<TABLE>
<S> <C> <C> <C> <C> <C> <C>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
AMENDMENT NO. 2 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------
BETA OIL & GAS, INC.
(Exact Name of Registrant in its Charter)
Nevada 1311 86-0876964
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
Incorporation or Organization) Classification Number)
Code Number)
Steve Antry, Chairman
901 Dove Street, Suite 230
Newport Beach, California 92660
(949) 752-5212
(949) 752-5757-Fax
(Address and telephone number of principal executive officer and principal place of business)
-----------
Copies to: Lawrence W. Horwitz, Esq.
Horwitz & Beam
Two Venture Plaza, Suite 350
Irvine, California 92618
(949) 453-0300
(949) 453-9416-Fax
----------
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
----------
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. /x/
- ------------------------------------------------------------------------------------------------------------------------------------
CALCULATION OF REGISTRATION FEE
- ------------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Proposed Proposed
Title of each class of securities Number of Shares to Maximum Offering Maximum Aggregate Amount of
to be registered be Registered Price Per Share(1) Offering Price Registration fee
- ------------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Common Stock, par value $0.001 per
share on behalf of Selling Security
Holders 7,029,492 $6.00 $42,176,952 $12,442.20
- ------------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Common Stock, par value $0.001 per
share offered by the Company 1,650,000 (5) $6.00 $9,900,000 $2,920.50
- ------------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Common Stock issuable upon exercise
of Selected Dealer Warrants(3) (4)
165,000 (5) $7.50 $1,237,500 $365.06
- ------------------------------------- ---------------------- ----------------------- ----------------------- -----------------------
Common Stock issuable upon Exercise
of Warrants Held by Selling
Security Holders(2)(3) 2,547,663 $5.24 $13,349,754 $3,938.18
===================================== ====================== ======================= ======================= =======================
11,392,155 $66,664,206 $19,665.94
===================================== ====================== ======================= ======================= =======================
<FN>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee.
(2) Underlying shares of common stock issuable upon exercise of warrants
held by the selling security holders at various exercise prices. This
Registration Statement also covers such additional number of shares as
may become issuable upon exercise of the warrants held by the selling
security holders by reason of anti-dilution provisions pursuant to Rule
416.
(3) Registration fee calculated pursuant to Rule 457(g)(1).
(4) Beta will issue up to 150,000 common stock purchase warrants to the
underwriter as compensation for services rendered in connection with the
Company's initial public offering. See "Underwriting."
(5) Includes 150,000 shares of common stock and 15,000 shares of common
stock underlying selected dealer warrants that the underwriter has the
</FN>
option to sell to cover over-allotments, if any.
</TABLE>
The Registrant amends this Registrant Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
This Registration Statement contains two forms of prospectus: One
prospectus that will be used in connection with the sale by the Registrant of up
to 1,500,000 shares of its common stock in a best efforts underwritten public
offering (the "IPO prospectus"); and the other prospectus which will be used by
existing shareholders of the Registrant in effectuating sales from time to time,
for their own account, of their shares of common stock, principally in
over-the-counter transactions (the "resale prospectus"). The registration of the
9,652,155 shares of common stock in the resale prospectus is conditioned upon
Beta successfully completing the minimum offering of 800,000 shares of its
initial public offering. The two prospectuses will be identical in all respects
except for the front and back cover pages, the section entitled "Summary of the
Offering," the "Use of Proceeds" section and the section of the resale
prospectus entitled "Plan of Distribution" which will be substituted for the
Underwriting section of the IPO prospectus. Each page to be included in the
resale prospectus and not in the IPO prospectus is marked as an "Alternate Page"
and the Alternate Pages follow immediately after the IPO prospectus.
<PAGE>
BETA OIL & GAS, INC.
Cross-Reference Sheet
Pursuant to Item 501(b) of Regulation S-K and Rule 404
Showing Location in Prospectus of Information
Required by Items of Form S-1
<TABLE>
Registration Statement Item Caption In Prospectus
<S> <C> <C>
1. Front of Registration Statement and Outside Front Cover Cross-Reference Sheet;
Prospectus Prospectus Cover Page
2. Inside Front and Outside Back Cover Pages Prospectus Cover Page;
Of Prospectus Prospectus Back Cover Page
3. Summary Information and Risk Factors Prospectus Summary; The Company;
Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Determination of Offering Price;
Risk Factors
6. Dilution Risk Factors; Dilution
7. Selling Security Holders Description of Securities;
Resale by Selling Security Holders
8. Plan of Distribution Prospectus Cover Page; Plan of Distribution;
Underwriting
9. Description of Securities to be Registered Capitalization; Description of Securities
10. Interest of Named Experts and Counsel Legal Matters; Experts
11. Information about the Registrant Outside Front Cover Page of Prospectus; Additional
Information; Prospectus Summary; Risk Factors; Use
of Proceeds; Dilution; Capitalization; Dividends;
Selected Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management;
Principal Shareholders; Resale by Selling Security
Holders; Description of Securities; Legal Matters;
Experts; Consolidated Financial Statements
12. Disclosure of Commission Position on Indemnification for Description of Securities
Securities Act Liabilities
13. Other Expenses of Issuance and Distribution Other Expenses of Issuance and Distribution
14. Indemnification of Directors and Officers Legal Matters; Experts
15. Recent Sales of Unregistered Securities Recent Sales of Unregistered Securities
16. Exhibits and Financial Statement Schedules Exhibits and Financial Statement Schedules
17. Undertakings Undertakings
</TABLE>
<PAGE>
Initial Public Offering
Prospectus
Beta Oil & Gas, Inc.
A Minimum of 800,000 shares
up to a Maximum of 1,500,000 shares
of Common Stock @ $6.00 per share
$.001 Par Value
The Offering: Beta is offering these shares
through the underwriter. The underwriter
must sell the minimum number of shares
offered of 800,000 within ten business
days of the date of this prospectus if
any are sold. The underwriter is not
required to sell any specific number or
dollar amount of shares but will use its
best efforts to sell the maximum number
of shares offered of 1,500,000. See
"Underwriting" which explains in detail
the terms and conditions of this
offering.
Offering Period: If the minimum number of 800,000
shares are not sold within ten business
days of the date of this prospectus,
this offering will be terminated. We are
offering the maximum number of shares of
1,500,000 for ninety days after the date
of this prospectus. We may extend this
offering period to one hundred and
twenty days from the date of this
prospectus at our option.
Escrow Account: Your funds will be deposited
into an escrow account at Southern
California Bank, Newport Beach,
California until we have sold the
minimum 800,000 shares. If we do not
sell the minimum 800,000 shares within
ten business days of the date of this
prospectus, your funds will be returned
to you with interest and without any
deduction
Proposed Trading Symbol: This is our initial
public offering, and no public market
currently exists for our shares. We
intend to apply for quotation on The
Nasdaq Small Cap Market under the symbol
"BETA." The offering price may not
reflect the market price of our shares
after the offering.
<TABLE>
Total Minimum Total Maximum
Per Share
---------------- ---------------- ----------------
<S> <C> <C> <C>
Public Offering Price.................... $ 6.00 $ 4,800,000 $ 9,000,000
Selected Dealer Commissions.............. $ 0.60 $ 480,000 $ 900,000
Proceeds to Beta......................... $ 5.40 $ 4,320,000 $ 8,100,000
====================================================================================================================================
</TABLE>
This investment involves a high degree of risk. You should purchase shares only
if you can afford a complete loss. See "Risk Factors" beginning on page __.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
================================================================================
Beta is offering the shares subject to various conditions and may reject all or
part of any order.
Brookstreet Securities Corporation
The date of this prospectus is ___________, 1999_
<PAGE>
INSIDE FRONT COVER PAGE OF PROSPECTUS
A map of the gulf coast areas of Texas and Louisiana which shows the location of
Beta's properties in those areas.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. You should also read the entire prospectus carefully, including the
risk factors and financial statements. There is no assurance that Beta will ever
generate a profit from oil and gas operations.
Beta Oil & Gas, Inc.
Offices: Beta's corporate headquarters are located at
901 Dove Street, Suite 230, Newport Beach, CA
92660. Our telephone number is (949) 752-5212.
Our Business: Beta is an oil and gas company organized in
June 1997 to participate in the exploration
and production of natural gas and crude oil.
Our operations are currently focused in proven
oil and gas producing trends primarily in
South Texas, Louisiana and Central California.
Beta's wholly owned subsidiary, BETAustralia,
LLC, participates in the exploration for
oil and gas in Australia
Operations Philosophy: Beta intends to rely on joint
ventures with qualified operating oil and gas
companies to operate its projects through the
exploratory and production phases. This will
reduce general and administrative costs
necessary to conduct operations. As of the
date of this prospectus, Beta was not
operating any of its projects.
3-D Seismic: Beta believes that 3-D seismic surveys have
reduced the risk of oil and gas exploration in
certain areas. Recognizing this change, we
have acquired prospective acreage blocks for
targeted, proprietary, 3-D seismic surveys.
Briefly, a seismic survey sends pulses of
sound from the surface down into the earth,
and records the echoes reflected back to the
surface. By calculating the speed at which
sound travels through the various layers
of rock, it is possible to estimate the
depth to the reflecting surface. We use
computers to perform these calculations and
"process" the seismic data. It then becomes
possible to create a picture of the rock
structures deep below the earth's surface.
A 3-D seismic survey provides us a three
dimensional picture of these rock structures.
These three dimensional "pictures" show us the
potential size of a potential oil or gas
reservoir and the best location to drill for
it.
Current Status: As of the date of this prospectus, we have
participated in projects which total about
76,000 gross acres under lease or option. This
is 13,000 acres net to Beta's average 17%
interest. Beta has participated with other
oil and gas companies to conduct seismic
surveys over approximately 94% of the acreage.
From the data generated by its initial
proprietary seismic surveys, covering 313
square miles, in excess of 100 potential
drillsites have been identified.
South Texas Exploration: Approximately $10,000,000, about 60% of the
total funds raised so far by Beta, have been
utilized to acquire interests in lands and
seismic data in the onshore Texas Gulf Coast
region. Beta's interests in the onshore Texas
properties are operated by Parallel Petroleum
Corporation. Drilling commenced in these
projects during the first quarter of 1999 and
has resulted in two discoveries of oil and
gas to date. Representatives of Parallel
have informed Beta that drilling will continue
in these projects throughout the year. Beta
anticipates that participation in exploratory
and drilling projects in South Texas will
constitute its primary activity during 1999.
Louisiana Exploration: Approximately $3,300,000, representing 20%
of the funds raised so far by Beta, have
been invested in leases, seismic data
acquisition and drilling in Louisiana.
Drilling commenced in these prospects in
1998 and has resulted in one oil and gas
discovery so far. It is expected that Beta
will participate in the drilling of a minimum
of six wells in Louisiana during 1999.
Other Exploration: The balance of the funds raised to date have
been utilized primarily to fund other domestic
and international exploratory activities.
Beta's exploratory activities in areas outside
of Texas and Louisiana have resulted in one
gas discovery located in Central California.
We anticipate that Beta will expend additional
funds to explore these areas during 1999
and future periods.
1999 Budget Plans: Beta's capital budget for 1999 of
approximately $8,300,000, subject to available
funds, includes amounts for the acquisition of
additional 3-D seismic data and for the
drilling of 38 gross wells or 8.39 wells net
to Beta in 1999. Beta will own interests in
the wells ranging from 12.5% to 75% and
averaging 22%. A majority of the budgeted
wells will be drilled in Texas and Louisiana.
Beta has substantial discretion in reducing
this budget, if necessary. In addition, Beta
anticipates that as its existing 3-D seismic
data is further evaluated, and 3-D seismic
data is acquired over the balance of its
acreage, additional prospects will be
identified for drilling beyond 1999.
The Offering
Common stock offered by Beta: 800,000 shares minimum
1,500,000 shares maximum
Common Stock to be outstanding
after the offering:(1) 8,258,492 shares if the minimum shares are
sold
8,958,492 shares if the maximum shares are
sold (2)
Use of proceeds:(3) Beta will receive net proceeds of $4,320,000
if the minimum shares are sold and up to
$8,100,000 if the maximum shares are
sold. The proceeds will be used to fund
the repayment of debt and the drilling of
wells in Beta's Louisiana, California and
Texas prospects. Funds held in escrow shall
receive an interest rate of at least 4%.
Upon an investor providing funds, the
investor shall not have the right to revoke
his/her subscription. If Beta does not
complete the minimum offering within ten days
of the date of this prospectus, your funds
will be returned to you with interest and
without deduction.
Risk factors: An investment in our shares is very risky, and
you should be able to bear a complete loss
of your investment. See "Risk Factors"
which contains a detailed discussion of these
risks.
Proposed Nasdaq SmallCap Market
Symbol:(4) BETA
(1) Excludes 2,697,663 shares reserved for issuance upon exercise of the
warrants.
(2) Does not include 150,000 shares reserved for issuance upon
exercise of the Over-allotment Option.
(3) Net proceeds before deducting estimated offering expenses of $90,000.
There is no assurance that the common stock will be approved for quotation in
the Nasdaq SmallCap Market or that a trading public market will develop, or,
if developed, will be sustained. See "Risk Factors -- There has been no prior
trading market for Beta's common stock; potential volatility of Beta's stock
price" for a more detailed discussion of these market risks.
<PAGE>
Summary Financial Information
The following table presents selected historical financial data for Beta
derived from Beta's Financial Statements. The following data should be read with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of Beta and the notes to the financial
statements included elsewhere in this prospectus.
<TABLE>
For the Cumulative
period from The year from
inception ended inception
(June 6, December 31, (June 6,
1997) to 1998 1997) to
December 31, December 31,
1997 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Consolidated Income Statement Data:
Revenues: $ - $ - $ -
Operating expenses:
General and administrative 245,452 746,769 992,221
Impairment expense - 1,670,691 1,670,691
Depreciation expense 1,530 11,883 13,413
----------------- ----------------- -----------------
Total operating expenses 246,982 2,429,343 2,676,325
----------------- ----------------- -----------------
Loss from operations (246,982) (2,429,343) (2,676,325)
Interest income 45,409 44,843 90,252
================= ================= =================
Net loss $ (201,573) $ (2,384,500) $ (2,586,073)
================= ================= =================
Net loss per basic and diluted common
share $ (.05) $ (.37)
================= =================
Weighted average common shares outstanding 4,172,662 6,366,923
================= =================
</TABLE>
<TABLE>
December 31, 1997 December 31, 1998
------------------ ------------------
<S> <C> <C>
Consolidated Balance sheet data:
Working capital ........... $ 3,117,351 $ (96,457)
Oil and gas properties, net $ 5,900,794 $ 13,183,304
Total assets .............. $ 9,921,057 $ 13,618,471
Total liabilities ......... $ 870,847 $ 319,129
Stockholder's equity ...... $ 9,050,210 $ 13,299,342
</TABLE>
<PAGE>
RISK FACTORS
The securities offered in this prospectus are very speculative and involve
a high degree of risk. They should be purchased only by people who can afford to
lose their entire investment. Therefore, you should, before purchase, consider
very carefully the following risk factors, as well as all other information
presented in this prospectus.
Beta is a development stage company; Beta was formed in June 1997 and
Beta has a limited operating is considered to be a
history and has incurred losses development stage or start up
from operations. company. Beta is subject to
risks associated with new
companies. To date, Beta has had
a minimal operating history
since June of 1997 and has
generated minimal revenues from
oil and gas operations. Beta has
incurred operating losses since
inception and as of December 31,
1998 has an accumulated deficit
of approximately $2.6 million.
Until Beta is able to establish
positive cash flow from oil and
gas operations, of which there
is no assurance, Beta will
continue to incur losses. There
is no assurance that Beta will
achieve or sustain profitability
in the future. See "Management's
Discussion and Analysis of
Financial Condition and Results
of Operations" for additional
detail concerning this risk
factor.
If Beta only secures the minimum In our opinion, the existing
offering in this prospectus, Beta working capital of Beta will be
will need additional financing sufficient to fund our
in six months. operations and projected capital
requirements until June 15,1999.
At that time it will be
necessary for Beta to raise
additional funds. There is
no guarantee that additional
funding will be available, or if
available, on terms acceptable
to Beta. If additional funding
is not available, Beta will have
to reduce its business
activities. If Beta were unable
to fund planned expenditures,
Beta may have to:
1. Forfeit our interest in
wells that are proposed
to be drilled;
2. Farm-out our interest in
proposed wells; and,
3. Sell a portion of our
interest in proposed wells
and use the sale proceeds
to fund our participation
for a lesser interest.
As you will read in this
prospectus, Beta's business plan
includes an aggressive program
to identify, acquire and develop
exploration projects that meet
certain criteria. Project
acquisitions and exploration
activities are planned in 1999
and future years which will
require large amounts of
capital. These activities,
together with others that may be
entered into, may impose
financial requirements which
will exceed the existing working
capital of Beta and the net
proceeds of this offering.
It is important to remember:
----------------------------
|_| The oil and gas
industry requires
substantial capital.
|_| We may need to raise
additional funds
through public or
private financings or
borrowings.
|_| We may not be able to
raise such funds.
|_| If we cannot obtain
additional funds, our
operations and
financial condition
will suffer.
|_| If funds are available
to us, they may not be
available on terms that
are advantageous to us.
<PAGE>
|_| If we issue additional
equity securities to
raise funds, the
percentage you own in
Beta at that time will
be diluted.
|_| Those additional equity
securities may have
better rights,
preferences or
privileges than your
common stock.
Beta may not have the proceeds of this As stated above, Beta believes
offering until after June 15, 1999; it has sufficient working
As a result Beta may forfeit its interest capital to fund its working
in certain wells which may be proposed. capital requirements until
June 15, 1999. It is possible
that Beta will not have the
minimum proceeds of this
offering by June 15, 1999. In
the event that Beta does not
have the minimum proceeds by
this date, it may be necessary
for Beta to substantially
curtail its business activities
until the proceeds are
available. The inability to
fund planned expenditures after
June 15 could negatively impact
Beta in several ways:
|_| This will prevent Beta from
carrying out its entire
proposed business plan and
prevent Beta from
participating in wells
proposed to be drilled
until the proceeds are
available.
|_| If Beta is unable to
participate in proposed
wells, it will be excluded
from any potential economic
benefit that the wells
might generate.
|_| Beta has previously
advanced over $11,000,000
to acquire leases and
seismic data in projects
associated with these
proposed wells.
|_| Beta's participation
agreements in those
projects preclude Beta from
receiving any reimbursement
of seismic and lease funds
previously advanced in the
event Beta does not
participate in the drilling
of wells on those projects.
|_| If Beta cannot participate
in the drilling in these
projects, it will be forced
to write down all or a
portion of the over
$11,000,000 in costs which
have been capitalized as
unevaluated properties.
|_| These writedowns will
result in substantial
financial losses to Beta
and negatively impact
shareholder's equity.
Beta may have to seek
alternative forms of financing
to "bridge" its capital needs
until the proceeds of this
offering are available. The
terms of the bridge financing
are likely to be onerous:
|_| The interest rate for
bridge financing would
likely be much higher than
interest on a conventional
bank loan.
|_| Bridge financing terms may
require Beta to issue
common shares which would
be highly dilutive to
existing shareholders.
|_| The bridge financing may
require Beta to pledge its
assets as collateral.
|_| Bridge financing terms
could likely contain
restrictive covenants on
Beta.
Subsequent to December 31, 1998,
Beta completed the private
placement of $3,000,000 in
bridge financing. For a detailed
discussion of the terms of the
bridge financing see the caption
"Bridge Note" in the section
entitled "Management's
Discussion and Analysis of
Financial Condition and Results
of Operations."
<PAGE>
Beta's operations subject it to a number of The operations of Beta are
risks associated with the drilling and subject to the many risks and
exploration for oil and hazards incident to exploring
gas. and drilling for, producing and
transporting oil and gas,
including:
|_| Blowouts, fires, pollution
and equipment failures that
may result in damage to or
destruction of wells,
producing formations,
production facilities and
equipment.
|_| Personal injuries.
|_| Engineering and
construction delays.
|_| Hazards resulting from
unusual or unexpected
geological or environmental
conditions.
|_| Human error.
|_| Accidental leakage of toxic
or hazardous materials,
such as petroleum liquids
or drilling fluids into the
environment.
|_| There is no assurance that
any oil and gas in
commercial quantities will
be discovered or acquired
by Beta.
The marketability of Beta's oil
and gas reserves or of reserves
which may be acquired or
discovered by Beta may be
affected by numerous factors
beyond the control of Beta.
These factors include
fluctuations in product markets
and prices, the proximity and
capacity of pipelines to Beta's
oil and gas reserves, the
ability of Beta to finance
exploration and development
costs and the availability of
processing equipment. Beta's
ability to manage and mitigate
these risks is limited since
Beta relies on third parties to
operate all of its projects.
Beta's title to its properties may be As is customary in the oil and
impaired by defects in the title. gas industry, only a perfunctory
title examination is conducted
at the time properties believed
to be suitable for drilling
operations are first acquired.
Before starting drilling
operations, a more thorough
title examination is usually
conducted and curative work is
performed on
known significant title defects.
Beta typically depends upon
title opinions prepared at the
request of the operator of the
property to be drilled; and,
therefore, there can be no
assurance that losses will not
result from title defects or
from defects in the assignment
of leasehold rights. Industry
standard forms of operating
agreements usually provide that
the operator of an oil and gas
property is not to be monetarily
liable for loss or impairment of
title. Beta's operating
agreements provide that in the
event of a monetary loss arising
from title failure, that the
loss shall be borne by all
parties in proportion to their
interest owned. Beta will suffer
a financial loss in the event of
a title defect on one or more of
its properties.
Beta's insurance coverage may be inadequate. We will not insure
fully against all business risks
either because such insurance is
not available or because premium
costs are too prohibitive. This
is a common practice in the oil
and gas industry. However, a
loss not fully covered by
insurance could have a
materially adverse effect on the
financial position and results
of operations of Beta.
All of Beta's joint exploration
agreements require the operator
to purchase and maintain
insurance on behalf of Beta and
other joint participants. The
policies cover general liability
and workers
<PAGE>
compensation insurance and cover
a wide range of potential
claims. The policies have
limits ranging
from $10,000 to $20,000,000
depending on the type of
occurrence. In addition to the
insurance maintained by the
operators, Beta has purchased a
general liability policy with a
total limit on claims of
$2,000,000 and a workers
compensation policy as required
by California law. Beta
purchased the general liability
policy as an added measure if
coverage provided by an
operators policy was inadequate
to cover Beta's losses.
Generally, these policies cover
losses arising from, but not
limited to:
|_| Personal injury
|_| Bodily injury
|_| Third party property
damage
|_| Aircraft and watercraft
liability
|_| Medical expenses
|_| Legal defense costs
|_| Pollution in some cases
|_| Well blowouts in some
cases
The price that Beta receives for its oil and Beta's revenues, cash flows and
gas production is subject to a great deal of profitability are substantially
volatility. dependent on prevailing prices
for both oil and gas.
Historically, oil and gas prices
and markets have been volatile,
and they are likely to continue
to be volatile in the future.
Prices for oil and gas are
subject to wide fluctuations in
response to relatively minor
changes in the supply of and
demand for oil and gas, market
uncertainty and a variety of
additional factors that are
beyond the control of Beta.
These factors include, among
others:
|_| Political conditions in
the Middle East and
other regions
|_| The domestic and
foreign supply of oil
and gas
|_| The level of consumer
demand
|_| Weather conditions
|_| Domestic and foreign
government regulations
|_| The price and
availability of
alternative fuels
|_| Overall economic
conditions
As an example of this
volatility, the quoted "spot
market" price for a barrel of
"West Texas Intermediate" crude
oil was $18.13 on Wednesday,
April 21, 1999. The quoted price
for the same grade of oil
exactly one year ago was $12.98
per barrel. This $5.15 increase
in the price of oil represents a
40% increase from one year ago.
Natural gas prices have been
very volatile during the past
year as well. During the past 12
months ended April 21, 1999, the
Henry-Hub natural gas price as
quoted on the New York
Mercantile Exchange has
fluctuated between approximately
$1.70 and $2.70 per Mcf. This
represents a price swing of 60%
during the past year. The
Henry-Hub price as of April 21,
1999 is approximately $2.20.
<PAGE>
Beta depends on its key personnel for Beta is very dependent upon the
critical management decisions and industry continued services of Steve
contacts. Antry, President, Founder and
Chairman of the Board of
Directors and Mr. R.Thomas
Fetters, a director of Beta and
Managing Director of
Exploration. Mr. Antry has
entered into an employment
agreement with Beta and
Mr. Fetters has a consulting
agreement with Beta. The loss
of the services of Mr. Antry
or Mr. Fetters through
incapacity or otherwise would
have a material adverse effect
upon Beta's business and
prospects. If the services of
Mr. Antry or Mr. Fetters became
unavailable, Beta would be
required to retain other
qualified personnel, and there
can be no assurance that Beta
will be able to recruit and
hire qualified persons on
acceptable terms. Beta is
currently named as beneficiary
on a key person life insurance
policy on the life of Mr. Antry
in the amount of $2,500,000.
Beta utilizes third party operators in each Beta is a non-operating interest
of its projects. owner in all of its properties.
Accordingly, Beta enters into
joint operating agreements with
third party operators for the
conductand supervision of
drilling, completion and
production operations on its
wells. The success of the
oil and gas operations on
a property, whether drilling
operations or production
operations, depends in large
measure on whether the
operator of the property
properly performs its
obligations. The failure of such
operators and their contractors
to perform their services in a
proper manner could result in
materially adverse consequences
to the owners of interests in
that particular property,
including Beta. Beta is relying
on the following companies to
operate its current projects:
(1) Parallel Petroleum,Inc.
(2) Spinnaker Exploration
Company LLC
(3) IP Petroleum, Inc.
(4) Source Energy LLC
(5) Cheniere Energy, Inc.
Beta's projects are subject to numerous Domestic exploration for, and
regulations; Beta doesn't operate its production and sale of, oil and
projects or directly control compliance with gas are extensively regulated at
these regulations; Beta could be subject to both the federal and state
substantial liabilities for non-compliance. levels. Legislation affecting
the oil and gas industry is
under constant review for
amendment or expansion,
frequently increasing the
regulatory burden. The
regulatory burdens are often
costly to
comply with and carry
substantial penalties for
failure to comply.
Beta may be required in the
future to make substantial
outlays of money to comply with
environmental laws and
regulations. The additional
changes in operating procedures
and expenditures required to
comply with future laws dealing
with the protection of the
environment cannot be predicted.
Since Beta does not operate the
oil and gas properties in which
it is involved, it does not
directly control compliance with
most of the rules and
regulations discussed above.
Beta is substantially dependent
on the operators of its oil and
gas properties to maintain such
compliance. The failure of the
operator to comply with such
rules and regulations could
result in substantial
liabilities to Beta which could
negatively affect its results of
operations.
<PAGE>
Up to 8,557,155 shares of Beta's common stock 8,557,155 of the Beta common
could be sold in the open market immediately shares being registered will be
upon completion of this offering which could eligible for immediate resale
have a depressive effect on the market price without further restriction
for the common stock; an additional 429,000 after completion of this
shares could be sold after 180 days from the offering. In addition, Beta is
close of this offering further depressing obligated to register for resale
the market price of the shares. an additional 429,000 shares of
common stock 180 days after the
close of this offering which
could then immediately be sold
in the market. If a significant
number of shares are offered for
sale simultaneously, it would
have a depressive effect on the
trading price of the common
stock.
The requirement that Beta secure the minimum Beta is offering the shares
offering within ten business days may result through selected broker dealers
in an investor providing funds, but not on a "best efforts"
receiving securities until the closing of the minimum/maximum basis. No
minimum offering. broker dealer has made a
commitment to purchase any
shares offered in this
prospectus. Consequently, there
can be no assurance that the
shares offered in this
prospectus will be sold. If the
minimum number of shares
offered in this prospectus is
not sold within 10 business days
of the date of this prospectus,
all proceeds received will be
refunded in full to investors
with interest and without
deduction. Therefore, investors
subscribing to purchase the
shares offered in this
prospectus may lose the use of
their funds and will not be able
to sell their shares for the ten
business day escrow period
applicable to the minimum
offering. See "Underwriting" for
additional discussion concerning
the handling of funds invested
in this offering.
