceding sentence, this Agreement is not intended to confer upon any person other than the
parties hereto any rights or remedies hereunder. 

        14.8    Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original,
but all of which together shall constitute one and the same instrument. A facsimile or other copy of a signature, including execution and delivery of this Agreement by electronic exchange bearing the
copies of a party's signature, shall be deemed an original for purposes of this Agreement. 

        14.9    Headings. The headings of the Articles and Sections of this Agreement have been inserted for convenience of reference
only and shall in no way restrict or otherwise modify any of the terms or provisions hereof or affect in any way the meaning or interpretation of this Agreement. 

        14.10    Negotiated Transaction. The provisions of this Agreement were negotiated by the parties hereto, and this Agreement
shall be deemed to have been drafted by all of the parties hereto. 

        14.11    Expenses and Taxes.

        (a)   Except
as otherwise specifically herein provided, all fees, costs and expenses incurred by Buyer and Seller in negotiating this Agreement or in consummating the
transactions contemplated by this Agreement shall be paid by the party incurring the same. 

        (b)   All
required documentary, filing and recording fees and expenses in connection with the filing and recording of the assignments, conveyances or other instruments
required to convey title to the Oil and Gas Assets to Buyer shall be borne by Buyer. Seller shall assume responsibility for, and shall bear and pay, all federal income taxes, state income taxes, and
other similar taxes (including any applicable interest or penalties) incurred or imposed with respect to the transactions described in this Agreement. Seller shall assume responsibility for, and shall
bear and pay, all state sales and use taxes (including any applicable interest or penalties) incurred or imposed with respect to the transactions described in this Agreement. Buyer shall be
responsible for payment to the taxing authorities of all ad valorem and property taxes for the current year. 

32

 

        14.12    Record Retention. Buyer, for a period of five (5) years following the Closing, will (a) retain the
Records and (b) provide Seller with access to the Records (to the extent that Seller has not retained the original or a copy) during normal business hours for review and copying at
Seller's expense; and (c) provide Seller and their officers, employees and representatives with access, during normal business hours, to materials received or produced after the Closing
relating to any indemnity claim made under Article X of this Agreement for review and copying at Seller's expense. 

        14.3    Disclosure Schedules.

        (a)   Notwithstanding
anything to the contrary contained in this Agreement or in any of the Disclosure Schedules, disclosure of any fact or item in any Disclosure Schedule
shall not be deemed to constitute
an admission that such fact or item is material or required to be disclosed for purposes of this Agreement. The headings, if any, of the individual sections of each of the Disclosure Schedules are
inserted for convenience only and shall not be deemed to constitute a part thereof or a part of this Agreement. 

        (b)   The
specification of any dollar amount in the representations and warranties or otherwise in this Agreement or in the Disclosure Schedules is not intended, and shall not
be deemed to be, an admission or acknowledgement of the materiality of such amounts or items, nor shall the same be used in any dispute or controversy between the parties to determine whether any
obligation, item or matter (whether or not described herein or included in any schedule) is or is not material for purposes of this Agreement. 

[Remainder of page is intentionally blank.]

33

 

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

	 	 	SELLER:

KENNEDY OIL
	
 	
 	

By:	
 	

/s/  M. JOHN KENNEDY      

	 	 	Name:	 	M. John Kennedy

	 	 	Title:	 	President

	 	 	

 BUYER:

PINNACLE GAS RESOURCES, INC.
	

 	
 	

By:	
 	

/s/  PETER G. SCHOONMAKER      

	 	 	Name:	 	Peter G. Schoonmaker

	 	 	Title:	 	CEO

34

QuickLinks

Exhibit 10.5

PURCHASE AND SALE AGREEMENT between KENNEDY OIL and PINNACLE GAS RESOURCES, INC.

Table of Contents

PURCHASE AND SALE AGREEMENT

ARTICLE XI SURVIVAL OF REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS

ARTICLE XII TERMINATION

ARTICLE XIII DEFINITIONS OF CERTAIN TERMS

ARTICLE XIV MISCELLANEOUSQuickLinks
 -- Click here to rapidly navigate through this document

 
 

Exhibit 10.6    
    

 
 

GAS GATHERING AGREEMENT
  
    Between
  
    BITTER CREEK PIPELINES, LLC
  "GATHERER"
  
    and
  
    Pinnacle Gas Resources, Inc
  Quaneco L.L.C. and
  Dolphin Energy
Corporation
  Collectively "SHIPPER"
  
    LOW PRESSURE FIELD GATHERING
  
    CONTRACT # 077028    
    

 
 
 

INDEX    
    

	DEFINITIONS	 	3
	GATHERING AND COMPRESSION SERVICE	 	6
	TERM OF AGREEMENT	 	7
	GATHERING RATES	 	7
	QUANTITY	 	7
	FACILITIES	 	8
	MEASUREMENT, METER EQUIPMENT AND TESTING	 	8
	PRESSURES	 	10
	QUALITY	 	10
	BILLING AND PAYMENT	 	12
	TAXES AND ROYALTY	 	13
	NOTICES AND PAYMENT INFORMATION	 	14
	CONTROL AND POSSESSION	 	14
	TITLE AND AUTHORITY	 	15
	FORCE MAJEURE	 	15
	INDEMNIFICATION	 	16
	ASSIGNMENT	 	16
	ATTORNEY-IN-FACT	 	16
	INTERPRETATION AND CONTROLLING LAW; CONSENT TO VENUE; JOINT AND SEVERAL LIABILITY	 	17
	REGULATION	 	17
	WAIVER	 	17
	MODIFICATIONS AND AMENDMENTS	 	17
	AGREEMENTS BEING SUPERSEDED	 	18
	MISCELLANEOUS	 	18

APPENDIX
"A"—Primary Term; MDQ; Receipt Point MDQ(s); Gathering Rate; Liquid Water Collected; Rate Adjustment; Fuel; Lost & Unaccounted Gas Quantity 

APPENDIX
"B"—Receipt Points; and Delivery Point(s) 

APPENDIX
"C"—Gatherer and Shipper Notification Information 

APPENDIX
"D"—Screw Compression Site; Operating Pressure/Volume Obligation; and Obligation Exclusion 

APPENDIX
"E"—Acreage Dedication 

2

  

 
 

GAS GATHERING AGREEMENT    
    

        This Gas Gathering Agreement ("Agreement") is by and between, Bitter Creek Pipelines, LLC ("Gatherer"), a Colorado limited liability company, and Pinnacle
Gas Resources, Inc., Quaneco L.L.C. and Dolphin Energy Corporation, (collectively "Shipper"). Gatherer and Shipper may be jointly referred to as the "Parties." Unless otherwise specified
herein, this Agreement is to be effective the later of January 1, 2006 or the completion of the pipeline and compression facilities needed to gather the gas. 

 
 

RECITALS    
    

        WHEREAS, Shipper has requested that Gatherer provide low pressure gathering and compression services of natural gas on Shipper's behalf to be delivered into
Gatherer's gathering system located in Big Horn County, Montana: 

        WHEREAS,
Shipper is willing to gather Gas from its wells to a mutually agreed upon Compression Site(s); and 

        WHEREAS,
Gatherer is willing to construct a Central Compression Site(s), and deliver Shipper's gas into Gatherer's 12" Deer Creek Lateral; and 

        WHEREAS,
Shipper desires to dedicate to Gatherer and Gatherer's gathering operations, all of its leasehold interest and the production therefrom within the lands described on
Appendix "E" attached hereto and made a part hereof; and 

        WHEREAS,
Gatherer is willing to provide the services subject to the terms and conditions contained in this Agreement. 

        NOW
THEREFORE, in consideration of the premises and of the mutual promises, covenants and agreements hereinafter set forth, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the Parties agree as follows: 

 
 

ARTICLE I
  
    DEFINITIONS    
    

        For purposes of this Agreement and except where the context otherwise indicates another or different meaning or intent, the following words and terms as used
herein shall have the meaning indicated: 

	1.01
	"Allocated
Deliveries" shall mean Gas credited to Shipper's Account at the Delivery Point.

	1.02
	"Allocated
Receipts" shall mean Gas credited to Shipper's Account at the Receipt Point.

	1.03
	"British
Thermal Unit (Btu)" shall mean the amount of heat required to raise the temperature of one (1) pound of water from sixty degrees Fahrenheit (60°F) to
sixty-one degrees Fahrenheit (61°F).

	1.04
	"Business
Day" shall mean any day except Saturday, Sunday or Federal Reserve Bank holidays.

	1.05
	"Capacity"
shall mean the maximum Gas volume, which any particular segment of Gatherer's system is capable of carrying or containing under then current operating conditions.

	1.06
	"Central
Compression Site(s)" shall mean the Facilities where Shipper's Gas, gathered from the Screw Compression Site(s), is further compressed for delivery into Gatherer's
downstream high pressure gathering line. 

3

 

	1.07
	"Condensate"
shall mean drip gas or other free liquids collected in Gatherer's, or its designee's or affiliate's, pipelines between the Receipt Point(s) and the
Delivery Point(s).

	1.08
	"Controlling
Party" shall mean the owner, operator, or other controlling party of a Receipt Point or a Delivery Point.

	1.09
	"Cubic
Foot of Gas" is the amount of Gas necessary to fill one (1) cubic foot of space when the Gas is at a temperature of sixty degrees Fahrenheit (60°F)
and under an absolute pressure of fourteen and seventy-three hundredths (14.73) pounds per square inch.

