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Exhibit 10.9  

 
 

PARTICIPATION RIGHTS AGREEMENT    
    
    BETWEEN    
    
    VENOCO, INC.,
  AS VENOCO,    
    
    AND    
    
    MARQUEZ ENERGY, LLC,
  AS MARQUEZ    
    
    AS OF
SEPTEMBER 1, 2004    
    

   PARTICIPATION RIGHTS AGREEMENT  

        THIS PARTICIPATION RIGHTS AGREEMENT is made as of September 1, 2004 ("Agreement") between
VENOCO, INC., a Delaware corporation ("Venoco"), with a place of business at 5464 Carpinteria Avenue, Carpinteria, California 93013, and MARQUEZ
ENERGY, LLC, a Colorado limited liability company ("Marquez"), with a place of business at 370 17th Street, Suite 3260,
Denver, Colorado 80202. 

RECITALS:  

        WHEREAS, Venoco desires to grant to Marquez and Marquez desires to acquire from Venoco, on the terms and conditions set forth in this Agreement, the right to
participate in new wells and recompletions with respect to certain interests and operating rights in certain oil and gas lease(s), agreement(s), contract(s), real property, personal property, and
equipment pertaining to those certain oil and gas fields located in Glenn, Sutter and Colusa Counties, California, known and referred to between the parties as the Willows and Grimes Fields; 

        NOW,
THEREFORE, for good and valuable consideration, including without limitations the mutual covenants, herein contained, Venoco and Marquez agree as follows: 

ARTICLE 1. EFFECTIVE TIME  

        The ("Effective Time") of the sale and purchase provided for in this Agreement shall be 7:00 a.m., local
time at the location of the Interests (as defined below) on the date first set forth above. 

ARTICLE 2. INTERESTS AND PARTICIPATION  

2.01    The Interests.    Subject to the terms, conditions, reservations, and
exceptions specified in this Agreement, Venoco shall transfer and Marquez shall acquire, as of the Effective Time, the right to participate, as further defined in Paragraph 2.04 of this
Agreement, in the exploration and development of Venoco's interest in and to the following assets described in Subsections 2.01(a) through 2.01(e) below (collectively, the
"Interests"): 

	(a)
	The
oil, gas and other mineral leasehold interests described in Exhibit "A", attached hereto and made part hereof, insofar as such cover and affect the lands described in Exhibit "A"
(the "Real Property"), together with Venoco's interest in any pooled communitized, or unitized acreage derived by virtue of Venoco's ownership of the
Real Property;

	(b)
	To
the extent reasonably possible without material detriment to Venoco's current operation and proven production, necessary to carry out the intent of this Agreement, the use of wells
in which Marquez participates and the use of equipment and facilities currently located on or under the Real Property and used directly and exclusively in the operation of the Real Property (the
"Equipment"), including, but not limited to, pumps, well equipment (surface and subsurface),, lines and facilities, sulfur recovery facilities,
compressors, back up or spare compressors, compressor stations, dehydration facilities, treating facilities, pipeline gathering lines, flow lines, and transportation lines (to the extent they are
owned by Venoco), valves, meters, separators, tanks, tank batteries and other fixtures;

	(c)
	To
the extent transferable by Venoco without additional cost or liability, a proportionate interest in all contracts and agreements related to the applicable well or wells in which
Marquez participates concerning the Interests, including, but not limited to, unit agreements, pooling agreements, area of mutual interest agreements, farmout agreements, farmin agreements,
participation agreements, development agreements, exploration agreements, road use agreements, operating agreements and gas balancing agreements; 

i

 

	(d)
	To
the extent transferable by Venoco without additional cost or liability, and to the extent applicable to a well or wells in which Marquez participates, a proportionate interest in
all surface use agreements, easements, rights-of-way, licenses, authorizations, permits, and similar rights and interests applicable to, or used or useful in connection with
the applicable well or wells excluding flowlines and other surface related facilities.: and

	(e)
	To
the extent permitted by existing licenses without additional cost or liability to Venoco, reasonable access to all geophysical, seismic and/or other technical data used or useable
in connection with the operation and/or development of the Interests. In the event Venoco discovers that certain technical data pertaining to the Interests not furnished to Marquez hereunder exists
and is in the possession or control of Venoco, Buyer shall have the right to purchase a non-exclusive license to such data at reasonable prevailing market rates. 

2.02    Computers and Equipment.    Subject to the terms, conditions, reservations,
and exceptions specified in this Agreement, Venoco shall sell and Marquez shall purchase, as of the Effective Time, at reasonable prevailing market rates, all of Venoco's interest in trucks and
maintenance equipment and to the computer equipment consisting of two Hewlett Packard desktop computers, one located in the Willows office and the other in the Grimes office, and specialized
electronic gas-measurement (EGM) software used in the monitoring of well functions in the Willows and Grimes Fields, and related equipment located in the Grimes field office. An inventory
of such equipment and the price to be paid is attached hereto as Exhibit B . 

2.03    Excluded Assets.    The following are expressly excluded from the Interests
and the sale and purchase thereof contemplated by this Agreement: 

	(a)
	Computer
equipment and software, except computer equipment consisting of two Hewlett Packard desktop computers, one located in the Willows office and the other in the Grimes office;;

	(b)
	All
transmission pipelines, gathering systems, equipment, facilities and easements and rights-of-way located on or used in connection with the Interests.;

	(c)
	Any
concurrent interests in (and/or the use of) any surface use agreements, easements, rights-of-way, licenses, authorizations, permits and similar rights
relating to the Real Property where Assignor or any of its affiliates retains any rights or interests; and

	(d)
	Injection
and salt water disposal wells; provided that, Marquez shall have access to such wells upon reimbursement to Venoco of reasonable disposal and injection costs. 

2.04    Participation Rights.    Marquez shall have the right to receive an
assignment of an interest in all new wells and new recompletions, as defined below, located on the Real Property as follows: 

	(a)
	New Wells.    New Well shall mean any well proposed to be drilled or re-entered on the Real Property after the
Effective Date hereof other than a well to be proposed by Venoco at the MJ-60 LW # 1. With respect to any New Wells proposed to be drilled on the Real Property or on lands pooled with the
Real Property in which Marquez elects to participate, Marquez shall be assigned an interest equal to 50% of the Interests currently owned by Venoco in the well bore of such New Well and Marquez shall
be obligated to pay its proportionate share of the cost of such New Well. All such assignments shall be made within Fifteen days of the date any such New Well is spud. To the extent there are any
liens or encumbrances, other than Permitted Encumbrances, on the Real Property involved, all such assignments shall be accompanied by releases of any such liens or encumbrances as they relate to the
wellbore interest to be assigned. To the extent either party does not participate in any New Well such party will be subject to the independent penalty provisions of three hundred percent or other 

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relevant
penalty provisions as implemented pursuant the operative provisions in any Joint Operating Agreement governing operations on the New Well. 

	(b)
	New Recompletions.    New Recompletion means a recompletion of a presently existing well, excluding the three PUD locations
drilled by Venoco in 2004. Recompletions in the three PUD wells drilled by Venoco in 2004 (the 49-SLLW#1, the 49-60 LW#2 and the 49-8) and the fourth PUD well to be
drilled by Venoco (the 60-MJLW#1) shall be solely for the account of Venoco. With respect to New Recompletions in any presently existing well which does not contain any reserves classified
as proven reserves by Ryder Scott Company in its reserve report covering Venoco's gas and oil reserves dated as of December 31, 2003 (the "Reserve
Report"), Marquez shall be assigned an interest equal to 25% of the Interests currently owned by Venoco in the well bore of any such well effective on the date New Recompletion
operations are commenced. Each Party shall pay its proportionate share of the cost of such New Recompletions.

	(c)
	New Recompletions (Commingled Zones).    In the event New Recompletion operations are proposed on a well which contains
Venoco proved developed or proved developed non-producing reserves as set forth in the Reserve Report in a zone or zones which will be produced concurrently with any new recompletion
zone(s), the costs, production, interests and adjustments thereto, if any, shall be accommodated as follows: 

        (1)   Venoco
shall assign to Marquez Twenty Five Percent of its interest in the wellbore of the applicable well to the end that the current interest of Venoco will be shared
Seventy Five Percent (75%) Venoco and Twenty Five Percent (25% Marquez. 

        (2)   The
decline curve for each Venoco proved producing zone and/or proved non producing zone, if applicable, in the relevant well to be recompleted will be determined based
upon the Ryder Scott Reserve Report unless such wells were recompleted subsequent to the Ryder Scott report and prior to the Effective Date. These wells will have a decline curve agreed upon between
Marquez and Venoco. If agreement cannot be reached, Ryder Scott will be the arbitrating party and make the final determination. These wells include: Willows wells; Willows MJ 07, Knight Unit 02,
Wineland 81-08, Hill Elvidge 02 and Grimes well; Cameron Unit 21-22-LW1. 

        (3)   The
combined Venoco/Marquez production from all zones in the recompleted well will then first be allocated on an ongoing monthly basis to Venoco in an amount equal to
the decline curve amount for each Venoco proved producing and/or proved non producing zone. After this amount has been allocated and met, all Venoco/ Marquez combined production will be shared in the
original owned percentages of 75% Venoco and 25% Marquez. 

        (4)   Each
party will be entitled to market its share of the natural gas from the well, whether such natural gas be allocated gas to meet decline curves or shared natural gas
after decline curve amounts have been met. 

        (5)   If
the combined gas stream from the applicable well is not sufficient to meet the decline curve quantities in the Venoco proved producing and/or proved non producing
zones for the well, Venoco shall have an option exercisable on Thirty (30) days written notice (a put) to require Marquez to cash balance the Ryder Scott reserves for its original zones in such
well (less production from December 31, 2003 to the date of closing of purchase) but all remaining costs and revenues from the well will continue to be shared 75% Venoco and 25% Marquez on an
ongoing basis. 

        (6)   The
cash balance price shall be based upon Five (5) year strip pricing, PG&E City gate less the current "firm" Silverado transportation and less the current PG&E
fuel/shrinkage factor. After the 5-year period, prices will be held constant, with operating costs escalating 

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Two
Percent (2%) per year. Future cash flows will be discounted at Ten Percent (10) per annum. 

	(d)
	All
such wellbore assignments pursuant to this clause shall be made within thirty days of the date operations on such New Recompletion are commenced. To the extent there are any liens
or encumbrances on the Real Property involved, other than Permitted Encumbrances, all such assignments shall be accompanied by releases of any such liens or encumbrances. To the extent Venoco does not
participate in any New Recompletion it will be subject to penalty provisions of three hundred percent or other relevant penalty provision as implemented pursuant to the operative provisions in any
Joint Operating Agreement governing operations on the New Recompletion. If a proposed New Recompletion could reduce Venoco's recovery from the current production and/or Ryder Scott proven reserves it
shall be Venoco's sole decision to allow the recompletion to proceed or not.

	(e)
	Participation
and earning rights herein shall, to the extent not inconsistent with this Agreement, be subject to the terms of existing Joint Operating Agreements including
preferential rights to purchase, if any, as set forth in such agreements. To the extent there are any inconsistencies, the terms of this Agreement shall govern.

	(f)
	Without
the consent of Venoco, Marquez shall not be entitled to propose a New Well in the Grimes Field which has a bottom hole location within 750 feet from the bottom location of any
well included in the Reserve Report if in the reasonable opinion of Venoco such New Well would interfere with or materially diminish production from an adjacent well or wells from which Venoco
produces or has the ability to produce. Without the consent of Venoco, Marquez shall not be entitled to propose a New Well in the Willows Field which has a bottom hole location within a fault block
containing any well included in the Reserve Report if in the reasonable opinion of Venoco such New Well would interfere with or materially diminish production from a well or wells from which Venoco
produces or has the ability to produce. Without the consent of Venoco, Marquez shall not be entitled to propose a New Recompletion in a well in which Venoco is producing or has the ability to produce
proved reserves as set forth in the Reserve Report. Venoco shall have the right to propose new wells or recompletions in which Marquez may or may not participate. If either party elects to
non-consent the operation, such party shall be entitled to the independent penalty provisions of the applicable operating agreement (usually 100% for surface equipment and 300% for capital
costs). Marquez shall also conform to existing set backs in active agreements with Cimarex Energy and Sunset Exploration.

	(g)
	The
parties to this Agreement shall meet from time to time but not less often than quarterly to discuss the scope, and timing of projected costs of New Wells and New Recompletions in
an effort to facilitate priorities and coordinate planning and scheduling of operations. Actual proposals for New Wells or New Recompletions shall be made in accordance with the terms and conditions
of the applicable operating agreement, including but not limited to, written notice of the work to be performed, the location, proposed depth, objective zone and the estimated cost of the operation.

	(h)
	Nothing
contained herein is intended to grant Marquez the right to participate in the development of, or production from, Proved Reserves, nor to interfere with or impede the rights
of Venoco to produce its Proved Reserves. In order to satisfy any such concern the parties agree as follows: Should Venoco, within one year of completion by Marquez of a New Well or New Recompletion,
be able to establish beyond reasonable doubt that such New Well or New Recompletion is materially draining the proven reserves set forth in the Reserve Report for a Venoco well, then the parties shall
negotiate an allocation of part of Marquez's production from such New Well or New Recompletion to Venoco intended to make Venoco whole; provided however that any such allocation shall never exceed 20%
of Marquez net working interest in any such New Well. 

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   2.05    Permitted Encumbrances.    The sale and purchase of the Interests
contemplated hereby shall, in addition to being subject to the terms of this Agreement, be made expressly subject to the following ("Permitted
Encumbrances"): 

	(a)
	the
contracts and agreements affecting the Real Property or any part thereof, together with any and all existing royalties, overriding royalties, and other liens, burdens,
encumbrances and/or interests upon or in the Real Property or any part thereof that are described in Exhibit A hereto or in title opinions, reports, data or information provided to Marquez, or
otherwise disclosed in writing by Venoco to Marquez prior to the execution of this Agreement; provided however that no mortgage or deed of trust intended to secure any debt of Venoco shall be deemed a
Permitted Encumbrance pursuant to this Section 2.05;

	(b)
	all
other contracts, agreements, liens, burdens, encumbrances, interests and other matters covering or affecting the Interests as of the Effective Time that were not created by,
through or under Venoco appearing in the public records of state, federal and/or local agencies having or asserting jurisdiction over any of the Interests;

	(c)
	all
matters visible and apparent upon an inspection of the Interests or that would be revealed by a true and correct survey;

	(d)
	all
inchoate liens and encumbrances securing payments to mechanics and materialmen, taxes or assessments that are not yet delinquent, or if delinquent, that are being contested in
good faith;

	(e)
	all
easements, rights-of-way, servitudes, permits, surface leases, surface use restrictions and other surface uses and impediments on, over or in respect of
the Real Property which are not such as to have a material adverse effect thereon; and

	(f)
	all
rights, reserved to or vested in any municipality or governmental, tribal, statutory or public authority. 

ARTICLE 3. CONSIDERATION  

3.01    Consideration.    The consideration for the Interests shall be comprised of
a release of all claims of Marquez against Venoco as of the Effective Date, which claims have been estimated by Marquez to have a fair value of at least Six Million, Eight Hundred Thousand Dollars ($
6,800,000) (the "Sale Consideration"). The Sale Consideration shall be tendered by Marquez to Venoco by delivery of a written release of all such
claims, in form and substance satisfactory to Venoco, concurrent with execution of this Agreement. 

