Exhibit 10.18

 

Prospect Letter Agreement

 

This prospect letter agreement (this “Letter Agreement”) is made and entered into this [__] day of October, 2010 (the “Effective Date”), by and between Empire Petroleum Corporation, a Delaware corporation (“Empire”), and [________________] (“Assignee”). Empire and Assignee shall sometimes be referred to herein individually as a “Party” and, collectively, as the “Parties.”

 

Recitals

 

A. The Gabbs Valley Prospect (the “Prospect”) covers approximately 92,825 gross acres, with no depth limitations. A number of leases or portions of leases making up the Prospect have been included in an oil and gas unit formed pursuant to that certain Unit Agreement for the Development and Operation of the Paradise Unit Area, Counties of Nye and Mineral, State of Nevada, dated April 14, 2010, No. ANVN88316X (the “Paradise Unit Agreement”). A copy of the Paradise Unit Agreement is attached hereto as Exhibit A. The unit formed under the Paradise Unit Agreement is hereafter referred to as the “Paradise Unit.”

 

B. The prospect leases wholly or partially included in the Paradise Unit are identified and described on Exhibit B attached hereto (the “Paradise Unit Leases”).

 

C. There are additional leases included in the Prospect that are not part of the Paradise Unit. The Prospect leases or portions of Prospect leases not included in the Paradise Unit are identified and described on Exhibit C attached hereto the “Non-Unit Leases” and, collectively with the Paradise Unit Leases, the “Prospect Leases”).

 

D. Subject to the provisions of the Paradise Unit Agreement, operations for the Paradise Unit have been and shall be conducted pursuant to the Unit Operating Agreement attached hereto as Exhibit D (the “Paradise Unit Operating Agreement”).

 

E. Pursuant to that certain Farmout Agreement dated June 11, 2010 attached hereto as Exhibit E (the “Farmout Agreement”), by and between Empire and Cortez Exploration, L.L.C. and Windmill Oil & Gas, L.L.C. (the “Cortez Group”), Empire drilled that certain initial test well with respect to the Paradise Unit Leases located on Lease No. N-599901, in the SE/4 of the SE/4 of the NE/4 of Section 12-T12N-R34E (the “Empire Paradise Unit No. 2-12 Well”) to a depth of approximately 4,248 feet.

 

F. Empire owns 98% (of 8/8ths) leasehold interest, record title interest and working interest in all of the Prospect Leases and 98% of 80% (of 8/8ths) net revenue interest in each of the Prospect Leases, all subject to certain reversionary interests to the Cortez Group pursuant to the Farmout Agreement.

 

G. In exchange for the payment of $[100,000] by Assignee to Empire, the Parties have agreed that the Empire will assign to Assignee [1]% of Empire’s gross working interest (which is [1]% of 80% (of 8/8ths) net revenue interest) in the Paradise Unit Leases and the Empire Paradise Unit No. 2-12 Well and grant Assignee an option to participate in the Non-Unit Leases.

 

Agreement

 

In consideration of the mutual premises and covenants contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereby agree as follows:

 

1. Purchase Price; Assignment of Transferred Interest. In exchange for the payment of $[100,000] by Assignee to Empire (the “Purchase Price”), Empire shall assign to Assignee [1]% of Empire’s gross working interest (which is [1]% of 80% (of 8/8ths) net revenue interest) in the Paradise Unit Leases and the Empire Paradise Unit No. 2-12 Well (the “Paradise Unit Transferred Interest”). Upon the execution of this Letter Agreement and the payment of the Purchase Price, Empire shall execute and deliver to Assignee assignments of the Paradise Unit Transferred Interest in form and substance reasonably acceptable to Assignee.

 

2. Completion of Empire Paradise Unit No. 2-12 Well. Empire hereby agrees that it will pay for the cost to deepen the Empire Paradise Unit No. 2-12 Well another 800 to 1,000 feet. Assignee shall not have any responsibility to pay the costs to continue drilling the Empire Paradise Unit No. 2-12 Well. Assignee likewise shall not have any responsibility to pay the costs to complete and equip the Empire Paradise Unit No. 2-12 Well into pipeline connections or tanks, or to abandon the Empire Paradise Unit No. 2-12 Well should it be a dry hole, as the case may be. As between Empire and Assignee, the manner in which to drill and complete the Empire Paradise Unit No. 2-12 Well and the costs to be incurred to drill and complete the Empire Paradise Unit No. 2-12 Well shall be in the sole discretion of Empire, consistent with good oil field practice. In this regard, Empire is not required to prepare an AFE or obtain approval of an AFE from Assignee with respect to the drilling and completion (or abandonment) of the Empire Paradise Unit No. 2-12 Well.

 

3. Option on Non-Unit Leases. The Parties acknowledge and agree that with respect to the Non-Unit Leases, Empire has certain optional rights pursuant to Section VII of the Farmout Agreement and, in the event that Empire does not exercise such rights, Empire’s interests in the Non-Unit Leases acquired from the Cortez Group pursuant to the Farmout Agreement are subject to a reversionary interest to the Cortez Group (the “Cortez Group Reversionary Interest”). In the event that Empire elects to exercise such optional rights with respect to any Non-Unit Lease, the Parties hereby agree that Assignee shall have the right to participate along with Empire and receive [1]% gross working interest(which is [1]% of 80% (of 8/8ths) net revenue interest) in such Non-Unit Lease (the “Non-Unit Lease Transferred Interest”) by paying [1]% of the rentals of such Non-Unit Lease, which Non-Unit Lease Transferred Interest shall be subject to the Cortez Group Reversionary Interest. Empire shall be the operator with respect to the drilling, completion and/or abandonment of the Non-Unit Test Well (as defined in the Farmout Agreement), if any, and all operations of the Non-Unit Leases shall be conducted pursuant to the joint operating agreement attached hereto as Exhibit “D”.

 

4. Representations and Warranties as to Title. Empire represents and warrants that as of the date of this Letter Agreement its title to the Prospect Leases is free and clear from any prior conveyance, lien or encumbrance made or suffered by it, or by any person by, through or under it, which diminishes, limits or burdens the rights and interests that Assignee has the right to earn under this Letter Agreement. Empire further represents and warrants that until such time as the Non-Unit Leases, or any of them, are assigned to Assignee under the terms of this Letter Agreement, Empire will not make or suffer, or allow to be made or suffered by any person by though or under it, any conveyance, lien or encumbrance with respect to the Non-Unit Leases.

 

5. Burdens. All assignments under this Letter Agreement shall be subject to and burdened by the terms and conditions of this Letter Agreement, the Prospect Leases, the Paradise Unit Operating Agreement and the Paradise Unit Agreement (or, with respect to assignments of the Non-Unit Leases, a unit agreement substantially similar to the Paradise Unit Agreement if a unit is subsequently formed), and a proportionate part of all landowners’ royalties, overriding royalty interests and similar interests of record as of the date of such assignment.

 

6. Tag Along and Drag Along Rights.

 

(a) Tag Along. For a period of [five] years from and after the Effective Date, in the event either Party (the “Transferring Party”) desires to sell, assign, transfer or otherwise dispose of all or any portion of its interests in the Prospect, directly or indirectly, the Transferring Party shall promptly deliver to the other Party (the “Non-Transferring Party”) written notice thereof, and the Non-Transferring Party shall have the right, but not the obligation, to elect to participate in the proposed transaction in proportion to Non-Transferring Party’s interests in the Prospect as part of the proposed transaction at the same terms, conditions and valuation. The notice shall include the name of the proposed transferee, and all of the terms and conditions of the proposed transaction. The Non-Transferring Party shall deliver to the Transferring Party written notice of the Non-Transferring Party’s election to participate in the proposed transaction on or before five days after the Non-Transferring Party’s receipt of written of notice thereof from the Transferring Party. If the Non-Transferring Party fails to deliver its election within said time-period, the Non-Transferring Party shall be deemed conclusively to have elected not to participate in the proposed transaction hereunder. If the acquiring party in the proposed transaction is unwilling to acquire all of the interests offered, the Non-Transferring Party shall have the right to participate in the proposed transaction in the same ratio as the Non-Transferring Party’s interest in the Prospect bears to the total interests in the Prospect to be transferred by both the Transferring Party and the Non-Transferring Party.

 

(b) Drag Along. If Empire receives a bona fide written offer (the “Purchase Offer”) from a third party (the “Purchaser”) to purchase all or substantially all of Empire’s interest in the Prospect, and the Purchase Offer is acceptable in Empire’s sole and absolute discretion, Empire shall have the right, but not the obligation, to cause Assignee (and their permitted assignee(s) or successors, if any) to sell all (but not less than all) of Assignee’s interests in the Prospect in accordance with the terms and conditions of this Section 6(b) (the “Drag Along Right”). Empire shall elect to exercise the Drag Along Right by written notice (the “Drag Along Notice”) delivered to Assignee on or before 30 days after receipt of the Purchase Offer. The Drag Along Notice shall include the name of the Purchaser, the purchase price (the “Purchase Price”) and all of the material terms and conditions of the proposed transaction. If Empire elects to exercise the Drag Along Right, the closing of the transaction shall occur on or before 90 days after receipt of the Drag Along Notice under the circumstances described herein and, upon compliance with the terms and conditions thereof, Assignee shall sell to such Purchaser all of their interest in the Prospect. The closing of the Purchaser’s acquisition of Empire’s interest in the Prospect and Assignee’s interest in the Prospect shall occur simultaneously and be conditioned upon each other.

 

7. Miscellaneous.

 

(a) Successors and Assigns. This Letter Agreement shall not be assigned by any Party without the prior written approval of the non-assigning Party, which approval shall not be unreasonably withheld, conditioned or delayed.

 

(b) Headings. Headings used in this Letter Agreement are inserted for convenience only and shall not affect the interpretation of any of the provisions of this Letter Agreement.

 

(c) Relationship of Parties. This Letter Agreement does not constitute the Parties as a partnership, mining partnership, mining partnership, joint venture, incorporated association or any other joint relationship, it being intended that liabilities and obligations of the Parties shall be several and not joint. Each Party shall be responsible only for its obligations and liabilities as set out herein and no Party shall be responsible for those of any other Party.

 

(d) Further Assurances. The Parties agree to execute such further instruments and documents and to diligently undertake such actions as may be necessary or appropriate in connection with the subject matter of this Letter Agreement and to take such other action as reasonably requested by a Party to give full force and effect to the terms and intent of this Letter Agreement.

 

(e) Entire Agreement. This Letter Agreement, including the Exhibits attached hereto, constitutes the entire agreement and understanding of the Parties hereto with respect to the transactions contemplated hereby, and supersedes all prior understandings, discussions and agreements between the Parties relating to the subject matter hereof. The Exhibits attached hereto are incorporated herein by reference.

 

(f) Laws Governing This Agreement. This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada.

 

(g) Binding Effect. This Letter Agreement shall be binding upon and inure to the benefit of the Parties hereto, their respective heirs, successors and assigns.

 

(h) Counterpart Execution. This Letter Agreement may be executed in any number of counterparts, each of such shall be considered an original for all purposes.

 

(i) Notices. All notices or other communications required or permitted hereunder shall be provided in writing and shall be delivered to the authorized representative of the Parties set forth below, by either (i) personal delivery, (ii) certified mail, return receipt requested, (iii) overnight delivery service, or (iv) facsimile, as follows:

 

If to Empire:

 

Empire Petroleum Corporation

8801 South Yale, Suite 120

Tulsa, Oklahoma 74137-3575

Attn: A. E. Whitehead

Facsimile: (918) 488-1530

 

If to Assignee:

 

[________________]

[________________]

[________________]

Attn: [___________]

Facsimile: (___) [__]-[___]

 

 

Either Party may, upon written notice to the other Party, change the address and person to whom such communications are to be directed.

 

 

IN WITNESS WHEREOF, the Parties have executed and delivered this Letter Agreement effective as of the Effective Date.

 

 

Empire Petroleum Corporation

 

By: /s/ Albert E. Whitehead

Albert E. Whitehead

President and Chief Executive Officer

 

 

 

[Assignee]

 

 

By: ___________________________________

 

Name: _________________________________

 

Title: __________________________________

 

 

EXHIBIT “A”

 

UNIT AGREEMENT

 

FOR THE DEVELOPMENT AND OPERATION

 

OF THE

 

PARADISE UNIT AREA

 

COUNTIES OF NYE AND MINERAL

 

STATE OF NEVADA

 

 

TABLE OF CONTENTS

 

 

SECTION			PAGE
		Preliminary Recitals	1
1.		Enabling Act and Regulations	1
2.		Unit Area	2
3.		Unitized Land and Unitized Substances	3
4.		Unit Operator	3
5.		Resignation or Removal of Unit Operator	3
6.		Successor Unit Operator	4
7.		Accounting Provisions and Unit Operating Agreement	5
8.		Rights and Obligations of Unit Operator	5
9.		Drilling to Discovery	5
10.		Plan of Further Development and Operation	6
11.		Participation after Discovery	7
12.		Allocation of Production	8
13.		Development or Operation of Non-Participating Land Formations	9
14.		Royalty Settlement	9
15.		Rental Settlement	10
16.		Conservation	10
17.		Drainage	10
18.		Lease and Contracts Conformed or Extended	11
19.		Covenants Run with Land	12
20.		Effective Date and Term	12
21.		Rate of Prospecting, Develop-0ment, and Production	13
22.		Appearances	13
23.		Notices	13
24.		No Waiver of Certain Rights	14
25.		Unavoidable Delay	14
26.		Nondiscrimination	14
27.		Loss of Title	14
28.		Non-Joinder and Subsequent Joinder	14
29.		Counterparts	15
30.		Special Surface Stipulations	15
31.		Surrender	15
32.		Taxes	16
33.		No Partnership	16

 

Exhibit “A” – Plat of Unit Area

 

Exhibit “B” – Schedule showing percentage and kind of ownership

 

 

 

 