	1.10
	"Dedicated
Area" shall have the meaning set forth in Section 2.06.

	1.11
	"Dedicated
Interests" shall have the meaning set forth in Section 2.06.

	1.12
	"Dekatherm"
(See MMBtu).

	1.13
	"Delivery
Point(s)" shall mean the point(s) set forth on Appendix "B" attached hereto and incorporated by reference at which Gatherer delivers Gas for
Shipper's account.

	1.14
	"Facilities"
shall mean the equipment, devices and/or pipelines necessary to move Gas from the Interconnection Point(s) to the Delivery Point(s).

	1.15
	"Firm
Gathering Service" shall refer to the obligation of Gatherer to make available to Shipper on a daily basis, subject to events of force majeure, gathering service for quantities
of Gas received from Shipper to be redelivered to the delivery point(s) as set forth in this Agreement.

	1.16
	"FL&U"
shall mean the combination of "Fuel Gas Quantity" and "Lost and Unaccounted for Gas Quantity" as defined in this Article.

	1.17
	"Fuel
Gas Quantity" or "Fuel" is that quantity of Shipper's Gas, in MMBtu's, received by Gatherer, which is retained by Gatherer for fuel. The Fuel Gas Quantity, as set forth in
Appendix "A" is stated as a percentage of the Gas delivered by Shipper at the Receipt Point(s). Title to the Fuel Gas Quantity shall vest in Gatherer upon receipt at the Receipt Point(s) at no
cost to Gatherer and free and clear of all adverse claims and liabilities.

	1.18
	"Gas"
shall mean natural gas or any mixture of hydrocarbons or of hydrocarbons and noncombustible gases, in a gaseous state, the quantity of which shall be determined on an
MMBtu basis.

	1.19
	"Gas
Day" or "Day" shall mean a period of twenty-four (24) consecutive hours, commencing at nine o'clock a.m. Central Clock Time, and ending at nine
o'clock a.m. Central Clock Time, immediately following said consecutive twenty-four (24) hour period. The reference date for any Gas Day shall be the calendar date upon which
said twenty-four (24) hour period commences.

	1.20
	"Gathering"
or "Gathering Services" shall mean the movement of Gas through Gatherer's Facilities from the Interconnection Point(s) to the Delivery Point(s). The services shall
include, but not be limited to, separation, compression, and metering necessary to meet downstream pipeline quality specifications.

	1.21
	"Gross
Dry Heating Value" is the number of Btu's produced by complete combustion, at a constant pressure, of the amount of Gas which would occupy a volume of one
(1) cubic foot at a temperature of sixty degrees Fahrenheit (60°F) on a water-free basis and at a pressure of fourteen and seventy-three hundredths pounds per
square inch absolute (14.73 p.s.i.a.), with air of the same temperature and pressure as the Gas, when the products of combustion are cooled to the initial temperature of the Gas and air, and
when the water formed by combustion has condensed to the liquid state. 

4

 

	1.22
	"Interconnection
Point(s)" shall mean the point(s) at which Shipper's field gathering interconnects with Gatherer's Facilities adjacent to the Screw Compression Site(s).

	1.23
	"Lost
and Unaccounted for Gas Quantity" or "L&U" is that volume of Shipper's Gas, in MMBtu's, received by Gatherer which is released and/or lost through piping, equipment, or
operations or is vented. The Lost and Unaccounted for Gas Quantity is stated as a percentage of the Gas delivered by Shipper at the Receipt Point(s), and is set forth on Appendix "A". Title to
the Lost and Unaccounted for Gas Quantity shall vest in Gatherer upon receipt at the Receipt Point(s) at no cost to Gatherer and free and clear of all adverse claims and liability.

	1.24
	"Mcf"
shall mean one thousand (1,000) Cubic Feet of Gas.

	1.25
	"MDQ"
shall mean the maximum daily quantity of Gas which Gatherer is obligated to deliver daily on behalf of Shipper, as set forth on Appendix "A" attached hereto.

	1.26
	"MMBtu"
shall mean one million (1,000,000) British Thermal Units ("Btu's"), also known as a Dekatherm.

	1.27
	"Month"
shall mean a period of time beginning on the first Gas Day of the calendar Month and ending on the first Gas Day of the next succeeding calendar Month.

	1.28
	"Monthly
Billing Period" is a Month.

	1.29
	"Pressure
Obligation" shall mean the pressure at the Interconnect Point that Shipper wishes to receive and Gatherer is obligated to provide in accordance with the terms set forth on
Appendix "D" attached hereto.

	1.30
	"p.s.i.a."
shall mean pounds per square inch absolute.

	1.31
	"p.s.i.g."
shall mean pounds per square inch gauge.

	1.32
	"Receipt
Point(s)" shall mean the point(s) set forth on Appendix "B" attached hereto and incorporated by reference at which Gatherer receives gas for Shipper's account.

	1.33
	"Screw
Compression Site(s)" shall mean the Facilities at the Interconnection Point(s) where Gatherer provides Shipper with the compression service described on Appendix "D"
attached hereto.

	1.34
	"Screw
Compression Site Fuel" shall mean the fuel that is consumed by the compressors at the Screw Compression Site as described on Appendix "A".

	1.35
	"Shipper's
Gas" shall mean the Gas tendered by Shipper to Gatherer at the Receipt Point(s) pursuant to this Agreement.

	1.36
	"Third
Parry" shall mean a party other than Shipper or Gatherer not involved in the original consideration of this project.

	1.37
	"Total
Thermal Energy Content" is determined by multiplying the Gross Dry Heating Value by the volume of Gas in Cubic Feet of Gas, adjusted for as-delivered water content
in accordance with Article X herein titled "MEASUREMENT METER EQUIPMENT AND TESTING".

	1.38
	"Well(s)"
shall mean any oil or coalbed methane Gas well and the Gas reserves attributable thereto which are assigned to such Well(s) pursuant to regulations of a duly constituted
governmental authority having jurisdiction, or if no such regulations are established, then the Gas reserves attributable thereto which can reasonably be drained by such Well(s) pursuant to
established spacing practices in the field where such Well(s) are drilled. 

5

 

	1.39
	"Year"
is a period of three hundred sixty-five (365) days commencing and ending at nine o'clock a.m. Central Clock Time, provided that any year which
contains the date of February 29 shall consist of three hundred sixty-six (366) days. 

 
 

ARTICLE II
  
    GATHERING AND COMPRESSION SERVICE    
    

	2.01
	Gatherer
shall provide Shipper Firm Service for all Gas, up to the MDQ specified on Appendix "A", delivered by Shipper at the Receipt Points.

	2.02
	Gatherer
shall provide Shipper compression services at each Screw Compression Site in accordance with the requirements set forth on Appendix "D".

	2.03
	Gatherer
shall have the right to commingle Shipper's Gas on the Facilities without Shipper's consent.

	2.04
	In
the event that Shipper's operations or activities cause damage to Gatherer's Facilities or operations and/or in the event any Gas received from Shipper does not, for any reason,
meet the quality specifications contained in Article IX hereof, Shipper shall reimburse Gatherer for any direct costs and expenses, including parts, materials, Gas linepack/replacement, labor
and any third party services required in order to repair Gatherer's Facilities and resume Gatherer's normal Gathering operations.

	2.05
	Gatherer
shall have the right, with reasonable notice and pursuant to the requirements as set forth on Appendix "D", "Runtime Obligations, to cease its Gathering
Services hereunder and/or to cease the operation of its Gathering systems, from time to time, as necessary to complete repairs, to perform normal, routine or unscheduled maintenance, to conduct tests,
and/or to alter, modify, expand or reconfigure its Gathering system.

	2.06
	Subject
hereto, and effective as of the date hereof, Shipper does hereby dedicate to Gatherer and its gathering operation, during the term of this agreement, all of its oil and gas
leases and all of its interest in and the coalbed methane gas production therefrom, whether presently owned or hereafter acquired, within the bounds of the lands described in Appendix "E"
attached hereto and by this reference, made part hereof. It is understood that certain of the leases described in Appendix "E" are subject to an option held by Cantera ("Cantera Option
Interest") to have such oil and gas leases ("Cantera Leases") and the production therefrom dedicated to Cantera. Such leases are listed under a subheading on Appendix "E" titled "Cantera". It
is further understood that in the event Cantera exercises its option, in whole or in part, under the terms thereof, certain of the Camera Leases and the production therefrom will not be subject to
this dedication. Shipper shall use its best efforts to obtain a release of Cantera's Option Interest. To the extent any of Cantera's Option Interest is not exercised, the Cantera Leases and the
production therefrom are included in this dedication and are subject to the terms and conditions hereof. Except as stated herein, the lands, whether now owned or hereafter acquired, described in
Appendix "E" shall be referred to in this Agreement as the "Dedicated Area" and, together with the gas reserves thereunder, whether now owned or hereafter acquired, shall be referred to in this
Agreement as the "Dedicated Interest". In the event Shipper cannot obtain a release from Cantera for the lands described in. Appendix "E", attached hereto and made a part hereof, then
Gatherer, in its sole discretion shall have the right to determine whether or not to construct facilities to gas from those lands intermingled with lands subject to prior dedication. 

