Attached files
Exhibit 10.81
PRODUCTION AND MARKETING AGREEMENT
BETWEEN
BARON PRODUCTION LLC
AND
PCEC SUB 1, LLC
JULY 28, 2014
Table of Contents
Article I DEFINITIONS AND REFERENCES..........................................1
Section 1.1 Defined Terms...............................................1
Section 1.2 Rules of Construction; Monthly and Daily Equivalents;
Publications................................................6
Article II NO ADVERSE CHANGES TO SUBJECT INTERESTS............................7
Section 2.1 Abandonment and Shut-In.....................................7
Section 2.2 Non-Consent Operations......................................7
Section 2.3 Production Imbalances.......................................7
Section 2.4 Defense of Agreement and Production Payment.................8
Section 2.5 Further Assurances..........................................9
Article III PRODUCTION OF SUBJECT INTERESTS...................................9
Section 3.1 General Operating Requirements..............................9
Section 3.2 Rates of Production........................................11
Section 3.3 Quality and Pressure Requirements..........................11
Section 3.4 Imbalance Charges..........................................12
Section 3.5 Environmental Compliance...................................12
Section 3.6 Maintaining and Restoring Productivity.....................12
Section 3.7 Insurance; Damage or Loss..................................13
Section 3.8 Continued Ability to Operate...............................13
Article IV [RESERVED]........................................................14
Article V OTHER AGREEMENTS...................................................14
Section 5.1 Performance of Production Payment Documents................14
Section 5.2 Interest on Late Payments; No Usury........................14
Section 5.3 Indemnity..................................................14
Section 5.4 Payment of Expenses........................................17
Section 5.5 Information and Reporting..................................17
Section 5.6 Marketing of Production Payment Hydrocarbons...............21
Section 5.7 Preservation of Subject Well Drainage......................22
Article VI LIENS TO SECURE PERFORMANCE; OTHER REMEDIES.......................22
Section 6.1 Mortgage...................................................22
Section 6.2 Production Proceeds........................................22
Section 6.3 Replacement of Operator....................................23
i
Article VII MISCELLANEOUS....................................................23
Section 7.1 Notices....................................................23
Section 7.2 Successors and Assigns.....................................23
Section 7.3 Acknowledgments and Admissions.............................24
Section 7.4 Entire Agreement; Amendments; Waiver.......................24
Section 7.5 Counterpart Execution......................................24
Section 7.6 Applicable Law.............................................24
Section 7.7 Severability...............................................24
Section 7.8 Termination; Limited Survival..............................24
Section 7.9 WAIVER OF JURY TRIAL AND PUNITIVE DAMAGES..................25
Section 7.10 CONSENT TO JURISDICTION....................................25
ii
PRODUCTION AND MARKETING AGREEMENT
This Production and Marketing Agreement (this "Agreement"), dated as of
July 28, 2014, is made by and between Baron Production LLC, a Texas limited
liability company ("Working Interest Owner" and a "Party"), and PCEC Sub 1, LLC,
a Texas limited liability company ("Royalty Owner" and a "Party").
WHEREAS, by means of a certain Conveyance of Term Overriding Royalty
Interest dated as of the date hereof from Working Interest Owner to Royalty
Owner (the "Conveyance"), Working Interest Owner has sold and conveyed to
Royalty Owner the "Production Payment" (as such term is defined in the
Conveyance) in the Subject Interests described therein; and
WHEREAS, the Parties are entering into this Agreement to set out certain
agreements with respect to the operation and production of the Subject Interests
and the marketing of the Production Payment Hydrocarbons;
NOW, THEREFORE, as a material inducement to cause Royalty Owner to purchase
the Production Payment and in consideration of the mutual benefits and
obligations of the Parties hereunder, Royalty Owner and Working Interest Owner
have agreed, and hereby agree, as follows:
ARTICLE I
DEFINITIONS AND REFERENCES
Section 1.1 Defined Terms. Reference is made to the Conveyance for the
meaning of all capitalized terms defined therein, all of which will when used
herein (unless otherwise expressly defined herein) have the meanings given them
in the Conveyance. As used herein, the terms "Agreement" and "Conveyance" have
the meanings given them above. For purposes of this Agreement, unless the
context otherwise requires, the following terms have the following meanings:
"Agreed Rate" means the rate of seventeen percent (17%) per annum,
calculated on the basis of actual days elapsed and a year of 360 days.
"Business Day" means any day that is not a Saturday, Sunday or other day on
which commercial banks in Dallas, Texas are authorized or required to close.
"Company Engineers" means Cawley, Gillespie & Associates, Haas Petroleum
Engineering Services, Inc. and any other nationally recognized independent
reserve engineering firm that Working Interest Owner and Royalty Owner from time
to time agree to designate as the Company Engineers for the purposes hereof.
"Credit Agreement" means the Credit Agreement, dated as of the date hereof,
among, Working Interest Owner, the Parent, the lenders from time to time party
thereto, and Petro Capital Energy Credit, LLC, as administrative agent for such
lenders.
1
"Downstream Contracts" means all contracts or arrangements to which Working
Interest Owner (or any Person acting on behalf of Working Interest Owner) is a
party that provide for or relate to the gathering, transportation, treatment,
processing, marketing or sale of Subject Hydrocarbons.
"Environmental Laws" means all applicable Laws regulating or otherwise
pertaining to (a) the use, generation, migration, storage, removal, treatment,
remedy, discharge, release, transportation, disposal or cleanup of pollutants,
contamination, hazardous wastes, hazardous substances, hazardous materials,
toxic substances or toxic pollutants, (b) environmental matters involving the
soil, surface waters, groundwater, land, stream sediments, surface or subsurface
strata, ambient air and any other environmental medium on or off any Subject
Interest, or (c) the environment or health and safety-related matters; including
the following as from time to time amended and all others whether similar or
dissimilar and whether now existing or hereinafter enacted: the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended by
the Superfund Amendments and Reauthorization Act of 1986, the Resource
Conservation and Recovery Act of 1976, as amended by the Used Oil Recycling Act
of 1980, the Solid Waste Disposal Act amendments of 1980, and the Hazardous and
Solid Waste Amendments of 1984, the Hazardous Materials Transportation Act, as
amended, the Toxic Substance Control Act, as amended, the Clean Air Act, as
amended, the Clean Water Act, as amended, and all regulations promulgated
pursuant thereto.
"Event of Force Majeure" means any of the following:
(a) physical events such as acts of God, landslides, lightning,
earthquakes, fires, hurricanes, storms or storm warnings that result in
evacuation of the affected area, floods, washouts, explosions, breakage or
accident or necessity of repairs to wells, equipment or lines of pipe;
(b) weather related events affecting an entire geographic region, such as
low temperatures which cause freezing or failure of wells, equipment or lines of
pipe;
(c) interruption of firm transportation and/or storage by transporters of
Hydrocarbons; and
(d) orders of any court or governmental authority having jurisdiction
(which in each case cannot be satisfied by actions taken with respect to wells
other than Subject Wells, which actions do not violate other contractual duties
of Working Interest Owner), strikes, lockouts or other industrial disturbances,
riots, sabotage, insurrections, wars and similar acts of other Persons; provided
that (i) in order to be entitled to assert an Event of Force Majeure, (1) the
affected Party must be making all reasonable efforts to mitigate the adverse
impacts of any such event or occurrence, to resolve the event or occurrence once
it has occurred, and to resume performance (provided that such Party will not be
obligated to settle any strike or lockout) and (2) the asserted Event of Force
Majeure must not be within the control of and must not be caused by the fault or
negligence of the affected Party and must be the type of event which, by the
exercise of reasonable diligence, the affected Party is unable to prevent; (ii)
no Party will be entitled to assert an Event of Force Majeure on account of
economic hardship or to the extent such Party's performance is affected by the
curtailment of interruptible or secondary firm transportation unless primary,
2
in-path, firm transportation is also curtailed; and (iii) no Party claiming an
Event of Force Majeure will be excused from any responsibility to make cash
payments that are due or become due during the period in which an Event of Force
Majeure persists.
"Hazardous Substances" means any substances regulated under any
Environmental Law, whether as pollutants, contaminants, or chemicals, or as
industrial, toxic or hazardous substances or wastes, or otherwise, including any
asbestos or asbestos-containing materials, any naturally occurring radioactive
materials, and any hydrocarbons or other substances that are released into the
environment.
"Imbalance Charges" means any fees, penalties, costs or charges (in cash or
in kind, and whether or not denominated as price adjustments or as prices for
spot sales in place of prices for nominated production) that are incurred,
payable or suffered by Royalty Owner to any Person in connection with any
imbalance between the amount of Production Payment Hydrocarbons delivered at the
Delivery Points and the amounts of nominated sales thereof or transportation,
gathering or processing capacity scheduled or available therefor, or that are
otherwise assessed against Royalty Owner by a transporter or purchaser for
failure to meet such Person's balance, delivery or nomination requirements.
Interest and penalties owing with respect to Imbalance Charges will also
constitute Imbalance Charges.
"Losses" has the meaning given to such term in Section 5.3(b).
"Mortgage" means the Second Lien Deed of Trust, Assignment of As-Extracted
Collateral Security Agreement, Fixture Filing and Financing Statement of even
date herewith executed in connection herewith by Working Interest Owner for the
benefit of Royalty Owner with respect to the Retained Interests and certain
related assets.