There has been no prior trading market for Before this offering, there was
Beta's common stock; potential volatility of no public market for the common
Beta's Stock price. stock. Although Beta intends
to apply for the listing of the
common stock for quotation on
the Nasdaq SmallCap Market,
there can be no assurance that
an active trading market will
develop for the
common stock or, if one does
develop, that it will be
maintained. If Beta is unable to
obtain a public quotation for
its shares or if the common
stock were to be delisted
because of inability to meet
maintenance requirements of
NASDAQ, it would have a material
adverse effect on the ability of
investors to resell their stock
in the secondary market as well
as on Beta's ability to obtain
future financing or make
acquisitions utilizing its
shares. The public offering
price of the common stock was
determined based on several
criteria The market price of the
shares of common stock, like
that of the common stock of many
other speculative businesses, is
likely to be highly volatile.
Factors such as fluctuation in
Beta's operating results or the
announcement of any discoveries
of any meaningful oil or gas
reserves, developments in Beta's
strategic relationships and
general market conditions may
have a significant effect on the
market price of the common
stock. See "Underwriting" for
additional details regarding the
potential volatility of Beta's
stock.
If Beta's stock is classified as a penny The initial public offering
stock investors may experience delays and price of the common stock is
other difficulties in trading shares in $6.00. However, the market
the stock market. price of the shares of common
stock is likely to the be highly
volatile and could drop below
$5.00 per share. If price of the
common stock drops lower than
$5.00 per share, the
common stock would be subject to
the "penny stock" rules. The
penny stock rules are contained
in The Securities Enforcement
and Penny Stock Reform Act of
1990. Unless an exception is
available, these rules require
the delivery, before any
transaction involving a penny
stock,
<PAGE>
of a disclosure schedule
explaining the penny stock
market and the risks associated
with investing in penny stocks.
Brokers must also provide
potential investors with current
bid and offer quotations for
penny stocks, the compensation
of the broker and its
salesperson in connection with
the sale of penny stocks, and
monthly accounts statements
showing the market value of each
penny stock in the investor's
account. As a consequence, an
investor could find it difficult
to dispose of, or to obtain
accurate quotations as to the
price of, the common stock.
Investors in this offering will experience The initial public offering
immediate and substantial dilution. price is substantially higher
than the book value per share of
common stock. Investors
purchasing sharesof common stock
in this offering
will incur immediate and
substantial dilution equal to
$3.90 per share if the minimum
number of shares offered in this
prospectus is sold. In addition,
the investors purchasing shares
of common stock in this offering
will incur additional dilution
as a result of 2,697,663 shares
of Beta's common stock
underlying outstanding common
stock purchase warrants which
are being registered on behalf
of selling security holders.
Exercise of the warrants will
reduce the interest you own in
Beta. See "Dilution" for
additional discussion concerning
the level of dilution to be
experienced by investors in this
offering.
Investors in this offering may experience Beta executed a contract of
dilution resulting from the employment employment with the President
contract of Steve Antry. and Chairman of the Board of
Directors, Mr. Steve Antry,
dated June 23,1997. The contract
may be terminated by Beta
without cause upon the payment
of, among other items, options
containing a five year term to
acquire the common stock of Beta
in an amount equal to 10% of the
then issued and outstanding
shares, piggyback registration
rights and an exercise price
equal to 60% of the fair market
value of the shares during the
sixty day period of time
preceding the termination
notice, such amount not to
exceed $3.00 per share.
If Beta were to terminate Mr.
Antry without cause, the common
shareholders would experience
immediate and substantial
dilution resulting from the
issuance of a large number of
options to Mr. Antry with an
exercise price substantially
lower than the market price. See
"Employment Contracts" under
"Executive Compensation" for
additional discussion concerning
this employment contract.
Investors in this offering will experience In connection with a January
dilution resulting from a bridge note and March 1999 bridge
financing. promissory note financing with
three qualified investors, Beta
issued a total of 429,000 shares
of common stock. In addition,
the terms of the
financing obligate Beta to issue
additional shares of common
stock as long as any principal
balance remains outstanding on
the promissory notes.
It is the intention of Beta to
immediately repay the $3,000,000
of bridge financing notes upon
completion of the minimum
offering. If the minimum
offering is not completed, Beta
may have to issue up to 420,000
additional shares of common
stock per the terms of the
bridge financing if the notes
are not repaid until maturity.
If Beta is unable to repay all
or a portion of the promissory
notes in a timely manner, the
common shareholders will
experience immediate and
substantial dilution resulting
from the issuance of these
additional
<PAGE>
common shares. See
"Management's Discussion and
Analysis of Financial Condition
and Results of Operations" for
additional discussion concerning
the bridge note financing.
Beta has paid no dividends nor does it intend Beta has not paid any cash
to pay dividends in the foreseeable future. dividends on its common stock
and does not expect to declare
or pay any cash or other
dividends in the
foreseeable future.
Additionally, state corporate
laws prohibit Beta from paying
dividends until such time as
Beta has retained earnings.
The Year 2000 issue; Beta could experience a Beta utilizes a number of
computer system failure. computer programs across its
entire operation. There can be
no assurances that Year 2000
problems will not occur with
respect to Beta's computer
systems or business
affiliations. The Year
2000 problem may impact other
entities with which Beta
transacts business, and Beta
cannot predict the effect of the
Year 2000 problem on such
entities or Beta. A major system
failure could have a material
adverse effect on Beta's
operations and results of
operations. See "Management's
Discussion and Analysis of
Financial Condition and Results
of Operations" for details
concerning Beta's Year 2000
ongoing assessment and the
current contingency plan.
Beta's statements about future events may In this prospectus, we have made
prove to be inaccurate; there is statements about future events
uncertainty about estimates used in this based upon reasonable
prospectus. assumptions of management.
Included are statements
concerning Beta's estimated oil
and gas reserves and reserve
values, and estimated capital
expenditures. However, the
actual results of these future
events may differ greatly from
the statements we have made.
Some of the specific material
uncertainties include:
|_| This prospectus contains
estimates of future net
cash flows from oil and gas
reserves. These estimates
are prepared based on
engineering estimates of
oil and gas that may be
recovered from Beta's
wells. Engineering
estimates are inherently
imprecise and may be
revised downward in the
future. Subsequent downward
revisions of estimated
future net cash flows could
result in substantial
additional losses to Beta
due to write-downs of the
carrying value of Beta's
assets.
|_| Our anticipated expenses
could be higher than we
expect resulting in a
possible need to raise more
funds and/or a reduction in
our working capital which
could curtail our
participation in other
projects.
|_| We may be unable to obtain
financing in the future
which could cause a
reduction in our
participation in future
projects.
You should be aware that actual
results will differ from the
expectations expressed in this
prospectus.
Beta has substantial discretion over Beta has projected its use of
how the proceeds from this offering are used; proceeds from this offering
the actual use of proceeds could differ based on management's best
materially from what is disclosed in the "Use estimate of wells that may be
of Proceeds" section. proposed for drilling. However,
Beta's board of directors has
retained the sole discretion to
change the use of proceeds. The
proceeds of this offering could
be allocated to projects or
purposes other than those
shown in the use of proceeds.
USE OF PROCEEDS
The net proceeds from this offering, after deducting broker commissions and
other expenses of this offering, estimated to be approximately $90,000, will be
approximately $4,230,000 if 800,000 shares are sold in this offering and
$8,010,000 if all 1,500,000 shares are sold in this offering. In either the
minimum offering or the maximum offering case Beta plans to use $3,000,000 of
such proceeds to repay the bridge financing debt. In either case Beta will use
the remainder to fund its participatory share of the cost of drilling wells in
its Texas, California and Louisiana prospects. This is Beta's best estimate of
its use of proceeds generated from the sale of shares by Beta based on the
current state of its business operations, its current plans and current economic
and industry conditions. Any changes in the projected use of proceeds will be
made at the sole discretion of Beta's Board of Directors. See "Business" and
"Properties" for a more detailed description of the four project areas where the
proceeds will be utilized.
<TABLE>
Description of Uses Minimum Offering Maximum Offering
-------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Repayment of Bridge Debt $ 3,000,000 71% $ 3,000,000 37%
Drilling and completion of wells:
Parallel Joint Venture, South Texas 630,000 15% 1,750,000 22%
Cheniere Joint Venture, South Louisiana 400,000 9% 1,180,000 15%
West Cameron Block 39, South Louisiana 200,000 5% 1,200,000 15%
Lapeyrouse Prospect, South Louisiana 0 0% 545,000 7%
Norcal Joint Venture, Central California 0 0% 335,000 4%
============= ============= ============= =============
Total net proceeds of offering $ 4,230,000 100% $ 8,010,000 100%
============= ============= ============= =============
</TABLE>
This table does not reflect the possible proceeds from exercise of the
over-allotment option. If the over-allotment option is exercised in full, the
additional net proceeds of $810,000 will be applied to drilling and completion
of wells in the Parallel Joint Venture in South Texas.
Beta's capital budget for 1999 is $8,300,000, most of which will be spent in the
drilling and completion of wells. The net proceeds of the offering will not be
enough to meet all of Beta's budgeted expenditures for 1999. If Beta sells the
minimum offering, Beta will need to raise additional funds of $5,270,000 over a
seven month period between June 15 and December 31, 1999 if it elects to
participate in all of its budgeted wells. In the event Beta is unable to raise
the additional capital, Beta will have to substantially curtail its activities.
If Beta sells the maximum offering, Beta will need to raise $1,500,000 of
additional funds in order to complete its 1999 budgeted business plan. See
"Management's Discussion and Analysis" in this prospectus for a detailed
discussion of what sources of additional capital Beta will seek to fund this
capital shortfall.
It is Beta's intention to repay the $3,000,000 bridge note financing if and when
the minimum offering is completed. Upon completion of the minimum offering, the
payment of commissions and other offering costs and the repayment of the
$3,000,000 bridge note financing, Beta's management estimates that Beta will
have approximately $1,200,000 in working capital. See "Management's Discussion
and Analysis" in this prospectus for a detailed discussion about the terms of
the bridge note.
The $3,000,000 gross proceeds from the bridge note financing have been applied
to the following uses:
<TABLE>
Approximate
-----------
<S> <C>
Drilling and completion of wells Louisiana and Texas $ 1,800,000
Acquisition of seismic and leasehold 550,000
General and Administrative Expense 250,000
Working capital 200,000
Interest expense 35,000
Offering costs 165,000
----------
Total $3,000`000
==========
</TABLE>
<PAGE>
DILUTION
"Dilution" represents the difference between the initial public offering
price per share of common stock and the adjusted pro forma net tangible book
value per share of common stock immediately after the completion of this
offering. "Adjusted pro forma net tangible book value" is the amount that
results from subtracting the total liabilities of Beta from its total tangible
assets after giving effect to common stock issued in a promissory bridge note
financing after December 31, 1998. Dilution arises mainly from an arbitrary
decision by Beta about the offering price per share of common stock. In this
offering, the level of dilution will be increased as a result of Beta's low net
tangible book before this offering.
Tangible assets are items of property in physical form, and not intangible
items such as goodwill or intellectual property.
The net tangible book value of Beta before this offering, based on
the December 31, 1998 financial statements, was $13,275,818 or $1.89 per share
of common stock based on 7,029,492 shares outstanding. After giving effect to
common stock sold in an institutional bridge financing after December 31, 1998,
the net tangible value of Beta would have been $13,110,818, or $1.76 per share
of common stock. This is based on 7,458,492 shares outstanding, assuming the
issuance of an additional 429,000 shares issued in the institutional bridge
financing after December 31, 1998. Before selling any shares in this offering,
Beta has 7,458,492 shares of common stock outstanding.
If the minimum shares offered in this prospectus are sold, Beta will have
8, 258,492 shares issued and outstanding upon completion of the offering. After
giving effect to the sale of the shares of common stock offered in this
prospectus by Beta, net of estimated commissions and offering expenses of the
offering, the post offering pro forma net tangible book value of Beta will be
$17,340,818 or $2. 10 per share, approximately. This would result in dilution to
investors in this offering of $3.90 per share or 65% from the offering price of
$6.00 per share. Net tangible book value per share would increase to the benefit
of present shareholders from $1.76 before the offering to $2. 10 after the
offering, or an increase of $0.34 per share attributable to the purchase of the
shares by investors in this offering.
If the maximum shares offered in this prospectus are sold, Beta will have
8,958,492 shares issued and outstanding upon completion of the offering. After
giving effect to the sale of the shares of common stock offered in this
prospectus by Beta, net of estimated commissions and offering expenses of the
offering, the post offering pro forma net tangible book value of Beta will be
$21,120,818 or 2.36 per share, approximately. This would result in dilution to
investors in this offering of $3.64 per share or 61% from the offering price of
$6.00 per share. Net tangible book value per share would increase to the benefit
of present shareholders from $1.76 before the offering to $2.36 after the
offering, or an increase of $0.60 per share attributable to the purchase of the
shares by investors in this offering.
The following table illustrates the estimated net tangible book
value per share after the offering and the dilution to persons purchasing shares
based on the maximum offering assumption. The table does not include exercise of
the over-allotment option.
<TABLE>
MINIMUM MAXIMUM
------- -------
OFFERING OFFERING
-------- --------
<S> <C> <C> <C> <C>
Offering price of common stock (per share) $ 6.00 $ 6.00
Net tangible book value per share before the offering $ 1.76 $ 1.76
Increase per share attributable to payments by new investors $ 0.34 $ 0.60
Pro forma net tangible book value per share after the offering $ 2. 10 $ 2.36
Dilution per share to new investors $ 3.90 (65%) $ 3.64 (61%)
</TABLE>
<PAGE>
The following tables sets forth as of December 31, 1998, after giving
effect to the offering, the number of shares of common stock purchased from
Beta, the total consideration paid and the average price per share paid by
existing shareholders and by new investors on an as adjusted basis:
<TABLE>
=================================================================================================================
MINIMUM OFFERING SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
- ----------------------------------------------------------------------------------------------------------------
PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Existing shareholders 7,458,492 90% $ 17,423,430 78% $2.34
New investors 800,000 10% 4,800,000 22% $6.00
================= =================
Total 8,258,492 100% $ 22,223,430 100% $2.69
=====================================================================================================================
=====================================================================================================================
MAXIMUM OFFERING SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
- -----------------------------------------------------------------------------------------------------------------
PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
-------------------------------------------------------------------
Existing shareholders 7,458,492 83% $ 17,423,430 66% $2.34
New investors 1,500,000 17% 9,000,000 34% $6.00
================= =================
Total 8,958,492 100% $ 26,423,430 100% $2.95
=====================================================================================================================
</TABLE>
<PAGE>
CAPITALIZATION
The following table sets forth as of December 31, 1998:
(1) the actual capitalization of Beta;
(2) the pro forma capitalization of Beta that gives effect to the sale and
issuance of shares of common stock in an institutional bridge financing
completed after December 31, 1998; and
(3) the capitalization of Beta on a pro forma basis as adjusted to give effect
to the proposed sale by Beta of a minimum of 800,000 shares and a maximum
of 1,500,000 shares of common stock being offered in this prospectus.
This table excludes 2,697,663 shares reserved for issuance on exercise of
outstanding warrants to purchase common stock of Beta assuming maximum offering.
<TABLE>
As of
December 31, 1998
--------------------------------------------------------------------------
Adjusted for Adjusted for
the Sale of the Sale of
Actual Pro Forma Minimum Offering Maximum
Offering
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Shareholders' Equity
Common shares, $.001 par value;
50,000,000 shares authorized;
7,029,492 shares issued and outstanding
actual;
7,458,492 shares pro forma; 8,258,492 shares
(minimum offering) and 8,958,492 (maximum
offering) pro forma as adjusted at $ 7,029 $ 7,458 $ 8,258 $ 8,958
December 31, 1998
Additional paid-in capital 15,878,386 17,857,957 22,087, 157 25,866,457
Accumulated deficit (2,586,073) (4,731,073) (4,731,073) (4,731,073)
============== ============== ================= =================
Total shareholders' equity $ 13,299,342 $ 13,134,342 $ 17,364,342 $ 21,144,342
============== ============== ================= =================
</TABLE>
DIVIDENDS
Beta has never paid any dividends, whether cash or property, on its
securities. For the foreseeable future it is anticipated that any earnings which
may be generated from operations of Beta will be used to finance the growth of
Beta and that dividends will not be paid to stockholders. Additionally, state
corporate laws prohibit Beta from paying dividends until such time as Beta has
retained earnings.
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected historical consolidated financial
data for Beta derived from Beta's financial statements. The historical financial
data should be read in conjunction with the Financial Statements and notes to
the financial statements of Beta which are contained in this prospectus. The
financial data for the periods presented were derived from the financial
statements of Beta which have been audited by Hein + Associates LLP, independent
accountants. The following data should also be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
For the period Cumulative
from inception from inception
(June 6, The year (June 6, 1997)
1997) to ended to
December 31, December 31, December 31,
1997 1998 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
Consolidated Income Statement Data:
Revenues: $ - $ - $ -
Operating expenses:
General and administrative 245,452 746,769 992,221
Impairment expense - 1,670,691 1,670,691
Depreciation expense 1,530 11,883 13,413
----------------- ----------------- -----------------
Total operating expenses 246,982 2,429,343 2,676,325
----------------- ----------------- -----------------
Loss from operations (246,982) (2,429,343) (2,676,325)
Interest income 45,409 44,843 90,252
================= ================= =================
Net loss $ (201,573) $ (2,384,500) $ (2,586,073)
================= ================= =================
Net loss per basic and diluted common
share $ (.05) $ (.37)
================= =================
Weighted average common shares
outstanding 4,172,662 6,366,923
================= =================
</TABLE>
<TABLE>
December 31, 1997 December 31, 1998
--------------------------------------
<S> ...................................................... <C> <C>
Consolidated Balance sheet data:
Working capital ...........................................$ 3,117,351 $ (96,457)
Oil and gas properties, net ...............................$ 5,900,794 $ 13,183,304
Total assets ..............................................$ 9,921,057 $ 13,618,471
Total liabilities .........................................$ 870,847 $ 319,129
Stockholder's equity ......................................$ 9,050,210 $ 13,299,342
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with Beta's
consolidated financial statements and related notes to the financial statements
appearing elsewhere in this prospectus. The following discussion is to inform
you about the financial position, liquidity and capital resources of Beta as of
December 31, 1997 and 1998 as well as for the results of operations for the
period from inception (June 6, 1997) through December 31, 1997 and the year
ended December 31, 1998.
Financial Condition, Liquidity and Capital Resources
Beta's working capital was a deficit of ($96,457) at December 31, 1998
compared to surplus of $3,117,351 at December 31, 1997. Beta's working capital
decreased due primarily to investments in oil and gas properties.
Beta is a Development Stage (Start-Up) Company
Beta has a limited operating history upon which an evaluation of Beta and
its prospects can be based. The risks, expense, and difficulties encountered by
early-stage companies must be considered when evaluating Beta's prospects. There
are numerous significant risks inherent in a development stage company which is
engaged in high risk oil and gas exploration. See "Risk Factors."
Beta had a working capital deficit as of December 31, 1998 when its current
liabilities exceeded its current assets by $96,457. Current liabilities are
those liabilities which are expected to come due within less than a year. In
order to address this working capital deficit and projected expenditures which
are expected to occur in the first six months of 1999, Beta obtained short term
financing in the form of $3,000,000 in bridge note financing.
Historical Cash Used In and Provided by Operating, Investing and Financing
Activities
Beta has financed all of its business activities through December 31, 1998
through issuances of its common stock in private placements. Beta raised net
proceeds of $9,221,783 during 1997 and $6,548,632 during 1998 in these private
placements.
The net proceeds of these private placements have been principally invested
in oil and gas properties of $5,900,794 in 1997 and $8,928,201 in 1998. The
balance of the funds have been utilized, for the most part, to fund general and
administrative expenses of $245,452 in 1997 and $746,769 in 1998.
Long Term Liquidity and Capital Resources
The timing of most of Beta's capital expenditures is discretionary. Beta has
no material long-term commitments associated with its capital expenditure plans
or operating agreements. Consequently, Beta has a significant degree of
flexibility to adjust the level of such expenditures as circumstances warrant.
The level of capital expenditures will vary in future periods depending on the
success it experiences on planned exploratory drilling activities in 1999, gas
and oil price conditions and other related economic factors. Accordingly, Beta
has not yet prepared an estimate of capital expenditures for the year 2000 or
future periods.
Bridge Note
Subsequent to December 31, 1998, Beta completed the private placement of a
$3,000,000 bridge financing to three institutional investors referred to as the
"1999 bridge financing." In connection with the 1999 bridge financing, Beta has
granted the investors a security interest in all of Beta's assets.
The first portion of the 1999 bridge financing was funded on January 20,
1999 for $2,000,000. The investors are St. Cloud Investments, Ltd. and Dandelion
Investments, Ltd., both of which are qualified institutional investors. The
promissory notes issued by Beta have a maturity date of January 2000. The notes
bear interest, payable monthly in arrears, at a rate of 10%. The securities
purchase agreements which govern the bridge financing specify that, during the
term of the notes, $1,000,000 of the proceeds of a public offering of common
stock by Beta must be directed to repayment of the notes. It is the intention of
Beta to repay the $2,000,000 January bridge financing upon completion of the
minimum.
In connection with the January 20, 1999 bridge financing, Beta issued
300,000 shares of common stock to the note holdersand issued an additional
29,000 shares as commissions in connection with the January bridge financing. In
addition, if any portion of the principal of the notes remains unpaid on the
180th, 210th, 240th, 270th, 300th, and/or the 330th day following the closing
date of the securities purchase agreements, then on the day following any of
such dates, Beta shall issue additional common stock to each holder of the
notes. The additional common shares issued shall be determined by multiplying
the unpaid principal balance by 2.5%. For example, if $1,000,000 of principal
remains unpaid on the 180th day following the closing date, then on the
following day the Purchasers would be issued an additional 25,000 Common Shares
calculated by multiplying $1,000,000 times 2.5%.
The second portion of the 1999 bridge financing was funded on March 19, 1999
for $1,000,000. The investor is Aztore Holdings, Inc., an accredited
institutional investor. The promissory note issued by Beta has a maturity date
of March 2000. The promissory note bears interest, payable monthly in arrears,
at a rate of 10%. The securities purchase agreements which govern this bridge
financing specify that, during the term of the promissory note, $1,000,000 of
the proceeds of a public offering of common stock by Beta must be directed to
repayment of the note. Therefore, $1,000,000 of the proceeds from this offering
will be used to repay the March note upon completion of the minimum offering.
In connection with the March 19, 1999 bridge financing, Beta issued 100,000
shares of common stock to the promissory note holder investor. In addition, if
any portion of the principal of the note remains unpaid on the 30th, 60th, 90th,
120th, 160th, 180th, 210th, 240th, 270th, 300th, 330th and/or the 360th day
following the March 19, 1999 closing date of the securities purchase agreement,
then on the day following any of such dates, Beta shall issue additional common
stock to the holder of the note. The additional common shares issued shall be
determined by multiplying the unpaid balance by 1%. For example, if $1,000,000
of principal remains unpaid on the 180th day following the March 19, 1999
closing date, then on the following day the investor would be issued an
additional 10,000 common shares calculated by multiplying $1,000,000 times 1%.
If $250,000 of principal remains unpaid on the 180th day following the closing
date, then on the following day the investor would be issued an additional 2,500
common shares calculated by multiplying $250,000 times 1%.
Beta received net cash proceeds of $2,835,000 from the bridge notes. The net
effect of this transaction will require Beta to record the $3,000,000 bridge
notes as a current liability since they have a maturity of one year. Interest
will be payable monthly in arrears at a rate of 10%. The estimated fair market
value of the 429,000 shares of common stock issued in connection with the bridge
note of $2,145,000 is treated as a discount and will be amortized over the term
of the promissory notes using the interest method. Accordingly, Beta will incur
additional interest expense of $2,145,000 over the term of the promissory notes
most of which will be expensed in 1999 and which will represent a significant
charge in the year ending December 31, 1999.
Per the terms of the bridge notes, Beta has granted a security interest in
all of the assets of Beta. This will prohibit Beta from selling assets to raise
cash for other purposes until the bridge notes are repaid. It further prohibits
Beta from using any assets to secure additional loans. This will make it very
difficult to obtain any additional loans until the bridge notes are repaid. It
may also pose difficulty in securing additional equity financing.
The bridge notes will require significant dedications of future cash flow to
service debt. Specifically, over the one year term of the bridge notes, Beta
will have to make debt service payments of up to $3,000,000 of principal and
$300,000 of interest.
Beta will repay the entire $3,000,000 of the bridge notes upon completion of
the minimum offering. If Beta is unsuccessful in completing the minimum
offering, then it will be obligated to issue up to 420,000 shares of additional
common stock as long as the principal balance of the bridge loans remains
outstanding. Assuming the minimum offering is completed By Ju1y 15, 1999, an
additional 30,000 shares shall be issuable on the following dates per the terms
of the bridge loans:
<TABLE>
Shares
Date Stock is Issuable Issuable
-----------------------
<S> <C>
April 19, 1999 10,000
May 19, 1999 10,000
June 19, 1999 10,000
--------
Total 30,000
==============
</TABLE>
Plan of Operation for 1999
In the opinion of Beta's management, the existing working capital
of Beta will be sufficient to fund the operations and projected capital
requirements of Beta until June 15, 1999. Beta plans to allocate its cash
resources from all sources, including the net proceeds of this offering, to the
following categories of expenditures:
1) Repayment of $3,000,000 of bridge debt. It is Beta's intention to repay
the entire $3,000,000 if and when the minimum offering is completed;
2) Drilling and completion costs for wells on Beta's prospects which are
estimated to be $6,500,000 for the period June 15 to December 31, 1999. It
is anticipated that as many as 38 test wells will be drilled in 1999 in
which Beta will have an average interest participation ranging from 12.5%
to 75% and averaging 22%;
3) Leasehold acquisition costs estimated to be $350,000 for the period
June 15 to December 31, 1999;
4) 3-D seismic acquisition costs only if funds are available; and
5) General and administrative overhead estimated to be $500,000 for the
period June 15 to December 31, 1999.
At such time as Beta has fully utilized the proceeds of the offering and
Beta's existing working capital, it will be necessary for Beta to raise
additional funds. It is anticipated that additional funds will be raised from
one or more of the following sources:
1) Beta has approximately 797,000 callable common stock purchase warrants
outstanding exercisable at a price of $5.00 per share. Beta is able to
call these warrants at any time on and after the date that its common
stock is traded on any exchange, including the Over-the-Counter
Bulletin Board, at a market price equal to or exceeding $7.00 per share
for 10 consecutive days, of which there can be no assurance that such a
price level will occur. It is Beta's intent to call all or a portion of
these warrants at such time, if and when, the market price of the stock
is at a sufficient level to fund capital requirements. Beta will
receive proceeds equal to the exercise price times the number of shares
which are issued from the exercise of warrants net of commission to the
broker of record, if any. Beta could realize net proceeds of
approximately $3,800,000 from the exercise of these warrants.
2) Beta may seek bank or other debt financing at such time that cash flow
from operations is established. Beta is not able to predict when, if
ever, such financing will be available. If sufficient cash flow from
producing wells is available, Beta will seek bank financing of
$2,000,000 to $5,000,000 in the fourth quarter of 1999.
3) Beta may seek mezzanine financing, if available, on terms acceptable to
Beta. Mezzanine financing usually involves debt with a higher cost of
capital as compared to conventional bank financing. As with bank
financing, Beta will seek mezzanine financing in the range of
$2,000,000 to $5,000,000 if sufficient cash flow is available from
wells.