3.02    Throughput Fees.    Marquez shall pay Venoco throughput fees for use of
Venoco's existing gas transmission systems, gas gathering facilities and production equipment (including pipelines, dehydrators, meters and compressors) not included in this sale for Marquez's net
share of natural gas production from New Wells or New Recompletions. Such fees are initially estimated to be $0.27 in the Grimes Field and $0.16 in the Willows Field per mcf of net gas produced to
Marquez's interest from New Wells and New Recompletions and shall be payable monthly within thirty days of the end of each production month. At the end of each calendar year, the parties shall
evaluate the throughput fee and adjust the same to actual costs if the estimated fee is 10% over or under actual costs. Actual costs for purposes of this paragraph shall be based upon the following:
(a) the current charges allocated to other non-operators under the operative Joint Operating Agreement and Accounting Procedure which includes an amount equal to 80% of the
estimated equivalent commercial annual rental rate for compressors and dehydrators allocated to each well on a throughput basis (currently an aggregate fee of $0.22 in Grimes and $0.11 in Willows and
(b) a capital cost component for the value and use of the pipelines and meters of $0.05 per mcf of net gas produced to Marquez's interest from the well or wells.    To the extent
the throughput fees paid to Venoco for the completed period exceed a 10% variance 

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over
or under such actual costs, the fees shall be adjusted for the subsequent calendar year such as to best estimate such actual costs for the subsequent calendar year. Any over or under payment for
the just completed period shall be recaptured by a per mcf charge or credit for the new period intended to result in total actual costs for all periods being equal to total throughput fees for all
periods at the end of the new calendar year. Marquez shall pay its proportionate share of incremental costs to add new production equipment, if required, and the cost or depreciation of any such new
equipment shall not be utilized in determining Venoco's actual costs for purposes of determining throughput fees. Venoco, unless the parties otherwise agree, shall not be obligated to provide Marquez
access to existing facilities if such access results in reduced production from Venoco's production; provided that Marquez may gain access to part or a portion of such facilities related to an
applicable well or wells in the event that either a) it installs equipment to remedy Venoco's production impairment or b) a New Recompletion operation is performed and Venoco utilizes
existing facilities to produce and market Venoco's share of production from the well attributable to the New Recompletions than Marquez may also utilize said existing facilities for it's share of
production from the well. In addition, Marquez shall serve as field operator of such facilities as set forth in Article 10 of this Agreement. 

ARTICLE 4. DUE DILIGENCE  

4.01    Venoco's Proprietary Data.    In the interest of full disclosure without any
representation as to its meaning or validity, Venoco has heretofore provided Marquez, with proprietary, subjective, confidential, or interpretative data, reports, information or projections concerning
the past or present production of hydrocarbons or the quality and quantity, if any, of the hydrocarbon reserves or the environmental condition of the Interests (collectively,
"Proprietary Data"). VENOCO HEREBY EXPRESSLY DISCLAIMS ALL RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF THE PROPRIETARY
DATA, AND MARQUEZ SPECIFICALLY ACKNOWLEDGES AND AGREES THAT THE PROPRIETARY DATA IS PROPRIETARY, SUBJECTIVE, CONFIDENTIAL AND INTERPRETATIVE, AND THAT MARQUEZ WILL NOT AND/OR HAS NOT HERETOFORE RELIED
ON THE PROPRIETARY DATA FOR ANY PURPOSE WHATSOEVER, INCLUDING BUT NOT LIMITED TO THE CALCULATION OF ITS OWN PROJECTIONS CONCERNING THE QUALITY AND QUANTITY, IF ANY, OF HYDROCARBON RESERVES CONTAINED
IN THE INTERESTS OR ITS DECISION TO PURCHASE THE INTERESTS.

4.02    Venoco's Non-Proprietary Information.    Venoco shall make
available to Marquez during normal business hours at Venoco's offices all material non-proprietary files, records, documents and non-interpretive data in Venoco's possession
relating to the Interest, including but not limited to, lease, land, title and division order files (including any available abstracts of title, title opinions and title curative documents),
contracts, correspondence, permitting files, engineering, production and well files and well logs. Venoco shall not be obligated to perform any additional title work, and Venoco shall not be obligated
to make any existing abstracts and title opinions current. NO WARRANTY OF ANY KIND IS MADE BY VENOCO AS TO THE INFORMATION SO SUPPLIED OR WITH RESPECT TO INTERESTS TO WHICH THE
INFORMATION RELATES, AND MARQUEZ EXPRESSLY AGREES THAT ANY CONCLUSIONS DRAWN THEREFROM SHALL BE THE RESULT OF ITS OWN INDEPENDENT REVIEW AND JUDGEMENT.

ARTICLE 5. THIRD PARTY RIGHTS AND CONSENTS  

        It is understood by Marquez that certain of the Interests are or may be subject to (1) preferential purchase rights, rights of first refusal and similar
option rights in third parties to purchase a part of the Interests (collectively, "Preferential Rights") or (2) lessors' approvals or other
consents to transfer any part of the Interests (other than governmental approvals and other consents routinely acquired after a transfer) including the non-transferability requirement of
any license, permit, right-of-way, pipeline franchise or easement, or a requirement for renegotiation upon transfer of ownership (collectively, 

vi

 

"Consents to Assign"), including the Preferential Rights and Consents to Assign set forth in Exhibit "C" and "D" to this Agreement which constitute all
Preferential Rights and Consents to Assign affecting the Interests of which Venoco is aware. This Agreement shall be subject to the terms and conditions of all such Preferential Rights and Consents to
Assign. The Consents to Assign are listed at Exhibit "C". Marquez acknowledges that Buyer has previously obtained necessary Lessor consents to transfer to Marquez and Marquez agrees that, to the
extent such consents are material and reasonably applicable to this transaction Marquez shall waive the requirement of further Lessor consents as to the applicable leases. Promptly following the
execution of this Agreement, Venoco shall use its best efforts to notify the holders of the Preferential Rights listed on Exhibit "D" and Consents to Assign which have not previously been receive or
waived, of the proposed transfer of the affected properties and the amount of the Sale Price allocated to such properties as set forth at Exhibit "E". If any third party exercises a valid Preferential
Right the affected properties shall be excluded from the Interests and all proceeds paid to Venoco from the exercise of any Preferential Right shall be paid from Venoco to Marquez within ten days of
receipt of said proceeds by Venoco.    Venoco shall promptly notify Marquez of the exercise of any Preferential Right and of the lapse of any applicable period of time within which a
Preferential Right must be exercised.    If a material Consent to Assign is not obtained then, unless it is waived by Marquez or it is evident that it will be routinely obtained
thereafter, Venoco will continue to use reasonable good faith efforts to obtain said Consent to Assign. In the event any successful New Well is drilled or successful New Recompletion operation is
conducted upon leases in which a Consent to Assign is required prior to Venoco conveying to Marquez a recordable interest in such well, Venoco agrees, at its option to either hold the applicable
interest in trust for the benefit of Marquez or to enter into an agreement with Marquez to pay to Marquez amounts equal to the economic interest to which Marquez would be entitled if a recordable
assignment of the appropriate ownership interest in such well had been tendered to Marquez. 

ARTICLE 6. REPRESENTATIONS AND WARRANTIES  

6.01    Exclusivity of Representations.    THE EXPRESS
REPRESENTATIONS OF VENOCO CONTAINED IN THIS ARTICLE 6 OR OTHERWISE STATED IN THIS AGREEMENT ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER REPRESENTATIONS, EXPRESS, IMPLIED, STATUTORY, OR OTHERWISE.
FURTHERMORE, THE REPRESENTATIONS CONTAINED HEREIN SURVIVE FOR A PERIOD OF ONE YEAR. 

6.02    Mutual Representations.    Each party represents to the other that: 

	(a)
	it
is a corporation or limited liability company duly organized, validly existing and in good standing under the laws of the State of its incorporation or formation, and is duly
qualified to do business in the States in which the Interests are located;

	(b)
	it
has all authority necessary to enter into this Agreement and to perform all its obligations hereunder;

	(c)
	its
execution, delivery and performance of this Agreement and the transactions contemplated hereby will not: (i) violate or conflict with any provisions of its certificate of
Incorporation, by-laws or other governing documents; (ii) 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 it is a party or by which it is bound; or (iii) violate or conflict with any applicable judgment, decree, order, permit, law, rule or regulation;

	(d)
	this
Agreement has been duly executed and delivered on its behalf and delivered. This Agreement, and all such documents and instruments shall constitute legal, valid and binding
obligations enforceable in accordance with their respective terms, except to the extent enforceability may be affected by bankruptcy, reorganization, insolvency or similar laws affecting creditors'
rights generally; and 

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	(e)
	it
has been represented by legal counsel of its own selection who has reviewed this Agreement. 

6.03    Third Party Fees and Costs.    Except as set forth herein, neither party has
incurred any obligation or liability, contingent or otherwise, for legal, broker's, finder's or other fees and costs in connection with this Agreement in respect of which the other party may have any
responsibility; and any such obligation or liability that might exist shall be the sole obligation of the party whose action gave rise thereto. 

6.04    Further Distribution.    Marquez warrants and represents to Venoco that
Marquez is acquiring the Interests for its own account and not with the intent to make a distribution thereof within the meaning of the Securities Act of 1933, as amended, and the rules and
regulations thereunder or distribution thereof on violation of any other applicable securities laws. 

6.05    Venoco's Representations.    Except as expressly disclaimed in
Article 7 hereof, Venoco represents the following to be to the best of its knowledge and belief. For the purpose of this Agreement, references to the "best of its knowledge and belief" of
Venoco means the actual and current knowledge of Venoco's officers and employees, without any duty of investigation by such officers and employees. 

	(a)
	Venoco
has full power and right to sell and convey the right, title and interest provided for in this Agreement in and to the Interests to Marquez, subject to any Preferential Rights
or Consents to Assign that may exist with respect thereto.

	(b)
	Venoco
has complied in all material respects with the provisions and requirements of all laws, orders, regulations and rules issued or promulgated by governmental authorities having
jurisdiction with respect to the Interests operated by Venoco, and has filed for and obtained all material governmental certificates, permits and other authorizations necessary for Venoco's current
operation of the interests other than permits, consents and authorizations required for the sale and transfer of the Interests to Marquez which shall be the responsibility of Marquez.

	(c)
	Venoco
has not defaulted or violated any material agreement to which Venoco is a party or any obligation to which Venoco is bound affecting or pertaining to the Interests other than
as disclosed hereunder or on any exhibit attached hereto.

	(d)
	There
are no suits, actions, claims, investigations or any legal, administrative or arbitration proceedings pending, affecting or pertaining to the Interests, other than as disclosed
hereunder or on any exhibit attached hereto.

	(e)
	The
oil and gas leases included within the Interests are in full force and effect.

	(f)
	Other
than as set forth in Exhibit F, no suit, action or other proceeding by a third party or a governmental authority is pending which seeks substantial damages, fines or
other penalties from either party in connection with the Interests, or seeks to restrain, enjoin or otherwise prohibit the consummation of the transactions contemplated by this Agreement.

	(g)
	The
wells and operations included in the Interests have been operated and conducted in material compliance with all material applicable environmental laws, and there has been no
material contamination of groundwater, surface water or soil on the Interests resulting from Venoco's or any third party's operations which require remediation under applicable environmental laws but
which has not been remediated. 

ARTICLE 7. DISCLAIMER OF REPRESENTATIONS AND WARRANTIES  

7.01    Special Warranty of Title and Disclaimer of Other
Warranties.    SUBJECT TO THE PERMITTED ENCUMBRANCES, VENOCO SHALL WARRANT AND DEFEND TITLE TO THE INTERESTSTO BE ASSIGNED UNTO MARQUEZ BY,
THROUGH AND UNDER VENOCO, BUT NOT OTHERWISE,  

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 WITH FULL RIGHTS TO SUBSTITUTION AND SUBROGATION OF VENOCO'S RIGHTS IN AND TO ALL COVENANTS, REPRESENTATIONS AND WARRANTIES BY OTHERS HERETOFORE GIVEN OR MADE WITH RESPECT TO THE INTERESTS. EXCEPT FOR
THE FOREGOING, THE TRANSACTION CONTEMPLATED HEREBY SHALL BE AS IS, WHERE IS WITHOUT ANY WARRANTY OR REPRESENTATION OF TITLE, EITHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND WITHOUT ANY EXPRESS,
IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION AS TO THE CONDITION, QUANTITY, QUALITY, FITNESS FOR A PARTICULAR PURPOSE, FREEDOM FROM REDHIBITORY VICES OR DEFECTS, CONFORMITY TO MODELS OR
SAMPLES OF MATERIALS OR MERCHANTABILITY OF ANY OF THE EQUIPMENT OR ITS FITNESS FOR ANY PURPOSE AND WITHOUT ANY OTHER EXPRESS, IMPLIED, STATUTORY OR OTHER WARRANTY OR REPRESENTATION WHATSOEVER. MARQUEZ
SHALL HAVE INSPECTED OR WAIVED ITS RIGHT TO INSPECT THE INTERESTS FOR ALL PURPOSES AND SATISFIED ITSELF AS TO THEIR PHYSICAL AND ENVIRONMENTAL CONDITION, BOTH SURFACE AND SUBSURFACE, INCLUDING BUT NOT
LIMITED TO CONDITIONS SPECIFICALLY RELATED TO THE PRESENCE, RELEASE OR DISPOSAL OF HAZARDOUS SUBSTANCES, AND THE CONDITION OF ANY WELL CASING, TUBING OR DOWNHOLE EQUIPMENT. MARQUEZ IS RELYING SOLELY
UPON ITS OWN INSPECTION OF THE INTERESTS, AND MARQUEZ SHALL ACCEPT ALL OF THE SAME IN THEIR "AS IS, WHERE IS" CONDITION. THERE ARE NO WARRANTIES THAT EXTEND BEYOND THE FACE OF THIS AGREEMENT. IN
ADDITION VENOCO MAKES NO WARRANTY OR REPRESENTATION, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AS TO THE ACCURACY OR COMPLETENESS OF ANY DATA, REPORTS, RECORDS, PROJECTIONS, INFORMATION OR MATERIALS
NOW, HERETOFORE OR HEREAFTER FURNISHED OR MADE AVAILABLE TO MARQUEZ IN CONNECTION WITH THIS AGREEMENT INCLUDING, WITHOUT LIMITATION, ANY DESCRIPTION OF THE INTERESTS, PRICING ASSUMPTIONS, OR QUALITY
OR QUANTITY OF HYDROCARBON RESERVES (IF ANY) ATTRIBUTABLE TO THE INTERESTS OR THE ABILITY OR POTENTIAL OF THE INTERESTS TO PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL CONDITION OF THE INTEREST TO
PRODUCE HYDROCARBONS OR THE ENVIRONMENTAL CONDITION OF THE INTERESTS OR ANY OTHER MATTERS CONTAINED IN THE PROPRIETARY DATA OR ANY OTHER MATERIALS FURNISHED OR MADE AVAILABLE TO MARQUEZ BY VENOCO OR
BY VENOCO'S AGENTS OR REPRESENTATIVES. ANY AND ALL SUCH DATA, RECORDS, REPORTS, PROJECTIONS, INFORMATION AND OTHER MATERIALS FURNISHED BY VENOCO OR OTHERWISE MADE AVAILABLE TO MARQUEZ ARE PROVIDED
MARQUEZ AS A CONVENIENCE AND SHALL NOT CREATE OR GIVE RISE TO ANY LIABILITY OF OR AGAINST VENOCO. ANY RELIANCE UPON ANY SUCH DATA, MATERIALS OR INFORMATION SHALL BE AT MARQUEZ'S SOLE RISK AND MARQUEZ
SHALL NOT BE ENTITLED TO, AND HEREBY COVENANTS THAT HE WILL NOT, USE THE SAME AS THE BASIS OF ANY CLAIM, DEMAND, LIABILITY OR CAUSE OF ACTION FOR MISREPRESENTATION, BREACH OF WARRANTY, BREACH OF
CONTRACT OR OTHERWISE.  