"NYMEX Strip Prices" means, as of any Day, the arithmetic average of the
settlement prices (per Barrel of Oil) on such Day of the applicable futures
contract traded on the New York Mercantile Exchange for the first thirty-six
Months after such Day. The NYMEX Strip Price for Oil will be the average of such
prices for the West Texas Intermediate Crude Oil Futures Contract for Cushing,
Oklahoma Delivery that is traded on such exchange.
"Overtake" has the meaning given to such term in Section 2.3(a).
"Parent" means Baron Energy, Inc., a Nevada corporation.
"Parent Guaranty" means the Guaranty Agreement of even date herewith
executed by Parent in favor of Royalty Owner.
"Parties" means Working Interest Owner and Royalty Owner.
"PDP Reserves" means proved developed producing reserves of Hydrocarbons,
as determined in accordance with the definitions and standards promulgated by
the Society of Petroleum Engineers.
"Performance Default" means any of the following:
3
(a) any failure by Working Interest Owner to pay any money owing or
belonging to Royalty Owner that continues unremedied for more than five (5)
Business Days after Working Interest Owner becomes aware of such failure;
(b) any breach by Working Interest Owner of any covenant or agreement made
by Working Interest Owner herein or in any other Production Payment Document
(other than as described in the preceding clause (a)) that continues unremedied
for thirty (30) days following the earlier to occur of: (i) written notice
thereof being delivered to Working Interest Owner by Royalty Owner or (ii)
Working Interest Owner first becoming aware of such breach;
(c) any of the representations or warranties made by Working Interest Owner
herein or in any other Production Payment Document is false or incorrect in any
material respect on any date made or as of which made;
(d) the commencement of a voluntary case by Working Interest Owner under
the United States Bankruptcy Code, or Working Interest Owner's application for
or consent to any order for relief in any involuntary case filed under such
code;
(e) the commencement of any involuntary case against Working Interest Owner
under such code that is not dismissed within thirty (30) days after filing; and
(f) the appointment or taking possession of a receiver, liquidator,
custodian, trustee, keeper or similar official of any of the Subject Interests
which either (i) is not made ineffective or discharged within thirty (30) days
thereafter or (ii) is requested, consented to or acquiesced to by Working
Interest Owner.
"Production Payment Documents" means this Agreement, the Conveyance, the
Purchase and Sale Agreement, the Mortgage, the Parent Guaranty Agreement, and
each other agreement, instrument, certificate or other document at any time made
or given by Working Interest Owner with or to Royalty Owner in connection with
this Agreement, the Conveyance, the Purchase and Sale Agreement or the Mortgage,
including all supplements and amendments to and restatements of any of the
foregoing.
"Purchase and Sale Agreement" means the Purchase and Sale Agreement of even
date herewith between Working Interest Owner and Royalty Owner, under which
Working Interest Owner has agreed to sell and Royalty Owner has agreed to
purchase the Production Payment.
"Remaining Reserves" means, as of the date of any determination, the PDP
Reserves projected to be attributable to the Subject Interests (i.e., both the
Production Payment Hydrocarbons and the Retained Interest Hydrocarbons) after
such date for the remaining expected productive life thereof. For the purpose of
calculating Remaining Reserves, the sales prices of the Oil to be produced from
each Subject Interest will be assumed to be the NYMEX Strip Price for Oil as
calculated on the date of determination. Calculations of Remaining Reserves will
otherwise be based on the then most recent Reserve Report, after disregarding
any reserves shown in such Reserve Report that have actually been produced on or
before the date of determination of such Remaining Reserves.
4
"Repair Operations" means reworking, redrilling, reconditioning, fracing,
refracing, plugging back, deepening, or other operations to repair, restore, or
enhance the productivity of one or more Subject Wells or to repair, restore,
replace or enhance equipment and facilities used to produce and handle Subject
Hydrocarbons.
"Reserve Report" means any annual or semiannual reserve engineering report
prepared by Company Engineers or Working Interest Owner's in-house reserve
engineers with respect to the Subject Interests as required under Section
5.5(c). Each Reserve Report will be in form and detail acceptable to Royalty
Owner and will set forth the following:
(i) an estimation of the Oil and Gas reserves, classified by appropriate
categories, as of such date attributable to the various Subject Interests,
(ii) a projection of the future production of, and net revenue from,
reserves,
(iii) a calculation of the present worth of such net revenue discounted at
the rate of ten percent per annum, and
(iv) a schedule or description of the principal assumptions, estimates and
projections made or used in the preparation of such report, including estimated
future product prices, capital expenditures, operating expenses and taxes.
Each such report will be prepared in accordance with customary and
generally accepted standards and practices for independent professional
petroleum engineers and will be based on the NYMEX Strip Prices on the effective
date of such report.
"Retained Interest Hydrocarbons" means the Subject Hydrocarbons other than
the Production Payment Hydrocarbons.
"Royalty Owner" refers to PCEC Sub 1, LLC, a Texas limited liability
company, as well as to its successors and assigns hereunder.
"Royalty Owner Indemnitees" has the meaning given to such term in Section
5.3(a). "Royalty Owner Spot Market PP Hydrocarbons" has the meaning given to
such term in Section 5.6(b).
"Subject Contracts" means all Upstream Contracts and Downstream Contracts.
"Trustee" means the Person or Persons who from time to time serve (or have
served) as the trustee under the Mortgage.
"Undertake" has the meaning given to such term in Section 2.3(a).
"Upstream Contracts" means all joint operating agreements, unit operating
agreements, facilities leases or use agreements, water agreements (whether
relating to water injection, supply, transportation or disposal), or other
agreements or arrangements to which Working Interest Owner (or any Person acting
on behalf of Working Interest Owner) is a party that provide for or relate to
the operation of the Subject Interests or the production of Hydrocarbons
therefrom.
5
"Working Interest Owner" refers to Baron Production LLC, a Texas limited
liability company, as well as to its successors and assigns hereunder.
"Working Interest Owner Spot Market PP Hydrocarbons" has the meaning given
to such term in Section 5.6(b).
Section 1.2 Rules of Construction; Monthly and Daily Equivalents;
Publications.
(a) Construction. All references in this Agreement to articles, sections,
subsections and other subdivisions refer to corresponding articles, sections,
subsections and other subdivisions of this Agreement unless expressly provided
otherwise. Titles appearing at the beginning of any of such subdivisions are for
convenience only and will not constitute part of such subdivisions and will be
disregarded in construing the language contained in such subdivisions. The words
"this Agreement", "this instrument", "herein", "hereof", "hereby", "hereunder "
and words of similar import refer to this Agreement as a whole and not to any
particular subdivision unless expressly so limited. Unless the context otherwise
requires: "including" (and its grammatical variations) means "including without
limitation"; "or" is not exclusive; words in the singular form will be construed
to include the plural and vice versa; words in any gender include all other
genders; references herein to the Conveyance, the Purchase and Sale Agreement,
or any other instrument or agreement refer to such instrument or agreement as it
may be from time to time supplemented, amended or restated; and references
herein to any Person include such Person's successors and assigns. All
references in this Agreement to exhibits and schedules refer to the exhibits and
schedules to this Agreement unless expressly provided otherwise, and all such
exhibits and schedules are hereby incorporated herein by reference and made a
part hereof for all purposes. This Agreement has been drafted with the joint
participation of Working Interest Owner and Royalty Owner and is to be construed
neither against nor in favor of either Party but rather in accordance with the
fair meaning hereof.
(b) Monthly Equivalents. To the extent that this Agreement refers to
information or data measured or based upon Daily production or deliveries of
Hydrocarbons and such information or data is instead provided or available only
with respect to Monthly production or deliveries of Hydrocarbons, such Monthly
Hydrocarbons will be deemed produced or delivered in equal quantities on each
Day during such Month. To the extent that this Agreement refers to Daily price
information for production or deliveries of Hydrocarbons and such information or
data is instead provided or available only on a Monthly basis, such Monthly
price information will be deemed to apply on each Day during such Month.
(c) Publications. To the extent that this Agreement (or any other
Production Payment Document other than the Conveyance) incorporates prices,
rates, adjustments to prices or rates, or other information from a specific
source or publication and that source or publication temporarily fails or
permanently ceases to publish such information, or ceases publication
altogether, or changes the heading or format under which such information is
published, or changes the source of information which it publishes under such
heading or format, and in any such case the relevant Production Payment Document
does not specify how to deal with such event, then Royalty Owner will designate
a reasonable alternative source for the same or equivalent information and the
Parties will thereafter use such designated alternative source.
6
ARTICLE II
NO ADVERSE CHANGES TO SUBJECT INTERESTS
Section 2.1 Abandonment and Shut-In.
(a) Abandonment. Working Interest Owner will not, without first obtaining
the consent of Royalty Owner, abandon (or propose or consent to the abandonment
of) any Subject Well or surrender, abandon or release (or propose or consent to
the surrender, abandonment or release of) any Subject Interest.