6

 

 
 

ARTICLE III
  
    TERM OF AGREEMENT    
    

	3.01
	This
Agreement, unless otherwise specified herein, shall be effective as of the Effective Date stated above, and, unless sooner terminated pursuant to other provisions of this
Agreement, shall continue in full force and effect for the primary term specified in Appendix "A" attached hereto from and after the effective date, and thereafter on a
month-to-month basis until terminated by either Gatherer or Shipper, by giving sixty (60) days advance written notice to the other, provided, however, that the
obligation of the Parties to balance receipts and deliveries of Gas shall remain in full force and effect for such additional limited period as may be necessary to bring receipts and deliveries of Gas
into balance.

	3.02
	In
the event the Federal Energy Regulatory Commission (FERC) or any successor or other federal or state governmental agency exercises jurisdiction over the Firm Services and/or rates
provided for under this Agreement, such shall have no effect on this Agreement unless Congress or the appropriate state legislative body shall authorize the retroactive application or specifically
require the amendment of existing contracts to conform to such agency exercise of jurisdiction. In the event Congress shall so act, Shipper and Gatherer shall renegotiate the Finn Service and/or its
rates to comply with the terms and costs associated with any such regulation.

	3.03
	Notwithstanding
anything contained in this Agreement to the contrary, if, in the event after five (5) years, Gatherer, in its sole discretion reasonably exercised, determines
it is no longer economically feasible to provide the Firm Service, then Gatherer may terminate this Agreement in whole or in part, provided that Gatherer shall prior to termination, give Shipper sixty
(60) days written notice of its intent to terminate and shall, during the notice period, at the request of Shipper, negotiate with Shipper in good faith with respect to the continuation of Firm
Service and, if requested by Shipper in the course of such negotiations, Gatherer shall provide a statement of revenue and costs for the pertinent facilities. 

 
 

ARTICLE IV
  
    GATHERING RATES    
    

	4.01
	Gatherer
shall charge and Shipper shall pay Gatherer the Gathering rate(s) specified in Appendix "A" attached hereto, commencing with the Month in which this Agreement is
effective and each Month thereafter. The monthly Gathering payment to be paid by Shipper shall be determined by multiplying the Mcfs delivered at the Receipt Point(s) by the applicable Gathering rate
and adding any applicable demand fees as provided for in Appendix "A". 

 
 

ARTICLE V
  
    QUANTITY    
    

	5.01
	Gatherer
agrees to deliver for the account of Shipper at the Delivery Point(s), on a firm basis up to the MDQ specified in Appendix "A", Gas received from Shipper at the
Receipt Point(s), less FL&U. Shipper shall accept, or cause acceptance of the Gas delivered by Gatherer at the Delivery Point(s).

	5.02
	Shipper
shall arrange with Third Parties for all services upstream of the Interconnection Point(s) and downstream of the Delivery Point(s) to affect the receipt and delivery of
Shipper's Gas by Gatherer. 

7

 

	5.03
	Shipper
shall use its best efforts to deliver or cause to be delivered the daily quantities of Gas to be received at the Receipt Point(s) and accepted at the Delivery Point(s) at a
substantially constant rate, so that large fluctuations in the quantity of Gas flow are minimized. 

 
 

ARTICLE VI
  
    FACILITIES    
    

	6.01
	Gatherer
shall construct, operate and maintain (or cause others to construct, operate, and maintain) pipeline, compression, and related facilities required to enable Gatherer
to receive Shipper's gas at the Interconnection Point(s) and redeliver gas to Shipper or for Shipper's account at the Delivery Point(s) in accordance with the terms of this Agreement.

	6.02
	Shipper
may request, in writing, that Gatherer expand Facilities in excess of the MDQ as stated in the attached Appendix "A" or add new Receipt or Delivery Point(s) or
provide additional services outside of the geographical area more fully-described on the attached Appendix "E" or outside of the terms of this Agreement. Gatherer shall determine, in its
sole discretion, whether it will undertake the construction and/or expansion of its Facilities or Gathering systems or provide additional services and/or add new Receipt or Delivery Point(s). In the
event that Shipper requests that Gatherer do so and Gatherer agrees, then Gatherer shall have the right to establish the rate(s) for such additional services.

	6.03
	Shipper
shall install and operate or cause the installation and operation of all Facilities necessary to deliver Shipper's Gas to Gatherer at the Interconnection Point(s). 

 
 

ARTICLE VII
  
    MEASUREMENT, METER EQUIPMENT AND TESTING    
    

	7.01
	The
unit of volume for measurement and for the determination of Gross Dry Heating Value shall be a Cubic Foot of Gas. Volumes of Gas measured at prevailing meter pressures and
temperatures shall be corrected to the unit of volume defined above by the procedures described below:

	(a)
	Orifice
Meters: Installation and determination of volumes, measured by means of an orifice meter shall be measured in accordance with the procedures contained in ANSI API
2530 First Edition, Section Edition, AGA Committee Report No. 7, or revisions or amendments made thereto. Construction, installation, and volumetric computation shall be performed per
the 2530 standards.

	7.02
	The
atmospheric pressure shall be the average atmospheric pressure as determined by elevation at the Delivery and Receipt Point(s). In the absence of recording the actual atmospheric
pressure Gatherer may assume the atmospheric pressure to be 12.7 p.s.i.a.

	7.03
	The
volume of Gas delivered through each Delivery Point(s) and Receipt Point(s) shall be corrected to a base temperature of sixty degrees Fahrenheit (60°F)
by using:

	(a)
	The
arithmetic average of the hourly temperatures recorded by a properly installed, continuously operated recording thermometer; or

	(b)
	A
meter containing a temperature operated device, hereinafter referred to as a temperature compensated meter, through the operation of which the meter correctly registers the volume,
corrected to sixty degrees Fahrenheit (60°F).

	7.04
	A
temperature of sixty degrees Fahrenheit (60°F) shall be assumed for any Gas flowing through a meter for which Gatherer does not elect to install a recording thermometer
or 

8

 

temperature
compensation meter. Notwithstanding the preceding sentence, the Parties agree that Gatherer shall install a recording thermometer at each Receipt Point. 

	7.05
	When
orifice meters are used, specific gravity and gross heating value of the Gas shall be determined from chromatographic results, at least quarterly, or more frequently, if
required. These results shall be used to compute volumes.

	7.06
	The
components for determining the deviation from Boyle's Law, at the pressure and temperature under which delivered, shall be determined by chromatographic tests at intervals of
twelve (12) Months or at such shorter interval as is found necessary by Gatherer. The correction factor shall be determined by using American Gas Association "Report Number Eight."

	7.07
	The
Gross Dry Heating Value of the Gas delivered shall be determined by Gas samples or industry accepted recording calorimeters or chromatographs installed or caused to be installed
by Gatherer at points on Gatherer's system(s) in specified areas. The gross heating values shall be calculated per the most current edition of GPA Standard 2145 and GPA
Standard 2172.

	7.08
	The
Total Thermal Energy Content shall be calculated by adjusting the measured volume to correct for the volume of water vapor assuming saturation at the temperature and pressure of
measurement and multiplying the corrected volume by the Gross Dry Heating Value.

	7.09
	Gatherer
agrees to operate and maintain, or cause to be operated and maintained, on its system at or near the Receipt Point(s) connecting the Facilities of Gatherer and Shipper, or
at or near Delivery Point(s) connecting the Facilities of Gatherer with those of another party which is transporting the Gas on behalf of Shipper, a meter or meters of standard type and design as
specified in this Article VII to measure all of the Gas to be received/delivered hereunder.

	7.10
	Shipper
may install, operate and maintain, at its own expense, check measuring equipment as it shall desire, provided that check meters and equipment shall be installed so as not to
interfere with the operation of Gatherer's meters or a meter operated on behalf of Gatherer. Gatherer shall have access to check measuring equipment at all reasonable hours, but Shipper shall perform
all calibrations and adjustments thereof and changing of charts.

	7.11
	Both
Gatherer and Shipper shall have the right to be represented at any installation, reading, cleaning, changing, repairing, inspection, calibration or adjustment done in connection
with the other's measuring equipment. The records from such measuring equipment shall remain the property of the owner of the equipment, but the owner, upon request by the other party, will submit
records, charts, and data together with calculations therefrom, for inspection and verification, subject to return within thirty (30) Gas Days after receipt.

	7.12
	The
party operating the measuring equipment shall use approved standard methods in general use in the Gas industry and shall cause adequate tests to be made to determine the quality
of the Gas delivered hereunder and the results of such testing shall be made available to the other party upon request. Meter tests shall be conducted as set forth more fully below in this Article.
Such tests shall be made frequently enough to ensure that the Gas conforms to the specifications hereof and no less than quarterly.

	7.13
	Gatherer
shall test or cause to be tested its meters at reasonable intervals, no less than quarterly. Shipper, at its sole expense, may have tests of Gatherer's meters made at
reasonable times in the presence of Gatherers representatives.

	(a)
	If,
upon any test, measuring equipment is found to be inaccurate by less than two percent (2%), previous readings of such equipment shall be used to determine the correct values 

9

 

in
computing deliveries of Gas. The equipment shall be properly adjusted at once to record accurately. 

	(b)
	If,
upon any test, any measuring equipment shall be found to be inaccurate by an amount exceeding two percent (2%) of the calculated volume, then any previous readings of such
equipment shall be corrected to zero error for any period which is known definitely or agreed upon. In case the period is not known definitely or agreed upon, such adjustment shall be for a period
extending over one-half of the time elapsed since the date of last test but not exceeding a correction period of ninety (90) Gas Days.

	7.14
	If
for any reason Gatherer's meters are out of service or not properly operating, the amount of Gas delivered during the affected period shall be estimated and agreed upon on the
basis of the best data available, using the first of the following methods, which is feasible.