7.02    Notations in the
Assignment.    THE ASSIGNMENT, THE LEASES (IF ANY) AND OTHER DOCUMENTS TO BE DELIVERED BY VENOCO PURSUANT TO SECTIONS 8.01 AND 8.02 BELOW
SHALL EXPRESSLY SET FORTH THE DISCLAIMERS OF REPRESENTATIONS AND WARRANTIES CONTAINED IN THIS ARTICLE 7. ALSO, SUCH ASSIGNMENT, LEASES AND OTHER DOCUMENTS SHALL EXPRESSLY STATE THAT THE INTERESTS HAVE
BEEN USED FOR OIL AND GAS DRILLING AND PRODUCING OPERATIONS, RELATED OIL FIELD OPERATIONS, AND THE STORAGE OF OIL, GAS AND OTHER HAZARDOUS SUBSTANCES.  

ix

 

 ARITCLE 8. TRANSACTIONS ON AND AFTER EFFECTIVE DATE  

8.01    Assignment.    From time to time as provided for in Article 2 of this
Agreement or elsewhere herein Venoco and Marquez shall execute and deliver assignments in the form of the Assignment attached hereto as Exhibit "G" and incorporated herein by this reference (the
"Assignment"), and other necessary conveyance instruments to the parties in accordance with or furtherance of the terms of this Agreement, covering all
of the Interests to be transferred or reserved pursuant hereto. 

8.02    Identification of zones with proved reserves.    Venoco shall immediately
authorize Ryder Scott Company to make available to Marquez information sufficient to allow the identification of the zones containing reserves classified as proven in the Reserve Report. Within thirty
days of execution of this Agreement Venoco and Marquez shall approve a schedule of reserves classified as proven in the Reserve Report to be utilized for all relevant provisions of this Agreement. 

8.03    Regulatory Filings.    Prior to October 15, 2004 Marquez shall
deliver to Venoco evidence of filing showing compliance with the appropriate regulatory authority dealing with plugging of any dry or inactive well(s) included in the Interests, along with evidence of
the appropriate bond, surety letter of credit in a form acceptable to such authority. 

8.04    Governmental Bonds and Insurance.    Upon written request by Venoco, Marquez
shall deliver or cause to be delivered to Venoco proof of bonds and insurance, in the amounts set forth in Exhibit "H", in form and substance and issued by corporate sureties and insurance companies
satisfactory to Venoco, covering the Interests required under any laws, rules or regulations of any federal, Indian tribe, state or local government agencies having jurisdiction over the Interests, or
a commitment by a surety company, satisfactory to Venoco, to issue such bonds. 

8.05    Change of Operator.    Prior to October 25, 2004, or as soon
thereafter as any necessary change of operator elections have been completed for any given well, Venoco shall provide Marquez with executed change of operator forms on all wells (active or inactive)
operated by Venoco, as required by the applicable state regulatory body, to effect a change of operator for the Interests, subject to any applicable operating agreement, but only to the extent allowed
or permitted by any relevant operating agreement. 

8.06    Notice of Sale.    Prior to October 25, 2004 Marquez shall notify all
operators, non-operators, government agencies and royalty owners that it has acquired the right to participate in the Interests and that it will, subject to existing operating agreements,
assume the role and capacity as Operator of the Interests. Marquez shall provide copies of all such notifications to Venoco. 

8.07    Copies of Records and Documents.    Prior to October 30, 2004 Venoco
shall provide Marquez copies of records and documents in Venoco's possession relating to the Interests, including, but not limited to, land and lease files, division of interest computer printouts,
contract files, well files and well logs. VENOCO SHALL AT ITS OPTION, RETAIN COPIES OF ALL FILES AND SHALL HAVE NO OBLIGATION TO FURNISH MARQUEZ ANY INTERPRETATIONS OF DATA OR
INFORMATION OR DATA OR INFORMATION WHICH VENOCO CANNOT PROVIDE MARQUEZ BECAUSE OF THIRD-PARTY RESTRICTIONS ON VENOCO. Costs for generating any copies shall be for the account
of Marquez. 

8.08    Willows and Grimes Field Office.    Venoco currently owns a building and
related real property utilized as the Willows and Grimes Field Office, which is described at Exhibit "I". Upon execution of this Agreement, Marquez and Venoco shall utilize good faith efforts to
negotiate and enter into an agreement whereby Marquez shall lease from Venoco the Willows and Grimes Field Office until the earlier of such date as Marquez resigns as operator of the Interests
acquired from Venoco pursuant to Article 2 of this Agreement or Marquez provides to Venoco thirty days written notice of termination of such lease. The annual lease amount shall equal the
prevailing market rate for properties of this 

x

 

character
in the area. Marquez shall be responsible for all costs of maintenance, utilities and related costs of occupying such real property. 

ARTICLE 9. AREAS OF MUTUAL INTEREST  

9.01    Areas of Mutual Interest among Marquez and Venoco.    Effective as of the
Effective Date Marquez and Venoco shall establish an Area of Mutual Interest ("AMI") for the joint acquisition of lease mineral interests and leasehold operating rights interests, (including any
working interest, farmout interests, overriding royalty interest, and royalty interests) and for the joint exploration and development of those interests for the production of oil & gas. The
AMI shall comprise and circumscribe the area of the original leased lands in the Willows and Grimes area as such leases are set Forth in Exhibit A and as further depicted in Exhibit J.
All interests acquired subsequent to the Effective Date of this agreement within the AMI shall be shared (if an election to participate is made) by Venoco 50% and Marquez 50%. 

        Any
party to this AMI agreement consummating a farmout or other acquisition of lease mineral interests and/or leasehold operating rights interests shall notify the other parties to this
AMI agreement in writing not later then 15 days of closing such acquisition. The notified party shall have 30 days from the date of such notice to elect in writing to participate in the
acquisition of its proportionate share, as set out above, of the interests acquired. If any party does not participate in a given acquisition the other parties shall have proportionate participation
rights in the interest declined. Any assignments shall be made to and money received from participating parties within 30 days of their election. 

ARTICLE 10. TAXES AND PREPAID ITEMS  

10.1    Apportionment of Ad Valorem and Property Taxes.    All applicable ad valorem
taxes, real property taxes, personal property taxes and similar obligations with respect to the Interests for the tax period in which the Effective Time occurs shall be apportioned as of the Effective
Time between Venoco and Marquez based upon their respective economic interest in the taxed property. Marquez shall file or cause to be filed all required reports and returns incident to such taxes and
shall pay or cause to be paid to the taxing authorities all such taxes relating to the tax period in which the Effective Time occurs. Venoco shall pay to Marquez its proportionate share of such tax
liability within fifteen days of receipt of Marquez's invoice for said taxes. Marquez shall supply Venoco with copies of the filed reports and proof of payment promptly after filing and paying same. 

10.2    Proration of Taxes, Etc.    All taxes, including, but not limited to, excise
taxes, state severance taxes, ad valorem taxes, and any other local, state, and/or federal taxes or assessments attributable to the Interests or any part thereof prior to the Effective Time, remain
Venoco's responsibility and all deductions, credits and refunds pertaining to the aforementioned taxes, attributable to the Interests or any part thereof prior to the Effective Time (no matter when
received), belong to Venoco. All such taxes attributable to the Interests or any part thereof on and after the Effective Time are the proportionate responsibility of both Marquez and Venoco, 

10.3    Transfer, Sales and /or Gross Receipts Taxes.    Marquez agrees to pay or
cause to be paid all sales, transfer and/or gross receipts taxes, including any stamp or documentary taxes, and any interest or penalties thereon, attributable to the sale and transfer of the
Interests or any part thereof pursuant to this Agreement, Marquez shall also be responsible for any and all filing and recording fees due and payable in connection with the filing or recording of any
documentation connected with the sale and transfer of the Interests or any part thereof. 

ARTICLE 11. OPERATIONS  

11.01    Existing and New Wells.    Venoco shall, from the date of execution of this
Agreement, continue to operate the Interests in a good and workmanlike manner until the transfer of operations to 

xi

 

Marquez,
when such operations shall be turned over to and become the responsibility of Marquez, unless an applicable unit, pooling, communitization or operating agreement requires otherwise, in which
case (unless Marquez and Venoco otherwise agree or the applicable operating agreement requires a vote to establish a successor operator) Venoco shall continue the physical operation of such portion of
the Interests pursuant to and under the terms of such applicable agreement and accounting procedure receiving the reimbursements and overhead fees allowed thereunder, until such time after the
Effective Date as such applicable agreement may require; provided, however, Venoco shall have no liability as Operator to Marquez for losses or damages sustained or liabilities incurred during such
interim operating period. Venoco and Marquez recognize that applicable provisions of a relevant operating agreement may require the vote of the owners to establish a successor operator, which may or
may not be Marquez. Marquez further acknowledges that as a successor operator it may be required to consent to and be bound by the terms and conditions of any operative Joint Operating Agreement and
Marquez further agrees to execute such additional documents as may be reasonably required to effectuate such change. Additionally, during any period of interim operations, if required, Marquez will be
required to advance to Venoco or otherwise be credited against settlement proceeds for its share of costs for New Wells and Recompletions either directly or by, through and under Venoco, if necessary,
in order to participate in operations and receive its share of revenues set forth herein. The parties further agree to prepare an appropriate post closing settlement statement by not later than
12-31-04 to adjust and correct all such interim costs and revenues. 

11.02    Marketing of Gas.    Venoco shall retain the right to market its share of
production from the Willows and Grimes Fields 

11.03    Operation of gas transmission and gathering facilities.    Marquez shall,
subject to existing operating agreements and accounting procedures, also serve as operator of Venoco's existing gas transmission systems, gas gathering facilities and production equipment (including
pipelines, meters and compressors) not included in this sale at no additional incremental charge; provided however that Marquez shall be entitled to reimbursement of any out of pocket costs associated
with operation of such transmission and gathering facilities. 

11.04    Operations on wells without an operating agreement.    In the event any New
Well is proposed operations thereon will by conducted by Marquez as operator. In the event there is no operating agreement in effect on any well to be operated by Marquez, including existing wells,
the parties will enter into a new operating agreement in the form attached hereto as Exhibit "K" containing terms consistent with existing operating agreements in the area. In the event of a conflict
between the terms of this Agreement and the new operating agreement, the terms of this agreement shall apply. 

11.05    Change in Control of Marquez.    In the event, at any time in the future
that the current owners of Marquez do not collectively own control (51% or more) of Marquez it shall be deemed a change in control of Marquez. In such event, Marquez agrees that upon the written
request of Venoco Marquez shall resign as operator of Interests acquired from Venoco pursuant to Article 2 of this Agreement and will vote for Venoco to become the successor operator and will
utilize all reasonable efforts to cause Venoco to be elected operator. 

11.06    Change of Operator.    If on September 1, 2006, using the same
pricing assumptions, Venoco's net proved reserves for the Willows and Grimes Fields, as delineated by the leases set forth in Exhibit A, do not equal at least Seventeen Thousand, Seven Hundred
and Seventy Eight MMCF (17,778 MMCF) of natural gas equivalents, (The net proved reserves as of September 1, 2006 shall be the total of a) Venoco's net proved reserves as of
September 1, 2006 plus b) Venoco's net production from September 1, 2004 through August 31, 2006), then Marquez agrees that upon the written request of Venoco Marquez shall
resign as operator of the Interests acquired from Venoco pursuant to Article 2 of this Agreement and will vote for Venoco to become the successor operator and will utilize all reasonable
efforts to cause Venoco to be elected operator. 

xii

 

11.07    Other Fields.    Marquez agrees that, upon the written request of Venoco,
Marquez and Venoco shall utilize good faith efforts to negotiate and enter into an agreement whereby Marquez shall act as contract operator for other fields currently owned by Venoco in the onshore
Northern California area. Such agreements shall include provision for reasonable, market rate operating fees to be paid to Marquez. 

11.08    Abandonment Costs.    Marquez shall be obligated to pay its pro rata
working interest share of all abandonment obligations of wells and facilities in which Marquez has a working interest. 

ARTICLE 12. ENVIRONMENTAL MATTERS ("AS IS, WHERE IS")  

12.01    Availability of Data to Marquez.    The Interests have been used for the
purpose of exploration, development, production and preparation for market of oil and gas. To the best of Venoco's knowledge, Venoco's historical files relating to the Interests contain information
regarding wells that have been plugged and abandoned by Venoco, land spreading; underground injection; crude oil and produced water which may have been spilled or disposed of on-site; and
other environmental information; provided, however, Venoco make no warranty, express or implied, as to the accuracy or completeness of any such data or information. 

12.02    Spills and NORM.    Marquez acknowledges that there may have been spills of
wastes, crude oil, produced water, or other materials in the past onto the Interests or in connection therewith. In addition, some production equipment may contain asbestos and/or Naturally Occurring
Radioactive Material (hereinafter referred to as "NORM"). In this regard Marquez expressly understands that NORM may affix or attach itself to the
inside of wells, materials, and equipment as scale, or in other forms. Marquez also expressly understands that special procedures may be required for the remediation, removal, transportation, and
disposal of asbestos and NORM from the Interests where it may be found and that Marquez assumes all liability for or in connection with assessment, remediation, removal, transportation, and disposal
of any such materials and associated activities in accordance with all rules, regulations and requirements of governmental agencies. 

ARTICLE 13. FURTHER ASSURANCES  

13.01    Performance of Obligations.    Venoco and Marquez shall use all reasonable
efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable to carry out all of their respective obligations under this Agreement, and
to consummate and make effective the purchase and sale of the Interests pursuant to the terms of this Agreement. 

13.02    Further Conveyances and Assumptions.    Venoco and Marquez shall execute,
acknowledge and deliver all such further conveyances, transfer orders, notices, assumptions and releases and such other instruments, and shall take all such further actions as may be necessary or
appropriate to assure fully to Marquez and its successors or assigns it's proportionate ownership of the Interests and to assure fully to Venoco and its successors and assigns the assumptions of
proportionate liabilities and obligations of Venoco by Marquez with respect to the Interests. 

ARTICLE 14. NOTICES  

        All notices and other communications to be given hereunder shall be made in writing and shall be deemed to have been duly given if sent by facsimile, delivered
personally with receipt acknowledged; mailed by registered mail, return receipt requested, postage prepaid; or delivered by a recognized 

xiii

 

commercial
courier to the party at the address set forth below or such other address as any party shall have designated for itself by ten (10) days' prior notice to the other party. 

Venoco:

Venoco, Inc.