(b) Shut-in of Subject Wells. Working Interest Owner will not, without
first obtaining the consent of Royalty Owner, voluntarily shut-in a Subject Well
(or propose or consent to such a shut-in), provided that a shut-in of a Subject
Well will not be deemed to be voluntarily made if it is caused by or results
from an Event of Force Majeure, or from well servicing or maintenance in the
ordinary course of business, or if Working Interest Owner is waiting for a
pipeline connection or other transportation services for Oil produced from a
Subject Well for which transportation or a pipeline connection is not otherwise
available.
Section 2.2 Non-Consent Operations. Working Interest Owner will not,
without the prior consent of Royalty Owner, elect to be a non-participating
party with respect to any plugging back, reworking, sidetracking, drilling,
completion or other operation on any Subject Interest or Subject Lands if the
consequence of such election is that any part of Working Interest Owner's
interest in such Subject Interest on Subject Lands is temporarily (e.g., during
a recoupment period) or permanently forfeited to the parties participating in
such operations or electing not to abandon such well. Upon any such election by
Working Interest Owner that is consented to by Royalty Owner (or for which,
pursuant to the preceding sentence, no consent is required), such election will
also be binding on the Production Payment as to the interest so temporarily or
permanently forfeited but will not cause any modification in the Scheduled
Quantities or in any component of the Adjustment Quantity.
Section 2.3 Production Imbalances. (a) Definitions. As used herein,
"Undertake" means that an owner of production from a Subject Well takes a lesser
share of Hydrocarbons produced from such Subject Well than the share of
Hydrocarbons which such owner is entitled to take by virtue of its ownership
interest, determined without regard to any rights under any production balancing
agreement or similar arrangement or any rights under common law with respect to
production balancing, and "Overtake" means that an owner of production from a
Subject Well takes a greater share of Hydrocarbons produced from such Subject
Well than the share of Hydrocarbons which such owner is entitled to take by
virtue of its ownership interest, again determined without regard to any rights
under any production balancing agreement or similar arrangement or any rights
under common law with respect to production balancing. Adjustments due to
Non-Consent Provisions, however, will not be considered Undertakes or Overtakes.
(b) No Undertakes Without Consent. Subject to Section 3.2, without Royalty
Owner's prior consent Working Interest Owner will not Undertake from a Subject
Well (either for itself or on behalf of Royalty Owner), except as a result of an
Event of Force Majeure or a joint interest owner in one or more Subject Wells
7
electing to Overtake in order to balance previous Overtakes from such Subject
Wells by Working Interest Owner or any of its predecessors in title to such
Subject Wells, but only to the extent that such previous Overtakes either
occurred after the Effective Time or occurred prior to the Effective Time and
are disclosed in Schedule 1 attached to the Purchase and Sale Agreement,
provided that Working Interest Owner may Undertake from any Subject Well on any
Day so long as Royalty Owner's actual share of production on such Day from all
Subject Wells is the entire Scheduled Quantity and Adjustment Quantity for such
Day. If any Undertake by Working Interest Owner occurs in violation of this
section, the Production Payment will be determined (to the maximum extent
allowed under applicable Law and any applicable Permitted Encumbrances) without
regard thereto.
(c) Limitation on Overtakes. Subject to Section 3.2, without Royalty
Owner's prior consent Working Interest Owner will not Overtake from a Subject
Well on any Day (either for itself or on behalf of Royalty Owner), except either
(i) in order to produce and take up to 110% of the Scheduled Quantities and
Adjustment Quantities for such Day from the Subject Wells, or (ii) if one or
more other owners of production from such Subject Well elects to Undertake, in
order to produce and take the same amount of Hydrocarbons that Working Interest
Owner and Royalty Owner would have received had such joint interest owner not
elected to Undertake. If, pursuant to applicable contracts and Law, Working
Interest Owner does Overtake, then the additional Hydrocarbons so taken by
Working Interest Owner will be included among the Subject Hydrocarbons and will
be subject to the Production Payment.
(d) No Balancing From Other Properties. Working Interest Owner will not
allow any Subject Interest to be subject to any production balancing arrangement
or agreement under which one or more third Persons may Overtake a portion of the
production attributable to such Subject Interest as a result of Undertakes or
Overtakes (or other actions or inactions) with respect to properties other than
such Subject Interest. For the purposes of this subsection (d), a production
unit in which all parties have uniform interests will be considered to be a
single Subject Interest.
Section 2.4 Defense of Agreement and Production Payment. If any Person
(including Working Interest Owner or its Affiliates but excluding Royalty Owner
and its Affiliates) ever challenges or attacks (a) the validity or priority of
the Production Payment Documents or of any rights, titles or interests of
Royalty Owner that are created or evidenced thereby or (b) the title of Working
Interest Owner to any Subject Interest or of Royalty Owner to any part of the
Production Payment, then upon learning thereof Working Interest Owner will give
prompt written notice thereof to Royalty Owner and at Working Interest Owner's
own cost and expense will diligently endeavor to defeat such challenge or attack
and to cure any defect that may be developed or claimed, and Working Interest
Owner will take all necessary or advisable steps for the defense of any legal
proceedings with respect thereto, including the employment of counsel to
represent Working Interest Owner, the prosecution or defense of litigation, and
the release or discharge of all adverse claims. Royalty Owner is hereby
authorized and empowered, at the expense of Working Interest Owner, to take such
additional steps as in its judgment and discretion may be necessary or proper
for the defense of any such legal proceedings or the protection of the validity
or priority of the Production Payment Documents and the rights, titles, and
interests created or evidenced thereby, including the employment of independent
counsel to represent Royalty Owner, the prosecution or defense of litigation,
8
the compromise or discharge of any adverse claims made with respect to the
Production Payment, the purchase of any tax title and the removal of prior liens
or security interests, and all reasonable and related expenditures so made of
every kind and character will be paid to Royalty Owner by Working Interest Owner
on demand.
Section 2.5 Further Assurances. Working Interest Owner will, on request of
Royalty Owner, (a) promptly correct any defect, error or omission which may be
discovered in the contents, execution or acknowledgment of any Production
Payment Document, (b) execute, acknowledge, deliver and record or file such
further instruments and do such further acts as may be necessary, desirable or
proper, in the judgment of Royalty Owner, to carry out more effectively the
purposes of the Production Payment Documents and to more fully identify and make
subject to the Production Payment Documents any property intended to be covered
thereby, including any renewals, additions, substitutions, replacements, or
appurtenances to the Subject Interests; and (c) execute, acknowledge, deliver,
and file or record any document or instrument reasonably requested by Royalty
Owner to protect its rights, title and interests under the Production Payment
Documents against the rights or interests of third Persons. Working Interest
Owner will provide to Royalty Owner any assurances of title to the Subject
Interests which Royalty Owner may from time to time request concerning the
Production Payment, including the recording and filing of the Conveyance (it
being understood that no title deficiencies learned of by Royalty Owner will in
any way be deemed to qualify any of Working Interest Owner's warranties of title
or indemnities with respect to title in any Production Payment Document).
ARTICLE III
PRODUCTION OF SUBJECT INTERESTS
Section 3.1 General Operating Requirements. At all times from the date
hereof until the termination of the Production Payment, and whether or not
Working Interest Owner is the operator of the relevant Subject Interests,
Working Interest Owner, at Working Interest Owner's cost and expense, will:
(a) Cause the Subject Interests to be maintained in full force and effect,
free of any right of cancellation, forfeiture or termination, and to be
developed, protected against drainage, and continuously operated for the
production of Hydrocarbons in a good and workmanlike manner as would a prudent
operator (and without regard to the burden of the Production Payment), all in
accordance with generally accepted industry practices, applicable operating
agreements, the Leases, and all applicable Laws, and will otherwise comply in
all material respects with all applicable Laws, the Leases, and all other
contracts or agreements forming a part of or related to the Subject Interests.
(b) Pay, or cause to be paid, as and when due and payable, all rentals,
royalties, Taxes and other amounts payable in respect of the Subject Interests
or the production therefrom, and all costs, expenses, capital expenditures and
liabilities incurred in or arising from the operation, maintenance or
development of the Subject Interests, or the producing, treating, gathering,
storing, marketing or transporting of Hydrocarbons therefrom at or prior to the
Delivery Points (except, in each case, to the extent contested in good faith by
appropriate proceedings that effectively delay any remedy for non-payment
thereof).
9
(c) Cause all Subject Wells, and all machinery, equipment and facilities of
any kind now or hereafter necessary or useful in the operation of such Subject
Wells (as well as all separation, metering and related facilities that are
located at or prior to each Delivery Point and all related wells for the supply,
injection or disposal of water, to the extent owned or operated by Working
Interest Owner or its Affiliates) to be maintained and kept in good and
effective operating condition as would a prudent operator (and without regard to
the burden of the Production Payment), and all repairs, renewals, replacements,
additions and improvements thereof or thereto, useful or needful to such end, to
be promptly made.
(d) Give or cause to be given to Royalty Owner written notice of every
adverse claim or demand made by any Person affecting the Subject Interests, the
Hydrocarbons produced therefrom, the Production Payment or the Production
Payment Hydrocarbons in any manner whatsoever, and of any suit or other legal
proceeding instituted with respect thereto, and at Working Interest Owner's
expense cause all necessary and proper steps to be taken with reasonable
diligence to protect and defend the Subject Interests, the Subject Hydrocarbons
produced therefrom, the Production Payment and the Production Payment
Hydrocarbons against any such adverse claim or demand, including the employment
of counsel for the prosecution or defense of litigation and the contest, release
or discharge of such adverse claim or demand.