	(a)
	By
using the registration of any check meter or meters if installed and accurately registering;

	(b)
	By
correcting the error if the percentage of error is ascertainable by calibration, test or mathematical calculation; or

	(c)
	By
estimating the quantity of delivery by deliveries during preceding periods under similar conditions when the meter was registering accurately.

	7.15
	If
Gatherer and Shipper mutually agree to institute a new method or technique of Gas measurement, Gatherer may substitute such new method or technique. Gatherer shall promptly inform
Shipper of the adoption of any such new technique and the date of its implementation. 

 
 

ARTICLE VIII
  
    PRESSURES    
    

	8.01
	Shipper
shall deliver Gas or cause Gas to be delivered to Gatherer at pressures sufficient to effect delivery of the Gas into the Gathering Facilities at the Interconnection
Point(s). Gatherer agrees to not exceed the applicable Pressure Obligation, described on Appendix "D", at the Interconnection Point(s).

	8.02
	Nothing
herein shall obligate Shipper to install compression; however, if Shipper elects to install compression prior to delivery, said installation shall be installed in a manner
that shall not induce pulsation and/or SRE (Square Root Error) in the downstream measuring devices. SRE shall be no greater than 0.25%. If SRE is greater than 0.25%, then it shall be the
responsibility of the Shipper to resolve the SRE to the satisfaction of Gatherer. All costs associated with the resolution of any problem hereunder shall be the responsibility of Shipper.

	8.03
	Gatherer
shall deliver Gas for Shipper's account at pressures sufficient to enter the Delivery Point(s), but in no event greater than 1440 psig. However, Gatherer shall have
no obligation to otherwise modify its Gathering Facilities or operations in order to effect deliveries at the Delivery Point(s) for gas in excess of the MDQ. 

 
 

ARTICLE IX
  
    QUALITY    
    

	9.01
	All
Gas tendered by Shipper for Gathering at the Receipt Point(s) shall conform to all of the minimum quality specifications of any pertinent downstream transporters; however, in no
event shall the Gas quality fall below the specifications set forth below. 

10

 

	(a)
	At
a base pressure of fourteen and seventy-three hundredths (14.73) p.s.i.a. and a base temperature of sixty degrees Fahrenheit (60°F), such Gas shall not contain
more than:

	(1)
	One
quarter (1/4) grain of hydrogen sulfide per one hundred (100) cubic feet;

	(2)
	Two
(2) grains of total sulfur per one hundred (100) cubic feet including the sulfur in any hydrogen sulfide, mercaptan sulfides and residual sulfur;

	(3)
	One
quarter (1/4) grain of mercaptans per one hundred (100) cubic feet;

	(4)
	Ten
parts per million (0.001 percent) by volume of oxygen and

	(b)
	Such
Gas shall be commercial in quality and shall only contain the reasonable and customary amounts of water and coal fines found in the ordinary course of coalbed methane production.
Gatherer reserves the right to refuse to accept any Gas containing materials other than those found in the reasonable and customary coal bed methane production and which is unacceptable to pipelines
downstream of Gatherers Receipt Point(s).

	(c)
	At
a base pressure of fourteen and seventy-three hundredths (14.73) p.s.i.a., the Gross Dry Heating Value of such Gas shall not be less than nine hundred fifty (950) Btu's per
cubic foot nor more than one thousand two hundred ten (1,210) Btu's per cubic foot.

	(d)
	The
temperature of such Gas shall not be less than forty degrees Fahrenheit (40°F) nor exceed one hundred and twenty degrees Fahrenheit (120°F).

	(e)
	The
Gas shall not contain hydrocarbons in the liquid state at the minimum base pressure or the pressure existing at the Interconnect Point(s), if higher.

	9.02
	Gatherer,
at its sole discretion reasonably exercised, may refuse to accept receipt of any Gas from Shipper not meeting the minimum quality specifications set forth above;
thereafter, Shipper shall have the right to conform the Gas to the above specifications. If Shipper does not elect to or cannot conform the Gas to said specifications, then Gatherer may accept Gas
tendered by Shipper hereunder which does not meet the above specifications, treat the same to conform to said specifications, and charge Shipper a fee for such service. The amount to be charged each
Month and any terms and conditions pertaining thereto shall be agreed to between the Parties prior to the time Gatherer commences to treat Shippers Gas. If neither Gatherer nor Shipper elects to treat
the Gas to conform to the above specifications, and/or such Gas cannot be brought into conformance with the minimum quality specifications, then Gatherer may, upon thirty (30) Days prior
written notice to Shipper, release from this Agreement the Well(s) from which such non-conforming Gas is produced. Any such refusal to accept non-conforming Gas hereunder may
be made known by Gatherer to Shipper by notification via facsimile or electronic media as soon as reasonably practicable after such decision has been made by Gatherer. Gatherer may, at its sole
discretion, accept gas that does not meet minimum quality specifications, if in Gatherer's judgment; such gas can be blended with other gas on Gatherer's system so that the total gas stream meets the
minimum quality specifications without causing any detrimental effects to Gatherer's facilities.

	9.03
	Gatherer
may elect, at its sole discretion, to accept Gas that fails to meet the specifications of this Article for a limited period of time. Gatherer's acceptance of such
non-conforming Gas shall not constitute a waiver by Gatherer of any quality specifications set forth in this Article with respect to any other Receipt or Delivery of Shipper's Gas. 

11

 

 
 

ARTICLE X
  
    BILLING AND PAYMENT    
    

	10.01
	"Interest
Rate" shall mean the Prime Interest Rate as published in the Wallstreet Journal plus five (5) percent per annum.

	10.02
	Gatherer
shall invoice Shipper for all Gas gathered in the Month on or before the twentieth (20th) Day of the succeeding Month. The invoice shall set forth the total quantity, of
Gas received and delivered by Gatherer during the preceding Month and the total amount of all fees for Gathering Service and other charges applicable for the Month.

	10.03
	Payment
for any invoice shall be due and payable to Gatherer by Shipper twenty (20) days from the date of receipt of Gatherer's invoice.

	10.04
	Any
payment due Gatherer of $25,000 or more shall be made by Shipper to Gatherer by wire transfer (or Automated Clearinghouse) to the account indicated in Appendix "C." Any
payment due Gatherer of less than $25,000 may be made by check payable to Gatherer at the address indicated in Appendix "C".

	10.05
	Should
Shipper fail to pay part or all of any invoice when due, interest will accrue on any outstanding balance at the Interest Rate from the date due until the date payment is
received by Gatherer. If all or any part of any invoice remains unpaid for longer than thirty (30) Days, Gatherer, in addition to any other remedy it may have, may suspend Gathering Service
hereunder upon thirty (30) Days written notification to Shipper.

	10.06
	Should
Shipper fail to pay part or all of any invoice when due because there are certain line items in dispute, any dispute resolution shall be handled as follows:

	(a)
	Shipper
shall, within ten (10) Days of receipt of such invoice, send Gatherer written notice setting forth the specific details of the disputed items.

	(b)
	Upon
timely receipt of such notice, Gatherer will suspend the application of interest until such time as the disputed items are resolved to the satisfaction of both parties. At that
time, Gatherer will send Shipper written notification of such resolution. If the resolution results in an amount still due and owing to Gatherer, Shipper will then have ten (10) Days from the
date of such notice within which to pay the remaining balance due on the disputed invoice. If the resolution results in a credit due Shipper, Gatherer will apply the credit on the next invoice to be
issued to Shipper.

	(c)
	In
the event Gatherer does not receive timely notification of Shipper's disputed invoicing items, Gatherer will not suspend interest, and Section 10.05 will apply.

	10.07
	Each
party has the right, at its sole expense and upon reasonable advance notice to the other, to examine the records of the other party during normal business hours to the extent
necessary to verify the accuracy of any statement, charge or computation made pursuant to this Agreement: provided, however, that neither party shall examine the books and records of the other more
frequently than once each year, and any such examination shall be confined to a period not exceeding two (2) years prior to the date the examination is to be conducted. This provision shall
survive any termination of this Agreement for a period of two (2) year from the date of termination.

	10.08
	As
a condition precedent to Gatherer's obligation to gather Gas hereunder and at any time during the term of this Agreement, Gatherer may request credit information concerning
Shipper, including but not limited to:

	(a)
	A
copy of Shipper's bank references satisfactory to Gatherer; 

12

 

	(b)
	A
copy of Shipper's most recent annual report and 10-K Form; if applicable,

	(c)
	A
completed credit application form furnished by Gatherer; and,

	(d)
	Shipper's
Federal Identification Number.

	10.09
	Based
upon Gatherer's review of the above credit information furnished by Shipper, Gatherer shall have the right not to proceed with the Gathering of Gas pursuant to this Agreement
if, in Gatherer's sole opinion reasonably exercised, Shipper does not have the financial capability to perform its obligations hereunder, in which event, Gatherer may terminate this Agreement and
neither parry shall have any further rights or obligations hereunder. Furthermore, during the term of this Agreement, if, at any time Gatherer becomes concerned about Shipper's financial condition or
Shipper's ability to fulfill its obligations hereunder, Gatherer may request, from time to time, supplemental credit information from Shipper, including but not limited to, the items specified above,
and Gatherer, at its sole discretion, may:

	(a)
	suspend
Gatherer's obligations to gather Gas hereunder until Shipper shall furnish to Gatherer a bond, letter-of-credit, or other documentation satisfactory to
Gatherer, evidencing Shipper's financial capability to perform its obligations hereunder; or

	(b)
	terminate
this Agreement in which event neither party shall have any further rights or obligations hereunder, except that Shipper shall remain liable for all outstanding payments then
due and payable to Gatherer hereunder. 