4) Beta may realize cash flow from oil and gas wells, if found to be
productive. Beta owns a working interest in one well that is currently
producing and in 6 wells which are presently being completed and
equipped for production. It is anticipated that cash flow from these
wells will commence in the first six months of 1999 and continue
throughout the year and generate net cash flow of approximately
$750,000. It is also anticipated that additional wells will be drilled
in 1999 which may contribute cash flow if completed for production.
The net proceeds of this offering combined with Beta's existing working
capital may not be sufficient to fund Beta's $8.3 million of capital
expenditures that are projected for 1999. If the above additional sources of
cash are unavailable on terms acceptable to Beta, Beta will be compelled to
reduce the scope of its business activities. If Beta is unable to fund planned
expenditures, it may be necessary to:
1) Forfeit its interest in wells that are proposed to be drilled;
2) Farm-out its interest in proposed wells; and,
3) Sell a portion of its interest in proposed wells and use the sale
proceeds to fund its participation for a lesser interest.
4) Reduce general and administrative expenses.
<PAGE>
As stated above, Beta believes it has sufficient working capital to fund
its working capital requirements until June 15, 1999. In the event that Beta
does not have the minimum offering proceeds by this date, it may be necessary
for Beta to substantially curtail its business activities until the proceeds are
available. The inability to fund planned expenditures after June 15 could
negatively impact Beta in several ways:
|_| This will prevent Beta from carrying out its business plan and prevent Beta
from participating in wells proposed to be drilled after that date.
|_| If Beta is unable to participate in proposed wells, it will be excluded
from any potential economic benefit that the wells might generate.
|_| Beta has previously advanced over $11,000,000 to acquire leases and seismic
data in projects associated with these proposed wells.
|_| Beta's participation agreements in those projects preclude Beta from
receiving any reimbursement of seismic and lease funds previously advanced
in the event Beta does not participate in the drilling of wells on those
projects.
|_| If Beta cannot participate in the drilling in these projects, it will be
forced to write down all or a portion of the over $11,000,000 in costs
which have been capitalized as unevaluated properties.
|_| These writedowns will result in substantial financial losses to Beta and
negatively impact shareholder's equity.
Beta may have to seek alternative forms of financing to "bridge" its
capital needs until the proceeds of this offering are available. The terms of
the bridge financing are likely to be onerous:
|_| The interest rate for bridge financing would likely be much higher than
interest on a conventional bank loan. |_| Bridge financing terms may
require Beta to issue common shares which would be highly dilutive to
existing shareholders. |_| The bridge financing may require Beta to pledge
its assets as collateral.
|_| Bridge financing terms could likely contain restrictive covenants on Beta.
These are forward looking statements that are based on assumptions which in the
future may not prove to be accurate. Although Beta management believes that the
expectations reflected in such forward looking statements are based on
reasonable assumptions, it can give no assurance that its expectations will be
achieved. Certain risks and uncertainties inherent in Beta's business are set
forth in the "Risk Factors" section of this prospectus.
Comparison of Results of Operations for the Period from Inception, June 6, 1997,
through December 31, 1997 and the year ended December 31, 1998
During the period from inception, June 6, 1997, through December 31, 1997
and the year ended December 31, 1998 Beta generated no revenues.
General and administrative expenses for the period from inception, June 6,
1997, through December 31, 1997 were $245,452 compared to $746,769 for the year
ended December 31, 1998. This represents a $501,317 or a 204% increase. The
primary reasons for the increase were due to:
(1) A full year of operations in 1998 as compared to a partial year in 1997 .
(2) An increase in the number of employees from three in 1997 to five in 1998.
(3) Costs related to filing this registration statement.
Loss from operations totaled $(246,982) for the period from inception, June
6, 1997, through December 31, 1997 compared to $(2,429,343) for the year ended
1998. The primary reason for the increase in the loss was due to an impairment
expense of $1,670,691 recorded in 1998. During 1998 Beta participated in the
drilling of two offshore test wells in Australia. The drilling resulted in two
dry holes. All of the property acquisition and exploration costs associated with
the Australian full cost pool totaling $1,624,218 have been transferred to
evaluated properties and charged to impairment expense during 1998. In addition,
it was determined that the capitalized costs associated with the U.S. full cost
pool exceeded their net realizable value by $46,473. Accordingly, an impairment
write-down of $46,473 was recorded as of December 31, 1998.
Other income for the period from inception, June 6, 1997, through December
31, 1997 consisted of interest income in the amount of $45,409. Beta realized
$44,843 of interest income for 1998.
Net loss for the period from inception, June 6, 1997, through December 31,
1997 was $(201,573) compared to $(2,384,500) for the year ended December 31,
1998. The increase in net loss was primarily due to the impairment writedown of
oil and gas properties.
<PAGE>
Subsequent Events
After December 31, 1998 Beta acquired interests in four exploratory
drilling prospects in Louisiana. Beta paid $658,000 as consideration for its 15%
share of land and seismic costs in the prospects. In addition, as previously
mentioned in this section, Beta secured $3,000,000 in short term "bridge"
financing. of which $3,000,000 will be repaid upon completion of the minimum
amount of this offering See section under "bridge notes."
Inflation
In recent years inflation has not had a significant impact on Beta's
operations or financial condition. However, in the past several years,
competition from other oil and gas companies to acquire, explore and develop
acreage, particularly in the Gulf Coast region of Texas and Louisiana, has
intensified. Competition from other companies has also increased utilization
rates and the costs of contracting with seismic acquisition and drilling
contractors. Although it is not possible to accurately predict whether such
competition will continue in future periods, it could put upward pressure on
costs incurred to explore for, acquire, drill, complete and operate oil and gas
properties.
Income Taxes
As of December 31, 1998, Beta had available, to reduce future taxable
income, a tax net operating loss carryforward of approximately $4,003,000 which
expires in the years 2012 through 2018. As of December 31, 1998, Beta has a
deferred tax asset of approximately $1,110,000 which is fully reserved for with
a valuation allowance. The deferred tax asset consists entirely of the net
operating loss carryforward. Utilization of the tax net operating loss
carryforward may be limited in the event a 50% or more change of ownership
occurs within a three year period. The tax net operating loss carryforward may
be limited by other factors as well.
Disclosure Regarding Forward-Looking Statements
All forward looking statements contained in this prospectus are based on
assumptions believed to be reasonable. These statements are included in the
following sections of this prospectus:
|_| Business
|_| Properties
|_| Management's Discussion and Analysis of Financial Condition and Results
of Operations
|_| Risk Factors
These forward looking statements include statements regarding:
|_| Beta's financial position
|_| Proved or possible reserve quantities and net present values of those
reserves
|_| Business strategy
|_| Plans and objectives of management of Beta for future operations and
capital expenditures
|_| Revenue and cash flow projections
Beta can give no assurance that such expectations and assumptions will
prove to be correct. Reserve estimates of oil and gas properties are generally
different from the quantities of oil and natural gas that are ultimately
recovered or found. This is particularly true for estimates applied to
exploratory prospects. Additionally, any statements contained in this report
regarding forward-looking statements are subject to various known and unknown
risks, uncertainties and contingencies, many of which are beyond the control of
Beta. Such things may cause actual results, performance, achievements or
expectations to differ materially from the anticipated results, performance,
achievements or expectations.
Factors that may affect such forward-looking statements include, but are
not limited to:
|_| Beta's ability to generate additional capital to complete its planned
drilling and exploration activities
|_| Risks inherent in oil and gas acquisitions, exploration, drilling,
development and production; price volatility of oil and
gas
|_| Competition from other oil and gas companies
|_| Shortages of equipment, services and supplies
|_| Government regulation
|_| Environmental matters
<PAGE>
|_| Financial condition and operating performance of the other companies
participating in the exploration, development and production of oil and gas
ventures that Beta is involved in
In addition, since all of Beta's prospects are currently operated by third
parties, Beta may not be in a position to control costs, safety and timeliness
of work as well as other critical factors affecting a producing well or
exploration and development activities. See "Risk Factors."
Year 2000 "Y2K" Problem
Beta has begun to address possible remedial efforts in connection with
computer software that could be affected by the Year 2000 "Y2K" problem. The Y2K
problem is the result of computer programs being written using two digits rather
than four to define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a major system failure or miscalculations.
The Y2K problem can affect any modern technology used by a business in the
course of its day. Any machine that uses embedded computer technology is
susceptible to this problem, including for example, telephone systems, postage
meters & scales and of course, computers. The impact on a company is determined
to a large extent by the company's dependence on these technologies to perform
their day to day operations.
Internally, Beta has begun reviewing all such equipment and has determined
that many of our systems are Y2K compliant. This includes our telephone systems,
postage equipment and some of our software. We anticipate that all systems and
software will be fully reviewed and brought into compliance by November 1999. If
certain systems are not brought up to Y2K compliance by the end of November
1999, then the non-compliant technology will be disabled so as not to have an
impact on the systems that are compliant. Any such events would not have a
serious impact on our day to day operations, nor would any valuable information
be lost. Our company backs up all computer systems daily to protect us against
data loss and we have a system that utilizes 10 rotating back-up tapes as a
safeguard against having a tape that is unreadable.
The costs of bringing our company technology up to Y2K compliance is
expected to be less than $5,000. This is because the majority of the "patches"
or programs designed to make software Y2K compliant can be obtained over the
internet from manufacturers for little or no cost and we do not expect to rely
heavily on outside consultants to upgrade our systems as most of the work can be
performed in-house.
Externally, the Year 2000 problem may impact other entities with which Beta
transacts business, and Beta cannot predict the effect of the Year 2000 problem
on such entities or Beta. With regard to those companies that we do business
with on a daily basis, we cannot guarantee that they will be vigilant about
their Y2K plan of action. We have, however, started mailing out a simple
questionnaire to these companies, requesting that they advise us of their Y2K
readiness. Should any of our oil and gas well operators experience a disruption
due to the Year 2000 problem, the most significant impact may be a delay in the
progress of drilling operations and/or interruption of production and revenue on
a producing well. In a worst case scenario, the former may ultimately cause Beta
to incur drilling cost overruns, while the latter may cause us to have an
interruption in revenues for several months.
We have also assessed the possibility of personal injury, loss of life,
property damage and accidental pollution resulting from equipment malfunctions.
Although we believe these to be a remote possibility, we have undertaken
investigations to determine possible problem areas and will communicate our
findings, if any, to the project operators.
In these unlikely events, Beta's plan of action is to have on hand a cash
reserve at December 31, 1999 to cover both the additional well costs and the
Company's overhead expenses until production resumes. We have not yet determined
the amount or source of such funds. We are contacting our insurance carriers to
determine the extent of insurance coverage, if any, in the event Y2K problems
affect any of Beta's project areas.
In the event that Beta does experience Y2K problems, it could result in a
suspension of Beta's revenues. A suspension of revenues could result in material
losses from operations and a reduction in Beta's working capital. Management is
unable at this time to quantify the impact that the Y2K problem could have on
Beta's results of operations and financial condition.
<PAGE>
GLOSSARY
As used in this prospectus:
"Acquisition of properties" are the costs incurred to obtain rights to
production of oil and gas. These costs include the costs of acquiring oil and
gas leases and other interests. These costs include lease costs, finder's fees,
brokerage fees, title costs, legal costs, recording costs, options to purchase
or lease interests and any other costs associated with the acquisitions of an
interest in current or possible production.
"Area of mutual interest" means, generally, an agreed upon area of land,
varying in size, included and described in an oil and gas exploration agreement
which participants agree will be subject to rights of first refusal as among
themselves, such that any participant acquiring any minerals, royalty,
overriding royalty, oil and gas leasehold estates or similar interests in the
designated area, is obligated to offer the other participants the opportunity to
purchase their agreed upon percentage share of the interest so acquired on the
same basis and cost as purchased by the acquiring participant. If the other
participants, after a specific time period, elect not to acquire their pro-rata
share, the acquiring participant is typically then free to retain or sell such
interests.
"Back-in interests" also referred to as a carried interest, involve the
transfer of interest in a property, with provision to the transferor to receive
a reversionary interest in the property after the occurrence of certain events.
"Bbl" means barrel, 42 U.S. gallons liquid volume, used in this prospectus
in reference to crude oil or other liquid hydrocarbons.
"Bcf" means billion cubic feet, used in this prospectus in reference to gaseous
hydrocarbons.
"BCFEQ" means billions of cubic feet of gas equivalent, determined using
the ratio of six thousand cubic feet of gas to one barrel of oil, condensate or
gas liquids.
"Casing Point" means the point in time at which an election is made by
participants in a well whether to proceed with an attempt to complete the well
as a producer or to plug and abandon the well as a non-commercial dry hole. The
election is generally made after a well has been drilled to its objective depth
and an evaluation has been made from drill cutting samples, well logs, cores,
drill stem tests and other methods. If an affirmative election is made to
complete the well for production, production casing is then generally cemented
in the hole and completion operations are then commenced.
"Development costs" are costs incurred to drill, equip, or obtain access
to proved reserves. They include costs of drilling and equipment necessary to
get products to the point of sale and may entail on-site processing.
"Exploration costs" are costs incurred, either before or after the
acquisition of a property, to identify areas that may have potential reserves,
to examine specific areas considered to have potential reserves, to drill test
wells, and drill exploratory wells. Exploratory wells are wells drilled in
unproven areas. The identification of properties and examination of specific
areas will typically include geological and geophysical costs, also referred to
as G&G, which include topological studies, geographical and geophysical studies,
and costs to obtain access to properties under study. Depreciation of support
equipment, and the costs of carrying unproved acreage, delay rentals, ad valorem
property taxes, title defense costs, and lease or land record maintenance) are
also classified as exploratory costs.
"Farmout" involves an entity's assignment of all or a part of its interest
in a property in exchange for the assignee's obligation to expend all or part of
the funds to drill and equip the property.
"Future net revenues, before income taxes" means an estimate of future net
revenues from a property at a specified date, after deducting production and ad
valorem taxes, future capital costs and operating expenses, before deducting
income taxes. Future net revenues, before income taxes, should not be construed
as being the fair market value of the property.
"Future net revenues, net of income taxes" means an estimate of future net
revenues from a property at a specified date, after deducting production and ad
valorem taxes, future capital costs and operating expenses, net of income taxes.
Future net revenues, net of income taxes, should not be construed as being the
fair market value of the property.
"Mcf" means thousand cubic feet, used in this prospectus to refer to gaseous
hydrocarbons.
<PAGE>
"MMcf" means million cubic feet, used in this prospectus to refer to
gaseous hydrocarbons.
"MBbl" means thousand barrels, used in this prospectus to refer to crude
oil or other liquid hydrocarbons.
"Gross" oil and gas wells or "gross" acres is the total number of wells or
acres in which Beta has an interest.
"Net" oil and gas wells or "net" acres are determined by multiplying
"gross" wells or acres by Beta's interest in such wells or acres.
"Oil and gas lease" or "Lease" means an agreement between a mineral owner,
the lessor, and a lessee which conveys the right to the lessee to explore for
and produce oil and gas from the leased lands. Oil and gas leases usually have a
primary term during which the lessee must establish production of oil and or
gas. If production is established within the primary term, the term of the lease
generally continues in effect so long as production occurs on the lease. Leases
generally provide for a royalty to paid to the lessor from the gross proceeds
from the sale of production.
"Overpressured reservoir" are reservoirs subject to abnormally high
pressure as a result of certain types of subsurface conditions.
"Present value of future net revenues, before income taxes" means future
net revenues, before income taxes, discounted at an annual rate of 10% to
determine their "present value." The present value is shown to indicate the
effect of time on the value of the revenue stream and should not be construed as
being the fair market value of the properties.
"Present value of future net revenues, net of income taxes" means future
net revenues, net of income taxes discounted at an annual rate of 10% to
determine their "present value." The present value is shown to indicate the
effect of time on the value of the revenue stream and should not be construed as
being the fair market value of the properties.
"Production costs" means operating expenses and severance and ad valorem
taxes on oil and gas production.
"Prospect" means a geologic anomaly which may contain hydrocarbons that has
been identified through the use of 3-D and/or 2-D seismic surveys and/or other
methods.
"Proved oil and gas reserves" are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions, i.e. prices
and costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions. Reservoirs are considered proved if
economic producibility is supported by either actual production or conclusive
formation test. The area of a reservoir considered proved includes (A) that
portion delineated by drilling and defined by gas-oil and/or oil-water contacts,
if any, and (B) the immediately adjoining portions not yet drilled, but which
can reasonably judged as economically productive on the basis of available
geological and engineering data. In the absence of information on fluid contacts
the lowest known structural occurrence of hydrocarbons controls the lower proved
limit of the reservoir.
"Proved developed oil and gas reserves" are reserves that can be expected
to be recovered through existing wells with existing equipment and operating
methods. Additional oil and gas reserves expected to be obtained through the
application of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery should be
included as "proved developed reserves" only after testing by a pilot project or
after the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
"Proved undeveloped oil and gas reserves" are reserves that are expected to
be recovered from new wells on undrilled acreage, or from existing wells where a
relatively major expenditure is required for recompletion. Reserves on undrilled
acreage shall be limited to those drilling units offsetting productive units
that are reasonably certain of production when drilled. Proved reserves for
other undrilled units can be claimed only where it can be demonstrated with
certainty that there is continuity of production from the existing productive
formation. Under no circumstances should estimates for proved undeveloped
reserves be attributable to any acreage for which an application of fluid
injection or other improved recovery technique is contemplated, unless such
techniques have been proved effective by actual tests in the area and in the
same reservoir.
"Reserve target" means a geologic anomaly which may contain hydrocarbons
that has been identified through the use of 3-D and 2-D seismic surveys and
other methods.
<PAGE>
"Royalty interest" is a right to oil, gas, or other minerals that is not
burdened by the costs to develop or operate the related property. The basic
royalty interest is retained by the owner of mineral rights when his property is
leased for purposes of development.
"Trend" means a geographical area where similar geological, geophysical, or
oil and gas reservoir and production characteristics may exist.
"Seismic Option" generally means an agreement in which the mineral owner
grants the right to acquire seismic data on the subject lands and grants an
option to acquire an oil and gas lease on the lands at a predetermined price.
"Working interest" is an interest in an oil and gas property that is
burdened with the costs of development and operation of the property.
<PAGE>
BUSINESS
General
Beta Oil & Gas, Inc. is an oil and gas company organized in June 1997 to
engage in the exploration, development, exploitation and production of natural
gas and crude oil. Beta's operations are currently focused in proven oil and gas
producing trends primarily in South Texas, Louisiana and Central California.
Beta believes that the availability of economic 3-D seismic surveys has
fundamentally changed the risk profile of oil and gas exploration in these
regions. Recognizing this change, Beta has aggressively sought to acquire
significant prospective acreage blocks for targeted, proprietary, 3-D seismic
surveys. As of the date of this prospectus, Beta had assembled approximately
76,000 gross acres under lease or option.
Approximately 94% of Beta's current acreage position is evaluated by
proprietary 3-D seismic data that Beta has acquired, or is in the process of
acquiring, through joint participation with operating oil and gas companies.
From the data generated by its initial 5 proprietary seismic surveys, covering
313 square miles, in excess of 100 potential drillsites have been identified.
Approximately $10,000,000, representing 60% of the total funds raised to
date by Beta, have been utilized to acquire working interests in lands and
seismic data in the onshore Texas Gulf Coast region. Beta's interests in the
onshore Texas properties are operated by Parallel Petroleum Corporation.
Drilling has commenced in these projects during the first quarter of 1999 and
has resulted in two discoveries of oil and gas to date. Representatives of
Parallel have informed Beta that drilling will continue in these projects
throughout the year. Beta anticipates that participation in exploratory and
drilling projects in South Texas will constitute its primary activity during
1999.
Approximately $3,300,000, representing 20% of the funds raised so far by
Beta have been invested in leases, seismic and drilling in Louisiana. Drilling
commenced in these prospects in 1998 and has resulted in one oil and gas
discovery so far. It is expected that Beta will participate in the drilling of a
minimum of six wells in Louisiana during 1999.
The balance of the funds raised to date have been utilized primarily to
fund various domestic and international exploratory activities. Beta's
exploratory activities in areas outside of Texas have resulted in a natural gas
discovery located in Central California. It is anticipated that Beta will expend
additional funds to explore these areas during 1999 and future periods.
Beta's capital budget for 1999 of approximately $8,300,000, subject to
available funds, includes amounts for the acquisition of additional 3-D seismic
data and for the drilling of 38 gross wells or 8.39 net wells in 1999 with
working interests ranging from 12.5% to 75% and averaging 22%. A majority of the
budgeted wells will be drilled in Jackson County, Texas. In addition, Beta
anticipates that as its existing 3-D seismic data is further evaluated, and 3-D
seismic data is acquired over the balance of its acreage, additional prospects
will be identified for drilling beyond 1999.
Beta intends to rely on joint ventures with qualified operating oil and gas
companies to operate its projects through the exploratory and production phases.
This will reduce general and administrative costs necessary to conduct
operations. As of the date of this prospectus, Beta is not operating any of the
oil and gas wells or prospects in which it owns an interest but instead relies
on third party companies to operate the wells and properties.
Technology
Beta participates in projects utilizing economically feasible advanced
technology in their exploration and development activities to reduce risks,
lower costs, and more efficiently produce oil and gas. Beta believes that the
availability of cost effective 3-D seismic surveys makes its use in exploration
and development activities attractive from a risk management perspective in
certain areas. In certain instances, 3-D seismic surveys more accurately inform
Beta in evaluating drilling prospects than do conventional 2-D seismic and
traditional evaluation methods.
Briefly, a seismic survey sends pulses of sound from the surface, down into
the earth, and records the echoes reflected back to the surface. By calculating
the speed at which sound travels through the various layers of rock, it is
possible to estimate the depth to the reflecting surface. It then becomes
possible to infer the structure of rock deep below the earth's surface. Beta has
focused its exploration activity in the Gulf of Mexico region due to affordable
and available seismic data, and the affordability of the software and computer
hardware necessary to peer through the layers of rock and salt to locate
heretofore undiscovered hydrocarbons. Beta evaluates substantially all of its
exploratory prospects using 3-D or enhanced 2-D seismic surveys.
In evaluating certain of its exploratory prospects, Beta also uses
amplitude versus offset "AVO" technology. AVO analysis can show the high
contrast between the sand and shales and provides for better interpretation of
the reservoir sands to determine the presence of gas.
Beta retains experienced third-party consultants and participates with
experienced joint working interest owners to acquire, process and interpret 3-D
seismic surveys. Beta attempts to ensure the integrity of the 3-D seismic
analysis in each of its projects by emphasizing quality control throughout the
data acquisition, processing and interpretation. Whenever possible, Beta also
attempts to correlate or "model" the interpretations of 3-D seismic surveys with
wells previously drilled on or near the prospect being evaluated.
Beta may supplement its exploration efforts with acquisitions of producing
oil and gas properties. Beta would seek to acquire producing properties that
either are underperforming relative to their potential or are candidates for 3-D
seismic analysis.
Summary of Oil and Gas Operations
Capitalized costs at December 31, 1997 and December 31, 1998 relating to Beta's
oil and gas activities are summarized as follows:
<TABLE>
December 31, 1997 December 31, 1998
------------------------------- -------------------------------
United United
States Foreign States Foreign
------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Capitalized costs-
Evaluated properties $ - $ - $ 1,763,082 $ 1,624,218
Unevaluated properties 5,870,794 30,000 11,426,732 39,963
Less- Accumulated depreciation,
Depletion, amortization
And impairment - - (46,473) (1,624,218)
============= ============== ============= ================
$ 5,870,794 $ 30,000 $ 13,143,341 $ 39,963
============= ============== ============= ================
</TABLE>
Costs incurred in oil and gas producing activities are as follows:
<TABLE>
Cumulative from inception
Inception (June 6, 1997) Year ended (June 6, 1997) through
through December 31, 1997 December 31, 1998 December 31, 1998
------------------------------ ------------------------------- -------------------------------
United States United States United States
Foreign Foreign Foreign
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Property acquisition $ 3,835,540 $ - $ 2,808,123 $ 323,463 $ 6,643,663 $ 323,463
============= ============= ============== ============= ============= =============
Exploration $ 2,035,254 $ 30,000 $ 4,510,897 $ 1,310,718 $ 6,546,151 $ 1,340,718
============= ============= ============== ============= ============= =============
Development $ - $ - $ - $ - $ - $ -
============= ============= ============== ============= ============= =============
</TABLE>
As of December 31, 1997 and 1998, Beta has not made a provision for
depletion since it has not derived any production from its properties. All costs
incurred through December 31, 1997 have been excluded from the amortization
base. As Beta's properties are evaluated through exploration, they will be
included in the amortization base. Costs of unevaluated properties in the United
States at December 31, 1997 and December 31, 1998 represent property acquisition
and exploration costs in connection with Beta's Louisiana, Texas and California
prospects. In excess of 80% of the costs of unevaluated properties were incurred
in connection with Beta's activities in Texas. The prospects and their related
costs in unevaluated properties have been assessed individually and no
impairment charges were considered necessary for any of the periods presented.
The current status of these prospects is that seismic has been acquired,
processed and is currently being interpreted on the subject lands within the
prospects. Drilling has commenced on these
<PAGE>
prospects and is expected to continue
in future periods. As the prospects are evaluated through drilling in future
periods, the property acquisition and exploration costs associated with the
wells drilled will be transferred to evaluated properties where they will be
subject to amortization.
During the year ended December 31, 1998, Beta participated in the drilling,
within the United States, of four unsuccessful exploratory wells and one well
that is being completed for production in its Louisiana "Transition Zone"
prospect, and one well that is being completed for production in its California
Norcal Project. The costs associated therewith have been transferred to
evaluated properties. A ceiling test was performed as of December 31, 1998 to
determine whether the capitalized costs associated with the drilling of the six
wells ("evaluated properties") exceeded their net realizable value. It was
determined that the capitalized costs exceeded their estimated net realizable
value by $46,473. Accordingly, an impairment provision of $46,473 was recorded
as of December 31, 1998 for Beta's United States cost center.
Exploration costs incurred outside the United States represent costs in
connection with the evaluation and proposed acquisition of one or more
exploration blocks located in Brazil. In addition, Beta, through its wholly
owned subsidiary, BETAustralia, LLC, participated in the drilling of two dry
holes in Australia. The property acquisition and exploration costs associated
therewith totaling $1,624,218 have been transferred to evaluated properties and
charged to impairment expense during the year ended December 31, 1998.
PROPERTIES
Beta's current oil and gas exploration activities are focused in four
distinct project areas as follows:
1. Yegua and Frio Trend 3-D Seismic Joint Venture - Onshore Gulf Coast Region,
Jackson County, Texas;
2. Louisiana Transition Zone Project - Offshore and Onshore Gulf Coast Region,
Louisiana;
3. Norcal Project - Onshore San Joaquin and Sacramento Basins, California; and
4. International - Onshore Australia and Brazil.
In each of its project areas, Beta has entered into joint ventures with
operators who have extensive experience and expertise in those areas. This has
allowed Beta to obtain working interests in a number of prospects with minimal
associated overhead.
The following discussion contains forward looking statements. The projects
discussed in this section may never yield any commercial discoveries of
hydrocarbons and, even if they do, they could result in a loss to Beta. See
"Risk Factors" for a discussion of the risk factors associated with the
projects.
YEGUA/FRIO/WILCOX TREND 3-D SEISMIC JOINT VENTURE, JACKSON COUNTY, TEXAS
Beta presently owns working interests in four Onshore Gulf Coast
exploration projects located in Jackson County, Texas. The projects are operated
by Parallel Petroleum Corporation, a publicly traded company. Approximately
60,000 gross acres, approximately 11,000 acres net to Beta's working interest,
of oil and gas leases or seismic options have been acquired in these four
projects as of December 31, 1998. As of December 31, 1998, Parallel had
completed 3-D seismic surveys over an area totaling 286 square miles within
which these projects are located and was evaluating seismic data to select
drilling locations. Drilling commenced on Beta's project areas in the first
quarter of 1999.