(e) Cause the Subject Interests to be kept free and clear of liens, charges
and encumbrances of every character, other than the Permitted Encumbrances.
(f) Except to the extent contested in good faith by appropriate proceedings
that effectively delay any remedy for non-payment thereof, pay all Taxes when
due and before they become delinquent (and provide Royalty Owner with proof of
such payment upon request), and reimburse Royalty Owner for any Taxes paid by
Royalty Owner relating to the Production Payment or the Production Payment
Hydrocarbons.
(g) Maintain or cause to be maintained in full force and effect in
accordance with prudent operator standards, all permits, licenses, easements,
servitudes, contracts and other rights reasonably necessary or useful in
connection with the development, operation or management of the Subject
Interests and the production, treating, gathering, storing, marketing or
transportation of the Subject Hydrocarbons or of water produced or used in
connection therewith.
(h) Not (i) resign as operator (or otherwise voluntarily relinquish such
position) of any of the Subject Interests that are or hereafter become operated
by Working Interest Owner until and unless the successor operator has been
approved in writing by Royalty Owner, or (ii) permit Parent to resign as
operator (or otherwise voluntarily relinquish such position) of any of the
Subject Interests that are or hereafter become operated by Parent until and
unless the successor operator has been approved in writing by Royalty Owner .
(i) Not conduct any work or operation in any wellbore of a Subject Well,
which work or operation is related to any horizon, zone, formation or interval
not included in the Subject Interests, without the prior written consent of
Royalty Owner.
10
Whenever Working Interest Owner is not the operator of a Subject Interest,
it will use its reasonable best efforts and diligently enforce its rights under
any operating agreement for such Subject Interest in order to cause such Subject
Interest to be operated and dealt with as contemplated in this Agreement.
Section 3.2 Rates of Production.
(a) Rates of Production. Working Interest Owner will prudently operate and
produce the Subject Interests and Subject Wells operated by Working Interest
Owner, and Working Interest Owner will use all commercially reasonable efforts
to cause the Subject Interests and Subject Wells not operated by Working
Interest Owner to be prudently operated and produced by whomever is the operator
thereof, in each case in accordance with prudent industry practices and the
following additional requirements:
(i) the amount of Hydrocarbons produced from any Subject Well shall not
exceed in any Month the lower of (1) the maximum amount that the Subject Well is
capable of producing at its maximum efficient rate of flow or (2) the respective
allowable rate of flow under applicable orders and Laws, if any; and
(ii) the amount of Hydrocarbons produced from the Subject Wells shall be
sufficient to prevent a material net migration of Hydrocarbons from the
reservoirs to which proved reserves are attributed underlying the Subject
Interests.
(b) Production Goals. Subject to the provisions of the preceding subsection
(a) and Sections 2.1, 2.2, 2.3, 3.6, 3.7(b) and 3.8, Working Interest Owner will
use all commercially reasonable efforts to ensure that the rate of production
from the Subject Wells, taken as a whole, is sufficient to allow the delivery to
Royalty Owner of the Scheduled Quantity and the Adjustment Quantity for such
Day.
Section 3.3 Quality and Pressure Requirements. All Production Payment
Hydrocarbons delivered to Royalty Owner, or to Royalty Owner's credit, will
satisfy the quality and pressure requirements and specifications as set forth
in:
(a) all applicable agreements with or requirements of Delivery Point
Recipients (including tariffs filed with regulatory agencies) for acceptance and
transportation of such Production Payment Hydrocarbons,
(b) all applicable agreements with or requirements of operators of
processing plants or treatment facilities for acceptance of such Production
Payment Hydrocarbons, and
(c) all applicable agreements with or requirements of first purchasers for
acceptance and purchase of such Production Payment Hydrocarbons, in each case
without penalty or deduction for nonconformity. All costs and expenses to
satisfy such quality and pressure requirements will be borne and paid by Working
Interest Owner.
Section 3.4 Imbalance Charges. WORKING INTEREST OWNER WILL EXERCISE ITS
BEST EFFORTS TO PREVENT ANY IMBALANCE CHARGES FROM BECOMING PAYABLE BY ROYALTY
11
OWNER, WILL PAY IN PLACE OF ROYALTY OWNER ALL SUCH IMBALANCE CHARGES NOT
PREVENTED, AND WILL IN ALL CIRCUMSTANCES INDEMNIFY AND HOLD ROYALTY OWNER
HARMLESS FROM AND AGAINST ALL IMBALANCE CHARGES.
Section 3.5 Environmental Compliance. Working Interest Owner will not (a)
cause or permit the Subject Lands or the condition thereof or operations thereon
to be in violation of any Environmental Laws, (b) cause or permit the disposal
or other release of any Hazardous Substance on or to the Subject Lands in
violation of any Environmental Law, (c) fail to timely remove or remediate any
Hazardous Substance which has been or now or hereafter is released on the
Subject Lands in amounts which would violate any Environmental Laws, or (d) take
or omit to take any action that will subject Working Interest Owner or the
Subject Lands to any remedial obligation (or Royalty Owner to any remedial
obligation) under any Environmental Laws pertaining to the Subject Lands,
assuming in each case disclosure to the applicable governmental authorities of
all relevant facts, conditions and circumstances, if any. Working Interest Owner
will promptly notify Royalty Owner in writing of any existing, pending or, to
the best knowledge of Working Interest Owner, threatened investigation or
inquiry of a affecting any Subject Lands by any private party or governmental
authority in connection with any Environmental Laws. Working Interest Owner will
take all steps reasonably necessary to determine that no Hazardous Substances
are disposed of or otherwise released or being released on or to the Subject
Lands in violation of any Environmental Laws.
Section 3.6 Maintaining and Restoring Productivity. (a) If any Subject Well
at any time ceases to be a Commercial Well for any reason, then Working Interest
Owner will carry out such Repair Operations on such Subject Well to increase its
productivity as may be reasonably requested by Royalty Owner.
(b) A well will be deemed to be a "Commercial Well" unless and until a
condition arises such that such well is no longer capable of producing in paying
quantities (without regard to the burden of the Production Payment).
Section 3.7 Insurance; Damage or Loss.
(a) Insurance. Working Interest Owner will maintain or cause to be
maintained, at Working Interest Owner's sole cost and expense and with
financially sound and reputable insurers reasonably satisfactory to Royalty
Owner, insurance against such liabilities, casualties, risks and contingencies,
and in such types as is customary in the case of independent oil and gas
companies engaged in operations of similar properties, including insurance of
the types and coverages described in Schedule 3.7 and with limits of coverage no
less than those set out in Schedule 3.7. Such insurance will name Royalty Owner
as an additional insured and as a loss payee as provided in Schedule 3.7, and
Working Interest Owner will otherwise take all actions described in Schedule
3.7. Any loss proceeds from such property insurance, whether collected by
Working Interest Owner or Royalty Owner, will be applied to the costs of
repairing or replacing the property loss or damage unless otherwise agreed by
Working Interest Owner and Royalty Owner. Working Interest Owner will furnish
certificates of such insurance to Royalty Owner and will obtain endorsements to
12
such policies providing that the insurer will notify Royalty Owner not less than
30 days prior to the expiration or termination of such policy of insurance.
(b) Repair. In the event of any damage to or loss of any platform,
pipeline, well, equipment or facility on the Subject Lands or otherwise owned by
any of Working Interest Owner and used in connection with the operation of any
Subject Interest or the production of Subject Hydrocarbons, or the balancing,
treating, gathering, transporting, tender, processing or other handling of
Subject Hydrocarbons, or the marketing, sale or transfer of Subject
Hydrocarbons, Working Interest Owner will (at no cost to Royalty Owner and
without regard to whether insurance proceeds are available to Working Interest
Owner) will promptly carry out or cause to be carried out Repair Operations as
necessary or appropriate to repair, restore or replace such damaged or lost
property (or carry out other Repair Operations reasonably expected to replace
the future production lost by such damage or loss).
Section 3.8 Continued Ability to Operate. Working Interest Owner will at
all times be a limited liability company, corporation or limited partnership
that is validly existing and in good standing under the Laws of its state of
formation and duly qualified to do business and in good standing in each
jurisdiction where any Subject Lands are located. Working Interest Owner (and
any Person operating the Subject Interest on its behalf) will at all times
obtain and possess (or cause to be obtained and possessed) all consents, bonds,
permits, licenses, right-of-ways, easements, authorizations and waivers
reasonably necessary under any applicable Law or any Lease or material contract,
indenture, instrument or agreement binding on or affecting Working Interest
Owner or the Subject Interests in order to permit the performance by Working
Interest Owner of the Production Payment Documents.
ARTICLE IV
[RESERVED]
ARTICLE V
OTHER AGREEMENTS
Section 5.1 Performance of Production Payment Documents. Working Interest
Owner will, at its sole cost and expense, perform all of its covenants and other
obligations under this Agreement and the other Production Payment Documents, as
and when provided therein and herein.