 
 

ARTICLE XI
  
    TAXES AND ROYALTY    
    

	11.01
	All
production, severance, excise, ad valorem, processing, Btu and other taxes, imposed or levied by any state government or the federal government or any governmental agency on the
Gas delivered by Shipper for Gathering hereunder and any and all other taxes or fees now or hereafter so levied, assessed, or collected on such Gas shall be the liability of Shipper. In the event
Gatherer is required to collect or remit any such tax, then Gatherer may invoice Shipper monthly for the amount thereof. Shipper shall indemnify and hold Gatherer harmless from any and all charges,
penalties, costs and expenses of whatever kind or nature arising from Shipper's failure to pay such taxes, including, but not limited to, the costs and expense of any litigation and reasonable
attorney's fees associated therewith. Notwithstanding any provision contained herein, Shipper shall not be responsible for any tax levied against Gatherer.

	11.02
	Shipper
shall make any and all royalty or overriding royalty payments or other payments due or which may become due to any party, on the Gas delivered to Gatherer hereunder under
the terms of any Lease(s) or under the terms of any assignments, contracts, or any agreements affecting Gas delivered by Shipper to Gatherer. Shipper shall indemnify and hold Gatherer harmless from
any and all charges, loss, costs or expenses of whatever kind or nature arising from Shipper's failure to make any such payments, including, but not limited to, the costs and expenses of any
litigation and reasonable attorney's fees associated therewith.

	11.03
	Shipper's
indemnification's hereunder shall survive any termination of this Agreement. 

13

 

 
 

ARTICLE XII
  
    NOTICES AND PAYMENT INFORMATION    
    

	12.01
	Except
as otherwise provided herein, any notice which either party desires to give to the other shall be in writing and shall be duly delivered when mailed or sent by successful
facsimile transmission to the party to be notified as specified on Appendix "C". 

 
 

ARTICLE XIII
  
    CONTROL AND POSSESSION    
    

	13.01
	Shipper
shall be deemed to have control and possession of Shipper's Gas until delivered at the Interconnection Point(s) hereunder and after redelivery of the Gas at the Delivery
Point(s), and shall be responsible and hold Gatherer harmless from any damage or injury caused thereby. Gatherer shall have control and possession of Shipper's Gas after such Gas has been received by
Gatherer at the Interconnection Point(s) and until Gatherer delivers Shipper's Gas to Shipper at the Delivery Point(s). Gatherer shall not be liable to Shipper for any damage to or loss of Shipper's
Gas while in Gatherer's control and possession, unless Gatherer's gross negligence or willful misconduct caused such damage or loss. 

14

  

 
 

ARTICLE XIV
  
    TITLE AND AUTHORITY    
    

	14.01
	Shipper
warrants that it has the right and title to all Gas delivered hereunder for Gathering and that Shipper has the authority to contract exclusively to have Shipper's Gas
gathered hereunder. Furthermore, Shipper warrants that Shipper's Gas is free and clear of all liens, encumbrances and claims, and that Shipper has the right, power and authority to enter into this
Agreement and to grant Gatherer the rights, titles, benefits and interests created hereby. Shipper shall indemnify and hold Gatherer harmless from any and all claims, demands, losses, damages,
expenses, liens, causes of action, suits and judgments, including, but not limited to, all court costs and reasonable attorney's fees in connection therewith, relating to disputes over Shippers Gas
and/or title thereto. Shipper's indemnification shall survive any termination of this Agreement. In the event any adverse claim of any character whatsoever is asserted with respect to any of Shipper's
Gas, Gatherer shall have the right to suspend Gathering Service under this Agreement until such time as Shipper's title or right to deliver is free from reasonable question, but only to such
adverse claim.

	14.02
	It
is expressly understood that title to all Gas delivered by Shipper to Gatherer for Gathering hereunder shall be held by Shipper and in no event shall Gatherer take title to Gas
gathered pursuant to this Agreement, except as provided for in this Agreement regarding FL&,U and Balancing.

	14.03
	Gatherer
shall retain all right, title, interest and ownership in any Condensate and/or Gas liquids, which condense or are recovered in the Gatherer's Gathering System(s) through
normal pipeline, Gathering, and compression operations. 

 
 

ARTICLE XV
  
    FORCE MAJEURE    
    

	15.01
	The
term "force majeure" as used in this Agreement shall mean any cause or causes not reasonably within the control of the party claiming suspension and which, by the exercise of
reasonable diligence, such party is unable to prevent or overcome. Such term shall likewise include, but not be limited to: Acts of God; acts, omissions to act and or delays in federal, state or local
government or any agency thereof; compliance with rules, regulations or orders of any governmental authority or any department, agency, or instrumentality thereof; strikes, lockouts or other
industrial disturbances; acts of the public enemy; wars; blockades; insurrections; riots; epidemics, landslides; lightning; earthquake" fires; storms; floods: washouts: winter weather, spring thaw or
other inclement weather; arrest or restraint of rulers of peoples; civil disturbances; terrorist activities; interruptions by governmental or court orders; present and future valid orders of any
regulatory body having jurisdiction; explosions; the interruption or suspension of the receipt or delivery of Gas hereunder due to the inability, failure or refusal of any party not a party to this
Agreement to receive or deliver such Gas; breakage or accident to, or routine maintenance and repair of, machinery or lines or pipes; compressors or plants; Well blowouts: freezing of Wells, or lines
of pipe, sudden partial or sudden entire failure of Gas Wells; failure to obtain materials and supplies due to governmental regulations, the inability of either party to acquire, or the delays an the
part of such party in acquiring, at reasonable cost and after the exercise of reasonable diligence, materials and supplies; permits and consents, and easements
and/or rights-of-way.

	15.02
	In
the event either parry hereto is rendered, wholly or in part, by force majeure, unable to carry out its obligations under this Agreement other than to indemnify or to make
payments of any amount due hereunder, including, but not hunted to, Shipper's payment of demand 

15

 

fees,
it is agreed that, upon such party giving notice and full particulars of such force majeure, in writing (which can be effected by facsimile or other electronic media) to the other party as soon
as possible after the occurrence of the causes relied on, then the obligation of the party giving such notice, so far as they are affected by such force majeure, shall be suspended during the
continuance of any inability so caused, but for no longer period, and such cause shall, so far as possible, be remedied with all reasonable dispatch; provided, however, that this provision shall not
require the settlement of strikes or lockouts by acceding to the demands of the opposing parties when such course is inadvisable in the discretion of the party hereto having the difficulty. 

 
 

ARTICLE XVI
  
    INDEMNIFICATION    
    

	16.01
	Subject
to the provisions of Section 19.01, each of the Parties hereto agrees that it will assume all risk and liability for the maintenance and operation of its respective
property to itself, its agents or employees, for any injury, including death, or damages resulting in any manner from its conduct in connection with the installation, presence, maintenance and
operation of its property and equipment hereunder, and shall indemnify and hold harmless the other party for any and all losses, suits, claims or actions, costs, "including all attorneys fees and
court costs", damages, demands or expenses resulting at anytime from any and all causes due to any act or omission of itself or its agents or employees in this regard. The Parties' indemnifications
hereunder shall survive any termination of this Agreement.

	16.02
	SUBJECT
TO THE PROVISIONS OF SECTION 19.01, NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR CONSEQUENTIAL, INCIDENTAL, PUNITIVE, EXEMPLARY OR INDIRECT DAMAGES, IN TORT,
CONTRACT, UNDER ANY INDEMNITY PROVISION OR OTHERWISE. THE PARTIES INTEND THAT THE LIMITATIONS UNDER THIS SECTION 16.02 IMPOSED ON REMEDIES AND THE MEASURE OF DAMAGES BE WITHOUT REGARD TO THE
CAUSE OR CAUSES RELATED THERETO, INCLUDING, WITHOUT LIMITATION, THE NEGLIGENCE OR STRICT LIABILITY OF ANY PARTY, WHETHER SUCH NEGLIGENCE BE SOLE, JOINT OR CONCURRENT, OR ACTIVE OR PASSIVE. 

 
 

ARTICLE XVII
  
    ASSIGNMENT    
    

	17.01
	This
Agreement, and the Parties' respective rights and obligations hereunder, shall be binding upon and inure to the benefit of the Parties hereto and their respective successors
and assigns. This Agreement, including, but without limitation, any and all renewals, extensions, amendments and/or supplements hereto, and all rights, title and interest contained herein shall not be
assigned without the express written consent of the other parry; provided, that said consent shall not be unreasonably withheld; and provided further that either party may assign this Agreement to any
affiliate or subsidiary without the prior consent of the other. 

 
 

ARTICLE XVIII
  
    ATTORNEY-IN-FACT    
    

	18.01
	Quaneco
L.L.C. and Dolphin Energy Corporation, both of whom who are, as stated in the introductory paragraph hereof, individual shippers hereunder, hereby each name, make and
appoint Pinnacle Gas Resources, Inc. as its true and lawful attorney-in-fact for the purpose of their performance of this Agreement and hereby confer upon Pinnacle Gas
Resources, Inc., 

16

 

the
power to nominate daily Gas volumes, to deliver Gas to the Delivery Points and to receive Gas at the Receipt Points and to do and perform each and every act on their behalf under the Agreement in
their name and to the same effect as if such act had been performed by them, either jointly or separately. 