i

1	UNIT AGREEMENT
2
3	FOR THE DEVELOPMENT AND OPERATION
4
5	OF THE
6
7	PARADISE UNIT AREA
8
9	COUNTIES OF NYE AND MINERAL
10
11	STATE OF NEVADA
12
13	NO.______________
14
15
16
17	THIS AGREEMENT, entered into as of the 22nd day of January, 2010, by and between the
18	parties subscribing, ratifying, or consenting hereto, and herein referred to as the "parties hereto,"
19
20	WITNESSETH:
21
22	WHEREAS, the parties hereto are the owners of working, royalty, or other oil and gas
23	interests in the unit area subject to this agreement; and
24
25	WHEREAS, the Mineral Leasing Act of February 25, 1920, 41 Stat. 437, as amended, 30
26	U. S.C. Sec. 181 et seq., authorizes Federal lessees and their representatives to unite with each other,
27	or jointly or separately with others, in collectively adopting and operating  under a unit plan of
28	development or operation of any oil and gas pool, field, or like area, or any part thereof for the
29	purpose  of  more  properly  conserving  the  natural  resources  thereof  whenever  determined  and
30	certified by the Secretary of the Interior to be necessary or advisable in the public interest; and
31
32	WHEREAS, the parties hereto hold sufficient interests in the Paradise Unit Area covering
33	the land hereinafter described to give reasonably effective control of operations therein; and
34
35	WHEREAS, it is the purpose of the parties hereto to conserve natural resources, prevent
36	waste, and secure other benefits obtainable through development and operation of the area subject to
37	this agreement under the terms, conditions, and limitations herein set forth;
38
39	NOW, THEREFORE, in consideration of the premises and the promises herein contained,
40	the parties hereto commit to this agreement their respective interests in the below-defined unit area
41	and agree severally among themselves as follows:
42
43	1.  ENABLING ACT AND REGULATIONS.  The Mineral Leasing Act of February 25,
44	1920,  as  amended, supra,  and  all  valid pertinent regulations including operating  and unit plan
45	regulations, heretofore issued thereunder or valid, pertinent and reasonable regulations hereafter
46	issued thereunder are accepted and made a part of this agreement as to Federal lands, provided such
1	regulations are not inconsistent with the terms ofthis agreement; and as to non-Federal lands, the oil
2	and gas operating regulations  in  effect  as  of  the  effective date hereof  governing drilling and
3	producing operations, not inconsistent with the terms hereof or the laws of the State in which the
4	non-Federal land is located, are hereby accepted and made a part of this agreement.
5
6	2.  UNIT AREA.  The area specified on the map attached hereto, marked Exhibit "A," is
7	hereby designated and recognized as constituting the unit area, containing 40,073.39 acres, more or
8	less.
9
10	Exhibit "A" shows, in addition to the boundary of the unit area, the boundaries and identity
11	of tracts and leases in said area to the extent known to the Unit Operator.  Exhibit "B" attached
12	hereto is a schedule showing to the extent known to the Unit Operator, the acreage, percentage, and
13	kind of ownership of oil and gas interests in all lands in the unit area.  However, nothing herein or in
14	Exhibits "A" or "B" shall be construed as a representation by any party hereto as to the ownership of
15	any interest other than such interest or interests as are shown in the Exhibits as owned by such party.
16	Exhibits "A" and "B" shall be revised by the Unit Operator whenever changes in the unit area or in
17	the ownership interests in the individual tracts render such revision necessary, or when requested by
18	the Authorized Officer, hereinafter referred to as "AO" and not less than four copies of the revised
19	Exhibits shall be filed with the proper Bureau of Land Management office.
20
21	The above-described unit area shall when practicable be expanded to include therein any
22	additional lands or shall be contracted to exclude lands whenever such expansion or contraction is
23	deemed  to be necessary or  advisable to confonn  with the purposes of  this  agreement.   Such
24	expansion or contraction shall be effected in the following manner:
25
26	(a) Unit Operator, on its own motion (after preliminary concurrence by the AO), or on
27	demand of the AO, shall prepare a notice of proposed expansion or contraction describing the
28	contemplated  changes in  the  boundaries of  the  unit area, the  reasons  therefor,  any  plans for
29	additional drilling, and the proposed effective date of the expansion or contraction, preferably the
30	first day of a month subsequent to the date of notice.
31
32	(b) Said notice shall be delivered to the proper Bureau of Land Management office, and
33	copies thereof mailed to the last known address of each working interest owner, lessee and lessor
34	whose interests are affected, advising that 30 days will be allowed for submission  to the Unit
35	Operator of any objections.
36
37	(c) Upon expiration of the 30-day period provided in the preceding item (b) hereof, Unit
38	Operator shall file with the AO evidence of mailing of the notice of expansion or contraction and a
39	copy  of  any objections  thereto  which  have  been  filed  with  Unit  Operator,  together  with an
40	application in triplicate, for approval of such expansion or contraction and with appropriate joinders.
41
42	(d) After due consideration of all pertinent infonnation, the expansion or contraction shall,
43	upon approval by the AO, become effective as of the date prescribed in the notice thereof or such
44	other appropriate date.
45
46	2
1	(e) All legal subdivisions of lands (i.e., 40 acres by Government survey or its nearest lot or
2	tract equivalent; in instances of irregular surveys, unusually large lots or tracts shall be considered in
3	multiples of 40 acres or the nearest aliquot equivalent thereof), no parts of which are in or entitled to
4	be in a participating area on or before the fifth anniversary of the effective date of the first initial
5	participating area established under this unit agreement, shall be eliminated automatically from this
6	agreement, effective as of said fifth anniversary, and such lands shall no longer be a part of the unit
7	area and shall no longer be subject to this agreement, unless diligent drilling operations are in
8	progress on unitized lands not entitled to participation on said fifth anniversary, in which event all
9	such  lands  shall  remain  subject  hereto  for  so  long  as such  drilling  operations  are  continued
10	diligently, with not more than 90 days' time elapsing between the completion of one such well and
11	the commencement of the next such well.   All legal subdivisions of lands not entitled to be in a
12	participating area  within  10  years after  the  effective date of  the  first  initial  participating area
13	approved under this agreement shall be automatically eliminated from this agreement as of said
14	tenth  anniversary.    The  Unit  Operator  shall,  within  90  days  after  the  effective  date  of  any
15	elimination hereunder, describe the area so eliminated to the satisfaction of the AO and promptly
16	notify all parties in interest.   All lands reasonably proved productive of unitized substances in
17	paying quantities  by diligent  drilling  operations  after the aforesaid 5-year period  shall  become
18	participating in the same manner as during said first 5-year period.  However, when such diligent
19	drilling operations cease, all non-participating lands not then entitled to be in a participating area
20	shall be automatically eliminated effective as of the 91st day thereafter.
21
22	Any expansion of the unit area pursuant to this section which embraces lands theretofore
23	eliminated pursuant  to  this  subsection  2(e)  shall  not be  considered  automatic  commitment or
24	recommitment of such lands.  If conditions warrant extension of the 10-year period specified in this
25	subsection, a single extension of not to exceed 2 years may be accomplished by consent of the
26	owners of 90% of the working interest in the current non-participating unitized lands and the owners
27	of 60% of the basic royalty interests (exclusive of the basic royalty interests of the United States) in
28	non-participating unitized lands with approval of the AO, provided such extension application is
29	submitted not later than 60 days prior to the expiration of said 10-year period.
30
31
32	3.   UNITIZED LAND  AND UNITIZED SUBSTANCES.     All land now or hereafter
33	committed to this agreement shall constitute land referred to herein as "unitized  land" or "land
34	subject to this agreement". All oil and gas in any and all formations of the unitized land are unitized
35	under the terms of this agreement and herein are called "unitized substances".
36
37	4. UNIT OPERATOR. Cortez Exploration LLC is hereby designated as Unit Operator and
38	by signature hereto as Unit Operator agrees and consents to accept the duties and obligations of Unit
39	Operator for the discovery, development, and production of unitized substances as herein provided.
40	Whenever reference is made herein to the Unit Operator, such reference means the Unit Operator
41	acting in that capacity and not as an owner of interest in unitized substances, and the term "working
42	interest owner" when used herein shall include or refer to Unit Operator as the owner of a working
43	interest only when such an interest is owned by it.
44
45	5. RESIGNATION OR REMOVAL OF UNIT OPERATOR. Unit Operator shall have
46	the right to resign at any time prior to the establishment of a participating area or areas hereunder,
	3
1	but such resignation shall not become effective so as to release Unit Operator from the duties and
2	obligations of Unit Operator and terminate Unit Operator's rights as such for a period of 6 months
3	after notice of intention to resign has been served by Unit Operator on all working interest owners
4	and the AO and until all wells then drilled hereunder are placed in a satisfactory condition for
5	suspension or abandonment, whichever is required by the AO, unless a new Unit Operator shall
6	have been selected and approved and shall have taken over and assumed the duties and obligations
7	of Unit Operator prior to the expiration of said period.
8
9	Unit Operator shall have the right to resign in like manner and subject to like limitations as
10	above provided at any time after a participating area established hereunder is in existence, but in all
11	instances of resignation or removal, until a successor Unit Operator is selected and approved as
12	hereinafter provided, the working interest owners shall be jointly responsible for performance of the
13	duties of Unit Operator, and shall not later than 30 days before such resignation or removal becomes
14	effective appoint a common agent to represent them in any action to be taken hereunder.
15
16	The resignation of Unit Operator shall not release Unit Operator from any liability for any
17	default by it hereunder occurring prior to the effective date of its resignation.
18
19	The  Unit  Operator  may,  upon  default  or  failure  in  the  performance  of  its  duties  or
20	obligations hereunder, be subject to removal by the same percentage vote of the owners of working
21	interests as herein provided for the selection  of  a new Unit Operator.   Such  removal shall be
22	effective upon notice thereof to the AO.
23
24	The resignation or removal of Unit Operator under this agreement shall not terminate its
25	right, title, or interest as the owner of a working interest or other interest in unitized substances, but
26	upon the resignation or removal of Unit Operator becoming effective, such Unit Operator shall
27	deliver possession of all wells, equipment, materials, and appurtenances used in conducting the unit
28	operations to the new duly qualified successor Unit Operator or to the common agent, if no such
29	new Unit Operator is selected, to be used for the purpose of conducting unit operations hereunder.
30	Nothing  herein  shall  be  construed  as  authorizing  removal  of  any  material,  equipment,  or
31	appurtenances needed for the preservation of any wells.
32
33	6. SUCCESSOR UNIT OPERATOR. Whenever the Unit Operator shall tender his or its
34	resignation as Unit Operator or shall be removed as hereinabove provided, or a change of Unit
35	Operator is negotiated by the working interest owners, the owners of the working interests according
36	to their respective acreage interests in all unitized land shall, pursuant to the Approval of the Parties
37	requirements of the unit operating agreement, select a successor Unit Operator.  Such selection shall
38	not become effective until:
39
40	(a)  a Unit Operator so selected shall accept in writing the duties and responsibilities of Unit
41	Operator, and
42
43	(b)  the selection shall have been approved by the AO.
44
45	If no successor Unit Operator is selected and qualified as herein provided, the AO at his
46	election may declare this unit agreement terminated.
	4
1
2	7. ACCOUNTING PROVISIONS AND UNIT OPERATING AGREEMENT. If the
3	Unit Operator is not  the sole owner of working interests, costs and  expenses incurred by Unit
4	Operator in conducting unit operations hereunder shall be paid and apportioned among and borne by
5	the owners of working interests, all in accordance with the agreement or agreements entered into by
6	and between the Unit Operator and the owners of working interests, whether one or more, separately
7	or collectively. Any agreement or agreements entered into between the working interest owners and
8	the Unit Operator as provided in this section, whether one or more, are herein referred to as the "unit
9	operating agreement".   Such unit operating agreement shall also provide the manner in which the
10	working interest owners  shall be entitled to receive their respective proportionate and allocated
11	share of the benefits accruing  hereto in conformity with their underlying operating agreements,
12	leases, or  other  independent  contracts,  and such  other  rights  and  obligations  as  between  Unit
13	Operator and the working interest owners as may be agreed upon by Unit Operator and the working
14	interest owners; however, no such unit operating agreement shall be deemed either to modify any of
15	the terms and conditions  of this unit agreement or to relieve the Unit Operator of any right or
16	obligation established  under  this  unit  agreement, and  in  case  of  any  inconsistency  or  conflict
17	between this agreement and the unit operating agreement, this agreement shall govern.  Two copies
18	of any unit operating agreement executed pursuant to this section shall be filed in the proper Bureau
19	of Land Management office, prior to approval of this unit agreement.
20
21	8. RIGHTS AND OBLIGATIONS OF UNIT OPERATOR. Except as otherwise
22	specifically provided herein, the exclusive right, privilege, and duty of exercising any and all rights
23	of the parties hereto which  are necessary or convenient for prospecting for, producing, storing,
24	allocating, and distributing the unitized substances are hereby delegated to and shall be exercised by
25	the Unit Operator as herein provided.  Acceptable evidence of title to said rights shall be deposited
26	with  Unit  Operator  and,  together  with  this  agreement,  shall  constitute  and  define  the  rights,
27	privileges, and obligations of Unit Operator. Nothing herein, however, shall be construed to transfer
28	title  to  any land  or  to  any  lease  or  operating  agreement, it  being  understood  that  under  this
29	agreement the Unit Operator, in its capacity as Unit Operator, shall exercise the rights of possession
30	and use vested in the parties hereto only for the purposes herein specified.
31
32	9. DRILLING TO DISCOVERY. Within 6 months after the effective date hereof, the
33	Unit Operator shall commence to drill an adequate test well at a location approved by the AO,
34	unless on such effective  date  a well  is being drilled in conformity with  the terms hereof, and
35	thereafter continue such drilling diligently until 500 feet below the top of the Triassic formation has
36	been tested or until at a lesser depth unitized substances shall be discovered which can be produced
37	in  paying quantities  (to-wit:  quantities  sufficient to  repay the costs of drilling, completing and
38	producing operations, with a reasonable profit) or the Unit Operator shall at any time establish to the
39	satisfaction of the AO that further drilling of said well would be unwarranted or impracticable,
40	provided, however, that Unit Operator shall not in any event be required to drill said well to a depth
41	in excess of 6,000 feet.  Until the discovery of unitized substances capable of being produced in
42	paying quantities, the Unit Operator shall continue drilling one well at a time, allowing not more
43	than 6 months between the completion of one well and the commencement of drilling operations for
44	the  next  well,  until  a  well  capable  of  producing  unitized  substances  in  paying  quantities  is
45	completed to the satisfaction of the AO or until it is reasonably proved that the unitized land is
46	incapable of producing unitized substances in paying quantities in the formations drilled hereunder.
	5
1	Nothing in this section shall be deemed to limit the right of the Unit Operator to resign as provided
2	in Section 5 hereof, or as requiring Unit Operator to commence or continue any drilling during the
3	period pending such resignation becoming effective in order to comply with the requirements of this
4	section.
5
6	The AO may modify any of the drilling requirements of this section by granting reasonable
7	extensions of time when, in his opinion, such action is warranted.
8
9	Until the establishment of a participating area, the failure to commence a well subsequent to
10	the drilling of the initial obligation well, or in the case of multiple well requirements, if specified,
11	subsequent to the drilling of those multiple wells, as provided for in this (these) section(s), within
12	the time allowed including any extension of time granted by the AO, shall cause this agreement to
13	terminate automatically.    Upon  failure  to  continue  drilling  diligently  any  well  other  than  the
14	obligation well(s) commenced hereunder, the AO may, after 15 days notice to the Unit Operator,
15	declare this unit agreement terminated.   Failure to commence drilling the initial obligation well, or
16	the first of multiple  obligation  wells,  on  time and  to drill  it diligently  shall  result in the unit
17	agreement approval being declared invalid ab initio by the AO. In the case of multiple well
18	requirements, failure to commence drilling the required multiple wells beyond the first well, and to
19	drill them diligently, may result in the unit agreement approval being declared invalid ab initio by
20	the AO.
21
22	10. PLAN OF FURTHER  DEVELOPMENT AND OPERATION.   Within 6 months
23	after completion of a well capable of producing unitized substances in paying quantities, Operator
24	shall submit for the approval of the AO an acceptable plan of development and operation for the
25	unitized land which, when approved by the AO, shall constitute the further drilling and development
26	obligations of the Unit Operator under this agreement for the period specified therein.  Thereafter,
27	from time to time before the expiration of any existing plan, the Unit Operator shall submit for the
28	approval of the AO a plan for an additional specified period for the development and operation of
29	the unitized land.  Subsequent plans should normally be filed on a calendar year basis not later than
30	March 1 each year.  Any proposed modification or addition to the existing plan should be filed as a
31	supplement to the plan.
32
33	Any plan submitted pursuant to this section shall provide for the timely exploration of the
34	unitized area, and for the diligent drilling necessary for determination of the area or areas capable of
35	producing unitized substances in paying quantities in each and every productive formation.   This
36	plan shall be as complete  and  adequate  as  the AO may determine  to  be  necessary for timely
37	development and proper conservation of the oil and gas resources of the unitized area and shall:
38
39	(a)  specify the number and locations of any wells to be drilled and the proposed order and
40	time for such drilling; and
41
42	(b)  provide a summary of operations and production for the previous year.
43
44	Plans shall be modified or supplemented when necessary to meet changed conditions or to
45	protect the  interests of  all  parties to  this  agreement.   Reasonable diligence shall   be  exercised in
46	complying with the obligations of the approved plan of development and operation.  The AO is
	6
1	authorized to grant a reasonable extension of the 6 month period herein prescribed for submission of
2	an initial plan of development  and operation where such action is justified  because of unusual
3	conditions or circumstances.
4
5	After completion of a well capable of producing unitized substances in paying quantities, no
6	further wells, except such as may be necessary to afford protection against operations not under this
7	agreement and  such  as  may  be  specifically  approved  by  the  AO,  shall  be  drilled  except  in
8	accordance with an approved plan of development and operation.
9
10	11. PARTICIPATION  AFTER DISCOVERY. Upon completion  of a well capable of
11	producing unitized substances in paying quantities, or as soon thereafter as required by the AO, the
12	Unit Operator shall submit for approval by the AO, a schedule, based on subdivisions of the public-
13	land survey or aliquot parts thereof, of all land then regarded as reasonably proved to be productive
14	of unitized substances in paying quantities.   These lands shall constitute a participating area on
15	approval of the AO, effective as of the date of completion of such well or the effective date of this
16	unit agreement, whichever is later.   The acreages of both Federal and non-Federal lands shall be
17	based upon appropriate computations from the courses and distances shown on the last approved
18	public-land survey as of the effective date of each initial participating area.  The schedule shall also
19	set forth the percentage of unitized substances to be allocated, as provided in Section 12, to each
20	committed  tract  in  the  participating  area  so  established,  and  shall  govern  the  allocation  of
21	production commencing with the effective date of the participating area.   A different participating
22	area shall be established for each separate pool or deposit of unitized substances or for any group
23	thereof which is produced as a single pool or zone, and any two or more participating areas so
24	established may be combined into one, on approval of the AO.  When production from two or more
25	participating areas is subsequently found to be from a common pool or deposit, the participating
26	areas shall be combined into one, effective as of such appropriate date as may be approved or
27	prescribed by the AO.  The participating area or areas so established shall be revised from time to
28	time, subject to the approval of the AO, to include additional lands then regarded as reasonably
29	proved to be productive of unitized substances in paying quantities or which are necessary for unit
30	operations, or to exclude lands then regarded as reasonably proved not to be productive of unitized
31	substances  in  paying  quantities,  and  the  schedule  of  allocation  percentages  shall  be  revised
32	accordingly.   The  effective date  of  any revision shall be the first  of  the  month in which the
33	knowledge or information is obtained on which such revision is predicated; provided, however, that
34	a more appropriate effective date may be used if justified by Unit Operator and approved by the AO.
35	No  land  shall be  excluded  from  a  participating area  on  account  of  depletion  of  its  unitized
36	substances, except that any participating area established under the provisions of this unit agreement
37	shall terminate automatically whenever all completions in the formation on which the participating
38	area is based are abandoned.
39
40	It is the intent of this section that a participating area shall represent the area known or
41	reasonably proved  to  be  productive  of  unitized  substances  in  paying  quantities  or  which are
42	necessary for unit operations; but, regardless of any revision of the participating area, nothing herein
43	contained shall be construed as requiring any retroactive adjustment for production obtained prior to
44	the effective date of the revision of the participating area.
45
46
	7
1	In the absence of agreement at any time between the Unit Operator and the AO as to the
2	proper definition or redefinition of a participating area, or until a participating area has, or areas
3	have, been established, the portion of all payments affected thereby shall, except royalty due the
4	United States, be impounded in a manner mutually acceptable to the owners of committed working
5	interests.  Royalties due the United States shall be determined by the AO and the amount thereof
6	shall be deposited, as directed by the AO, until a participating area is finally approved and then
7	adjusted in accordance with a determination of the sum due as Federal royalty on the basis of such
8	approved participating area.
9
10	Whenever it is determined, subject to the approval of the AO, that a well drilled under this
11	agreement is not capable of production of unitized substances in paying quantities and inclusion in a
12	participating area of the land on which it is situated is unwarranted, production from such well shall,
13	for the purposes of settlement among all parties other than working interest owners, be allocated to
14	the land on which the well is located, unless such land is already within the participating area
15	established for the pool or deposit from which such production is obtained.  Settlement for working
16	interest benefits from such a nonpaying unit well shall be made as provided in the unit operating
17	agreement.
18
19	12.  ALLOCATION  OF  PRODUCTION.    All  unitized  substances  produced  from  a
20	participating area established under this agreement, except any part thereof used in conformity with
21	good operating practices within the unitized area for drilling, operating and other production or
22	development purposes, for repressuring or recycling in accordance with a plan of development and
23	operations that has been approved by the AO, or unavoidably lost, shall be deemed to be produced
24	equally on an acreage basis from the several tracts of unitized land and unleased Federal land, if any,
25	included in the participating area established  for such production.    Each  such  tract shall have
26	allocated to it such percentage of said production as the number of acres of such tract included in
27	said participating area bears to the total acres of unitized land and unleased Federal land, if any,
28	included in said participating area.   There shall be allocated to the working interest owner(s) of
29	each tract of unitized land in said participating area, in addition, such percentage of the production
30	attributable to the unleased Federal land within the participating area as the number of acres of such
31	unitized tract included in said participating area bears to the total acres of unitized land in said
32	participating area, for the payment of  the compensatory royalty specified  in Section 17 of this
33	agreement.  Allocation of production hereunder for purposes other than for settlement of the royalty,
34	overriding  royalty, or payment  out of production obligations of  the respective working interest
35	owners, including compensatory royalty obligations under Section 17, shall be prescribed as set
36	forth in the unit operating agreement or as otherwise mutually agreed by the affected parties. It is
37	hereby agreed that production of unitized substances from a participating area shall be allocated as
38	provided herein, regardless of whether any wells are drilled on any particular part or tract of the
39	participating area.   If any gas produced  from one participating area is used for repressuring or
40	recycling purposes in another participating area, the first gas withdrawn from the latter participating
41	area for sale during the life of this agreement, shall be considered to be the gas so transferred, until
42	an amount equal to that transferred shall be so produced for sale and such gas shall be allocated to
43	the participating area from which initially produced as such area was defined at the time that such
44	transferred gas was finally produced and sold.
45
46
	8
1	13. DEVELOPMENT OR OPERATION OF NON-PARTICIPATING LAND OR
2	FORMATIONS.  Any operator may, with the approval of the AO, at such party's sole risk, cost,
3	and expense, drill a well on the unitized land to test any formation provided the well is outside any
4	participating area established for that formation, unless within 90 days of receipt of notice from said
5	party of his intention to drill the well, the Unit Operator elects and commences to drill the well in a
6	like manner as other wells are drilled by the Unit Operator under this agreement.
7
8	If any well drilled under this section by a non-unit operator results in production of unitized
9	substances in paying quantities such that the land upon which it is situated may properly be included
10	in a participating area, such participating area shall be established or enlarged as provided in this
11	agreement and the well shall thereafter be operated by the Unit Operator in accordance with the
12	terms of this agreement and the unit operating agreement.
13
14	If any well drilled under this section by a non-unit operator obtains production in quantities
15	insufficient to justify the inclusion of the land upon which such well is situated in a participating
16	area, such  well  may  be operated  and produced  by the party drilling  the  same,  subject  to the
17	conservation requirements of this agreement.  The royalties in amount or value of production from
18	any such well shall be paid as specified in the underlying lease and agreements affected.
19
20	14. ROYALTY SETTLEMENT. The United States and any State and any royalty owner
21	who is entitled to take in kind a share of the substances now unitized hereunder shall hereafter be
22	entitled to the right to take in kind its share of the unitized substances, and Unit Operator, or the
23	non-unit operator in the case of the operation of a well by a non-unit operator as herein provided for
24	in special cases, shall make deliveries of such royalty share taken in kind in conformity with the
25	applicable contracts, laws, and regulations. Settlement for royalty interest not taken in kind shall be
26	made by an operator responsible therefor under existing contracts, laws and regulations, or by the
27	Unit Operator on or before the last day of each month for unitized substances produced during the
28	preceding calendar month; provided, however, that nothing in this section shall operate to relieve
29	the responsible parties of any land from their respective lease obligations for the payment of any
30	royalties due under their leases.
31
32	If gas obtained from lands not subject to this agreement is introduced into any participating
33	area hereunder, for use in repressuring, stimulation of production, or increasing ultimate recovery, in
34	conformity with a plan of development and operation approved by the AO, a like amount of gas,
35	after settlement as herein provided for any gas transferred from any other participating area and with
36	appropriate deduction for loss from any cause, may be withdrawn from the formation into which the
37	gas is introduced, royalty free as to dry gas, but not as to any products which may be extracted
38	therefrom; provided that such withdrawal shall be at such time as may be provided in the approved
39	plan of development and operation or as may otherwise be consented to by the AO as conforming to
40	good petroleum engineering practice; and provided further, that such right of withdrawal shall
41	terminate on the termination of this unit agreement.
42
43	Royalty due the United States shall be computed as provided in 30 CFR Group 200 and paid
44	in value or delivered in kind as to all unitized substances on the basis of the amounts thereof
45	allocated to unitized Federal land as provided in Section 12 at the rates specified in the respective
46	Federal leases, or at such other rate or rates as may be authorized by law or regulation and approved
	9
1	by the AO; provided, that for leases on which the royalty rate depends on the daily average
2	production per well, said average production shall be determined in accordance with the operating
3	regulations as though each participating area were a single consolidated lease.
4
5	15. RENTAL SETTLEMENT.   Rental or minimum royalties due on leases committed
6	hereto shall  be  paid by  the  appropriate parties under existing  contracts,  laws, and regulations,
7	provided that nothing herein contained shall operate to relieve the responsible parties of the land
8	from their respective obligations for the payment of any rental or minimum royalty due under their
9	leases.  Rental or minimum royalty for lands of the United States subject to this agreement shall be
10	paid at the rate specified  in  the respective leases from the United States  unless such rental or
11	minimum royalty is waived, suspended, or reduced by law or by approval of the Secretary or his
12	duly authorized representative.
13
14	With respect to any lease on non-Federal land containing provisions which would terminate
15	such lease unless drilling operations are commenced upon the land covered thereby within the time
16	therein specified or rentals are paid for the privilege of deferring such drilling operations, the rentals
17	required thereby shall, notwithstanding any other provision of this agreement, be deemed to accrue
18	and become payable during the term thereof as extended by this agreement and until the required
19	drilling operations are commenced upon the land covered thereby, or until some portion of such
20	land is included within a participating area.
21
22	16. CONSERVATION.   Operations hereunder and production of unitized substances shall
23	be conducted to provide for the most economical and efficient recovery of said substances without
24	waste, as defined by or pursuant to State or Federal law or regulation.
25
26	17. DRAINAGE.
27
28	(a)  The Unit Operator shall take such measures as the AO deems appropriate and adequate
29	to prevent drainage of unitized substances from unitized land by wells on land not subject to this
30	agreement, which shall include the drilling of protective wells and which may include the payment
31	of a fair and reasonable compensatory royalty, as determined by the AO.
32
33	(b)   Whenever a participating area approved under Section 11 of this agreement contains
34	unleased Federal lands, the value of 12-112 percent of the production that would be allocated to such
35	Federal lands under Section 12 of this agreement, if such lands were leased, committed and entitled
36	to participation, shall be payable as compensatory royalties to the Federal Government.  Parties to
37	this agreement holding working interests in committed leases within the applicable participating
38	area shall be responsible  for such compensatory royalty payment on the volume of production
39	reallocated from the unleased Federal lands to their unitized tracts under Section 12.  The value of
40	such production subject to the payment of said royalties shall be determined pursuant to 30 CFR
41	Part 206.  Payment of compensatory royalties on the production reallocated from unleased Federal
42	land to the committed tracts within the participating area shall fulfill the Federal royalty obligation
43	for such production, and said production shall be subject to no further Federal royalty assessment
44	under Section 14 of this agreement.  Payment of compensatory royalties as provided herein shall
45	accrue from the date the committed tracts in the participating area that includes unleased Federal
46	land receive a production allocati :m, and shall be due and payable monthly by the last day of the
	10
1	calendar month next following the calendar month of actual production. If leased Federal lands
2	receiving a  production  allocation  from  the  participating  area  become  unleased,  compensatory
3	royalties shall accrue from the date the Federal lands become unleased.   Payment due under this
4	provision shall  end  when  the  unleased Federal tract is leased or  when  production of  unitized
5	substances ceases within the participating area and the participating area is terminated, whichever
6	occurs first.
7
8	18.  LEASES  AND  CONTRACTS  CONFORMED  AND  EXTENDED.    The  terms,
9	conditions, and provisions  of  all  leases, subleases, and other  contracts  relating  to exploration,
10	drilling, development, or operation for oil or gas on lands committed to this agreement are hereby
11	expressly modified and amended to the extent necessary to make the same conform to the provisions
12	hereof, but otherwise to remain in full force and effect; and the parties hereto hereby consent that the
13	Secretary shall  and  by  his  approval  hereof, or  by the  approval  hereof  by his duly authorized
14	representative, does  hereby  establish,  alter,  change,  or  revoke  the  drilling,  producing,  rental,
15	minimum royalty, and royalty requirements of Federal leases committed hereto and the regulations
16	in respect thereto to conform said requirements to the provisions of this agreement, and, without
17	limiting the generality of the foregoing, all leases, subleases, and contracts are particularly modified
18	in accordance with the following:
19
20	(a) The development and operation oflands subject to this agreement under the terms hereof
21	shall be deemed full performance of all obligations for development and operation with respect to
22	each and every separately owned tract subject to this agreement, regardless of whether there is any
23	development of any particular tract of this unit area.
24
25	(b)  Drilling and producing operations performed hereunder upon any tract of unitized lands
26	will be accepted and deemed to be performed upon and for the benefit of each and every tract of
27	unitized land, and no lease shall be deemed to expire by reason of failure to drill or produce wells
28	situated on the land therein embraced.
29
30	(c) Suspension of drilling or producing operations on all unitized lands pursuant to direction
31	or consent of the AO shall be deemed to constitute such suspension pursuant to such direction or
32	consent as to each and every tract of unitized land. A suspension of drilling or producing operations
33	limited to specified lands shall be applicable only to such lands.
34
35	(d)   Each lease, sublease or contract relating to the exploration, drilling, development, or
36	operation for oil or gas of lands other than those of the United States committed to this agreement
37	which, by its terms might expire prior to the termination of this agreement, is hereby extended
38	beyond any such term so provided therein so that it shall be continued in full force and effect for and
39	during the term of this agreement.
40
41	(e)  Any Federal lease committed hereto shall continue in force beyond the term so provided
42	therein or by law as to the land committed so long as such lease remains subject hereto, provided
43	that production of unitized substances in paying quantities is established under this unit agreement
44	prior to the expiration date of the term of such lease, or in the event actual drilling operations are
45	commenced on unitized land, in accordance with provisions of this agreement, prior to the end of
46	the primary term of such lease and are being diligently prosecuted at that time, such lease shall be
	11
1	extended for two years, and so long thereafter as oil or gas is produced in paying quantities in
2	accordance with the provisions of the Mineral Leasing Act, as amended.
3
4	(f)    Each  sublease  or  contract  relating  to  the  operation  and  development  of  unitized
5	substances from lands of the United States committed to this agreement, which by its terms would
6	expire prior to the time at which the underlying lease, as extended by the immediately preceding
7	paragraph, will expire, is hereby extended beyond any such term so provided therein so that it shall
8	be continued in full force and effect for and during the term of the underlying lease as such term is
9	herein extended.
10
11	(g)  The segregation of any Federal lease committed to this agreement is governed by the
12	following provision in the fourth paragraph of Sec. 17(m) of the Mineral Leasing Act, as amended
13	by the Act of September 2, 1960, (74 Stat. 781-784) (30 U.S.C. 226 (m)): "Any (Federal) lease
14	heretofore or hereafter committed to any such (unit) plan embracing lands that are in part within and
15	in part outside of the area covered by any such plan shall be segregated into separate leases as to the
16	lands committed and the lands not committed as of the effective date of unitization: Provided,
17	however, that any such lease as to the non-unitized portion shall continue in force and effect for the
18	term thereof but for not less than two years from the date of such segregation and so long thereafter
19	as oil or gas is produced in paying quantities."  If the public interest requirement is not satisfied, the
20	segregation of a lease and/or extension of a lease pursuant to 43 CFR 3107.3-2 and 43 CFR 3107.4,
21	respectively, shall not be effective.
22
23	(h)   Any lease, other than a Federal lease, having only a portion of its lands committed
24	hereto shall be segregated as to the portion committed and the portion not committed, and the
25	provisions of such lease shall apply separately to such segregated portions commencing as of the
26	effective date hereof. In the event any such lease provides for a lump-sum rental payment, such
27	payment shall be prorated between the portions so segregated in proportion to the acreage of the
28	respective tracts.
29
30	19. COVENANTS RUN WITH LAND.  The covenants herein shall be construed to be
31	covenants running  with  the  land  with  respect to  the  interests  of  the  parties  hereto  and  their
32	successors in interest until  this agreement terminates, and any grant, transfer or conveyance of
33	interest in land or leases subject hereto shall be and hereby is conditioned upon the assumption of all
34	privileges and obligations hereunder by the grantee, transferee, or other successor in interest.  No
35	assignment or transfer of  any working interest royalty, or other interest subject hereto shall be
36	binding upon Unit Operator until the first day of the calendar month after Unit Operator is furnished
37	with the original, photostatic, or certified copy of the instrument of transfer.
38
39	20.  EFFECTIVE  DATE  AND  TERM.    This  agreement shall  become  effective upon
40	approval of the AO and shall automatically terminate five (5) years from said effective date unless:
41
42	(a) upon application by the Unit Operator such date of expiration is extended by the AO, or
43
44	(b)  it is reasonably determined prior to the expiration of the fixed term or any extension
45	thereof that the unitized land is incapable of production of unitized substances in paying quantities
46	in the formations tested hereunder, and after notice of intention to terminate this agreement on such
	12
1	ground is given by the Unit Operator to all parties in interest at their last known addresses, this
2	agreement is terminated with approval of the AO, or
3
4	(c)   a  valuable discovery of  unitized substances in paying quantities  has been made or
5	accepted on unitized land  during said initial term or any extension thereof, in which event this
6	agreement shall remain in effect for such term and so long thereafter as unitized substances can be
7	produced in quantities sufficient to pay for the cost of producing same from wells on unitized land
8	within any participating area established hereunder. Should production cease and diligent drilling or
9	reworking operations to restore production or new production are not in progress within 60 days and
10	production  is  not restored  or  should  new  production not  be obtained  in  paying  quantities  on
11	committed lands within this unit area, this agreement will automatically terminate effective the last
12	day of the month in which the last unitized production occurred, or
13
14	(d)  it is voluntarily terminated as provided in this agreement.  Except as noted herein this
15	agreement may be terminated at any time prior to the discovery of unitized substances which can be
16	produced in paying quantities by not less than 75 per centum, on an acreage basis, of the working
17	interest owners signatory hereto, with the approval of the AO.  The Unit Operator shall give notice
18	of any such approval to all parties hereto.   If the public interest requirement is not satisfied, the
19	approval of this unit by the AO shall be invalid.
20
21	21. RATE OF PROSPECTING, DEVELOPMENT, AND PRODUCTION.  The AO is
22	hereby vested with authority to alter or modify from time to time, in his discretion, the quantity and
23	rate of production under this agreement  when such quantity and rate are not fixed pursuant to
24	Federal or State law, or  do  not conform to any Statewide voluntary conservation  or allocation
25	program which is established, recognized, and generally adhered to by the majority of operators in
26	such State.  The above authority is hereby limited to alteration or modifications which are in the
27	public interest.  The public interest to be served and the purpose thereof, must be stated in the order
28	of alteration or modification.  Without regard to the foregoing, the AO is also hereby vested with
29	authority to  alter or  modify  from  time  to  time, in his discretion,  the  rate  of  prospecting and
30	development and the quantity and rate of production under this agreement when such alteration or
31	modification is in the interest of attaining the conservation objectives stated in this agreement and is
32	not in violation of any applicable Federal or State law.
33
34	Powers in this section vested in the AO shall only be exercised after notice to Unit Operator
35	and opportunity for hearing to be held not less than 15 days from notice.
36
37	22. APPEARANCES.  The Unit Operator shall, after notice to other parties affected, have
38	the right to appear for and on behalf of any and all interests affected hereby before the Department
39	of the Interior and to appeal from orders issued under the regulations of said Department, or to apply
40	for relief from any of said  regulations, or in any proceedings relative to operations  before the
41	Department, or any other legally constituted authority; provided, however, that any other interested
42	party shall also have the right at its own expense to be heard in any such proceeding.
43
44	23.  NOTICES.  All  notices,  demands,  or statements required hereunder  to  be given or
45	rendered to the parties hereto shall be in writing and shall be personally delivered to the party or
46
	13
1	parties,  or sent by postpaid  registered  or certified  mail, to the last known  address  of the party or
2	parties.
3
4	24. NO WAIVER OF CERTAIN RIGHTS.  Nothing herein contained  in this agreement
5	shall be construed  as a waiver  by any party hereto of the right to assert any legal or constitutional
6	right or defense as to the validity or invalidity  of any law of the State where the unitized  lands are
7	located, or of the United States, or regulations  issued thereunder in any way affecting such party, or
8	as a waiver by any such party of any right beyond his or its authority to waive.
9
10	25. UNAVOIDABLE DELAY.   All obligations  under  this  agreement  requiring  the Unit
11	Operator  to commence  or continue  drilling,  or to operate on, or produce  unitized  substances  from
12	any of the lands covered by this agreement,  shall be suspended while the Unit Operator, despite the
13	exercise of due care and diligence,  is prevented  from complying with such obligations,  in whole or
14	in part, by strikes, acts of God, Federal, State, or municipal law or agencies,  unavoidable accidents,
15	uncontrollable  delays in transportation, inability  to obtain  necessary  materials  or equipment  in the
16	open market, or other matters beyond the reasonable control of the Unit Operator  whether similar to
17	matters herein enumerated or not.
18
19	26. NONDISCRIMINATION. In connection with the performance of work under this
20	agreement,  the Unit Operator  agrees  to comply  with  all the provisions  of Section  202 (1) to (7)
21	inclusive of Executive Order 11246 (30 F.R. 12319), as amended, which are hereby incorporated by
22	reference in this agreement.
23
24	27. LOSS OF TITLE. In the event title to any tract of unitized land shall fail and the true
25	owner cannot be induced to join in this unit agreement, such tract shall be automatically  regarded as
26	not committed  hereto, and there shall be such readjustment  of future costs and benefits as may be
27	required on account of the loss of such title. In the event of a dispute as to title to any royalty,
28	working  interest, or other interest  subject  thereto,  payment or delivery  on account  thereof may be
29	withheld  without liability for interest until the dispute is finally settled; provided,  that, as to Federal
30	lands or leases, no payments  of funds due the United States shall be withheld,  but such funds shall
31	be deposited  as directed  by the AO, to be held as unearned money pending  final settlement  of the
32	title dispute, and then applied as earned or returned in accordance with such final settlement.
33
34	Unit Operator as such is relieved from any responsibility for any defect or failure of any title
35	hereunder.
36
37	28. NON-JOINDER AND SUBSEQUENT JOINDER.   If the  owner  of any substantial
38	interest in a tract within the unit area fails or refuses to subscribe  or consent  to this agreement, the
39	owner  of the working interest  in that tract may withdraw  the tract from this agreement  by written
40	notice delivered to the proper Bureau of Land Management office and the Unit Operator prior to the
41	approval  of this agreement  by the AO.   Any oil or gas interests  in lands within  the unit area not
42	committed  hereto prior to final approval may thereafter be committed hereto by the owner or owners
43	thereof subscribing or consenting  to this agreement, and, if the interest is a working interest, by the
44	owner  of  such  interest  also  subscribing  to  the  unit  operating  agreement.    After  operations  are
45	commenced  hereunder,  the right of subsequent  joinder,  as provided  in this section,  by a working
46	interest owner is subject to such requirements  or approval(s),  if any, pertaining  to such joinder, as
	14
1	may be provided for in the unit operating agreement. After final approval hereof, joinder by a non-
2	working interest owner must be consented to in writing by the working interest owner committed
3	hereto and responsible for the payment of any benefits that may accrue hereunder in behalf of such
4	non-working interest.  A non-working interest may not be committed to this unit agreement unless
5	the corresponding working interest is committed hereto.  Joinder to the unit agreement by a working
6	interest owner, at any time,  must  be accompanied  by appropriate joinder  to the  unit operating
7	agreement, in order for the interest to be regarded as committed to this agreement.  Except as may
8	otherwise herein be provided, subsequent joinders to this agreement shall be effective as of the date
9	of the filing with the AO of duly executed counterparts of all or any papers necessary to establish
10	effective commitment of any interest and/or tract to this agreement.
11
12	29. COUNTERPARTS.  This agreement may be executed in any number of counterparts,
13	no one of which needs to be executed by all parties, or may be ratified or consented to by separate
14	instrument in writing specifically referring hereto and shall be binding upon all those parties who
15	have executed such a counterpart, ratification, or consent hereto with the same force and effect as if
16	all such parties had signed the same document, and regardless of whether or not it is executed by all
17	other parties owning or claiming an interest in the lands within the above-described unit area.
18
19	30. SPECIAL SURFACE STIPULATIONS.   Nothing in this agreement shall modify the
20	special Federal lease stipulations attached to the individual Federal oil and gas leases.
21
22	31. SURRENDER.  Nothing in this Agreement shall prohibit the exercise by any working
23	interest owner of the right to surrender vested in such party by any lease, sublease, or operating
24	agreement as to all or any part of the lands covered thereby, provided that each party who will or
25	might acquire such working interest by such surrender or by forfeiture as hereafter set forth, is
26	bound by the terms of this Agreement.
27
28	If as a result of any surrender, the working interest rights as to such lands become vested in
29	any party other than the fee owner of the Unitized Substances, said party may forfeit such rights and
30	further benefits from operations hereunder as to said land to the party next in the chain of title who
31	shall be and become the owner of such working interest.
32
33	If as the result of any such surrender of forfeiture working interest rights become vested in
34	the fee owner of the Unitized Substances, such owner may:
35
36	(a)  Accept  those working  interest  rights subject to  this Agreement  and the Unit
37	Operating Agreement; or
38
39	(b) Lease the portion of such land as is included in a participating area established
40	hereunder subject to this Agreement and the Unit Operating Agreement; or
41
42	(c) Provide for the independent operation of any part of such land that is not then
43	included within a participating area established hereunder.
44
45	If  the  fee  owner of  the  Unitized Substances  does   not  accept the  working  interest rights
46	subject to this Agreement and the Unit Operating Agreement or lease such lands as above provided
	15
1	within 6 months after the surrendered or forfeited, working interest rights become vested in the fee
2	owner; the benefits and obligations of operations accruing to such lands under this Agreement be
3	shared by the remaining owners of the unitized working interests in accordance with their respective
4	working interest ownerships, and such owners of working interests shall compensate the fee owner
5	of Unitized Substances in such lands by paying sums equal to the rentals, minimum royalties, and
6	royalties applicable to such lands under the lease in effect when the lands were unitized.
7
8	An appropriate accounting  and settlement shall  be made for all benefits accruing to or
9	payments and expenditures made or incurred on behalf of such surrendered or forfeited working
10	interests subsequent to the date of surrender of forfeiture, and payment of any moneys found to be
11	owing by such an accounting shall be made as between the parties within 30 days.
12
13	The exercise of any right vested in a working interest owner to reassign such working
14	interest to the party from whom obtained shall be subject to the same conditions as set forth in this
15	section in regard to the exercise of a right to surrender.
16
17	32. TAXES.   The working interest owners shall render and pay for their account and the
18	account of the royalty owners all valid taxes on or measured by the Unitized Substances in and
19	under or that may be produced, gathered and sold from the land covered by this Agreement after its
20	effective date, or upon the proceeds derived therefrom.  The working interest owners on each tract
21	shall and may charge the proper proportion of said taxes to royalty owners having interests in said
22	tract, and may currently  retain  and  deduct a sufficient  amount of  the  Unitized  Substances or
23	derivative products, or net proceeds thereof, from the allocated share of each royalty owner to secure
24	reimbursement for the taxes so paid.  No such taxes shall be charged to the United States or the
25	State of Nevada or to any lessor who has a contract with his lessee which requires the lessee to pay
26	such taxes.
27
28	33. NO PARTNERSHIP. It is expressly agreed that the relation of the parties hereto is that
29	of independent contractors and nothing contained in this Agreement, expressed or implied, nor any
30	operations  conducted  hereunder,  shall  create  or  be  deemed  to  have  created  a  partnership  or
31	association between the parties hereto or any of them.
32
33
34
35
36
37
38
39	* * * The balance of this page is left blank intentionally* * *
40
41
42
43
44
45
46
	16

 

1	IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed
2	and have set opposite their respective names the date of execution.
3
4
5	UNIT OPERATOR  AND WORKING INTEREST OWNER
6
7
8	CORTEZ EXPLORATION,  LLC
9
10
11
12				By:  /s/Otto F. Duffield
13				Otto F. Duffield
14
15
16	Address:       16786 Kincheloe  Road
17	Siloam Springs, Arkansas 72761			Date of Execution
18
19				February 4, 2010
20
21
22	STATE OF  OKLAHOMA         )
23	) ss.
24	COUNTY OF TULSA )
25
26	The foregoing instrument  was acknowledged before me by			OTTO F. DUFFIELD
27
28			as	MANAGER
29
30	of Cortez Exploration,  LLC.
31
32	This 4TH day of FEBRUARY , 2010.
33
34	WITNESS my hand and official seal.
35
36	My Commission Expires:
37
38	DECEMBER 4, 2010			/s/ Gale L. Staton
39				Notary Public
40
41	UNIT OPERATOR SIGNATURE PAGE FOR THE
42	PARADISE UNIT AGREEMENT
43	NYE AND MINERAL COUNTIES, NEVADA
44
45
46
	17

 

 