Section 5.2 Interest on Late Payments; No Usury. Should Working Interest
Owner fail to pay Royalty Owner any amount of money due under any Production
Payment Document at the time when such amount is due, Working Interest Owner
will also pay interest on such amount at the Agreed Rate from the date such
amount is due until it is paid. Working Interest Owner and Royalty Owner
stipulate and agree, however, that they intend to contract in strict compliance
with applicable usury Law from time to time in effect. In furtherance thereof
they further stipulate and agree that neither this Section 5.2 nor any of the
other terms and provisions contained in any Production Payment Document will
ever be construed to create a contract to pay, for the use, forbearance or
detention of money, interest in excess of the maximum amount of interest
permitted to be charged by applicable Law from time to time in effect. No party
to any Production Payment Document will ever be liable for unearned interest or
13
will ever be required to pay interest in excess of the maximum amount that may
be lawfully charged under applicable Law from time to time in effect, and the
provisions of this section will control over all other provisions of the
Production Payment Documents which may be in conflict or apparent conflict
herewith. In determining whether or not the interest paid or payable, under any
specific circumstance, exceeds the maximum amount permitted under applicable
Law, the parties to the Production Payment Documents will to the greatest extent
permitted under applicable Law prorate, allocate, and spread the total amount of
interest throughout the entire contemplated term of the interest bearing
obligations in accordance with the amounts thereof outstanding from time to time
and the maximum legal rate of interest from time to time in effect under
applicable Law in order to lawfully charge the maximum amount of interest
permitted under applicable Law.
Section 5.3 Indemnity.
(a) AS USED HEREIN, "ROYALTY OWNER INDEMNITEES" MEANS (I) ROYALTY OWNER,
(II) EACH OF ROYALTY OWNER'S SUCCESSORS AND ASSIGNS (INCLUDING ITS MORTGAGEES
AND LENDERS), (III) ALL OF THE AFFILIATES OF EACH PERSON REFERRED TO IN EITHER
OF THE PRECEDING CLAUSES (I) AND (II), AND (IV) ALL OF THE PARTNERS, MEMBERS,
MANAGERS, SHAREHOLDERS, OFFICERS, DIRECTORS, AGENTS, REPRESENTATIVES,
BENEFICIARIES, TRUSTEES (INCLUDING TRUSTEE), ATTORNEYS AND EMPLOYEES OF EACH
PERSON DESCRIBED IN ANY OF THE PRECEDING CLAUSES (I), (II) AND (III).
(b) WORKING INTEREST OWNER AGREES TO INDEMNIFY AND HOLD EACH ROYALTY OWNER
INDEMNITEE HARMLESS FROM AND AGAINST ALL CLAIMS, DEMANDS, DAMAGES, LIABILITIES,
LIENS, LOSSES, FINES, PENALTIES, CHARGES, ADMINISTRATIVE AND JUDICIAL
PROCEEDINGS, ORDERS, JUDGMENTS, REMEDIAL ACTION REQUIREMENTS, INVESTIGATIONS,
AND ENFORCEMENT ACTIONS OF ANY KIND, TOGETHER WITH ALL INTEREST THEREON AND ALL
COSTS AND EXPENSES RELATED THERETO (INCLUDING ALL FEES AND DISBURSEMENTS OF
COUNSEL AND OTHER ADVISORS) AND ALL OTHER OBLIGATIONS WHATSOEVER (COLLECTIVELY,
"LOSSES") ARISING, IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, FROM OR IN
CONNECTION WITH ANY OF THE FOLLOWING:
(i) THE EXPLORING, DRILLING, DEVELOPING, OPERATING, MAINTAINING, REWORKING,
REDRILLING OR RECOMPLETING OF THE SUBJECT INTERESTS, SUBJECT LANDS, OR SUBJECT
WELLS, OR OTHER OPERATIONS THEREON, OR THE PRODUCTION OF SUBJECT HYDROCARBONS,
OR THE BALANCING, TREATING, GATHERING, TRANSPORTING, TENDER, PROCESSING OR OTHER
HANDLING OF SUBJECT HYDROCARBONS, OR THE MARKETING, SALE OR TRANSFER OF SUBJECT
HYDROCARBONS;
(ii) THE PRESENCE OF ANY HAZARDOUS SUBSTANCES IN, AROUND, UNDER OR ABOUT
ANY OF THE SUBJECT LANDS, ANY OTHER PROPERTIES OR ASSETS OF WORKING INTEREST
14
OWNER, OR ANY OTHER PROPERTIES OR NATURAL RESOURCES IN THE VICINITY THEREOF OR
AFFECTED THEREBY (IN THIS SUBSECTION, ALL OF THE FOREGOING ARE REFERRED TO AS
THE "RELEVANT PROPERTY");
(iii) THE PRESENCE, USE, GENERATION, TRANSPORTATION, TREATMENT, STORAGE,
REMEDIATION, DISPOSAL, RELEASE, OR DISCHARGE AT ANY TIME OF ANY HAZARDOUS
SUBSTANCE ON, UNDER OR FROM THE RELEVANT PROPERTY; ANY FAILURE AT ANY TIME BY
ANY PERSON (WHETHER WORKING INTEREST OWNER, ROYALTY OWNER, ANY OF THEIR
AFFILIATES, OR ANY OTHER PERSONS) TO COMPLY WITH ANY ENVIRONMENTAL LAWS OR WITH
ANY OTHER DUTIES IN RESPECT OF DAMAGE TO OR REMEDIATION OF THE ENVIRONMENT THAT
ARE IN ANY WAY RELATED TO THE RELEVANT PROPERTY; OR THE EXPOSURE OF ANY PERSON
OR PROPERTY AT ANY TIME TO ANY HAZARDOUS SUBSTANCE ON, UNDER OR FROM THE
RELEVANT PROPERTY OR IN CONNECTION WITH ANY OPERATIONS CONDUCTED ON OR IN
RESPECT OF THE RELEVANT PROPERTY BY ANY PERSON;
(iv) ANY INJURY OR ALLEGED INJURY TO PERSONS OR PROPERTIES OCCURRING OR
ALLEGEDLY OCCURRING IN CONNECTION WITH ANY OF THE MATTERS DESCRIBED IN THE
PRECEDING SUBSECTIONS (I) OR (II);
(v) ANY BREACH OF WORKING INTEREST OWNER'S WARRANTIES IN SECTION 1.9 OF THE
CONVEYANCE (INCLUDING ANY LOSSES SUFFERED BY ANY ROYALTY OWNER INDEMNITEE AS A
RESULT OF ANY CLAIM THAT SUCH ROYALTY OWNER INDEMNITEE LACKS GOOD TITLE TO THE
PRODUCTION PAYMENT HYDROCARBONS OR OTHERWISE MUST DELIVER OR PAY OVER TO ANY
PERSON ANY PART OF THE PRODUCTION PAYMENT HYDROCARBONS OR ANY PROCEEDS THEREOF
AT ANY TIME PREVIOUSLY RECEIVED OR THEREAFTER TO BE RECEIVED BY SUCH ROYALTY
OWNER INDEMNITEE);
(vi) THE BREACH OR ALLEGED BREACH OF ANY SUBJECT CONTRACT BY WORKING
INTEREST OWNER OR ANY OTHER PERSON (INCLUDING ROYALTY OWNER);
(vii) ANY VIOLATION OR ALLEGED VIOLATION OF THE RIGHTS OF ANY PERSON AS A
RESULT OF WORKING INTEREST OWNER'S CONVEYANCE OF THE PRODUCTION PAYMENT TO
ROYALTY OWNER OR WORKING INTEREST OWNER'S EXECUTION, DELIVERY OR PERFORMANCE OF
ANY PRODUCTION PAYMENT DOCUMENT; OR
(viii) ANY BREACH BY WORKING INTEREST OWNER OF ANY OF ITS REPRESENTATIONS,
WARRANTIES, COVENANTS OR AGREEMENTS IN ANY OF THE PRODUCTION PAYMENT DOCUMENTS,
15
OR ANY MATTERS RELATING TO THE ENFORCEMENT OR DEFENSE OF THE PRODUCTION PAYMENT
DOCUMENTS BY ROYALTY OWNER.
(c) THE FOREGOING INDEMNITY WILL APPLY WHETHER OR NOT ANY LOSSES ARISE OUT
OF THE SOLE, JOINT OR CONCURRENT NEGLIGENCE, FAULT OR STRICT LIABILITY OF ANY
ROYALTY OWNER INDEMNITEE OR IN CONNECTION WITH ANY LIABILITY IMPOSED UPON ANY
ROYALTY OWNER INDEMNITEE AS ARESULT OF ANY THEORY OF STRICT LIABILITY OR ANY
OTHER DOCTRINE OF LAW (IN EACH CASE WHETHER ALLEGED, ARISING OR IMPOSED IN A
LEGALPROCEEDING BROUGHT BY OR AGAINST WORKING INTEREST OWNER, ANY AFFILIATE
OFWORKING INTEREST OWNER, ANY ROYALTY OWNER INDEMNITEE, OR ANY OTHER PERSON),
PROVIDED THAT THE FOREGOING INDEMNITY WILL NOT APPLY TO ANY LOSSES INCURRED BY
ANY ROYALTY OWNER INDEMNITEE TO THE EXTENT PROXIMATELY CAUSED BY THE GROSS
NEGLIGENCE OR WILLFUL MISCONDUCT OF SUCH ROYALTY OWNER INDEMNITEE AS DETERMINED
IN A FINAL JUDGMENT BY A COURT OF COMPETENT JURISDICTION. THE FOREGOING
INDEMNITY WILL NOT BE QUALIFIED OR LIMITED BY ANY OTHER PROVISIONS OF ANY
PRODUCTION PAYMENT DOCUMENTS AND WILL SURVIVE THE TERMINATION OF THE PRODUCTION
PAYMENT AND OF THIS AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS.