 
 

ARTICLE XIX
  
    INTERPRETATION AND CONTROLLING LAW; CONSENT TO VENUE; JOINT AND
  SEVERAL LIABILITY    
    

	19.01
	THIS
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MONTANA, EXCLUDING ANY CONFLICT-OF-LAWS RULE, OR PRINCIPLE
WHICH MIGHT REFER SUCH CONSTRUCTION TO THE LAWS OF ANOTHER STATE.

	19.02
	THE
PARTIES AGREE AND CONSENT THAT ANY ACTION AT LAW, SUIT IN EQUITY OR OTHER JUDICIAL PROCEEDING BROUGHT FOR THE ENFORCEMENT OF THIS AGREEMENT OR ANY PROVISION THEREOF SHALL BE
INSTITUTED ONLY IN THE COURTS LOCATED IN THE STATE OF MONTANA.

	19.03
	IN
THE EVENT EITHER PARTY HAS TO INITIATE ANY ACTION TO ENFORCE ITS RIGHTS HEREUNDER THEN THE PREVAILING PARTY SHALL BE ENTITLED TO RECOVER ITS COSTS, INCLUDING, BUT NOT LIMITED TO,
ITS COURT COSTS AND EXPENSES AND REASONABLE ATTORNEY'S FEES.

	19.04
	SHIPPER
AND EACH OF THEM SHALL BE JOINTLY AND SEVERALLY LIABLE FOR ALL SHIPPER'S OBLIGATIONS HEREUNDER. 

 
 

ARTICLE XX
  
    REGULATION    
    

	20.01
	Subject
to Gatherer's rights set forth in the Article titled "TERM OF AGREEMENT", this Agreement and the respective rights and obligations of the Parties hereto are subject to, and
shall be varied and amended to comply with or conform to, all existing and future laws, statutes, rules, regulations, orders or directives promulgated by any duly constituted state or federal
governmental authority, regulatory body or commission having jurisdiction or control over the Parties, their respective facilities or Gas supply, this Agreement, the Gathering of Gas, or any of the
provisions hereof. 

 
 

ARTICLE XXI
  
    WAIVER    
    

	21.01
	No
waiver by Gatherer or Shipper of any default of the other parry under this Agreement shall operate as a waiver of any subsequent default, whether of a like or a
different character. 

 
 

ARTICLE XXII
  
    MODIFICATIONS AND AMENDMENTS    
    

	22.01
	All
modifications, amendments or changes to this Agreement, whether made simultaneously with or after the execution of this Agreement, shall be in writing, executed by all Parties
hereto. Course of dealing and/or course of performance between the Parties shall not be considered in determining the meaning and intent of the terms and conditions stated herein. 

17

 

 
 

ARTICLE XXIII
  
    AGREEMENTS BEING SUPERSEDED    
    

	23.01
	When
this Agreement becomes effective, it shall supersede and cancel any other agreements between the Parties for the same service identified herein. 

 
 

ARTICLE XXIV
  
    MISCELLANEOUS    
    

	24.01
	The
descriptive headings for the articles, sections, and paragraphs contained in this Agreement were written and arranged for convenience only and shall not affect the meaning or
interpretation of the provisions herein.

	24.02
	Unless
otherwise specified herein, this Agreement contains the entire agreement between the Parties, and except as stated herein, there are no promises, agreements, or warranties,
obligations, assurances, or conditions precedent or otherwise, affecting it. Insofar as the Parties have had prior dealings, including the negotiations and exchanges leading up to this writing, it is
the intention of the respective Parties to negate specifically any effect of any prior dealings with respect to the writing. 

        IN
WITNESS WHEREOF, the Parties have executed this Agreement to be effective as of the Effective Date stated above. 

	BITTER CREEK PIPELINES, LLC "GATHERER"	 	PINNACLE GAS RESOURCES, INC. "SHIPPER"
	
 By:    /s/ Paul Hopfauf
	
 	

By:    /s/ Peter G. Schoonmaker

	
 Name:    Paul Hopfauf
	
 	

Name:    Peter G. Schoonmaker

	
 Title:    Vice President & General Manager
	
 	

Title:    CEO

	
 Date Signed:    12-23-2005
	
 	

Date Signed:    12/27/05

	
QUANECO, L.L.C. "SHIPPER"	
 	

DOLPHIN ENERGY CORPORATION "SHIPPER"
	
 By:    /s/ Paul J. Mysyk
	
 	

By:    /s/ Cecil D. Gritz

	
Name:    Paul J. Mysyk
	
 	

Name:    Cecil D. Gritz

	
 Title:    CEO
	
 	

Title:    COO

	
 Date Signed:    1/20/06
	
 	

Date Signed:    1/16/2006

18

  

 
 

APPENDIX "A"
  TO THE
  GAS GATHERING AGREEMENT
  BETWEEN
  BITTER CREEK PIPELINES, LLC
  AND
  SHIPPER    
    

EFFECTIVE DATE:    The later of January 1, 2006 or the completion of the initial gathering system pipeline and compression facilities
necessary to begin receipt and delivery of gas. 

CONTRACT NO.:    077028 

PRIMARY TERM:    Ten (10) years, and then month-to-month thereafter. 

MDQ:    Total MDQ from all receipts points will correspond to the MDQ specified in the high-pressure contract, Contract
# 077027. 

RECEIPT POINT MDQ(s):    The total Receipt Point MDQ cannot exceed Total MDQ for contract. 

1.                          BATTERY
             MMcf per Day @
                         psig screw compressor suction pressure, where suction pressure is measured at the
suction inlet flange of the compressor (the suction
inlet flange pressure will be considered equivalent to the common suction header for all battery level compressors less 1 psig). 

(Example:
1.95 MMcf per Day @ 5 psig. Shipper may choose from Table (1) desired MDQ and corresponding maximum pressure.) 

Table 1:    Shipper shall choose from the following table the desired MDQ and associated suction flange pressure: 

	Suction Flange

Pressures—PSIG
 
	 	Each Screw Unit
 

	1	 	1.55
	2	 	1.63
	3	 	1.75
	4	 	1.83
	5	 	1.95
	7	 	2.13
	10	 	2.27
	12	 	2.37
	15	 	2.47
	20	 	2.68
	24	 	2.88
	30	 	3.25

GATHERING RATE:    The Gathering Rate hereunder shall be comprised of (A) a commodity rate based on average daily volumes, and
(B) monthly demand charges based on the number of compression sites and number of compressors. 

19

 
APPENDIX "A" (continued)

TO THE

GAS GATHERING AGREEMENT

BETWEEN

BITTER CREEK PIPELINES, LLC

AND

SHIPPER  

	(A)
	The
commodity rate shall be as follows: 

	Average Daily

Volumes (Mcf)
 
	 	Commodity

(per Mcf plus fuel)
 

	 	First 10,000	 	$0.44
	 	Next 10,000	 	$0.37
	 	Next 10,000	 	$0.34
	 	Next 10,000	 	$0.32
	
	 	

	40,001 and greater	 	$0.28
	
	 	

GATHERING RATE (continued):    The commodity rate shall be based on the average daily volumes of Gas only for the days of the month in which
Gatherer is otherwise ready, willing and able to take gas in accordance with this Agreement, to be calculated as outlined in the following paragraph of this Appendix "A". 

The
Average Daily Volume shall be calculated by dividing the volume of gas received by Gatherer at each Receipt Point by the number of days in the Month that Gatherer's facilities at such Receipt
Point were operational. The sum of the individual Receipt Point volumes shall then be divided by the number of Receipt Points used in determining the average daily volume. 

	(B)
	The
monthly demand charges shall be calculated as follows: 

A
central compression monthly demand charge of $25,000 shall be paid by Shipper for each operational Central Compression Site which will include one (1) nominal 1680 horsepower
reciprocating compressor unit. Each additional compressor unit required will have a monthly demand charge of $20,000. (Note: Demand charges at Deer Creek Station will be prorated based upon the
percentage of shipper's gas in the total throughput.) Demand fees shall continue as long as the compressor station and units are available and ready for service. 

A
screw compression monthly demand charge of $20,000 shall paid by Shipper for each operational Screw Compression Site which will include one nominal four-hundred (400) horsepower
compressor unit. Each additional screw compressor unit will have a monthly demand charge of $8,000. Demand fees shall continue as long as the compressor station and units are available and ready
for service. 

LIQUID WATER COLLECTED:    Liquid water removed from the gas stream by Gatherer at the compressor station inlet the responsibility of Shipper
to store and dispose of. All other water collected in Gatherer's facilities will be the responsibility of Gatherer. 

RATE ADJUSTMENT:    Effective January 1, 2007, and annually each January 1st thereafter, the monthly demand
and gathering rates shall be adjusted based on the GDP Implicit Price Deflator contained in the Gross Domestic Product, 4th quarter (final) report, published by the U. S.
Department of Commerce, Bureau of Economic Analysis, "GDP Deflator" in March of each year. For purposes of adjusting this contract, the annual rate adjustment percentage ("Escalator") will be
determined by Gatherer each April 1 by calculating the percent of increase or decrease from the previous year's GDP Deflator and the current year's GDP Deflator. 