Attn: General Counsel

5464 Carpinteria Avenue, Suite J

Carpinteria, California 93013

Phone: (805) 745-2100

FAX No. (805) 745-1816 

Marquez:

Marquez
Energy, LLC

Attn: CEO

370 17th Street, Suite 3260

Denver, Colorado 80202

Phone: (303) 626-8300

FAX No. (303) 626-8315 

        Notice
is deemed to have been duly received on the day personally delivered; on the day after it is sent by facsimile, four (4) days after mailing by certified or registered mail
and the day after it is received from a recognized commercial courier. 

ARTICLE 15. MISCELLANEOUS  

15.01    Entire Agreement.    This Agreement, together with any confidentiality
agreements relating to the Interests previously executed by Marquez, constitute the entire agreement between the parties and supersede all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties. No supplement, amendment, alteration, modification, waiver or termination of this Agreement shall be binding unless executed in writing by the
parties hereto after the execution of this Agreement. 

15.02    Severability.    In the event any covenant, condition, or provision
contained herein is held to be invalid by a court of competent jurisdiction, the invalidity of any such covenant, condition or provision shall in no way affect any other covenant, condition or
provision contained herein; provided, however, that any such invalidity does not materially prejudice either Marquez or Venoco in its respective rights and obligations contained in the valid
covenants, conditions, and provisions of this Agreement. 

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

15.04    Construction of Ambiguity.    In the event of any ambiguity in any of the
terms or conditions of this Agreement, including any exhibits thereto and whether or not placed of record, such ambiguity shall not be construed for or against any party hereto on the basis that such
party did or did not author the same. 

15.05    Captions.    The captions, headings and titles in this Agreement are for
convenience only and shall not be considered a part of or affect the construction or interpretation of any provisions of this Agreement. 

15.06    Governing Law.    This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California. All assignments and instruments of conveyance executed in accordance with this Agreement shall be governed by and interpreted and enforced in
accordance with the laws of 

xiv

 

the
state where the Interests conveyed thereby are located. The Parties Agree that the exclusive venue for any disputes regarding this Agreement shall be the Superior Court for the State of California
situated in Sacramento, California. 

15.07    Limitation of Liability.    Venoco and Marquez do hereby covenant and agree
that the recovery by either party hereto of any damages suffered or incurred by it as a result of any breach by the other party of any provision of this Agreement shall be limited to the actual
damages suffered or incurred by the non-breaching party as a result of the breach by the breaching party and in no event shall the breaching party be liable to the
non-breaching party for any indirect, consequential, exemplary or punitive damages suffered or incurred by the non-breaching party as a result of the breach by the breaching
party. 

15.08    Publicity.    Venoco and Marquez shall consult with each other with regard
to all publicity and other releases concerning this Agreement and the transactions contemplated hereby. 

15.09    Counterparts.    This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 

15.10    Assignment.    This Agreement may not be assigned without the prior written
consent of the other party hereto, which consent may not be unreasonably withheld. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective permitted
successors and assigns. All future conveyances of all or any portion of the Interests shall expressly recognize and perpetuate the rights and obligations set out in this Agreement. 

15.11    Costs and Expenses.    Except as otherwise expressly provided herein, each
party shall bear and pay its own costs and expenses, including, but not limited to attorneys' fees, incurred in connection with the negotiation, documentation and closing of this transaction. 

15.12    Joint Venture, Partnership and Agency.    Nothing contained in this
Agreement shall be deemed to create a joint venture, partnership, tax partnership or agency relationship between the parties. 

15.13    Interests Located on Indian or Federal Lands.    If the Interests are
located on Indian or Federal Lands, Marquez agrees to obtain approval from the appropriate federal and/or state agencies as soon as practicable and to provide Venoco with a copy thereof. Marquez shall
indemnify, defend, save, discharge, release and hold Venoco harmless from and against any liability resulting from Marquez's failure to abide by this provision. 

15.14    Mediation.    If a dispute arises out of or relates to this Agreement, or
the breach thereof, and if the dispute cannot be settled through negotiation, the parties agree first to try in good faith to settle the dispute by mediation administered by the American Arbitration
Association under its Commercial Mediation Rules (or such other form of mediation as is reasonably acceptable to both parties) before resorting to arbitration, litigation, or some other dispute
resolution procedure. The mediator selected to resolve any dispute hereunder shall be acceptable to both parties. If the parties cannot agree on a mediator, then they shall make application to the
Superior Court of the State of California situated in Sacramento, California, for appointment of a mediator. Each party shall bear its own attorneys' fees in connection with any mediation and the cost
of the mediation shall be shares equally by both parties. 

15.15    Arbitration.    Any controversy or claim arising out of or relating to this
Agreement or the breach hereof which is not solved by mediation shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration
Rules, and judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof. 

xv

 

        IN
WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above set forth. 

	 	 	VENOCO:
	

 	
 	

VENOCO, INC.,

a Delaware corporation
	

 	
 	

By:	
 	

/s/  GREGORY B. SCHRAGE      
 Title: Vice President, Northern Assets
	

 	
 	
MARQUEZ:
	

 	
 	

MARQUEZ ENERGY, LLC

a Colorado limited liability company
	

 	
 	

By:	
 	

/s/  DAVID CHRISTOFFERSON      
 Title: CFO and General Counsel

xvi

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PARTICIPATION RIGHTS AGREEMENT BETWEEN VENOCO, INC., AS VENOCO, AND MARQUEZ ENERGY, LLC, AS MARQUEZ AS OF SEPTEMBER 1, 2004QuickLinks
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Exhibit 10.10  

 
 

PURCHASE AND SALE AGREEMENT    
    

        This Purchase and Sale Agreement ("Agreement") is made and entered into on this 16th day of
February 2005, by and between BMC, Ltd., a California limited partnership ("Seller") and BlackWell Energy Group, LLC, a Texas limited
liability company ("Buyer"). 

        1.    Sale and Purchase of the Properties.    Subject to the terms and conditions herein set
forth, Seller agrees to sell, assign, convey and deliver to Buyer, and Buyer agrees to purchase and acquire from Seller at the Closing (as hereinafter defined in Section 12.1), but effective as
of 7:00 A.M. on February 1, 2005 ("Effective Date"), all of Seller's right, title and interest in and to the following: 

        1.1   All
oil, gas and mineral leases, and the leasehold estates created thereby, covering lands located in Grayson County, Texas, including, but not limited to, those oil,
gas and mineral leases and the leasehold estates created thereby described in the attached Exhibit "A" (collectively, the "Leases"), and all of the
lands covered by said Leases ("Lands"), 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 Lands being a part thereof, all production from the pool or unit allocated to any such Lands; and all interests in any wells within the pool
or unit associated with the Lands; 

        1.2   All
producing, non-producing, shut-in and abandoned oil and gas wells, salt water disposal wells, injection wells, and water wells located on the
Leases or lands pooled or unitized therewith, including the wells described in Exhibit "B" and the proration units associated therewith ("Wells") and
the locations for the PUD Leases (as defined in Section 10.2.7), also described in Exhibit "B", and all pipelines, personal property, equipment, fixtures, and improvements located on and
appurtenant to the Leases and Lands or elsewhere insofar as they are used or obtained in connection with the operation of the Leases or relate to the production, treatment, sale, or disposal of
hydrocarbons or water produced from the Leases or Lands or attributable thereto (the "Facilities"); 

        1.3   Farmout
and farmin agreements, operating agreements, production sales and purchase contracts, saltwater disposal agreements, surface leases, division and transfer
orders, and to the extent transferable by Seller without material restrictions under third party agreements, all other contracts, contractual rights, interests and other agreements covering or
affecting any or all of the interests described or referred to above ("Contracts"); 

        1.4   All
easements, rights-of-way, licenses, authorizations, permits, and similar rights and interests applicable to, or used or useful in connection
with, any or all of the above described interests (the "Easements"); 

        1.5   All
oil, condensate, natural gas, natural gas liquids, and other minerals produced after the Effective Date attributable to Seller's interest in the Properties. 

        1.6   All
environmental and other governmental (whether federal, state or local) permits, licenses, orders, authorizations, franchises and related instruments or rights
relating to the ownership, operation or use of the Facilities (the "Permits"). 

        1.7   To
the extent transferable without material restriction or payment of a transfer or licensing fee under third party agreements, all of Seller's right, title and interest
in and to all books, files, records, correspondence, studies, surveys, reports, geologic, proprietary geophysical and seismic data (including, raw data and any interpretative data or information
relating to such geologic, geophysical and seismic data) and other data in the actual possession or control of Seller and relating to the operation of the Leases, Lands and Facilities, including
without limitation, all 

1

 

title
records, customer lists, supplier lists, sales materials, promotional materials, operational records, technical records, production and processing records, division order and lease
right-of-way files, accounting files and contract files (the "Records"). 

        1.8   All
of the above real and personal properties, rights, titles, and interests described in Sections 1.1 through 1.7 above, subject to the limitations and terms expressly
set forth herein and in the Exhibits "A" and "B" attached hereto, are hereinafter collectively called the "Properties" or, individually, the
"Property". 

        2.    Purchase Price.    The total purchase price for all of Seller's interest in the
Properties shall be FORTY-FIVE MILLION DOLLARS ($45,000,000.00) (the "Purchase Price"), subject to any applicable adjustments as hereinafter
provided. 

        2.1    Earnest Money.    Upon execution of this Agreement, Buyer shall tender to Seller by
wire transfer ONE MILLION DOLLARS ($1,000,000.00) as an initial performance deposit ("Initial Deposit"), and no later than February 28, 2005
Buyer shall tender to Seller by wire transfer an additional ONE MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($1,250,000.00) (the "Subsequent Deposit"),
both of which deposits shall be retained by Seller if Closing occurs and credited against the Purchase Price. If the Closing does not occur under this Agreement as a result of any breach of this
Agreement by Buyer, Seller shall be entitled, to retain the Initial and Subsequent Deposits (and the Additional Deposit referred to in Section 12.1 in the event Buyer elects to extend the
Closing Date to March 31, 2005) as liquidated damages, not as a penalty. However, if the Closing does not occur through no fault of Buyer, the Initial, and if paid, the Subsequent and
Additional Deposit will be refunded, without interest (other than interest earned in an escrow account) to Buyer. If Buyer fails to make the Subsequent Deposit by February 28, 2005 and Buyer
has not previously elected to terminate this Agreement pursuant to the provisions of Section 18.2(a) or (b) hereof, this Agreement shall automatically terminate and Seller shall retain
the Initial Deposit as liquidated damages, not as a penalty. The Subsequent Deposit and the Additional Deposit, if one is made, shall be deposited in an interest bearing escrow account at Chicago
Title, Santa Barbara, California to be held and disbursed in accordance with the terms of this Agreement. 

	 
	 	 
	 	 
	 	 
	 	 

	 	 	
	 	 	 	
	 	 
	 	 	Buyer's Initials	 	 	 	Seller's Initials	 	 
	 	 	
	 	 	 	
	 	 

        3.    Adjustments to Purchase Price.    The Purchase Price shall be adjusted as follows: 

        3.1    Increases in Purchase Price.    The Purchase Price shall be increased by an amount
equal to the sum of the following amounts: 

        3.1.1 The
amount of costs and expenses actually paid by Seller related to operating, producing and maintaining the Properties from the Effective Date to the Closing Date,
including, without limitation, such capital expenditures as are permitted by Section 6.1, plus a fixed overhead charge of $50,000 per month. 

        3.1.2 The
amount of all prepaid expenses, including, without limitation, ad valorem, property and similar taxes and assessments based upon or measured by ownership of the
Properties and attributable to periods of time after the Effective Date. 

        3.1.3 As
to Wells or PUD Leases in which Seller's Net Revenue Interest (as defined in Section 10.2.3 below) is determined to be greater than the decimal interest
noted in Exhibit "B" with no greater than a proportional increase in Seller's Working Interest, an amount determined in accordance with Section 10.4.1. 

        3.1.4 The
value of all merchantable, clean oil and other products in tanks above the pipeline sales connection at the Effective Date that is credited to the Properties, such
value to 

2

 

be
the market or, if applicable, the contract price in effect as of the Effective Date, less any applicable severance taxes and royalties. 

        3.2    Decreases in Purchase Price.    The Purchase Price shall be decreased by an amount
equal to the sum of the following amounts: 

        3.2.1 The
amount of all proceeds received by Seller, including, without limitation, proceeds from the sale of production, net of all applicable taxes and royalties actually
paid, attributable to the Properties for periods of time after the Effective Date, which proceeds shall be for the account of Buyer, but excluding, however, such proceeds from all production prior to
the Effective Date, which proceeds shall be for the account of Seller. 

        3.2.2 An
amount equal to all ad valorem, property, and similar taxes and assessments based upon or measured by Seller's ownership of the Properties that are unpaid as of the
Closing Date and attributable to periods of time prior to the Effective Date. 

        3.2.3 Any
amount determined in connection with uncured Title Defects as provided for in Section 10 below. 

        3.2.4 Any
amount determined in connection with Adverse Environmental Conditions as provided for in Section 19.7.1 and/or 19.7.2 below. 

        4.    Representations and Warranties of Seller.    Seller represents and warrants to Buyers as
follows: 

        4.1    Organization.    Seller is a California limited partnership duly organized, validly
existing and in good standing under the laws of the state of California and is in good standing and duly qualified to do business in the State of Texas. 

        4.2    Authority.    Seller has full power and authority and has taken, all requisite action,
corporate or otherwise, to authorize Seller to carry on Seller's business as presently conducted, to own the Properties, to enter into this Agreement and to perform Seller's obligations under this
Agreement. Neither the execution and delivery of this Agreement nor the performance of Seller's obligations hereunder will (i) violate its articles of incorporation or bylaws or
(ii) violate or constitute a default under any law, regulation, contract, agreement, consent, decree or judicial order by which Seller is bound. 

        4.3    Enforceability.    This Agreement has been duly executed and delivered on behalf of
Seller and constitutes the legal, valid and binding obligation of Seller, enforceable in accordance with its terms. At the Closing, all documents required hereunder to be executed and delivered by
Seller shall be duly authorized, executed and delivered and shall constitute legal, valid and binding obligations of Seller enforceable in accordance with the respective terms. 

        4.4    Contracts.    Schedule 4.4
hereto sets out a description of (a) all of the unit agreements, farmout agreements, pooling agreements, pooling designations, unit operating agreements and operating agreements governing or
relating to Wells and PUD Leases, (b) all of the production sales, marketing and processing agreements relating to the Wells and PUD Leases, and (c) any contracts or agreements (other
than contracts for utility services) burdening the Properties which could reasonably be expected to obligate Seller to expend in excess of $50,000 in any calendar year (collectively,
"Material Contracts"). The material terms of all Leases, operating agreements, production sales contracts, farmout agreements and other contracts or
agreements respecting the Properties can be found either of record in the counties in which the Properties are located or in Seller's files, and Seller has received no notice of its default under any
of said contracts. Such contracts (including the Leases) are in full force and effect and have not been modified or amended and Seller is not in default in any material respect under such contracts. 

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        4.5    Preferential Purchase Rights/Consents.    Seller represents and warrants that except as
set forth in Exhibit "D" there are no (a) consents and approvals required to be obtained for or (b) preferential purchase rights exercisable in connection with, the assignment of any
material Properties to Buyer, and except as set forth on Exhibit "D" and except with respect to seismic data there are no material restrictions on the transfer of, or the requirement of the payment of
a transfer or licensing fee with respect to, any of the Material Contracts. 