EXHIBIT “B”
		NUMBER	SERIAL NO.	BASIC	LESSEE
TRACT	DESCRIPTION	OF	& EXPIRATION	ROYALTY	OF		OVERRIDING		WORKING
NO.	OF LAND	ACRES	DATE OF LEASE	AND %	RECORD	AND %	ROYALTY	AND %	INTEREST	AND %
1	T12N-R34E  MOM	3,840.56	N-59901	U.S.A.-ALL (12.5% ROYALTY)	Cortez Exploration LLC	85.50%	O. F. Duffield	2.50%	Cortez Exploration LLC	85.50%
	Sec. 1: Lots 1, 2, 3, 4, S/2N/2,				Empire Petroleum Corporation	10.00%	Frances A. Duffield Johnson	1.00%	Empire Petroleum Corporation	10.00%
	S/2 (All)		EFFECTIVE		Windmill Oil & Gas LLC	2.50%	Valorie S. Duffield Reynolds	1.00%	Windmill Oil & Gas LLC	2.50%
	Sec.  12: All		9/1/1995		Punto De Luz, LLC	2.00%	James P. Duffield	1.00%	Punto De. Luz, LLC	2.00%
	Sec. 13:  All				TOTAL	100.00%	Otto F. Duffield II	1.00%	TOTAL	100.00%
	Sec. 24: All		Expires				Alfred H. Pekarek	1.00%
	Sec. 25:  All		11/28/2010*	*Extended by the termination of			TOTAL	7.50%
	Sec. 36: All			the Cobble Cuesta Unit Agreement
2	T13N-R35E  MDM	1,440.00	N-60807	U.S.A.-ALL (12.5% ROYALTY)	Cortez Exploration LLC	85.50%	O. F. Duffield	1.50%	Cortez Exploration LLC	85.50%
	Sec. 10:  All				Empire Petroleum Corporation	10.00%	Frances A. Duffield Johnson	1.00%	Empire Petroleum Corporation	10.00%
	Sec. 11:  All		Effective		Windmill Oil & Gas LLC	2.50%	Valorie S. Duffield Reynolds	1.00%	Windmill Oil & Gas LLC	2.50%
	Sec. 16:  NW/4		6/1/1997		Punto De Luz, LLC	2.00%	James P. Duffield	1.00%	Punto De. Luz, LLC	2.00%
					TOTAL	100.00%	Otto F. Duffield II	1.00%	TOTAL	100.00%
			Expires				Alfred H. Pekarek	1.00%
			11/28/2010*	*Extended by the termination of			Shawn L. Messinger	0.50%
				the Cobble Cuesta Unit Agreement			Elizabeth M. Murphy	0.50%
							TOTAL	7.50%
3	T12N-R34E MDM	7,040.17	N-60812	U.S.A.-ALL (12.5% ROYALTY)	Cortez Exploration LLC	85.50%	O. F. Duffield	2.50%	Cortez Exploration LLC	85.50%
	2  Lots 1, 2, S/2NE/4,				Empire Petroleum Corporation	10.00%	Frances A. Duffield Johnson	1.00%	Empire Petroleum Corporation	10.00%
	SE/4		Effective		Windmill Oil & Gas LLC	2.50%	Valorie S. Duffield Reynolds	1.00%	Windmill Oil & Gas LLC	2.50%
	Sec.  10:  E/2		6/1/1996		Punto De Luz, LLC	2.00%	James P. Duffield	1.00%	Punto De. Luz, LLC	2.00%
	Sec.   11:  All				TOTAL	100.00%	Otto F. Duffield II	1.00%	TOTAL	100.00%
	Sec.  14:  All		Expires	*Extended by the termination of			Alfred H. Pekarek	1.00%
	Sec.  15:  All		11/2/2010*	the Cobble Cuesta Unit Agreement			TOTAL	7.50%
	Sec.  21:  All
	Sec. 22:  All
	Sec. 23:  All
	Sec. 26:  All
	Sec. 27:  All
	Sec. 28:  NE/4, NE/4NW/4,
	S/2SW/4,  E/2SE/4
	Sec. 33:  E/2NE/4,  NW/4
	Sec. 34:  All
	Sec. 35:  All
4	T13N-R35E  MDM	960.00	N-60815	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	85.50%	O. F. Duffield	2.50%	Cortez Exploration LLC	85.50%
	Sec.  17  All				Empire Petroleum Corporation	10.00%	Frances A. Duffield Johnson	1.00%	Empire Petroleum Corporation	10.00%
	Sec.  19  E/2		Effective		Windmill  Oil & Gas LLC	2.50%	Valorie S. Duffield Reynolds	1.00%	Windmill Oil & Gas LLC	2.50%
			6/1/1996		Punta De Luz, LLC	2.00%	James P. Duffield	1.00%	Punto De. Luz, LLC	2.00%
					TOTAL	100.00%	Otto F. Duffield II	1.00%	TOTAL	100.00%
			Expires	•Extended by the termination of			Alfred H. Pekarek	1.00%
			11-28-2010.	the Cobble Cuesta Unit Agreement			TOTAL	7.50%
5	T13N-R35E  MDM	2,560.00	N-60816	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	85.50%	O. F. Duffield	2.50%	Cortez Exploration LLC	85.50%
	Sec. 2:  All				Empire Petroleum Corporation	10.00%	Frances A. Duffield Johnson	1.00%	Empire Petroleum Corporation	10.00%
	Sec. 3:  All		Effective		Windmill  Oil & Gas LLC	2.50%	Valorie S. Duffield Reynolds	1.00%	Windmill Oil & Gas LLC	2.50%
	Sec. 4:  All		6/1/1996		Punta De Luz, LLC	2.00%	James P. Duffield	1.00%	Punto De. Luz, LLC	2.00%
	Sec. 9:  All				TOTAL	100.00%	Otto F. Duffield II	1.00%	TOTAL	100.00%
			Expires	•Extended by the termination of			Alfred H. Pekarek	1.00%
			11-28-2010.	the Cobble Cuesta Unit Agreement			TOTAL	7.50%
6	T12N-R35E  MOM	1,908.16	N-60885	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	85.50%	O. F. Duffield	2.50%	Cortez Exploration LLC	85.50%
	Sec. 29  All				Empire Petroleum Corporation	10.00%	Frances A. Duffield Johnson	1.00%	Empire Petroleum Corporation	10.00%
	Sec. 30  Lots 1, 2, 3, 4, E/2,		Effective		Windmill  Oil & Gas LLC	2.50%	Valorie S. Duffield Reynolds	1.00%	Windmill Oil & Gas LLC	2.50%
	E/2W/2  (All)		9/1/1995		Punta De Luz, LLC	2.00%	James P. Duffield	1.00%	Punto De. Luz, LLC	2.00%
	Sec  31  Lots 1, 2, 3, 4, E/2,				TOTAL	100.00%	Otto F. Duffield II	1.00%	TOTAL	100.00%
	E/2W/2   (All)		Expires	•Extended by the termination of			Alfred H. Pekarek	1.00%
			11/28/2010*	the Cobble Cuesta Unit Agreement			TOTAL	7.50%
7	T12N-R34E  MOM	319.43	N-82193	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	100.00%	Alfred H. Pekarek	1.00%	Coretez Exploration LLC	100.00%
	Sec    2  Lots 3, 4, S/2NW/4,
	SW/4		Effective
			9/1/2006
			Expires
			8/31/2016
8	T13N-R34E  MOM	1,284.00	N-82185	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	98.00%	Alfred H. Pekarek	1.00%	Coretez Exploration LLC	98.00%
	Sec  25  All (Protracted)				Punto De Luz	2.00%			Punto De Luz	2.00%
	Sec. 36  All (Protracted)		Effective		TOTAL	100.00%			TOTAL	100.00%
			9/1/2006
			Expires
			8/31/2016
9	T13N-R35E  MOM	640.00	N-82186	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	98.00%	Alfred H. Pekarek	1.00%	Coretez Exploration LLC	98.00%
	Sec     8. All (Protracted)				Punto De Luz	2.00%			Punto De Luz	2.00%
			Effective		TOTAL	100.00%			TOTAL	100.00%
			9/1/2006
			Expires
			8/31/2016
10	T13N-R35E  MOM	220.00	N-82187	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	98.00%	Alfred H. Pekarek	1.00%	Coretez Exploration LLC	98.00%
	Sec.  19. W/2 (Protracted)				Punto De Luz	2.00%			Punto De Luz	2.00%
			Effective		TOTAL	100.00%			TOTAL	100.00%
			9/1/2006
			Expires
			8/31/2016
11	T12N-R35E  MOM	2,538.67	N-85867	U.SA- All  (12.5% royalty)	Empire Petroleum Corporation	100.00%	Alfred H. Pekarek	1.00%	Empire Petroleum Corporation	100.00%
	Sec    5  Lots 1, 2, 3, 4, S/2N/2,
	S/2 (All)		Effective
	Sec    6  Lots 1, 2, 3, 4, 5, 6, 7,		11/1/2008
	S/2NE/4, SE/4NW/4
	E/2SW/4, SE/4 (All)		Expires
	Sec     7  Lots 1, 2, 3, 4, E/2W/2,		10/31/2018
	E/2 (All)
	Sec     8  All
12	T12N-R35E  MOM	2,544.24	N-85871	U.SA- All  (12.5% royalty)	Empire Petroleum Corporation	100.00%	Alfred H. Pekarek	1.00%	Empire Petroleum Corporation	100.00%
	Sec   17. All
	Sec   18  Lots 1, 2, 3, 4, E/2,		Effective
	E/2W/2 (All)		11/1/2008
	Sec. 19:  Lots 1,2,3,4, E/2,
	E/2W/2 (All)		Expires
	Sec  20  All		10/31/2018
13	T13N-R35E  MOM	2,400.00	N-85873	U.SA- All  (12.5% royalty)	Empire Petroleum Corporation	100.00%	Alfred H. Pekarek	1.00%	Empire Petroleum Corporation	100.00%
	Sec. 16  E/2, SW/4,  (Protracted)
	Sec. 20  All (Protracted)		Effective
	Sec.  21:  All (Protracted)		11/1/2008
	Sec.  22: All (Protracted)
			Expires
			10/31/2018
14	T13N-R35E MOM	2,461.00	N-85876	U.SA- All  (12.5% royalty)	Empire Petroleum Corporation	100.00%	Alfred H. Pekarek	1.00%	Empire Petroleum Corporation	100.00%
	Sec  29  All (Protracted)
	Sec. 30  All (Protracted)		Effective
	Sec  31  All (Protracted)		11/1/2008
	Sec  32  All (Protracted)
			Expires
			10/31/2018
15	T12N-R35E  MOM	1,280.00	N-86963	U.SA- All  (12.5% royalty)	James Henry Henderson	100.00%	NONE		James Henry Henderson	100.00%
	Sec    9  All
	Sec   10  All		Effective
			12/1/2009
			Expires
			11/30/2019
16	T12N-R35E  MOM	1,280.00	N-86965	U.SA- All  (12.5% royalty)	James Henry Henderson	100.00%	NONE		James Henry Henderson	100.00%
	Sec   16  All
	Sec  21  All		Effective
			12/1/2009
			Expires
			11/30/2019
17	T12N-R35E  MOM	1,277.16	N-86972	U.SA- All  (12.5% royalty)	Nancy Fagen	100.00%	NONE		Nancy Fagen	100.00%
	Sec.   3  Lots 1, 2, 3, 4, S/2N/2,
	S/2 (All)		Effective
	Sec.   4  Lots 1, 2, 3, 4, S/2N/2,		11/1/2009
	S/2 (All)
			Expires
			10/31/2019
18	T13N-R35E  MOM	1,920.00	N-86998	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	100.00%	NONE		Cortez Exploration LLC	100.00%
	Sec.  14  All (Protracted)
	Sec   15  All (Protracted)		Effective
	Sec  23  All (Protracted)		11/1/2009
			Expires
			10/31/2019
19	T13N-R35E MOM	1,280.00	N-86999	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	100.00%	NONE		Cortez Exploration LLC	100.00%
	Sec  26  All (Protracted)
	Sec.  35  All (Protracted)		Effective
			11/1/2009
			Expires
			10/31/2019
20	T13N-R35E  MOM	2,560.00	N-87000	U.SA- All  (12.5% royalty)	Cortez Exploration LLC	100.00%	NONE		Cortez Exploration LLC	100.00%
	Sec  27  All (Protracted)
	Sec  28  All (Protracted)		Effective
	Sec  33  All (Protracted)		11/1/2009
	Sec  34  All (Protracted)
			Expires
			10/31/2019
21	T12N-R34E MOM	320.00	Unleased	U.SA- All  (12.5% royalty)	Unleased	100.00%	NONE		Unleased	100.00%
	Sec.  10  W/2
21	FEDERAL  TRACTS	TOTALING		40,073.39 ACRES	OR		100% OF UNIT AREA
21	TRACTS	TOTALING		40073.39 ACRES	IN		UNIT AREA
NOTE: PENDING ASSIGNMENTS ON TRACTS 1-20  WILL  RESULT IN AN OWNERSHIP OF:   EMPIRE PETROLEUM CORPORATION, 57%;  CORTEZ EXPLORATION LLC,  38.5%; WINDMILL OIL & GAS LLC, 2.5%,  AND,
PUNTO DE LUZ, LLC, 2%

 

EXHIBIT “C”

 

NON-UNIT ACREAGE

 

LEASE SERIAL		EFFECTIVE
NUMBER		DATE		ACREAGE		DESCRIPTION
N-60885		9/1/1995		4,480.00		Twp: 12N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 13: All
						Section 23:  All
						Section 24: W/2
						Section 26:  NW/4
						Section 27:  All
						Section 28:  All
						Section 32:  All
						Section 33:  All
						Section 34:  NW/4
N-60812		6/1/1996		2,844.99		Twp: 11N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Nye & Mineral
						Section 1:  Lots 3-4, S/2NW/4, SW/4
						Section 2:  Lots 1-4, S/2N/2, S/2
						Section 3:  Lots 1-4, S/2N/2, S/2
						Section 4:  Lots 1-4, S/2N/2, S/2
N-60816		6/1/1996		3,520.00		Twp: 13N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 1:  All
						Section 12:  All
						Section 13:  E/2
						Twp: 13N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 18:  All
						Section 19:  All
						Section 29:  All
N-60792		6/1/1996		5,461.37		Twp: 12N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 4:  Lots 1-4, S/2N/2, S/2
						Section 5:  Lots 1 & 2, S/2NE/4, E/2SE/4
						Section 6:  Lots 1-7, SW/4NE/4, SE/4NW/4, E/2SW/4
						Section 7:  Lots 1-4, E/2W/2, SW/4NE/4, SE/4
						Section 8:  S/2S/2, N/2SE/4
						Section 17:  All
						Section 18:  Lots 1-4, E/2W/2, E/2
						Section 19:  Lots 1-4, E/2W/2, E/2
						Section 20:  N/2NE/4, NW/4
						Section 30:  Lots 1-4, E/2W/2, E/2
						Section 31:  Lots 1-4, E/2W/2, E/2
N-60791		9/1/1996		3,200.00		Twp: 12N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 24:  E/2
						Section 25:  ALL
						Section 26:  SW/4, E/2
						Section 34:  SW/4, E/2
						Section 35:  All
						Section 36:  All
N-60793		6/1/1997		1,920.00		Twp: 13N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 30:  All
						Section 31:  All
						Section 32:  All
N-60808		6/1/1997		2,553.43		Twp: 11N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 1:  Lots 1-4, S/2N/2, S/2
						Section 2:  Lots 1-4, S/2N/2, S/2
						Section 3:  Lots 1-4, S/2N/2, S/2
						Twp: 11N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 6:  Lots 1-7, S/2NE/4, SE/4NW/4, E/2SW/4, SE/4
N-60807		6/1/1997		320.00		Twp: 13N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 13:  W/2
N-60806		6/1/1997		2,235.70		Twp: 11N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 1:  Lots 1 & 2, S/2NE/4, SE/4 (E/2)
						Twp: 11N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 4:  Lots 1-4, S/2N/2, S/2
						Section 5:  Lots 1-4, S/2N/2, S/2
						Section 6:  Lots 1-7, S/2NE/4, SE/4NW/4, E/2SW/4, SE/4
N-82180		9/1/2006		1,274.33		Twp: 11N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Mineral
						Section 5:  Lots 1-4
						Section 5:  S/2N/2, S/2
						Section 6:  Lots 1-7
						Section 6:  S/2NE/4, SE/4NW/4, E/2SW/4, SE/4
N-82181		9/1/2006		2,560.00		Twp: 11N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Mineral
						Section 9:    All
						Section 10:  All
						Section 15:  All
						Section 16:  All
N-82182		9/1/2006		2,560.00		Twp: 11N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Mineral
						Section 11:  All
						Section 12:  All
						Section 13:  All
						Section 14:  All
N-82183		9/1/2006		1,279.04		Twp: 12N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 3:  Lots 1-4
						Section 3:  S/2N/2, S/2
						Section 4:  Lots 1-4
						Section 4:  S/2N/2, S/2
N-82184		9/1/2006		680.00		Twp: 12N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Mineral
						Section 28:  W/2NW/4, SE/4NW/4, N/2SW/4, W/2SE/4
						Section 33:  W/2NE/4, S/2
N-82185		9/1/2006		643.00		Twp: 13N     Rge: 34E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 24:  Prot All
N-82186		9/1/2006		1,715.00		Twp: 13N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 5:  Prot All
						Section 6:  Prot All
						Section 7:  Prot All
N-82187		9/1/2006		540.00		Twp: 13N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 18:  Prot All
N-82188		9/1/2006		1,916.92		Twp: 11N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 4:  Lots 1, 3-12
						Section 4:  S/2N/2, S/2
						Section 5:  Lots 1-4
						Section 5:  S/2N/2, S/2
						Section 7:  Lots 1-4
						Section 7:  E/2, E/2W/2
N-82189		9/1/2006		2,476.04		Twp: 11N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 8:    All
						Section 9:    All
						Section 17:  All
						Section 18:  Lots 1-4
						Section 18:  NE/4, E/2W/2, E/2SE/4
N-82190		9/1/2006		640.00		Twp: 11N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 16:  All
N-82191		9/1/2006		1,119.60		Twp: 12N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 5:  Lots 3-4
						Section 5:  S/2NW/4, SW/4, W/2SE/4
						Section 6:  SE/4NE/4, SE/4
						Section 7:  N/2NE/4, SE/4NE/4
						Section 8:  N/2, N/2SW/4
N-82192		9/1/2006		1,280.00		Twp: 12N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 9:    All
						Section 16:  All
N-82446		10/1/2006		2,000.00		Twp: 12N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 20:  S/2NE/4, S/2
						Section 21:  All
						Section 28:  W/2NE/4, NW/4, W/2SW/4
						Section 29:  All
N-82194		9/1/2006		730.00		Twp: 12N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 32:  N/2, SW/4, W/2SE/4, SE/4SE/4
						Section 32:  W/2NE/4, SE/4
						Section 33:  S/2SW/4
						Section 33:  W/2NE/4SW/4, SE/4NE/4SW/4
N-82195		9/1/2006		2,560.00		Twp: 13N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 4:    Prot All
						Section 9:    Prot All
						Section 16:  Prot All
						Section 17:  Prot All
N-82196		9/1/2006		2,560.00		Twp: 13N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 5:  Prot All
						Section 6:  Prot All
						Section 7:  Prot All
						Section 8:  Prot All
N-82197		9/1/2006		1,920.00		Twp: 13N     Rge: 36E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 21:  Prot All (Excl Me Patent)
						Section 28:  Prot All (Excl Me Patent)
						Section 33:  Prot All (Excl Me Patent)
N-86998		11/01/2009		640.00		Twp: 13N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 24:   Prot All
N-86999		11/01/2009		1,280.00		Twp: 13N     Rge: 35E     Meridian:  MDM     State:  Nevada     County:  Nye
						Section 25:   Prot All
						Section 36:   Prot All
TOTAL NON-UNIT ACREAGE				56,909.42
TOTAL UNIT ACREAGE				35,916.23
						PARADISE UNIT ACREAGE TOTAL
						EMPIRE, ET AL	35,916,23
						JAMES HENDERSON	2,560.00
						NANCY FAGEN	1,277.16
						UNLEASED	320.00
						TOTAL UNIT ACREAGE	40,073.39

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980 (Pages 2, 3, 4, 6, 7, 8, 9, 10, 10A, and 16 Revised 1985)

 

 

 

EXHIBIT "D"

 

UNIT OPERATING AGREEMENT

PARADISE UNIT AREA

COUNTIES OF MINERAL AND NYE

STATE OF NEVADA

 

 

 

TABLE OF CONTENTS
Preliminary Recitals				1
ARTICLE I-DEFINITIONS
Section	1.1		Definitions	2
ARTICLE 2-EXHIBITS
Section	2.1		Exhibits.	2
ARTICLE 3-INITIAL TEST WELL
Section	3.1		Location	2
Section	3.2		Costs of Drilling	2
ARTICLE 4-SUBSEQUENT TEST WELLS
Section	4.1		Right to Drill	2
ARTICLE 5-ESTABLISHMENT, REVISION, AND CONSOLIDATION
OF PARTICIPATING AREAS
Section	5.1		Proposal	2
Section	5.2		Objections to Proposal	2
Section	5.3		Revised Proposal	2
Section	5.4		Rejection of Proposal	2
Section	5.5		Consolidation	2
ARTICLE 6-APPORTIONMENT OF COSTS AND OWNERSHIP AND
DISPOSITION OF PRODUCTION AND PROPERTY
Section	6.1		Apportionment and Ownership Within Participating Area	3
			A.  Costs	3
			B.  Production	3
			C.  Property	3
Section	6.2		Ownership and Costs Outside Participating Area	3
			A.  When All Drilling Block Parties Participate	3
			B.  When Less Than All Drilling Block Parties Participate	3
Section	6.3		Cost Liability of Subsequently Created Interests	3
Section	6.4		Taking in Kind	3
Section	6.5		Failure to Take in Kind	3
Section	6.6		Surplus Materials and Equipment	4
ARTICLE 7-PLANS OF DEVELOPMENT
Section	7.1		Submittal of Plans	4
Section	7.2		Proposal	4
Section	7.3		Objections to Plan	4
Section	7.4		Revised Plan	4
Section	7.5		Rejection of Plan	4
Section	7.6		Notice of Approval or Disapproval	4
Section	7.7		Supplemental Plans	4
Section	7.8		Cessation of Opers Under the Plan	4
i
ROCKY MOUNTAIN UNIT OPERATING AGREEMENT
Form 2 (Divided Interest)
February, 1980
ARTICLE 8-DEVELOPMENT WELLS
Section	8.1		Purpose of Procedure	4
Section	8.2		Drilling	4
			A.  Approval Required	4
			B.  Notice of Proposed Drilling	5
			C.  Response to Notice	5
			D.  Notice of Election to Proceed	5
			E.  Subsequent Election	5
			F.  Effect of Election	5
			G.  Rights and Obligations of Drilling Party and Non-Drilling Party	5
Section	8.3		Attempted Completion	5
			A.  Notice by Unit Operator	5
			B.  Right to Attempt Completion	5
			C.  Time and Manner of Initiating Proposal	5
			D.  Election	5
			E.  Effect of Election	5
			F.  Rights and Obligations of Completing Party and Non-Completing Party	5
			G.  Notice Prior to Plugging	5
ARTICLE 9-EXPLORATORY WELLS
Section	9.1		Purpose and Procedure	6
Section	9.2		Drilling	6
			A.  Notice of Proposed Drilling	6
			B.  Basis of Participation	6
			C.  Exclusion of Land From Proposed Drilling Block	6
			D.  Preliminary Notice to Join in Drilling	6
			E.  Notice of Election to Proceed	6
			F.  Subsequent Election	6
			G.  Effect of Election	6
			H.  Rights and Obligations of Drilling Party and Non-Drilling Party	6
Section	9.3		Attempted Completion	6
			A.  Notice by Unit Operator	6
			B.  Right to Attempt Completion	6
			C.  Time and Manner of initiating Proposal	7
			D.  Election	7
			E.  Effect of Election	7
			F.  Rights and Obligations of Completing Party and Non-Completing Party	7
			G.  Notice Prior to Plugging	7
ARTICLE 10-REQUIRED WELLS
Section	10.1		Definition	7
Section	10.2		Election to Drill	7
Section	10.3		Alternatives to Drilling	7
			A.  Compensatory Royalties	7
			B.  Contraction	7
			C.  Termination	7
Section	10.4		Required Drilling	7
			A.  Development Well	7
			B.  Exploratory Well	7
ARTICLE 11-DEEPENING, PLUGGING BACK,
AND ABANDONMENT
Section	11.1		Attempted Deepening or Plugging Back	8
			A.  Notice by Unit Operator	8
			B.  Right to Initiate Proposal	8
			C.  Right to Participate	8
			D.  Time and Manner of Initiating Proposal	8
			E.  Election	8
			F.  Effect of Election	8
			G.  Rights and Obligations of Participating party and Non-Participating Party	8
Section	11.2		Deepening or Plugging Back to Participating Area	8
Section	11.3		Conflicts	8
Section	11.4		Attempted Completion	8
Section	11.5		Abandonment of Producing Wells	9
			A.  Consent Required	9
			B.  Abandonment Procedure	9
ii
ROCKY MOUNTAIN UNIT OPERATING AGREEMENT
Form 2 (Divided Interest)
February, 1980
			C.  Rights and Obligations of Non-Abandoning Party	9
			D.  Option to Repurchase Materials	9
Section	11.6		Deepening or Plugging Back Abandoned Producing Wells	9
ARTICLE 12-RIGHTS AND OBLIGATIONS OF DRILLING
PARTY AND NON-DRILLING PARTY
Section	12.1		Use of Terms	9
Section	12.2		Scope of Article	9
Section	12.3		Relinquishment of Interest by Non-Drilling Party	9
Section	12.4		Reversion of Relinquished Interest	10
Section	12.5		Effect of Reversion	10
Section	12.6		Rights and Obligations of Drilling Party	10
Section	12.7		Accounting Due Non-Drilling Party	10
Section	12.8		Stand-By Rig Time	10
Section	12.9		Subsequently Created Lease Burdens	10A
ARTICLE 13-ADJUSTMENT ON ESTABLISHMENT OR CHANGE OF
PARTICIPATING AREA
Section	13.1		When Adjustment Made	11
Section	13.2		Definitions	11
			A.  “Usable well”	11
			B.  “Intangible value”	11
			C.  “Tangible property”	11
			D.  “Value”	11
Section	13.3		Method of Adjustment on Establishment or Enlargement	11
Section	13.4		Method of Adjustment on Contraction	11
Section	13.5		Ownership of Wells and Tangible Property	12
Section	13.6		Relinquished Interest of Non-Drilling Parties	12
ARTICLE 14-SUPERVISION OF OERATIONS BY PARTIES
Section	14.1		Right of Supervision	13
Section	14.2		Voting Control	13
Section	14.3		Meetings	13
Section	14.4		Action Without Meeting	13
Section	14.5		Representatives	13
Section	14.6		Audits	13
Section	14.7		Extraneous Projects	13
ARTICLE 15-UNIT OPERATOR’S POWERS AND RIGHTS
Section	15.1		In General	13
Section	15.2		Employees	13
Section	15.3		Non-Liability	13
Section	15.4		Force Majeure	13
Section	15.5		Lien	14
Section	15.6		Advances	14
Section	15.7		Use of Unit Operator’s Drilling Equipment	14
Section	15.8		Rights as Party	14
ARTICLE 16-UNIT OPERATOR’S DUTIES
Section	16.1		Specific Duties	14
			A.  Drilling of Wells	14
			B.  Compliance with Laws and Agreements	14
			C.  Consultation with Parties	14
			D.  Payment of Costs	14
			E.  Records	15
			F.  Information	15
			G.  Access to Unit Area	15
Section	16.2		Insurance	15
			A.  Unit Operator’s	15
			B.  Contractors’	15
			C.  Automotive Equipment	15
Section	16.3		Non-Discrimination	15
Section	16.4		Drilling Contracts	15
Section	16.5		Uninsured Losses	15
ARTICLE 17-LIMITATIONS ON UNIT OPERATOR
Section	17.1		Specific Limitations	15
iii
ROCKY MOUNTAIN UNIT OPERATING AGREEMENT
Form 2 (Divided Interest)
February, 1980
			A.  Change in Operations	15
			B.  Limit on Expenditures	15
			C.  Partial Relinquishment	15
			D.  Settlement of Claims	16
			E.  Determinations	16
ARTICLE 18-TITLES
Section	18.1		Representation of Ownership	16
Section	18.2		Title Papers to be Furnished	16
			A.  Lease Papers	16
			B.  Title Papers for Initial Test Well	16
			C.  Title Papers for Subsequent Wells	16
			D.  Title Papers on Establishment or Enlargement of a Participating Area	16
Section	18.3		Title Examination	16
Section	18.4		Option for Additional Title Examination	16
Section	18.5		Approval of Titles Prior to Drilling	17
Section	18.6		Approval of Titles Prior to Inclusion of Land in a Participating Area	17
Section	18.7		Failure of Title to Committed Working Interest	17
Section	18.8		Failure of Title to Committed Working Interest After Approval	17
Section	18.9		Joinder by True Owner	17
Section	18.10		Title Challenge	17
ARTICLE 19-UNLEASED INTERESTS
Section	19.1		Treated as Leased	17
Section	19.2		Execution of Lease	17
ARTICLE 20-RENTALS AND LEASE BURDENS
Section	20.1		Rentals	18
Section	20.2		Lease Burdens	18
Section	20.3		Loss of Committed Working Interest	18
ARTICLE 21-TAXES
Section	21.1		Payment	18
Section	21.2		Apportionment	18
Section	21.3		Transfer of Interests	18
Section	21.4		Notices and Returns	18
ARTICLE 22-WITHDRAWAL OF TRACTS AND
UNCOMMITTED INTERESTS
Section	22.1		Right of Withdrawal	18
Section	22.2		Non-Withdrawal	18
ARTICLE 23-COMPENSATORY ROYALTIES
Section	23.1		Notice	18
Section	23.2		Demand for Failure to Drill a Development Well	18
Section	23.3		Demand for Failure to Drill a Well Other Than a Development Well	19
ARTICLE 24-SEPARATE MEASUREMENT AND SALVAGE
Section	24.1		Separate Measurement	19
Section	24.2		Salvaged Materials	19
ARTICLE 25-ENHANCED RECOVERY AND
PRESSURE MAINTENANCE
Section	25.1		Consent Required	19
Section	25.2		Above-Ground Facilities	19
ARTICLE 26-TRANSFERS OF INTEREST
Section	26.1		Sale by Unit Operator	19
Section	26.2		Assumption of Obligations	19
Section	26.3		Effective Date	19
ARTICLE 27-RELEASE FROM OBLIGATIONS AND SURRENDER
Section	27.1		Surrender or Release Within Participating Area	19
Section	27.2		Procedure on Surrender or Release Outside Participating Area	20
Section	27.3		Accrued Obligations	20
iv
ROCKY MOUNTAIN UNIT OPERATING AGREEMENT
Form 2 (Divided Interest)
February, 1980
ARTICLE 28-LIABILITY
Section	28.1		Liability	20
Section	28.2		No Partnership Created	20
Section	28.3		Election	20
ARTICLE 29-NOTICES
Section	29.1		Giving and Receipt	20
Section	29.2		Addresses	20
ARTICLE 30-EXECUTION
Section	30.1		Counterparts	20
Section	30.2		Ratification	20
Section	30.3		Effect of Signature	21
ARTICLE 31-SUCCESSORS AND ASSIGNS
Section	31.1		Covenants	21
ARTICLE 32-HEADINGS FOR CONVENIENCE
Section	32.1		Headings	21
ARTICLE 33-RIGHT OF APPEAL
Section	33.1		Not Waived	21
ARTICLE 34-SUBSEQUENT JOINDER
Section	34.1		Prior to the Commencement of Operations	21
Section	34.2		After Commencement of Operations	21
ARTICLE 35-CARRIED INTERESTS
Section	35.1		Treatment of	21
ARTICLE 36-EFFECTIVE DATE AND TERM
Section	36.1		Effective Date and Term	21
Section	36.2		Effective Termination	21
ARTICLE 37-OTHER PROVISIONS
EXHIBITS
Exhibit	1		Accounting Procedure
Exhibit	2		Initial Test Well
Exhibit	3		Insurance
Exhibit	4		Non-Discrimination
Exhibit	5		Oil and Gas Lease
NOTE:  Attention is called to pages 1, 6, 10, 11, 13, 14, 15, 16, and 19, which contain blanks to be filled in.
v

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980

 

 

UNIT OPERATING AGREEMENT

 

PARADISE UNIT AREA

 

 

THIS AGREEMENT made as of the day of , 2010, by and among the parties who by and among the parties who execute or ratify this Agreement or a counterpart hereof,

 

WITNESSETH:

 

WHEREAS, the Parties have entered into that certain UNIT AGREEMENT FOR THE DEVELOPMENT AND OPERATION OF THE PARADISE AREA, Counties of Mineral and Nye State of Nevada , dated as of the day of , 2010, and hereinafter referred to as the “Unit Agreement”, covering the lands described in EXHIBIT B thereto attached, which lands are referred to in the Unit Agreement and in this Agreement as the “Unit Area”; and

 

WHEREAS, the Parties enter into this Agreement pursuant to Section 7 of the Unit Agreement,

 

NOW, THEREFORE, in consideration of the covenants herein contained, it is agreed as follows:

 

ARTICLE 1

DEFINITIONS

 

1.1 Definitions. The definitions contained in the Unit Agreement are adopted for all purposes of this Agreement. In addition, each term listed below shall have the meaning stated therefor, whenever used in this Agreement:

 

"Unit Operator" means Cortez Exploration LLC and its successors, as the Unit Operator designated in accordance with the Unit Agreement, acting in that capacity and not as an owner of a Committed Working Interest.

 

"Party" means a party to this Agreement, including the Party acting as Unit Operator when acting as an owner of a Committed Working Interest.

 

"Drilling Party", "Completing Party", and "Participating Party" all mean the Party or Parties obligated to bear Costs incurred in the Drilling, Completing, or Deepening or Plugging Back, respectively, of a well at the commencement of such operation.

 

"Non-Drilling Party", "Non-Completing Party", and "Non-Participating Party" all mean the Party or Parties who had the optional right to participate in the Drilling, Completing, or Deepening or Plugging Back, respectively, of a well and who elected not to participate therein.

 

"Committed Working Interest" means a working interest which is shown on Exhibit B to the Unit Agreement as owned by a Party and which is committed to the Unit Agreement. Whenever reference is made to a Party "in" or "within" the Unit Area, a participating area, or other area designated pursuant to this Agreement, such reference shall mean a Party owning a Committed Working Interest in lands within such area.

 

"Acreage Basis", when used to describe the basis of participation by the Parties within the Unit Area, a participating area. or other area designated pursuant to this Agreement in voting, Costs, or Production, means participation by each such Party in the proportion that the acreage of its Committed Working Interests in such area bears to the total acreage of the Committed Working Interests of all such Parties therein. For the purposes of this definition, (a) the acreage of the Committed Working Interest in a tract within the Unit Area shall be the acreage of such tract as set forth in Exhibit B to the Unit Agreement, and (b) if there are two or more undivided Committed Working Interests in a tract, there shall be apportioned to each such Committed Working Interest that proportion of the acreage of the tract that such Committed Working Interest bears to the entire Committed Working Interest in the tract.

 

"Production" means all unitized substances produced and saved from the Unit Area except so much thereof as is used in the conduct of operations under the Unit Agreement and this Agreement.

 

"Costs" means all costs and expenses incurred in the development and operation of the Unit Area pursuant to this Agreement or the Unit Agreement and all other expenses that are herein made chargeable as Costs, determined in accordance with the Accounting Procedure attached hereto as Exhibit 1, which shall govern in all matters covered thereby, except that in the event of an inconsistency between said Accounting Procedure and this Agreement, this Agreement shall control.

 

"Lease Burdens" means the royalty reserved to the lessor in an oil and gas lease, an overriding royalty, a production payment, and any similar burden, but does not include a carried working interest, a net profits interest, or any other interest which is payable out of profits.

 

"Drill" means to perform all operations reasonably necessary and incident to the drilling of a well to its projected depth, including preparation of roads and drill site, testing, and logging, but excluding Completion operations.

 

"Complete" means to perform all operations reasonably necessary and incident to the completion of a well, commencing with the running and setting of the production pipe and, if productive of unitized substances, equipping through the wellhead connections, or plugging and abandoning, if dry.

 

"Equip" means to perform all operations reasonably necessary and incident to the equipping of a well for production beyond the wellhead connections.

1

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 2 Revised 1985)

 

 

"Deepen" or "Plug Back" means to perform all operations reasonably necessary and incident to Drilling a well below its original projected depth or plugging back a well to a depth above its original projected depth, testing, and logging, but excluding Completing and Equipping operations.

 

"Initial Test Well" means the test well or wells provided for in Section 9 of the Unit Agreement and in Exhibit 2 attached hereto.

 

"Subsequent Test Well" means a test well Drilled after the Drilling of the Initial Test Well and before discovery of unitized substances in Paying Quantities in the Unit Area.

 

"Development Well" means a well Drilled within a participating area and projected to the pool or zone for which the participating area was established.

 

“Exploratory Well" means a well (other than a Development Well) Drilled after discovery of unitized substances in Paying Quantities in the Unit Area.

 

"Approval of the Parties" or "Direction of the Parties" means an approval, authorization, or direction which receives the affirmative vote of the Parties entitled to vote on the giving of such Approval or Direction, as specified in Section 14.2.

 

"Salvage Value" of a well means the value of the materials and equipment in or appurtenant to the well, determined in accordance with Exhibit 1, less the reasonably estimated Costs of salvaging the same and plugging and abandoning the well.

 

"Appropriate Agency" means the agency designated in the applicable Federal Regulations, including any person acting under the authority thereof.

 

"Paying Quantities" means paying quantities as defined in Section 9 of the Unit Agreement.

 

Other Definitions:

 

ARTICLE 2

EXHIBITS

 

2.1 Exhibits. The following Exhibits are incorporated herein by reference:

 

Exhibit 1. Accounting Procedure.

Exhibit 2. Initial Test Well.

Exhibit 3. Insurance.

Exhibit 4. Non-Discrimination.

Exhibit 5. Oil and Gas Lease.

 

In the event of a conflict or inconsistency between the provisions of an Exhibit and the provisions of this Agreement, the provisions of this Agreement shall control.

 

ARTICLE 3

INITIAL TEST WELL

 

3.1 Location. Unit Operator shall begin to Drill the Initial Test Well within the time required by Section 9 of the Unit Agreement, or any extension thereof, at the location specified in Exhibit 2.

 

3.2 Costs of Drilling. Subject to the investment adjustment provisions of Article 13, the Costs of Drilling the Initial Test Well shall be shared by the Parties in the manner and in the proportions specified in Exhibit 2.