The following projects in which Beta is participating will use the same
seismic techniques that Parallel has previously used to identify potential drill
sites. The status of the projects is as follows:
1) Texana Project. Approximately 25,000 gross acres under seismic coverage;
2,293 gross acres under seismic option; 164 gross acres under lease; 614 acres
under seismic lease option or lease net to Beta's 25% working interest as of
December 31, 1998:
Approximately 40 square miles of 3-D seismic data has been
acquired and processed. "Amplitude Versus Offset" analysis and data
interpretation is currently being completed. Drilling of exploratory wells is
expected to commence in the second half of 1999.
2) Formosa Grande Project. Approximately 92,000 gross acres under seismic
coverage; 7,064 gross acres under seismic lease options and 9,194 gross acres
under lease; 4,064 acres under seismic lease options or lease net to Beta's 25%
working interest at December 31, 1998:
<PAGE>
Approximately 140 square miles of 3-D seismic data has been
acquired. The seismic data is currently in the interpretive stages with drilling
of exploratory wells expected to commence in the second half of 1999.
3) Ganado Project. Approximately 25,000 gross acres under seismic coverage,
4,581 gross acres under seismic lease options and 9,439 gross acres under lease;
2,804 acres under option or lease net to Beta's 20% working interest at December
31, 1998:
Approximately 40 square miles of 3-D seismic data has been
acquired and is in the interpretive stages. One exploratory well was drilled in
this project in March of this year. The well was completed as a dry hole. A
second exploratory well is scheduled to be drilled in May of 1999.
4) BWC Project. Approximately 42,440 gross acres under seismic coverage, 23,015
gross acres under seismic lease options and 833 gross acres under lease; 2,981
acres under option net to Beta's 12.5% working interest at December 31, 1998:
Approximately 66 square miles of 3-D seismic data has been
acquired and is in the interpretive stages. Drilling of exploratory wells
commenced in the first quarter of 1999 and has resulted in 2 oil and gas
discoveries to date. Additional drilling is scheduled for the second half of
1999.
Terms of Participation
All of the lands covered by the exploration agreements are subject to "area
of mutual interest" provisions described in the glossary preceding the
"Business" section. The exploration agreements generally provide, among other
things, for participation by Beta and other participants on the following terms
and conditions:
|_| Participants are required to pay 133% of actual cost of initial
land costs, consisting mainly of seismic options, and the costs of
acquiring, processing and interpreting seismic data. All costs
incurred after the interpretation phase are billed to the
participants at actual cost. The post interpretation costs include
the cost of drilling, completing and equipping wells and the costs
of acquiring leases.
|_| Once the seismic data has been acquired and interpreted, prospects
will be designated within the seismic survey areas. The parties to
the agreement then have the option to participate in the prospect
according to their pro-rata working interest. Those parties who
elect not to participate forfeit their rights of participation in
the specific prospect but retain the right to participate in other
prospects proposed in the seismic survey area which are outside of
the specific prospect.
|_| Those parties who elect to participate in a specific prospect
then proceed to acquire oil and gas leases within the prospect by
exercising seismic options. The seismic options were acquired in
advance of seismic acquisition and convey the right to conduct
seismic operations as well as the option to enter into an oil and
gas lease on the subject lands at a pre-determined price per
acre. The seismic option allows Beta and its partners to acquire
and evaluate seismic data before actually acquiring leases. After
the seismic data has been evaluated, Beta and its partners can
then selectively acquire leases by exercising on acreage which is
determined to be prospective from seismic evaluation. Seismic
options covering lands which are determined not to have oil and
gas potential are allowed to expire at no further cost to the
participants. The cost of a seismic option is usually much lower
than the cost of acquiring a lease and it also prevents the
mineral owner lessor from leasing the oil and gas rights to
another party during the term of the option.
Geological and Economic Overview of the Yegua/Frio/Wilcox Trend 3-D Joint
Venture
The subject lands lie in close proximity to productive oil and gas fields
which produce from the Yegua/Frio/Wilcox intervals. Beta wishes to emphasize
that the historical production results in the area are not necessarily
indicative of the results that Beta may obtain from its oil and gas prospects.
Within Beta's project areas, there are high potential exploration
opportunities that are being defined with the use of 3-D seismic. The Jackson
County area has proven to be suitable for 3-D seismic as faulting and structures
are easily identified and many stratigraphic reservoirs exhibit hydrocarbon
indicators from the shallowest Miocene sands, throughout the Frio, and into the
Vicksburg, Yegua, and Wilcox intervals. The Formosa Grande Prospect Area has
numerous regional down-to-the-coast faults that are easily identified at the top
of the Frio, but also has deep seated faulting that does not exhibit
displacement at the shallower horizons. Very often, these deep faults do create
hydrocarbon traps. Most fields in this trend area exhibit multiple stacked
reservoirs.
<PAGE>
A Frio level structure map exhibits numerous large four-way closures,
primarily down-thrown to regional growth faulting. These large structures have,
for the most part, been exploited, some as early as the 1930s and 1940s.
Although it is not readily apparent in regional mapping, much of the Frio
production is stratigraphic in nature, that is, trapped in channel sands that
traverse structures, or in sands that "pinch out" up onto the flanks of these
large structures. Significant reserves may remain in similar traps which have
not been developed to date. Such traps should be readily defined with 3-D
seismic data.
Beta's project areas appear to be located in a suitable "trend" area to
apply 3-D seismic technology to identify reserves that have been passed over in
existing fields as well as to discover new reserves in deeper pools and
undrained fault segments in compartmentalized fields.
LOUISIANA TRANSITION ZONE PROJECT
Beta has entered into several joint exploration agreements in southern
Louisiana in an area which is generally described as the Transition Zone.
The Transition Zone
The Transition Zone of Southern Louisiana covers the shoreline and
near shore environments in the Gulf of Mexico region. This region has been
under-explored because acquisition of seismic data in the area was very
expensive and has historically been of less than ideal quality due to the
problems inherent in gathering data in the wide variety of environments
encountered between land and deeper water offshore. Innovative techniques have
been utilized to acquire and process 3-D seismic data and quality data that
provides the opportunity to accurately interpret the structural and
stratigraphic framework of the area.
All of the reserve targets will lie in the shallow waters or
onshore. Depths of the reserve targets will typically range from 3,000 to 15,000
feet. The average dry hole costs for these wells are expected to be $1,500,000
for a straight hole and $2,000,000 for a directional hole to the 100% working
interest. The completion cost per well is estimated at $1,000,000 to $1,500,000
to the 100% working interest. Beta's prospects in the Transition Zone are
located within or adjacent to existing pipeline infrastructure. This will enable
wells drilled in the prospects to be connected to existing pipelines to
transport oil and gas to markets.
The Cheniere Exploration Agreements
In January 1999, Beta entered into joint exploration agreements with
Cheniere Energy, Inc. on four natural gas prospects located in Louisiana. Beta
paid $658,000 to Cheniere as consideration for land and seismic costs and
committed to participate in the drilling of a test on three of the four
prospects. The agreements provide that Beta will pay 20% of the costs of
drilling each of the test wells to total depth to earn a 15% working interest in
each prospect. All costs incurred thereafter shall be borne by Beta at its 15%
working interest. Total estimated costs of drilling the three test wells to
total depth are $876,000 net to Beta.
The following prospects in which Beta is participating have been identified from
a proprietary 3-D seismic survey acquired by Cheniere. The status of the
prospects is as follows:
1) Cobra Prospect. Approximately 1,404 gross acres under lease; 211 acres net
to Beta's 15% working interest:
This prospect is located onshore in Cameron Parish, Louisiana. A well
commenced drilling on this prospect to a projected depth of 12,500 feet in
February 1999 and was determined to be non-commercial. The estimated cost of
drilling and testing this well to casing point is $380,000 net to Beta.
2) Shark Prospect. Approximately 752 gross acres under lease; 113 acres net to
Beta's 15% working interest:
This prospect is located offshore in West Cameron Block 49, Louisiana. A
9,900 foot test well commenced drilling on this prospect in April 1999 and was
completed as a dry hole. The estimated cost of drilling this well to casing
point is $245,000 net to Beta. A separate deeper 11,000 foot test is planned for
this prospect later in the year.
3) Redfish Prospect. Approximately 404 gross acres under lease; 61 acres net
to Beta's 15% working interest:
<PAGE>
This prospect is located offshore in West Cameron Block 49, Louisiana. A
10,000 foot test well was drilled on this prospect in March 1999 and is
currently being completed for production testing. The estimated cost of drilling
this well to casing point is $284,000 net to Beta.
4) Stingray Prospect. Approximately 691 gross acres under lease; 104 acres net
to Beta's 15% working interest:
This prospect is located offshore in West Cameron Block 49, Louisiana. A
10,000 foot test well is expected to commence drilling on this prospect in June
of 1999. The estimated cost of drilling this well to casing point is $245,000
net to Beta if Beta elects to participate.
The Rozel Exploration Agreement
Beta entered into a joint exploration agreement with Rozel Energy in 1998
to explore for oil and gas in the Transition Zone of South Louisiana. Under this
agreement, which expired on February 23, 1999, Rozel identified prospects on the
basis of a 3-D seismic survey completed by Fairfield Industries, one of the
leading providers of 3-D seismic data for the Gulf of Mexico. The survey is the
largest shallow water survey that has ever been conducted in the United States,
covering an area in excess of 2,000 square miles. Although the agreement with
Rozel has expired, Beta continues to have participation rights in acreage
acquired and wells drilled before the expiration of the agreement.
Under the terms of the Rozel agreement, Beta provided a total of $480,000
of lease acquisition funding for prospects before expiration of the agreement.
Rozel identified the prospects utilizing the 3-D seismic data from the Fairfield
survey. In consideration for providing the lease acquisition funds, Beta is
entitled, but not obligated, to participate on a prospect by prospect basis in
leases that were acquired by Rozel Energy during the term of the agreement.
There are currently three remaining undrilled prospects in which Beta has
rights of participation. Beta's terms of participation shall require it to pay
approximately 12.5% of the costs of drilling and completing the first well in
each prospect to earn approximately a 9.375% working interest in the initial
well and prospect acreage, a "third for a quarter" basis. Beta's 9.375% working
interest shall be further reduced to 8.8% after the costs of the prospect have
been recouped. Beta is obligated to pay a $50,000 fee on those prospects in
which it elects to participate. Beta shall be entitled to reimbursement of lease
funds advanced for prospects in which it elects not to participate. Beta shall
be entitled to such reimbursement if and when Rozel either sells or otherwise
conveys, i.e. farmouts, its interest in, or drills, the Prospect.
In addition to the three undrilled prospects, Beta owns a 9.375% working
interest in a producing well and 5,000 acres surrounding it. The OCS-G-13825
Minkfish #1, West Cameron Blk. 39, was drilled to a depth of approximately
10,500 feet. The well commenced production in January 1999. Drilling on a second
well, the Minkfish #2, commenced in March of 1999. Beta intends to participate
in a proposed completion of the well as a producer. The estimated cost of
drilling this well to casing point is $215,000 net to Beta's 9.38% working
interest. Estimated completion cost net to Beta is $172,000.
The Lapeyrouse 3-D Prospect
This prospect is in Terrebone Parish, South Louisiana, an area specifically
targeted by Beta for its high reserve potential based on historical production
results that have been published for this area. Although the main objective, the
Duval, will be reached with a 14,800' test well, a total of twenty-one
objectives will be tested with one well bore. These consist of fourteen smaller
objectives from 10,000' to 14,000' to pressure point and seven larger objectives
in abnormal pressure, over-pressured reservoir, through 16,000'.
Beta's working interest was purchased after detailed 3-D seismic was
completed and interpreted. A total of 7,000 mineral acres have been leased to
drill the multiple objectives stated above. Beta's working interest varies
between 2.5% and 6.25% in the project leases. An initial exploratory well is
anticipated to be drilled in the second or third quarter of 1999. Beta has
acquired an additional 6.25% working interest from a participant who has
declined to participate, which has increased Beta's working interest in the
initial exploratory well to 12.5%. Estimated drilling costs to casing point for
a proposed 14,800 foot test are $3,304,302 of which Beta shall pay $413,000 for
its proportionate 12.5% working interest. Estimated completion costs are
$1,051,683 of which Beta shall pay $131,000 for its proportionate 12.5% working
interest, provided Beta elects to participate in the completion.
<PAGE>
NORCAL PROJECT, ONSHORE SAN JOAQUIN AND SACRAMENTO BASINS
Beta has entered into an exclusive eighteen month contract, expiring in
April of 1999, to utilize 3-D and 2-D seismic technology in a 500 square mile
area of mutual interest with a prospect generator, Jim Frimodig. A prospect
generator is someone who generates an oil and gas prospect idea using geologic
and/or seismic data. Beta will maintain a 75% working interest in certain
prospects generated by Mr. Frimodig in the San Joaquin and Sacramento Basins in
Central and Northern California. As of December 31, 1998, Beta has participated
in the drilling of two wells in the Norcal Project. The N.W. Buttonwillow #1 was
completed in July 1998 flowing at a rate of 415,000 cubic feet of natural gas
per day from a perforated interval at a depth of approximately 4,500 feet.
Additional pay zones remain behind pipe in this well. The South Shafter #1 was
completed as a dry hole in December of 1998. See "Drilling Activity"
Three additional wells are planned for this project in the second and third
quarters.
INTERNATIONAL
Although the majority of Beta's exploration efforts are focused in the
United States, management believes that international exposure can reduce the
business risks commonly associated with having operational activities confined
to one country.
Australian Projects
Beta has reviewed a number of exploration projects in the Asia Pacific
Region and elected to participate in two exploration areas covering four
separate exploration permits in Eastern Australia. A description of the areas is
as follows:
1) Toko Syncline Project
Beta's wholly owned subsidiary BETAustralia LLC has signed an agreement
with Dyad Australia, Inc. of Midland, Texas to participate for a 20% working
interest, 16.4% net revenue interest, in Dyad's rights to the Toko Syncline
Project. Dyad is the holder of exploration permits covering approximately
918,000 contiguous acres, 1,434 square miles, in the Georgina and Eromanga
Basins of Western Queensland. Since the acquisition of the permits, Dyad has
acquired, analyzed, and reprocessed 400 miles of existing 2-D seismic data and
identified four potentially significant geological structures encompassing
approximately 55,000 acres or 86 square miles. During the period from 1964 to
1980, there were six wells drilled in the Toko Syncline that went deep enough to
provide meaningful subsurface control. Four were exploratory and two were full
core tests by the Geological Survey of Queensland. Of these six, only one well
failed to identify oil or gas shows. At the time the wells were drilled, there
were no gas pipelines in the prospect areas available to transport natural gas,
if commercial amounts of gas could be discovered. The lack of pipelines in the
area discouraged further exploration in the area until now.
One of the structures is of particular interest due to a well, the Ethabuka
#1 drilled on the structure in 1973 by Alliance Oil Development. The well
encountered a persistent gas flow of 200 MCF of gas per day while drilling. The
well was abandoned 3,500 feet short of the initial target depth after twisting
off the drill pipe and making several unsuccessful efforts to reclaim the hole.
This very significant show of gas was documented by the Queensland Department of
Minerals and Energy. At the time, there was no gas pipeline in the area.
The market for natural gas has increased significantly since then in the
area. Western Queensland has a large mining industry centered in the city of Mt.
Isa. This area holds some of the world's largest deposits of copper, lead, zinc,
and phosphate. Previously, the mines and the associated processing and smelting
plants were fueled entirely by coal, which was shipped approximately 750 miles
by rail. The Queensland government is encouraging the introduction of natural
gas as an energy source. Construction of a 14 inch gas transmission line from
southwest Queensland to Mt. Isa is now complete and transporting gas. The
pipeline crosses the Toko Syncline project area, exposing the project to a
viable market for natural gas.
Dyad has entered into an agreement with a major U.S. concern for the
funding of additional seismic data acquisition and the drilling of an
exploration well. Under the terms of the agreement, Dyad will have the
opportunity to buy into the exploratory well on a cost only basis and after the
well has been drilled and evaluated. Dyad also has the option of postponing its
buy-in until later stages in the development program. If Dyad buys into the
program after the initial exploratory well has been drilled and evaluated, Beta
will at that point, have the option of acquiring a net 10% working interest at
cost. If Dyad postpones its buy-in option until the later stages of the project,
then its option to purchase an interest will be incrementally reduced. Per the
terms of the Beta-Dyad agreement, Beta has paid $100,000 to acquire 20% of
Dyad's working interest buy-in rights in the project area. Beta's working and
net revenue interest in the Toko Syncline project area will depend on if and
when Dyad and its partners elect to buy-in to the project and will be reduced in
the later
<PAGE>
stages of the project if the buy-in option is not exercised and
additional expenditures are incurred by the funding partner. The funding partner
will have exclusive marketing rights to hydrocarbons in the project area,
subject to an agreed minimum floor price to be received for hydrocarbons
produced and sold.
Beta anticipates that the initial exploratory well could be drilled as
early as the second or third quarter of 1999.
2) Stansbury Basin Project
In March 1998, Beta formed a wholly owned subsidiary called BETAustralia,
LLC, a limited liability company organized under the laws of California, for the
purposes of participating in the Stansbury Basin Project and other Australian
projects. Beta made an initial cash advance of $320,000 to secure an option to
participate for a 5% working interest in two petroleum licenses covering
2,798,000 acres or approximately 4,372 square miles. Per the terms of the option
agreement, Beta exercised its option to earn a 5% working interest by
participating in the drilling of two offshore test wells in the license areas.
Beta incurred costs of $1,304,218 in the drilling of the two wells. The wells
were completed as dry holes. The costs associated therewith totaling $1,624,218
have been transferred to evaluated properties and charged to impairment expense
during the year ended December 31, 1998. Beta has no current plans to conduct
additional exploration activities in the Australian, Stansbury Basin, license
areas. The exploration licenses expired in December of 1998.
Additional Projects Under Review
Although Beta's initial international focus is Australia, management is
currently reviewing several other opportunities including exploration licenses
in Brazil. However, there is no guarantee that any of these projects will ever
reach fruition.
These are forward looking statements. The projects discussed in this
section may never materialize and, even if they do materialize, they could
result in a loss to Beta. No formal agreements have been reached and there can
be no assurance that such a purchase will ever be completed and this potential
acquisition should not be relied upon in making an investment decision.
General
Beta holds interests in producing properties and undeveloped acreage in
three states within the United States.
Company Reserves
Beta had no proved reserves as of December 31, 1997. Beta's total net
ownership in oil and gas reserves as of December 31, 1998 is based on an
independent engineering report. The reserve quantities and valuations for fiscal
1998 are based upon estimates by Veazey & Associates, Inc.
Proved developed reserves are those that can be recovered through existing
wells with existing equipment and existing operating or tested recovery
techniques. All of Beta's reserves are classified as proved developed reserves.
<PAGE>
These reserves are located entirely within the United States.
<TABLE>
Beta Oil & Gas, Inc.
Historical Reserve Information
as of December 31, 1998 and 1997
------------------------------------------------------------------------------
DESCRIPTION 1998 1997
------------------------------------------------------------------------------
<S> <C> <C>
Proved Developed Reserves
Oil (bbls) 1,461 0
Gas (mcf) 1,596,740 0
------------------------------------------------------------------------------
Proved Reserves
Oil (bbls) 1,461 0
Gas (mcf) 1,596,740 0
------------------------------------------------------------------------------
Future Net Cash Flows
Before Income Tax $2,553,762 $0
------------------------------------------------------------------------------
Standardized Measure of
Discounted Future Net Cash Flows $1,716,608 $0
------------------------------------------------------------------------------
</TABLE>
Well Statistics
As of December 31, 1997, Beta did not own working interest in any
productive wells. As of December 31, 1998 Beta owned working interests in two,
.84 net, wells which have been completed for production but which have not yet
commenced production.
Acreage Statistics
The following tables set forth the undeveloped and developed acreage of
Beta as of December 31, 1998:
<TABLE>
Beta Oil & Gas, Inc. Acreage Holdings
As of December 31, 1998
------------------------------------------------------------------------------------------------
UNDEVELOPED ACREAGE GROSS ACRES NET ACRES
------------------------------------------------------------------------------------------------
<S> <C> <C>
California 200 150
Louisiana 7,502 485
Texas 59,038 10,955
------------------------------------------------------------------------------------------------
UNDEVELOPED ACREAGE 66,740 11,590
================================================================================================
------------------------------------------------------------------------------------------------
DEVELOPED ACREAGE GROSS ACRES NET ACRES
------------------------------------------------------------------------------------------------
California 600 450
Louisiana 5,000 470
Texas 0 00
------------------------------------------------------------------------------------------------
DEVELOPED ACREAGE 5,600 920
================================================================================================
</TABLE>
Drilling Activity
The following table sets forth the results of Beta's drilling activities in
the fiscal years ended December 31, 1998 and 1997:
<PAGE>
<TABLE>
Beta Oil & Gas, Inc.
Summary of Drilling Activity
For Fiscal Years Ending December 31, 1998 and 1997
---------------------------------------------------------------
EXPLORATORY WELLS 1998 1997
---------------------------------------------------------------
<S> <C> <C> <C>
GROSS
Productive 2 0
Dry 6 0
---------------------------------------------------------------
TOTAL 8 0
===============================================================
NET
Productive .84 0
Dry 1.13 0
---------------------------------------------------------------
TOTAL 1.97 0
===============================================================
---------------------------------------------------------------
DEVELOPMENT WELLS 1998 1997
---------------------------------------------------------------
GROSS
Productive 0 0
Dry 0 0
--------------------------------------------------------------
TOTAL 0 0
===============================================================
NET
Productive 0 0
Dry 0 0
---------------------------------------------------------------
TOTAL 0 0
===============================================================
</TABLE>
Drilling activity for 1998 is summarized as follows:
1. During March 1998, Beta participated in the drilling of two dry holes on
one of its Australian exploration licenses. Estimated costs net to Beta's
interest are $1,624,000 which have been charged to impairment expense
during the nine months ended September 30, 1998.
2. In May 1998, Beta participated in the drilling of the first test well in
its Louisiana Transition Zone Prospect. The well, the Whiskey Pass #1, Ship
Shoal Blk. 43, was drilled to a depth of 2,500 feet and was completed as a
dry hole at a net cost to Beta of $320,000 for its 12.5% working interest.
3. In July 1998, Beta participated in the drilling of the Sea Serpent #1, Ship
Shoal Blk. 67, to a depth of 11,000 feet and was completed as a dry hole at
a net cost of $244,000 for Beta's 12.5% working interest.
4. In July 1998, Beta participated in the drilling of the Minkfish #1, West
Cameron Blk. 39, to a depth of 11,000 feet and has been completed as a
producer. Beta has expended $328,000 in connection with this well.
5. In October of 1998, Beta participated in the drilling of the Whiskey Pass
#2, SL15743 #1, which was drilled to a depth of approximately 4,700 feet
and completed as a dry hole. Beta's estimated share of the dry hole costs
is 236,000 net to its 9.375% working interest.
6. In July 1998, Beta commenced the drilling of the first test well in its
Norcal Project. The well has been completed for production and is currently
awaiting a pipeline hook-up. All of the permits have been acquired to
commence construction of a one mile pipeline. Completion of the pipeline
and commencement of production from the well is expected by the end of
March 1999. The estimated cost net to Beta for the pipeline is $80,000. The
estimated cost net to Beta's 75% working interest in the well is $313,000.
In December of 1998, Beta participated in the drilling of a second test
well in its Norcal Project which was completed as a dry hole at an
estimated cost net to Beta of $128,000.
<PAGE>
Competition
The oil and gas industry is highly competitive in many respects, including
identification of attractive oil and gas properties for acquisition, drilling
and development, securing financing for such activities and obtaining the
necessary equipment and personnel to conduct such operations and activities. In
seeking suitable opportunities, Beta competes with a number of other companies,
including large oil and gas companies and other independent operators with
greater financial resources and, in some cases, with more experience. Many other
oil and gas companies in the industry have financial resources, personnel, and
facilities substantially greater than those of Beta and there can be no
assurance that Beta will be able to compete effectively with these larger
entities. Companies that are active in the same geographic areas as Beta
include, but are not limited to, Basin Exploration Inc., Unocal Corp., Fina
Inc., Kerr-McGee Corp., St. Mary Land & Exploration, Esenjay Exploration and
Cheniere Energy Inc. Employees
As of the date of this prospectus, Beta employs four full-time employees
and one part-time employee. Beta also has two consultants with long-term
contracts. Beta hires independent contractors on an "as needed" basis only. Beta
has no collective bargaining agreements with its employees. Beta believes that
its employee relationships are satisfactory. Due to its current level of growth,
Beta anticipates increasing its number of full-time employees to six by the end
of 1999. See also, "Management, Executive Compensation, and Employment
Contracts."
Premises
Beta leases slightly over 1,800 square feet in Newport Beach, California,
which includes offices and storage space. All of Beta's operations are conducted
from this site. The lease expires September 1999, and requires monthly payments
of $2,645 per month.
Litigation
There is no litigation currently pending or threatened against Beta.
Additional Information
Concerning the securities offered by this prospectus, Beta has filed with the
principal office of the Securities and Exchange Commission in Washington, DC, a
registration statement on Form S-1, the "registration statement," under the
Securities Act of 1933, as amended. For purposes hereof, the term "registration
statement" means the original registration statement and any and all amendments
to the registration statement. This prospectus does not contain all of the
information presented in the registration statement and the exhibits to the
registration statement. Each statement made in this prospectus concerning a
document filed as an exhibit to the registration statement is not necessarily
complete and is qualified in its entirety by reference to such exhibit for a
complete statement of its provisions. Any interested party may inspect the
registration statement and its exhibits without charge, or obtain a copy of all
or any portion thereof, at prescribed rates, at the public reference facilities
of the Commission at its principal office at Judiciary Plaza, 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549. Such material may also be accessed
electronically by means of the Commission's home page on the Internet or http://
www.sec.gov for no charge.
Beta will furnish its stockholders with annual reports containing financial
statements audited by independent certified public accountants and will file
with the Commission quarterly reports containing unaudited financial information
for each of the first three quarters of each fiscal year within 45 days
following the end of each such quarter. These periodic reports will also be
available electronically on the Commission's website.
<PAGE>
MANAGEMENT
The following table sets forth the names and ages of all current directors
and officers of Beta and the positions in Beta held by them:
<TABLE>
Name Age Position
- ---------------------- -- ------------------------------------------
<S> <C> <C>
Steve Antry 43 President, Chairman
R. Thomas Fetters 59 Managing Director of Exploration, Director
J. Chris Steinhauser 39 Chief Financial Officer, Director
Joe C. Richardson, Jr 70 Director
Stephen L. Fischer 40 Vice President of Capital Markets
Lisa Antry 36 Secretary, Treasurer
Lawrence W. Horwitz 39 Director
John P. Tatum 64 Director
</TABLE>
Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and qualified. The
Bylaws permit the board itself to fill vacancies and appoint additional
directors pending shareholder approval at the next annual meeting. Officers are
appointed to serve until the meeting of the Board of Directors following the
next annual meeting of stockholders and until their successors have been elected
and qualified. Beta's Bylaws currently authorize six directors to serve on the
Board of Directors. The last annual meeting was held on February 12, 1998.
Steve Antry and Lisa Antry are married.
The business experience of each director, executive officer and key
employee is summarized below.