WITHOUT LIMITATION OF THE FOREGOING PROVISIONS, THE FOREGOING INDEMNITY WILL
APPLY IN THE EVENT OF ANY DISPUTE, ADVERSARY PROCEEDING, LITIGATION OR OTHER
ACTION AMONG OR BETWEEN WORKING INTEREST OWNER AND ANY OF THE ROYALTY OWNER
INDEMNITEES.
Section 5.4 Payment of Expenses. Working Interest Owner will promptly (and
in any event, within ten (10) days after any invoice or other statement or
notice) pay: (a) all transfer, stamp, mortgage, documentary or other similar
taxes, assessments or charges levied by any governmental or revenue authority in
respect of any of the Production Payment Documents or any other document or
transaction referred to herein or therein, (b) all costs and expenses incurred
by or on behalf of Royalty Owner (including attorneys' fees, consultants' fees,
engineering fees, travel costs and miscellaneous expenses) in connection with
(i) the amendment, filing, recording, refiling or re-recording of any Production
Payment Document (or any waiver in connection therewith) or any other document
or instrument or further assurances obtained, provided, filed or recorded or
refiled or re-recorded in connection with the terms of any Production Payment
Document, the analysis of the Production Payment, the administration of the
Production Payment Documents, or the monitoring of the Production Payment or
Working Interest Owner's compliance with the Production Payment Documents, and
(c) all costs and expenses incurred by or on behalf of Royalty Owner (including
attorneys' fees, consultants' fees, engineering fees, travel costs and
miscellaneous expenses whether or not related to disputes, adversary proceedings
or litigation between or involving Working Interest Owner and Royalty Owner) in
connection with the defense or enforcement of any of the Production Payment
Documents, any attempt to cure any breach thereunder, or the defense of Royalty
Owner's exercise of its rights thereunder.
16
Section 5.5 Information and Reporting.
(a) Monthly Statements. Until the termination of the Production Payment and
the completion of all payments for Production Payment Hydrocarbons, Working
Interest Owner, at its own expense, will furnish to Royalty Owner within 30 Days
after the end of each Month, a lease operating statement in form acceptable to
Royalty Owner, showing (1) gross volumes of Hydrocarbons produced and sold from
the Subject Lands during such Month and the portions thereof that constituted
Subject Hydrocarbons, (2) the average sales prices paid to Working Interest
Owner for the Retained Interest Hydrocarbons, and (3) the severance Taxes, lease
operating expenses, capital expenditures and any other expenses for such Month.
Each such lease operating statement will be in a form and level of detail
acceptable to Royalty Owner and certified by an authorized officer of Working
Interest Owner to be materially true and correct.
(b) Quarterly Reports. Until the termination of the Production Payment and
the completion of all payments for Production Payment Hydrocarbons, Working
Interest Owner, at its own expense, will furnish to Royalty Owner the following
reports and information within 30 days after the end of each March, June,
September, and December:
(i) A certificate executed by an authorized officer of Working Interest
Owner certifying that, to the best of his knowledge after reasonable
investigation, all Taxes, royalties, rentals and other amounts with respect to
the Subject Interests (other than amounts disputed in good faith by appropriate
proceedings and royalties held in suspense due to title disputes or title
questions) have been paid in full and in accordance with the terms of the
Leases, any other applicable agreements and all applicable Laws, and that
Working Interest Owner is in compliance in all respects with the terms of the
Production Payment Documents, the Leases, and the Subject Contracts, or if not,
specifying in reasonable detail any exceptions thereto.
(ii) Reports concerning any material change in methods of treatment or
operation of all or any Subject Wells which are productive of Hydrocarbons, any
new drilling or development, any method of secondary or tertiary recovery by
repressuring or otherwise, or any other action with respect to the Subject
Interests, the decision as to which may materially increase or reduce the
quantity of Hydrocarbons ultimately recoverable from the Subject Interests, or
the rate of production therefrom, or which may shorten or prolong the period of
time required for termination of the Production Payment.
(iii) A report setting out the current status of all production imbalances
by Subject Well or Subject Interest.
(iv) Unaudited consolidated financial statements of Working Interest Owner
as of the end of and for the fiscal quarter then ending, including a balance
sheet and statements of income and cash flows, prepared in accordance with
generally accepted accounting principles (other than the omission of footnotes),
consistently applied, accompanied by a certificate of Working Interest Owner's
chief financial officer stating that such financial statements were so prepared
and fairly present the matters addressed therein, subject to normal year-end
adjustments.
17
(c) Annual and Semiannual Reports. Until the termination of the Production
Payment and the completion of all payments for Production Payment Hydrocarbons,
Working Interest Owner, at Working Interest Owner's own expense, will furnish to
Royalty Owner the following reports and information:
(i) Semi-annually, on or before April 1 and October 1 of each year, a
Reserve Report prepared as of the preceding February 1 and August 1,
respectively. Each report dated as of August 1 will be prepared or audited by
the Company Engineers, and each report dated as of February 1 will, at Royalty
Owner's election, be prepared by Working Interest Owner's in-house reserve
engineers or by the Company Engineers. Each report will incorporate all current
information and data available to Working Interest Owner pertinent to the
estimation of Oil and Gas reserves attributable to the Subject Interests and the
Production Payment. Working Interest Owner will also furnish to Royalty Owner
Working Interest Owner's internally prepared summary of such report, if any, and
a copy of any other reserve report from time to time prepared for Working
Interest Owner by any independent petroleum engineering firm covering the
Subject Interests or any part thereof.
(ii) Annually, within 105 days after the end of each fiscal year, audited
financial statements of Working Interest Owner as of the end of and for such
year, including a balance sheet and statements of income, owner's equity and
cash flows, prepared in accordance with generally accepted accounting
principles, accompanied by a report of Working Interest Owner's independent
certified public accountants stating that their examination was made in
accordance with generally accepted auditing standards and that in their opinion
such financial statements fairly present Working Interest Owner's financial
position, results of operations, owner's equity and cash flows in accordance
with generally accepted accounting principles consistently applied.
Notwithstanding the preceding sentence, the foregoing audited financial
statements of Working Interest Owner for the first fiscal year following the
execution of this Agreement shall be delivered to Royalty Owner within 150 days
of such fiscal year end.
(iii) At least 10 days prior to the expiration date of any policy, evidence
satisfactory to Royalty Owner confirming timely renewal of the insurance
policies required hereunder.
(d) Notices. Until the termination of the Production Payment and the
completion of all payments for Production Payment Hydrocarbons, Working Interest
Owner, at Working Interest Owner's own expense, will furnish to Royalty Owner
the following as and when indicated below:
(i) As soon as possible and in any event within 5 days after Working
Interest Owner becomes aware thereof, written notice of (A) any breach of any
Production Payment Document or any breach (by any party thereto) of any Subject
Contract, (B) any action, event or occurrence that could reasonably be expected
to have a material adverse effect on the Production Payment, or (C) any material
change in the rate of production of Subject Hydrocarbons from the Subject Wells.
(ii) Promptly after obtaining actual knowledge thereof, written notice of
any adverse claim or demand made by any Person affecting the Subject Interests
18
or the Hydrocarbons produced therefrom in any manner whatsoever, or of any
proceedings instituted or threatened with respect thereto, or of any other
matter required to be reported under Section 3.1(d) or Section 3.5.
(iii) Promptly after the filing thereof, copies of any notices and filings
made by Working Interest Owner or the Parent with the Securities and Exchange
Commission.
(iv) At least 30 days prior to the occurrence thereof, notice of any change in
Working Interest Owner's name, identity or organizational structure, or any
change to its jurisdiction of organization, including in such notice a
ratification of Royalty Owner's authority to file any related financing
statement amendments contemplated in the Uniform Commercial Code. In connection
with any change in Working Interest Owner's name, identity or organizational
structure, or any change to its jurisdiction of organization, Royalty Owner is
hereby authorized (whether or not Working Interest Owner's gives the
ratification described in the preceding subsection (iv)) to file any related
financing statement amendments contemplated in the Uniform Commercial Code.
(e) Other Information Upon Request. Until the termination of the Production
Payment and the completion of all payments for Production Payment Hydrocarbons,
Working Interest Owner, at Working Interest Owner's own expense, will, upon
request, furnish to Royalty Owner and its consultants and representatives the
following information and access as and when requested from time to time:
(i) Access to the Company Engineers or other engineers who prepared the
most recent annual and semiannual Reserve Reports delivered hereunder, and to
their engineering databases and other relevant data, for the purpose of
discussing and reviewing their data, analysis, and conclusions.
(ii) copies of surface maps showing property lines and well locations, well
logs, core analysis data, flow and pressure tests, production analysis, casing
programs and other similar information related to the Subject Interests, the
Subject Wells or the production therefrom.
(iii) A schedule of the Upstream Contracts pursuant to which operations
relating to the Subject Interests are carried out, all reasonably requested
information pertaining thereto, and copies of each such Upstream Contract (or
amendment thereto).