        4.6    Litigation and Claims.    Seller represents and warrants that no claim, demand, filing,
cause of action, administrative proceeding lawsuit or other litigation is pending or, to its knowledge, threatened with respect to Seller that could now or hereafter materially adversely affect the
ownership, operation or value of the Properties or any of the Wells or PUD Leases. 

        4.7    Finder's Fees.    Seller has not incurred any liability, contingent or otherwise, for
brokers' or finders' fees in respect to this transaction for which Buyer shall have any responsibility whatsoever. Seller shall indemnify and hold Buyer harmless from and against all claims, demands,
suits, actions or causes of action whatsoever arising from any allegation by a broker, finder or other intermediary that it is entitled to a commission, finder's fee or other compensation as a result
of having dealt with Seller. 

        4.8    Sale Contracts.    Except with respect to that certain Farmout Option Agreement dated
as of April 1, 2004 between Venoco, Inc and H&S Production Company for certain lands south of the current producing area and outside of the existing Units, there are no contracts or options
outstanding for the sale, exchange or transfer of the Properties or any portion thereof. 

        4.9    Notices.    Seller has received no notice which has not heretofore been complied with,
of any violation of laws, rules, regulations (federal, state and local) issued with respect to the Properties. 

        4.10    Condemnation Proceedings.    There are no condemnation or eminent domain proceedings
pending with respect to any of the Properties or any portion thereof. 

        4.11    Imbalances.    To the best of Seller's knowledge, there are no gas or other
hydrocarbon production, pipeline; transportation or processing imbalances existing as of the Effective Date with respect to any of the Properties; however should it be determined that a production or
pipeline imbalance does exist, Seller will assume and indemnity Buyer for all liabilities and/or will assume all benefits associated with any such imbalance. 

        4.12    Property Obligations.    All rentals, royalties, shut-in royalties,
overriding royalties and other payments due pursuant to or with respect to the Leases have been properly paid, except for such failures to pay which could not be reasonably be expected to have a
material adverse effect on the ownership, use or value of any of the Wells or PUD Leases ("Material Adverse Effect"). 

        4.13    Property Operation.    The Wells have been drilled, completed, operated, developed and
produced in material compliance with all applicable judgments, orders, laws, rules and regulations and all necessary certificates, consents, permits, licenses and other governmental authorizations
which are material to the ownership, use or operation of the Properties have been obtained and are in force. 

        4.14    Take-or-Pay.    Seller is not obligated, under a
take-or-pay or similar arrangement, or by virtue of an election to non-consent, or not participate in a past or current operation on the Properties pursuant to the
applicable operating agreements, to produce hydrocarbons, or allow hydrocarbons to be produced, without receiving full payments at the time of delivery in an amount that corresponds to the net revenue
interest in the hydrocarbons described in Exhibit B. 

4

 

        4.15    Taxes.    All taxes based on or measured by the ownership of Property, the production
or removal of hydrocarbons and the receipt of proceeds which are due and relating to the Properties have been properly paid. 

        4.16    Timely Receipt.    Seller is timely receiving its share of proceeds from the sale of
hydrocarbons produced from the Properties without suspense, counterclaim or set-off except for immaterial amounts. There has been no production of hydrocarbons from the Properties in
excess of the allowable production established pursuant to applicable state or federal law or regulation that would result in any material restriction on production from the Leases subsequent to the
Effective Time. 

        4.17    Timely Payment.    Seller has paid its share of all costs payable by it under all
material contracts and agreements, except those being contested in good faith. 

        4.18    Outstanding Obligations.    Except as otherwise described in Schedule 4.18
hereof, there are no outstanding authorizations for expenditures or any written commitments or proposals to conduct operations on the Properties. 

        4.19    Compliance.    The Properties have been operated in material compliance with all
applicable laws, regulations, orders, judgments, licenses and permits concerning the prevention, abatement or elimination of pollution and the protection of the environment and there is no
circumstance which could reasonably be expected to (i) materially interfere with such continued compliance, (ii) give rise to material liability, (iii) form the basis for any
material claim, suit, relief or investigation, or (iv) require a material change in the present condition or operation of the Properties. 

        4.20    Leases.    All of the Leases upon which the Wells are located and all of the Leases
which have been pooled or unitized with the Leases upon which the Wells are located are described on Exhibit "A". All of the PUD Leases are described on Exhibit "B". 

        4.21    Material Differences.    The Lease Operating Expense and Revenue statements for the
Properties provided by Seller to Buyer accurately reflect the lease operating expenses incurred by Seller and the revenues received by Seller for the periods covered in the statements in all material
respects. 

        4.22    Lake Texoma Well Sites.    Those certain Well site locations constructed upon the
Lands and which extend into Lake Texoma (the "Lake Texoma Well Sites") are to the best of Seller's knowledge in good repair, were constructed and have
been maintained in compliance with applicable permits or other authorizations issued therefor, and are free of significant erosion or subsidence. 

        5.    Representations and Warranties of Buyer.    Buyer represents and warrants to Seller
that: 

        5.1    Organization.    Buyer is a Texas limited liability company duly organized, validly
existing and in good standing under the laws of the state of its organization and is qualified to do business and is in good standing under the laws of the State of Texas. 

        5.2    Authority.    Buyer has full power and authority to carry on its business as presently
conducted, to enter into this Agreement, to purchase the Properties on the terms described in this Agreement and to perform its obligations under this Agreement. Neither the execution and delivery of
this Agreement nor the performance of Buyer's obligations hereunder will (i) violate its articles of incorporation or bylaws or membership agreement; or (ii) violate or constitute a
default 

5

 

under
any law, regulation, contract, agreement, consent, decree or judicial order by which Buyer or any of its directors, officers or members are bound: 

        5.3    Enforceability.    This Agreement has been duly executed and delivered on behalf of
Buyer and constitutes the legal, valid and binding obligation of Buyer enforceable in accordance with its terms. At the Closing, all documents required hereunder to be executed and delivered by Buyer
shall be duly authorized, executed and delivered and shall constitute legal, valid and binding obligations of Buyer enforceable in accordance with the respective terms. 

        5.4    Basis of Buyer's Decision.    Buyer represents that by reason of its knowledge and
experience in the evaluation, acquisition, and operation of oil and gas properties, Buyer has evaluated the merits and risks of purchasing the Properties from Seller and has formed an opinion based
solely on Buyer's knowledge and experience and not on any representations or warranties by Seller which are not contained in this Agreement. Buyer further represents that it has performed, or will
perform before Closing, such review and due diligence with respect to the Properties, as will enable it to make an
informed and knowledgeable decision with respect to the purchase of the Properties under the terms of this Agreement. 

        5.5    Finder's Fees.    Buyer has not incurred any liability, contingent or otherwise, for
brokers' or finders' fees in respect to this transaction for which Seller shall have any responsibility whatsoever. Buyer shall indemnify and hold Seller harmless from and against all claims, demands,
suits, actions or causes of action whatsoever arising from any allegation by a broker, finder or other intermediary that it is entitled to a commission, finder's fee or other compensation as a result
of having dealt with Buyer. 

        6.    Covenants of Seller.    

        6.1    Conduct of Business Pending Closing.    Seller covenants that from the date hereof to
the Closing Date, except (a) as provided herein, (b) as required by any obligation, agreement, lease, contract, or instrument referred to on any Exhibit hereof, or (c) as
otherwise consented to in writing by Buyer, Seller will: 

        6.1.1 Not
(a) act in any manner with respect to the Properties other than in the normal, usual and customary manner, consistent with prior practice;
(b) dispose of, encumber or relinquish any of the Properties (other than relinquishments resulting from the expiration of leases that Seller has no right or option to renew); (c) waive,
compromise or settle any material right or claim with respect to any of the Properties; or (d) make capital or workover expenditures with respect to the Properties in excess of $25,000 in any
single instance or $250,000 in the aggregate or except when required by an emergency when there shall have been insufficient time to obtain advance consent. Seller will promptly notify Buyer of any
such emergency expenditures. 

        6.1.2 Use
its best efforts to preserve relationships with all third parties having business dealings with respect to the Properties. 

        6.1.3 Cooperate
with Buyer in the notification of all applicable governmental regulatory authorities of the transactions contemplated hereby and cooperate with Buyer in
obtaining the issuance by each such authority of such permits, licenses and authorizations as may be necessary for Buyer to own and operate the Properties following the consummation of the
transactions contemplated by this Agreement. 

        6.1.4 Notify
Buyer of the discovery by Seller that any representation or warranty of Seller contained in the Agreement is or becomes untrue or will be untrue on the Closing
Date. 

        6.1.5 Use
its reasonable best efforts to cause Buyer to be designated as the successor operator to Seller with respect to all Properties currently operated by Seller. 

6

 

        6.1.6 Until
Closing maintain all insurance now in force with respect to the Properties. Schedule 6.1.6 sets out all
insurance currently in force with respect to the Properties. 

        6.1.7 Use
its reasonable efforts to obtain the consent of Western GECO Holdings L.L.C. ("Western GECO") to the transfer to
Buyer at Closing of the Data Use License between Western GECO and Venoco, Inc. dated December 8, 2000; provided that in no event shall Seller be obligated to pay or incur any transfer or
consent fees in connection with the transfer of the license to Buyer. 

        6.2    Access.    Seller shall afford to Buyer and its authorized representatives reasonable
access, at Buyer's sole risk and expense, from the date hereof until the Closing Date during normal business hours, to (a) the Properties operated by Seller, provided, however, that Buyer shall
indemnify and hold harmless Seller from and against any and all losses, costs, damages, obligations, claims, liabilities, expenses and causes of action (collectively "Claims") arising from Buyer's
inspection of the Properties, including, without limitation, claims for personal injuries, property damage and reasonable attorneys' fees, but excluding claims arising from Seller's gross negligence
or willful misconduct, and (b) Seller's operating, accounting, contract, corporate and legal files, records, materials, data and information regarding the Properties ("Data"); provided however,
that Data shall not include (i) any legal materials the disclosure of which Seller determines would jeopardize the assertion of a privilege in ongoing or anticipated litigation with third
parties, or (ii) information, the disclosure of which would violate any confidentiality agreement to which Seller is bound. 

        6.3    Closing Conditions.    Seller shall cause all the representations and warranties of
Seller contained in this Agreement to be true and correct in all material respects on and as of the Closing Date. To the extent the conditions precedent to the obligations of Buyer are within the
control of Seller, Seller shall cause such conditions to be satisfied on or prior to the Closing Date, and to the extent the conditions precedent to the
obligations of Buyer are not within the control of Seller, Seller shall use its best efforts to cause such conditions to be satisfied on or prior to Closing Date. 

        7.    Covenants of Buyer.    

        7.1    Closing Conditions.    Buyer shall cause all of the representations and warranties of
Buyer contained in this Agreement to be true and correct on and as of the Closing Date. To the extent the conditions precedent to the obligations of Seller are within the control of Buyer, Buyer shall
cause such conditions to be satisfied on or prior to the Closing Date and, to the extent the conditions precedent to the
obligations of Seller are not within the control of Buyer, Buyer shall use its best efforts to cause such conditions to be satisfied on or prior to the Closing Date. 

        8.    Conditions Precedent to the Obligations of Seller.    The obligations of Seller to be
performed at the Closing are subject to the fulfillment (or waiver by Seller in its sole discretion), before or at the Closing, of each of the following conditions: 

        8.1    Representations and Warranties.    The representations and warranties by Buyer set
forth in this Agreement shall be true and correct in all material respects at, and as of the Closing as though made at and as of the Closing; and Buyer shall have performed and complied with in all
material respects all covenants and agreements required to be performed and satisfied by it at or prior to Closing. 

        8.2    No Litigation.    There shall be no suits, actions or other proceedings pending or
threatened to enjoin the consummation of the transactions contemplated by this Agreement or seeking substantial damages against Seller in connection therewith. 

7

 

        8.3    Consents.    All consents and approvals required to be obtained for the assignment of
the Properties to Buyer shall have been obtained by Seller or waived by Buyer or shall have expired without being exercised and have therefore been waived, except for those consents and approvals
which are customarily obtained after closing. 

        9.    Conditions Precedent to the Obligations of Buyer.    The obligations of Buyer to be
performed at the Closing are subject to the fulfillment (or waiver by Buyer in its sole discretion), before or at the Closing, of each of the following conditions: 

        9.1    Representations and Warranties.    The representations and warranties by Seller set
forth in this agreement shall be true and correct in all material respects at and as of the Closing as though made at and as of the Closing; and Seller shall have performed and complied with in all
material respects all covenants and agreements required to be performed and satisfied by it at or prior to Closing. 

        9.2    No Litigation.    There shall be no suits, actions or other proceedings pending or
threatened to enjoin the consummation of the transactions contemplated by this Agreement or seeking substantial damages against Buyer in connection therewith. 

        9.3    Consents:    All consents and approvals required to be obtained for the assignment of
the Properties to Buyer shall have been obtained by Seller or waived by Buyer or shall have expired without being exercised and have therefore been waived, except for those consents and approvals
which are customarily obtained after closing. 

        9.4    Release of Liens.    All mortgages, liens, deeds of trust and other security interest
burdening the Properties which secure indebtedness of Seller or any of its affiliates shall be released at or before Closing. 

        10.    Title Matters.    

        10.1    Title Adjustment.    There shall not exist at Closing any uncured Title Defects which
exceed the Title Basket Value (as defined in Section 10.5.2 below) unless adjustments therefor have been made pursuant to the further terms of this Agreement or Buyer has elected to waive any
such Title Defects. Buyer shall notify Seller in writing of any claimed Title Defects no later than March 10, 2005 ("Title Defects Notice"). The
Title Defects Notice shall set forth in reasonable detail (a) the Well, PUD and/or Lease with respect to which a claimed Title Defect is made, (b) the nature of such claimed Title
Defect, and (c) Buyer's calculation of the value of each claimed Title Defect in accordance with the guidelines set forth in Section 10.4. Any Title Defect that is not identified in the
Title Defects Notice shall thereafter be forever waived and expressly assumed by Buyer and shall be deemed to have become a Permitted Encumbrance. 

        10.2    Certain Defined Terms:    As used in this Agreement, the following terms have the
following meanings: 

        10.2.1 "Good and Defensible Title" means such title to the Properties that (a) entitles Seller to receive not less
than the Net Revenue Interests in all oil, gas, condensate and related hydrocarbons produced from the Wells and PUD Leases described in Exhibit B and (b) obligates Seller to bear not
more than the Working Interests in the Wells and PUD Leases as set forth in Exhibit B (unless there is a corresponding increase in the Net Revenue Interests) and (ii) is free and clear
of all liens and encumbrances, except for Permitted Encumbrances. 

        10.2.2 "Title Defect" shall mean, with respect to Seller's title to the Properties, any lien, mortgage, claim, charge,
defect, or other encumbrance which renders Seller's title to such Properties less than Good and Defensible Title. 

8

  

        10.2.3 "Net Revenue Interest" shall mean Seller's interest in and to all production of oil, gas and other minerals saved,
produced and sold from any Well or PUD after giving effect to all valid lessor's royalties, overriding royalties, production payments, carried interests, liens and other encumbrances or charges
against production therefrom. 

        10.2.4 "Working Interest" shall mean, with respect to the Wells and PUD Leases Seller's interest in and to the full and
entire leasehold estate created under and by virtue of the Leases and all rights and obligations of every kind and character appurtenant thereto or arising therefrom, without regard to any valid
lessor's royalty, overriding royalties, production payments, carried interests, liens, or other encumbrances or charges against production therefrom insofar as such interest in said leasehold estate
is burdened with the obligation to bear and pay costs of operations. 