 

ARTICLE 4

SUBSEQUENT TEST WELLS

 

4.1 Right to Drill. The Drilling of any Subsequent Test Well shall be upon such terms and conditions as may be agreed to by the Parties; provided, however, that in the absence of agreement, such well may be Drilled under the provisions of Article 9.

 

ARTICLE 5

ESTABLISHMENT, REVISION, AND CONSOLIDATION OF PARTICIPATING AREAS

 

5.1 Proposal. Unit Operator shall initiate each proposal for the establishment or revision of a participating area by submitting the proposal in writing to each Party at least twenty (20) days before filing the same with the Appropriate Agency. The date of proposed filing must be shown in the proposal. If, within the 20-day period above provided, the proposal receives the Approval of the Parties within the proposed participating area or no written objections are received, then such proposal shall be filed on the date specified.

 

5.2 Objections to Proposal. Prior to the proposed filing date any Party may submit to all other Parties written objections to such proposal. If, despite such objections, the proposal receives the Approval of the Parties within the proposed participating area, then the Party making the objections may renew the same before the Appropriate Agency.

 

5.3 Revised Proposal. If the proposal does not receive the Approval of the Parties within the proposed participating area, and Unit Operator receives written objections thereto, then Unit Operator shall submit to the Parties a revised proposal, taking into account the objections made to the first proposal. If no proposal receives the Approval of the Parties within sixty (60)

 

2

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 3 Revised 1985)

 

days from submission of the first proposal, then Unit Operator shall file with the Appropriate Agency a proposal reflecting as nearly as practicable the various views expressed by the Parties.

 

5.4 Rejection of Proposal. If a proposal filed by Unit Operator as above provided is rejected by the Appropriate Agency, Unit Operator shall initiate a new proposal in the same manner as provided in Section 5.1, and the procedure with respect thereto shall be the same as in the case of an initial proposal.

 

5.5 Consolidation. Two or more participating areas may be combined as provided in the Unit Agreement.

 

ARTICLE 6

APPORTIONMENT OF COSTS AND OWNERSHIP AND DISPOSITION OF PRODUCTION AND PROPERTY

 

6.1 Apportionment and Ownership Within Participating Area. Except as otherwise provided in Articles 8, 9, 11, and 12:

 

A. Costs. All Costs incurred in the development and operation of a participating area for or in connection with production of unitized substances from any pool or zone for which such participating area is established shall be borne by the Parties within such participating area on an Acreage Basis, determined as of the time such Costs are incurred.

 

B. Production. All Production from a participating area shall be allocated on an Acreage Basis to the tracts of unitized land within such participating area. That portion of such Production which is allocated to any such tract shall be owned by the Party or Parties having Committed Working Interest or Interests therein in the same manner and subject to the same conditions as if actually produced from such tract through a well thereon and as if this Agreement and the Unit Agreement had not been executed.

 

C. Property. All materials, equipment, and other property, whether real or personal, the cost of which is chargeable as Costs and which have been acquired in connection with the development or operation of a participating area, shall be owned by the Parties within such participating area on an Acreage Basis.

 

6.2 Ownership and Costs Outside Participating Area. If a well Drilled (including the Deepening or Plugging Back thereof) within a Drilling Block established under the provisions of either Article 9 or Article 10 is completed as a producer but not included within a participating area, then the following provisions shall be applicable:

 

A. When All Drilling Block Parties Participate. If all Parties within the Drilling Block shall have elected to participate in Drilling and Completing such well, then said well, the Production therefrom, and the materials and equipment therein or appurtenant thereto shall be owned by such Parties; and all Costs incurred in the operation of such well and all Lease Burdens payable in respect of Production from such well shall be borne and paid by said Parties. Apportionment among said Parties of ownership, Costs, and Lease Burdens shall be in the same proportions in which Costs incurred in Drilling the well were borne.

 

B. When Less Than All Drilling Block Parties Participate. If any Party within the Drilling Block shall have elected not to participate in Drilling or Completing such well, then the provisions of Article 12 shall be applicable thereto; and the relinquished interest of the Non-Drilling Party shall revert to it in the same manner and under the same conditions as provided in Section 12.4 with respect to a well which results in the establishment or enlargement of a participating area, except that the proceeds or market value to be used in determining when such reversion shall occur shall be the proceeds or market value (after making the deductions provided for in Section 12.4) of that portion of the Production obtained from the well which, had the Non-Drilling Party elected to participate in the Drilling or Completing thereof, would have been allocable, on an Acreage Basis within the Drilling Block, to the Non-Drilling Party. Upon reversion of the relinquished interest of the Non-Drilling Party in such well, the provisions of Section 12.5 shall become applicable.

 

6.3 Cost Liability of Subsequently Created Interests. Anything herein to the contrary not withstanding, if, subsequent to the date of this Agreement, any Party shall create an overriding royalty, production payment, net proceeds interest, carried interest, or any other interest out of its Committed Working Interest (hereinafter called "Subsequently Created Interest"), such Subsequently Created Interest shall be made expressly subject to the terms and provisions of this Section 6.3 and of Section 12.9. If the Party which created such Subsequently Created Interest fails to pay, when due, its share of Costs and the proceeds from its share of Production are insufficient to cover such Costs, then the Subsequently Created Interest shall be chargeable with a pro rata share of such Costs as if such Subsequently Created Interest were a Committed Working Interest; and Unit Operator shall have the right to enforce against such Subsequently Created Interest the lien and all other rights granted in Section 15.5 for the purpose of collecting Costs chargeable to the Subsequently Created Interest.

 

6.4 Taking in Kind. Each Party shall currently, as produced, take in kind or separately dispose of its share of Production and pay Unit Operator for any extra expenditure necessitated thereby. Except as otherwise provided in Section 15.5, each Party shall be entitled to receive directly all proceeds from the sale of its share of Production. Unit Operator shall timely make all permitted governmental filings relative to the price to be charged for gas; however, Unit Operator shall not be liable if, through mistake or oversight, it should fail to make any such filing or should make erroneous filings.

 

6.5 Failure to Take in Kind. Should any Party fail to take in kind or separately dispose of its share of Production, the Party acting as Unit Operator shall have the right, revocable at will by the Party owning such share, to purchase such share for its own account at not less than the market price

 

3

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 4 Revised 1985)

 

receives for its own share of Production; provided that all such sales shall be only for such reasonable periods of time as are consistent with the minimum needs of the industry under the circumstances, but not to exceed one (1) year. Notwithstanding the foregoing, Unit Operator shall not sell or commit any Party's share of gas Production to a sale without first giving such Party not less than ninety (90) days written notice.

 

6.6 Surplus Materials and Equipment. Materials and equipment owned by the Parties or by any of them pursuant to this Agreement may be classified as surplus by Unit Operator when deemed bv it to be no longer needed in operations hereunder, by giving to each Party owning an interest therein notice thereof. Such surplus materials and equipment shall be disposed of as follows:

 

A. Each Party owning an interest therein shall have the right to take in kind its share of surplus tubular goods and other surplus items which are susceptible of division in kind, by notice given to Unit Operator within thirty (30) days after classification thereof as surplus, except that such right shall not apply to junk or to any item (other than tubular goods) having a replacement cost of less than Seven Thousand Five Hundred Dollars ($7,500.00).

 

B. Surplus materials and equipP1ent not divided in kind, other than junk and any item (other than tubular goods) having a replacement cost of less than Seven Thousand Five Hundred Dollars ($7,500.00), shall be sold to the highest bidder or bidders.

 

C. Surplus materials and equipment not disposed of in accordance with the preceding provisions of this Section shall be disposed of as provided in Exhibit 1.

 

ARTICLE 7

PLANS OF DEVELOPMENT

 

7.1 Submittal of Plans. Each plan for the development and operation of the Unit Area shall be submitted by Unit Operator to the Appropriate Agency in accordance with the Unit Agreement and the further provisions of this Article.

 

7.2 Proposal. Unit Operator shall initiate each proposed plan by submitting the same in writing to each Party at least thirty (30) days before filing the same with the Appropriate Agency. If, within the 30-day period above provided, such plan receives the Approval of the Parties or no written objections are received, then such plan shall be filed.

 

7.3 Objections to Plan. Within the 30-day period above provided, any Party may submit to Unit Operator written objections to such plan. If, despite such objections, the plan receives the Approval of the Parties, then the Party making the objections may renew the same before the Appropriate Agency.

 

7.4 Revised Plan. If such plan does not receive the Approval of the Parties, and Unit Operator receives written objections thereto, then Unit Operator shall submit to the Parties a revised plan, taking into account the objections made to the first plan. If no plan receives the Approval of the Parties within sixty (60) days from submission of the first plan, then Unit Operator shall file with the Appropriate Agency a plan reflecting as nearly as practicable the various views expressed by the Parties.

 

7.5 Rejection of Plan. If a plan filed by Unit Operator as above provided is rejected by the Appropriate Agency, Unit Operator shall initiate a new plan in the same manner as provided in Section. 7.2, and the procedure with respect thereto shall be the same as in the case of an initial plan.

 

7.6 Notice of Approval or Disapproval. If and when a plan has been approved or disapproved by the Appropriate Agency, Unit Operator shall give prompt notice thereof to each Party.

 

7.7 Supplemental Plans. If any Party or Parties shall have elected to proceed with a ·Drilling, Deepening, or Plugging Back operation in accordance with the provisions of this Agreement, and such operation is not provided for in the then current plan of development approved by the Appropriate Agency, Unit Operator shall either (a) submit to the Appropriate Agency for approval a supplemental plan providing for the conduct of such operation or (b) request the Appropriate Agency to consent to such operation, if such consent is sufficient.

 

7.8 Cessation of Operations Under the Plan. If any plan approved by the Appropriate Agency provides for the cessation of any Drilling or other operation therein provided for on the happening of a contingency and such contingency occurs, Unit Operator shall promptly cease such Drilling or other operation and shall not incur any additional Costs in connection therewith unless and until such Drilling or other operation is again authorized, in accordance with this Agreement, by the Parties chargeable with such Costs and the Appropriate Agency.

 

ARTICLE 8

DEVELOPMENT WELLS

 

8.1 Purpose and Procedure. It is the purpose of this Article to set forth the procedure for Drilling and Completing a Development Well.

 

8.2 Drilling. The Drilling of a Development Well shall be pursuant to the procedure herein set forth.

 

A. Approval Required. The Drilling of a Development Well shall be subject to such Drilling receiving the Approval of the Parties, unless the Drilling of the proposed well is necessary to prevent the loss of a Committed Working Interest in the tract of land on which the proposed well is to be Drilled. Vote by any Party in favor of the Drilling of any such well shall not, however, be deemed an election by such Party to participate in the Costs thereof but shall mean only that such Party

 

4

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

considers the Drilling of the well to be consistent with the efficient and economic development of the participating area involved and has no objection to the Drilling thereof.

 

B. Notice of Proposed Drilling. Subject to the provisions of Subdivision A of this Section 8.2, any Party within a participating area may propose the Drilling of a Development Well therein by giving to each of the other Parties within the participating area notice, specifying the location, depth, and estimated cost of the proposed well, which location shall conform to any applicable spacing pattern then existing or an approved exception thereto.

 

C. Response to Notice. Within thirty (30) days after receipt of such notice, each Party within such participating area shall advise all other Parties therein whether or not it wishes to participate in Drilling the proposed well. If any Party fails to give such advice within said 30-day period, it shall be deemed to have elected not to participate in Drilling the proposed well. If all Parties within such participating area advise that they wish to participate in Drilling the proposed well, then Unit Operator shall Drill the well for the account of all such Parties.

 

D. Notice of Election to Proceed. Unless all Parties within the participating area agree to participate in Drilling such well, then, within fifteen (15) days after expiration of the 30-day period specified in Subdivision C of this Section 8.2, each Party within the participating area then desiring to have the proposed well Drilled shall give to all other Parties therein notice of its election to proceed with the Drilling of said well. Failure to give such notice shall be deemed an election not to participate in Drilling the well.

 

E. Subsequent Election. If election to Drill the proposed well is made, any Party within the participating area who had not previously elected to participate therein may do so by notice given to Unit Operator at any time before the well is spudded, in which event such Party shall be included in the Drilling Party. However, such Party shall be bound by any and all Directions and Approvals theretofore given by the Drilling Party concerning the Drilling of the well.

 

F. Effect of Election. If one or more, but not all, of the Parties within the participating area elect to proceed with the Drilling of the well, Unit Operator shall Drill the well for the account of such Party or Parties, who shall constitute the Drilling Party, on an Acreage Basis among them selves, or on such other basis as said Parties may specify.

 

G. Rights and Obligations of Drilling Party and Non-Drilling Party. Whenever a Development Well is Drilled otherwise than for the account of all Parties within the participating area involved, the provisions of Article 12 shall be applicable to such operation.

 

8.3 Attempted Completion. The attempted Completion of Development Wells Drilled to their projected depths shall be governed by the following provisions:

 

A. Notice by Unit Operator. After a Development Well has reached its projected depth and been tested, logged, and logs furnished to each Drilling Party, but before production pipe has been set, Unit Operator shall give notice thereof to each Drilling Party.

 

B. Right to Attempt Completion. Each Drilling Party shall have the right to initiate a proposal to attempt the Completion of such well and also shall be entitled to participate in the Completion attempt.

 

C. Time and Manner of Initiating Proposal. A period of twenty-four (24) hours (exclusive of Saturdays, Sundays, and holidays) from and after receipt of the notice given pursuant to Subdivision A of this Section 8.3 shall be allowed within which a Party entitled to do so may initiate a proposal to Complete. Any such proposal shall be initiated by giving notice thereof to Unit Operator and to each Drilling Party. If no such proposal is initiated within said period and no other proposal is initiated pursuant to Article 11, Unit Operator shall plug and abandon the well for the account of the Drilling Party.

 

D. Election. If a proposal to Complete is initiated, each Drilling Party shall have a period of twenty-four (24) hours (exclusive of Saturdays, Sundays, and holidays) from and after receipt of such proposal within which to notify Unit Operator whether or not it elects to participate in the Completion attempt. The failure of a Party to signify its election within said 24-hour period shall be deemed an election not to participate in the Completion attempt.

 

E. Effect of Election. The Party or Parties electing to participate in an attempt to Complete a well as above provided shall constitute the Completing Party for such operation. Each Party who was entitled to make such election but failed to do so as above provided shall be a Non-Completing Party with respect to such operation. Such operation shall be conducted by Unit Operator for the account of the Party or Parties constituting the Completing Party, on an Acreage Basis among themselves, or on such other basis as the Completing Party may specify. Such operation, if successful, shall include Equipping the well for production.

 

F. Rights and Obligations of Completing Party and Non-Completing Party. Upon the commencement of a Completion operation otherwise than for the account of all Drilling Parties, the provisions of Article 12 shall be applicable to such operation.

 

G. Notice Prior to Plugging. Before plugging and abandoning any Development Well which was Drilled to its projected depth and not completed as a producer of unitized substances, Unit Operator shall give the notice specified in Section 11.1 A, unless every Party entitled to the notice has consented to the plugging and abandonment of such well, in which event Unit Operator shall plug and abandon the well for the account of the Completing Party. Upon the giving of such notice, the provisions of Article 11 shall apply.

 

5

 

ROCKY MOUNTAIN U JIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980 (Page 6 Revised 1985)

 

 

ARTICLE 9

EXPLORATORY WELLS

 

9.1 Purpose and Procedure. It is the purpose of this Article to set forth the procedure for Drilling and Completing an Exploratory Well.

 

9.2 Drilling. The Drilling of an Exploratory Well shall be pursuant to the procedure herein set forth.

 

A. Notice of Proposed Drilling. Any Party desiring the Drilling of an Exploratory Well on land in which it owns a Committed Working Interest shall designate an area, herein called a Drilling Block, not to exceed 960 acres, which, on the basis of available geological information, will, in its judgment, be proved productive by the Drilling of such well. Unit Operator and each Party within the Drilling Block shall be furnished with a plat and description of the area so designated, together with notice of the location, objective formation, estimated depth, and estimated cost of the proposed well. The location of the proposed we II shall conform to any applicable spacing pattern then existing or an approved exception thereto. The Drilling Block shall include no land in an established participating area for the objective formation for the well to be Drilled thereon nor any land included in a proposal therefor filed with the Appropriate Agency nor any land within an active, previously designated Drilling Block for such formation. The Drilling Block shall be considered active for ninety (90) days after the designation thereof and, if the actual Drilling of a well is commenced thereon within such period, until either:

 

(1) the Completion of the well, if it is completed otherwise than as a producer of unitized substances in Paying Quantities, either at its original projected depth or, if Deepening or Plugging Back operations are conducted, at any other projected depth; or

 

(2) the filing with the Appropriate Agency of a proposal for the establishment or revision of a participating area if the Completion of the well results in the filing of such proposal.

 

B. Basis of Participation. Each Party within the Drilling Block shall be entitled to participate in the Costs of Drilling the proposed well on an Acreage Basis but shall be required to do so only if it notifies the other Parties within the Drilling Block of its willingness so to participate, as hereinafter in this Article 9 provided.

 

C. Exclusion of Land From Proposed Drilling Block. Within thirty (30) days after receipt of such notice, any part of the land included in the proposed Drilling Block may be excluded therefrom at the Direction of the Parties therein. In such event the proposed Drilling Block, as reduced by the exclusion of such land, shall be established as the Drilling Block. In the absence of any such Direction, then, at the expiration of said 30-day period, the proposed Drilling Block shall be established as the Drilling Block.

 

D. Preliminary Notice to Join in Drilling. Within ten (10) days after the establishment of the Drilling Block, each Party within such Drilling Block shall advise all other Parties therein whether or not it wishes to participate in Drilling the proposed well. If any Party fails to give such advice within said 10-day period, it shall be deemed to have elected not to participate in Drilling the proposed well. If all Parties within the Drilling Block advise that they wish to participate in Drilling the proposed well, then Unit Operator shall Drill the well for the account of all such Parties.

 

E. Notice of Election to Proceed. Unless all Parties within the Drilling Block agree to participate in Drilling such well, then, within fifteen (15) days after expiration of the 10-day period specified in Subdivision D of this Section 9.2, each Party within the Drilling Block then desiring to have the proposed well Drilled shall give to all other Parties therein notice of its election to proceed with the Drilling of said well. Failure to give such notice shall be deemed an election not to participate in Drilling the well.

 

F. Subsequent Election. If election to Drill the proposed well is made, any Party within the Drilling Block who had not previously elected to participate therein may do so by notice given to all other Parties within the Drilling Block at any time before the well is spudded, in which event such Party shall be included in the Drilling Party. However, such Party shall be bound by any and all Directions and Approvals theretofore given by the Drilling Party concerning the Drilling of the well.

 

G. Effect of Election. If one or more, but not all, of the Parties within the Drilling Block elect to proceed with the Drilling of the well, Unit Operator shall Drill the well for the account of such Party or Parties, who shall constitute the Drilling Party, on an Acreage Basis among themselves, or on such other basis as said Parties may specify.

 

H. Rights and Obligations of Drilling Party and Non-Drilling Party. Whenever an Exploratory Well is Drilled otherwise than for the account of all Parties within the Drilling Block involved, the provisions of Article 12 shall be applicable to such operation.

 

9.3 Attempted Completion. The attempted Completion of Exploratory Wells Drilled to their projected depths shall be governed by the following provisions:

 

A. Notice by Unit Operator. After an Exploratory Well has reached its projected depth and has been tested, logged, and logs furnished to each Drilling Party, but before production pipe has been set, Unit Operator shall give notice thereof to each Drilling Party.

 

B. Right to Attempt Completion. Each Drilling Party shall have the right to initiate a proposal to attempt the Completion of such well and also shall be entitled to participate in the Completion attempt.

 

6

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February 1980 (Page 7 Revised 1985)

 

 

C. Time and Manner of Initiating Proposal. A period of twenty-four (24) hours (exclusive of Saturdays, Sundays, and holidays) from and after receipt of the notice given pursuant to Subdivision A of this Section 9.3 shall be allowed within which a Party entitled to do so may initiate a proposal to Complete. Any such proposal shall be initiated by giving notice thereof to Unit Operator and to each Drilling Party. If no such proposal is initiated within said period and no other proposal is initiated pursuant to Article 11, Unit Operator shall plug and abandon the well for the account of the Drilling Party.

 

D. Election. If a proposal to Complete is initiated, each Party entitled to participate in the Completion attempt shall have a period of twenty-four (24) hours (exclusive of Saturdays, Sundays, and holidays) from and after receipt of such proposal within which to notify Unit Operator whether or not it elects to participate in the Completion attempt. The failure of a Party to signify its election within said 24-hour period shall be deemed an election not to participate in the Completion attempt.

 

E. Effect of Election. The Party or Parties electing to participate in an attempt to Complete a well as above provided shall constitute the Completing Party for such operation. Each Party who was entitled to make such election but failed to do so as above provided shall be a Non-Completing Party with respect to such operation. Such operation shall be conducted by Unit Operator for the account of the Party or Parties constituting the Completing Party, on an Acreage Basis among themselves, or on such other basis as the Completing Party may specify. Such operation, if successful, shall include Equipping the well for production.

 

F. Rights and Obligations of Completing Party and Non-Completing Party. Upon the commencement of a Completion operation otherwise than for the account of all Drilling Parties, the provisions of Article 12 shall be applicable to such operation.

 

G. Notice Prior to Plugging. Before plugging and abandoning any Exploratory Well which was Drilled to its projected depth and not completed as a producer of unitized substances, Unit Operator shall give the notice specified in Section 11.1 A, unless every Party entitled to the notice has consented to the plugging and abandonment of such well, in which event Unit Operator shall plug and abandon the well for the account of the Completing Party. Upon the giving of such notice, the provisions of Article 11 shall apply.

 

ARTICLE 10

REQUIRED WELLS

 

10.1 Definition. For the purpose of this Article, a well shall be deemed a Required Well if the Drilling thereof is required by a final order of the Appropriate Agency. Such an order shall be deemed final upon expiration of the time allowed for appeal therefrom without the commencement of appropriate appeal proceedings or, if such proceedings are commenced within said time, upon the final disposition of the appeal. Whenever Unit Operator receives any such order, it shall promptly mail a copy thereof to each Party. If any such order is appealed, the Party appealing shall give prompt notice thereof to Unit Operator and to each of the other Parties, and, upon final disposition of the appeal, Unit Operator shall give each Party prompt notice of the result thereof.

 

10.2 Election to Drill. Any Party desiring to Drill, or to participate in the Drilling of, a Required Well shall give to Unit Operator notice thereof within thirty (30) days after the order requiring such well becomes final or within such lesser time as may be required to insure compliance with such order. If such notice is given within said period, Unit Operator shall Drill the Required Well for the account of the Party or Parties giving such notice; provided, however, if the Required Well is a Development Well, it shall not be Drilled unless it receives the Approval of the Parties within the participating area involved. All rights and obligations with respect to the ownership of such well, the operating rights therein, the Production therefrom, and the bearing of Costs incurred therein shall be the same as if the well had been Drilled under Article 8, if the same is a Development Well, or under Article 9, if the same is an Exploratory Well or a Subsequent Test Well.

 

10.3 Alternatives to Drilling. If no Party elects to Drill a Required Well within the period allowed for such election, and if any of the following alternatives is available, the first such alternative which is available shall be followed:

 

A. Compensatory Royalties. If compensatory royalties may be paid in lieu of Drilling the well and if payment thereof receives, within said period, the Approval of the Parties who would be chargeable with the Costs incurred in Drilling the well if the well were Drilled as provided in Section 10.4, Unit Operator shall pay such compensatory royalties for the account of said Parties; or

 

B. Contraction. If the Drilling of the well may be avoided, without other penalty, by contraction of the Unit Area, Unit Operator shall make a reasonable effort to effect such contraction; or

 

C. Termination. If the Required Well is a Subsequent Test Well, the Parties shall join in termination of the Unit Agreement in accordance with its provisions.

 

10.4 Required Drilling. If none of the foregoing alternatives is available, Unit Operator shall Drill the Required Well under whichever of the following provisions is applicable:

 

A. Development Well. If the Required Well is a Development Well, it shall be Drilled by Unit Operator for the account of all Parties within the participating area in which the well is Drilled; or

 

B. Exploratory Well. If the Required Well is an Exploratory Well, the Drilling Block for such well shall consist of all forty (40) acre subdivisions and lots of the Public Land Survey of which more than one-half of the surface area is within a distance of 2,640 feet from the proposed bottom hole location of such well, but excluding therefrom all lands within any participating area theretofore

 

7

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 8 Revised 1985)

 

established for the pool or zone to which the well is to be Drilled. Unit Operator shall Drill such well for the account of all the Parties owning Committed Working Interests within the Drilling Block, on an Acreage Basis among themselves; and no such Party shall have the right to elect not to participate in the Drilling of said well.

 

ARTICLE 11

DEEPENING, PLUGGING BACK, AND ABANDONMENT

 

11.1 Attempted Deepening or Plugging Back. The attempted Deepening or Plugging Back of wells not completed as producers of unitized substances at their original projected depths shall be governed by the following provisions of this Section 11.1 and by the provisions of Section 11.2, unless every Party entitled to the notice provided for in Subdivision A of this Section 11.1 has consented to the plugging and abandonment of such well:

 

A. Notice by Unit Operator. Before abandoning any well which has been Drilled to its original projected depth but not completed as a producer of unitized substances, Unit Operator shall give notice of its intention to plug and abandon such well to each Drilling Party and Non-Drilling Party.

 

B. Right to Initiate Proposal. Each Party who participated in the Drilling of a well concerning which notice is g1ven in accordance with Subdivision A of this Section 11.1 and any other Party owning a Committed Working Interest in the tract of land on which the well is located may initiate a proposal to attempt to Deepen or Plug Back such well; provided, however, if the well was Drilled as a Development Well, a proposal to Deepen or Plug Back may be initiated only by a Party owning a Committed Working Interest in the tract of land on which the well is located.

 

C. Right to Participate. In order to be entitled to participate in a Deepening or Plugging Back operation, a Party must have the right to initiate the same or must own a Committed Working Interest in the Drilling Block theretofore established for Drilling the well involved; if no Drilling Block was theretofore established for Drilling such well, the Drilling Block for such Deepening or Plugging Back operation shall be established automatically in accordance with the provisions of Subdivision B of Section 10.4, which shall be applicable hereto.

 

D. Time and Manner of Initiating Proposal. A period of twenty-four (24) hours (exclusive of Saturdays, Sundays, and holidays) from and after receipt of the notice given pursuant to Subdivision A of this Section 11.1 shall be allowed within which a Party entitled to do so may initiate a proposal to Deepen or Plug Back. Any such proposal shall be initiated by giving notice thereof to Unit Operator and to each Party entitled to participate in the proposed operation. If no such proposal is initiated within said period, Unit Operator shall plug and abandon the well for the account of the Completing Party if a Completion attempt was made or, if not, then for the account of the Drilling Party.

 

E. Election. If a proposal to Deepen or Plug Back a well is initiated, each Party entitled to participate in the operation proposed shall have a period of forty-eight (48) hours (exclusive of Saturdays, Sundays, and holidays) from and after receipt of such proposal within which to notify Unit Operator whether or not it elects to participate in the proposed operation. The failure of a Party to signify its election within said 48-hour period shall be deemed an election not to participate in the proposed operation.

 

F. Effect of Election. The Party or Parties electing to participate in an operation to Deepen or Plug Back a well as above provided shall constitute the Participating Party for such operation. Each Party who was entitled to make such election but failed to do so as above provided shall be a Non-Participating Party with respect to such operation. Such operation shall be conducted by Unit Operator for the account of the Party or Parties constituting the Participating Party, on an Acreage Basis among themselves, subject, however, to the provisions of Section 11.2 and Section 11.3. If the Party or Parties making such election do not proceed with the operation, the Costs incurred in plugging and abandoning the well shall be charged and borne as part of the Costs incurred in Drilling the well.

 

G. Rights and Obligations of Participating Party and Non-Participating Party. Upon the commencement of a Deepening or Plugging Back operation otherwise than for the account of all Parties entitled to participate therein, the provisions of Article 12 shall be applicable to such operation.

 

11.2 Deepening or Plugging Back to Participating Area. If a well within the surface boundaries of a participating area is to be Deepened or Plugged Back to the pool or zone for which such participating area was established, such operation, including the Completion of such well, may be conducted only if it receives the Approval of the Parties within such participating area, and only upon such terms and conditions as may be specified in such Approval, and upon such further terms and conditions as may be agreed to by the Parties owning interests in the well immediately prior to the commencement of any such Deepening or Plugging Back operation.

 

11.3 Conflicts. If conflicting elections to attempt to Deepen or Plug Back are made in accordance with the provisions of this Article 11, preference shall be given first to Deepening. However, if a Deepening attempt does not result in completion of the well as a producer of unitized substances, Unit Operator shall again give notice in accordance with Subdivision A of Section 11.1 before plugging and abandoning the well.

 

11.4 Attempted Completion. Except as otherwise provided in Section 11.2, the attempted Completion of a well Deepened or Plugged Back to the depth projected for such Deepening or Plugging Back operation shall be governed by the provisions of Section 9.3, unless every Participating Party has

 

8

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 9 Revised 1985)

 

consented to the plugging and abandonment of such well, in which event Unit Operator shall plug and abandon the well for the account of the Participating Party.

 

11.5 Abandonment of Producing Wells. A well completed as a producer of unitized substances within a participating area shall be abandoned for plugging if and when abandonment thereof receives the Approval of the Parties within such participating area, subject, however, to the provisions of Section 11.6. The abandonment of a well completed as a producer but not included in a participating area shall be governed by the following provisions:

 

A. Consent Required. Such well shall not be abandoned for production from the pool or zone in which it is Completed, except with the consent of all Parties then owning the well.

 

B. Abandonment Procedure. If the abandonment of such well receives the Approval of the Parties who own the well but is not consented to by all such Parties, Unit Operator shall give notice thereof to each Party, if any, then having an interest in the well who did not join in such Approval. Any such non-joining Party who objects to abandonment of the well (herein called Non-Abandoning Party) may give notice thereof to all other Parties (herein called Abandoning Parties) then having interests in the well, provided such no lice is given within thirty (30) days after receipt of the notice given by Unit Operator. If such objection is so made, the Non-Abandoning Party or Parties shall forthwith pay to the Abandoning Parties their respective shares of the Salvage Value of the well. Upon the making of such payment, the Abandoning Parties shall be deemed to have relinquished to the Non-Abandoning Party or Parties all their operating rights and working interest in the well, but only with respect to the pool or zone in which it is then Completed, and all their interest in the materials and equipment in or pertaining to the well. If there is more than one Non-Abandoning Party, the interests so relinquished shall be owned by the Non-Abandoning Parties in the proportions which their respective interests in the well bear to the total of their interests therein immediately prior to such relinquishment.

 

C. Rights and Obligations of Non-Abandoning Party. After the relinquishment above provided for, such well shall be operated by Unit Operator for the account of the Non-Abandoning Party or Parties, who shall own all Production therefrom and shall bear all Costs, Lease Burdens, and other burdens thereafter incurred in operating the well and plugging it when abandoned (unless the well is taken over for Deepening or Plugging Back as hereinafter provided) and also the Costs of any additional tankage, flow lines, or other facilities needed to measure separately the unitized substances produced from the well. Costs shall include an overhead charge computed at the highest per well rate applicable to the operation of a single producing well in accordance with Exhibit 1, if such rate is provided.

 

D. Option to Repurchase Materials. If a well taken over by the Non-Abandoning Party or Parties as above provided is abandoned for plugging within six (6) months after relinquishment by the Abandoning Parties of their interests therein, each Abandoning Party shall have the right at its option to repurchase that portion of the materials and equipment salvaged from the well which is equal to the interest relinquished by it to the Non-Abandoning Party or Parties, at the value previously fixed therefor. Said option may be exercised only by notice given to Unit Operator and to the Non-Abandoning Party or Parties within fifteen (15) days after receipt of the notice given by Unit Operator pursuant to Section 11.6.

 

11.6 Deepening or Plugging Back Abandoned Producing Wells. Before plugging any well authorized for abandonment pursuant to Section 11.5, Unit Operator shall give notice to the Party or Parties owning Committed Working Interests in the tract of land upon which the well is located, which Parties, for the further purposes of this Section 11.6, shall constitute the Parties entitled to initiate and participate in a proposed Deepening or Plugging Back operation. Within ten (10) days after receipt of said notice, any such Party desiring the Deepening or Plugging Back of such well shall give notice thereof to Unit Operator and to each Party entitled to participate in the proposed operation; and all the provisions of Subdivisions E, F, and G of Section 11.1 shall apply in the same manner as if the proposed Deepening or Plugging Back were a proposal for the Drilling of an Exploratory Well, subject, however, to the provisions of Section 11.2 and Section 11.3. If no Party gives notice of desire to Deepen or Plug Back such well within said period often ( 10) day. or if such notice is given but no party elects to proceed with the Deepening or Plugging Back of the well within the time specified therefor, Unit Operator shall plug and abandon the well for the account of the Party or Parties owning the well.

 

ARTICLE 12

RIGHTS AND OBLIGATIONS OF DRILLING PARTY AND NON-DRILLING PARTY

 

12.1 Use of Terms. As used in this Article, the terms "Drilling Party" and "Non-Drilling Party" are to be understood as including "Completing Party" and "Non-Completing Party" and "Participating Party" and "Non-Participating Party", respectively, as such terms are used in Articles 8, 9, and 11.