(iv) A schedule of the Downstream Contracts under which the Subject
Hydrocarbons were transported, treated, processed, resold or otherwise dealt
with during the most recent Month(s), setting out the amount of Subject
Hydrocarbons dealt with under each such Downstream Contract and the prices paid
or received thereunder by Working Interest Owner, the Leases covered thereby,
and the remaining term thereof, and a copy of each such Downstream Contract (or
amendment thereto).
(v) Access to remote field monitoring data specifically related to the
wells subject to the Production Payment, such as SCADA data that is available
electronically.
19
(vi) Such other information relating to the Subject Interests or the
matters addressed in the Production Payment Documents as Royalty Owner may from
time to time request.
(f) Audit and Inspection Rights. Royalty Owner will, at the expense of
Working Interest Owner, have the right from time to time to audit the books and
records of Working Interest Owner with respect to the Subject Interests and the
Subject Hydrocarbons, including all information with respect to the matters to
be reported on by Working Interest Owner as provided herein. Such audits will be
conducted during normal business hours at Working Interest Owner's offices or at
the offices where Working Interest Owner maintains the records relating to the
items set forth above. This right to audit will survive the termination of the
Production Payment for two years. If, as a result of any such audit, it is
determined that any amount is due Royalty Owner under the Production Payment
Documents, whether as a result of the failure of Working Interest Owner to
properly deliver all Production Payment Hydrocarbons, or the proceeds thereof,
to Royalty Owner in accordance with the terms of the Production Payment
Documents, or otherwise, Working Interest Owner will pay such amount to Royalty
Owner together with interest at the Agreed Rate from the date that such amount
should have been delivered or paid in accordance with the terms of the
Production Payment Documents to the date of payment. Working Interest Owner will
also permit the duly authorized representatives of Royalty Owner, at any
reasonable time, to make such inspections of the Subject Interests and the
property, equipment and facilities used in the operation thereof (or any records
of Working Interest Owner related thereto) as such representatives may deem
proper.
Section 5.6 Marketing of Production Payment Hydrocarbons.
(a) General Provision. As provided in the Conveyance, the Production
Payment Hydrocarbons will be delivered to Royalty Owner in kind or to the credit
of Royalty Owner, free of Delivery Point Charges and other costs and expenses,
at the applicable Delivery Points. Royalty Owner will take and market the
Production Payment Hydrocarbons upon delivery by Working Interest Owner at the
applicable Delivery Points.
(b) Spot Market PP Hydrocarbons. Royalty Owner will have the right to take
and market all or any portion of the Production Payment Hydrocarbons and also
the right to require Working Interest Owner to process and/or market, as Royalty
Owner's agent, all or any portion of the Production Payment Hydrocarbons on the
same terms and conditions as Working Interest Owner's Retained Interest
Hydrocarbons are processed and/or marketed. Any such Production Payment
Hydrocarbons so marketed by Royalty Owner are called "Royalty Owner Spot Market
PP Hydrocarbons" and any such Production Payment Hydrocarbons that Royalty Owner
so requires Working Interest Owner to process or market as Royalty Owner's agent
are herein called "Working Interest Owner Spot Market PP Hydrocarbons".
(c) Assistance with Marketing. Working Interest Owner will, without charge,
render all assistance that may be useful or necessary to Royalty Owner in
marketing the Royalty Owner Spot Market PP Hydrocarbons, including giving
Royalty Owner access to and the use of all treating, gathering, processing,
storage, transportation and other facilities available to Working Interest Owner
or Working Interest Owner's Affiliates, whether by ownership, contract or
otherwise, which access and use will, to the maximum extent allowed by Law or
20
other agreements existing on the date hereof, (i) be made available to the
Subject Hydrocarbons prior to any other Hydrocarbons owned or controlled by
Working Interest Owner, (ii) be allocated between the Production Payment
Hydrocarbons and the Retained Interest Hydrocarbons in proportion to the
relative amounts thereof, and (iii) be without charge by Working Interest Owner
or its Affiliates for any such treating, gathering or other facilities in the
area of production and with the same charges per unit of Oil as are paid by
Working Interest Owner to third parties for any other facilities. Working
Interest Owner will process and market all Working Interest Owner Spot Market PP
Hydrocarbons on the same terms as its own Retained Interest Hydrocarbons.
Working Interest Owner will use its best efforts to cause all proceeds of
Working Interest Owner Spot Market PP Hydrocarbons and Retained Interest
Hydrocarbons to be paid directly to Royalty Owner by the purchasers thereof, and
upon receipt thereof, Royalty Owner will retain the proceeds from the Production
Payment Hydrocarbons and promptly remit the remainder to Working Interest Owner.
Until such designation is effective (and if Working Interest Owner otherwise
receives any such proceeds), Working Interest Owner will receive such proceeds
in trust on behalf of Royalty Owner and pay such proceeds to Royalty Owner by
wire transfer on or before the third Business Day after receipt thereof, without
any setoff, defense or counterclaim, all of which are hereby waived by Working
Interest Owner.
(d) Nominations. Whenever any Royalty Owner Spot Market PP Hydrocarbons are
being sold, Working Interest Owner will, not less than five Business Days prior
to the first day of each Month in which such sales will occur, notify Royalty
Owner of the daily quantities of such Production Payment Hydrocarbons that
Working Interest Owner expects to be produced and delivered for Royalty Owner's
account at each Delivery Point during such Month.
Section 5.7 Preservation of Subject Well Drainage. From the Effective Date
of this Agreement through the termination of the Production Payment and the
completion of all payments to Royalty Owner that are required under any of the
Production Payment Documents, Working Interest Owner will not take any action in
drilling or completing any well that is not a Subject Well (or other operations
in connection therewith) that has, or would reasonably be expected to have, a
negative impact on the performance characteristics of any Subject Well.
ARTICLE VI
LIENS TO SECURE PERFORMANCE; OTHER REMEDIES
Section 6.1 Mortgage. The Conveyance is the grant of a property interest in
the Subject Interests and the Subject Hydrocarbons, pursuant to which Royalty
Owner will own and possess the Production Payment Hydrocarbons if, as and when
produced. Royalty Owner will look solely to the Production Payment Hydrocarbons
for satisfaction and discharge of the Production Payment, and Working Interest
Owner will not be personally liable for such satisfaction and discharge (and the
indemnity provided in Section 5.3 will not be construed to make Working Interest
Owner personally liable for such satisfaction and discharge). Working Interest
Owner has, however, made various covenants, agreements, representations,
warranties and indemnities in the various Production Payment Documents for which
it is personally liable. In order to secure the performance by Working Interest
Owner of all of Working Interest Owner's obligations and liabilities under this
21
Agreement or any other Production Payment Document, Working Interest Owner is
concurrently herewith executing and delivering the Mortgage.
Section 6.2 Production Proceeds. Notwithstanding that, by the terms of the
Mortgage, Working Interest Owner is granting to Royalty Owner the right to
collect directly all of the "As-Extracted Collateral" (as defined therein), so
long as no Performance Default has occurred Working Interest Owner may continue
to receive from the purchasers of production all such Production Proceeds,
subject, however, to the liens created under the Mortgage, which liens are
hereby affirmed and ratified, and Royalty Owner will not exercise its rights and
powers under Section 4.03 of the Credit Agreement. Upon the occurrence of a
Performance Default, Royalty Owner may exercise all rights and remedies granted
under the Mortgage, including the right to obtain possession of all Production
Proceeds then held by Working Interest Owner and the right to receive directly
from the purchasers of production all other Production Proceeds. In no case
shall any failure, whether intentioned or inadvertent, by Royalty Owner to
collect directly any Production Proceeds constitute in any way a waiver,
remission or release of any of its rights under the Production Payment
Documents, nor shall any release of any Production Proceeds by Royalty Owner to
Working Interest Owner constitute a waiver, remission, or release of any other
Production Proceeds or of the rights of Royalty Owner to collect all other
Production Proceeds thereafter.
Section 6.3 Replacement of Operator. In addition to its other remedies
under the Production Payment Documents, upon the continuance of a Performance
Default for thirty consecutive days without being cured, Royalty Owner may
require Working Interest Owner to do (or require Working Interest Owner to cause
Parent to do) either or both of the following: (i) employ a contract operator
designated by Royalty Owner for any or all of the Subject Interests, or (ii)
resign as operator of any or all of the Subject Interests, whereupon Working
Interest Owner will so resign and will appoint, vote for, and otherwise support
a substitute operator acceptable to Royalty Owner.
ARTICLE VII
MISCELLANEOUS
Section 7.1 Notices. All notices, requests, demands, instructions and other
communications required or permitted to be given hereunder or under the
Conveyance will be in writing and will be given as provided in the Purchase and
Sale Agreement.