Mr. Steve Antry, President and Chairman of the Board of Directors, is Beta's
founder. In addition, Mr. Antry founded Beta Capital Group, Inc., a financial
consulting firm in November 1992, and was its President through June 1997. Beta
Capital Group, Inc. specializes in selecting and working with emerging oil and
gas exploration companies which have production and drilling prospects strategic
for rapid growth yet also need capital and market support to achieve that
growth. Most recently, Mr. Antry orchestrated and implemented the restructuring
of Pease Oil and Gas Company, NASDAQ: WPOG, and remains a Director. Mr. Antry
remains Chairman of the Board of Directors of Beta Capital Group, Inc., but
resigned as its President to devote his full attention to Beta. Before forming
Beta Capital Group, Inc., Mr. Antry was an early officer of Benton Oil & Gas
Company, NYSE: BNO, from 1989 through 1992, ultimately becoming President of a
wholly owned subsidiary. Before Benton, Mr. Antry was a Marketing Director for
Swift Energy, NYSE: SFY, from 1987 through 1989. Mr. Antry began working in the
oil fields in Oklahoma in 1974. He has served in various exploration management
capacities with different companies, including Warren Drilling Company, as Vice
President of Exploration and Nerco Oil and Gas, a division of Pacific Power and
Light, where he served as Western Regional Land Manager. Mr. Antry is a member
of the International Petroleum Association of America "IPAA", serving on the
Capital Markets Committee and has B.B.A. and M.B.A. degrees from Texas Christian
University.
Mr. R. Thomas Fetters, Managing Director of Exploration, and Director, spent 17
years with Exxon ultimately achieving the position of Exploration Planning
Manager, Exxon U.S.A. Other notable positions held include Exploration Manager
for Exxon Australia "ESSO" and Division Manager of Research in Houston and Chief
Geologist, Exxon Production Malaysia. Mr. Fetters was President and Chief
Executive Officer of CNG Producing Co. in New Orleans from 1983 through 1989 and
President of XCL-China, Ltd. from 1989 through 1995. From 1995 through 1997, he
served as Senior Vice President of National Energy Group and also currently sits
on the Board of XCL, Ltd.. He earned his B.S./M.S. in Geology from the
University of Tennessee in 1966.
Mr. J. Chris Steinhauser, Chief Financial Officer and Director, joined Beta in
January 1998. He is a Certified Public Accountant in the State of Colorado, who
began his career with Peat, Marwick, Mitchell & Co. from 1981 through 1984.
Since that time, Mr. Steinhauser was primarily, September 1987 through January,
1998, with Sharon Energy Ltd. and Sharon Resources, Inc., their operating
subsidiary, ultimately serving as Executive Vice President and Chief Financial
Officer of the parent and President, COO and Director of
<PAGE>
the subsidiary. He is
experienced in financial and SEC reporting, shareholder communications, tax
filings, and all other aspects of a public oil and gas exploration and
production company. He received his BBA from University of Southern California
in 1981 and conducted graduate studies at the University of Denver Graduate Tax
Program in 1985.
Mr. Joe C. Richardson, Jr., Director, graduated from Texas A&M with B.S. degrees
in Petroleum Engineering and Mechanical Engineering in 1950 when he started his
career with Shamrock Oil and Gas in Amarillo, Texas. In 1961, Mr. Richardson
formed an oil, gas, refining, and compressor equipment fabrication company and,
in 1968, co-founded a public oil and gas company that was later merged with
Worldwide Energy, Inc. Mr. Richardson has been an officer and/or director of
several successful public and private companies including Pyro Energy, Inc.
(NYSE), Consolidated Oil & Gas (AMEX), Texoil, Inc. (NASDAQ), and Corporate
Systems Corporation. He is a Regent Emeritus of the Texas A&M University System,
past President of the Texas A&M Twelfth Man Association, and was honored in 1989
with the University's Distinguished Alumni Award. He currently serves on the
University Presidents' Advisory Board and the Engineering Advisory Council. Mr.
Richardson is a registered engineer in the state of Texas and a member of the
IPAA. The Petroleum Engineering Building on the campus of Texas A&M University,
completed in 1990, was named in his honor.
Mr. Stephen L Fischer, Vice President of Capital Markets, has been Vice
President of Beta Capital Group, Inc. since March 1996 and from April 1996
through March 1998 he was also a registered representative of Signal Securities,
Inc., a registered broker-dealer. Between 1991 and before joining Beta Capital
Group, Inc. in 1996, Mr. Fischer was a Registered Representative of Peacock,
Hislop, Staley & Given, an Arizona based investment banking firm. Since 1983,
Mr. Fischer has held various positions in the financial services industry in
investment banking, retail, and institutional sales, with a special emphasis on
the oil and gas exploration sector.
Ms. Lisa Antry, Secretary and Treasurer, was Executive Vice President of Beta
Capital Group, Inc. from July 1994 through June 1997. In June 1997, she was
appointed President of Beta Capital Group, Inc. upon the resignation of Mr.
Antry. Ms. Antry has in excess of 15 years of finance, accounting, and tax
experience. Before Beta Capital Group, Inc., she served as Corporate Planning
Manager for United California Savings Bank from 1988 to July 1994. Ms. Antry
also served United California for several years as its Finance and Tax Manager
and worked at Priority Records, a recording and distribution company, as its
Controller. Ms. Antry received her B.B.A. from Stephen F. Austin University in
1984 and her M.B.A. from Pepperdine University in 1991.
Mr. Lawrence W. Horwitz, Director, is a founding partner of Horwitz & Beam, an
Irvine, California law firm primarily representing Orange County business
concerns in high technology industries. His experience includes virtually all
legal issues associated with mergers, acquisitions and the raising of private
and public capital. Within the last three years, Mr. Horwitz's practice has
increasingly focused upon the legal and business issues associated with
utilizing mergers and acquisitions to achieve NASDAQ listing status. Mr. Horwitz
is a graduate of the University of California at Berkeley (B.S. 1981) and of
Boalt Hall School of Law, University of California at Berkeley (J.D. 1984). Mr.
Horwitz was admitted to the bar in both Texas and California in 1984. Lawrence
Horwitz commenced his career in Dallas, Texas where he was involved in a number
of private and public offerings involving oil and gas companies and related
limited partnerships. He has represented public oil and gas concerns in both
hostile takeovers, as well as mutually negotiated acquisitions. Before forming
Horwitz & Beam, Mr. Horwitz practiced in the corporate and securities group of
the Newport Beach law firm of Stradling, Yocca, Carlson & Rauth and was elected
a partner at Hart, King & Coldren, also located in Orange County. Mr. Horwitz
has been admitted to the U.S. Federal District Court, Central District of
California and the U.S. Court of Appeals, Ninth Circuit.
Mr. John P. Tatum, Director, joined Beta as a director in March 1999. Mr. Tatum
has worked in the oil and gas industry since 1962, holding successive positions
with Skelly Oil Company, Placid Oil Company, Hunt International Company and Hunt
Energy Company. From 1980 to 1996, Mr. Tatum was employed with Triton Energy
Corporation as Vice President (1980-82), Senior Vice President (1982-1991) and
Executive Vice President (1991-96). As Senior Vice President for Triton Energy
Corporation, Mr. Tatum was responsible for directing Triton's operations in
Colombia, Thailand, New Zealand, Nepal, Gabor, Cote D'Ivoire and Argentina.
Since 1996, Mr. Tatum has worked as an international oil & gas consultant. Mr.
Tatum received his B.B.A. from the University of Texas in 1956 and conducted
graduate studies at the Louisiana State University Graduate Business School.
Board Committees
In September 1997, Beta initiated several steps to improve the corporate
governance and direction of Beta.
First, the Board of Directors established an executive committee whose
purpose is to formulate and implement recommendations, strategies and actions
which are intended to support and protect shareholder value. The executive
committee is comprised of three voting members: Steve Antry, Beta's President
and Chairman, Tom Fetters, a Director and consultant to Beta and Joe C.
Richardson,
<PAGE>
Jr., an independent Director. The Board of Directors implemented
these changes to enhance the decision making processes in all aspects of Beta's
business.
Second, the Board of Directors established an audit committee whose purpose
is to oversee Beta's financial reporting and controls and to recommend the
appointment of an independent auditor to the board each year. The audit
committee is comprised of three voting members: Larry Horwitz, a Director and
Beta's legal counsel, Tom Fetters, a Director and consultant to Beta and Joe C.
Richardson, Jr., an independent Director.
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table will inform you about the compensation earned by Beta's
Chief Executive Officer for services rendered to Beta during the fiscal years
ended December 31, 1997 and 1998. No other executive officer's cash compensation
exceeded $100,000 for the fiscal years ended December 31, 1997 and 1998.
<TABLE>
Long-Term
Compensation
Other Annual Awards- All Other
Compen- Restricted Compen-
Name and Principal Position Year Salary Bonus Sation Stock Awards Sation
($) ($) ($) # ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Steve Antry
Chief Executive Officer 1998 $ 150,000 $ 0 $ 2,600(4) 0 $ 9,343(3)
============= =========== ============= =============== =============
and Chairman of the
Board of Directors (2) 1997 $ 34,522(1) $ 0 $ 0 0 $ 2,294(3)
============= =========== ============= =============== =============
- -----------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Mr. Antry's annual salary is $150,000. Mr. Antry's salary commenced in
October of 1997. Therefore his salary for 1997 was as presented above.
(2) Mr. Antry directly owns, jointly with his wife, who is also an officer of
Beta, 1,500,000 shares of common stock which are being registered along
with the shares offered by this prospectus. Mr. Antry subscribed to the
common stock on June 23, 1997 at a price of $0.05 per share.
(3) Represents payments toward annual car allowance per the terms of Mr.
Antry's contract of employment with Beta.
(4) Represents Beta's matching contributions toward Mr. Antry's Simple IRA
retirement plan.
</FN>
</TABLE>
Beta's Bylaws state that non-employee Directors of Beta shall not receive
any stated salary for their services, but, by resolution of the Board of
Directors, a fixed sum and expense of attendance, if any, may be allowed for
attendance at each regular and special meeting of the Board of Directors. Beta
has paid a total of $2,000 in attendance fees to its non-employee directors
since inception. Beta maintains directors and officers liability insurance.
Employment Contracts
Beta has executed an employment contract dated June 23, 1997 with its
President and Chairman of the Board, Mr. Steve Antry. The contract provides for
an indefinite term of employment at an annual salary of $150,000 commencing in
October of 1997 and an annual car allowance of up to $12,000. The contract may
be terminated by Beta without cause upon the payment to Mr. Antry of the
following:
(a) Options to acquire the common stock of Beta in an amount equal to 10% of
the then issued and outstanding shares containing a five year term,
piggyback registration rights and an exercise price equal to 60% of the
fair market value of the shares during the sixty day period of time
preceding the termination notice, such amount not to exceed $3.00 per
share.
(b) A cash payment equal to two times the aggregate annual compensation.
(c) In the event of termination without cause, all unvested securities issued
by Beta to the Employee shall immediately vest and Beta shall not have the
right to terminate or otherwise cancel any securities issued by Beta to the
Employee.
During the period from inception, June 6, 1997 through December 31, 1997,
and for the year ended December 31, 1998, R. Thomas Fetters, a director of Beta
was paid $20,000 and $60,000, respectively, pursuant to a consulting contract
for exploration related services. Beta has a consulting agreement with Mr.
Fetters which provides that he will provide part time geologic services to Beta
for $5,000 per month. The agreement provides that Mr. Fetters will serve as a
director during the term of the agreement. It further provides that if Mr.
Fetters is offered a full time position with Beta, his compensation will be
increased to a salary of $125,000 per year. The agreement terminates June 6,
2000.
<PAGE>
On June 23, 1997, Beta entered into an employment agreement with Steve
Fischer, a shareholder. The agreement provides for a two year term at an annual
salary of $60,000 for services as "Vice President of Capital Markets." Under
separate agreement, Mr. Fischer subscribed to 350,000 shares of Founders Shares
at price of $0.05 per share. The subscription agreement provides that the shares
shall vest over a three year period.
All other employees of Beta are terminable at will.
On January 27, 1998, Beta issued 100,000 common stock purchase warrants
exercisable at a price of $3.75 per share to J. Chris Steinhauser, the Chief
Financial Officer of Beta. The warrants vest as follows:
(a) 25,000 warrants vested immediately
(b) 25,000 shall vest upon the first anniversary of the employee's employment.
(c) 25,000 shall vest upon the second anniversary of employment
(d) 25,000 shall vest upon the third anniversary of employment
If the officer ceases employment during the vesting period, all nonvested
warrants shall be forfeited. The Warrants shall expire on January 23, 2003.
Compensation Committee
On October 17, 1998 the Board of Directors of Beta established a
compensation committee of the Board of Directors. The compensation committee of
the Board of Directors is responsible for formulating and recommending to the
full Board of Directors the compensation paid to Beta's executive officers. In
reviewing the overall compensation of Beta's executive officers, the committee
will review and consider the following components of executive compensation:
base salaries, stock option/warrant grants, cash bonuses, insurance plans, and
company contributions to company sponsored retirement plans. There are, however,
no stock option, retirement or other long term compensation plans, except what
is set forth in this prospectus, currently in place or under discussion or
consideration by the Board of Directors at the present time. The committee
presently consists of two outside Directors, Joe C. Richardson Jr. and John P.
Tatum.
In establishing the compensation paid to Beta's executives, the committee
emphasizes: (1) Providing compensation that will motivate and retain Beta's
executives and reward performance (2) Encouraging the long-term success of Beta
(3) Encouraging prudent decision making processes in an industry marked by
volatility and high risk.
The committee will evaluate compensation paid to Beta's executive officers
based upon a variety of factors, including Beta's growth in oil and gas
reserves, the market value of Beta's common stock, cash flow, the extent to
which Beta's executive officers are able to find and create opportunities for
Beta to participate in drilling or acquisition ventures having quality
prospects, their ability to formulate and maintain sound budgets for Beta's
drilling ventures and other business activities, the overall financial condition
of Beta, and the extent to which proposed business plans are met. The committee
does not assign relative weights or rankings to these factors but instead
subjectively determines compensation based on all such factors.
In establishing base salaries for Beta's executive officers, the committee
does not rely on formal surveys or comparisons with other companies, but instead
relies on their general knowledge and experience, focusing on a subjective
analysis of each executive's contributions to Beta's overall performance.
Independent consultants have not been utilized by the committee for the purposes
of determining compensation. While specific performance levels or "benchmarks"
are not used to establish salaries, the committee will take into account
historic comparisons of company performance. Concerning future awards of stock
warrants or options, the committee will try to provide Beta's executives with an
incentive compensation vehicle that could result in future additional
compensation to the executives, but only if the value of Beta increases for all
stockholders.
<PAGE>
PRINCIPAL SHAREHOLDERS
Security Ownership Of Certain Beneficial Owners And Management
The following table will inform you, as of the date of this prospectus,
about the beneficial ownership of shares of Beta's common stock held by each
person who beneficially owns more than 5% of the outstanding shares of the
common stock, each person who is a director or officer of Beta and all persons
as a group who are officers and directors of Beta, and as to the percentage of
outstanding shares held.
<TABLE>
Approximate Approximate
Shares Beneficially Percent of Class Percent of Class
Name of Beneficial Owner Owned (1) Before the Offering After the Offering(2)
- --------------------------------------------- -------------------- --------------------- ---------------------
<S> <C> <C> <C>
Mr. Steve Antry
Mrs. Lisa Antry, Jointly
901 Dove Street, #230
Newport Beach, CA 92660 1,525,000(3) 19.9% 16.5%
Mr. R. Thomas Fetters
901 Dove Street, #230
Newport Beach, CA 92660 350,000(4) 4.6% 3.8%
Mr. Lawrence W. Horwitz
2 Venture Plaza,
Suite 350
Irvine, CA 92618 85,000(5) 1.1% .9%
Mr. Joe C. Richardson Jr.
901 Dove Street, #230
Newport Beach, CA 92660 400,000(6) 5.2% 4.3%
Mr. Stephen L. Fischer
901 Dove St., #230
Newport Beach, CA 92660 375,000(7) 4.9% 4.1%
Mr. J. Chris Steinhauser
901 Dove Street, #230
Newport Beach, CA 92660 125,000(8) 1.6% 1.4%
Mr. John P. Tatum
901 Dove Street, #230
Newport Beach, CA 92660 70,000(9) 1% 0.8%
-------------------- -------------------- ---------------------
All officers and directors as a group (6
persons) 2,930,000(10) 38% 31.8%
==================== ===================== =====================
<FN>
All of the securities listed in this table are being registered for resale in
this prospectus. However, certain of the shareholders in this table have agreed
that they will not sell their Founder's Shares representing 2,670,000 of the
2,930,000 of the total beneficial shares held for one year from the date of this
prospectus. See "Underwriting."
(1) Unless otherwise indicated, all shares of common stock are held
directly with sole voting and investment powers. Securities not
outstanding, but included in the beneficial ownership of each such
person are deemed to be outstanding for the purpose of computing the
percentage of outstanding securities of the class owned by such person,
but are not deemed to be outstanding for the purpose of computing
percentage of the class owned by any other person.
(2) Assumes maximum offering.
(3) Mr. Steve Antry and Mrs. Lisa Antry, husband and wife, own 1,500,000
shares as community property. This also includes 25,000 shares of
common stock underlying presently exercisable stock warrants. The
warrants are exercisable at $5.00 per share and expire on March 12,
2003.
(4) Mr. Fetters subscribed to 350,000 shares of Beta's common stock
"founder shares".
(5) Mr. Horwitz subscribed to 50,000 founder shares. In addition, Horwitz &
Beam with whom the director is a shareholder, subscribed to 20,000
founders shares. This also includes 15,000 shares of common stock
underlying presently exercisable stock warrants. The warrants are
exercisable at $5.00 per share and expire on March 12, 2003.
(6) Mr. Richardson subscribed to 400,000 founder shares.
(7) Mr. Fischer subscribed to 350,000 founder shares. This also includes
25,000 shares of common stock underlying presently exercisable stock
warrants. The warrants are exercisable at $5.00 per share and expire on
March 12, 2003.
This represents 100,000 shares of common stock underlying stock
warrants which shall expire on January 27, 2003. On January 27, 1998,
Beta issued 100,000 common stock purchase warrants exercisable at a
price of $3.75 per share to J. Chris Steinhauser, the chief financial
officer of Beta. This also includes 25,000 shares underlying presently
exercisable stock warrants which were granted to Mr. Steinhauser. The
warrants are exercisable at $5.00 per share and expire on March 12,
2003.
(8) Mr. Tatum owns 16,000 shares of common stock. This includes 4,000
shares of common stock underlying warrants which are exercisable at a
price of $5.00 per share and which expire September 5, 2002. In
addition, it includes 50,000 shares of warants to purchase common stock
which are exercisable at a price of $5.00 and which expire April 1,
2004.
(9) Includes 244,000 shares of common stock underlying stock warrants.
</FN>
</TABLE>
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
During the period from inception, June 6, 1997, through December 31, 1997,
a director of Beta, Mr. R.T. Fetters, was paid $20,000 per a consulting contract
for management and geologic evaluation services. Mr. Fetters received $60,000 in
consulting fees during the year ended December 31, 1998. In addition, on June
23, 1997, the director subscribed to 350,000 founder shares of Beta's common
stock at a price of $0.05 per share.
A second director of Beta, Mr. Larry Horwitz, subscribed to 50,000 founder
shares at a price of $0.05 per share. In addition, a legal firm with whom the
director is a shareholder, subscribed to 20,000 founder shares at a price of
$0.05 per share. The legal firm represents Beta as general counsel. The legal
firm also received 15,000 common stock purchase warrants presently exercisable
at a price of $5.00 per share until expiration on March 12, 2003 in connection
with the February 12, 1998 private placement.
A third director of Beta, Mr. Joe C. Richardson, Jr., subscribed to 400,000
founder shares at price of $0.05 per share.
A fourth director of Beta, Mr. John P. Tatum, is a partner with Dyad
Petroleum Company in Midland, Texas. Beta has purchased a 20% interest in a
property owned by an affiliate of Dyad at a cost of $100,000 in January 1999,
prior to the time Mr. Tatum joined Beta as a director.
Beta entered into an expense sharing agreement with Beta Capital Group,
Inc., a company owned by the President and Chairman of the Board, and the
Treasurer of Beta. The agreement provides for the allocation and reimbursement
of certain office expenses such as office rent, secretarial support, office
supplies, marketing materials, telephone charges between Beta and Beta Capital
Group, Inc. During the period from inception through December 31, 1997 Beta made
payments totaling $9,940 to Beta Capital Group, Inc. in connection with this
agreement. During the year ended December 31, 1998 Beta paid $17,000 in
connection with this agreement. As of March 16, 1999, this agreement was
terminated because Beta Capital Group, Inc. became inactive.
Effective October 1, 1997, Beta entered into an agreement to lease office
space with the Colton Company, an unrelated third party. The lease agreement
provides for a 24-month term expiring in September 1999. Monthly rent payments
under the lease agreement commenced in October 1997 and are currently $2,645 per
month. The lease agreement was previously in the name in Beta Capital Group,
Inc. and was modified and extended by amendment to reflect Beta as tenant. Beta
Capital Group, Inc. no longer occupies the suite.
Beta's President and Chairman, and Treasurer are personal guarantors of the
lease agreement.
There are no outstanding loans to officers, directors and related persons.
The present policy of Beta does not permit loans to officers, directors and
related persons.
All future transactions with affiliates of the Company are to be on terms
no less favorable than could be approved by a majority of the directors
including the majority of disinterested directors.
<PAGE>
DESCRIPTION OF SECURITIES
Beta is authorized to issue 50,000,000 shares of common stock, $0.001 par
value. As of the date of this prospectus, Beta had 7,458,492 shares of common
stock outstanding.
Common Stock
Each holder of common stock is entitled to one vote per share on all
matters to be voted upon by Beta's stockholders. Stockholders are entitled to as
many votes as equal to the number of shares multiplied by the number of
directors to be elected and may cast all votes for a single director or may
distribute them among the number to be voted for any two or more of them in the
election of directors. These are called cumulative voting rights. The holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. Beta has not paid, and does not presently intend to pay,
dividends on its common stock. In the event of a liquidation, dissolution or
winding up of Beta, the holders of common stock are entitled to share ratably in
all assets remaining after payment of liabilities, subject to prior distribution
rights of holders of Preferred Stock, if any, then outstanding. The common stock
has no preemptive or conversion rights or other subscription rights. There are
no redemption or sinking fund provisions available to the common stock. All
outstanding shares of common stock are validly authorized and issued and are
fully paid and non-assessable, and the shares of common stock to be issued upon
exercise of warrants as described in this prospectus will be validly authorized
and issued, fully paid and non-assessable. As of March 1, 1999 there were
approximately 500 recordholders of Beta's common stock.
During the period from inception, June 6, 1997, through December 31, 1997,
Beta issued 797,245 callable and 730,977 non-callable common stock purchase
warrants entitling the holders to purchase 1,528,222 shares of Beta's common
stock at prices ranging from $2.00 to $5.00 per share. During the year ended
December 31, 1998, Beta issued 415,958 callable and 553,483 non-callable common
stock purchase warrants entitling the holders to purchase 969,441 shares of
Beta's common stock at prices ranging from $3.75 to $7.50 per share. Beta will
be entitled to call 797,245 warrants at any time on and after the date that its
common stock is traded on any exchange, including the Over-the-Counter Bulletin
Board, at a market price equal or exceeding $7.00 per share for 10 consecutive
trading days. In addition, Beta will be entitled to call 415,958 warrants at any
time on and after the date that its common stock is traded on any exchange,
including the Over-the-Counter Bulletin Board, at a market price equal or
exceeding $10.00 per share for 10 consecutive trading days. All common stock
Purchase warrants expire five years from their date of issuance.
Stockholder Action
According to Beta's Bylaws, concerning any act or action required of or by
the holders of the common stock, the affirmative vote of the holders of a
majority of the issued and outstanding common stock entitled to vote thereon is
sufficient to authorize, affirm, ratify or consent to such act or action, except
as otherwise provided by law. Officers, directors and holders of 5% or more of
Beta's outstanding common stock do not constitute a majority and thus do not
control the voting upon all actions required or permitted to be taken by
stockholders of Beta, including the election of directors.
Possible Anti-Takeover Effects of Authorized but Unissued Stock
Beta's authorized but unissued capital stock consists of 42,541,508 shares
of common stock. One of the effects of the existence of authorized but unissued
capital stock may be to enable the Board of Directors to render more difficult
or to discourage an attempt to obtain control of Beta by means of a merger,
tender offer, proxy contest or otherwise, and to protect the continuity of
Beta's management. If in the due exercise of its fiduciary obligations, for
example, the Board of Directors were to determine that a takeover proposal was
not in Beta's best interests, such shares could be issued by the Board of
Directors without stockholder approval in one or more private placements or
other transactions that might prevent or render more difficult or costly the
completion of the takeover transaction by diluting the voting or other rights of
the proposed acquiring or insurgent stockholder or stockholder group, by
creating a substantial voting block in institutional or other hands that might
undertake to support the position of the incumbent Board of Directors, by
effecting an acquisition that might complicate or preclude the takeover, or
otherwise.
Other Anti-Takeover Provisions
Beta executed a contract of employment with the President and Chairman of
the Board of Directors, dated June 23, 1997. The contract provides for an
indefinite term of employment at an annual salary of $150,000, commencing in
October 1997, and an annual car allowance of up to $12,000. The contract may be
terminated by Beta without cause upon the payment of the following:
<PAGE>
(a) Options to acquire the common stock of Beta in an amount equal to 10% of
the then issued and outstanding shares containing a five year term,
piggyback registration rights and an exercise price equal to 60% of the
fair market value of the shares during the sixty day period of time
preceding the termination notice, such amount not to exceed $3.00 per
share.
(b) A cash payment equal to two times the aggregate annual compensation.
(c) In the event of termination without cause, all unvested securities issued
by Beta to the Employee shall immediately vest and Beta shall not have the
right to terminate or otherwise cancel any securities issued by Beta to the
Employee.
The termination provisions of this employment contract were designed, in
part, to impede and discourage a hostile takeover attempt and to protect the
continuity of management.
Certain Charter and Bylaws Provisions
Limitation of Liability
Beta's Articles of Incorporation and its Bylaws limit the liability of
directors and officers to the extent permitted by Nevada law. Specifically, the
Articles of Incorporation provide that the directors and officers of Beta will
not be personally liable to Beta or its shareholders for monetary damages for
breach of their fiduciary duties as directors, including gross negligence,
except liability for acts or omissions "which involve intentional misconduct,
fraud or a knowing violation of law not in good faith, or the payment of
dividends in violation of Section 78.300 of the Nevada Revised Statutes."
Beta has obtained a directors and officers liability insurance policy for
the purposes of indemnification which shall cover all elected and appointed
directors and officers of Beta up to $1,000,000 for each claim and $3,000,000 in
the aggregate. Beta believes that the limitation of liability provision in its
Articles of Incorporation, and the directors and officers liability insurance
will facilitate Beta's ability to continue to attract and retain qualified
individuals to serve as directors and officers of Beta.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers, and controlling persons of Beta, Beta
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore
unenforceable. Except for the payment by Beta of expenses incurred or paid by a
director, officer, or controlling person of Beta in the successful defense of
any action, suitor proceeding, if a claim for indemnification against such
liabilities is asserted by such director, officer or controlling person of Beta
in connection with the securities being registered, Beta will, unless in the
opinion of its counsel the matter has been settled by a controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issues.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent for which indemnification will be required
or permitted under Beta's Articles of Incorporation. Beta is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
Stockholder Meetings and Other Provisions
Under the Bylaws, special meetings of the stockholders of Beta may be
called only by a majority of the members of the Board of Directors, the Chairman
of the Board, the President, or by one or more stockholders holding shares in
the aggregate entitled to cast not less than 10% of the votes at any such
meeting. The annual meeting shall be held each year on May 15 at 10:00 A.M., or
at such other date that is convenient as determined by the Directors, at a place
to be designated by the Board of Directors.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Oxford Transfer &
Registrar, 317 S.W. Alder, Portland, OR 97204.