 

12.2 Scope of Article. The rights and obligations of the Drilling Party and Non-Drilling Party with respect to any Drilling, Deepening, Plugging Back, or Completion operation conducted otherwise than for the account of all Parties entitled to participate therein shall be governed by the succeeding provisions of this Article 12.

 

12.3 Relinquishment of Interest by Non-Drilling Party. When any Drilling, Deepening, Plugging Back, or Completion operation is conducted otherwise than for the account of all Parties entitled to participate therein, each Non-Drilling Party, upon the commencement of such operation, shall be deemed to have relinquished to the Drilling Party, and the Drilling Party shall own, all such Non-

 

9

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)'

February, 1980 (Page 10 Revised 1985)

 

Drilling Party's operating rights and working interest in and to the well with respect to which such operation was conducted. In the case of a Deepening or Plugging Back operation, if a Non-Drilling Party in such operation owned an interest in the well immediately prior to the Deepening or Plugging Back, then the Drilling Party for that operation shall pay to such Non-Drilling Party its share of the Salvage Value of the well, such payment to be made at the time the well is taken over by the Drilling Party for Deepening or Plugging Back.

 

12.4 Reversion of Relinquished Interest. If, as a result of any Drilling, Deepening, Plugging Back, or Completion operation conducted otherwise than for the account of all Parties entitled to participate therein, a well is completed as a producer of unitized substances and is a Development Well or results in the establishment or enlargement of a participating area to include such well and if, by reason thereof, there is included in such participating area any land within the Drilling Block in which a Non-Drilling Party owns a Committed Working Interest, then the operating rights and working interest relinquished by such Non-Drilling Party shall revert to it at such time as the proceeds or market value of that portion of the Production obtained from the well after such relinquishment which is allocated to all the acreage of such Non-Drilling Party in the participating area involved (after deducting from such proceeds or market value all Lease Burden and all taxes upon or measured by Production that are payable up to such time on said portion of the Production from such well) shall equal the total of the following:

 

A. 100% of that portion of the Costs incurred in Equipping the well and in operating the well after such relinquishment, and up to such time, that would have been charged to such Non-Drilling Party had the well been Drilled, Deepened, Plugged Back, or Completed and Equipped for the account of all Parties entitled to participate therein.

 

B. 300% of that portion of the Costs incurred in Drilling, Deepening, Plugging Back, or Completing the well that would have been charged to such Non-Drilling Party had the well been Drilled, Deepened, Plugged back, or Completed and Equipped for the account of all Parties entitled to participate therein.

 

However, if a Deepening or Plugging Back operation is involved, then (1) any payment made to such Non-Drilling Party as its share of the Salvage Value of the well in accordance with Section 12.3 shall be added to and deemed part of the Costs incurred in operating the well, for the purposes of Subdivision A above, and (2) if such Non-Drilling Party did not participate in the initial Drilling of the well, but the Drilling Party did participate therein, and if the interest relinquished by such Non-Drilling Party upon the initial Drilling of the well had not reverted to it before such Deepening or Plugging Back, then, for the purposes of Subdivision B above, (i) where a Plugging Back is involved, there shall be added to and deemed part of the Costs incurred in such Plugging Back the then unrecovered portion of the Costs incurred in the initial Drilling of the well down to the pool or zone in which such well is completed as a producer of unitized substances as a result of such Plugging Back, and (ii) where a Deepening is involved, there shall be added to and deemed part of the Costs incurred in such Deepening the then unrecovered portion of the Costs incurred in the initial Drilling of the well.

 

12.5 Effect of Reversion. From and after reversion to a Non-Drilling Party of its relinquished interest in a well, such Non-Drilling Party shall share, on an Acreage Basis, in the ownership of the well, the operating rights and working interests therein, the materials and equipment in or pertaining to the well, the Production therefrom, and the Costs of operating the well.

 

12.6 Rights and Obligations of Drilling Party. The Drilling Party for whom a well is Drilled, Deepened, Plugged Back, or Completed shall pay and bear all Costs incurred therein and shall own the well and the materials and equipment in the well or pertaining thereto, subject to reversion to each Non-Drilling Party of its relinquished interest in the well. If the well is a Development Well or results in the establishment or enlargement of a participating area to include the well, then, until reversion to a Non-Drilling Party of its relinquished interest, the Drilling Party shall own that portion of the Production obtained from the well after such relinquishment which is allocated to all the acreage of such Non-Drilling Party in the participating area involved and shall pay and bear (a) that portion of the Costs incurred in operating the well that otherwise would be chargeable to such Non-Drilling Party and (b) all Lease Burdens that are payable with respect to that portion of the Production from such well which is allocated to the acreage of such Non-Drilling Party. If the Drilling Party includes two or more Parties, the burdens imposed upon and the benefits accruing to the Drilling Party shall be shared by such Parties on an Acreage Basis among themselves.

 

12.7 Accounting Due Non-Drilling Party. In the event a relinquishment of interest by a Non Drilling Party occurs pursuant to any provision of this Agreement with respect to any well and Production is had from such well, Unit Operator shall furnish each Non-Drilling Party, upon its request, all information referred to in Subdivision F of Section 16.1 and, in addition, the following:

 

A. an itemized statement of the Costs of the operation in which the Non-Drilling Party did not participate; and

 

B. until reversion occurs, a monthly itemized statement of the Costs incurred in operating said well, the quantity of Production obtained therefrom, the proceeds received from the sale of such Production, and the Lease Burdens paid with respect thereto.

 

12.8 Stand-By Rig Time. Stand-by time for the rig on a well for the period of time allowed for the initiation of a proposal and for the response thereto shall be charged and borne as part of the Costs incurred in the operation just completed. Stand-by time subsequent to said period of time shall be charged to and borne as Costs incurred in the proposed operation, unless no Party elected to participate therein.

 

10

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 1 OA Revised 1985)

 

12.9 Subsequently Created Lease Burdens. Anything herein to the contrary notwithstanding, if, subsequent to the date of this Agreement, any Party shall create an overriding royalty, production payment, net proceeds interest, carried interest. or any other interest out of its Committed Working Interest and at any time become a Non-Drilling Party with respect to any operation conducted under this Agreement, then the Drilling Party entitled to receive the share of Production to which the Non-Drilling Party would otherwise be entitled shall receive the same free and clear of any such burden, and the Non-Drilling Party who created such burden shall hold the Drilling Party harmless with respect thereto.

 

l0A (The next page is 11)

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

ARTICLE 13

ADJUSTMENT ON ESTABLISHMENT OR CHANGE OF PARTICIPATING AREA

 

13.1 When Adjustment l\lade. Whenever, in accordance with the Unit Agreement, a participating area IS established, or revised by contraction or enlargement, and whenever two or more participating areas are combined (the participating area resulting from such establishment, revision, or combination being hereinafter referred to as a "resulting area"), an adjustment shall be made in accordance with the succeeding provisions of this Article 13, as of the date on which the establishment revision or combination that creates such resulting area becomes effective, such date being hereinafter referred to as the "effective date" of such resulting area. For the purposes of this Article 13, all Costs of a usable well shall be deemed to have been incurred on the date the well was Completed.

 

13.2 Definitions. As used in this Article 13:

 

A. "Usable well" within a resulting area means a well which is either (1) completed in and capable of producing unitized substances from a pool or zone for which the resulting area was created or (2) used as a disposal well, injection well, or otherwise in connection with the production of unitized substances from such resulting area.

 

B. "Intangible value" of a usable well within a resulting area means the amount of those Costs incurred in Drilling, Completing, and Equipping such well, down to the deepest pool or zone for which such resulting area was created, which contribute to the production of unitized substances therefrom and which are properly classified as intangible costs in conformity with accounting practices generally accepted in the industry, reduced at the following rates for each month during any part of which such well was operated prior to the effective date of such resulting area:

 

(1) .5 % per month for a cumulative total of 60 months, and

 

(2) NONE% per month for each month in excess of said cumulative total.

 

C. "Tangible property" serving a resulting area means any kind of tangible property (whether or not in or pertaining to a well) which has been acquired for use in or in connection with the production of unitized substances from such resulting area or any portion thereof, and the cost of which has been charged as Costs pursuant to this Agreement.

 

D. "Value" of tangible property means the amount of Costs incurred in the construction or installation thereof (except installation costs properly classified as part of the intangible costs incurred in connection with a well), reduced, in the case of tangible property which is generally regarded as depreciable, at the rate of .50 % per month for each month during any part of which such well has been operated prior to the effective date of such resulting area.

 

13.3 Method of Adjustment on Establishment or Enlargement. As promptly as reasonably possible after the effective date of a resulting area created by the establishment or enlargement of a participating area, and as of such effective date, an adjustment shall be made in accordance with the following provisions, except to the extent otherwise specified in Section 13.6:

A. The intangible value of each usable well within such resulting area on the effective date thereof shall be credited to the Party or Parties owning such well immediately prior to such effective date, in proportion to their respective interests in such well immediately prior to such effective date. The total amount so credited as the intangible value of usable wells shall be charged to all Parties within the resulting area on an Acreage Basis.

 

B. The value of each item of tangible property serving the resulting area on the effective date thereof shall be credited to the Party or Parties owning such item immediately prior to such effective date, in proportion to their respective interests in such item immediately prior to such effective date. The total amount so credited as the value of the tangible property shall be charged to all Parties within the resulting area on an Acreage Basis.

 

C. If a resulting area, on the effective date thereof, is served by any tangible property or usable well which also serves another participating area or other participating areas, the value of such tangible property and usable well (including the intangible value thereof shall be determined in accordance with Subdivision D of Section 13.2, and such value shall be fairly apportioned between such resulting area and such other participating area or areas, provided that such apportionment receives the Approval of the Parties in each participating area concerned. That portion of the value of such tangible property and usable well (including the intangible value thereof) which is so apportioned to the resulting area shall be included in the adjustment made as of the effective date of such resulting area in the same manner as is the value of tangible property serving only the resulting area.

 

D. The credits and charges above provided for shall be made by Unit Operator in such manner that an adjustment shall be made for the intangible value of usable wells separate and apart from an adjustment for the value of tangible property. On each such adjustment, each Party who is charged an amount in excess of the amount credited to it shall pay to Unit Operator the amount of such excess, which shall be considered as Costs chargeable to such Party for all purposes of this Agreement; and such amount, when received by Unit Operator, shall be distributed or credited to the Parties who, in such adjustment, are credited with amounts in excess of the amounts charged to them respectively.

 

13.4 Method of Adjustment on Contraction. As promptly as reasonably possible after the effective date of a contraction of a participating area, an adjustment shall be made with each Party owning a

 

11

 

ROCKY MOUNTAIN UNIT OPERATINGAGREEMENT

Form 2 (Divided Interest)

February. 1980

 

 

Committed Working Interest in land excluded from the participating area by such contraction (such Committed Working Interest being hereinafter in this Section referred to as "excluded interest") in accordance with the following provisions:

 

A. An adjustment for intangibles shall be made in accordance with Subdivision B of this Section 13.4, and a separate adjustment for tangibles shall be made in accordance with Subdivision C of this Section 13.4.

 

B. Such Party shall be credited with the sum of (1) the total amount theretofore charged against such Party with respect to its excluded interest, pursuant to the provisions of Exhibit 1, as intangible Costs incurred in the development and operation of the participating area prior to the effective date of such contraction, plus (2) the total amount charged against such Party with respect to such excluded interest as intangible value of usable wells in any previous adjustment or adjustments made upon the establishment or revision of such participating area. Such Party shall be charged with the sum of (1) the market value of that portion of the Production from such participating area which, prior to the effective date of such contraction, was delivered to such Party with respect to such excluded interest, less the amount of Lease Burdens and taxes paid or payable on said portion, plus (2) the total amount credited to such Party with respect to such excluded interest as intangible value of usable wells in any previous adjustment or adjustments made upon the establishment or revision of such participating area. Any difference between the amount of said credit and the amount of said charge shall be adjusted as hereinafter provided.

 

C. Such Party shall be credited with the sum of (1) the total amount theretofore charged against such Party with respect to its excluded interest, pursuant to the provisions of Exhibit 1, as Costs other than intangible Costs incurred in the development and operation of the participating area prior to the effective date of such contraction, plus (2) the total amount charged against such Party with respect to its excluded interest as value of tangible property in any previous adjustment or adjustments made upon the establishment or revision of such participating area, plus (3) the excess, if any, of the credit provided for in Subdivision B of this Section 13.4 over the charge provided for in said Subdivision B. Such Party shall be charged with the sum of(l) the excess, if any, of the charge provided for in said Subdivision B over the credit therein provided for, plus (2) the total amount credited to such Party with respect to its excluded interest as value of tangible property in any previous adjustment or adjustments made upon the establishment or revision of such participating area.

 

D. If the charge provided for in Subdivision C of this Section 13.4 is equal to or greater than the credit therein provided for, no adjustment shall be made with such Party. However, if the credit provided for in said Subdivision C is in excess of the charge therein provided for, such excess shall be charged on an Acreage Basis against Parties who remain in the participating area after such contraction and shall be paid by said Parties to Unit Operator upon receipt of invoices therefor. Such payments, when received by Unit Operator, shall be paid by it to the Party owning such excluded interest.

 

13.5 Ownership of Wells and Tangible Property. From and after the effective date of a resulting area, all usable wells within such resulting area and all tangible property serving such resulting area shall be owned by the Parties within such area on an Acreage Basis, except that (a) in the case of tangible property serving a participating area or participating areas in addition to the resulting area, only that undivided interest therein which is proportionate to that portion of the value thereof which is included in the adjustment provided for shall be owned by the Parties within the resulting area on an Acreage Basis, and (b) if a Party within the resulting area was a Non-Drilling Party for a well which is a usable well within such resulting area on the effective date thereof, and if the relinquished interest of such Non-Drilling Party in such well has not reverted to it prior to such effective date, the Drilling Party for such well shall own the interest therein that would otherwise be owned by such Non-Drilling Party until reversion to such Non-Drilling Party of its relinquished interest in such well.

 

13.6 Relinquished Interest of Non-Drilling Parties. If the interest relinquished by a Non-Drilling Party in a well which is a usable well within a resulting area on the effective date thereof has not reverted to it prior to such effective date, then insofar, but only insofar, as they relate to such well, the adjustments provided !'or in Section 13.3 shall be subject to the following provisions, wherein the sum of the intangible value of such well, plus the value of the tangible property in or pertaining thereto, is referred to as the "value" of such well:

 

A. The Drilling Party for such well shall be charged with that part of the value of the well that would otherwise be chargeable to such Non-Drilling Party with respect to (1) such Non-Drilling Party's Committed Working Interest or Interests in the participating area in which the well was Drilled, as such participating area existed when the Drilling of the well was commenced, if the well was Drilled as a Development Well, or (2) the Committed Working Interest or Interests of such Non-Drilling Party which entitled it to participate in the Drilling, Deepening, Plugging Back, or Completion of the well, if it was Drilled, Deepened, Plugged Back, or Completed otherwise than as a Development Well. However, such Non-Drilling Party shall be charged with such part, if any, of the value of such well as is chargeable to it, in accordance with Subdivisions A and B of Section 13.3, with respect to its Committed Working Interests other than those referred to in ( 1) and (2) above.

 

B. If that part of the value of such well which would have been credited to such Non-Drilling Party if the well had been Drilled, Deepened, Plugged Back, or Completed for the account of all Parties entitled to participate therein exceeds the amount provided in Subdivison A of this Section.

 

13.6 to be charged against the Drilling Party, such excess shall be applied against the reimbursement

 

12

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

to which the Drilling Party is entitled out of Production that would otherwise accrue to such Non-Drilling Party. Any balance of such excess over the amount necessary to complete such reimbursement shall be credited to such Non-Drilling Party.

 

ARTICLE 14

SUPERVISION OF OPERATIONS BY PARTIES

 

14.1 Right of Supervision. Each operation conducted by Unit Operator under this Agreement or the Unit Agreement shall be subject to supervision and control in accordance with the succeeding provisions of this Article 14 by the Parties who are chargeable with the Costs thereof.

 

14.2 Voting Control. In the supervision of an operation conducted by Unit Operator, the Parties chargeable with the Costs of such operation shall have the right to vote in proportion to their respective obligations for such Costs. The Parties having the right to vote on any other matter shall vote thereon on an Acreage Basis. Except as provided for in the Unit Agreement and except as otherwise specified in this Agreement (particular reference being made to Section 25.1, Section 27.1, and that portion of Section 11.5 relating to abandonment of producing wells outside of a participating area), the affirmative vote of Parties having 65 % or more of the voting power on any matter which is proper for action by them shall be binding upon all Parties entitled to vote thereon; provided, however, if one Party voting in the affirmative has 65 % or more but less than 75 % of the voting power, the affirmative vote of such Party shall not be binding upon the Parties entitled to vote thereon unless its vote is supported by the affirmative vote of at least one additional Party; and provided further, that if one Party voting in the negative or failing to vote has more than 35 % but less than 50% of the voting power, the affirmative vote of the Parties having a majority of the voting power shall be binding upon all Parties entitled to vote unless there is a negative vote of at least one additional Party. In the event only two Parties are entitled to vote, the vote of the one with the greater interest shall prevail. If only one Party is entitled to vote, such Party's vote shall control. A Party failing to vote shall not be deemed to have voted either in the affirmative or in the negative. Any Approval or Direction provided for in this Agreement which receives the affirmative vote above specified shall be deemed given by and shall be binding upon all Parties entitled to vote thereon, except where the vote of a larger percentage is specifically required.

14.3 Meetings. Any matter which is proper for consideration by the Parties, or any of them, may be considered at a meeting held for that purpose. A meeting may be called by Unit Operator at any time, and a meeting shall be called by Unit Operator upon written request of any Party having voting power on any matter to be considered at the meeting. At least ten (10) days in advance of each meeting, Unit Operator shall give each Party entitled to vote thereat notice of the time, place, and purpose of the meeting. Unit Operator's representative shall be the Chairman of such meeting.

 

14.4 Action Without Meeting. In lieu of calling a meeting, Unit Operator may submit any matter which is proper for consideration by the Parties, or any of them, by giving to each such Party notice, describing in adequate detail the matter so submitted. Each Party entitled to vote on any matter so submitted shall communicate its vote thereon to Unit Operator within such period as may be designated in the notice given by Unit Operator (which period shall be not less than ten (10) nor more than thirty (30) days); provided, however, if, within ten (10) days after submission of such matter, request is made for a meeting in accordance with Section 14.3, such matter shall be considered only at a meeting called for that purpose. If a meeting is not required, then, at the expiration of the period designated in the notice given by it, Unit Operator shall give to each Party entitled to vote thereon notice, stating the tabulation and result of the vote.

 

14.5 Representatives. Promptly after execution of this Agreement, each Party, by notice to all other Parties, shall designate a representative authorized to vote for such Party and may designate an alternate authorized to vote for such Party in the absence of its representative. Any such designation of a representative or alternate representative may be revoked at any time by notice given to all other Parties, provided such notice designates a new representative or alternate representative, as the case may be.

 

14.6 Audits. Audits may be made of Unit Operator's records and books of account pertaining to operations hereunder, as provided in Exhibit 1.

 

14.7 Extraneous Projects. Nothing contained in this Agreement shall be deemed to authorize the Parties, by vote or otherwise, to act upon any matter or to authorize any expenditure unless such matter or expenditure relates to the conduct of operations authorized by the Unit Agreement or this Agreement.

 

ARTICLE 15

UNIT OPERATOR'S POWERS AND RIGHTS

 

15.1 In General. Subject to the limitations set forth in this Agreement, all operations authorized by the Unit Agreement and this Agreement shall be managed and conducted by Unit Operator. Unit Operator shall have exclusive custody of all materials, equipment, and any other property used in connection with any operation within the Unit Area.

 

15.2 Employees. All individuals employed by Unit Operator in the conduct of operations hereunder shall be the employees of Unit Operator alone; and their working hours, rates of compensation, and all other matters relating to their employment shall be determined solely by Unit Operator.

 

15.3 Non-Liability. Unit Operator shall not be liable to any Party for anything done or omitted to be done by it in the conduct of operations hereunder, except in case of bad faith.

 

15.4 Force Majeure. The obligations of Unit Operator hereunder shall be suspended to the extent

 

13

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

that, and only so long as, performance thereof is prevented by fire, action of the elements, strikes or other differences with workmen, acts of civil or military authorities, acts of the public enemy, restrictions or restraints imposed by law or by regulation or order of governmental authority, whether Federal, State, or local, inability to obtain necessary rights of access, or any other cause reasonably beyond the control of Unit Operator, whether or not similar to any cause above enumerated. Whenever performance of its obligations is prevented by any such cause, Unit Operator shall give notice thereof to the Parties as promptly as is reasonably practicable.

 

15.5 Lien. Each of the Parties hereby grants to Unit Operator a lien upon its Committed Working Interests, its interest in all jointly owned materials, equipment, and other property, and its interest in all Production, as security for payment of Costs chargeable to it, together with any interest payable thereon. In addition to Unit Operator's rights under the foregoing lien, and as a secured party, Unit Operator shall be entitled to the benefit of any statutory operator's lien provided for in the jurisdiction in which the Unit Area is located. Unit Operator may, but need not, bring an action at law or in equity to enforce collection of such indebtedness, with or without foreclosure of such lien, and, in addition, shall have all rights provided under the terms of the Uniform Commercial Code or of any other law. In addition to the foregoing, and not in limitation thereof, upon default by any Party in the payment of Costs chargeable to it, Unit Operator shall have the right to collect and receive proceeds from the purchaser of such Party's share of Production, up to the amount owing by such Party, plus interest at the rate of * % per annum until paid. Each such purchaser shall be entitled to rely upon Unit Operator's statement concerning the existence and amount of any such default. None of the remedies or rights specified above shall be deemed exclusive, and the exercise of any such remedy or right shall not be deemed an election of remedies and shall not affect enforceability of the foregoing lien or security interest.

 

15.6 Advances. Unit Operator, at its election, shall have the right from time to time to demand and receive from the Parties chargeable therewith payment in advance of their respective shares of the estimated amount of Costs to be incurred during any month, which right may be exercised only by submission to each such Party of a properly itemized statement of such estimated Costs, together with an invoice for its share thereof. Each such statement and invoice for the payment in advance of estimated Costs for any month shall be submitted on or about the twentieth (20th) day of the next preceding month. The amount of each such invoice shall be payable within fifteen (15) days after receipt thereof and thereafter shall bear interest at the rate of * % per annum until paid. Proper adjustment shall be made monthly between such advances and Costs, to the end that each Party shall bear and pay its proportionate share of Costs incurred and no more. Unit Operator may request advance payment or security for the total estimated Costs to be incurred in a particular Drilling, Deepening, Plugging Back, or Completing operation and, notwithstanding any other provisions of this Agreement, shall not be obligated to commence such operation unless and until such advance payment is made or Unit Operator is furnished security acceptable to it for such payment by the Party or Parties chargeable therewith.

 

15.7 Use of Unit Operator's Drilling Equipment. Any Drilling, Deepening, or Plugging Back operation conducted hereunder may be conducted by Unit Operator with its own tools and equipment, provided that the rates to be charged and the applicable terms and conditions are set forth in a form of drilling contract which receives the Approval of the Party or Parties chargeable with the Costs of such operation, except that in any case where Unit Operator alone constitutes the Drilling Party, such form shall receive the Approval of the Parties within the participating area or other designated area for such well prior to the commencement of such operation.

 

15.8 Rights as Party. As an owner of a Committed Working Interest, the Party acting as Unit Operator shall have the same rights and obligations hereunder as if it were not Unit Operator. In each instance where this Agreement requires or permits a Party to give notice, consent, or approval to Unit Operator, such notice, consent, or approval shall be deemed properly given by the Party acting as Unit Operator if and when given to all other Parties entitled to give or receive such notice, consent, or approval. *2% above prime rate as set by the Chase Manhattan Bank of New York City, New York

 

ARTICLE 16

UNIT OPERATOR'S DUTIES

 

16.1 Specific Duties. In the conduct of operations hereunder, Unit Operator shall:

 

A. Drilling of Wells. Drill, Deepen, Plug Back, or Complete a well or wells only in accordance with the provisions of this Agreement.

 

B. Compliance with Laws and Agreements. Comply with the provisions of the Unit Agreement, all applicable Jaws and governmental regulations (whether Federal, State, or local), and Directions of the Parties pursuant to this Agreement. In case of conflict between such Directions and the provisions of the Unit Agreement or such laws or regulations, the provisions of the Unit Agreement or such laws or regulations shall govern.

 

C. Consultation with Parties. Consult freely with the Parties within the area affected by any operation hereunder and keep them advised of all matters arising in operations hereunder which Unit Operator deems important, in the exercise of its best judgment.

 

D. Payment of Costs. Pay all costs incurred in operations hereunder promptly as and when due and payable and keep the Committed Working Interests and all property used in connection with operations under this Agreement free from liens which may be claimed for the payment of such Costs, except any such lien which it disputes, in which event Unit Operator may contest the disputed lien upon giving notice thereof to the Parties affected thereby.

 

14

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

 

E. Records. Keep full and accurate records of all Costs incurred and of all controllable materials and equipment, which records, and receipts and vouchers in support thereof, shall be available for inspection by authorized employees or agents of the Parties at reasonable intervals during usual business hours at the office of Unit Operator.

 

F. Information. Furnish promptly to each Party chargeable with Costs of the operation Involved and to each additional Party who makes timely written request therefor (1) copies of Unit Operator's authorizations for expenditures or itemizations of estimated expenditures in excess of Twenty –Five Thousand Dollars ($25,000), (2) copies of all drilling reports, well logs, and State and Federal reports, (3) samples of cores and cuttings taken from wells Drilled hereunder, to be delivered at the well in containers furnished by the Party requesting same, and (4) such other and additional information or reports as may be required by Direction of the Parties within the area aff'ected. If multiple copies of any such materials are requested by any Party, Unit Operator may charge the cost thereof directly to the requesting Party.

 

G. Access to Unit Area. Permit each Party, through its authorized employees or agents, but at such Party's sole risk and expense, to have access to the Unit Area at all times and to the derrick floor of each well Drilled or being Drilled hereunder, for the purpose of observing operations conducted hereunder and inspecting materials, equipment, or other property used in connection with operations under this Agreement and to have access at reasonable times to information and data in the possession of Unit Operator concerning Unit operations.

 

16.2 Insurance.

 

A. Unit Operator's. Unit Operator shall comply with the Workmen's Compensation Law of the State in which the Unit Area is located. Unit Operator shall also maintain in force at all times with respect to operations hereunder such other insurance, if any, as may be required by law. In addition, Unit Operator shall maintain such other insurance, if any, as is described in Exhibit 3 or as receives the Approval of the Parties from time to time. Unit Operator shall carry no other insurance for the benefit of the Parties, except as above specified. Upon request of any Party, Unit Operator shall furnish evidence of insurance carried by it with respect to operations hereunder.

 

B. Contractors'. Unit Operator shall require all contractors engaged in operations under this Agreement to comply with the Workmen's Compensation Law of the State in which the Unit Area is located and to maintain such other insurance as may be required by Direction of the Parties.

 

C. Automotive Equipment. In the event Automobile Public Liability insurance is specified in Exhibit 3 or subsequently receives the Approval of the Parties, no direct charge shall be made by Unit Operator for premiums paid for such insurance for Unit Operator's fully owned automotive equipment.

 

16.3 Non-Discrimination. In connection with the performance of work under this Agreement, Unit Operator agrees to comply with the provisions of Exhibit 4. Unit Operator agrees to insert non-discrimination provisions in all subcontracts hereunder, as required by law or regulation.

 

16.4 Drilling Contracts. Each Drilling, Deepening, Plugging Back, or Completing operation con· ducted hereunder, and not performed by Unit Operator with its own tools and equipment in accordance with Section 15. 7, shall be performed by a reputable drilling contractor having suitable equipment and personnel, under written contract between Unit Operator and the contractor, at the most favorable rates and on the most favorable terms and conditions bid, if bids were obtained, but otherwise at rates and on terms and conditions receiving the Approval of the Parties.

 

16.5 Uninsured Losses. Any and all payments made by Unit Operator in the settlement or discharge of any liability to third persons (whether or not reduced to judgment) arising out of an operation conducted hereunder and not covered by insurance herein provided for shall be charged as Costs and borne by the Party or Parties for whose account such operation was conducted.

 

ARTICLE 17

LIMITATIONS ON UNIT OPERATOR

 

17.1 Specific Limitations. In the conduct of operations hereunder, Unit Operator shall not, without first obtaining the Approval of the Parties:

 

A. Change in Operations. Make any substantial change in the basic method of operation of any well, except in the case of an emergency.

 

B. Limit on Expenditures. Undertake any project reasonably estimated to require an expenditure in excess of Twenty Five Thousand Dollars($25,000); provided, however, that (1) Unit Operator is authorized to make all usual and customary operating expenditures that are required in the normal course of producing operations, (2) whenever Unit Operator is authorized to conduct a Drilling, Completing, or Deepening or Plugging Back operation, or to undertake any other project, in accordance with this Agreement, Unit Operator shall be authorized to make all reasonable and necessary expenditures in connection therewith, and (3) in case of emergency, Unit Operator may make such immediate expenditures as may be necessary for the protection of life or property, but notice of such emergency shall be given to all Parties as promptly as reasonably possible.

 

C. Partial Relinquishment. Make any partial relinquishment of its rights as Unit Operator, appoint any sub-operator, or execute any Designation of Agent.

 

15

 

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980 (Page 16 Revised 1985)

 

D. Settlement of Claims. Pay in excess Ten Thousand Dollars ($10,000) in settlement of any claim (other than Workman’s Compensation Claims) for injury to or death of persons or for loss of or damage to property.

 

E. Determinations. Make any of the determinations provided in the Unit Agreement to be made by Unit Operator, except as otherwise specified in this Agreement.

 

 

ARTICLE 18

TITLES

 

18.1 Representation of Ownership. Each Party represents to all other Parties that, to the best of its knowledge and belief, 1ts ownership of Committed Working Interests in the Unit Area is that set out in Exhibit B to the Unit Agreement. If it develops that any such ownership is incorrectly stated, the rights and responsibilities of the Parties shall be governed by the provisions of this Article 18, but such erroneous statement shall not be a cau3e for canceling or terminating this Agreement.

 

18.2 Title Papers to be Furnished.

 

A. Lease Papers. Each Party, after executing this Agreement, shall upon request promptly furnish Unit Operator with copies of all leases, assignments, options, and other contracts which it has in its possession relating to its Committed Working Interests.

 

B. Title Papers for Initial Test Well. Promptly after the effective date of this Agreement each Party within the area described as the Title Examination Area in Exhibit 2 shall, at its own expense but without responsibility for the accuracy thereof, furnish Unit Operator with the following title materials relating to all lands within such area in which it owns Committed Working Interests:

 

(1) Abstracts of title based upon the County records, certified to the current date;

 

(2) All lease papers, or copies thereof, mentioned in Subdivision A of this Section 18.2 which the Party has in its possession and which have not been previously furnished to Unit Operator;

 

(3) Copies of any title opinions which the Party has in its possession;

 

(4) If Federal lands are involved, status reports of current date, setting forth the entries found in the BLM State Office for such lands, and also certified copies of the Serial Registers for the Federal leases involved;

 

(5) If State lands are involved, status reports of current date, setting forth the entries found in the State records for such lands; and

 

(6) If Indian lands are involved, status reports of current date, setting forth the entries found in the Bureau of Indian Affairs Agency Realty Office having jurisdiction over such lands and in the Bureau of Indian Affairs Land Titles and Records Office having jurisdiction over such lands.

 

C. Title Papers for Subsequent Wells. Any Party who proposes the Drilling of a Subsequent Test Well or Exploratory Well shall, at the time of giving notice for such proposed well, designate a title examination area not exceeding 2,560 acres and not including any lands within a participating area. When the Drilling of a Development Well receives the Approval of the Parties within the participating area in which it is to be Drilled, a title examination area covering lands outside any participating area may be designated by the Approval of such Parties. Each Party within any such title examination area shall, at its own expense and upon request, furnish Unit Operator with the title materials listed in Subdivision B of this Section 18.2 not previously furnished, relating to all lands within such area in which it owns Committed Working Interests.

 

D. Title Papers on Establishment or Enlargement of a Participating Area. Upon the establishment or the enlargement of a participating area, each Party shall promptly furnish Unit Operator all the title materials listed in Subdivision B of this Section 18.2 not previously furnished, relating to all its Committed Working Interests in the lands lying within such participating area as established or enlarged.

 

18.3 Title Examination. Promptly after all title materials delivered pursuant to Section 18.2 have been received, Unit Operator shall deliver the same to an attorney or attorneys approved by the Parties within the title examination area. Unit Operator shall arrange to have said materials examined promptly by such attorney or attorneys and shall distribute copies of title opinions to all Parties within the title examination area as soon as they are received. Each Party shall be responsible, at its expense, for curing its own titles. After a reasonable time, not exceeding thirty (30) days, has been allowed for any necessary curative work, Unit Operator shall submit to each Party written recommendations for approval or disapproval of the title to each Committed Working Interest involved, and thereafter the Parties shall advise Unit Operator in writing, within fifteen (15) days after receipt of such recommendations, of approval or disapproval of titles. Unless otherwise agreed, the cost of all title examinations made under this Section 18.3 shall be charged as part of the Costs of Drilling the well for which such title examination was made.