Section 7.2 Successors and Assigns. The covenants, provisions and
conditions contained in this Agreement will be binding upon and (subject to the
restrictions concerning the Subject Interests that are contained in Section 1.8
of the Conveyance) inure to the benefit of Working Interest Owner and Royalty
Owner and their respective successors and permitted assigns. Working Interest
Owner will not transfer, assign or pledge its rights or obligations hereunder or
under the other Production Payment Documents except as allowed under Section 1.8
of the Conveyance. Royalty Owner and its successors and assigns may, and nothing
contained in the Production Payment Documents will in any way limit or restrict
the right of Royalty Owner, or Royalty Owner's successors and assigns, to, sell,
convey, assign, transfer, pledge, mortgage or otherwise transfer the Production
Payment or its rights and obligations under the Production Payment Documents in
whole or in part. If Royalty Owner, or any of Royalty Owner's successors and
assigns, at any time executes a mortgage, pledge or deed of trust covering all
or any part of the Production Payment as security for any obligation, then the
mortgagee, the pledgee or the trustee therein named or the holder of the
22
obligation secured thereby will be entitled, when and to the extent such
mortgage, pledge or deed of trust so provides or Royalty Owner otherwise agrees,
to exercise all of the rights, remedies, powers and privileges conferred upon
Royalty Owner under the Production Payment Documents and to give or withhold all
consents required or permitted to be obtained from Royalty Owner pursuant to the
Production Payment Documents. All references herein to either Working Interest
Owner or Royalty Owner will include their respective successors and permitted
assigns.
Section 7.3 Acknowledgments and Admissions. Working Interest Owner hereby
represents, warrants, agrees, acknowledges and admits that Royalty Owner is not
a fiduciary or an advisor for Working Interest Owner with respect to any
Production Payment Document or the transactions contemplated thereby and that no
partnership or joint venture exists with respect to the Production Payment
Documents between Working Interest Owner and Royalty Owner.
Section 7.4 Entire Agreement; Amendments; Waiver. This Agreement and the
other Production Payment Documents constitute the entire agreement between the
Parties. This Agreement may not be amended or modified, and no rights hereunder
may be waived, except by a written document signed by the Party to be charged
with such amendment, modification or waiver. Provisions of this Agreement that
refer to any consent, approval, amendment or waiver by either Party require such
consent, approval, amendment or waiver to be in writing. No waiver of any of the
provisions of this Agreement will be deemed to be or will constitute a waiver of
any other provisions hereof (whether or not similar), nor will such waiver
constitute a continuing waiver unless otherwise expressly provided.
THIS WRITTEN AGREEMENT AND THE OTHER PRODUCTION PAYMENT DOCUMENTS REPRESENT
THE FINAL AGREEMENT BETWEEN THEPARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE
OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE
ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
Section 7.5 Counterpart Execution. This Agreement may be executed by
Working Interest Owner and Royalty Owner in any number of counterparts, each of
which will be deemed an original instrument and all of which will constitute but
one and the same Agreement.
Section 7.6 Applicable Law. This Agreement will be governed by and
construed in accordance with the Laws of the State of Texas.
Section 7.7 Severability. If any term or provision of this Agreement or any
other Production Payment Document is ever determined to be illegal or
unenforceable to any extent, such term or provision will otherwise remain
effective and be enforced, and all other terms and provisions of the hereof or
thereof will nevertheless remain effective and will be enforced, to the fullest
extent permitted by applicable Law.
Section 7.8 Termination; Limited Survival. Upon both (i) the termination of
the Production Payment as provided in the Conveyance and (ii) the full and
complete payment and performance of all obligations and duties of Working
23
Interest Owner under this Agreement and the other Production Payment Documents,
Working Interest Owner will be entitled to request and receive the release by
Royalty Owner of the liens and security interests under the Mortgage, and at
such time Royalty Owner will, at the request and expense of Working Interest
Owner, execute and deliver an appropriate release to Working Interest Owner.
Notwithstanding the foregoing or anything to the contrary herein or in any other
Production Payment Document, the following will survive any termination of the
Production Payment, this Agreement, or any other Production Payment Document:
(a) all waivers or admissions made by Working Interest Owner herein or therein,
(b) all obligations that any Person may have to indemnify or compensate Royalty
Owner or any Royalty Owner Indemnitee hereunder or thereunder, and (c) all other
provisions hereof or thereof that are expressly stated to survive the
termination of the Production Payment or of this Agreement, the Conveyance, or
any other Production Payment Document.
Section 7.9 WAIVER OF JURY TRIAL AND PUNITIVE DAMAGES. WORKING INTEREST
OWNER AND ROYALTY OWNER HEREBY RATIFY AND REMAKE THEIR WAIVERS OF AND AGREEMENTS
CONCERNING JURY TRIAL AND PUNITIVE AND OTHER DAMAGES MADE IN SECTION 7.9 OF THE
PURCHASE AND SALE AGREEMENT.
Section 7.10 CONSENT TO JURISDICTION. WORKING INTEREST OWNER AND ROYALTY
OWNER HEREBY RATIFY AND REMAKE THEIR CONSENTS TO AND AGREEMENTS CONCERNING
JURISDICTION, FORUM AND VENUE MADE IN SECTION 7.10 OF THE PURCHASE AND SALE
AGREEMENT.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
24
IN WITNESS WHEREOF, Working Interest Owner and Royalty Owner have duly
executed and delivered this Agreement as of the date set forth above.
BARON PRODUCTION LLC
By:
-----------------------------------------
Name:
---------------------------------------
Title:
--------------------------------------
25
PCEC SUB 1, LLC
By:
-----------------------------------------
Rosser C. Newton
Vice President
26
SCHEDULE 3.7
TO PRODUCTION AND MARKETING AGREEMENT
INSURANCE
Required Coverage
Working Interest Owner will at all times while operations are conducted on
the Subject Interests procure and maintain with responsible insurance companies
for the benefit and protection of the Parties the following insurance and such
other insurance as Working Interest Owner deems appropriate:
(a) Worker's Compensation Insurance and Employer's Liability Insurance in
compliance with all applicable Laws.
(b) Comprehensive General Liability Insurance (including pollution) with a
combined single limit of not less than $1,000,000 per occurrence and $2,000,000
in the aggregate. This policy will be endorsed to provide coverage for
explosion, collapse and underground damage hazards to property of others;
contractual liability; and products and completed operations;
(c) Comprehensive Liability Insurance covering all owned, hired or
non-owned vehicles with a combined single limit of not less than $1,000,000 per
occurrence;
(d) Excess Umbrella Liability Insurance with a combined single limit of not
less than $5,000,000 per occurrence, provided that after August 15, 2014, the
Working Interest Owner shall maintain Excess Umbrella Liability Insurance with a
Combined single limit of not less than $10,000,000;
(e) Well Control Operator's Excess Expense Liability Insurance (including
cost of well control, relief wells, redrilling) in an amount not less than
$15,000,000 per occurrence; and
(f) Property Insurance (subject to deductibles that are customary in the
case of independent oil and gas companies engaged in operations of similar
properties) fully covering the property subject to this Production and Marketing
Agreement including the value of all facilities and well surface equipment.
Additional Requirements
1. All insurance policies will be endorsed to be primary and
noncontributory with any other valid and collectible insurance.
2. Working Interest Owner will provide to Royalty Owner from time to time
as requested a Certificate of Insurance, in form satisfactory to Royalty Owner,
as evidencing that satisfactory coverages of the type and limits set forth
hereinabove are in effect. Policies providing such coverages will contain
provisions that no cancellation or material changes in the policies will become
effective except on 30 days' advance written notice thereof to Royalty Owner.
Irrespective of the requirements as to insurance to be carried as provided for
herein, the insolvency, bankruptcy or failure of any insurance company carrying
insurance of Working Interest Owner, the failure of any insurance company to pay
27
claims accruing, or the inadequacy of the limits of the insurance, will not
affect, negate or waive any of the provisions of any Production Payment Document
applicable to the property, including, without exception, the indemnity
obligations of Working Interest Owner. Working Interest Owner will furnish to
Royalty Owner copies of all renewal applications or applications for replacement
insurance promptly following submission of the same.
3. Working Interest Owner will promptly notify Royalty Owner of any one or
more claims made under any insurance policy where Working Interest Owner is a
named or additional insured (whether such claim is made by Working Interest
Owner or any other person insured thereunder) where such claim(s) are for an
aggregate amount in excess of 50% of any aggregate policy limit.
4. Working Interest Owner will require any policies of liability insurance,
except workers compensation coverage, that are in any way related to the Subject
Interests, and that are obtained or maintained by Working Interest Owner, to
include Royalty Owner, its parent and affiliated companies and mortgagees, and
their directors, officers, employees and agents, as Additional Insureds, without
any limitations based on the fault or negligence, in whole or in part, of such
Additional Insureds. Working Interest Owner will require any property and
casualty policies that are in any way related to the Subject Interests, and that
are obtained or maintained by Working Interest Owner, to name Royalty Owner as
the loss payee to the extent of Royalty Owner's or Working Interest Owner's
interests. If any insurance policy is issued with the name of the insured being
other than the name of Working Interest Owner, then Working Interest Owner will
be added as a named insured and Royalty Owner and its parent and affiliated
companies and mortgagees, and their directors, officers, employees and agents
will be named as Additional Insureds and loss payee as required in the preceding
sentences of this paragraph.
5. Working Interest Owner will require all policies of insurance that are
in any way related to this Production and Marketing Agreement and that are
obtained or maintained by Working Interest Owner to include clauses providing
that each underwriter will waive its rights of recovery, under subrogation or
otherwise, against Royalty Owner, its parent and affiliated companies and
mortgagees, and their directors, officers, employees and agents.
2