        10.2.5 "Permitted Encumbrances" shall mean: 

        (a)   Lessors'
royalties, overriding royalties reversionary interests and similar burdens if the cumulative effect of the burdens does not operate to reduce the Net Revenue
Interest of Seller in a Well or PUD below the Net Revenue Interest for such Well or PUD set forth in Exhibit B or operate to increase Seller's Working Interest in a Well or PUD to more than the
Working Interest for such Well or PUD set forth in Exhibit B; 

        (b)   Division
orders and sales contracts terminable without penalty upon no more than 90 days notice to the purchaser; 

        (c)   Required
third party consents to assignment and similar agreements with respect to which waivers or consents are obtained from the appropriate parties; 

        (d)   Materialman's,
mechanic's, repairman's employee's, contractor's, operator's, tax, and other similar liens or charges arising in the ordinary course of business for
obligations that are not delinquent or that will be paid and discharged in the ordinary course of business or if delinquent, that are being contested in good faith by appropriate action of which Buyer
is notified in writing before Closing and for which Seller indemnifies Buyer subsequent to Closing; 

        (e)   All
rights to consent by, required notices to, filings with, or other actions by governmental entities in connection with the sale or conveyance of oil and gas leases or
interests therein if they are routinely obtained subsequent to the sale or conveyance; 

        (f)    Easements,
rights-of-way, servitudes, permits, surface leases other rights in respect of surface operations that do not materially interfere with
oil and gas operations to be conducted on any Well, PUD or Lease; 

        (g)   All
operating agreements, unit agreements, unit operating agreements, pooling agreements and pooling designations affecting the Properties that are contained in Seller's
files and which do not reduce the interest of Seller with respect to oil and gas produced from any Well or PUD below the Net Revenue Interest set forth in Exhibit B; or increase Seller's
Working Interest in such Well or PUD to more than the Working Interest set forth in Exhibit B for such Well or PUD (unless there is a corresponding increase in the Net Revenue Interest); 

        (h)   Conventional
rights of reassignment prior to release or surrender requiring notice to the holders of the rights; 

        (i)    All
rights reserved to or vested in any governmental, statutory or public authority to control or regulate any of the Properties in any manner, and all applicable laws,
rules and orders of governmental authority; 

9

 

        (j)    The
terms and conditions of the Leases, and of all agreements that are contained in Seller's files and which do not reduce the interest of Seller with respect to oil and
gas produced from any Well or PUD Leases below the Net Revenue Interest set forth in Exhibit B for such Well or PUD; or increase Seller's working Interest in such Well or PUD to more than the
Working Interest set forth in Exhibit B for such Well or PUD (unless there is a corresponding increase in the Net Revenue Interest); 

        (k)   All
other liens, charges, encumbrances, contracts, agreements, instruments, obligations, defects and irregularities affecting the Properties which individually or in the
aggregate are not such as to interfere materially with the operation, value or use of any of the Properties, do not prevent Buyer from receiving the proceeds of production from any of the Wells or PUD
Leases and which do not reduce the interest of Seller with respect to oil and gas produced from any Well or PUD below the Net Revenue Interest set forth in Exhibit B for such Well or PUDs, or
increase Seller's working Interest in such Well or PUD to more than the Working Interest set forth in Exhibit B for such Well or PUD (unless there is a corresponding increase in the Net Revenue
Interest); and 

        (l)    Any
Title Defects Buyer may have expressly waived in writing or which are deemed to have become Permitted Encumbrances under Section 10.1 

        10.2.6 "Defect Value" shall mean the amount which is determined in accordance with Section 10.4 below with respect to
each Title Defect which is accepted by Seller or determined to be a Title Defect pursuant to Section 10.2. 

        10.2.7 "PUD Leases" shall mean the Leases as to which locations have been identified by Buyer for wells to develop proved
undeveloped reserves and the Land associated therewith as identified on Exhibit "B". Seller has not made (and does not make herein) any representations respecting the existence or location of proved
undeveloped reserves. 

        10.3    Determination of Title Defects and Defect Values.    Within three (3) business
days after Seller's receipt of the Title Defects Notice, Seller shall notify Buyer whether Seller agrees with Buyer's claimed Title Defects and/or the proposed Defect Values therefor
("Seller's Response"). If Seller does not agree with any claimed Title Defect and/or the proposed Defect Value therefor, then the parties shall enter
into good faith negotiations and shall attempt to agree on such matters. If the parties cannot reach agreement concerning either the existence of a Title Defect or a Defect Value prior to Closing,
upon either party's request, the parties shall submit said dispute to a mutually acceptable attorney experienced in title examination in the state in which the Property affected by the claimed Title
Defect is located to resolve all points of disagreement relating to Title Defects and Defect Values; provided, however, that if at any time any consultant so chosen fails or refuses to perform
hereunder, a new consultant shall be chosen by the parties. The cost of any such consultant shall be borne 50% by Seller and 50% by Buyer. Each party shall present a written statement of its position
on the Title Defect and/or Defect Value in question to the consultant within three (3) business days after the consultant is selected, and the consultant shall make a determination of all
points of disagreement in accordance with the terms and conditions of this Agreement within ten (10) business days of receipt of such position statements. The determination by the consultant
shall be conclusive and binding on the parties, and shall be enforceable against any party in any court of competent jurisdiction. If necessary, the Closing Date shall be deferred only as to those
Properties affected by any unresolved disputes regarding the existence of a Title Defect and/or the Defect Value until the consultant has made a determination of the disputed issues with respect
thereto and all subsequent dates and required activities with respect to any such Properties having reference to the Closing Date shall be correspondingly deferred; provided, however, that, unless
Seller and Buyer mutually agree to the contrary, the Closing Date shall not be deferred in any event for more than thirty (30) days beyond the original 

10

 

Closing
Date. All Properties as to which no such dispute(s) exist shall be conveyed to Buyer subject to the terms of this Agreement at Closing. Once the consultant's determination has been expressed
to both parties, Seller shall have five (5) business days in which to advise Buyer in writing which of the options available to Seller under Section 10.4 below Seller elects regarding
each of the Properties as to which the consultant has made a determination. 

        10.4    Calculation of Defect Value.    

        10.4.1 If
a Title Defect is based upon Buyer's notice that Seller owns a lesser interest, or the notice is from Seller to Buyer to the effect that Seller owns a greater
interest than that shown on Exhibit "B" (a "Title Benefit"), then the Purchase Price shall be reduced or increased, as appropriate, by an amount equal
to the product of (1) the allocated value of the Property affected as set forth in Exhibit "B" and (2) a fraction, the numerator of which is the amount of lesser or greater interest set
forth in the notice and the denominator of which is the respective interest set forth on Exhibit "B". 

        10.4.2 In
the event a third party exercises an applicable preferential right of purchase, the Purchase Price shall be reduced by the amount allocated to the affected
Property as set forth on Exhibit "B" or a proprata portion thereof calculated in accordance with Section 10.4.1 above if the preferential right affects less than 100% of a Property, and Closing
shall occur as to the remainder of the Properties, if any. 

        10.4.3 If
a Title Defect is a lien, encumbrance or other charge upon a Property which is liquidated in amount, then the adjustment shall be the sum necessary to be paid to
the obligee to remove the Title Defect from the affected Property, and Buyer shall pay such sum to obligee at Closing. However, Seller reserves the right to retain the obligation of this Title Defect
and elect to challenge the validity of any such Title Defect or any portion thereof, and Buyer shall extend reasonable cooperation to Seller in such efforts at no risk or expense to Buyer. If a Title
Defect represents an obligation or burden upon the affected Property for which the economic detriment to Buyer is not liquidated but can be estimated with reasonable certainty, the adjustment shall be
the sum Seller and Buyer mutually agree upon as necessary to compensate Buyer at Closing for the adverse economic effect which such Title Defect will have on the affected Property. If the parties
cannot reach an agreement as to the amount of such adverse economic effect, then such dispute shall be resolved in the manner set forth in Section 10.3 hereof. 

        10.5    Remedies for Title Defect.    Seller shall have the right, but not the obligation, to
cure any Title Defect accepted by Seller or determined to be a Title Defect pursuant to Section 10.2 above. With respect to any Title Defect that Seller elects not to cure or that Seller fails
to cure at or prior to Closing, Buyer shall have the option to: 

        10.5.1 exclude
the Property subject to the Title Defect from this Agreement, in which event the Purchase Price shall be reduced by the value allocated to the affected
Property as set forth on Exhibit "B" or 

        10.5.2 purchase
the Property subject to such Title Defect from Seller, and the Purchase Price shall be reduced by the Defect Value for such Title Defect; provided, however,
no downward adjustment of the Purchase Price on account of Title Defects shall occur unless the aggregate amount of the Defect Values determined in accordance with this Section 10 exceeds
$450,000 ("Title Basket Value") and the
amount of downward adjustment shall be the aggregate amount of Defect Values counted from the first dollar. 

        10.6    Calculation of Basket Value.    In calculating the aggregate amount of Defect Values
for purposes of determining whether the Title Basket Value has been achieved, the value of all Title Benefits shall be offset and netted against the value of all Title Defects and vice versa and no 

11

 

adjustments
to the Purchase Price shall occur (either upwards or downwards) unless the aggregate net value of Title Defects or Title Benefits, as the case may be, exceeds the basket value of $450,000,
after which the aggregate amount of such net values shall be counted from the first dollar to adjust the Purchase Price upwards or downwards. 

        10.7    Termination as a Remedy.    In the event the aggregate sum of the Defect Values
exceeds ten percent (10%) of the Purchase Price (as adjusted for the exercise of any preferential rights to purchase under Section 10.4.2 hereof), either Buyer or Seller may elect to terminate
this Agreement, in which case neither party shall have any further liability or obligation to the other hereunder except as to (i) the return of the Deposit to Buyer and (ii) all
obligations imposed by any confidentiality agreement, which shall survive such termination and be enforceable in accordance with the terms thereof. 

        11.    Suspense Funds Held by Seller.    Within 90 days after the Closing, Seller shall
provide to Buyer a listing showing all proceeds from production attributable to the Properties that are currently held in suspense and shall transfer to Buyer all such suspended proceeds
("Buyer's Suspense Accounts"). Buyer shall be responsible for proper distribution of all Buyer's Suspense Accounts to the parties lawfully entitled to
them, and hereby agrees to indemnify, defend, and hold harmless Seller from and against any and all losses arising out of or relating to Buyer's retention or distribution of such suspended proceeds. 

        12.    Closing.    

        12.1    The Closing.    The purchase and sale of the Properties pursuant to this Agreement
shall be consummated ("Closing") in Denver, Colorado at the offices of Seller on March 15, 2005 ("Closing
Date"), but effective as of the Effective Date; provided that at Buyer's option the Closing Date may be extended to March 31, 2005 by the payment to Seller of an
additional deposit of TWO MILLION TWO HUNDRED FIFTY THOUSAND DOLLARS ($2,250,000.00) (the "Additional Deposit"). If Closing is not consummated by
March 15, 2005 (or March 31, 2005 in the event the Additional Deposit is timely made) due to Buyer's failure to satisfy one or more of the conditions to Closing, this Agreement shall
terminate and Seller shall retain the Initial Deposit and the Subsequent Deposit (and the Additional Deposit if one is made) as liquidated damages. 

        12.2    Closing Obligations.    At Closing the following events shall occur, each event under
the control of one Party hereto being a condition precedent to the events under the control of the other Party, and each event being deemed to have occurred simultaneously with the other events: 

        12.2.1 Seller
shall execute and deliver to Buyer, and Buyer shall execute and receive, one or more instruments of assignment, in substantially the form of the Assignment set
forth as Exhibit "C" hereto ("Assignment"). 

        12.2.2 Buyer
shall deliver to Seller, in immediately available funds (wire transfer) a preliminary amount which shall be that amount estimated in good faith by Seller to be
the computation of the Purchase Price ("Preliminary Amount"). Seller shall provide Buyer with a Closing Statement reflecting its calculation of the
Preliminary Amount at least five (5) business days prior to the Closing. Any disputes concerning the computation of the Preliminary Amount shall be resolved pursuant to the provisions of
Section 13.2 hereof. 

        12.2.3 Seller
and Buyer shall execute, acknowledge and deliver division orders, transfer orders or letters in lieu thereof directing all purchasers of production from the
Properties to make payment of proceeds attributable to such production occurring on or after the Effective Date to Buyer. 

        12.2.4 As
to those Properties operated by Seller, Seller and Buyer shall execute all appropriate state or local forms required to be executed to effect the administrative
change of 

12

 

operator
of such Properties from Seller to Buyer. Also with respect to any wells for which Seller is designated as the operator under the applicable operating or other similar agreement, Seller shall
send letters to all working interest owners advising of Seller's resignation as operator and recommending that Buyer be appointed as successor operator. 

        12.2.5 Seller
shall deliver to Buyer possession of the Properties at the Closing. 

        13.    Post-Closing Adjustments.    

        13.1    Final Settlement Statement.    After the Closing Date, Seller shall prepare, in
accordance with this Agreement and with generally accepted accounting principles consistently applied, a statement ("Final Settlement Statement"), a
copy of which shall be delivered by Seller to Buyer no later than ninety (90) days after the Closing Date, setting forth each adjustment to the Purchase Price necessary to
determine the Final Purchase Price and showing the calculation of such adjustments in accordance with Section 3. Buyer shall have forty-five (45) days after receipt of the
Final Settlement Statement to review such statement and to provide written notice to Seller of Buyer's objection to any item on the statement. Buyer's notice shall clearly identify the item(s)
objected to and the reasons and support for the objection(s). If Buyer does not provide written objection(s) within the 45-day period, the Final Settlement Statement shall be deemed
correct and shall not be subject to further adjustment. If Buyer provides written objection(s) within the 45-day period, the Final Settlement Statement shall be deemed correct with respect
to the items not objected to. Buyer and Seller shall meet to negotiate and resolve the objections within fifteen (15) days of Buyer's receipt of Seller's objections. If Buyer and Seller agree
on all objections the adjusted Final Settlement Statement shall be deemed correct and shall not be subject to further adjustment. Any items not agreed to at the end of the 15-day period
may, at either party's request, be resolved by arbitration in accordance with Section 13.2 below. 

        13.2    Arbitration.    If Seller and Buyer cannot agree upon the Final Settlement Statement,
the parties agree that the dispute shall be submitted to a mutually agreeable third party accountant, which shall act as an arbitrator and decide all points of disagreement with respect to the Final
Settlement Statement. The decision of arbitrator on all such points shall be binding upon the parties. The costs and expenses of the arbitrator shall be borne 50% by Seller and 50% by Buyer. 

        13.3    Payment of Final Purchase Price.    If the Final Purchase Price is more than the
Preliminary Amount, Buyer shall pay such difference to Seller in immediately available funds within five (5) business days after the parties have agreed upon the Final Settlement Statement. If
the Final Purchase Price is less than the Preliminary Amount, Seller shall pay such difference to Buyer in immediately available funds within five (5) business days after the parties have
agreed upon the Final Settlement Statement. 