 

18.4 Option for Additional Title Examination. Any Party who furnishes materials for title examination pursuant to Section 18.2 shall have the right to examine all materials furnished Unit Operator. If such additional, independent title examination is elected, it shall be at the sole cost and expense of the Party electing to perform the same; and such Party shall bear any expense which may be necessary to reproduce title materials for its use, if required. Whether or not such additional title examination is elected, each Party shall have the right to approve or disapprove titles according to the provisions of this Article 18

 

16

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

 

18.5 Approval of Titles Prior to Drilling. Where the Committed Working Interests within a title examination area are owned by more than one Party, no Drilling shall be conducted in such area until t1tles to the Comm1tted Working Interests therein have received the Approval of the Parties as hereinafter m th1s Section prov1ded. If a Drilling Block has been designated for the Drilling of a well, such well shall not be Drilled until titles to the Committed Working Interests within the title examination area established for such well have received the Approval of the Parties within the Drilling Block in which such wells to be Drilled. Approval of title to lands within a Drilling Block shall be binding upon all Parties owning Committed Working Interests within such Drilling Block. If lands outside a participating area are included in the title examination area for a Development Well, such well shall not be Drilled until t1tles to the Committed Working Interests within such title examination area have received the Approval of the Parties therein. In the event Approval of the Parties is not obtained as in this Section 18.5 provided, the Drilling Party (whether one or more) may proceed with the Drilling of the well, but sa1d Drilling Party (a) shall, by so proceeding, assume all risk attending the failure to obtain such approval to the s me extent as if approval of titles to all lands within the Drilling Block (if one has been established) or within the title examination area (in all other instances) had been obtained, and (b) shall also be deemed to have g1ven its approval to the titles to all lands within the Drilling Block (if one has been established) or within the title examination area (in all other instances).

 

18.6 Approval of Titles Prior to Inclusion of Land in a Participating Area. Where the Committed Working Interests within a participating area are owned by more than one Party, no Committed Working Interest shall be included within said participating area or be entitled to participate in the Production of unitized substances from said participating area until title to such Committed Working Interest has received the Approval of the Parties within said participating area. Approval of titles to lands within a participating area shall be binding upon all Parties within such participating area and all Parties coming within such participating area upon any enlargement thereof.

 

18.7 Failure of Title to Committed Working Interest Before Approval. If title to a Committed Working Interest shall fail in whole or in part prior to receiving the Approval of the Parties, the Parties who improperly claimed said interest shall sustain the entire loss occasioned by such failure of title and do hereby expressly relieve and indemnify Unit Operator and all other Parties from and against any and all liability on account thereof.

 

18.8 Failure of Title to Committed Working Interest After Approval. If title to a Committed Working Interest which has received the Approval of the Parties under Section 18.5 fails in whole or in part at a time when the tract affected thereby is within an active Drilling Block or within a Drilling Block upon which a well has been completed otherwise than as a producer of unitized substances in Paying Quantities, or if title to a Committed Working Interest which has received the Approval of the Parties under Section 18.6 fails in whole or in part at a time when the tract affected thereby is within a participating area, then:

 

A. the loss, the cost of litigation, and any ensuing liability shall be borne by the Parties having interests in the affected participating area or Drilling Block (including the Party whose Committed Working Interest has been lost and including the acreage of such Committed Working Interest);

 

B. there shall be relinquished to the Party whose Committed Working Interest has been lost such proportionate part of each of the 0ther Committed Working Interests in the lands within such affected participating area or Drilling Block, subject to a like proportion of their respective Lease Burdens, as may be necessary to make the loss of such Committed Working Interest a joint loss of the Parties within such participating area or Drilling Block; and

 

C the relinquished portions of said Committed Working Interests (subject to their proportionate part of the Lease Burdens attributable thereto) shall be deemed owned by the Party receiving same.

 

18.9 Joinder by True Owner. If title to a Committed Working Interest fails in whole or in part, such Committed Working Interest shall no longer be subject to this Agreement or the Unit Agreement. The true owner of a Committed Working Interest, title to which has failed, may join in this Agreement or enter into a separate Operating Agreement with the Parties to this Agreement upon such terms and conditions as receive the Approval of the Parties within the Unit Area and subject to any valid claims by the true owner.

 

18.10 Title Challenge. In the event of any suit or action challenging the title of any Party to any of the oil and gas rights committed by said Party to this Agreement and to the Unit Agreement, the Party served will immediately notify the other Parties, and the Party whose title has been challenged shall forthwith take over and be in charge of the conduct of the litigation and shall bear the entire cost of such litigation, unless the title has previously received the Approval of the Parties, in which event the provisions of Section 18.8 shall apply.

 

ARTICLE 19

UNLEASED INTERESTS

 

19.1 Treated as Leased. If a Party owns in fee all or any part of the oil and gas rights in any tract within the Unit Area which is not subject to any oil and gas lease or other contract in the nature thereof, such Party shall be deemed to own a Committed Working Interest in such tract and also a royalty interest therein in the same manner as if such Party's oil and gas rights in such tract were covered by the form of oil and gas lease attached as Exhibit 5.

 

 

19.2 Execution of Lease. In any provision of this Agreement where reference is made to an assignment or conveyance by any Party of its Committed Working Interest to any other Party. each such reference as to any Party owning an unleased interest shall be interpreted to mean that such Party shall

 

 

17

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

execute an oil and gas lease to such other Party in the form of Exhibit 5, which shall satisfy the requirement for an assignment or conveyance of a Committed Working Interest.

 

ARTICLE 20

RENTALS AND LEASE BURDENS

 

20.1 Rentals. Each Party shall be obligated to pay any and all rentals and other sums (other than Lease Burdens) payable upon or with respect to its Committed Working Interests, subject, however, to the right of each Party to surrender any of its Committed Working Interests in accordance with Article 27. Upon request, each Party shall furnish to Unit Operator satisfactory evidence of the making of such payments. However, no Party shall be liable to any other Party for unintentional failure to make any such payment, provided it has acted in good faith.

 

20.2 Lease Burdens. Each Party entitled to receive a share of Production shall be obligated for any and all payments, whether in cash or in kind, accruing to any and all Lease Burdens, net profits interests, carried interests, and any similar interest payable with respect to such share or the proceeds thereof; provided, however, at any time any such Party entitled to receive Production is not taking in kind or separately disposing of its share, that portion of such Production or the proceeds thereof (at the option of such Party) accruing to such Lease Burdens shall, upon request, be distributed to such Party.

 

20.3 Loss of Committed Working Interest. If a Committed Working Interest is lost through failure to make any payment above provided to be made by the Party owning the same, such loss shall be borne entirely by such Party; provided, however, if the Committed Working Interest so lost covers land within a participating area, the provisions of Section 18.8 shall apply.

 

ARTICLE 21

TAXES

 

21.1 Payment. Any and all ad valorem and severance taxes payable upon Committed Working Interests (and upon Lease Burdens which are not payable by the owners thereof) or upon materials, equipment, or other property acquired and held by Unit Operator hereunder, and any and all taxes (other than income taxes) upon or measured by unitized substances produced from the Unit Area which are not payable by the purchaser or purchasers thereof or by the owner of Lease Burdens shall be paid by Unit Operator as and when due and payable.

 

21.2 Apportionment. Taxes upon materials, equipment, and other property acquired and held by Unit Operator hereunder shall be charged to and borne by the Parties owning the same in proportion to their respective interests therein. All taxes paid by Unit Operator upon or measured by the value of Production shall be charged to and borne by the Parties owning the same in the same proportions as the assessed values of their respective portions of such Production bear to the whole thereof. All other taxes paid by Unit Operator shall be charged to and borne by the Parties in proportion to their ownership in the Committed Working Interests or unitized substances (as the case may be) upon which or with respect to which such taxes are paid. All reimbursements from owners of Lease Burdens, whether obtained in cash or by deduction from Lease Burdens, on account of any taxes paid for such owners shall be paid or credited to the Parties in the same proportions as such taxes were charged to such Parties.

 

21.3 Transfer of Interests. In the event of a transfer by one Party to another under the provisions of this Agreement of any Committed Working Interest or of any other interest in any well or in the materials and equipment in any well, or in the event of the reversion of any relinquished interest as in this Agreement provided, the taxes above mentioned assessed against the transferred or reverted interest for the taxable period in which such transfer or reversion occurs shall be apportioned among said Parties so that each shall bear the percentage of such taxes which is proportionate to that portion of the taxable period during which it owned such interest.

 

21.4 Notices and Returns. Each Party shall promptly furnish Unit Operator with copies of notices, assessments, levies, or tax statements received by it pertaining to the taxes to be paid by Unit Operator. Unit Operator shall make such returns, reports, and statements as may be required by law in connection with any taxes above provided to be paid by it and shall furnish copies to the Parties upon request. It shall notify the Parties of any tax which it does not propose to pay before such tax becomes delinquent.

 

ARTICLE 22

WITHDRAWAL OF TRACTS AND UNCOMMITTED INTERESTS

 

22.1 Right of Withdrawal. If the owner of any substantial interest in a tract within the Unit Area fails or refuses to join in the Unit Agreement, then such tract may be withdrawn from the Unit Agreement, as provided in the Unit Agreement.

 

22.2 Non·Withdrawal. Should the Party or Parties having the right under the Unit Agreement to withdraw a tract from the Unit Agreement fail to exercise such right, then all payments and liabilities accruing to the owners of uncommitted interests in such tract shall be paid and borne by such Party or Parties.

 

ARTICLE 23

COMPENSATORY ROYALTIES

 

23.1 Notice. Whenever demand is made in accordance with the Unit Agreement for the payment of compensatory royalties, Unit Operator shall give notice thereof to each Party affected by the demand.

 

23.2 Demand for Failure to Drill a Development Well. If the demand for compensatory royalties results from the failure to have Drilled a Development Well and such well is not Drilled, then Unit

 

18

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

Operator shall pay such compensatory royalties. Such payment shall be charged as Costs incurred in operations within the participating area involved.

 

23.3 Demand for Failure to Drill a Well Other Than a Development Well. If the demand for compensatory royalties results from the failure to have Drilled a well other than a Development Well and such well is not Drilled, then Unit Operator shall pay such compensatory royalties. Such payment shall be chargeable to and borne by the Parties who would be obligated to bear the Costs of such well if the well were Drilled as a Required Well under Subdivision B of Section 10.4.

 

ARTICLE 24

SEPARATE MEASUREMENT AND SALVAGE

 

24.1 Separate Measurement. If a well completed as a producer of unitized substances is in or becomes included in a participating area but is not owned on an Acreage Basis by all the Parties within such participating area and if, within thirty (30) days after request therefor by any interested Party, a method of measuring the Production from such well without the necessity of additional facilities does not receive the Approval of the Parties, then Unit Operator shall install such additional tankage, flow lines, or other facilities for separate measurement of the unitized substances produced from such well as Unit Operator may deem suitable. The Costs of such facilities for separate measurement shall be charged to and borne by the Drilling Party for such well and treated as Costs incurred in operating such well, notwithstanding any other provisions of this Agreement.

 

24.2 Salvaged Materials. If any materials or equipment are salvaged from a well completed as a producer after being Drilled, Deepened, Plugged Back, or Completed otherwise than for the account of all the Parties entitled to participate therein before reversion to the Non-Drilling Party of its relinquished interest in the well, the proceeds derived from the sale thereof or, if not sold, the Salvage Value thereof, shall be treated in the same manner as proceeds of Production from such well for the purpose of determining reversion to the Non-Drilling Party of its relinquished interest in such well.

 

ARTICLE 25

ENHANCED RECOVERY AND PRESSURE MAINTENANCE

 

25.1 Consent Required. Unit Operator shall not undertake any program of enhanced recovery or pressure maintenance involving injection of gas, water, or other substance by any method, whether now known or hereafter devised, without first obtaining the consent of Parties owning, on an Acreage Basis, not less than 90 % of the Committed Working Interests in the participating area affected by any such program. After the Parties have voted to undertake a program of enhanced recovery or pressure maintenance in accordance with this Section 25.1, the conduct of such program shall be subject to supervision by the Parties as set forth in Article 14.

 

25.2 Above-Ground Facilities. This Agreement shall not be deemed to require any Party to participate in the construction or operation of any gasoline plant, sulphur recovery plant, dewaxing plant, or other above-ground facilities to process or otherwise treat Production, other than such facilities as may be required for treating Production in ordinary lease operations and such facilities as may be required in the conduct of operations authorized under Section 25.1.

 

ARTICLE 26

TRANSFERS OF INTEREST

 

26.1 Sale by Unit Operator. If Unit Operator sells all its Committed Working Interests, it shall resign and a new Unit Operator shall be selected as provided in the Unit Agreement.

 

26.2 Assumption of Obligations. No transfer of any Committed Working Interest shall be effective unless the same is made expressly subject to the Unit Agreement and this Agreement and the transferee agrees in writing to assume and perform all obligations of the transferor under the Unit Agreement and this Agreement insofar as they relate to the interest assigned, except that such assumption of obligations shall not be required in case of a transfer by mortgage or deed of trust as security for indebtedness.

 

26.3 Effective Date. A transfer of Committed Working Interests shall not be effective as among the Parties until the first day of the month next following the delivery to Unit Operator of the original or a certified copy of the instrument of transfer conforming to the requirements of Section 26.2. In no event shall a transfer of Committed Working Interests relieve the transferring Party of any obligations accrued under this Agreement prior to said effective date, for which purpose any obligation assumed by the transferor to participate in the Drilling, Deepening, Plugging Back, or Completing of a well prior to such effective date shall be deemed an accrued obligation.

 

ARTICLE 27

RELEASE FROM OBLIGATIONS AND SURRENDER

 

27.1 Surrender or Release Within Participating Area. A Committed Working Interest in land within a participating area shall not be surrendered except with the consent of all Parties within such participating area. However, a Party who owns a Committed Working Interest in land within a participating area and who is not at the time committed to participate in the Drilling, Deepening, Plugging Back, or Completing of a well within such participating area may be relieved of further obligations with respect to such participating area, as then constituted, by executing and delivering to Unit Operator an assignment conveying to all other Parties within such participating area all Commit ted Working Interests owned by such Party in lands within the participating area, together with the

 

19

 

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

entire interest of such Party in any and 21l wells, materials, equipment, and other property within or pertaining to such participating area.

 

27.2 Procedure on Surrender or Release Outside Participating Area. Whenever a Party or Parties owning 100% of the Committed Working Interest in any tract which is not within any participating area desire to surrender said 100% interest, such Party or Parties shall give to all other Parties notice thereof, describing such Committed Working Interest. The Parties receiving such notice, or any of them, shall have the right at their option to take from the Party or Parties desiring to surrender an assignment of such Committed Working Interest by giving the Party or Parties desiring to surrender notice of election so to do within thirty (30) days after receipt of notice of the desire to surrender. If such election is made as above provided, the Party or Parties taking the assignment (which shall be taken by them in proportion to the acreage of their respective Committed Working Interests among themselves in the Unit Area) shall pay the assigning Party or Parties for its or their share of the Salvage Value of all wells, if any, in which the assigning Party or Parties own an interest and which are located on the land covered by such Committed Working Interest, which payment shall be made upon receipt of the assignment. If no Party elects to take such assignment within said thirty (30) day period, then the Party or Parties owning such Committed Working Interest may surrender the same, if surrender thereof can be made in accordance with the Unit Agreement. Whenever a Party owning less than 100% of the Committed Working Interest in any tract desires to surrender its interest therein, such interest may be acquired by the other Party or Parties owning Committed Working Interests in said tract without notice being given to any other Parties owning interests within the Unit Area. In the event the other Party or Parties owning Committed Working Interests in the tract to be surrendered do not desire to acquire such interest, the interest shall be treated as a 100% interest.

 

27.3 Accrued Obligations. A Party making an assignment or surrender in accordance with Section 27.1 or Section 27.2 shall not be relieved of its liability for any obligation accrued under this Agreement at the time the assignment or surrender is made or of the obligation to bear its share of the Costs incurred in any Drilling, Deepening, Plugging Back, or Completing operation in which such Party had elected to participate prior to the making of such assignment or surrender, except to the extent that the Party or Parties receiving such assignment shall assume, with the Approval of the Parties, any and all obligations of the assigning Party under this Agreement and under the Unit Agreement.

 

ARTICLE 28

LIABILITY

 

28.1 Liability. The liability of the Parties hereunder shall be several and not joint or collective. Each Party shall be responsible only for its obligations as herein set out.

 

28.2 No Partnership Created. It is not the intention of the Parties to create, nor shall this Agreement or the Unit Agreement be construed as creating, a mining or other partnership or association between the Parties or as rendering them liable as partners or associates.

 

28.3 Election. Each of the Parties hereby elects, under the authority of Section 761(a) of the Internal Revenue Code of 18 86 to be excluded from the application of all the provisions of Subchapter K of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986. In making this election, each Party states that income derived by it from operations under this Agreement can be adequately determined without computation of partnership taxable income. If the income tax laws of the State or States in which the Unit Area is located contain, or hereafter contain, provisions similar to those contained in the Subchapter of the Internal Revenue Code of 1986 above referred to under which a similar election is permitted, each of the Parties agrees that such election shall be exercised; and should the income tax laws of such State or States require evidence of such election, Unit Operator is authorized and directed to execute the same on behalf of each Party. Beginning with the first taxable year of operation under this Agreement, each Party agrees that the deemed election provided by Federal Regulations Section 1.761-2(b)(2)(ii) will apply, and no Party will file an application under Federal Regulations Section 1.761·2(b)(3)(i) to revoke said election. *See Page 22.

 

ARTICLE 29

NOTICES

 

29.1 Giving and Receipt. Whenever a rig is on location, every notice and every response shall be by telephone, to be confirmed promptly in writing. In all other instances, any notice, response, consent, advice, or statement herein provided or permitted to be given shall be in writing and shall be deemed given only when received by the Party to whom the same is directed.

 

29.2 Addresses. For the foregoing purposes, each Party's address and telephone number shall be deemed to be the address and telephone number set forth under or opposite its signature hereto, unless and until such Party specifies another address or telephone number by not less than ten (10) days' prior notice to all other Parties.

 

ARTICLE 30

EXECUTION

 

30.1 Counterparts. This Agreement may be executed in counterparts, and all such counterparts taken together shall be deemed to constitute one and the same instrument.

 

30.2 Ratification. This Agreement may be executed by the execution and delivery of a good and sufficient instrument of ratification, adopting and entering into this Agreement. Such ratification shall have the same effect as if the Party executing it had executed this Agreement or a counterpart hereof.

 

 

20

 

ROCKY MOUNTAIN UNIT OPERATING AGREEMENT

Form 2 (Divided Interest)

February, 1980

 

30.3 Effect of Signature. When this Agreement is executed by two Parties, execution by each shall be deemed consideration for execution by the other, and each Party theretofore or thereafter executing this Agreement shall thereupon become and remain bound hereby until the termination of this Agreement. However, if the Unit Agreement does not become effective within twelve (12) months from and after the date of this Agreement, then, at the expiration of said period, this Agreement shall terminate.

 

ARTICLE 31

SUCCESSORS AND ASSIGNS

 

31.1 Covenants. This Agreement shall be binding upon and shall inure to the benefit of all Parties signing the same, their heirs, devisees, personal representatives, successors and assigns, and their successors in interest, whether or not it is signed by all the Parties listed below. The terms hereof shall constitute covenants running with the lands and the Committed Working Interests of the Parties.

 

ARTICLE 32

HEADINGS FOR CONVENIENCE

 

32.1 Headings. The Table of Contents and the headings used in this Agreement are inserted for convenience only and shall be disregarded in construing this Agreement.

 

ARTICLE 33

RIGHT OF APPEAL

 

33.1 Not Waived. Nothing contained in this Agreement shall be deemed to constitute a waiver by any Party of any right it would otherwise have to contest the validity of any law or any order or regulation of governmental authority (whether Federal, State, or local) relating to or affecting the conduct of operations within the Unit Area or to appeal from any such order.

 

ARTICLE 34

SUBSEQUENT JOINDER

 

34.1 Prior to the Commencement of Operations. Prior to the commencement of operations under the Unit Agreement, all owners of working interests in the Unit Area who have joined the Unit Agreement shall be privileged to execute or ratify this Agreement.

34.2 After Commencement of Operations. After commencement of operations under the Unit Agreement, any working interest in land within the Unit Area which is not then committed hereto may be committed to this Agreement and to the Unit Agreement upon such reasonable terms and conditions as may receive the Approval of the Parties.

 

ARTICLE 35

CARRIED INTERESTS

 

35.1 Treatment of. If any working interest shown on Exhibit B to the Unit Agreement and committed thereto is a carried working interest, such interest shall, if the carrying Party executes this Agreement, be deemed to be, for the purpose of this Agreement, a Committed Working Interest owned by the carrying Party.

 

ARTICLE 36

EFFECTIVE DATE AND TERM

 

36.1 Effective Date and Term. This Agreement shall become effective upon the effective date of the Unit Agreement, shall continue in effect during the term of the Unit Agreement, and shall terminate concurrently therewith.

 

36.2 Effect of Termination. Termination of this Agreement shall not relieve any Party of its obligations then accrued hereunder. Notwithstanding termination of this Agreement, the provisions hereof relating to the charging and payment of Costs and the disposition of materials and equipment shall continue in force until all materials and equipment owned by the Parties have been disposed of and until final accounting between Unit Operator and the Parties has been made. Termination of this Agreement shall automatically terminate all rights and interests acquired by virtue of this Agreement in lands within the Unit Area, except such transfers of Committed Working Interests as have been evidenced by formal written instruments of transfer.

 

21

 

ARTICLE 37

OTHER PROVISIONS

 

 

37.1 PAYMENT OF TAXES RELATING TO PRODUCTION.

 

A. At and during such time, or times, as Non-Operator is exercising the right to take in kind or separately dispose of its proportionate part of the production as set forth in Paragraph 6.4 hereof, Non-Operator shall pay, or arrange for the payment of, all production, severance, gathering, sales or similar taxes imposed upon such part.

 

B. At and during such time, or times, as Unit Operator is selling Non-Operator's proportionate part of the production, as set forth m Paragraph 6.5 hereof, Unit Operator shall pay, or arrange for the payment of, all production, severance, gathering, sales or similar taxes imposed upon such part.

 

37.2 NON-CONSENT INVESTMENT ADJUSTMENT. Notwithstanding any provision in this Agreement to the contrary, no Party shall be liable, without its consent, for any investment adjustment charge under the provisions of Section 13.3D or 13.4D, which charge is in excess of the Party's credits under Article 13. In the event of the establishment, enlargement or contraction of a Participating Area, the provisions of Article 12, and other provisions related thereto, shall be applicable to any investment adjustment to the same extent that these provisions are applicable to a well drilled otherwise than for the account of all Parties entitled to participate therein. Any Party subject to such charge may elect not to pay it in cash. If, within 30 days after proposal for establishment, enlargement or con traction of a Participating Area has been submitted by Unit Operator in writing to the Working Interest Owners involved, a Party elects not to participate in the investment adjustment applicable to the establishment, enlargement or contraction, that Party shall be a Non-Drilling Party, and shall be deemed, as of the effective date of the resulting area in connection with which such charge is made, to have relinquished the interest for which such charge is made to the Party, or Parties, who would otherwise be entitled to receive a credit under Section 13.3D or Section 13.4D, which latter Party, or Parties, shall be the Drilling Party with respect to this relinquished interest. The Drilling Party shall own the relinquished interest until it reverts to Non-Drilling Party pursuant to Article 12, except that it is specifically understood that the Article 12.4B percentage for exercise of the Non-Drilling Option applicable to establishment, enlargement or contraction of the Participating Area be 300%.

 

28.3 TAX ELECTION. (Continued) This election by the Parities to be excluded from the application of all of the provisions of Subchapter K does not apply in any way to any subsequent agreements between the Parties, or with third parties, concerning the sharing of costs for the drilling of any wells in the Unit Area. The Parties reserve the right to decide with each such subsequent agreement whether they elect to be excluded from the application of Subchapter K.

 

22

 

IN WITNESS WHEREOF, the parties hereto have caused this agreement to be executed and have set opposite their respective names
the date of execution.
UNIT OPERATOR  AND WORKING INTEREST OWNER
		CORTEZ EXPLORATION, LLC
		By:  /s/Otto F. Duffield
		Otto F. Duffield
Address:       16786 Kincheloe  Road
Siloam Springs, Arkansas 72761		Date of Execution
		February 4, 2010
STATE OF  OKLAHOMA         )
) ss.
COUNTY OF TULSA )
The foregoing instrument was acknowledged before me by OTTO F. DUFFIELD ,
as	MANAGER
of Cortez Exploration,  LLC.
This 4TH day of FEBRUARY , 2010.
WITNESS my hand and official seal.
My Commission Expires:
DECEMBER 4, 2010	/s/ Gale L. Staton
	Notary Public
UNIT OPERATOR SIGNATURE PAGE FOR THE
PARADISE UNIT AGREEMENT
NYE AND MINERAL COUNTIES, NEVADA

 

 

 

 

 