20

 
APPENDIX "A" (continued)

TO THE

GAS GATHERING AGREEMENT

BETWEEN

BITTER CREEK PIPELINES, LLC

AND

SHIPPER  

FUEL, LOST AND UNACCOUNTED GAS QUANTITY:    The Fuel, Lost and Unaccounted For (FL&U) reimbursement rate shall be based upon the actual fuel
used, lost and unaccounted for. The FL&U reimbursement rate shall be the difference between volumes received at Receipt Point(s) less volumes delivered at the Delivery Point. 

	BITTER CREEK PIPELINES, LLC

"GATHERER"	 	PINNACLE GAS RESOURCES, INC.

"SHIPPER"
	
 By:	
 	

/s/ Paul Hopfauf
	
 	

By:	
 	

/s/ Peter G. Schoonmaker

	
 Name:	
 	

Paul Hopfauf
	
 	

Name:	
 	

Peter G. Schoonmaker

	
 Title:	
 	

Vice President & General Manager
	
 	

Title:	
 	

CEO

	
 Date Signed:	
 	

12-23-2005
	
 	

Date Signed:	
 	

12/27/05

21

 
APPENDIX "A" (continued)

TO THE

GAS GATHERING AGREEMENT

BETWEEN

BITTER CREEK PIPELINES, LLC

AND

SHIPPER  

	QUANECO, L.L.C.

"SHIPPER"	 	DOLPHIN ENERGY CORPORATION

"SHIPPER"
	
 By:	
 	

/s/ Paul J. Mysyk
	
 	

By:	
 	

/s/ Cecil D. Gritz

	
 Name:	
 	

Paul J. Mysyk
	
 	

Name:	
 	

Cecil D. Gritz

	
 Title:	
 	

CEO
	
 	

Title:	
 	

COO

	
 Date Signed:	
 	

1/20/06
	
 	

Date Signed:	
 	

1/16/2006

 This Appendix "A" supersedes and cancels any previously effective APPENDIX "A" to the referenced Gas Gathering Agreement.

22

 
 
 

APPENDIX "B"
  TO THE
  GAS GATHERING AGREEMENT
  BETWEEN
  BITTER CREEK PIPELINES, LLC
  AND
  SHIPPER    
    

EFFECTIVE DATE:    The later of January 1, 2006 or the completion of the initial gathering system pipeline and compression facilities
necessary to begin receipt and delivery of gas. 

CONTRACT NO.:    077028 

RECEIPT POINT(S):    Inlet of Screw Compression Sites. Gas will be measured at the Screw Compressor outlet meter(s). Screw compression fuel
gas will be taken off downstream of the battery discharge flow meter, and the fuel gas flow will be measured. Volume received at each receipt point includes the fuel gas. 

DELIVERY POINT(S):    Outlet meters of central compressor stations including Deer Creek Station and other central compressor stations as
required as production increases. Gas will be delivered into Bitter Creek's high-pressure Sheridan-Landeck pipeline system. 

	BITTER CREEK PIPELINES, LLC

"GATHERER"	 	PINNACLE GAS RESOURCES, INC.

"SHIPPER"
	
 By:	
 	

/s/ Paul Hopfauf
	
 	

By:	
 	

/s/ Peter G. Schoonmaker

	
 Name:	
 	

Paul Hopfauf
	
 	

Name:	
 	

Peter G. Schoonmaker

	
 Title:	
 	

Vice President & General Manager
	
 	

Title:	
 	

CEO

	
 Date Signed:	
 	

12-23-2005
	
 	

Date Signed:	
 	

12/27/05

	QUANECO, L.L.C.

"SHIPPER"	 	DOLPHIN ENERGY CORPORATION

"SHIPPER"
	
 By:	
 	

/s/ Paul J. Mysyk
	
 	

By:	
 	

/s/ Cecil D. Gritz

	
 Name:	
 	

Paul J. Mysyk
	
 	

Name:	
 	

Cecil D. Gritz

	
 Title:	
 	

CEO
	
 	

Title:	
 	

COO

	
 Date Signed:	
 	

1/20/06
	
 	

Date Signed:	
 	

1/16/2006

 This APPENDIX "B "supersedes and cancels any previously effective APPENDIX "B" to the referenced Gas Gathering Agreement.

23

  

 
 

APPENDIX "C"
  TO THE
  GAS GATHERING AGREEMENT
  BETWEEN
  BITTER CREEK PIPELINES, LLC
  AND
  SHIPPER    
    

EFFECTIVE DATE:    The later of January 1, 2006 or the completion of the initial gathering system pipeline and compression facilities
necessary to begin receipt and delivery of gas. 

CONTRACT NO.:    077028 

	NOTICE TYPE
 
	 	GATHERER
 
	 	SHIPPER
 

	CONTRACTS	 	Bitter Creek Pipelines, LLC

P.O. Box 5601

Bismarck, ND 58506-5601

Attn: Nancy Senger

Telephone: (701) 530-1585

Fax: (701) 530-1596	 	Pinnacle Gas Resources, Inc.

1000 Louisiana Suite 1500

Houston, TX 77002

Attn: Gary W. Uhland

Telephone: (713) 328-1080

Fax: (713) 328-1089
	
SCHEDULING	
 	

Bitter Creek Pipelines, LLC

P.O. Box 5601

Bismarck, ND 58506-5601

Attn: Nancy Senger

Telephone: (701) 530-1585

Fax: (701) 530-1596

Email: nancy.senger@wbip.com	
 	

Pinnacle Gas Resources, Inc.

1 E. Alger Suite 206

Sheridan, WY 82801

Attn: Paul Stroud

Telephone: (307) 673-9710

Fax: (307) 673-9711
	
ACCOUNTING	
 	

Bitter Creek Pipelines, LLC

P.O. Box 5601

Bismarck, ND 58506-5601

Attn: Energy Support

Telephone: (701) 530-1580

Fax: (701) 530-1596	
 	

Pinnacle Gas Resources, Inc.

1 E. Alger Suite 206

Sheridan, WY 82 801

Ann: Ron Barnes

Telephone: 307-673-9710

Fax: 307-673-9711
	
PAYMENTS	
 	
BY CHECK	
 	
BY WIRE
	 	 	Bitter Creek Pipelines,

Attn: Accounts Receivable

P.O. Box 5601

Bismarck, ND 58506-5601	 	Bitter Creek Pipelines, LLC

US Bank North Dakota

ABA # 091300023

Account # 163095557142

24

 
APPENDIX "C" (continued)

TO THE

GAS GATHERING AGREEMENT

BETWEEN

BITTER CREEK PIPELINES, LLC

AND

SHIPPER  

	BITTER CREEK PIPELINES, LLC

"GATHERER"	 	PINNACLE GAS RESOURCES, INC.

"SHIPPER"
	
 By: /s/ Paul Hopfauf
	
 	

By: /s/ Peter G. Schoonmaker

	
 Name: Paul Hopfauf
	
 	

Name: Peter G. Schoonmaker

	
 Title: Vice President & General Manager
	
 	

Title: CEO

	
 Date Signed: 12-23-2005
	
 	

Date Signed: 12/27/05

	
QUANECO, L.L.C.

"SHIPPER"	
 	

DOLPHIN ENERGY CORPORATION

"SHIPPER"
	
 By: /s/ Paul J. Mysyk
	
 	

By: /s/ Cecil D. Gritz

	
 Name: Paul J. Mysyk
	
 	

Name: Cecil D. Gritz

	
 Title: CEO
	
 	

Title: COO

	
 Date Signed: 1/20/06
	
 	

Date Signed: 1/16/2006

This APPENDIX "C" supersedes and cancels any previously effective APPENDIX "C" to the referenced Gas Gathering Agreement.

25

  

 
 

APPENDIX "D"
  TO THE
  GAS GATHERING AGREEMENT
  BETWEEN
  BITTER CREEK PIPELINES, LLC
  AND
  SHIPPER    
    

EFFECTIVE DATE:    The later of January 1, 2006 or the completion of the initial gathering system pipeline and compression facilities
necessary to begin receipt and delivery of gas. 

CONTRACT NO:    077028 

SCREW COMPRESSION SITE:    Gatherer is responsible for 100% of the costs associated with the location, design, construction, maintenance and
operation of all facilities downstream of the Interconnect Point(s) to the Delivery Point(s). Shipper agrees to provide road access to the Screw Compression Site(s). In order to ensure timely and
suitable expansion of Gatherer's facilities, Gatherer and Shipper agree to meet periodically to discuss Shipper's field development and production forecasts. The parties will work together and
mutually agree upon the location of future Screw Compression Site(s) and the time in which such site(s) must be constructed and operational in order to accommodate Shipper's gas from expanding
development. Shipper shall provide for access by Gatherer to Receipt Point(s). Shipper shall provide for access road(s) for Receipt Point(s) and all maintenance of said road(s). For those Right of Way
(ROW) areas where common facilities are installed, Shipper will provide for all maintenance of said ROW areas. 

        OPERATING PRESSURE / VOLUME OBLIGATION:    Gatherer agrees to use its best efforts to construct and operate its facilities in a
mariner to maintain operating pressures at or below the levels specified or flows at or above those specified for each Receipt Point (specific pressures defined by requested MDQ flow and pressure
level in Appendix A attached hereto). In those instances when the actual average monthly operating pressure exceeds the designated level and the actual average monthly flow is below the
designated level for a battery facility, Gatherer shall initiate improvements to bring the operating pressure below or the flow above the designated level. If the average
monthly pressure exceeds the designated level and the average monthly flow is less than the designated level for more than two consecutive months, then Shipper's commodity gathering rate for all gas
that did flow through
the restricted location will be reduced by fifty percent (50%) beginning with the second month of non-compliance until compliance is achieved. The above commodity rate reduction will not
be applicable during times in which new production being brought on does not coincide with existing horsepower available at a given battery location provided that Shipper and Gatherer mutually agree
upon an operational plan to bring pressures back within desired specifications. 