        14.    Assumption of Certain Obligations.    Except for Seller's Retained Liabilities (as
defined in Section 16.1 hereof) at Closing, Buyer shall assume all costs and liabilities and discharge all obligations of Seller (a) under all leases, operating agreements, production
sales contracts, farmout agreements and other contracts or agreements respecting the Properties and relating to the ownership or operation of the Properties from and after the Effective Date,
(b) all accounts payable and contractual obligations incurred by Seller in accordance with this Agreement with respect to the Properties and attributable to periods on or after the Effective
Date, and (c) all obligations to cleanup and restore any property included in or affected by the Properties. 

        15.    Limitation and Survival.    

        15.1    Limitation of Warranties.    Anything in this Agreement to the contrary
notwithstanding, the Properties are being sold by Seller to Buyer without recourse, covenant, or warranty of any kind, express, implied, or statutory, with the sole exception that Seller will warrant
title to the Net 

13

 

Revenue
Interests and Working Interests in the Properties as set forth in Exhibit B, subject to the Permitted Encumbrances, against every person whomsoever lawfully claiming or to claim the
same or any part thereof by, through, or under each Seller, but not otherwise. WITHOUT LIMITATION OF THE GENERALITY OF THE IMMEDIATELY PRECEDING SENTENCE, SELLER CONVEYS THE PROPERTIES
AS-IS, WHERE-IS AND WITH ALL FAULTS AND EXPRESSLY DISCLAIMS AND NEGATES (a) ANY IMPLIED OR EXPRESS WARRANTY OF MERCHANTABILITY, (b) ANY IMPLIED OR EXPRESS
WARRANTY OF FITNESS FOR A PARTICULAR PURPOSE, AND (c) ANY IMPLIED OR EXPRESS WARRANTY OF CONFORMITY TO MODELS OR SAMPLES OF MATERIALS. SELLER ALSO EXPRESSLY DISCLAIMS AND NEGATES ANY IMPLIED OR
EXPRESS WARRANTY AT COMMON LAW, BY STATUTE OR OTHERWISE RELATING TO THE ACCURACYOF ANY OF THE INFORMATION FURNISHED WITH RESPECT TO THE EXISTENCE OR EXTENT OF RESERVES OR THE VALUE OF THE PROPERTIES
BASED THEREON OR THE CONDITION OR STATE OF REPAIR OF ANY OF THE PROPERTIES; THIS DISCLAIMER AND DENIAL OF WARRANTY ALSO EXTENDS TO THE EXPRESS OR IMPLIED REPRESENTATION OR WARRANTY AS TO THE PRICES
BUYER AND SELLER ARE OR WILL BE ENTITLED TO RECEIVE FROM PRODUCTION OF OIL, GAS OR OTHER SUBSTANCES FROM THE PROPERTIES, IT BEING UNDERSTOOD THAT ALL RESERVE, PRICE AND VALUE ESTIMATES UPON WHICH
BUYER HAS RELIED OR IS RELYING HAVE BEEN DERIVED BY THE INDIVIDUAL EVALUATION OF BUYER. 

        15.2    Survival of Representations.    The representations and warranties made by Seller in
Sections 4.4 through 4.6, Sections 4.8 through 4.10 and Sections 4.12 through 4.22 shall terminate at Closing. Representations made by Seller in Section 4.1, 4.2, 4.3, 4.7 and 4.11 and by Buyer
in Sections 5.1 through 5.5 shall survive Closing. 

        16.    Indemnification.    Except as expressly limited elsewhere in this Agreement: 

        16.1    Seller's Indemnity.    After Closing Seller shall retain and be fully responsible and
shall indemnify, hold harmless and defend Buyer and its employees, officers, directors, attorneys, agents and representatives from and against all loss, liability, and claims (including without
limitation, attorneys' fees and expenses, court costs and expert fees and expenses) and causes of action presented or filed within two (2) years after the Effective Date, arising from: 

        (a)   personal
injury claims and third party property damage claims (other than those arising as a result of Adverse Environmental Conditions or title to the Properties)
relating to Seller's period of ownership and operation of the Properties prior to the Effective Date; and 

        (b)   personal
injury claims and third party property damage claims (other than those arising as a result of Adverse Environmental Conditions or title to the Properties)
related to the period between the Effective Date and the Closing Date to the extent attributable to Seller's gross negligence or willful misconduct; and 

        (c)   Seller's
accounting of, or payment to, royalty owners and working interest owners and providers of goods and services in or with respect to the Leases and Lands
comprising a part of the Properties, insofar as such losses relate to or arise out of actions of Seller prior to the Effective Date; provided the indemnity provided in this Section 16.1(c) as
it relates to working interest and royalty owners shall relate only to amounts payable based on ownership interests as reflected in Seller's division orders in effect from time to time and shall not
include payments which may be due to others not currently reflected in such division orders or for whom Seller does not reflect in such division orders as having an interest in the Properties. 

The
matters described in this Section 16.1 and in Section 19.9.1 being hereafter referred to as "Seller's Retained Liabilities." 

14

 

        16.2    Buyer's Indemnity.    Except for Seller's Retained Liabilities described in
Section 16.1, above, Buyer shall assume and be fully responsible for the Properties on or after Closing, including all operations, and shall indemnify, hold harmless and defend Seller and its
employees, officers, directors, attorneys, agents and representatives from and against all loss, liability, claims, fines, expenses, costs (including without limitation attorneys' fees and expenses,
court costs and expert fees and expenses) and causes of action whenever arising with respect thereto, whether before or after the Effective Date, including, but not limited to accidents or injuries
associated with the wells, the casing, and all other leasehold equipment in and on the wells, gathering lines, pipelines, tanks and all other personal property and fixtures used on or in connection
with the Properties. 

        17.    Risk of Loss.    If, after the date hereof and prior to the Closing any part of the
Properties shall be destroyed or harmed by fire or any other casualty or cause or shall be taken by condemnation or the exercise of eminent domain, Buyer shall be entitled to any applicable insurance
proceeds or condemnation awards and an adjustment to the Purchase Price based upon the allocated value of the Property destroyed or harmed, to the extent such loss is not covered by insurance or
condemnation award; provided, however, if prior to Closing an event occurs, whether fire, other casualties or eminent domain, causing a loss of more than ten percent (10%) of the Purchase Price for
which Seller has not agreed to bear responsibility, either party hereto shall have the right to terminate this Agreement without obligation or liability to the other party, except for liabilities
assumed by Buyer pursuant to Section 6.2 hereto and except for Seller's obligation to refund to Buyer the Deposit. 

        18.    Termination and Remedies.    

        18.1    Termination.    If the Closing has not occurred on or prior to March 15, 2005
(or March 31, 2005 if Buyer timely pays to Seller the Additional Deposit), and Seller has fully complied and performed pursuant to the provisions of this agreement and is prepared to close, and
Buyer has failed to fully and timely comply with Buyer's obligations as set forth herein or as required by applicable law, Seller may terminate this Agreement and retain the Initial Deposit,
Subsequent Deposit and Additional Deposit (if one is made) as liquidated damages in which case it shall give written notice of the termination to Buyer. 

        18.2    Sole Remedy of Buyer Prior to Closing.    If any time at or prior to Closing 

        (a)   it
is discovered that any of the representations and warranties made herein by Seller are incorrect in any material respect, 

        (b)   Seller
fails to fully and timely comply with any of Seller's obligations as set forth herein or as required by applicable law, or 

        (c)   the
Closing has not occurred on or prior to March 15, 2005 (or March 31, 2005 if Buyer timely pays to Seller the Additional Deposit), and Buyer has
complied and performed in all material respects pursuant to the provisions of this Agreement and is prepared to close (except where Buyer is excused from being prepared to close as result of the of
failure of any of the conditions precedent set out in Section 9 hereof), 

then
Buyer's sole and exclusive remedy against Seller shall be to terminate this Agreement, and within five (5) business days after Seller receives written notice of such election by Buyer,
Seller shall return the Initial Deposit, the Subsequent Deposit and the Additional Deposit (if made) to Buyer (unless an alternative remedy shall be mutually agreed upon between Buyer and Seller);
provided, however, if such a breach consists of Seller intentionally refusing to comply with this Agreement or to execute and deliver the documents referred to in Section 12.2, Buyer may bring
suit for damages or seek injunctive relief requiring Seller to execute and deliver such documents in accordance with the terms of this Agreement. 

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        19.    Environmental Matters    

        19.1    Presence of Wastes, NORM, Hazardous Substances, and Asbestos.    Buyer acknowledges
that the Properties have been used to explore for, develop and produce oil and gas, and that spills of wastes, crude oil, produced water, hazardous substances, and other materials may have occurred
hereon. Additionally, the Properties, including production equipment, may contain asbestos, hazardous substances, or Naturally Occurring Radioactive Material
("NORM"). NORM may affix or attach itself to the inside of wells, materials, and equipment as scale or in other forms, and NORM-containing
material may have been buried or otherwise disposed of on the Properties. Special procedures may be required for remediation, removing, transporting, and disposing of asbestos, NORM, hazardous
substances, and other materials from the Property, and with respect to the Properties actually acquired by Buyer at Closing hereunder, Buyer assumes all liability for the assessment, remediation,
removal, transportation, and disposal of these materials and associated activities in accordance with the applicable rules, regulations, and requirements of governmental agencies, unless otherwise
provided in this Section 19. 

        19.2    Adverse Environmental Condition.    "Adverse Environmental
Condition" means (a) any contamination or condition exceeding regulatory limits (now or in the future) and not otherwise permanently authorized by permit or law,
resulting from any discharge, release, production, storage, treatment, seepage, escape, leakage, emission, emptying, leaching or any other activities on, in or from any Property, or the migration or
transportation from other lands to any Property, prior to the Effective Date, of any wastes, pollutants, contaminants, hazardous materials or other materials or substances subject to regulation
relating to the protection of the environment under current or future federal, state or local laws or statutes, including, but not limited to, the Clean Air Act, the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, the Federal Water Pollution Control Act, the Safe Drinking Water Act, the Toxic Substance Control Act, the Hazardous and Solid Waste Amendments Act of
1984, the Superfund Amendments and Reauthorization Act of 1986, the Hazardous Materials Transportation Act, the Clean Water Act, the national Environmental Policy Act, the endangered species Act, the
Fish and Wildlife Coordination Act, the National Historic Preservation Act, and the Oil Pollution Act of 1990, as such laws may be amended from time to time and all regulations, orders, rulings,
directives, requirements and ordinances promulgated thereunder (collectively, "Environmental Laws"), and (b) any such contamination or condition temporarily authorized by permit, fee agreement
or other arrangement. 

        19.3    Environmental Assessment.    Prior to Closing, Buyer shall have the opportunity to
conduct at its sole risk and expense an environmental assessment of the Properties. Seller will provide reasonable access for this purpose to Properties operated by Seller; for any Property not
operated by Seller, Seller will reasonably cooperate with Buyer in contacting the operators of any such non-operated Property directly to arrange for access for the purposes of
environmental assessment. Buyer or any of its representatives and agents must comply with Seller's environmental and safety rules and policies while performing any environmental assessment on
Seller-operated Properties. Buyer agrees it will not disclose any information obtained in its environmental assessment to third parties unless agreed to in writing by Seller or unless such disclosure
is expressly required by applicable law or regulation or is completed pursuant to legal process of any court or governmental authority. Buyer will notify Seller in advance of any such disclosure and
will furnish Seller copies of all materials to be disclosed prior to any disclosure thereof to third parties. As soon as possible after Buyer's receipt thereof, Buyer shall forward to Seller copies of
all reports, data, analysis, test results, remediation costs estimates, and recommended remediation procedure or other information concerning or derived from Buyer's environmental assessment. 

        19.4    Notice of Adverse Environment Conditions.    Buyer shall notify Seller in writing of
any claimed Adverse Environmental Condition no later than March 10, 2005 ("Environmental Defects  

16

 

 Notice"). The Environmental Defects Notice shall (a) set forth in reasonable detail the Well, PUD and/or Lease or Easement with respect to which a claimed Adverse
Environmental Condition is made, (b) the nature of such claimed Adverse Environmental Condition, and (c) Buyer's proposed calculation of the cost to remediate each claimed Adverse
Environmental Condition ("Remediation Value"). Buyer shall absolutely and forever waive its right to assert any claim or liability against Seller
arising out of or in any way related to any Adverse Environmental Condition not set forth in the Environmental Defects Notice. 

        19.5    Determination of Adverse Environmental Conditions and Remediation Values.    Within
three (3) business days after Seller's receipt of the Environmental Defects Notice, Seller shall notify Buyer whether Seller agrees with Buyer's claimed Adverse Environmental Conditions and/or
the Remediation Value ("Seller's Environmental Response"). If Seller does not agree with the claimed Adverse Environmental Condition and/or the
Remediation Value, then the parties shall enter into good faith negotiations and shall attempt to agree on such matters. If the parties cannot reach agreement concerning either the existence of an
Adverse Environmental Condition or the Remediation Value prior to Closing, upon either party's request, the dispute shall be submitted to a mutually acceptable environmental consultant who is
experienced in environmental matters in the state in which the Property affected by the claimed Adverse Environmental Condition is located to resolve all points of disagreement with respect to such
matters. If at any time any consultant so chosen fails or refuses to perform hereunder, a new consultant shall be chosen by the parties. The cost of any such consultant shall be borne 50% by Seller
and 50% by Buyer. Each party shall present a written statement of its position on the Adverse Environmental Condition and/or the Remediation Value in question to the consultant within five
(5) business days after the consultant is selected, and the consultant shall make a determination of all points of disagreement in accordance with the terms and conditions of this Agreement
within ten (10) business days of receipt of such position statements. The determination by the consultant shall be conclusive and binding on the parties, and shall be enforceable against any
party in any court of competent jurisdiction. If necessary, the Closing Date shall be deferred only as to those Properties affected by any unresolved disputes regarding the existence of an Adverse
Environmental Condition and/or the Remediation Value until the consultant has made a determination of the disputed issued with respect thereto and all subsequent dates and required activities with
respect to any such Properties having reference to the Closing Date shall be correspondingly deferred; provided, however, that unless Seller and Buyer mutually agree to the contrary, the Closing Date
shall not be deferred in any event for more than thirty (30) days beyond the original Closing Date. All Properties as to which no such dispute(s) exist shall be conveyed to Buyer subject to the
terms of this Agreement at Closing. Once the consultant's determination has been expressed to both parties, Buyer shall have five (5) business days in which to advise Seller in writing which of
the options available to Buyer under section 19.7 below Buyer elects regarding each of the Properties as to which the consultant has made a determination that an Adverse Environmental Condition
exists. 

        19.6    Remediation of Adverse Environmental Conditions.    As to any Adverse Environmental
Condition accepted by Seller or determined to be an Adverse Environmental Condition, Seller shall have the election to remediate such Adverse Environmental Condition at Seller's sole cost in
accordance with
applicable Environmental Laws, and there shall be no adjustment to the Purchase Price in respect of such Adverse Environmental Condition and the provisions of Section 19.9 below shall
thereafter apply in all respects. If Seller elects to remediate an Adverse Environmental Condition, Seller will be obligated to diligently pursue and complete such remediation and will exercise all
reasonable efforts and diligence to complete remediation within six (6) months of the Closing Date, but any failure to complete its efforts by such time shall not relieve Seller of its duty to
satisfy its obligation hereunder. Buyer shall allow Seller and its agents and representatives such access to the Properties as is reasonably necessary for performance of remediation work. Seller will
conduct such work so as not to unreasonably interfere with Buyer's operations. 