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, Beta will have between 8,258,492,
assuming completion of the minimum offering, and 8,958,492, assuming completion
of the maximum offering, shares of common stock outstanding assuming no exercise
of the 2,547,663 common stock warrants outstanding. All the shares being
registered under the Registration Statement, of which this prospectus is a part,
will be freely transferable by persons except "affiliates" of Beta, as that term
is defined under the Securities Act of 1933, without restriction or further
registration under the Act. Beta is obligated to register 7,029,492 shares of
common stock and 2,697,663 shares of common stock issuable upon exercise of the
common stock purchase warrants in the current registration statement filed by
Beta with the Commission, so that holders of such common stock shall be entitled
to sell their shares at any time simultaneously with the shares being offered by
Beta in this offering, subject to such lock-up provisions as may be agreed to by
the common stockholders. This is called the "piggyback registration right." In
addition, Beta is obligated to register, in a subsequent registration statement,
429,000 shares of common stock issued in connection with note and common stock
purchase agreements dated January and March 1999. Beta is required to file a
registration statement registering these shares 180 days after the close of this
offering. At such time that the subsequent registration statement becomes
effective, all of the 429,000 shares will become freely tradeable.
Beta is unable to estimate the number of shares that may be sold in the
future by its existing shareholders or the effect, if any, that sales of shares
by such shareholders will have on the market price of the common stock
prevailing from time to time. Sales of substantial amounts of common stock by
existing shareholders could adversely affect prevailing market prices. See "Risk
Factors common stock eligible for future sales" for additional discussion
concerning this risk.
UNDERWRITING
Beta has entered into an underwriting agreement with Brookstreet Securities
Corporation, the "underwriter." Under the agreement, Beta has retained the
underwriter as its exclusive agent to offer, sell and distribute publicly on a
"best efforts" basis a minimum of 800,000 and a maximum of 1,500,000 shares of
the common stock of Beta at an offering price of $6.00 per share, for a gross
minimum offering of $4,800,000 and a gross maximum offering of $9,000,000. All
of the proceeds from the sale of the shares offered in this prospectus will be
deposited into the Beta Oil & Gas escrow account at Southern California Bank,
Newport Beach, California. Beta has agreed that in the event the minimum
proceeds of this offering are not raised within ten business days of the
effective date of this prospectus, that it will immediately terminate this
offering.None of the shares offered in this prospectus may be sold if within ten
business days from the effective date of this prospectus, the minimum offering
has not been subscribed. Upon completion of the minimum offering, the shares may
be offered for a 90 day period which may be extended by Beta for an additional
30 days upon mutual consent of Beta and the underwriter. In the event the
minimum offering is completed, then the escrowed funds will be released to Beta
to be used for the purposes stated in this prospectus under caption "Use of
Proceeds" and Beta will issue certificates for those shares to the subscribers.
The offering will then continue until the remaining unsold shares are subscribed
to and paid for or the expiration of the offering period, whichever comes first.
No shares will be issued to any of the subscribers until the minimum offering is
satisfied and the subscription funds for the purchase of such shares have been
released from the escrow account to Beta.
If the minimum offering is not met within ten business days of the
effective date of this prospectus, all monies will be refunded promptly to the
subscribers, with interest and without deduction for commissions or expenses,
directly from the escrow account.
The underwriter has advised Beta that it intends to offer the shares only
through itself and selected registered securities dealers who are members of the
National Association of Securities Dealers, Inc., the "selected dealers."
Neither the underwriter nor the selected dealers have made a firm commitment to
purchase any of the shares offered . There are no assurances that any or all of
the shares will be sold.
The underwriter has an option, exercisable within 45 days of the effective
date of this prospectus, to sell an additional 150,000 shares of the common
stock at the public offering price, less selected dealer commissions, solely for
the purpose of covering over-allotments, if any, the "over-allotment option."
Subject to the sale of at least 800,000 shares of common stock, Beta has
agreed to pay to the underwriter and Selected Dealers a commission of 8% and a
non-accountable expense allowance of 2% for a total of ten percent of the
initial offering price of $.60 per share. No commission shall be earned or paid
unless the minimum offering is satisfied before the expiration of the offering
period. The underwriter reserves the right to reject all subscriptions, in whole
or in part, to make allotments and to close subscriptions at any time without
notice. The selected dealers agreement may be terminated by the underwriter or
any of the selected dealers by one party giving
<PAGE>
notice of the termination to the other at any time. Such termination will not
affect the selected dealer's right to commissions on subscriptions accepted
prior to termination, provided the minimum offering is satisfied.
Subject to the sale of the minimum of 800,000 of the shares of common stock
offered in this prospectus, Beta has agreed to sell to the underwriter and
selected dealers, for $.001 each, warrants to purchase a number of shares of
common stock of Beta equal to 10% of the shares sold by them in this offering,
the "selected dealer warrants" , at an exercise price per share equal to $7.50
per share, which is 125% of the initial public offering price of the shares
offered in this prospectus. The selected dealer warrants are exercisable for a
period of four years beginning one year after the date of this prospectus. The
selected dealer warrants are not transferable except to officers, employees and
partners of the underwriter and selected dealers and their respective
successors, and will contain provisions for appropriate adjustments in the event
of stock splits, stock dividends, combinations, reorganizations,
recapitalizations and certain other events. In addition, Beta is registering the
common stock underlying the selected dealer warrants in the registration
statement of which this prospectus is a part.
Beta has agreed to indemnify the underwriter against certain civil
liabilities, including liabilities under the Securities Act, or to contribute to
payments the underwriter may be required to make in respect thereof.
The underwriter has advised Beta that the underwriter does not expect to
make sales to accounts over which it exercises discretionary authority in excess
of 5% of the number of shares of common stock offered.
Certain shareholders of Beta, including those shareholders who also are
executive officers and directors of Beta, have agreed that they will not offer,
sell or otherwise dispose of certain founder's shares owned by them totaling
2,670,000 shares of common stock during the 365-day period following the date of
this prospectus.
Before this offering, there was no market for the common stock of Beta.
Accordingly, the initial public offering price has been determined by
negotiation between Beta and the underwriter. Among the factors considered in
determining the initial public offering price were Beta's working interests and
seismic assets, Beta's future prospects, the prices at which Beta sold shares of
common stock in private, arms length transactions during the past six months,
the experience of its management, the general condition of the equity securities
market and the demand for similar securities of companies considered comparable
to Beta.
This is a summary of the material provisions of the underwriting agreement
but is not a complete statement of its terms and conditions. A copy of the
underwriting agreement is on file with the Commission as an exhibit to the
registration statement of which the prospectus forms a part. See "Available
Information" For guidance on how this information can be obtained. The complete
underwriting agreement may be viewed on the Commission's EDGAR database at
http://www.sec.gov.
LEGAL MATTERS
Certain legal matters in connection with this Registration Statement are
being passed upon for Beta by Horwitz & Beam, Two Venture Plaza, Suite 350,
Irvine, CA 92618. Members of that firm own 70,000 shares of Beta's common stock,
which includes 50,000 shares held by Lawrence W. Horwitz, a senior partner of
the firm and a director of Beta. The firm also owns 15,000 shares underlying
presently exercisable common stock warrants.
EXPERTS
The audited consolidated financial statements of Beta Oil & Gas, Inc.
included herein have been examined by Hein + Associates LLP, independent
certified public accountants, for the periods and to the extent set forth in
their report and are included herein in reliance upon such report of said firm
given upon their authority as experts in accounting and auditing.
The unaudited supplementary oil and gas reserve information included in
this prospectus has been included in reliance of the report of Veazey &
Associates, Inc. The unaudited supplementary oil and gas reserve information
appears elsewhere in this prospectus on the authority of Veazey & Associates,
Inc.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
Index to Consolidated Financial Statements
<TABLE>
Page
<S> <C>
Independent Auditor's Report ................................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998 ...... F-3
Consolidated Statements of Operations for the Period from Inception (June 6,
1997) through December 31, 1997, the Year Ended December 31, 1998, and
Cumulative from Inception through December 31, 1998 ............................ F-5
Consolidated Statement of Shareholders' Equity for the Period from Inception
(June 6, 1997) through December 31,1998 ........................................ F-6
Consolidated Statements of Cash flows for the Period from Inception through
December 31, 1997, the Year Ended December 31, 1998, and Cumulative from
Inception through December 31, 1998 ............................................ F-7
Notes to Consolidated Financial Statements ..................................... F-8
</TABLE>
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors
Beta Oil & Gas, Inc. (a Development Stage Enterprise)
Newport Beach, California
We have audited the accompanying consolidated balance sheets of Beta Oil &
Gas, Inc. and subsidiary (a Development Stage Enterprise) as of December 31,
1997 and 1998, and the related statements of operations, shareholders' equity,
and cash flows for the period from inception (June 6, 1997) to December 31,
1997, the year ended December 31, 1998, and the period from inception through
December 31, 1998. These consolidated financial statements are the
responsibility of Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Beta Oil &
Gas, Inc. and subsidiary (a Development Stage Enterprise) as of December 31,
1997 and 1998, and the results of their operations and their cash flows for the
period from inception (June 6, 1997) to December 31, 1997 the year ended
December 31, 1998, and the period from inception (June 6, 1997) through December
31, 1998 in conformity with generally accepted accounting principles.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 9, 1999 except for the fourth and fifth paragraph of Note 8 which is as
of March 19, 1999
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
December 31, December 31,
1997 1998
----------------- -----------------
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 3,985,599 $ 198,043
Accounts receivable - 9,678
Prepaid expenses 2,599 14,951
----------------- -----------------
Total current assets 3,988,198 222,672
----------------- -----------------
Oil and gas properties, at cost (full cost method):
Evaluated properties - 3,387,300
Unevaluated properties 5,900,794 11,466,695
Less--impairment - (1,670,691)
----------------- -----------------
Net oil and gas properties 5,900,794 13,183,304
----------------- -----------------
Furniture, fixtures and equipment, at cost, less
Accumulated depreciation of $1,530 and $13,413 at
December 31, 1997 and December 31, 1998, respectively 32,065 22,943
Other assets - 166,028
Deferred offering costs - 23,524
================= =================
$ 9,921,057 $ 13,618,471
================= =================
</TABLE>
(Continued)
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
December 31, December 31,
1997 1998
----------------- -----------------
<S> <C> <C> <C> <C>
Current Liabilities:
Accounts payable, trade $ 807,474 $ 310,770
Commissions payable 25,329 -
Payroll and payroll taxes payable 24,044 7,559
Other accrued expenses 14,000 800
----------------- -----------------
Total current liabilities 870,847 319,129
----------------- -----------------
Commitments and contingencies (Notes 1, 7 and 8)
Shareholders' Equity:
Common stock, $.001 par value; 10,000,000 and 50,000,000 shares
authorized at December 31, 1997 and December 31, 1998, respectively;
5,565,648 and 7,029,492 shares issued and outstanding at
December 31, 1997 and December 31, 1998, respectively 5,566 7,029
Additional paid-in capital 9,246,217 15,878,386
Deficit accumulated during the development stage (201,573) (2,586,073)
----------------- -----------------
Total shareholders' equity 9,050,210 13,299,342
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 9,921,057 $ 13,618,471
================= =================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
For the period Cumulative
from inception from inception
(June 6, 1997) The year ended (June 6, 1997)
to December December 31, to December
31, 1997 1998 31, 1998
----------------- ----------------- -----------------
<S> <C><C> <C> <C> <C> <C>
REVENUES $ - $ - $ -
----------------- ----------------- -----------------
COSTS AND EXPENSES:
General and administrative 245,452 746,769 992,221
Impairment expense - 1,670,691 1,670,691
Depreciation expense 1,530 11,883 13,413
----------------- ----------------- -----------------
Total costs and expenses 246,982 2,429,343 2,676,325
----------------- ----------------- -----------------
LOSS FROM OPERATIONS (246,982) (2,429,343) (2,676,325)
OTHER INCOME:
Interest income 45,409 44,843 90,252
----------------- ----------------- -----------------
NET LOSS $ (201,573) $ (2,384,500) $ (2,586,073)
================= ================= =================
BASIC AND
DILUTED LOSS
PER COMMON SHARE ($.05) ($.37)
================= =================
Weighted average number of
Common shares outstanding 4,172,662 6,366,923
================= =================
The accompanying notes are an integral part of these consolidated financial
statements
</TABLE>
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
Deficit
Accumulated
Common Stock Additional During the
--------------------------------------
Paid-in Development
Shares Amount Capital Stage
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, June 6, 1997 - $ - $ - $ -
Issuance of Common Stock at $.05
per share on June 23, 1997 2,910,000 2,910 142,590 -
Issuance of Common Stock at $3.75
per share on Sept. 5, 1997, net
of offering costs 2,655,648 2,656 9,073,627 -
Salary contributed to Beta - - 30,000 -
Net loss - - - (201,573)
----------------- ----------------- ---------------- ----------------
BALANCES, December 31, 1997 5,565,648 5,566 9,246,217 (201,573)
Issuance of Common Stock at $5.00 per
share, February 12 through November
2, 1998, net of offering costs 1,458,844 1,458 6,547,174 -
Issuance of shares for properties at $5.00
per share on March 12, 1998 5,000 5 24,995 -
Salary contributed to Beta - - 60,000 -
Net loss - - - (2,384,500)
BALANCES, ================= ================= ================ ================
December 31, 1998 7,029,492 $ 7,029 $ 15,878,386 $ (2,586,073)
================= ================= ================ ================
Total
Shareholders'
Equity
------------------
<S> <C>
BALANCES, June 6, 1997 $ -
Issuance of Common Stock at $.05
per share on June 23, 1997 145,500
Issuance of Common Stock at $3.75
per share on Sept. 5, 1997, net
of offering costs 9,076,283
Salary contributed to Beta 30,000
Net loss (201,573)
-----------------
BALANCES, December 31, 1997 9,050,210
Issuance of Common Stock at $5.00 per
share, February 12 through November
2, 1998, net of offering costs 6,548,632
Issuance of shares for properties at $5.00
per share on March 12, 1998 25,000
Salary contributed to Beta 60,000
Net loss (2,384,500)
BALANCES, ==================
December 31, 1998 $13,299,342
==================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
For the
period from Cumulative
inception For the year from inception
(June 6, 1997) ended (June 6,1997)
to December December to December
31,1997 31, 1998 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (201,573) $ (2,384,500) $ (2,586,073)
Adjustments to reconcile net loss to net
cash (used in) operating activities:
Depreciation 1,530 11,883 13,413
Impairment expense - 1,670,691 1,670,691
Salary contributed to Beta 30,000 60,000 90,000
Changes in operating assets and liabilities:
(Increase) in accounts receivable - (9,678) (9,678)
(Increase) decrease in prepaid expenses (2,599) (12,352) (14,951)
Increase (decrease) in accounts payable,
trade 807,474 (496,703) 310,770
Increase (decrease) in commissions
payable 25,329 (25,329) -
Increase (decrease) in payroll taxes payable 24,044 (16,485) 7,559
Increase (decrease) in other accrued
expenses 14,000 (13,200) 800
Net cash (used in) ----------------- ----------------- -----------------
Operating activities 698,205 (1,215,673) (517,469)
----------------- ----------------- -----------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Oil and gas property expenditures (5,900,794) (8,928,201) (14,828,995)
Change in other assets - (166,028) (166,028)
Acquisition of furniture, fixtures & equipment (33,595) (2,762) (36,356)
----------------- ----------------- -----------------
Net cash used in investing activities (5,934,389) (9,096,991) (15,031,379)
----------------- ----------------- -----------------
</TABLE>
(Continued)
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
<TABLE>
For the
period from Cumulative
inception For the year from inception
(June 6, 1997) ended (June 6,1997)
to December December to December
31,1997 31, 1998 31, 1998
----------------- ----------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from sale of shares and warrants, net 9,221,783 6,548,632 15,770,415
(Increase) in deferred offering costs - (23,524) (23,524)
----------------- ----------------- -----------------
Net cash provided by financing activities 9,221,783 6,525,108 15,746,891
----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS: 3,985,599 (3,787,556) 198,043
CASH AND CASH EQUIVALENTS:
Beginning of period - 3,985,599 -
---------------- ----------------- ----------------
End of period $ 3,985,599 $ 198,043 $ 198,043
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest $ - $ - $ -
================= ================= =================
Cash paid for income taxes $ - $ - $ -
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the year ended December 31, 1998 and the cumulative period from
inception (June 6, 1997) to December 31, 1998, Beta issued 5,000 shares of
common stock for properties costing $25,000.
</TABLE>
The accompanying notes are an integral part to these consolidated financial
statements
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND OPERATIONS
The Company
Beta Oil & Gas, Inc., a development stage enterprise, was incorporated under the
laws of the State of Nevada on June 6, 1997 to participate in the oil and gas
acquisition, exploration, development and production business in the United
States and internationally. Beta's wholly owned subsidiary, BETAustralia, LLC,
was formed on February 20, 1998 as a limited liability company under the laws of
the State of California for the purposes of participating in the acquisition,
evaluation and development of exploration blocks in Australia.
Operations
Since its inception, Beta has participated as a non-operating working interest
owner in the acquisition of undeveloped leases, seismic options, lease options
and foreign concessions and has participated in extensive seismic surveys and
the drilling of test wells on its undeveloped properties. Further leasehold
acquisitions and seismic operations are planned for 1999 and future periods. In
addition, exploratory drilling is scheduled during 1999 and future periods on
Beta's undeveloped properties. It is anticipated that these exploration
activities together with others that may be entered into will impose financial
requirements which will exceed the existing working capital of Beta. Management
plans to raise additional equity and/or debt capital to finance its continued
participation in planned activities. In the opinion of Beta management, current
cash flow projections indicate that Beta can continue as a going concern even if
additional financing is unavailable. However, if additional financing is not
available, Beta will be compelled to reduce the scope of its business
activities. If Beta is unable to fund planned expenditures, it may be necessary
to:
1. Forfeit its interest in wells that are proposed to be drilled;
2. Farm-out its interest in proposed wells;
3. Sell a portion of its interest in prospects and use the sale proceeds to
fund its participation for a lesser interest; and,
4. Reduce general and administrative expenses.
Beta is considered to be in the development stage as defined in Statement of
Financial Accounting Standards No. 7 ("SFAS 7") and is subject to risks
associated with its development stage activities. To date, Beta has had a
minimal operating history and has generated no revenues from oil and gas
operations. Oil and gas exploration is a speculative business and involves a
high degree of risk.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Beta and its
wholly-owned subsidiary. All significant intercompany accounts and transactions
have been eliminated in consolidation.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
Beta's financial statements are based upon a number of significant estimates,
including the impairment of oil and gas properties and the estimated useful
lives selected for furniture, fixtures and equipment. Due to the uncertainties
inherent in the estimation process, it is at least reasonably possible that
these estimates will be further revised in the near term and such revisions
could be material.
Oil and Gas Properties
Beta follows the full cost method of accounting for oil and gas producing
activities and, accordingly, capitalizes all costs incurred in the acquisition,
exploration, and development of proved oil and gas properties, including the
costs of abandoned properties, dry holes, geophysical costs, and annual lease
rentals. All general corporate costs are expensed as incurred. In general, sales
or other dispositions of oil and gas properties are accounted for as adjustments
to capitalized costs, with no gain or loss recorded. Amortization of evaluated
oil and gas properties is computed on the units of production method based on
all proved reserves on a country by country basis. Unevaluated oil and gas
properties are assessed for impairment either individually or on an aggregate
basis. The net capitalized costs of evaluated oil and gas properties (full cost
ceiling limitation) are not to exceed their related estimated future net
revenues discounted at 10%, and the lower of cost or estimated fair value of
unproved properties, net of tax considerations.
Joint Ventures
All exploration and production activities are conducted jointly with others and,
accordingly, the accounts reflect only Beta's proportionate interest in such
activities. Beta is a non-operator in all of its oil and gas producing
activities to date.
Revenue Recognition
Revenue will be recognized upon delivery of oil and gas production.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment is stated at cost. Depreciation is provided on
furniture, fixtures and equipment using the straight-line method over an
estimated service life of three years.
Income Taxes
Beta accounts for income taxes using the asset and liability method wherein
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which the temporary
differences are expected to be recovered or settled.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Concentrations of Credit Risk
Credit risk represents the accounting loss that would be recognized at the
reporting date if counterparties failed completely to perform as contracted.
Concentrations of credit risk (whether on or off balance sheet) that arise from
financial instruments exist for groups of customers or counterparties when they
have similar economic characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in economic or other
conditions described below. In accordance with FASB Statement No. 105,
Disclosure of Information about Financial Instruments with Off-Balance-Sheet
Risk and Financial Instruments with Concentrations of Credit Risk, the credit
risk amounts shown in cash and accounts receivable do not take into account the
value of any collateral or security. As of December 31, 1997 and 1998, Beta
maintained cash in a bank that was approximately $3,886,000 and $98,000,
respectively, in excess of the federally insured limit.
Fair Value of Financial Instruments
The estimated fair values for financial instruments under FAS No. 107,
Disclosures about Fair Value of Financial Instruments, are determined at
discrete points in time based on relevant market information. These estimates
involve uncertainties and cannot be determined with precision. The estimated
fair values of Beta's financial instruments, which includes all cash, accounts
receivable and accounts payable, approximates the carrying value in the
financial statements at December 31, 1997 and 1998.
Stock Based Compensation
Beta has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB25) and related interpretations in
accounting for its employee stock options. In accordance with FASB Statement No.
123 Accounting for Stock-Based Compensation (FASB123), Beta will disclose the
impact of adopting the fair value accounting of employee stock options.
Transactions in equity instruments with non-employees for goods or services have
been accounted for using the fair value method as prescribed by FASB123.
Loss Per Common Share
Basic earnings per share excludes dilution and is calculated by dividing net
loss by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the entity. Potential common shares for all periods presented
were anti-dilutive and excluded in the earnings per share computation.
Cash Equivalents
For purposes of the Statements of Cash Flows, cash and cash equivalents include
cash on hand, amounts held in banks and highly liquid investments purchased with
an original maturity of three months or less.
Impact of Recently Issued Standards
Beta adopted SFAS 130, "Reporting Comprehensive Income," effective January 1,
1998. However, Beta has no items of other comprehensive income in any period
presented and, as a result, is not required to report comprehensive income.
Beta intends to adopt SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities," issued in June 1998 effective with its fiscal year
beginning January 1, 2000 as required by the Statement. Due to Beta's current
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and anticipated limited use of derivative instruments, management anticipates
that adoption of SFAS 133 will not have any significant impact on Beta's
financial position or results of operations. SFAS 132, "Employees' Disclosures
about Pensions and other Postretirement Benefits," and SFAS 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" were issued in 1998 and are not
expected to impact Beta regarding future financial statement disclosures,
results of operations and financial position.
Deferred offering costs
Deferred offering costs of $23,524 relate to Beta's proposed initial public
offering. Such costs will be charged against the proceeds of the offering when
completed. Should the offering not be completed, such costs will be charged to
expense.
Segment Information
Beta has adopted SFAS 131, "Disclosure about Segments of an Enterprise and
Related Information." As defined in that Standard, Beta operates in only one
segment, oil and gas exploration.
(3) SUMMARY OF OIL AND GAS OPERATIONS
Capitalized costs at December 31, 1997 and December 31, 1998 relating to Beta's
oil and gas activities are summarized as follows:
<TABLE>
December 31, 1997 December 31, 1998
------------------------------- -------------------------------
United United
States Foreign States Foreign
------------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
Capitalized costs-
Evaluated properties $ - $ - $ 1,763,082 $ 1,624,218
Unevaluated properties 5,870,794 30,000 11,426,732 39,963
Less- Accumulated depreciation,
depletion, amortization
and impairment - - (46,473) (1,624,218)
------------- -------------- ------------- ----------------
$ 5,870,794 $ 30,000 $ 13,143,341 $ 39,963
============= ============== ============= ================
</TABLE>
Costs incurred in oil and gas producing activities are as follows:
<TABLE>
Cumulative from inception
Inception (June 6, 1997) Year ended (June 6, 1997) through
through December 31, 1997 December 31, 1998 December 31, 1998
------------------------------ ------------------------------- -------------------------------
United United United
States Foreign States Foreign States Foreign
------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Property acquisition $ 3,835,540 $ - $ 2,808,123 $ 323,463 $ 6,643,663 $ 323,463
============== ============= ============= ============= ============= =============
Exploration $ 2,035,254 $ 30,000 $ 4,510,897 $ 1,310,718 $ 6,546,151 $ 1,340,718
============== ============== ============== ============= ============= =============
Development $ - $ - $ - $ - $ - $ -
============== ============== ============== ============= ============== ==============
</TABLE>
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unevaluated oil and gas properties
As of December 31, 1997 and 1998 , respectively, Beta has not made a provision
for depletion (amortization) since it has not derived any production from its
properties. All costs incurred through December 31, 1997 have been excluded from
the amortization base. As Beta's properties are evaluated through exploration,
they will be included in the amortization base. Costs of unevaluated properties
in the United States at December 31, 1997 and 1998 represent property
acquisition and exploration costs in connection with Beta's Louisiana, Texas and
California prospects. The prospects and their related costs in unevaluated
properties have been assessed individually and no impairment charges were
considered necessary for the United States properties for any of the periods
presented. The current status of these prospects is that seismic has been
acquired, processed and is currently being interpreted on the subject lands
within the prospects. Drilling is expected to commence on the prospects in the
first quarter of 1999 and continue in future periods. As the prospects are
evaluated through drilling in future periods, the property acquisition and
exploration costs associated with the wells drilled will be transferred to
evaluated properties where they will be subject to amortization.
At December 31, 1998 and 1997, capitalized unevaluated properties consist of the
following:
<TABLE>
December 31, 1997 December 31, 1998
---------------------- ----------------------
<S> <C> <C> <C> <C>
Unproved property acquisition cost $ 3,835,540 $ 6,476,043
Exploration costs 2,065,254 4,990,652
--------------------- ---------------------
$ 5,900,794 $ 11,466,695
====================== ======================
</TABLE>
Management expects that planned activities for 1999 will enable the evaluation
for approximately 40% of the costs as of December 31, 1998. Evaluation of 40% of
the remaining costs is expected to occur in 2000 and the remainder in 2001.
Evaluated Properties
During the year ended December 31, 1998 Beta participated in the drilling of 6
wells within the United States. The property acquisition and exploration costs
associated with the wells totaling $1,763,082 have been transferred to evaluated
properties and have been evaluated for impairment. It has been determined that
the capitalized costs associated with the drilling of these properties exceed
their net realizable value by $46,473. Accordingly, an impairment write-down of
$46,473 was recorded as of December 31, 1998. Since all of the proved reserves
associated with the wells are non-producing or behind pipe and no production has
occurred as of December 31, 1998, no depletion expense has been recorded during
the year ended December 31, 1998.
Exploration costs incurred outside the United States represent costs in
connection with the evaluation and proposed acquisition of one or more
exploration blocks in Brazil. In addition, in February 1998, Beta, through its
wholly owned subsidiary, BETAustralia, LLC secured an option to participate for
a 5% working interest in two petroleum licenses covering 2,798,000 acres
(approximately 4,372 square miles). Per the terms of the option agreement, Beta
exercised its option to earn a 5% working interest by participating in the
drilling of two offshore test wells in the license areas. The wells were
completed as dry holes. The property acquisition and exploration costs
associated therewith totaling $1,624,218 have been transferred to evaluated
properties and charged to impairment expense during the year ended December 31,
1998. The exploration licenses expired in December 1998.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) PRIVATE PLACEMENTS
During the periods from inception (June 6, 1997) through December 31, 1997 and
the year ended December 31, 1998, Beta issued 5,565,648 and 1,458,844 shares,
respectively, of its common stock and 1,528,222 and 968,191 common stock
purchase warrants, respectively.
Initial start-up funding was raised through the sale, effective June 23, 1997,
of 2,910,000 shares ("founder shares") of Beta's common stock to its founders
and other principals for $0.05 per share. An additional 640,000 common stock
purchase warrants were issued with each warrant entitling the holder thereof to
purchase one share of Beta's common stock at prices ranging from $2.00 to $5.00
per share.