		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
EXHIBIT "1"
		Attached to and made a part of the Unit Operating Agreement for the Paradise Unit Area, Mineral and Nye Counties, Nevada
ACCOUNTING PROCEDURE
JOINT OPERATIONS
I.  GENERAL PROVISIONS
1		Definitions
		"Joint    Property"    shall    mean    the    real    and    personal    property    subject    to    the    agreement     to  which    this    Accounting    Procedure
		is attached.
		"Joint      Operations"      shall      mean      all      operations      necessary      or     proper      for     the      development,    operation,      protection      and
		maintenance of the Joint Property.
		"Joint    Account"     shall     mean     the     account     showing     the     charges     paid     and     credits     received     in    the    conduct     of    the    Joint
		Operations and which are to be shared by the Parties.
		"Operator" shall mean the party designated  to conduct the Joint Operations.
		''Non-Operators" shall mean the Parties to this agreement other than the Operator.
		"Parties" shall mean Operator and Non-Operators
		"First      Level     Supervisors"     shall      mean      those      employees      whose      primary      function      in     Joint     Operations      is     the     direct
		supervision     of     other     employees      andlor     contract     labor     directly     employed     on     the     Joint     Property     in            field     operating
		capacity.
		"Technical      Employees"      shall      mean      those      employees      having      special      and      specific      engineering,      geological      or      other
		professional     skills,    and     whose    primary     function    in    Joint     Operations     is    the    handling     of    specific    operating     conditions     and
		problems for the benefit of the Joint Property.
		"Personal Expenses'' shall mean travel and other reasonable reimbursable expenses of Operator's employees.
		"Material" shall mean personal property, equipment  or supplies acquired or held for use on the Joint Property.
		"Controllable    Material''     shall    mean      1aterial  which    at    the    time    is    so    classified     in    the    Material    Classification     Manual    as
		most recently recommended  by the Council or Petroleum Accountants Societies.
2		Statement and Billings
		Operator    shall    bill    Non-Operators     on    or    before    the    last    day    of    each    month    for    their    proportionate     share    of    the    Joint
		Account     for     the     preceding      month.     Such     bills     will     be     accompanied      by     statements      which     identify     the     authority     for
		expenditure,      lease     or     facility,     and     all     charges     and     credits     summarized     by    appropriate     classifications     of     investment     and
		expense     except     that     items     of    Controllable     Material     and     unusual     charges     and     credits     shall     be    separately     identified     and
		fully described in detail.
3		Advances and Payments by Non-Operators
		A.        Unless     otherwise     provided     for     in    the     agreement,     the     Operator     may     require     the    Non-Operators    to    advance     their
		share    of    estimated     cash    outlay     for    the    succeeding     month's    operation     within     fifteen    (15)    days    after    receipt    of    the
		billing    or   by   the    first   day   of   the   month    for   which    the   advance    is   required,    whichever    is   later.   Operator    shall   adjust
		each monthly billing to reflect advances  received from the Non-Operators.
		B.       Each   Non-Operator    shall    pay    its   proportion    of   all   bills    within    fifteen   (15)   days   after   receipt.    If   payment    is   not   made
		Within such time, the unpaid balance shall bear interest monthly at the prime rate in effect at Chase Manhattan Bank, New York, New York
		the         first         day         of         the         month         in        which         delinquency         occurs         plus                   2%                     the
		maximum   contract    rate    permitted     by    the    applicable     usury    laws    in    the    state    in    which    the    Joint    Property    is    located,
		whichever    is   the    lesser,    plus    attorney's    fees,   court    costs.    and    other    costs    in   connection    with   the    collection    of    unpaid
		amounts
4		Adjustments
		Payment    of   any   such    bills    shall    not    prejudice   the    right of   any   Non-Operator to   protest    or   question    the   correctness    thereof.
		provided,     however,     all     bills     and     statements      rendered  to     Non-Operators      by     Operator     during     any     calendar     year     shall
		conclusively    be    presumed     to    be    true    and    correct    after  twenty-four    (24)    months    following    the    end    of    any    such    calendar
		year,     unless     within     the     said     twenty-four     (24)    month     period     a    Non-Operator     takes     written    exception     thereto    and     makes
		claim   on    Operator    for   adjustment       No   adjustment    favorable   to   Operator    shall    be   made    unless    it     is   made    withm   the    same
		prescribed     period      The    provisions     of    th1s    paragraph     shall    not    prevent     adjustments     resulting     fi"om     a    physical    inventory    of
		Controllable Material as provided for in Section  V.
		COPYRIGHT© 1985 by the Council of Petroleum  Accountants Societies.
		-1-
		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
5		Audits
		A.      A   Non-Operator,    upon     notice     in      writing    to    Operator     and     all    other    Non-Operators,    shall    have     the    right     to    audit
		Operator's accounts and records relating to the Joint Account for any calendar year wllhln the twenty-four
		(24)    month    period    following    the  end     of     such     calendar    year;     provided,    however,    the     making    of     an     audit     shall     not
		extend     the      time      for     the      taking  of     written       exception     to     and      the      adjustments    of     accounts    as     provided     for  in
		Paragraph     4        of     this    Section  1.    Where     there   are    two  or  more  Non-Operators,     the      Non-Operators    shall      make
		every    reasonable     effort    to    conduct     a    Joint     audit    in    a    manner     which    Will       result     in      a    minimum    of    inconvenience
		to      the      Operator.        Operator       shall     bear    no     portion      of      the      Non-Operators'      audit      cost      incurred      under      this
		paragraph      unless     agreed     to     by     the     Operator.      The     audits     shall     not     be     conducted     than    once  each     year
		Without    prior     approval     of    Operator,     except     upon    the     resignation     or    removal    of    the     Operator,     and      shall   be    made
		at the expense of those Non-Operators  approvmg  such audit.
		B.      The Operator shall reply in writing to an audit report within 180 days after receipt of such report
6		Approval By Non-Operators
		Where    an    approval    or    other    agreement    of    the    Parties    or    Non-Operators     is    expressly    required     under    other    sections    of    th1s
		Accounting       Procedure       and       if      the       agreement       to       which      this       Accounting       Procedure       is      attached       contains       no
		contrary      provisions               regard      thereto,      Operator     shall      notify     all     Non-Operators      of     the     Operator's     proposal,     and     the
		agreement or approval  of a majority in interest of the Non-Operators shall be controlling on all Non-Operators
II.  DIRECT CHARGES
Operator shall charge the Joint Account With the following items:
1		Ecological and  Environmental
		Costs    incurred     for    the    benefit     of    the    Joint     Property    as    a    result    of    governmental     or    regulatory     requirements     to    satisfy
		environmental     considerations    applicable      to     the     Joint     Operations       Such     costs     may     include     surveys    of    an     ecological     or
		archaeological  nature and pollution control procedures as required by applicable laws and regulations.
2		Rentals and Royalties
		Lease rentals and royalties paid by Operator  for the Joint Operations.
3		Labor
		A.      ( 1)    Salaries     and     wages    of    Operator's     field    employees    directly     employed     on    the    Joint    Property     in    the    conduct     of
		Joint Operations
		(2)     Salaries of First level Supervisors  in the field.
		(3)     Salaries      and     wages     of     Technical      Employees     directly     employed  the    Joint     Property     if      such     charges     are
		excluded from the overhead rates
		(4)     Salaries  and  wages  of  Technical  Employees      either      temporarily      or      permanently      assigned     to     and      directly
		employed  in the operation or the Joint Property if such charges are excluded from the overhead rates.
		B.     Operator's      cost      of     holiday,      vacation,     sickness      and     disability    benefits      and     other      customary      allowances      paid     to
		employees     whose     salaries     and    wages    are    chargeable     to    the    Joint    Account     under    Paragraph     3A     of    this    Section    II
		Such    costs    under    this    Paragraph    3B    may    be    charged    on    a    "when    and    as    paid    basis"    or   by    "percentage    assessment"
		on  the  amount  of  salaries  and  wages  chargeable  to  the  Joint  Account  under  Paragraph  3A  of  this  Section  II.  If
		percentage assessment  is  used, the rate shall be based on the Operator's cost experience.
		C.      Expenditures       or      contributions      made      pursuant       to      assessments       1mposed      by      governmental       authority     which      are
		applicable  to Operator's costs chargeable  to the Joint Account under Paragraphs 3A and 3B of this Section II.
		D.     Personal      Expenses      of     those     employees      whose     salaries      and     wages     are     chargeable      to     the     Joint     Account     under
		Paragraphs 3A and 3B of this Section II.
4		Employee Benefits
		Operator's      current      costs      or     established      plans      for     employees'     group      life     insurance,      hospitalization,      pension,     retirement.
		stock    purchase.    thrift.     bonus,    and    other    benefit    plans    of   a    like   nature.    applicable    to   Operator's    labor   cost    chargeable    to   the
		Joint    Account    under     Paragraphs    3A    and    3B    of    this   Section    II   shall    be    Operator's      actual    cost    not   to    exceed    the    percent
		most recently recommended  by the Council  of Petroleum Accountants  Societies
		-2-
		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
5		Material
		Material purchased or furnished by Operator for use on the Joint Property as provided under Section IV.  Only such
		Material    shall      be     purchased    for     or     transferred    to     the     Joint      Property    as     may      be     required     for    Immediate    use     and      is
		reasonably    practical    and     consistent    with   efficient    and     economical    operations.       The     accumulation    of     surplus    stocks    shall     be
		avoided.
6		Transportation
		Transportation of employees and  Material necessary for the Joint  Operations but subject to the following limitations:
		A.      If   Material     is    moved   to    the    Joint    Property    from    the    Operator's    warehouse    or    other    properties,    no    charge    shall    be
		made    to   the    Joint    Account    for   a    distance    greater    than    the   distance   from   the    nearest    reliable    supply    store    where   like
		material is normally available or railway receiving point nearest the Joint Property unless agreed to by the Parties
		B.      If   surplus     Material  is      moved     to    Operator's    warehouse    or    other    storage    point,    no    charge    shall    be    made    to    the    Joint
		Account    for    a    distance    greater    than    the    distance   to    the    nearest    reliable    supply    store    where    like    material    is   normally
		available,    or    railway     rece1vmg   point    nearest    the    Joint    Property    unless    agreed    to    by    the    Parties.    No     charge    shall    be
		made    to    the    Joint    Account    for    moving   Material    to    other    properties   belonging    to    Operator,    unless    agreed    to    by    the
		Parties.
		C.     In     the     application     of    subparagraphs      A      and    B    above.     the    option     to    equalize     or    charge     actual    trucking     cost     is
		avallable    when    the    actual    charge    is     $400    or    less   excluding    accessorial    charges.    The    $400    will    be    adjusted    to    the
		amount most recently recommended by the Council of Petroleum Accountants Societies
7		Services
		The    cost    of    contract    services,   equipment   and    utilities    provided  by    outside    sources,    except    services   excluded  by    Paragraph
		10    of    Section    II  and    Paragraph    i,    ii,     and    III,    of    Section   III.  The    cost    of    professional    consultant    services  and  contract
		services    of    technical     personnel     directly    engaged    on    the    Joint Property    if    such    charges    are    excluded     from the overhead
		rates.    The    cost    of    professional    consultant     services   or    contract    services    of    technical    personnel    not    directly    engaged    on    the
		Joint Property shall not be charged to the Joint Account unless previously agreed to by the Parties
8		Equipment and  Facilities  Furnished By Operator
		A.         Operator    shall    charge    the    Joint    Account    for    use    of    Operator    owned    equipment   and    facilities    at    rates    commensurate
		with     costs     of     ownership     and     operation.      Such     rates     shall     include     costs     of     maintenance.     repairs,     other     operating
		expense,      insurance,      taxes,      depreciation,      and     interest     on     gross     investment      less     accumulated      depreciation     not     to
		exceed twelve percent ( 12 %) per annum Such rates shall not exceed average commercial
		rates currently prevailing in the immediate area of the Joint Property
		B.         In    lieu    of    charges    1n     Paragraph    8A    above.    Operator    rnay   elect    to    use    average    commercial    rates    prevailmg    in     the
		immediate     area     of    the    Joint     Property     less    20%.  For automotive equipment, Operator may elect to use rates
		published by the Petroleum Motor Transport Assoc1ation.
9		Damages  and  Losses to Joint  Property
		All    costs    or    expenses    necessary     for    the    repa1r   or    replacement    of    Joint    Property    made    necessary    because    of    damages    or
		losses     incurred     by     fire,     flood,      storm,     theft,     accident,              other     cause,     except     those     resulting     from     Operator's      gross
		negligence     or     willful    misconduct.     Operator     shall     furnish    Non-Operator    written     notice     of    damages     or     losses    incurred     as
		soon as practicable after a report thereof has been received by Operator
10		Legal  Expense
		Expense     of     handling,      investigating      and     settling     litigation    or     claims,    discharging     of     liens,     payment      of    Judgment      and
		amounts     paid     for    settlement     of    claims    incurred     in    or    resulting     from    operations     under    the    agreement     or    necessary      to
		protect    or    recover    the    Joint    Property,    except    that    no    charge    for    services    of   Operator's    legal   staff    or    fees   or    expense    of
		outside   attorneys    shall    be    made    unless    previously    agreed    to    by    the    Parties.   All    other    legal   expense    is   considered    to    be
		covered    by    the   overhead    provisions    of   Section    III  unless     otherwise    agreed    to   by   the    Parties,    except    as   provided    in    Section
		I,  Paragraph 3.
11		Taxes
		All   taxes    of   every    kind   and    nature   assessed    or   levied   upon   or   in   connection    with   the   Joint    Property.   the   operation    thereof,
		or    the    production   therefrom,    and    which     taxes    have    been    paid    by    the    Operator    for     the    benefit    of    the    Parties.    If   the    ad
		valorem     taxes     are     based      in     whole     or     in         part     upon     separate      valuations     of     each     party's     working     interest,     then
		notwithstanding     anything    to    the    contrary    herein,    charges    to    the    Joint    Account    shall    be    made    and    paid    by   the    Parties
		hereto in accordance  with the tax value generated  by each party's working interest.
		- 3-
		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
12		Insurance
		Net    premiums    paid   for   insurance    requ1red     to    be    earned    for    the     Joint     Operations    for    the     protection     of    the     Parties.    In    the
		event    Joint     Operations     are     conducted     in     a     state      in      which    Operator     may     act     as     self-insurer     for     Worker's    Compensation
		and/or    Employers   Liability    under    the     respective    state's    laws.     Operator   may,     at    its      election,    include    the     risk     under      its    self
		insurance program and  in that  event,  Operator shall  include a charge at Operator's cost  not to exceed manual rates.
13		Abandonment and Reclamation
		Costs    incurred     for     abandonment     of      the      Joint       Property,     Including     costs       required       by    governmental     or      other      regulatory·
		authority.
14		Communications
		Cost      of      acquiring,     leasing,     installing,    operating,    repairing     and      maintaining     communication     systems,     Including     radio      and
		microwave    facilities    directly    serving    the     Joint      Property.          In     the     event      communication    facilities/ systems    serving    the     Joint
		Property are Operator Owned,  charges to the Joint  Account shall  be made  as provided  in Paragraph 8 of this Section II.
15		Other Expenditures
		Any   other     expenditure   not    covered   or    dealt     With    in   the    foregoing   provisions   of    this    Section   II,   or    in   Section   III  and    which
		is    of    direct   benefit     to   the    Joint     Property   and    is     incurred   by    the    Operator   in    the    necessary   and    proper   conduct   of    the    Joint
		Operations.
		III.   OVERHEAD
1		Overhead- Drilling and Producing Operations
		i.        As       compensation      for       administrative,      supervision,    office     services     and       warehousing     costs.      Operator      shall       charge
		drilling and  producing operations on either:
		( X ) Fixed Rate Basis, Paragraph 1A, or
		(       ) Percentage Basis, Paragraph 1B
		Unless      otherwise    agreed    to     by    the     Parties,    such     charge    shall     be     in     lieu     of     costs     and     expenses    of    all     offices   and
		salaries  or      wages     plus      applicable     burdens    and      expenses    of      all      personnel,    except     those      directly    chargeable     under
		Paragraph    3A,      Section    II.         The     cost     and     expense    of     services    from     outside     sources    in     connection    with     matters   of
		taxation,    traffic,    accounting    or     matters    before    or     involving    governmental    agencies      shall     be     considered     as     included    in
		the    overhead    rates     provided    for    in    the    above   selected    Paragraph   of    this     Section   III  unless   such     cost     and     expense   are
		agreed to by the Parties as a direct charge to the Joint Account.
		ii.      The       salaries,     wages     and       Personal     Expenses     of      Technical     Employees     and/or     the      cost      of      professional    consultant
		services  and  contract services of technical personnel directly employed on the  Joint  Property
		(  X   ) shall   be covered by the Overhead rates, or
		(       ) shall  not be covered by the  overhead rates
		iii      The      salaries,    wages    and      Personal     Expenses     of     Technical    Employees    and/or    costs      of     professional     consultant     servicces
		and     contract    services      of     technical    personnel    either    temporarily    or     permanently    assigned    to     and     directly    employed     in
		the operation  of the  Joint  Property.
		(        ) shall  be covered by the overhead rates, or
		(   X   ) shall  not be covered by the  overhead rates
		A.                  0verhead- Fixed Rate  Bass
		(1)        Operator shall  charge the Joint  Account at the  following rates  per  well  per month:
		Drilling well Rate $ 6,500.00
		(Prorated for  less than  a full  month)
		Producing Well Rate $ 650.00
		(2)       Application of Overhead- Fixed  Rate  Basis shall  be  as  follows:
		(a) Drilling Well Rate
		(1) Charges for drilling wells shall begin on the date the well is spudded and terminate on the date
		the     drilling   rig,     completion    rig,     or      other  units     used     in    completion   of     the    well      is     released,    whichever
		-4-
		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
		is      later,    except     that    no    charge     sha ll    be    made    during     suspensron     of    drilling     or    completion     operations
		for  fifteen  (15)  or  more  consecutive calendar days
		(2)     Charges      for     wells     undergoing      any     type     of     workover     or     recompletion      for            period       of      live      (5)
		consecutive   work    days      or     more      shall      be     made      at     the      drilling    well      rate.      Such      charges    shall      be
		applied     for     the     period     from     date     workover     operations,   with      rig     or     other      units      used      in     workover
		commence    through    date      of     rig     or     other      unit      release,    except    that     no     charge    shall      be     made      during
		suspension of operations for  fifteen  ( 15) or more  consecutive calendar days.
		(b)     Producing  Well Rates
		(1)     An    active   well    either     produced    or     Injected      into     for    any     portion    of    the     month     shall     be    considered    as
		a one-well charge for the entire month.
		(2)     Each  active     completion    in              multi-completed      well    which      production     is    not      commingled     down
		hole        shall      be      considered    as     a     one-well    charge     providing     each completion is considered a separate
		well by the  governing regulatory authority
		(3)      An       inactive       gas       well      shut    in      because     of      overproduction     or      failure     of      purchaser     to      take       the
		production    shall      be     considered    as     a     one-well    charge    providing    the     gas     well      is    directly     connected     to
		a permanent sales outlet.
		(4)      A      one-well    charge    shall      be      made       for     the      month       in       which      plugging     and      abandonment     operations
		are     completed             any      well.       This      one-well     charge     shall      be      made      whether    or     not      the      well     has
		produced except when  drilling well  rate applies.
		(5) All other inactive wells (including but not limited to inactive wells covered by unit allowable, lease
		allowable, transferred allowable, etc.)  shall  not qualify for an overhead charge.
		(3)      The     well     rates      shall     be     adjusted    as     of     the     first     day     of     April      each     year     following    the     effective    date     of    the
		agreement    to     which    this      Accounting    Procedure    is       attached         The     adjustment    shall      be     computed    by     multiplying
		the rate currently in use by the percentage increase or decrease in the average weekly earnings of Crude
		Petroleum    and     Gas     Production    Workers    for     the     last     calendar    year     compared    to     the     calendar    year     preceding    as
		shown    by     the     index      of     average   weekly    earnings    of     Crude    Petroleum    and     Gas     Production    workers    as     published
		by     the     United      States    Department    of     Labor.      Bureau      of     Labor      Statistics,      or     the     equivalent    Canadian    index      as
		published    by    Statistics    Canada,    as     applicable.    the      adjusted    rates     shall      be     the     rates     currently    in     use,     plus     or
		minus the  computed adjustment.
		B.        Overhead- Percentage Basis
		(1) Operator shall charge the Joint Account at the following rates:
		(a)      Development
		Percent (                                          0/o) of the cost of development of the Joint Property exclusive of costs
		provided  under  Paragraph 10 of Sect1on  II and all salvage credits.
		(b)      Operating
		Percent (                                      %) of the cost of operating the Joint Property exclusive of costs provided
		under    Paragraphs    2     and      10   of     Section    II,    all     salvage    credits,    the     value     of     inJected      substances    purchased
		for      secondary    recovery    and    all      taxes       and     assessments     which      are     levied,     assessed     and      paid     upon      the
		mineral interest in and  to the Joint  Property.
		(2)      Application of Overhead- Percentage Basis  shall  be as  follows:
		For      the      purpose  of      determining     charges   on   a    percentage   basis   under   Paragraph   1B    of   this   Section    III,
		development  shall  include  all  costs  in connection  with drilling,  re-drilling,  deepening,  or  any  remedial
		operations   on    any     or     all    wells     involving    the     use     of    drilling    rig     and     crew     capable   of    drilling   to    the     producing
		interval      on       the       Joint        Property;      also.       preliminary      expenditures      necessary      in    preparation      for      drilling      and
		expenditures     incurred   in   abandoning    when    the      well      is   not      completed     as    a     producer.     and      orig1nal      cost      of
		construction     or     installation    of      fixed       assets,     the      expansion     of      fixed     assets     and      any       other      project       clearly
		discernible   as     a    fixed    asset,    except    Major    Construction   as     defined    in    Paragraph    2    of    this     Section    III.      All    other
		costs shall  be considered as operating.
2		Overhead-Major  Construction
		To     compensate    Operator    for     Overhead    costs      incurred    in      the     construction    and     installation    of     fixed   assets,    the     expansion    of
		fixed     assets,   and     any     other     project    clearly     discernible      fixed     asset     required     for    the     development    and    operation    of    the
		Joint      Property.    Operator    shall      either     negotiate    a     rate     prior    to     the     beginning    of     construction,    or     shall     charge    the     Joint
		- 5-
		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
		Account for overhead based on the following rates for any Major Construction project in excess of $ 25,000
		A.         5          % of first $100,000 or total cost if less, plus
		B.         3          % of costs in excess of $100.000 but less than $1.000.000, plus
		C.        2         % of costs in excess of $1.000,000.
		Total   cost   shall   mean    the   gross    cost   of   any    one   project.     For   the   purpose    of   this   paragraph,    the   component    parts   of   a   single
		project    shall    not     be    treated    separately    and     the     cost     of     drilling   and    workover    wells     and     artificial     lift     equipment    shall     be
		excluded.
3		Catastrophe  Overhead
		To    compensate     Operator     for    overhead     costs    incurred    in      the    event    of    expenditures    resulting     from    a    single    occurrence    due
		to    oil     spill.     blowout,     explosion,     fire,     storm,     hurricane.      or    other     catastrophes     as    agreed     to    by    the    Parties,    which
		necessary      to     restore      the     Joint      Property      to      the     equivalent      condition      that      existed      prior      to      the     event     causing      the
		expenditures,   Operator     shall    either    negotiate    a    rate    prior    to    charging    the    Joint    Account    or    shall    charge    the    Joint    Account
		for overhead  based on the following rates:
		A.          5          % of total costs through $100,000; plus
		B.          3         % of total costs in excess of $100,000 but less than $1 ,000,000; plus
		C.         2           % of total costs in excess of $1.000,000.
		Expenditures subject to the overheads above will not be reduced by insurance recoveries, and no other overhead
		provisions of this Section III shall apply.
4		Amendment  of Rates
		The overhead rates provided for in this Section III may be amended from time to time only by mutual agreement
		between the Parties hereto if, in practice, the rates are found to be insufficient or excessive.
		IV.              PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
		Operator     Is    responsible     for    Joint    Account     Material    and    shall    make    proper    and    tImely   charges     and     credits     for     all     material
		movements    affecting    the   Joint     Property.      Operator      shall      provide      all     Material      for    use on  the     Joint      Property:     however,      at
		Operator's   option,     such     Material   may     be     supplied    by    the  Non-Operator.    Operator   shall     make     timely     disposition   of  idle     and/or
		surplus  Materia,   such     disposal      being     made     either     through     sale     to     Operator   or   Non-Operator,      division     in     kind,    sale     to
		outsiders.      Operator   may    purchase,   but   shall   be   under   no    obligation   to   purchase,     interest     of    Non-Operators   in   surplus     condition
		A or B Material.      The disposal of surplus  Controllable  Material  not purchased  by the Operator shall be agreed to by the Parties.
1		Purchases
		Material     purchased     shall    be    charged     at    the    price     paid    by    Operator    after    deduction     of    all    discounts     received     In     case    of
		Material    found    to    be    defective    or    returned    to    vendor    for   any    other    reasons,    credit    shall    be    passed    to   the    Joint    Account
		when adjustment  has been received  by the Operator.
2		Transfers and Dispositions
		Material     furnished    to    the    Joint    Property    and    Material    transferred     from    the    Joint    Property    or    disposed    of   by   the    Operator,
		unless otherwise agreed to by the Parties, shall  be priced on the following  basis exclusive  of cash discounts:
		A.     New Material  (Condition A)
		(1)   Tubular Goods Other than Line Pipe
		(a)     Tubular     goods,     sized     2     3/8     inches     OD     and     larger,     except     line    pipe.    shall    be     priced    at       Eastern     mill
		published     carload     base     prices     effective    as    of    date    of    movement     plus    transportation    cost    using    the    80,000
		pound      carload      weight      basis      to      the      railway    receiving      point      nearest      the     Joint      Property      for     which
		published    rail    rates    for   tubular    goods    exist.      If  the    80,000    pound    rail    rate    is     not   offered,    the    70.000    pound
		or    90,000     pound     rail    rate    may    be    used.    Freight  charges    for    tubing     will    be   calculated    from    Lorain,    Ohio
		and casing  from Youngstown, Ohio.
		(b)     For   grades    which    are    special    to   one    mill    only,   prices    shall    be   computed    at   the    mill   base   of   that   mill   plus
		transportation    cost     from    that      mill    to     the     railway      receiving    point     nearest     the    Joint     Property   as      provided
		above in Paragraph 2 A (1)(a). For transportation cost from points other than Eastern mills, the 30,000
		-6-
		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
		pound Oil  Field  Haulers Association  Interstate truck  rate shall  be used.
		(c)      Special    end      finish      tubular    goods    shall      be     priced    at     the     lowest    published    out-of-stock    price,    f.o.b.       Houston,
		Texas,     plus       transportation     cost,       using      Oil      Field      Haulers     Association     Interstate    30.000     pound       truck      rate,
		to the railway receiving point  nearest the Joint  Property nearest the Joint  Property.
		(d)       Macaroni   tubing   (size   less     than     2    3/8    inch     OD)  shall     be    priced    at    the     lowest     published   out-of-stock  prices
		f.o.b    the      supplier    plus      transportation    costs,     using      the      Oil     Field     Haulers    Association    interstate     truck      rate
		per weight  of tubing transferred,  to the railway  receiving point nearest the Joint Property.
		(2)     Line  Pipe
		(a)      Line     pipe     movements    (except    size     24     inch     OD     and     larger   with     walls   3/4   inch     and     over)     30,000   pounds   or
		more    shall    be     priced     under    provisions     of     tubular    goods    pricing    in      Paragraph    A.(1)(a)     as     provided    above.
		Freight  charges shall  be calculated from  Lorain, Ohio.
		(b)     Line     Pipe     movements    (except    size     24     inch    OD)  and     larger   with    walls    3/4   inch     and     over)   less    than     30,000
		pounds    shall      be     priced    at     Eastern    mill      published    carload    base      prices    effective      as     of     date      of   shipment.
		plus      20     percent,    plus      transportation    costs      based      on     freight     rates    as     set     forth     under      provisions    of     tubular
		goods    pricing     in     Paragraph    A (1)(a)    as     provided    above     Freight    charges    shall      be     calculated    from      Lorain,
		Ohio.
		(c)      Line      pipe      24      inch      OD      and      Over      and      3/4   inch      wall      and      larger      shall      be     priced    f.o.b     the    point  of
		manufacture     at      current     new       published     prices     plus       transportation     cost       to      the      railway     receiving      point
		nearest the  Joint  Property.
		(d)      Line     pipe,     including    fabricated    line     pipe,     drive   pipe     and          conduit    not     listed     on     published    price    lists     shall
		be     priced    at     quoted    prices    plus      freight     to     the     railway    receiving    point      nearest    the     Joint      Property    or     at
		prices agreed to  by the  Parties.
		(3) Other Material shall be priced at the current new price, in effect at date of movement. as listed by a reliable
		supply    store    nearest    the     Joint      Property,    or     point     of     manufacture,    plus     transportation    costs,    if     applicable,    to     the
		railway  receiving point  nearest the Joint Property.
		(4)      Unused     new      Material,     except    tubular    goods,    moved    from      the      Joint      Property    shall    be     priced      at     the      current
		new     price,    in     effect    on     date     of     movement,    as     listed     by     a    reliable    supply    store   nearest   the     Joint     Property,
		point      of     manufacture,    plus      transportation    costs,    if    applicable,    to     the      railway    receiving    point      nearest    the     Joint
		Property. Unused new tubulars will be priced as provided above in Paragraph 2.A (I) and (2).
		B.    Good used Materia1  (Condition B)
		Material in sound and  serviceable condition and  suitable for reuse  without reconditioning·
		(1)     Material moved to the Joint Property
		At seventy-five percent (75%) of current new  price,  as determined by Paragraph  A.
		(2)      Material used  on and  moved from  the Joint  Property
		(a)      At     seventy-five    percent    (75%)    of     current    new     price,    as     determined    by     Paragraph     A.     If    Material    was
		originally charged to the Joint  Account as new Material or
		(b)      At      sixty-five    percent     (65%)    of     current    new      price,    as     determined    by     Paragraph       A.    If    Material     was
		originally charged to the Joint  Account as  used  Material.
		(3)      Material  not  used  on and  moved from  the Joint  Property:
		At seventy-five percent (75%) of current new price as determined by Paragraph A.
		The  cost  of reconditioning, if any, shall  be absorbed by  the  transferring property.
		C. Other Used Material
		(1)     Condition C
		Material    wh1ch     is       not     in     sound    and      serviceable  condition    and      not     suitable    for     its     original    function     until
		after       reconditioning     shall       be      priced     at      fifty      percent     (50%' )     of      current     new      price         determined     by
		Paragraph     A.      The      cost      of     reconditioning    shall      be     charged    to     the      receiving    property,     provided      Condition
		C  value plus  cost  of reconditioning does  not exceed Condition  B value.
		-7-
		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
		(2)      Condition D
		Material,    excluding     junk,     no    longer    suitable     for    its   original     purpose,     but     usable     for    some    other    purpose
		shall     be     priced     on     a    basis    commensurate      with    its    use.    Operator     may    dispose     of    Condition     D    Material
		under procedures  normally used by Operator  without  prior approval of   Non Operators.
		(a)      Casing,   tubing,   or    drill   pipe     used     as     line    pipe     shall     be    priced    as    Grade   A    and     B    seamless   line    pipe
		of     comparable    size      and     weight .           Used    casing,    tubing    or     drill    pipe    utilized    as     line     pipe      shall      be
		priced at used line pipe prices.
		(b)      Casing,     tubing    or      drill      pipe      used       as      higher      pressure    service      lines      than      standard     line      pipe,      e. g.
		power     oil      lines,      shall      be     priced     under     normal     pricing    procedures     for     casing,     tubing,   or     drill     pipe.
		Upset  tubular goods shall  be priced on a non  upset  basis.
		(3)      Condition  E
		Junk        shall       be       priced      at       prevailing     prices.      Operator     may       dispose       of      Condition     E      Material      under
		procedures normally utilized by Operator without prior approval of Non-Operators.
		D.     Obsolete Material
		Material  which  is   serviceable  and   usable   for     its     original    function    but     condition    and/or    value     of     such     Material
		is   not  equivalent   to    that   which   would   justify   a    price   as    provided   above   may   be    specially   priced   as  agreed  to  by
		the      Parties.     Such   price   should   result  in    the    Joint   Account     being   charged  with   the   value  of  the service
		rendered by such  Material.
		E.        Pricing Conditions
		(1)     Loading  or   unloading  costs   may   be  charged  to   the   Joint   Account  at   the  rate  of  twenty-five    cents      (25¢)
		per      hundred     weight on   all   tublar      goods     movements,      in    lieu     of      actual       loading    or   unloading    costs
		sustained  at  the  stocking    point.    The   above   rate   shall   be  adjusted  as  of   the   first  day  of  April  each     year
		following    January  1,   1985   by   the    same    percentage    increase    or   decrease    used   to   adjust   overhead    rates      in
		Section  III,     Paragraph     1.A.(3)     Each  year,  the   rate  calculated  shall   be  rounded  to  the  nearest  cent   and
		shall   be   the   rate   in  effect   until   the   first   day   of    April   next   year.     Such   rate  shall  be  published  each  year
		by the  Council of Petroleum Accountants Societies.
		(2)      Material     involving  erection   costs   shall    be    charged   at   applicable   percentage    of    the   current  knocked-down
		price  of new  Material.
3		Premium Prices
		Whenever   Material   is    not     readily    obtainable    at    published    or     listed     prices     because    of    national    emergencies.   strikes    or    other
		unusual    causes    over    which    the     Operator    has     no     control,    the     Operator    may     charge    the     Joint      Account    for     the     required
		Marerial   at    the     Operator's   actual   cost     incurred    in    providing   such     Material,   in    making   it    suitable   for    use,     and     in    moving    it
		to     the     Joint    Property;    provided    notice   in    writing    is     furnished    to    Non-Operators   of     the     proposed    charge    prior    to     billing
		Non-Operators    for     such    Material.        Each  Non-Operator    shall     have     the     right,      by     so     electing    and   notifying    Operator  within
		ten    days    after     receiving   notice  from    Operator,   to    furnish    in    kind    all    or    part    of    his   share   of  such Material   suitable     for    use
		and  acceptable to Operator.
4		Warranty of Material Furnished By Operator
		Operator   does     not     warrant    the     Material    furnished.        In    case     of    defective    Material,   credit    shall     not    be    passed   to  the   Joint
		Account until adjustment has  been  received by Operator from the manufacturers or their  agents.
		V.  INVENTORIES
		The  Operator shall  maintain detailed records of Controllable Material.
1		Periodic  Inventories, Notice and  Representation
		At     reasonable    intervals,    inventories    shall      be     taken      by   Operator    of     the     Joint      Account    Controllable  Material     Written    notice
		of    intention   to    take     inventory   shall     be    given     by   Operator   at    least    thirty   (30)   days    before   any     inventory   is   to    begin  so  that
		Non-Operators    may      be      represented     when       any      Inventory    is    taken.        Failure     of     Non-Operators    to    be    represented   at   an
		inventory shall  bind  Non-Operators to accept the  inventory taken  by Operator.
2		Reconciliation and  Adjustment of Inventories
		Adjustments    to     the     Joint    Account    resulting      from     the     reconciliation    of    a     physical    inventory    shall     be     made  within six
		months    following    the     taking     of     the     inventory.     Inventory     adjustments     shall     be     made     by   Operator   to    the     Joint     Account    for
		-8-
		COPAS 1984 ONSHORE
		Recommended by the Council
		of Petroleum Accountants
		Societies
		overages and shortages.  but, Operator shall be held accountable only for shortages due to lack of reasonable diligence.
3		Special  Inventories
		Special    inventories     may      be    taken     whenever   there  is   any   sale,   change  of  interest,    or    change  of  Operator  in  the    Joint
		Property.    It   shall    be    the    duty   of    the    party    selling    to    notify   all   other    Parties   as    quickly    as    possible    after   the    transfer    of
		interest    takes    place    In  such  cases,    both  the  seller  and  the  purchaser  shall   be  governed  by  such  inventory.  In cases
		involving a change of Operator,  all Parties shall be governed by such inventory.
4		Expense of Conducting Inventories
		A.      The    expense     of    conducting     periodic     inventories    shall    not    be    charged    to    the    Joint    Account    unless    agreed    to    by     the
		Parties.
		B.      The  expense  of  conducting  special   inventories   shall  be   charged   to  the  Parties  requesting   such  inventories,   except    inventories
		required due to change of Operator shall be charged to the Joint Account.
		-9-

 

 

EXHIBIT "2"

 

 

Initial Test Well

 

Attached to and made a part of the

Unit Operating Agreement for the

Paradise Unit Area

Mineral and Nye Counties, Nevada

 

 

1.. LOCATION: The initial test well shall be drilled at a location selected by Unit Operator and approved by the Authorized Office of the Bureau of Land Management.

 

2. DEPTH: The initial test well shall be drilled conformably with the terms of Article 9 of the Paradise Unit Agreement.

 

3. COSTS: All costs and expenses incurred in connection with the initial test well, including drilling, testing and completing into the tanks, if an oil well, or through gas separator, if a gas producer, and plugging and abandoning, if a dry hole, shall be borne and paid for by Cortez Exploration LLC and such other parties hereto as agreed to bear such costs in accordance with separate agreement among themselves and where applicable subject to the investment adjustment provisions of Article 13 of this Agreement. Any cash contributions received toward the drilling of the initial test well shall belong to the parties sustaining the risk of drilling the initial test well.

 

4. TITLE EXAMINATION AREA: The title examination area for the initial test well shall be an area surrounding the location of such well as may be designated by the Unit Operator.

 

5. COST OF TITLE EXAMINATION: The cost of title examination shall be charged as a cost of drilling the initial test well.

 

6. DEEPENING, PLUGGING RACK: In the absence of any agreement to the contrary, the attempted completion, deepening or plugging back, and abandonment of the Initial Test Well shall be governed by the provisions of Section 9.3 to this agreement.

EXHIBIT "3"

 

 

Attached to and made a part of the

Unit Operating Agreement for the

Paradise Unit Area

Mineral and Nye Counties. Nevada

 

 

INSURANCE

 

 

For Operations by Unit Operator: The Unit Operator shall carry for the benefit of the joint account insurance to cover the Unit Operator's operations on the lands covered by this Agreement as follows:

 

1. Workmens' Compensation Insurance in full compliance w1th the laws of the applicable State in which operations are conducted.

 

2. Employer's Liability Insurance with limits of$100,000 as to any one person and $100,000 as to any one accident.

 

3. Public Liability Insurance: Bodily Injury (other than automobile) w1th limits of$1,000,000 as to any one person, $1,000,000 as to any one accident; and Property Damage (other than automobile) with limits of$1,000,000 for each accident, $1,000,000 aggregate.

 

4. Automobile Public Liability Insurance, with limits of $50,000 as to any one person and

$50,000 as to any one accident, and Property Damage of $50,000 for each accident; excess coverage of such limits up to $1,000,000 combined single limit.

 

Operator shall not carry physical damage insurance on Jointly-owned property, it being understood and agreed that each party will be responsible for its own interest in such properties and will assume its portion of any loss that occurs. Operator shall promptly notify Non-Operator in writing of all losses involving damage to jointly-owned property in excess of S 1,000.

 

Operator shall submit to Non-Operators certificates of insurance in evidence of the above coverage. Such certificates shall specify that in event of cancellation or material change in coverage at least ten days prior written notice will be given to Non-Operators at their respective addresses.

 

Operator shall notify Non-Operators promptly in writing of any occurrences wherein liability may exceed the limits of the insurance if covered by insurance as set out above.

EXHIBIT "4"

 

Attached to and made a part of the

Unit Operating Agreement for the

Paradise Unit Area

Mineral and Nye Counties, Nevada

 

EXECUTIVE ORDER NO. 11246 AND EXECUTIVE ORDER NO. 11598

PROVISIONS OF SECTION 202 OF EXECUTIVE ORDER NO. 11246

 

 

(1) The contractor will not discriminate against any employee or applicant for employment because of race, color, religion, sex or national origin. The contractor will take affirmative action to ensure the applicants are employed and that employees are treated during employment, without regard to their race, color, religion, sex or national origin. Such action shall include but not be limited to the following: Employment, upgrading, demotion, or transfer; recruitment or recruitment advertising; layoff or termination; rates of pay or other forms of compensation; and selection for training, including apprenticeship. The contractor agrees to post in conspicuous places available to employees and applicants for employment, notices to be provided by the contracting officer setting forth the provisions of this non-discrimination clause.

 

(2) The contractor will, in all solicitations or advertisements for employees placed by or on behalf of the contractor, state that all qualified applicants will receive consideration for employment without regard to race, color, religion, sex or national origin.

 

(3) The contractor will send to each labor union or representative of workers with which he has a collective bargaining agreement or other contract or understanding, a notice, to be provided by the agency contracting officer, advertising the labor union or workers' representative of the contractors' commitments under Section 202 of Executive Order No. 11246 of September 24, 1965, and shall post copies of the notice in conspicuous places available to employees and applicants for employment.

 

(4) The contractor will comply with all provisions of Executive Order No. 11246 of September 24, 1965, and of the rules, regulations, and relevant orders of the Secretary of Labor.

 

(5) The contractor will furnish all information and reports required by Executive Order No. 11246 of September 24, 1965, and by the rules, regulations, and orders of the Secretary of Labor, or pursuant thereto, and will permit access to his books, records, and accounts, by the contracting agency and the Secretary of Labor for purposes of investigation to ascertain compliance with such rules, regulations, and orders.