17

  

        19.7    Remedies for Adverse Environmental Conditions Not Remediated.    As to any Adverse
Environmental Condition accepted by Seller or determined to be an Adverse Environmental Condition which Seller does not elect to or fails to remediate, Buyer shall have the option to either: 

        19.7.1 reduce
the Purchase Price by the applicable Remediation Value of the Unit and/or Well or PUD affected by such Adverse Environmental Condition; provided that the
Purchase Price shall not be reduced by an amount which exceeds the value allocated to the affected Property as set forth in Exhibit B, in which event Seller shall have no other or further
obligation or liability in respect of such Adverse Environmental Condition and the provisions of Section 19.9 below shall thereafter apply in all respects; provided, however, no downward
adjustment of the Purchase Price on account of Adverse Environmental Conditions shall occur unless the aggregate sum of all Remediation Values exceeds $450,000 ("Environmental
Basket Value"), and the amount of downward adjustment shall be the aggregate sum of all Remediation Values counted from the first dollar; or 

        19.7.2 delete
from this Agreement the Property which contains the Adverse Environmental Condition in which event the Purchase Price shall be reduced by the value allocated
to the affected Property as set forth in Exhibit "B". 

        19.8    Termination as a Remedy.    In the event the aggregate sum of the Remediation Values,
as estimated in good faith by Buyer, exceeds ten percent (10%) of the Purchase Price, either Buyer or Seller may elect to terminate this Agreement, in which case neither party shall have any further
liability or obligation to the other hereunder except as to (i) the return of the Deposit to Buyer and (ii) all obligations imposed by any confidentiality agreement, which shall survive
such termination and be enforceable in accordance with the terms thereof. 

        19.9    Indemnification of Adverse Environmental Conditions.    

        19.9.1 Seller
shall forever indemnify and hold Buyer harmless from all liability damages, claims, costs, legal fees and causes of action caused by, relating to or arising
out of any lawsuit, regulatory or administrative action whose basis is the violation of any governmental law or regulation applicable to hazardous wastes, which were intentionally removed from the
Properties and deposited elsewhere during Seller's period of ownership of the Properties and prior to the date of Closing. 

        19.9.2 Except
for the costs associated with Seller's remediation of any Adverse Environmental Conditions pursuant to Section 19.6 and Seller's indemnity in
Section 19.9.1, above, Buyer shall indemnify, defend and hold Seller harmless from and against any and all claims, demands, cause of action, liabilities and obligations, and all costs and
expenses (including, without limitation, reasonable attorneys' fees and court costs) associated with all Adverse Environmental Conditions, including without limitation, any such conditions arising out
of or relating to any discharge, release, production, storage, treatment or any activities on or in the Properties, or the migration or transportation from any other lands to the Properties
(specifically excluding transportation and disposal from the Properties to offsite locations prior to Closing), whether before or after the Effective Date, of materials or substances that are at
present, or become in the future, subject to regulation under federal, state or local laws or regulations, whether such laws or regulations now exist or are hereafter enacted INCLUDING, WITHOUT
LIMITATION, ANY CLAIMS, DEMANDS, CAUSES OF ACTION, LIABILITIES, OR OBLIGATIONS ARISING IN WHOLE OR IN PART FROM THE SOLE OR CONCURRENT NEGLIGENCE OR STRICT LIABILITY OF SELLER. BUYER HEREBY RELEASES
SELLER FROM AND AGAINST ANY AND ALL CLAIMS FOR CONTRIBUTION UNDER CERCLA AND/OR ANY OTHER PRESENT OR FUTURE ENVIRONMENTAL LAW OR REGULATION. 

18

 

        20.    Further Assurances.    After the Closing, Seller and Buyer shall execute, acknowledge
and deliver or cause to be executed, acknowledged and delivered such instruments and take such other action as may be necessary or advisable to carry out their obligations under this Agreement and
under any exhibit, document, certificate or other instrument delivered pursuant hereto. Seller shall use its best efforts to obtain all approvals and consents required by or necessary for the
transactions contemplated by this Agreement that are customarily obtained after Closing. 

        21.    Access to Records by Seller.    Within five (5) days after Closing, Seller shall
deliver to Buyer, at Seller's address, or at such other place as any of same may be kept, the originals of all Records and Data, except that Seller may retain (a) the originals of all Data
which are related to properties other than the Properties being sold herein, in which case Seller shall deliver duplicate copies of any such retained originals to Buyer, and (b) the originals
of all accounting Data, in which case Seller shall deliver duplicate copies of any such retained originals which relate to the Properties to Buyer. For a period of four (4) years after the date
of Closing, Buyer will retain the Data delivered to it pursuant hereto and will make such Data available to Seller upon reasonable notice at Buyer's headquarters at reasonable times and during office
hours. Buyer shall notify Seller in writing within thirty (30) days of the sale to a third party of all or any part of the Properties which involves the transfer of any of the Data of the name
and address of the buyer(s) in any such sale. Buyer shall require as part of any such sales transaction that such third party assume the obligations imposed on Buyer in this Section 21.
Notwithstanding anything to the contrary contained herein, for a period of three (3) years after Closing, Seller shall make available to Buyer, at Buyer's sole cost and expense, and during
normal business hours, such records and. accounting data relating to the Properties as will allow Buyer to conduct an audit for three prior years for the purpose of the registration of a public
offering of its stock with the SEC or otherwise. 

        22.    Use of BMC, Ltd. Name.    Buyer agrees that, as soon as practicable after the
Closing, it will remove or cause to be removed the names and marks "BMC, Ltd." and all variations and derivatives thereof and logos relating thereto from the Properties of which it has assumed
operations and will not thereafter make any use whatsoever of such names, marks, and logos. 

        23.    Seller's Employees.    Seller shall encourage its current field employees to consider
employment with Buyer. Buyer shall be permitted to contact such employees and offer employment to such employees. 

        24.    Notices.    All notices required or permitted under this Agreement shall be in writing
and shall be delivered personally or by certified mail, postage prepaid and return receipt requested or by telecopier as follows:

	Seller:	 	BMC, Ltd.

5464 Carpinteria Avenue

Carpinteria, CA 93013-1423
	 	 	 	 	Attention:	 	General Counsel
	 	 	 	 	Telephone:	 	(805) 745-2100
	 	 	 	 	Telecopier:	 	(805) 745-1846
	 	 	 	 	 	 	 
	Buyer:	 	BlackWell Energy Group, LLC

9400 North Central Expressway, Suite 520

Dallas, Texas 75231
	 	 	 	 	Attention:	 	Joe Ciavarra
	 	 	 	 	Telephone:	 	(214) 346-0222
	 	 	 	 	Telecopier:	 	(214) 346-0228

19

 

or
to such other place within the United State of America as either Party may designate as to itself by written notice to the other. All notices given by personal delivery or mail shall be effective
on the date of actual receipt at the appropriate address. Notices given by telecopier shall be effective upon actual receipt if received during recipient's normal business hours or at the beginning of
the next business day after receipt if received after the recipient's normal business hours. All notices by telecopier shall be confirmed in writing on the day of transmission by either mailing by
postage prepaid certified mail with return receipt requested, or by personal delivery. 

        25.    Arbitration.    Except as elsewhere provided in this Agreement, any controversy,
dispute or claim between the parties hereto arising under this Agreement shall be determined by binding arbitration, the conduct of which shall be governed by the Commercial Arbitration Rules of the
American Arbitration Association. 

        25.1    Determination.    The arbitrators selected to act hereunder under the Commercial
Arbitration Rules of the American Arbitration Association shall be qualified by education and experience to pass on the particular question in dispute. The arbitrators shall promptly hear and
determine (after due notice of hearing and giving the parties a reasonable opportunity to be heard) the questions submitted, and shall render their decision within sixty (60) days after
appointment of the third arbitrator. The arbitration shall be held in Denver, Colorado. If within such period a decision is not rendered by the board, or majority thereof, new arbitrators may be named
and shall act hereunder at the election of either Buyer or Seller in like manner as if none had been previously named. 

        25.2    Decision Binding.    The decision of the arbitrators, or the majority thereof, made in
writing shall be final and binding upon the parties hereto as to the questions submitted, and Buyer and Seller will abide by and comply with such decision. The expenses of arbitration, including
reasonable compensation to the arbitrators, shall be borne equally by the parties hereto. 

        26.    Governing Law.    This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas. 

        27.    Assignment.    This Agreement shall be binding upon and shall inure to the benefit of
the Parties hereto and their respective permitted successors and assigns. Notwithstanding the preceding sentence, neither party shall assign this Agreement or its rights hereunder without the other
party's written consent, which shall not be unreasonably withheld. Additionally, notwithstanding the foregoing, Buyer may transfer its rights under this Agreement to a partnership or other entity in
which Buyer is the general partner or managing member. 

        28.    Entire Agreement; Amendments; Waivers.    This Agreement constitutes, the entire
Agreement between the Parties hereto with respect to the subject matter hereof, superseding all prior negotiations, discussions, agreements and understandings, whether oral or written, relating to
such subject matter. This Agreement may not be amended and no rights hereunder may be waived except by a written
document signed by the Party to be charged with such amendment or waiver. No waiver of any of the provisions of the Agreement shall be deemed or shall constitute a waiver of any other provisions
hereof (whether or not similar) nor shall such waiver constitute a continuing waiver unless otherwise expressly provided. 

        29.    Severability.    If a court of competent jurisdiction determines that any clause or
provision of this Agreement is void, illegal, or unenforceable, the other clauses and provisions of the Agreement shall remain in full force and effect and the clauses and provisions which are
determined to be void, illegal, or unenforceable shall be limited so that they shall remain in effect to the extent permissible by law. 

        30.    Press Releases.    Seller and Buyer shall consult with each other prior to the issuance
of any press releases or other public announcements concerning this transaction. 

20

 

        31.    Headings.    The headings of the Articles and Sections of this Agreement are for
guidance and convenience of reference only and shall not limit or otherwise affect any of the terms or provisions of this Agreement. 

        32.    Counterparts.    This Agreement may be executed by Buyer and Seller in any number of
counterparts, each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same instrument. 

        33.    Expenses, Fees and Taxes.    Each of the parties hereto shall pay its own fees and
expenses incident to the negotiation and preparation of this Agreement and consummation of the transactions contemplated hereby, including broker fees. Buyer shall be responsible for the cost of all
fees for the recording of transfer documents. All other costs shall be borne by the party incurring them. Notwithstanding anything to the contrary herein, it is acknowledged and agreed by and between
Seller and Buyer that the Purchase Price excludes any sales taxes or other taxes in connection with the sale of property pursuant to this Agreement. If a determination is ever made that a sales tax or
other transfer tax applies, Buyer shall be liable for such tax as well as any applicable conveyance, transfer and recording fees, and real estate transfer stamps or taxes imposed on any transfer of
property pursuant to this Agreement. Buyer shall indemnify and hold Seller harmless with respect to the payment of any of such taxes, including any interest or penalties assessed thereon. The
indemnity and hold harmless obligation contained in the preceding sentence shall survive the Closing. 

        34.    Attorneys Fees/Expert Witness Fees.    In the event that any party hereto makes or
institutes a claim, demand, action, litigation, arbitration or other proceeding relating to or arising out of matters or relationships set forth in or contemplated by this Agreement, (any such
occurrence being referred to as
a "Dispute), then the prevailing party in such Dispute shall be entitled to recover from the other party hereto all reasonable attorney's fees and other costs and expenses reasonably incurred by the
prevailing party during the course of the Dispute. A party hereunder shall be deemed to be a prevailing party once a favorable finding, ruling, order, judgment, decisions or other such action is taken
or entered in favor of one party on the merits of the Dispute and which becomes unappealable. Without limiting any other rights of the prevailing party hereunder, in the event that in connection with
a Dispute, the defending party makes a settlement offer which is, in all material respects equal to or more valuable or favorable than the terms upon which any such Dispute is ultimately decided,
resolved, or settled, then the defending party shall be deemed to be a prevailing party under this Section with respect to all of its reasonable attorney's fees, costs and expenses which it incurs
after it makes such offer in writing to the other party hereto. 

        35.    Laws and Regulations.    From and after the Closing, (a) Buyer shall comply with
all applicable laws, ordinances, rules and regulations and shall properly obtain and maintain all permits required by public authorities with regard to the Properties, and shall provide and maintain
with the applicable regulatory agency(ies) all required bonds, and (b) Buyer shall assume all of Seller's obligations with regard to abandonment of all existing unplugged wells, whether
producing or nonproducing, and abandonment of the leasehold property including, where applicable, the plugging of wells and the restoration of the surface as completely as practicable and/or in
compliance with all applicable laws, rules, regulations and in compliance with all leases and other agreements affecting the Properties, and shall indemnify and hold Seller harmless with respect to
any and all of those obligations. Such obligations shall survive the Closing and Buyer shall remain liable therefor as regards Seller even if Buyer shall assign, sell or transfer the Properties to a
third party. 

        36.    Tax-Deferred Exchange Option.    Seller shall have the right to elect to
effect a tax-deferred exchange under Internal Revenue Code Section 1031 (a "Tax Deferred Exchange") for -the Properties at any time prior to the Closing Date. If Seller
elects to effect a Tax-Deferred Exchange, Buyer agrees to execute escrow instructions, documents, agreements, or instruments to effect the exchange, provided that Buyer shall incur no
additional costs, expenses, fees or liabilities as a result of or connected with 

21

 

the
exchange. Seller may assign any of its rights and delegate performance of any of their duties under this Agreement in whole or in part to a third party in order to effect such an exchange;
provided that Seller shall remain responsible to Buyer for the full and prompt performance of their respective delegated duties. Seller shall indemnify and hold Buyer and its Affiliates harmless from
and against all claims, expenses (including reasonable attorneys' fees), loss and liability resulting from its participation in any exchange undertaken pursuant to this Section 36 pursuant to
the request of Seller. 

        37.    Exhibits and Schedules.    The following enumerated Exhibits are incorporated herein
and are a part hereof. 

	Exhibit "A"	 	Units and Leases
	Exhibit "B"	 	Working Interests, Net Revenue Interests and Allocated Values
	Exhibit "C"	 	Assignment and Bill of Sale
	Exhibit "D"	 	Consents, Preferential Rights
	Schedule 4.4	 	Material Contracts
	Schedule 4.18	 	Outstanding Obligations
	Schedule 6.1.6	 	Insurance

[Remainder of page intentionally left blank]

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Executed
as of the date set forth above. 

	 	 	SELLER:
	 	 	 	 	 	 	 
	 	 	BMC, Ltd.
	 	 	 	 	 	 	 
	 	 	 	 	By:	 	Venoco, Inc.

it's General Partner
	 	 	 	 	 	 	 
	 	 	 	 	By:	 	/s/  TIMOTHY M. MARQUEZ      
 Timothy M. Marquez

Chief Executive Officer
	 	 	 	 	 	 	 
	 	 	 	 	 	 	 
	 	 	BUYER:
	 	 	 	 	 	 	 
	 	 	BlackWell Energy Group, LLC
	 	 	 	 	 	 	 
	 	 	By:	 	/s/  J. JOSEPH CIAVACCA      

	 	 	Name:	 	J. Joseph Ciavacca

	 	 	Title:	 	President and Chief Executive Officer

23

QuickLinks

PURCHASE AND SALE AGREEMENT

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