The
Gathering Rate adjustments will remain until the monthly average pressure is at or below the Pressure Obligation. Gatherer will have a pressure transducer installed at the compressor suction as
defined in Appendix "A" attached hereto in order to get accurate pressure information. This pressure information will be provided to Shipper electronically as frequently as possible but not
less then once every twenty-four (24) hours. 

RUNTIME OBLIGATION:    If Gatherer is unable to meet the Operating Pressure / Volume Obligation as defined above, then Gatherer shall make a
payment to Shipper or credit Shipper with the applicable dollar amount as set forth in the table below for each location/unit beginning in the month in which the obligation is not met: 

	Actual Monthly Runtime % at the location/unit
 
	 	Central Compressor Unit
	 	Screw Compressor Unit

	Less than 95% but greater than or equal to 90%	 	50% reduction in demand fees	 	504% reduction in demand fees
	Less than 90%	 	75% reduction in demand fees	 	75% reduction in demand fees

Runtime
percentage for each site shall be computed as follows: 

Total
of hours run by all compressor units at the site / hours in the month × number of units at the site 

26

 
APPENDIX "D" (continued)

TO THE

GAS GATHERING AGREEMENT

BETWEEN

BITTER CREEK PIPELINES, LLC

AND

SHIPPER  

The
Runtime Obligation payment or credit for the Central Compressor Site(s) shall apply only if the Operating Pressure / Volume Obligation for one or more of the screw compressor sites is
not met. 

OBLIGATION EXCLUSION:    The "Operating Pressure /Volume Obligation" and "Runtime Obligation"
sections of this Appendix "D" shall not apply during times when Gatherer suspends receipt of gas at Interconnection Point(s) due to failure of Shipper's gas to meet the quality specifications
as set forth in Article IX of this Agreement or if Shipper requests modifications or additions at Compression Sites that require downtime. 

	BITTER CREEK PIPELINES, LLC

"GATHERER"	 	PINNACLE GAS RESOURCES, INC.

"SHIPPER"
	
 By: /s/ Paul Hopfauf
	
 	

By: /s/ Peter G. Schoonmaker

	
 Name: Paul Hopfauf
	
 	

Name: Peter G. Schoonmaker

	
 Title: Vice President & General Manager
	
 	

Title: CEO

	
 Date Signed: 12-23-2005
	
 	

Date Signed: 12/27/05

	
QUANECO, L.L.C.

"SHIPPER"	
 	

DOLPHIN ENERGY CORPORATION

"SHIPPER"
	
 By: /s/ Paul J. Mysyk
	
 	

By: /s/ Cecil D. Gritz

	
 Name: Paul J. Mysyk
	
 	

Name: Cecil D. Gritz

	
 Title: CEO
	
 	

Title: COO

	
 Date Signed: 1/20/06
	
 	

Date Signed: 1/16/2006

This APPENDIX "D "supersedes and cancels airy previously effective APPENDIX "D "to the referenced Gas Gathering Agreement.

27

 
 
 

APPENDIX "E"
  TO THE
  GAS GATHERING AGREEMENT
  BETWEEN
  BITTER CREEK PIPELINES, LLC
  AND
  SHIPPER    
    

28

 

	 "BITTER CREEK. PIPELINES"
 LAND DESCRIPTION	 	"CANTERA"
 LANDS SUBJECT TO CANTERA OPTION
	
 T2N—R49E	
 	

T2S—R44E	
 	

T6S—R42E	
 	

T6S—R43E (SEC. 32)
	 T2N—848E	 	T2S—R43E	 	T6S—R41E	 	T7S—R43E
	 T2N—R47E	 	T2S—R42E	 	T6S—R40E	 	T7S—R42E
	 T2N—R46E	 	T2S—R41E	 	T6S—R39E	 	T7S—R40E (SEC. 32)
	 T2N—R45E	 	T2S—R40E	 	T6S—R38E	 	T8S—R45E (W/2, SEC. 10 & 15)
	 T2N—R44E	 	T2S—R39E	 	T6S—R37E	 	T8S—R44E
	 T2N—R43E	 	T2S—R38E	 	T7S—R44E	 	T8S—R43E
	 T2N—R42E	 	T2S—R37E	 	T7S—R43E	 	T8S—R42E
	 T2N—R41E	 	T3S—R44E	 	T7S—R42E	 	T8S—R41E (E/2)
	 T2N—R40E	 	T3S—R43E	 	T7S—R41E	 	T8S—R3 8E (SEC. 25)
	 T2N—R39E	 	T3S—R42E	 	T7S—R40E	 	T9S—R45E (SEC. 4)
	 T2N—R38E	 	T3S—R41E	 	T7S—R39E	 	T9S—R44E
	 T2N—R37E	 	T3S—R40E	 	T7S—R38E	 	T9S—R43E
	 TIN—R49E	 	T3S—R39E	 	T7S—R37E	 	T9S—R42E
	 TIN—R48E	 	T3S—R38E	 	T7.5S—R41E	 	T9S—R41E
	 TIN—R47E	 	T3S—R37E	 	T7.5S—R40E	 	 
	 TIN—R46E	 	T4S—R44E	 	T8S—R44E	 	 
	 TIN—R45E	 	T4S—R43E	 	T8S—R43E	 	 
	 TIN—R44E	 	T4S—R42E	 	T8S—R42E	 	 
	 TIN—R43E	 	T4S—R41E	 	T8S—R41E	 	 
	 TIN—R42E	 	T4S—R40E	 	T8S—R40E	 	 
	 TIN—R41E	 	T4S—R39E	 	T8S—R39E	 	 
	 TIN—R40E	 	T4S—R38E	 	T8S—R38E	 	 
	 TIN—R39E	 	T4S—R37E	 	T8S—R37E	 	 
	 TIN—R38E	 	T5S—R44E	 	T9S—R44E	 	 
	 TIN—R37E	 	T5S—R43E	 	T9S—R43E	 	 
	 TIS—R44E	 	T5S—R42E	 	T9S—R42E	 	 
	 TIS—R43E	 	TSS—R41E	 	T9S—R41E	 	 
	 TIS—R42E	 	T5S—R40E	 	T9S—R40E	 	 
	 TIS—R41E	 	T5S—R39E	 	T9S—R39E	 	 
	 TIS—R40E	 	T5S—R38E	 	T9S—R38E	 	 
	 TIS—R39E	 	T5S—R37E	 	T9S—R37E	 	 
	 TIS—R38E	 	T6S—R44E	 	T10S—R43E	 	 
	 TIS—R37E	 	T6S—R43E	 	T10S—R42E	 	 

29

QuickLinks

Exhibit 10.6

GAS GATHERING AGREEMENT Between BITTER CREEK PIPELINES, LLC "GATHERER" and Pinnacle Gas Resources, Inc Quaneco L.L.C. and Dolphin Energy Corporation Collectively "SHIPPER" LOW PRESSURE FIELD GATHERING CONTRACT #
077028

INDEX

GAS GATHERING AGREEMENT

RECITALS

ARTICLE I DEFINITIONS

ARTICLE II GATHERING AND COMPRESSION SERVICE

ARTICLE III TERM OF AGREEMENT

ARTICLE IV GATHERING RATES

ARTICLE V QUANTITY

ARTICLE VI FACILITIES

ARTICLE VII MEASUREMENT, METER EQUIPMENT AND TESTING

ARTICLE VIII PRESSURES

ARTICLE IX QUALITY

ARTICLE X BILLING AND PAYMENT

ARTICLE XI TAXES AND ROYALTY

ARTICLE XII NOTICES AND PAYMENT INFORMATION

ARTICLE XIII CONTROL AND POSSESSION

ARTICLE XIV TITLE AND AUTHORITY

ARTICLE XV FORCE MAJEURE

ARTICLE XVI INDEMNIFICATION

ARTICLE XVII ASSIGNMENT

ARTICLE XVIII ATTORNEY-IN-FACT

ARTICLE XIX INTERPRETATION AND CONTROLLING LAW; CONSENT TO VENUE; JOINT AND SEVERAL LIABILITY

ARTICLE XX REGULATION

ARTICLE XXI WAIVER

ARTICLE XXII MODIFICATIONS AND AMENDMENTS

ARTICLE XXIII AGREEMENTS BEING SUPERSEDED

ARTICLE XXIV MISCELLANEOUS

APPENDIX "A" TO THE GAS GATHERING AGREEMENT BETWEEN BITTER CREEK PIPELINES, LLC AND SHIPPER

APPENDIX "B" TO THE GAS GATHERING AGREEMENT BETWEEN BITTER CREEK PIPELINES, LLC AND SHIPPER

APPENDIX "C" TO THE GAS GATHERING AGREEMENT BETWEEN BITTER CREEK PIPELINES, LLC AND SHIPPER

APPENDIX "D" TO THE GAS GATHERING AGREEMENT BETWEEN BITTER CREEK PIPELINES, LLC AND SHIPPER

APPENDIX "E" TO THE GAS GATHERING AGREEMENT BETWEEN BITTER CREEK PIPELINES, LLC AND SHIPPER

Source: [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00110-of-00352.parquet"}, [{"source": "alea-institute/alea-institute/kl3m-data-edgar-agreements/train-00110-of-00352.parquet"}]]