Effective September 5, 1997, Beta issued 663,912 equity units at $15 per unit
through a private placement. Each unit entitled the purchaser to four shares of
common stock and one callable warrant exercisable to purchase one share of
common stock at $5.00 for a term of five years. The offering generated net
proceeds, after offering costs, of $9,076,283. Beta issued 224,310 additional
common stock purchase warrants with an exercise price of $4.50 per share to
brokers in connection with the offering.
The following table summarizes the private placement transactions for the period
from inception (June 6, 1997) through December 31, 1997:
<TABLE>
Common Shares Warrants Issued Exercise Price
------------------------------- -------------------------------
Shares $ Amount #Warrants Expiration Per Share
<S> <C> <C> <C> <C> <C> <C>
1) Tranch 1 2,910,000 $ 145,500 640,000 6/23/02 to $ $2.00 to
10/1/02 $5.00
2) Tranch 2 2,655,648 9,958,770 663,912 9/5/02 $ 5.00
3) Warrants issued as
commission in Tranch 2 - - 224,310 12/30/02 $ 4.50
4) Direct offering expenses
- Tranch 2 - (882,487) -
Totals 5,565,648 $ 9,221,783 1,528,222
============= ============= ============
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 1998, Beta completed a private placement
offering of equity units at a subscription price of $20 per unit. Each unit
consisted of four shares of Beta's common stock and one callable warrant to
purchase one share of its common stock at a price of $7.50 per share for a
period of five years from the date of issuance. During the year ended December
31, 1998 Beta issued 1,458,844 common shares and 364,708 common stock purchase
warrants exercisable at $7.50 per share pursuant to this offering. The offering
generated net proceeds, after offering costs, of $6,548,632. In addition, Beta
issued 482,100 common stock purchase warrants exercisable at prices ranging from
$5.00 to $7.50 per share for services rendered in connection with the offering.
The following table summarizes the private placement transactions for the year
ended December 31, 1998:
<TABLE>
Exercise
Common Shares Warrants Issued Price
------------------------------ ------------------------------
Shares $ Amount #Warrants Expiration Per Share
<S> <C> <C> <C> <C> <C> <C>
1) Tranch 3 1,458,844 $ 7,294,160 364,708 3/12/03 $ 7.50
2) Warrants issued as
Commission in Tranch 3 - - 121,383 3/12/03 $ 7.00
3) Direct offering expenses -
Tranch 3 - (745,528) -
4) Warrants issued as
additional commissions for
capital raised - - 482,100 2/4/03 to $ 5.00 to
3/21/03 7.00
Totals 1,458,844 $ 6,548,632 968,191
============= ============= =============
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, during the year ended December 31, 1998 and the period cumulative
from inception (June 6, 1997) to December 31, 1998, Beta issued 5,000 shares of
common stock and 1,250 common stock purchase warrants for properties costing
$25,000.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) COMMON STOCK WARRANTS
During the period from inception (June 6, 1997) through December 31, 1997, Beta
issued 1,528,222 callable and non-callable common stock purchase warrants
entitling the holders to purchase 1,528,222 shares of Beta's common stock at
prices ranging from $2.00 to $5.00 per share.
The following table summarizes the number of shares reserved for the exercise of
stock warrants as of December 31, 1997:
<TABLE>
Shares Exercise Price Expiration Date Callable/Non-Callable
<S> <C> <C> <C>
230,000 $2.00 June 23, 2002 Non-Callable
133,333 $5.00 September 5, 2002 Callable (a)
266,667 $5.00 September 5, 2002 Non-Callable
10,000 $4.50 October 1, 2002 Non-Callable
224,310 $4.50 December 30, 2002 Non-Callable
663,912 $5.00 September 5, 2002 Callable (a)
--------
1,528,222
<FN>
(a) Beta will be entitled to call these warrants at any time on and after the
date that its common stock is traded on any exchange, including the NASD
Over-the-Counter Bulletin Board, at a market price equal to or exceeding
$7.00 per share for 10 consecutive trading days.
</FN>
</TABLE>
During the year ended December 31, 1998, Beta issued 969,441 callable and
non-callable common stock Purchase warrants entitling the holders to purchase
969,441 shares of Beta's common stock at prices ranging from $3.75 to $7.50 per
share.
The following table summarizes the number of shares reserved for the exercise of
common stock purchase warrants as of December 31, 1998:
<TABLE>
Shares Exercise Price Expiration Date Callable/Non-Callable
<S> <C> <C> <C>
230,000 $2.00 June 23, 2002 Non-Callable
133,333 $5.00 September 5, 2002 Callable (a)
266,667 $5.00 September 5, 2002 Non-Callable
10,000 $4.50 October 1, 2002 Non-Callable
224,310 $4.50 December 30, 2002 Non-Callable
663,912 $5.00 September 5, 2002 Callable (a)
100,000 $3.75 January 23, 2003 Non-Callable (c)
2,000 $5.00 February 4, 2003 Non-Callable
230,100 $5.00 March 12, 2003 Non-Callable
100,000 $7.50 March 12, 2003 Non-Callable
50,000 $7.50 March 12, 2003 Callable (b)
121,383 $7.00 March 12, 2003 Non-Callable
365,958 $7.50 March 12, 2003 Callable (b)
--------
2,497,663
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<FN>
(a) Beta will be entitled to call these warrants at any time on and after the
date that its common stock is traded on any exchange, including the NASD
Over-the-Counter Bulletin Board, at a market price equal to or exceeding
$7.00 per share for 10 consecutive trading days.
(b) Beta will be entitled to call these warrants at any time on and after the
date that its common stock is traded on any exchange, including the NASD
Over-the-Counter Bulletin Board, at a market price equal to or exceeding
$10.00 per share for 10 consecutive trading days.
(c) On January 27, 1998, Beta issued 100,000 common stock purchase warrants
exercisable at a price of $3.75 per share to an officer of Beta. The
exercise price was equal to the market value of the common stock on the
date of grant. The warrants vest as follows: (a) 25,000 warrants vested
immediately; (b) 25,000 shall vest upon the first anniversary of the
employee's employment (January 27,1998) with Beta; (c) 25,000 shall vest
upon the second anniversary of employment; and (d) 25,000 shall vest upon
the third anniversary of employment. If the officer ceases employment
during the vesting period, all nonvested warrants shall be forfeited.
</FN>
</TABLE>
Pro Forma Information
As stated in Note 2, Beta has not adopted the fair value accounting prescribed
by FAS123 for employees. Had compensation cost for stock options issued to
employees been determined based on the fair value at grant date for awards in
the year ended December 31, 1998 consistent with the provisions of FAS123,
Beta's net loss and net loss per share would have been adjusted to the pro forma
amounts indicated below:
December 31, 1998
Net loss $(2,473,000)
Loss per common share $(.39)
During the year ended December 31, 1997, Beta did not grant options to
employees. As a result, there would be no effect on Beta's net loss or net loss
per share.
The fair value of each option is estimated on the date of grant using the
minimum value option-pricing model using the following assumptions: expected
volatility of 0%, an expected life of 2-3 years, no dividends would be declared
during the expected term of the options, a risk free interest rate of
approximately 5.6%.
The weighted average fair value of the options on the grant dates was $4.31 per
share.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) INCOME TAXES
Income tax (expense) for the years ended December 31, 1997 and 1998 is
comprised of the following:
<TABLE>
Cumulative
Inception Year ended From inception (June
(June 6, 1997) to December 31, 6, 1997) to
December 31, 1997 1998 December 31, 1998
--------------------- -------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Current:
Federal $ - $ - $ -
State - (800) (800)
--------------------- ------------------- ----------------------
$ - $ (800) $ (800)
===================== ==================== ======================
Deferred:
Federal $ - $ - $ -
State - - -
--------------------- -------------------- ----------------------
$ - $ - $ -
===================== ==================== ======================
</TABLE>
The actual income tax (expense ) benefit differs from the "expected" tax
(expense) benefit (computed by applying the U.S. Federal corporate income tax
rate of 34% for each period) as follows:
<TABLE>
Cumulative
Inception Year ended from inception (June
(June 6, 1997) to December 31, 6, 1997) to
December 31, 1997 1998 December 31, 1998
---------------------- ------------------- ----------------------
<S> <C> <C> <C> <C> <C> <C>
Amount of expected tax
(expense) benefit $ 68,535 $ 810,458 $ 878,993
Non-deductible expenses (713) (23,759) (24,472)
State taxes, net - (800) (800)
Change in valuation allowance
For deferred tax assets (67,822) (786,699) (854,521)
----------------------- ---------------------- ----------------------
Total $ - $ (800) $ (800)
======================= ====================== =======================
</TABLE>
The components of the net deferred tax asset recognized as of December 31, 1997
and 1998 are as follows:
<TABLE>
December 31, 1997 December 31, 1998
---------------------- -----------------------
<S> <C> <C>
Long-term deferred tax assets (liabilities)
Net operating loss carryforwards $ 74,801 $ 1,714,694
Exploration and development costs
capitalized for financial purposes,
expensed for tax purposes - (605,173)
---------------------- -----------------------
74,801 1,109,521
Valuation allowance (74,801) (1,109,521)
---------------------- -----------------------
Net long term deferred tax asset $ - $ -
====================== =======================
</TABLE>
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 1998, Beta has net operating loss carryforwards of
approximately $4,003,000 which expire in the years 2012 through 2018. Beta has
California net operating loss carryforwards for the year ended December 31,
1998 of $4,002,000 which expire in 2005.
Utilization of the tax net operating loss carryforward may be limited in the
event 50% or more change in ownership occurs within a three year period.
(7) OTHER
Related Party Transactions
During the period from inception (June 6, 1997) through December 31, 1997, and
for the year ended December 31, 1998, a director of Beta was paid $20,000 and
$60,000, respectively, pursuant to a consulting contract for management and
geologic evaluation services. In addition, the director subscribed to 350,000
shares of Beta's common stock at a price of $0.05 per share ("founder shares").
A second director of Beta subscribed to 50,000 founder shares at a price of
$0.05 per share. In addition, a legal firm with whom the director is a
shareholder, subscribed to 20,000 founder shares at a price of $0.05 per share.
The legal firm represents Beta as general counsel. The legal firm also received
15,000 common stock purchase warrants presently exercisable at a price of $5.00
per share until expiration on March 12, 2003 in connection with the February 12,
1998 private placement (see Note 4).
A third director of Beta subscribed to 400,000 founder shares at a price of
$0.05 per share.
Beta entered into an expense sharing agreement with Beta Capital Group, Inc., a
company owned by the President and Chairman of the Board, and the Treasurer of
Beta. The agreement provides for the allocation and reimbursement of certain
office expenses such as office rent, secretarial support, office supplies,
marketing materials, telephone charges between Beta and Beta Capital Group, Inc.
During the period from inception through December 31, 1997 Beta made payments
totaling $9,940 to Beta Capital Group, Inc. in connection with this agreement.
During the year ended December 31, 1998 Beta paid $17,000 in connection with
this agreement.
Leases
Effective October 1, 1997, Beta entered into an agreement to lease office space.
The lease agreement provides for a 24-month term expiring in September 1999.
Monthly rent payments under the lease agreement commenced in October 1997. The
lease agreement was previously in the name in Beta Capital Group, Inc. and was
modified and extended by amendment to reflect Beta as tenant. Beta's President
and Chairman, and Treasurer are personal guarantors of the lease agreement. Beta
is recognizing rent expense ratably over the term of the lease. Total minimum
future rental payments under this lease are as follows:
Year ended December 31, 1999 $ 23,804
============
Rent expense for the period ended December 31, 1997 and the year ended December
31, 1998 amounted to approximately $8,000 and $ 31,000 , respectively.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Initial Public Offering; Registration of Common Sstock
On December 4, 1998, Beta filed an S-1 Registration Statement with respect to
its common stock. The S-1 Registration Statement contains two forms of
prospectus: One prospectus will be used in connection with the sale by Beta of
up to 880,000 shares of its common stock in a best efforts underwritten public
offering and the other prospectus will be used by existing shareholders of Beta
in effectuating sales from time to time, for their own account, of their shares
of common stock, principally in over-the-counter transactions. It is anticipated
that the Registration Statement will be amended subsequent to the date of this
report for the following items: (i) to include this report, (ii) to increase the
number of shares being offered by Beta from 880,000 to 1,500,000, and (iii) to
include any other material changes to Beta since December 4, 1998.
Employment Contracts
Beta has executed an employment contract dated June 23, 1997 with its president
who also serves as a director. The contract provides for an indefinite term of
employment at an annual salary of $150,000 commencing in October of 1997 and an
annual car allowance of up to $12,000. The contract may be terminated by Beta
without cause upon the payment of the following:
(a) Options to acquire the common stock of Beta in an amount equal to 10% of
the
then issued and outstanding shares containing a five year term, piggyback
registration rights and an exercise price equal to 60% of the fair market
value of the shares during the sixty day period of time preceding the
termination notice, such amount not to exceed $3.00 per share.
(b) A cash payment equal to two times the aggregate annual compensation.
(c) In the event of termination without cause, all unvested securities issued
by Beta to the Employee shall immediately vest and Beta shall not have the
right to terminate or otherwise cancel any securities issued by Beta to the
Employee.
On June 23, 1997, Beta entered into an employment agreement with a shareholder.
The agreement provides for a two year term at an annual salary of $60,000 for
services as "Vice President of Capital Markets". Under separate agreement, the
Shareholder subscribed to 350,000 shares of Founders Shares at price of $0.05
per share. The subscription agreement provides that the shares shall vest over a
three year period.
Deferred Compensation
In 1998, the Company began to offer a simple individual retirement account (IRA)
plan for all employees meeting certain eligibility requirements. Employees may
contribute up to 3% of the employees eligible compensation. Beta's contribution
to the plan for the year ended December 31, 1998 was $4,693.
Other Assets
Other assets of approximately $166,000 at December 31, 1998 consisted of
unapplied well prepayments.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(8) SUBSEQUENT EVENTS
Bridge Loan
Subsequent to December 31, 1998, Beta completed the private placement of a
$3,000,000 bridge promissory note financing to three qualified investors (the
"1999 bridge financing"). In connection with the 1999 bridge financing, Beta has
granted the investors a security interest in all of Beta's assets.
The first portion of the 1999 Bridge Financing was funded on January 20, 1999
for $2,000,000. The promissory notes issued by Beta have a maturity date of
January 20, 2000. The notes bear interest, payable monthly in arrears, at a rate
of 10%. The securities purchase agreements which govern the January bridge
financing specify that, during the term of the notes, $1,000,000 of the proceeds
of a public offering of common stock by Beta must be directed to repayment of
the notes.
In connection with the January 1999 bridge financing, Beta issued 300,000 shares
of common stock to the note holders. In addition, if any portion of the
principal of the notes remains unpaid on the 180th, 210th, 240th, 270th, 300th,
and/or the 330th day following the closing date of the securities purchase
agreements, then on the day following any of such dates, Beta shall issue
additional common stock to each holder of the notes. The additional common
shares issued shall be determined by multiplying the unpaid principal balance by
2.5%. For example, if $1,000,000 of principal remains unpaid on the 180th day
following the closing date, then on the following day the purchasers would be
issued an additional 25,000 common shares calculated by multiplying $1,000,000
times 2.5%.
The second portion of the 1999 bridge financing was funded on March 19, 1999 for
$1,000,000. The promissory note issued by Beta has a maturity date of March 19,
2000. The promissory note bears interest, payable monthly in arrears, at a rate
of 10%. The securities purchase agreements which govern the bridge financing
specify that, during the term of the promissory note, $1,000,000 of the proceeds
of a public offering of common stock by Beta must be directed to repayment of
the note.
In connection with the March 1999 bridge financing, Beta issued 100,000 shares
of common stock to the promissory note holder (investor). In addition, If any
portion of the principal of the note remains unpaid on the 30th, 60th, 90th,
120th, 160th, 180th, 210th, 240th, 270th, 300th, 330th and/or the 360th day
following the Closing Date of the securities purchase agreement, then on the day
following any of such dates, Beta shall issue to the holder of the promissory
note, that number of common shares determined by the above formula and a
coverage percentage, in each instance, of 1%. For example, if $1,000,000 of
principal remains unpaid on the 180th day following the closing date, then on
the following day the investor would be issued an additional 10,000 common
shares ($1,000,000 x 1%=10,000); if $250,000 of principal remains unpaid on the
180th day following the closing date, then on the following day the investor
would be issued an additional 2,500 common shares calculated by multiplying
$250,000 times 1%.
Cheniere Energy, Inc. Joint Exploration Agreements
In January 1999, Beta entered into joint exploration agreements with Cheniere
Energy, Inc. ("Cheniere") on three natural gas prospects located in Louisiana.
Beta paid $658,000 to Cheniere as consideration for land and seismic costs in
connection with the prospects and committed to participate in the drilling of a
test well on each of the three prospects. The agreements provide that Beta will
pay 20% of the costs of drilling each of the test wells to total depth to earn a
15% working interest in each prospect. All costs incurred thereafter shall be
borne by Beta at its 15% working interest. Total estimated costs of drilling the
three test wells to total depth are $873,000 net to Beta.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dyad Australia, Inc. Exploration Agreement
In January 1999, Beta's wholly owned subsidiary BETAustralia LLC has signed an
agreement with Dyad Australia, Inc. of Midland, Texas ("Dyad") to participate
for a 20% working interest (16.4% net revenue interest) in Dyad's rights to the
Toko Syncline Project. Dyad is the holder of exploration permits covering
approximately 918,000 contiguous acres (1,434 square miles) in the Georgina and
Eromanga Basins of Western Queensland. Beta has paid $100,000 to acquire 20% of
Dyad's working interest buy-in rights in the project area. Dyad's buy-in rights
allow it to buy into the exploratory well on a cost only basis and after the
well has been drilled. If Dyad buys into the program after the initial
exploratory well has been drilled and evaluated, Beta will at that point, have
the option of acquiring a net 10% working interest in the well and entire
program at cost. If Dyad postpones its buy-in option until the later stages of
the project, then its option to purchase an interest will be incrementally
reduced. Beta's working and net revenue interest in the Toko Syncline project
area will depend on if and when Dyad and its partners elect to buy-in to the
project and will be reduced in the later stages of the project if the buy-in
option is not exercised and additional expenditures are incurred by the funding
partner. The funding partner will have exclusive marketing rights to
hydrocarbons in the project area, subject to an agreed minimum floor price to be
received for hydrocarbons produced and sold.
9) UNAUDITED SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION
The following supplementary information is presented in compliance with United
States Securities and Exchange Commission) regulations and is not covered by the
report of Beta's independent auditors. The information required to be disclosed
for the year ended 1998 in accordance with FASB Statement No. 69, "Disclosures
About Oil and Gas Producing Activities," is discussed below and is further
detailed in the following tables. There were no oil and gas reserves as of
December 31, 1997.
The reserve quantities and valuations for fiscal 1998 are based upon
estimates by Veazey & Associates, Inc. and Beta's management. Proved reserves
are the estimated quantities of crude oil, natural gas and natural gas liquids
which geological and engineering data demonstrate with reasonable certainty to
be recoverable in future years from known reservoirs under existing economic and
operating conditions, i.e. prices and costs as of the date the estimate is made.
Prices include consideration of changes in existing prices provided only by
contractual arrangements, but not on escalations based upon future conditions.
Reservoirs are considered proved if economic producibility is supported by
either actual production or conclusive formation test. The area of a reservoir
considered proved includes (A) that portion delineated by drilling and defined
by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining
portions not yet drilled, but which can reasonably judged as economically
productive on the basis of available geological and engineering data. In the
absence of information on fluid contacts the lowest known structural occurrence
of hydrocarbons controls the lower proved limit of the reservoir.
Proved developed reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods. Additional
oil and gas reserves expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing the natural
forces and mechanisms of primary recovery should be included as "proved
developed reserves" only after testing by a pilot project or after the operation
of an installed program has confirmed through production response that increased
recovery will be achieved.
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Beta wishes to emphasize that the estimates included in the following tables are
by their nature inexact and are subject to changing economic, operating and
contractual conditions. At December 31, 1998, all of Beta's reserves are
attributable to recently drilled wells which are being completed and are not yet
producing oil and gas as of that date. Reserve estimates for these wells are
subject to substantial upward or downward revisions after production commences
and a production history is obtained. Accordingly, reserve estimates of future
net revenues from production may be subject to substantial revision from year to
year. Reserve information presented herein is based on reports prepared by
independent petroleum engineers.
The assumptions used to compute the standardized measure are those prescribed by
the Financial Accounting Standards Board and, as such, do not necessarily
reflect Beta's expectations for actual revenues to be derived from those
reserves nor their present worth. The limitations inherent in the reserve
quantity estimation process, as discussed previously, are equally applicable to
the standardized measure computations since these are the basis for the
valuation process.
CHANGES IN QUANTITIES OF PROVED PETROLEUM AND NATURAL GAS RESERVES
FOR THE YEAR ENDED DECEMBER 31, 1998 (Unaudited)
<TABLE>
Oil Gas
PROVED RESERVES (Bbls) (Mcf's)
- -------------------------------------------------------------------------------- ----------- ----------
<S> <C> <C>
Balance at December 31, 1997 - -
Extensions and discoveries 1,461 1,596,740
----------- -----------
Balance at December 31, 1998 1,461 1,596,740
=========== ===========
Oil Gas
PROVED DEVELOPED BEHIND PIPE RESERVES (Bbls) (Mcf's)
- -------------------------------------------------------------------------------- -------------- -------------
December 31, 1997 - -
============== =============
December 31, 1998 1,461 1,596,740
============== =============
</TABLE>
<PAGE>
BETA OIL & GAS, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED PETROLEUM AND NATURAL GAS RESERVES (Unaudited)
For purposes of the following disclosures, estimates were made of quantities of
proved reserves and the periods during which they are expected to be produced.
Future cash flows were computed by applying year-end prices to estimated annual
future production from proved oil and gas reserves. The average year-end price
for oil was $13.14 per barrel at December 31, 1998. The average year-end price
for gas was $1.85 per Mcf at December 31, 1998. Future development and
production costs were computed by applying year-end costs to be incurred in
producing and further developing the proved reserves. Future income tax expenses
were computed by applying, generally, year-end statutory tax rates (adjusted for
permanent differences, tax credits and allowances) to the estimated net future
pre-tax cash flows. The discount was computed by application of a 10% discount
factor. The calculations assume the continuation of existing economic, operating
and contractual conditions. However, such arbitrary assumptions have not proven
to be the case in the past. Other assumptions of equal validity could give rise
to substantially different results.
<TABLE>
Year Ended
December 31,
1998
---------------
<S> <C> <C>
Future cash inflows $ 2,978,861
Future costs-
Production (343,478)
Development (81,621)
---------------
Future net cash inflows before income tax 2,553,762
Future income tax -
---------------
Future net cash flows 2,553,762
10% discount factor (837,154)
Standardized measure of discounted
===============
future net cash flows $ 1,716,608
===============
</TABLE>
CHANGES IN THE STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS FROM PROVED PETROLEUM AND NATURAL GAS RESERVE
QUANTITIES (Unaudited)
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows:
<TABLE>
Year Ended
December 31,
1998
---------------
<S> <C> <C>
Standardized measure of discounted future net cash
flows--beginning of year $ -
Extensions and discoveries, net of future costs 1,716,608
-
Standardized measure of discounted future net cash
---------------
flows--end of year $ 1,716,608
===============
</TABLE>
<PAGE>
INSIDE BACK COVER PAGE OF PROSPECTUS
(Three graphic illustrations depicting the following: (i) A three dimensional
cube which illustrates the ground surface and underlying layers of earth from
which oil and gas is produced, (ii) a map of California which shows the location
of Beta's prospects and (iii) a map of Australia which shows the location of
Beta's ongoing Australian prospect.)
<PAGE>
================================================================================
You should rely only on the information contained in this document or that we
have referred to you. We have not authorized anyone to provide you with
information that is different. The delivery of this prospectus and any sale made
by this prospectus does not imply that there has been no change in the affairs
of Beta since the date of this prospectus. This prospectus does not constitute
an offer or solicitation by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
TABLE OF CONTENTS
Additional Information ............................. 35
Prospectus Summary ................................. 1
Risk Factors ....................................... 4
Use of Proceeds .................................... 11
Dilution ........................................... 12
Capitalization ..................................... 14
Dividends .......................................... 14
Selected Consolidated Financial Data ............... 15
Management's Discussion and Analysis of
Financial Condition and Results of Operations .... 16
Glossary ........................................... 21
Business ........................................... 24
Properties ......................................... 26
Management ......................................... 36
Executive Compensation ............................. 38
Summary Compensation Table ......................... 38
Principal Shareholders ............................. 40
Certain Relationships and Related Party Transactions 41
Description of Securities .......................... 42
Shares Eligible for Future Sale .................... 44
Underwriting ....................................... 45
Legal Matters ...................................... 46
Experts ............................................ 46
Financial Statements ............................... F-1
For an explanation of industry terms used in this prospectus, see "Glossary."
----------------------
Dealer prospectus delivery obligation. Until ___, 1999 (25 days after the date
of this prospectus), all dealers effecting transactions in the registered
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This delivery requirement is in addition to the obligation
of dealers to deliver a prospectus when acting as underwriters and with respect
to their unsold allotments or subscriptions.
================================================================================
[Beta Oil & Gas, Inc. Logo]
Beta Oil & Gas, Inc.
800,000 (Minimum)
1,500,000 (Maximum)
Shares Of Common Stock
($.001 Par Value)
--------------------------
PROSPECTUS
--------------------------
Brookstreet Securities
Corporation
_________, 1999
================================================================================
<PAGE>
The information contained in this prospectus is not complete and may be changed.
We may not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
ALTERNATE PAGE
Prospectus
Beta Oil & Gas, Inc.
9,652,155 shares of Common Stock
($.001 Par Value)
The Offering: This offering relates to the possible sale,
from time to time, by certain shareholders, the
"selling security holders" of Beta of up to 7,029,492
shares of common stock, and 2,697,663 shares of common
stock issuable upon exercise of unregistered common
stock purchase warrants, the "warrants." Beta will not
receive any proceeds from sales by selling security
holders, except when warrantholders choose to exercise
their warrants, in which case Beta will receive the
exercise price of the warrants net of a 5% commission.
The registration of the 9,652,155 shares of common
stock in this prospectus is conditioned upon Beta
successfully completing the minimum offering of 800,000
shares of its initial public offering. See "Plan of
Distribution" for further details concerning the
possible sale of these shares.
Proposed Trading Symbol: No public market currently exists for our shares. We
intend to apply for quotation on The Nasdaq SmallCap
Market under the symbol "BETA." The offering price
may not reflect the market price of our shares after
the offering.
---------------- ---------------------------
================================================================================
This Investment Involves a High Degree of Risk. You Should Purchase Shares
Only if You Can Afford a Complete Loss. See "Risk Factors" Beginning on
Page __.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
================================================================================
Beta has agreed to bear all the expenses of registering these shares. The
expenses are estimated at $90,000.
The date of this prospectus is ___________, 1999_
<PAGE>
ALTERNATE PAGE
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. You should also read the entire prospectus carefully, including the
risk factors and financial statements. There is no assurance that Beta will ever
generate a profit from oil and gas operations.
Beta Oil & Gas, Inc.
Offices: Beta's corporate headquarters are located at 901 Dove
Street, Suite 230, Newport Beach, CA 92660. Our
telephone number is (949) 752-5212.
Our Business: Beta Oil & Gas, Inc. is an oil and gas
company organized in June 1997 to participate in the
exploration and production of natural gas and crude
oil. Our operations are currently focused in proven oil
and gas producing trends primarily in South Texas,
Louisiana and Central California. Beta's wholly owned
subsidiary, BETAustralia, LLC, participates in the
exploration for oil and gas in Australia.
Operations Philosophy: Beta intends to rely on joint ventures with qualified
operating oil and gas companies to operate its
projects through the exploratory and production
phases. This will reduce general and administrative
costs necessary to conduct operations. As of the date
of this prospectus, Beta was not operating any of its
projects.