 

(6) In the event of the contractor's non-compliance with the non-discrimination clauses of this contract or with any of such rules. regulations or orders, this contract may be canceled, terminated or suspended in whole or in part and the contractor may be declared ineligible for further Government contracts in accordance with procedures authorized in Executive Order No. I 1246 of September 24, I 965, and such other sanctions may be imposed and remedies invoked as provided in Executive Order No. I 1246 of September 24, I 965, or by rule, regulation or order of the Secretary of Labor, or as otherwise provided by law.

 

(7) The contractor will include the provisions of Paragraphs (I) through (7) in every subcontract or purchase order unless exempted by rules, regulations or orders of the Secretary of Labor issued pursuant to Section 204 of Executive Order No. 11246 of September 24, 1965, so that such provision will be binding upon each subcontractor or vendor. The contractor will take such action with respect to any subcontract or purchase order as the contracting agency may direct as a means of enforcing such provisions including sanctions for non-compliance; provided, however, that in the event the contractor becomes involved in, or is threatened with litigation with a subcontractor or vendor as a result of such direction by the contracting agency, the contractor may request the United States to enter into such litigation to protect the interests of the United States.

 

 

No. 950CP-I Rev.

 

FORM 88 UNIT-WYO.-COLO

 

OIL AND GAS LEASE

 

AGREEMENT, Made and entered into this day of , 20 , by and between

 

, party of the first part, hereinafter called lessor, (whether one or more) and ,party of the second part, lessee.

 

WITNESSETH: That the lessor for and in consideration of Dollars in hand paid, receipt of which is hereby acknowledged, of the royalties herein provided, and of the agreements of lessee herein contained, herby grants, leases and lets exclusively unto lessee for the purpose of investigating, exploring, prospecting, drilling and mining for the producing oil, gas, casinghead gas, and all other minerals, laying pipe lines, building tanks, power stations, telephone lines and other structures thereon to produce, save, take care of, treat, transport, and own said products, and housing its employees, the following described land in County, State of to wit:

 

EXHIBIT “5”

 

including all minerals underlying lakes, streams, roads, easements and rights-of-way which traverse or adjoin said lands, which minerals are owned or claimed by lessor or rights to which minerals may hereafter be established in lessor; and also, in addition to the above-described land, all land adjoining the same and owned or claimed by lessor and containing

acres more or less.

TO HAVE AND TO HOLD the same (subject to the other provisions herein contained) for a term of ten years from this date (call “primary term”) and as long thereafter as oil or gas or casinghead gas or either or any of them, is produced therefrom; or as much longer thereafter as the lessee in good faith shall conduct drilling operations thereon and should production result from such operations, this lease shall remain in full force an effect as long as oil or gas or casinghead gas, shall be produced therefrom.

In consideration of the premises it is hereby mutually agreed as follows:

1. The lessee shall deliver to the credit of the lessor as royalty, free of cost, in the pipe line to which lessee may connect its wells the equal one-eighth ( 1/8) part of all oil produced and saved from the leased premises, or at the lessee's option, may pay to the lessor for such one-eight (1/8) royalty the market price for oil of like grade and gravity prevailing in the field where produced on the day such oil is run into the pipe line, or into storage tanks.

2. The lessee shall pay lessor, as royalty, one-eighth ( 1/8) of the proceeds from the sale of the gas, as such, for

gas from wells where gas only is found, and where not used or sold shall pay Fifty Dollars ($50.00) per annum as royalty from each such well, and while such royalty is so paid such well shall be held to be a producing well. The lessor to have gas free of charge from any gas well on the leased premises for stoves and inside lights in the principal dwelling house on said land by making his own connections with the well, the use of said gas to be at the lessor's sole risk and expense.

3. To pay lessor for gas produced from any oil well and used off the premises or in the manufacturing of gasoline or any other product a royalty of oneeight (1/8) of the market value, at the mouth of the well, payable monthly at the prevailing market price.

4. If operation• for the drilling of a well for oil or gas arc not commenced on said ian on or before one year from this date, this lease shall terminate a• to both parties, unless the Jesse< shall. on or before one year from this date, pay or tender to the lessor or for the lessor’s credit in

Bank at

or its successor or successors, which bank and its successors are lessor's agents and which shall continue as the depository regardless of changes in the ownership of the land, the sum of Dollars which shall operate as a rental and cover the privilege of deferring the commencement of operations for the drilling of a well one year from said date. In like manner and upon payments or tenders the commencement of operations for the drilling of a well may be further deferred for like periods successively during the primary term of this lease. And it is understood and agreed that the consideration first recited herein, the down payment, covers not only the privileges granted to the date when said rental is payable as aforesaid, but also the lessee's option of extending that period as aforesaid, and any and all other rights conferred. All payments or tenders may be made by check or draft of lessee or any assignee thereof, mailed or delivered on or before the rental paying date. Lessee may at any 1me execute and deliver to lessor or place of record a release or releases covering any portion or portions of the above described premises and thereby surrender this lease as to such portion or portions and be relieved of all obligations as to the acreage surrendered and thereafter the rentals payable hereunder shall be reduced in the proportion that the acreage covered herein is reduced by said release or releases. Notwithstanding the death of the lessor, or his successor in interest, the- payment or tender of rentals in the manner provided above shall be binding on the heirs, devisees, executors and administrators of such persons.

5. If at any time prior to the discovery of oil or gas on this land and during the term of this lease, the lessee shall drill a dry hole, or holes, on this land, this lease shall not terminate, provided operations for the drilling of a well shall be commenced by the next ensuing rental paying date, or provided the lessee begins or resumes the payment of rentals 1n the manner and amount above herein provided; and in this event the preceding paragraphs. hereof governing the payment of rental and the manner and effect thereof shall continue in force.

6. If said lessor owns a less interest in the above described land than the entire and undivided fee simple estate herein, then the royalties and rentals herein provided for shall be paid the lessor only in the proportion which his interest bears to the whole and undivided fee.

7. Lessee shall have the right to use, free of cost, gas, oil, and water produced on said land for its operation thereon, except water from wells of lessor. When requested by lessor, lessee shall bury his pipe lines below plow depth.

No well shall be drilled nearer than 200 feet to the house or barn now on said premises, without the written consent of the lessor. Lessee shall pay for damages caused by its operations to growing crops on said land. Lessee shall have the right at any time to remove all improvements, machinery. and fixtures placed or erected by lessee on said premises, including the right to pull and remove casings.

8. If the lessee shall commence to drill a well within the. term of this lease or any extension thereof, the lessee shall have the right to drill such well to completion with reasonable diligence and dispatch, and if oil or gas, or either of them, be found in paying quantities, this lease shall continue and be in force with the like effect as if such well had been completed within the term of years herein first mentioned.

9. If the estate of either party hereto is assigned (and the privilege of assigning in whole or in part is expressly allowed), the covenants hereof shall extend to their heirs, executors, administrators. successors and assigns, but no change o ownership in the land or in the rentals or royalties shall be binding on the lessee until after notice to the lessee and it has been furnished with the written transfer or assignment or a certified copy thereof, and in case lessee assigns this lease, in whole or in part. lessee shall be relieved of all obligations with respect to the assigned portion or portions arising subsequent to the date of assignment.

 

10. There shall be no obligation on the put of the lessee to offset wells on separate tracts into which the land covered by this lease may be hereafter divided by sale, devise or otherwise, or to furnish separate measuring or receiving tanks. It is hereby agreed that, in the event this lease shall be assigned as to a part or as to parts of the above described lands, and the holder or owner of any such part or parts shall fail or make default in the payment of the proportionate part of the rent due from him or them, on an acreage basis, such default shall not operate to defeat or affect this lease in so far as it covers a part or part of said land upon which the said lessee or any assignee hereof shall make due payments of said rentals.

11. If at any time there be as many as six parties (or more) entitled to receive royalties under this lease, lessee may withhold payment thereof unless and until all parties designate in writing in a recordable instrument to be filed with the lessee, a Trustee to receive all royalty payments due hereunder and to execute division and transfer orders on behalf of said parties and their respective successors in title.

12. Lessee shall have the right to unitize, pool, or combine all or any part of the above described ands with other. lands in the same general area by entering 1nto a cooperative or unit plan of development or operation approved by any governmental authority and, from time to time, with like approval, to modify, change or terminate any such plan or agreement and, in such event, the terms. conditions and provisions of this lease shall be deemed modified to conform to the terms, conditions, and provisions of such approved cooperative or unit plan of development or operation and, particularly, all drilling and development requirements of this lease, express or implied, shall be satisfied by compliance with the drilling and development requirements of such plan or agreement, and this lease shall not terminate or expire during the life of such plan or agreement. In the event that said above described lands or any part thereof, shall hereafter be operated under any such cooperative or unit plan of development or operation whereby the production therefrom is allocated to different portions o! the land covered by said plan, then the production allocated to any particular tract of land shall, for the purpose of computing the royalties to be paid hereunder to lessor, be regarded as having been produced from the particular tract of land to which it is allocated and not to any other tract of land; and the royalty payments. to be made hereunder to lessor shall be based upon production only as so allocated. Lessor shall formally express lessor's consent to any cooperative or unit plan of development or operation adopted by lessee and approved by any governmental agency by executing the same upon request of lessee.

13. In addition to and not in limitation of the rights granted in paragraph 12 hereof, lessee is hereby granted the right and option to consolidate, pool or combine the lands covered by this lease. or any portion or portions thereof or any stratum or strata thereunder, with other lands or like strata there under for the development thereof or for the production therefrom of oil, gas, casinghead gas or other hydrocarbons, or any or all of said products, when in lessee's discretion and judgment it is advisable so to do for proper development or operation of the premises, or to conform to spacing or zoning rules of any lawful authority, such consolidation, pooling or combining to be into units of such shape and dimensions as lessee may elect provided that all lands in any such unit shall be contiguous (either adjoining or cornering) but for this purpose contiguity shall not be deemed to be destroyed by reason of the existence of a y excluded street. alley, road, railroad, canal, stream. right of way or other similar strip or parcel of land. Any unit formed under this paragraph for production of oil and casinghead gas shall not exceed forty-three (43) acres in surface area, for production of dry or gas well shall not exceed six hundred and sixty (660) acres in surface area, and for production of condensate or distillate shall not exceed three hundred and thirty (330) acres in surface area unless some larger unit for condensate or distillate is permitted or prescribed by lawful authority, in which event such larger unit shall control, provided that, if governmental survey units be irregular in size in the area of this lease, the size of any of the units mentioned herein may be increased to the size of the there existing governmental survey unit nearest in size to the unit acreage prescribed herein. The right and option herein granted to lessee may be exercised at any time or from time to time, whether before or after production is secured and whether or not a unit may theretofore have been created for some other product, by executing in writing an instrument identifying and describing the unit created. and· by delivering a copy thereof to lessor or by recording a copy thereof in the county where the land 1s located. The lands in any such unit shall be developed or operated as one tract and any drilling on or production from such unit, whether or not from lands described in this lease, shall be deemed to be drilling done or production secured on the lands subject to this lease for all purposes except for the purpose of payment of royalty hereunder. In such event, and in lieu of the royalties elsewhere herein specified, the lessor shall receive from production on any such unit only such . portion of the royalty, at the rate stipulated elsewhere herein, as lessor's acreage in the unit (or his royalty interest therein) bears to the total acreage. Formation of any unit as herein provided shall in no manner affect the ownership or amount of any rental which may be payable under the terms of this lease.

14. In the interest of conservation, the protection of reservoir pressures and recovery of the greatest ultimate

yield of oil, gas and other minerals, lessee shall have the right to combine the leased premises with other premises

in the same general area for the purpose of operating and maintaining repressuring and recycling facilities, and for

such purpose may locate such facilities including input wells, upon the leased premises, and no royalties shall be

payable hereunder upon any gas used for repressuring and recycling operations benefiting the leased premises.

15. Lessor hereby warrants and agrees to defend the title to the land herein described and agrees that the lessee, at its option, may pay and discharge any taxes, mortgage, or other liens existing levied, or assessed on or against the above described lands and, in event it exercises such option, it shall he subrogated to the rights of any holder or holders thereof and may reimburse itself by applying to the discharge of any such mortgage, tax or other lien, any royalty or rentals accruing hereunder.

16. All rental payments which may fall due under this lease may be made to

one of the above named lessor, in the manner herein stated.

17. If within the primary term of this lease production on the leased premises shall cease from any cause, this lease shall not terminate provided operations for the drilling of a well sha11 be commenced before or on the next ensuing rental paying date: or, provided lessee begins or resumes the payment of rentals in the manner and amount hereinbefore provided. If, after the expiration of the primary term of this lease, production on the leased premises shall cease from any cause, this lease shall not terminate provided lessee resumes operations for drilling a well within sixty (60) days from such cessation, and this lease shall remain in force during the prosecution of such operations and. if production results therefrom, then as long as production continues.

18. It is agreed that this lease shall never be forfeited or cancelled for failure to perform in whole or in part any of its implied covenants conditions or stipulations until it shall have first been finally judicially determined that such failure exists and after such final determination, lessee is given reasonable time therefrom to comply with any such covenants, conditions, or stipulations.

19. All express and implied covenants of this lease shall be subject to all federal and state laws, executive orders, rules and regulations, and this lease shall not be terminated, in whole or in part, nor lessee held liable in damage for failure to comply therewith if compliance is prevented by or if such failure is the result of any such law, order, rule or regulation, or if such compliance is prevented by or failure is the result of inability of lessee through no fault of its own, to obtain sufficient and satisfactory material and equipment to justify the commencement of drilling operations or to continue production of oil or gas from the leased premises.

20. This lease and all its terms, conditions, and stipulations shall extend to and be binding on al1 successors of said lessor or lessee.

21. With respect to and for the purpose of this lease, lessor, and each of them if there be more than one, hereby release and waive the right of homestead. WHEREOF witness our hands as of the day and year first above written.

 

 

 ACKNOWLEGDEMENT

 

STATE OF
		}ss.
County of

 

 

On this day of , 19 , before me personally appeared

 

to me known to be the person described in and who executed the

 

foregoing instrument and acknowledged that executed the same as free act and deed.

 

Given under my hand and seal this day of , 19 .

 

 

My Commission Expires
			Notary Public

 

 

ACKNOWLEDGMENT-MAN AND WIFE

 

STATE OF
		}ss.
County of

 

On this day of , 19 , before me personally appeared

 

me known to be the person described in and who executed the

foregoing instrument and acknowledged that executed the same as free act and deed, including the re-

lease and waiver of the right of homestead; the said wife having been by me fully apprised of her right and the effect of signing and acknowledging the said instrument.

 

Given under my hand and seal this day of , 19 .

 

 

 

My Commission Expires
			Notary Public

 

EXHIBIT “E”

 

 

 

 

 

FARMOUT AGREEMENT

 

THIS Farmout Agreement ("Agreement") is made and entered into this 11th day of June,

2010, by and between EMPIRE PETROLEUM CORPORATION (hereinafter referred to as "Empire"), as party of the first part, and CORTEZ EXPLORATION, L.L.C. and WINDMILL OIL & GAS, L.L.C., as parties of the second part. Hereafter, Cortez Exploration, L.L.C. will sometimes be referred to as "Cortez" and Windmill Oil & Gas, L.L.C. will sometimes be referred to as "Windmill". On some occasions, Cortez and Windmill will be collectively referred to as the "Cortez Group".

 

RECITALS

 

1. The Gabbs Valley Prospect ("Prospect") covers approximately 92,825 gross acres, with no depth limitations, in Nye and Mineral Counties, Nevada, which acreage is owned by the parties to this Agreement.

 

2. A number of leases or portions of leases making up the Prospect have been included in an oil and gas unit formed pursuant to that certain agreement titled "Unit Agreement for the Development and Operation of the Paradise Unit Area Counties of Nye and Mineral, State of Nevada", dated April 14, 2010, No. ANVN88316X (hereinafter, the "Paradise Unit Agreement"). A copy of the Paradise Unit Agreement is attached hereto as Exhibit "A". The unit formed under the Paradise Unit Agreement is hereafter referred to as the "Paradise Unit". Prospect leases wholly or partially included in the Paradise Unit are identified and described on Exhibit "B" attached to this Agreement, and are hereafter referred to as the "Paradise Unit Leases".

 

3. There are additional leases included in the Prospect that are not part of the Paradise Unit. Prospect leases or portions of Prospect leases not included in the Paradise Unit are identified and described on Exhibit "C" attached to this Agreement, and are hereafter referred to as the "Non-Unit Leases".

 

4. The Cortez Group owns 41% (of 8/8ths) leasehold interest, record title interest and working interest in all of the Prospect Leases and 41% of 80% (of 8/8ths) net revenue interest in each of the Prospect Leases free and clear of other burdens, liens and encumbrances. Empire desires to acquire by farmout an additional working interest in the Paradise Unit Leases.

 

5. The Cortez Group and Empire have agreed, at the request of Empire, that the

Cortez Group will assign to Empire the Cortez Group's 41% gross working interest (which is

41% of 8/8 net revenue interest) in all of the "Prospect" Leases concurrently with the fully

execution of this Agreement. At this time, the Cortez Group's ownership in the Prospect Leases

is as follows:

 

Cortez Exploration, L.L.C. Windmill Oil & Gas, L.L.C.

38.5%

2.5%

Empire will earn a working interest in the Paradise Unit Leases, owned by the Cortez Group only, by payment of 100% of the lease rentals on the Paradise Unit Leases coming due subsequent to June 1, 2010, within the terms of this Agreement, and after Empire drills the Paradise Unit No. 2-12 Well, and otherwise performs in accordance with the terms and provisions as set forth below.

 

6. Concurrently with the execution of this Agreement, Cortez Exploration, L.L.C. will execute an agency agreement or any other required documents so as to make Empire the designated "Unit Operator", to be effective with commencement of drilling operations on the Paradise Unit No. 2-12 Well.

 

I. PAYMENT OF RENTALS AS TO PARADISE UNIT LEASES

 

A. As a part of this Agreement, Empire has paid tl-e Paradise Unit lease rentals which became due in June of 2010. In addition thereto, during the time that Empire holds the Cortez Group working interest in the Paradise Leases, which is a 41% of 8/8ths gross working interest and a 41% of 80% net revenue interest, Empire shall pay the 41% of rentals due under the Paradise Unit Leases on behalf of the Cortez Group. At such time as Empire has reassigned to the Cortez Group a collective 20.5% (of 8/8ths) working interest in the Paradise Unit Leases, Empire shall pay 77.5% of the rentals due under the Paradise Unit Leases and the Cortez Group and Punto De Luz shall pay the remaining portion of such rentals.

 

II. EARNING OBLIGATIONS FOR PARADISE UNIT LEASES

 

A. Assignment to Empire.

 

Upon the full execution of this Agreement, the Cortez Group shall, at the request of Empire, execute and deliver to Empire assignments of all of the Cortez Group's working interest and the agreed upon corresponding net revenue interest in the Prospect Leases.

 

B. Obligation To Drill The Paradise Unit No. 2-12 Well.

 

The initial test well with respect to the Paradise Unit Leases will be known as the "Empire Paradise Unit No. 2-12 Well". The Empire Paradise Unit No. 2-12 Well shall be located in the Paradise Unit, on Lease No. N-599901, in the SE/4 of the SE/4 of the NE/4 of Section 12-T12N-R34E, and shall be drilled to the lesser of (i) 6,000 feet below the surface, (ii)

500 feet into the Triassic formation, or (iii) any lesser depth where oil and/or gas is found in

commercial quantities. Empire shall commence the drilling of the Empire Paradise Unit No. 2-

12 Well on or before the 15th day of August, 2010, or at such other time as may be agreed upon by the Cortez Group in writing. Empire shall earn the working interest in the Paradise Unit Leases contemplated in this Agreement when either (a) Empire has completed and equipped the Empire Paradise Unit No. 2-12 Well into pipeline connections or tanks, should such well produce oil and/or gas, or (b) Empire has properly plugged and abandoned such well in accordance with the rules and regulations of the BLM, should such well be a dry hole.

C. Costs for Drilling and Completing the Empire Paradise Unit Nol. 2-12 Well.

 

The Cortez Group shall not have any responsibility to pay the costs to drill the Empire Paradise Unit No. 2-12 Well. The Cortez Group likewise shall not have any responsibility to pay the costs to complete and equip the Empire Paradise Unit No. 2-12 Well into pipeline connections or tanks, or to abandon the Empire Paradise Unit No. 2-12 Well should it be a dry hole, as the case may be. As between Empire and the Cortez Group, the manner in which to drill and complete the Empire Paradise Unit No. 2-12 Well and the costs to be incurred to drill and complete the Empire Paradise Unit No. 2-12 Well shall be in the sole discretion of Empire, consistent with good oil field practice. In this regard, Empire is not required to prepare an AFE or obtain approval of an AFE from the Cortez Group with respect to the drilling and completion (or abandonment) of the Empire Paradise Unit No. 2-12 Well. All reference to the Empire Paradise Unit No. 2-12 Well in this Section II.C shall apply equally to any substitute well under Section II.D, immediately below.

 

D. Substitute Well(s).

 

If, in Empire's opinion, the drilling or further drilling of the Empire Paradise Unit No. 2-12 Well as set forth in Section II.B above is rendered impossible or impractical prior to satisfying the requirements of Section II.B above, Empire shall notify the Cortez Group of the same as provided in this Agreement. Empire shall have the option, but not the obligation, of drilling a substitute well in a reasonable location of Empire's choosing. If Empire chooses not to drill a substitute well, then Empire shall promptly reassign the entirety of the Paradise Unit Leases and corresponding net revenue interest to the Cortez Group using BLM Form 3000-3 in recordable form so that the Cortez Group may record such assignments in Nye and Mineral Counties, Nevada. This Agreement shall terminate upon the transmittal of such reassignment from Empire to the Cortez Group.

 

III. REASSIGNMENT TO CORTEZ WITH REPSECT TO THE PARADISE UNIT LEASES

 

A. Reassignment if the Empire Paradise Unit No. 2-12 Well is a Dry Hole.

 

If Empire drills the Empire Paradise Unit No. 2-12 Well to the requirements of Section II above, but such well is a dry hole, then Empire, upon completion of the plugging and abandonment of such well, shall reassign to the Cortez Group 20.5% (of 8/8ths) of the working interest and corresponding net revenue interest in the Paradise Unit Leases using BLM Form

3000-3.

 

B. Reassignment if the Empire Paradise Unit No. 2-12 Well Produces in Paying

Quantities.

 

If the Empire Paradise Unit No. 2-12 Well produces hydrocarbons, Empire shall retain all of the working interest and corresponding net revenue interest in the NE/4 of Section

12-T12N-R34E (the "Spacing Unit") in the Paradise Unit Leases (i.e., the 41% (of 8/8ths)

working interest and corresponding net revenue interest assigned by the Cortez Group pursuant

to Section III.A above, until the Empire Paradise Unit No. 2-12 Well reaches Payout, as defined in Section III.D below. At such time as the Empire Paradise Unit No. 2-12 Well reaches Payout, Empire shall reassign to the Cortez Group 20.5% (of 8/8ths) of the working interest and corresponding net revenue interest in the Paradise Unit Leases, and Empire shall retain 77.5% (of

8/8ths) of the working interest and corresponding net revenue interest in the Paradise Unit

Leases.

 

C. Reassignment if the Empire Paradise Unit No. 2-12 Well is Not Drilled.

 

If Empire does not drill the Empire Paradise Unit No. 2-12 Well within the time provided in Section II.B above, then Empire, if it has received assignment, shall promptly reassign the entirety of the Paradise Unit Leases and corresponding net revenue interest to the Cortez Group using BLM Form 3000-3.

 

D. Definition of Payout.

 

"Payout" for this Agreement shall be on a well-by-well basis, and shall be deemed to occur for each well when sales proceeds actually received from production from the well, after deduction of taxes and Nevada taxes on production, landowner's royalty and overriding royalty interest shall equal 100% of the actual cost of drilling, testing, completing, equipping and operating the well to the point of payout, and treating, processing, transporting and marketing production therefrom.

 

IV. OPERATIONS WITH RESPECT TO PARADISE UNIT

 

A. Empire To Be Unit Operator.

 

The Cortez Group shall take the actions necessary so that Empire is appointed as the replacement Unit Operator as soon as possible, or at the request of Empire.

 

B. Unit Operating Agreement.

 

Subject to all provisions of the "Paradise Unit Agreement", operations for the Paradise Unit shall be conducted pursuant to the Unit Operating Agreement, attached hereto as Exhibit "D", except that with respect to any inconsistencies between this Agreement and the Unit Operating Agreement, this Agreement shall govern. If additional Paradise Unit wells are proposed subsequent to the drilling, completion and/or abandonment or the Empire Paradise Unit No. 2-12 Well, then such additional wells shall be drilled pursuant to the terms and provisions of the Unit Operating Agreement.

 

V. AREA OF MUTUAL INTEREST

 

Empire and the Cortez Group hereby form an area of mutual interest ("AMI") covering Townships 11, 12, 13 and 14 North and Ranges 34, 35 and 36 East MDM, Nevada. This AMI shall remain in effect for five (5) years from the date of this Agreement.

If during the five (5) year duration of such AMI any party should acquire ("Acquiring Party") any oil and gas leases, leasehold interest or mineral interest within the AMI by any means including, but not limited to, purchase, top lease, farmins, farmouts, farmout options, or acreage contributions, then the Acquiring Party shall immediately notify the Non-Acquiring Parties, in writing, of such acquisition, setting forth the nature of the interest acquired, all terms, provisions and contracts related to the acquisition (along with copies of all documents relating to the acquisitions or rights to earn a leasehold or mineral interest) and the price paid therefor. The Non-Acquiring Parties shall have a period of thirty (30) days following receipt of notice to elect in writing, with all appropriate documentation relating to the acquisition, to purchase at the Acquiring Party's cost and acquire its Ownership Percentage (defined below) of such acquisition by remitting the required payment to the Acquiring Party, during such thirty (30) day period. If the interest is to be earned by drilling and/or shooting seismic, the Non-Acquiring Parties must ratify all appropriate agreements within the thirty (30) days period. Notwithstanding the preceding sentence, such thirty (30) day notice period may be reduced due to applicable contractual obligations or limitations (e.g., farmout terms or lease expiration dates), in which case the Non-Acquiring Parties may be required to respond in a shorter time period as may be reasonably appropriate under the circumstances. In the event one or more parties receiving an offer pursuant to this paragraph do not accept same, the Acquiring Party shall first offer the interest not accepted by a party to the other parties on a pro rata basis. If any of the interest that was previously turned down by a party is available after it has been turned down by the remaining parties, the Acquiring Party shall hold such interest free and clear of any further AMI obligations of this Agreement. However, notwithstanding anything to the contrary contained herein, any interest within the AMI acquired by any party as a result of the acquisition of the stock or substantially all of the assets of another entity or any transaction in which such interests are not of material value in relation to the entire transaction, shall be excluded from and not subject to this AMI.

 

The parties specifically agree that if a lease or interest covers land both inside and outside an AMI, the Acquiring Party must offer the entire lease or interest to the other parties and if the party elects to acquire an interest in the lease, it must agree to proportionately acquire an interest in the entire lease or interest even if a portion of the lease or interest lies outside the AMI.

 

Any interest acquired within the AMI shall be subject to the provisions of the Unit

Operating Agreement, or Joint Operating Agreement, as applicable.

 

As used herein, "Ownership Percentage" shall be the same percentage as the parties' then-ownership in the Paradise Unit. To the extent the parties' then-ownership in the Paradise Unit is not uniform throughout the Unit, then Ownership Percentage shall be the average of each party's ownership interest on an acreage basis.

VI. REPRESENTATIONS AND WARRANTIES BY THE CORTEZ GROUP; LIMITED INDEMNITY

 

A. Warranty of Title.

 

Cortez and Windmill, and each of them, represent and warrant that as of the date of this Agreement their respective title to the Prospect Leases is free and clear from any prior conveyance, lien or encumbrance made or suffered by them, or by any person by, through or under them, which diminishes, limits or burdens the rights and interests that Empire has the right to earn under this Agreement. Cortez and Windmill, and each of them, further warrant that until such time as the Non-Unit Leases, or any of them, are assigned to Empire under the terms of this Agreement, neither Cortez nor Windmill will make or suffer, or allow to be made or suffered by any person by through or under them, any conveyance, lien or encumbrance with respect to the Non-Unit Leases.

 

B. No Third Party Acquisitions.

 

Cortez and Windmill, and each of them, represent and warrant that as of the date of this Agreement, there are no agreements with any person not a party to this Agreement that in any manner qualify, alter or otherwise affect the rights and obligations of the parties under this Agreement.

 

C. Limited Indemnity.

 

Cortez shall indemnify, defend, protect and hold harmless Empire from and against any and all loss, cost or liability with respect to any lien, encumbrance or claim made by James S. Isern, Isern Oil Company, Inc., or either of them, and any successors or assigns of either of them, making any claims affecting title to either the Paradise Unit Leases or the Non Unit Leases.

 

VII. NON-PARADISE UNIT LEASES

 

A. Empire's Option With Respect to the Non-Unit Leases.

 

For a period of one (1) year from June 1, 2010, Empire shall have the optional right to drill an additional test well on any of the Non-Unit Leases that have not expired. In order to maintain such option, Empire must pay 100% of the rentals that become due under each of the Non-Unit Leases. However, Empire shall have the right to elect, on a lease-by-lease basis during this one (1) year term, whether to release its option as to a particular Non-Unit Lease (or Leases), while still maintaining its option to the remaining Non-Unit Leases. Should Empire elect to release a Non-Unit Lease from the option provided in this Agreement, Empire shall give written notice of such election to the Cortez Group no later than thirty (30) days in advance of the date the rental is due on such Non-Unit Lease.

B. Drilling the Non-Unit Test Well.

 

As between Empire and the Cortez Group, Empire shall have the right to select the location for the Non-Unit Test Well. This Non-Unit Test Well shall be drilled and earning rights achieved under the same terms and conditions as previously set forth for the drilling of the Empire Paradise Unit No. 2-12 Well, with Empire earning 98% of the 160 acre governmental drilling and spacing unit surrounding the Non-Unit Test Well until payout and earning one-half (1/2) of the Cortez Group's 41% (of 8/8ths) working interest in the remaining Non-Unit Leases.

 

C. Reassignment of Non-Unit Leases.

 

In the event that Empire does not exercise its optional right to drill a Non Unit Test Well within the term of this Agreement, then it shall immediately reassign all of the Cortez Group's interest to them in their proportion of ownership.

 

D. Operator/Joint Operating Agreement.

 

Empire shall be the Operator with respect to the drilling, completion and/or abandonment of the optional Non-Unit Test Well and all operations for such Non Unit Leases shall be conducted pursuant to a Joint Operating Agreement, a copy of which is attached hereto as Exhibit "D".

 

VIII. NOTICES

 

All notices or other communications required or permitted hereunder shall be provided in writing and shall be delivered to the authorized representatives of Empire or the Cortez Group, as the case may be, by either (i) personal delivery, (ii) certified mail, return receipt requested, (iii) overnight delivery service, or (iv) facsimile, as follows:

 

To Empire:

 

Empire Petroleum Corporation

8801 South Yale, Suite 120

Tulsa, Oklahoma 74137-3575

Attn: A. E. Whitehead

Facsimile: (918) 488-1530

 

To the Cortez Group:

 

Cortez Exploration, L.L.C.

16786 Kincheloe Road

Siloam Springs, Arkansas 72761

Attn: 0. F. Duffield, Manager

Facsimile: (479) 524-6057

IX. MISCELLANEOUS PROVISIONS

 

A. Successors and Assigns.

 

This Agreement shall not be assigned by any party without the prior written approval of the non-assigning parties, which approval shall not be unreasonably withheld, conditioned or delayed.

 

B. Headings.

 

Headings used in this Agreement are inserted for convenience only and shall not affect the interpretation of any of the provisions of this Agreement.

 

C. Relationship of Parties.

 

This Agreement does not constitute the parties hereto as a partnership, mining partnership, mining partnership, joint venture, incorporated association or any other joint relationship, it being intended that liabilities and obligations of the parties hereunder shall be several and not joint. Each party shall be responsible only for its obligations and liabilities as set out herein and no party shall be responsible for those of any other party.

 

D. Further Assurances.

 

The parties agree to execute such further instruments and documents and to diligently undertake such actions as may be necessary or appropriate in connection with the subject matter of this Agreement and to use their best efforts to do those things reasonably necessary to give full force and effect to the terms and intent of this Agreement.

 

E. Entire Agreement.

 

This Agreement, including the Exhibits attached hereto, constitutes the entire agreement and understanding of the parties hereto with respect to the transactions contemplated hereby, and supersedes all prior understandings, discussions and agreements between the parties relating to the subject matter hereof.

 

F. Laws Governing This Agreement.

 

This Agreement shall be governed by and construed in accordance with the laws of the State of Nevada.

 

G. Binding Effect.

 

This Agreement shall be binding upon and inure to the benefit of the parties hereto, their respective heirs, successors and assigns.

H. Counterpart Execution.

 

This Agreement may be executed in any number of counterparts, each of such shall be considered an original for all purposes.

 

IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the dates set forth below.

 

		EMPIRE PETROLEUM CORPORATION
6-11-10	By:	/s/ A. E. Whitehead
(Date)		A. E. Whitehead, President
		CORTEZ EXPLORTION, L.L.C.
6-15-10	By:	/s/  O. F. Duffield
(Date)		O. F. Duffield, Manager
		WINDMILL OIL & GAS, L.L.C.
6-11-10	By:	/s/  Richard L. Harris
(Date)		Richard L. Harris, Manager