3-D Seismic: Beta believes that 3-D seismic surveys have
reduced the risk of oil and gas exploration in certain
areas. Recognizing this change, we have acquired
prospective acreage blocks for targeted, proprietary,
3-D seismic surveys. Briefly, a seismic survey sends
pulses of sound from the surface, down into the earth,
and records the echoes reflected back to the surface.
By calculating the speed at which sound travels through
the various layers of rock, it is possible to estimate
the depth to the reflecting surface. We use computers
to perform these calculations and "process" the seismic
data. It then becomes possible to create a picture of
the rock structures deep below the earth's surface. A
3-D seismic survey provides us a three dimensional
picture of these rock structures. These three
dimensional "pictures" show us the potential size of a
potential oil or gas reservoir and the best location to
drill for it.
Current Status: As of the date of this prospectus, we have
participated in projects which total about 76,000 gross
acres under lease or option. This is 13,000 acres net
to Beta's average 17% interest. Beta has participated
with other oil and gas companies to conduct seismic
surveys over approximately 94% of the acreage. From the
data generated by its initial proprietary seismic
surveys, covering 313 square miles, in excess of 100
potential drillsites have been identified.
South Texas Exploration:Approximately $10,000,000, about 60% of the total funds
raised so far by Beta, have been utilized to acquire
interests in lands and seismic data in the onshore Texas
Gulf Coast region. Beta's interests in the onshore
Texas properties are operated by Parallel Petroleum
Corporation. Drilling commenced in these projects during
the first quarter of 1999 and has resulted in two
discoveries of oil and gas to date. Representatives of
Parallel have informed Beta that drilling will continue
in these projects throughout the year. Beta anticipates
that participation in exploratory and drilling projects
in South Texas will constitute its primary activity
during 1999.
Louisiana Exploration: Approximately $3,300,000, representing 20% of the funds
raised so far by Beta have been invested in leases,
seismic data acquisition and drilling in Louisiana.
Drilling commenced in these prospects in 1998 and has
resulted in one oil and gas discovery so far. It is
expected that Beta will participate in the drilling
of a minimum of six wells in Louisiana during 1999.
Other Exploration: The balance of the funds raised to date have been
utilized primarily to fund other domestic and
international exploratory activities. Beta's exploratory
activities in areas outside of Texas and Louisiana have
resulted in one gas discovery located in Central
California. We anticipate that Beta will expend
additional funds to explore these areas during 1999 and
future periods.
1999 Budget Plans: Beta's capital budget for 1999 of approximately
$8,300,000, subject to available funds, includes amounts
for the acquisition of additional 3-D seismic data and
for the drilling of 38 gross wells, or 8.39 wells net to
Beta, in 1999. Beta will own interests in the wells
ranging from 12.5% to 75% and averaging 22%. A majority
of the budgeted wells will be drilled in Texas and
Louisiana. In addition, Beta anticipates that as its
existing 3-D seismic data is further evaluated, and 3-D
seismic data is acquired over the balance of its
acreage, additional prospects will be identified for
drilling beyond 1999.
The Offering
<TABLE>
<S> <C>
Common stock offered by the selling security holders: 9,727,155 shares (1)
Common stock warrants: 2,697,663
Common stock to be outstanding after the offering:(2) 7,458,492 shares
Use of proceeds: (3) The Company will not receive any proceeds from the sale
of securities by the selling security holders, although
it could realize as much as $14,463,821 if all warrants
are exercised, less an approximate 5% commission to
brokers of record, if any. The proceeds from the
exercise of warrants will be used for general working
capital purposes, the repayment of debt and the drilling
of wells in Beta's Louisiana, California and Texas
prospects. The registration of the 9,652,155 shares of
common stock in this prospectus is conditioned upon Beta
successfully completing the minimum offering of 800,000
shares of its initial public offering.
Risk factors: An investment in our shares is very risky, and you should
be able to bear a complete loss of your investment. See "Risk Factors"
for a detailed discussion of the risks and uncertainties concerning
Beta's common stock.
Proposed Nasdaq SmallCap Market Symbol:(4) BETA
<FN>
(1) Includes 2,697,663 shares of common stock reserved for issuance upon exercise of warrants
(2) Does not include common stock issuable upon exercise of outstanding
warrants. In addition, it does not include between 800,000 and
1,500,000 shares being offered concurrently with this offering.
(3) Net proceeds before deducting estimated offering expenses of $90,000.
(4) There is no assurance that the common stock will be approved for
quotation in the Nasdaq SmallCap Market or that a trading public market
will develop, or, if developed, will be sustained. See "Risk Factors -
There has been no prior trading market for Beta's common stock;
potential volatility of Beta's stock price" for a more detailed
discussion of these market risks.
</FN>
</TABLE>
<PAGE>
ALTERNATE PAGE
USE OF PROCEEDS
Beta will not receive any proceeds from the sale of securities by the
selling security holders. Beta intends to utilize the proceeds received from the
exercise of any warrants, estimated to be $14,463,821 if all warrants are
exercised in full, less a 5% commission to the brokers of record if applicable,
for general corporate and working capital purposes, for the repayment of debt
and for exploratory and development drilling on its various projects. There can
be no assurance that any of the warrants will be exercised. This is Beta's best
estimate of its use of proceeds generated from the sale of shares by Beta and
the possible exercise of warrants based on the current state of its business
operations, its current plans and current economic and industry conditions. Any
changes in the projected use of proceeds will be made at the sole discretion of
Beta's board of directors. The registration of the 9,652,155 shares of common
stock in this prospectus is conditioned upon Beta successfully completing the
minimum offering of 800,000 shares of its initial public offering.
<PAGE>
ALTERNATE PAGE
RESALE BY SELLING SECURITY HOLDERS
This prospectus relates to the proposed resale by the selling security
holders of up to 7,029,492 shares of outstanding common stock as well as the
resale of up to 2,697,663 additional shares of common stock issuable upon
exercise of Beta's outstanding common stock purchase warrants. The following
tables set forth as of the date of this prospectus certain information
concerning the persons for whom Beta is registering the shares for resale to the
public. Beta will not receive any of the proceeds from the sale of the shares,
but will receive a maximum of $14,463,821 if the warrants listed below are
exercised.
<TABLE>
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
<S> <C> <C> <C> <C> <C>
15TH STREET PARTNERS A LIMITED PARTNERSHIP 20,000 20,000 -
ALSTROM, JOHN K. & ALSTROM, DOREEN Y. COM PROP 8,000 2,000 -
ALTER, SCOTT C 4,000 1,000 -
ANDERSON, RAYMOND A. & ANDERSON, PATRICIA ANN 1,336 334 -
ANDERSON, SAMUEL THOMAS & ANDERSON, DIANA LEE JTWROS 10,000 2,500 -
ANTRY, JO LAYNE TTEE ANTRY, JO LAYNE REV INT TR U/A DTD 10,000 0 -
5/11/93
ANTRY, SARA ELIZABETH 0 12,500 -
ANTRY, STEVE & ANTRY, LISA 1,500,000 0 21%
ANTRY, W FRED 10,000 0 -
ANTRY, WILLIAM WARREN 5,000 0 -
ARAX, NAVO & ARAX, JOSETTE COM PROP 1,000 250 -
ARKOOSH, JOHN T & ARKOOSH, GAIL A JTWROS 8,000 2,000 -
ARKOOSH, JOHN T 0 23,200 -
ARKOOSH, THOMAS J 8,000 2,000 -
ASSEMI, MASSOUD 2,000 500 -
ASSEMI, SAID IRA 2,000 500 -
AVANT, DON L 0 800 -
BAIRD, RALPH 0 10,000 -
BALAKIAN, LARRY 4,000 1,000 -
BARBOUR, MATT 8,000 2,000 -
BEAR STEARNS SECURITIES CORP CUST FBO MANZ, VIRGINA C IRA #5859520214048 20,000 5,000 -
BEAR STEARNS SECURITIES CORP CUST FBO LACY, FREDERICK SEP IRA 13,120 3,280 -
BENNETT, BILL & BENNETT, JOYCE L COMMUNITY PROPERTY 10,200 2,550 -
BENNETT, JACK K & BENNETT, GLORIA E 10,000 0 -
BENNETT, LAURIE LEA 5,000 0 -
BERBERIAN & GAZARIAN FAMILY FOUNDATION 10,000 2,500 -
BERLINER, WILLIAM P & BERLINER, MARIE E JTWROS 4,000 1,000 -
BERTAINA, LAWRENCE J TTEE BERTAINA, LAWRENCE J REV LIV TR DTD 2,000 500 -
09/18/89
BIPPUS, JUNE 0 4,000 -
BIPPUS, WANDA JUNE 0 5,000 -
BIRCHTREE FINANCIAL SERVICES INC. 0 1,442 -
BLACK DIAMOND BLADE INC PROFIT SH PL & TR BRENNER, FRANKLIN TTEE 19,000 4,750 -
BLACK, JOHN M & BLACK, JOYCE E. JTWROS 4,000 1,000 -
BLAIR, SUSAN A 6,000 1,500 -
BLOUNT, LAMARUS L. & BLOUNT, MICHELLE T. JTWROS 12,000 3,000 -
BLUM, DEREK E 1,000 250 -
BLUM, GERALD H. 1,348 334 -
BLUM, RYAN H 1,000 250 -
BOESEL, JOHN 1,200 -
BOGHOSIAN, NICHOLAS P & NANCY TTEES FBO BOGHOSIAN FAMILY TRUST UTD 11-20-90 4,000 1,000 -
BONNER, CHARLES B. 10,668 2,667 -
BONNER JR, S.M. 8,000 2,000 -
BORELLI, DON 8,000 2,000 -
BOSWELL, GEORGE & BOSWELL, NORMA G. JTWROS 4,000 1,000 -
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
BOVA, MICHAEL F & BOVA, L. MICHELLE TIC 4,000 1,000 -
BOWERS, STEVEN W. & BOWERS, SYBIL A. 2,600 650 -
BOYD, KEN TTEE FBO KENCO INVESTMENT INC PROFIT SHARING PLAN 2,000 500 -
BOYD, KEN 2,000 500 -
BRAGG, ROBERT M TTEE FBO THE BRAGG, ROBERT M SEPARATE PROPERTY TR 17,112 4,278 -
5-30-72
BRENNER, FRANK 19,000 4,750 -
BRENNER, HOBY & BRENNER, ALEXIS 18,332 4,583 -
BRILL JR, WILLIAM B. & BRILL, DOLORES M TIC 8,000 2,000 -
BROOKSHIRE, G. LEE & BROOKSHIRE, JANEL M. 6,000 1,500 -
BRUNY, STEPHEN J. 4,000 1,000 -
BUCKENBERGER, ROBERT A. IRA 4,000 1,000 -
BURKS, STEVE 0 8,464 -
CAMBRIDGE, THOMAS R. TTEE CAMBRIDGE PRODUCTION INC.401K PRF SH PLN 8,000 2,000 -
CANALES, JAMES P. 4,000 1,000 -
CANADA, LEESA NAN HOLLAND 2,000 500 -
CARIB FINANCIAL 0 10,000 -
CARLISLE, FRED H TTEE FBO CARLISLE, FRED H & SUE Z REV TRUST 2,000 500 -
CARLISLE, FRED H. & CARLISLE, SUE Z. REV TRUST 2,000 500 -
CARR, GARY B. 6,000 1,500 -
CASEY FAMILY TRUST UTD 04/18/90 8,000 2,000 -
CASEY, LARRY W & SUANNE BLAIR TTEES FBO CASEY FAMILY TRUST UA DTD 4-18-90 4,000 1,000 -
CASWELL BELL HILLISON BURNSIDE & GREER SHARING TR FBO JAMES M BELL 1,000 250 -
CASWELL, G THOMAS JR & CASWELL, CAROL W COMMUNITY PROPERTY 6,000 1,500 -
CASWELL, THOMAS 4,000 1,000 -
CENTANNI, RANI 0 1,000 -
CHANNER, GARY J & PATRICIA J TTEES CHANNER FAMILY TRUST 4,000 1,000 -
CHANNER, GARY J. 8,000 2,000 -
CHAN, JACKY C. 1,000 250 -
CHERRY, ROBERT T & TAY N TTEES CHERRY FAMILY TRUST 2,000 500 -
CHILDS, SPENCER 0 2,000 -
CHIZMAR, LAWRENCE E JR IRA 2,000 500 -
CHOOLJIAN, LEO 8,000 2,000 -
CHOOLJIAN, MEHRAN & MADELINE TTEES FBO CHOOLIJAN, MERHAN & MADELINE FAM TR DT 22,000 5,500 -
08/91
CHOOLJIAN, MEHRAN & CHOOLJIAN, MADELINE 10,000 2,500 -
CHOOLJIAN, MICHAEL 2,700 675 -
CIFELLI, THOMAS A LIVING TRUST 0 231 -
CITY NATIONAL BANK TTEE FBO APPLICATION SOFTWARE INC PROF SH TR 16,000 4,000 -
CLARK, JEFF 840 -
COFFMAN, SUSAN M & COFFMAN, LEROY B II COMMUNITY PROPERTY 16,000 4,000 -
COHEE, GARY 0 2,500 -
COLBERT ENTERPRISES PRF SHR PLN COLBERT TTEE, FLOYD O. 4,000 1,000 -
COLLETTE, DAVID G. 2,600 650 -
COLLINS, TRUDY G. 3,000 750 -
COLTON INVESTMENTS LLC 8,000 2,000 -
COLTON, RANDALL WAYNE 60,000 15,000 -
CONNOLLY, JOSEPH & BETTY LOU CONNOLLY FAMILY TRUST UTD 1-24-92 16,000 4,000 -
CONSTRUCTION DEVELOPERS INC. 16,000 4,000 -
CONZELMAN, MAX TTEE MAX CONZELMAN TR UTD 06/10/91 1,332 333 -
COPELAND, CARRIE 1,000 0 -
COPELAND, COURTNEY 1,000 0 -
COPELAND, GREGORY 1,000 0 -
COPELAND, KRISTEN 1,000 0 -
COPELAND, LEE R & COPELAND, CAROL S JTWROS 2,000 1,750 -
COPELAND, LEE R 2,000 500 -
COPELAND, NATHAN LEWIS - 1,000 0 -
CORNWELL, KNOWLES 8,000 2,000 -
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
CORRIN, ALLAN A 8,000 2,000 -
COSTNER-MCIHENNY, KATHY M 2,000 500 -
CULLUM, TIM 0 8,464 -
CUMMINGS, RICHARD & LAURA TTEES CUMMINGS, RICHARD REV TR UTD 01/17/96 6,668 1,667 -
CUNNINGS, ROY W. & CUNNINGS, NORMA D. 2,700 675 -
CURRY, PATRICK GREGG 8,000 2,000 -
CURTIS, CHARLES ELLIOTT & CHARLENE ANN TEES CURTIS, CHARLES & CHARLENE FAM TR 7,336 1,834 -
4-15-94
CUTLER, STANLEY 4,000 1,000 -
DAHLIA FINANCIAL LTD. 0 400,000 -
DANDELION INTERNATIONAL LTD 177,776 44,444 2.5%
DAVIS, CHRISTINE 5,000 0 -
DAVIDIAN, DOUGLAS B & ROBYN D TTEES DAVIDIAN REV TR DTD 07/05/95 8,000 2,000 -
DAVIDIAN, DOUG 2,000 500 -
DAVIDIAN, HAIG 0 10,000 -
DAVIDIAN, HAIG 24,000 6,000 -
DAVIDSON, JANICE A TTEE UA DTD 5-19-81 6,000 1,500 -
DEBOOY, DAVID P & DEBOOY, RUTH E JTWROS 2,000 500 -
DEFONSEKA, MAHENDRA M.D. 1,500 375 -
DELAWARE CHARTER GUARANTEE & TRUST T/F HAGERTY, WILLIAM KELLY 8,000 2,000 -
DESMOND, JOSEPH F TTEE OF THE DESMOND SURVIORS TRUST 14,000 3,500 -
DESMOND, JOSEPH F 8,000 5,500 -
DICKISON-RYSKAMP, JUDITH 0 660 -
DICKISON-RYSKAMP, JUDITH 2,000 500 -
DIR, DALE B TTEE FBO THE DALE B DIR LIVING TRUST DTD 11-3-93 12,000 3,000 -
DIR, RODNEY D 12,000 7,400 -
DIXON, BILL 0 2,000 -
DOMME M.D., SYLVESTER 1,332 333 -
DONALDSON LUFKIN JENRETTE SECURITIES CUST FILEDS, STEPHEN A IRA DLJ AC#6JC105452 3,000 750 -
DOW, ROBERT L JR 5,000 1,250 -
DRAKE, RONALD L. 12,000 3,000 -
DUBOIS, J.SCOTT & DUBOIS, CYNTHIA A. JTWROS 8,000 2,000 -
DUNCAN, LARRY R. 4,000 1,000 -
DUNCAN, ROBERT E. TTEE FBO DUNCAN FAMILY TRUST 1986 10,000 2,500 -
DUNCAN, ROBERT E. & DUNCAN, LINDA L. COMM PROP 50,000 12,500 -
EGAN, RICHARD M 1,000 250 -
ELHAJ, ABED K. 6,000 1,500 -
ELLIOTT, BRUCE 2,000 500 -
ELLIS, JOHN STEVEN SR & ELLIS, REBECCA C JTWROS 6,000 1,500 -
EVANS, MARK A & EVANS, STACEY D JTWROS 1,332 333 -
EVEREN CLEARING CORP CUST FBO COLLETTE, DAVID G. SEP IRA 4,000 1,000 -
EVERS, MARJORIE S 8,000 2,000 -
EVETTS, CURTIS A 8,000 2,000 -
FAMALETTE, JAMES R & FAMALETTE, DWANNA N COMMUNITY PROPERTY 4,000 1,000 -
FASI, RALPH 8,000 2,000 -
FETTERS, R T 350,000 0 5%
FIELDS FAMILY ADMINISTRATIVE TRUST 4,000 1,000 -
FIELDS, KATHRYN R TTEE FIELDS GRANDCHILDREN'S TRUST 4,000 1,000 -
FIELDS, KATHRYN R TTEE FBO FIELDS, KATHRYN R SURVIVORS TR UDT 8,000 2,000 -
03/27/81
FIFTEENTH STREET PARTNERS L.P. 26,668 6,667 -
FINE, HOWARD F & FINE, CAROL M TTEES FINE REV TR DTD 120,000 30,000 2%
12/1/88
FISCHER, STEPHEN L 350,000 25,000 5%
FOERSTER, STEVEN P 16,000 4,000 -
FOSTER, RAYMOND T & LEITA TTEES OF THE FOSTER, RAY T REVOCABLE TRUST 5,668 1,417 -
FOX & COMPANY INVESTMENTS INC. 0 313 -
FRANEY, ROGER C. 4,000 1,000 -
FRAZER, JOE W M.D. & FRAZER, JILL B. JTWROS 4,000 1,000 -
FREDSON, RONALD A & FREDSON, MARGARET A JTWROS 8,000 2,000 -
FRICK, C. WALTER TTEE OF THE FRICK FAMILY TRUST UTD 1-31-92 4,000 1,000 -
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
FRICK, C. WALTER 4,000 1,000 -
FROGGATTE, THERON L 1,332 4,374 -
FUJINAKA, STEVE HISAO FUJINAKA, BARBIE JTWROS 24,000 6,000 -
GALBRAITH, JACK H TTEE JACK H GALBRAITH TR UTD 05/25/95 5,332 1,333 -
GAMMAGE & BURNHAM PROF SH PL #18 2,000 500 -
GAZARIAN, ARNOLD H & DIANE B TTEES FBO GAZARIAN FAMILY TRUST 16,000 4,000 -
GBS FINANCIAL CORP 0 3,621 -
GESSERT, CHARLES 4,000 1,000 -
GETZ, KAREN A. 1,000 250 -
GIDDINGS, DEBRA & GIDDINGS, RICHARD JTWROS 8,000 2,000 -
GIDDINGS, RICHARD J. & GIDDINGS, CAROL H. 8,000 2,000 -
GLASCO, DALE TTEE GLASCO FAMILY TRUST 8,000 2,000 -
GLASPEY, RODGER C TTEE GLASPEY FAMILY TRUST UTD 05/15/92 20,000 5,000 -
GORDON, CHRIS 56,000 14,000 -
GOULD, PAUL L. 11,000 2,750 -
GRALNICK, MARK AVERY 4,000 1,000 -
GRAY, BETTY CURTIS 8,000 2,000 -
GRIDER, ROBERT E. & GRIDER, JEANETTE COMM PROPERTY 1,000 250 -
GRIDER, ROBERT E & GRIDER, JEANETTE 2,000 500 -
GRIFFIN, JAMES 0 2,000 -
GROSS, RONALD I 0 51 -
GRUS, GEORGE W & GRUS, LIBBY JTWROS 8,000 2,000 -
H. ARNOLD KELA FARMS EMPLOYEE RETIREMENT PLAN & TRUST DTD 12-28-71 14,000 3,500 -
HAFER, EDWARD 8,000 2,000 -
HAGERTY STEWART & ASSOCIATES 0 53,756 -
HAGERTY, WM KELLY & GLADYS W TTEES FBO HAGERTY TRUST DTD 11/24/92 0 8,160 -
HANGEN, DONALD H & PATRICIA C TTEES HANGEN FAMILY TRUST UTD 3-6-96 2,000 500 -
HANOIAN, DARRYL G. 2,700 675 -
HANSON, AMY ANN 1,000 0 -
HANSON, MARY ANN 1,000 0 -
HANSON, PEDER CHRISTIAN 1,000 0 -
HANSON, ROBERT FRANKLIN 1,000 0 -
HARDMAN, GARY D 4,000 1,000 -
HARDIN, JAMES & HARDIN, DIANE COM PROP 2,000 500 -
HARRIES, EUGENE J. & HARRIES, EDEN L. JTWROS 1,000 250 -
HARRIS, PATRICIA 0 5,000 -
HARTOG, B. M. DEN TTEE OF THE HARTOG, DEN 1989 FAMILY TR UA DTD 6-13-89 3,000 750
HARTOG, B. M. DEN 2,000 500 -
HARTMAN, JOHN 2,000 500 -
HASKER, DAN C 8,000 2,000 -
HAWKINS, BRUCE E & HAWKINS, KATHY B 5,000 0 -
HEITKOTTER, JAMES & HARTLEY, JUNE G JTWROS 6,000 1,500 -
HELMER, JAMES D & IRIS C HELMER TTEES FBO HELMER FAMILY TRUST DTD 5-1-97 4,000 1,000 -
HENDRICKS, FRANK IRA #83003228 2,000 500 -
HERNDON, BILL 0 6,421 -
HIBNER, RICHARD W & HIBNER, EILEEN W COM PROP 21,844 5,461 -
HILL, T WILLIAM & HILL, BARBARA C JTWROS 8,000 2,000 -
HILL, T. WILLIAM & HILL, BARBARA C JTWROS 4,000 1,000 -
HIRSCHFELD, DAVID S. 5,368 1,342 -
HLLYWA, JOHN & HLLYWA, CYNTHIA JTWROS 2,500 5,000 -
HOBBS, JERRY C. & HOBBS, SARAH JANE TIC 4,000 1,000 -
HODGES, JOSEPH MICHAEL 17,332 4,333 -
HODGES, MICHAEL S 0 5,000 -
HOFFMAN, DAROL TTEE FOR RICHARD D GORDON INC PROFIT SHARING PLAN 20,000 5,000 -
HOFFMAN, DAROL 10,000 2,500 -
HOLDEN, GREGORY M & HOLDEN, NANCY 1,000 250 -
HOLDER, MARY LYNN 1,000 0 -
HOLLAND, C.T. 24,000 6,000 -
HOLLAND, PAMELA J 2,000 500 -
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
HOMEN, ROBERT E. & HOMEN, LUCY M. COM PROP 5,000 1,250 -
HOPKINS, ALAN R & KAREN D TTEES UNDER THE DECLARATION OF TRUST DTD 1,000 250 -
1-23-90
HORN, J.P. & JILL B COMMUNITY PROPERTY 2,000 500 -
HORWITZ, FLOYD 5,000 0 -
HORWITZ & BEAM 20,000 15,000 -
HORWITZ, LAWRENCE 50,000 0 -
HOULIHAN SMITH & CO. INC. (NEVADA) 0 30,800 -
HOWARD, FRED 4,000 1,000 -
HUBER, DAVID S 8,000 2,000 -
HUGHES, BETTY R TTEE EST U/A/T DTD 10/16/97 20,000 5,000 -
HUGHES, BETTY R. TTEE HUGHES, REUBEN P AND BETTY R TR UA 10,000 2,500 -
11/30/71
HUGHES, JOSEPH BERNARD 1,000 250 -
HUNNICUTT, LUTHER C. & HUNNICUTT, CARROL N. COM PROP 6,000 1,500 -
INNIS, ELIZABETH A. LIVING TRUST DTD 6/28/89 6,700 1,675 -
IORIO, GLORIA JEAN IRA 4,000 1,000 -
JACHENS, ALBERT M 1,000 250 -
JACOBS, DAVID A 2,000 500 -
JEFFRIES, JOHN R & JEFFRIES, PAMELA A COMM PROP 1,000 250 -
JENSEN, RODGER B 10,000 2,500 -
JOBE, CHRISTOPHER M. & WUCHENICH-JOBE, MELANIE M. JTWROS 8,000 2,000 -
JOE B FIELDS FAMILY PARTNERSHIP L.P. 4,000 1,000 -
JOHNSON, J. RONALD & JOHNSON, CHRISTINE E JT TEN 1,000 250 -
JONES, CARROLL SHANNON TTEE JONES TRUST, CARROLL SHANNON 10,400 2,600 -
JONES, LEO & MARGARET L TTEES JONES FAMILY TRUST 400 100 -
JONES, STANLEY F & JONES, BOBBE C 4,000 1,000 -
JONES, THOMAS H. & JONES, SHIRLEY 2,668 667 -
JURA, ROY & JURA, BETTY JANE COM PROP 3,352 838 -
K & B DEVELOPMENT INC PROFIT SHARING TR FBO KUNZ, R. KENT 9,000 2,250 -
THE KASHIAN GROUP LTD. 8,000 2,000 -
KECK, HUNTER TTEE KECK FAMILY TR UTD 03/21/78 8,000 2,000 -
KELA, H. ARNOLD & KELA, COLLEEN F. COM PROP 18,668 4,667 -
KELA FARMS CORPORATION 12,000 3,000 -
KELTON, LISA TTEE FBO MICHAEL K KELTON LISA KELTON LIVING TR 2,000 500 -
KEMP, CHARLES 16,000 11,500 -
KEMP, KELLY 20,000 30,000 -
KENCAROL INC. A CORPORATION 18,000 4,500 -
KENFIELD, STEPHEN C. & KENFIELD, ANN E. 4,000 1,000 -
KENNEDY, THOMAS J & EILEEN M TTEES FBO KENNEDY, THOMAS J & EILEEN M REV TR NO.1 8,000 2,000 -
KENT, R TTEE FBO T.T.& K. EDUCATIONAL TRUST II 4,000 1,000 -
KEROLA, GREG 2,500 0 -
KEROLA, RYAN 2,500 0 -
KESZLER, GARY R. & KESZLER, MARLENE JTWROS 6,000 1,500 -
KHASIGIAN, HARRY A. & KHASIGIAN, LYNDA H. 13,332 3,333 -
KHASIGIAN, HARRY A & LYNDA H TTEES THE KHASIGIAN REVOC LIV TR DTD 7-24-91 8,000 2,000 -
KHAYYAM, MANSOUR & KHAYYAM, VICTORIA JTWROS 16,000 4,000 -
KILPATRICK, BYRON & KILPATRICK, MYRIAM JTWROS 24,000 6,000 -
KIMBALL, ROBERT L. & KIMBALL, ELIZABETH S. JTWROS 8,000 2,000 -
KIMURA MARKETS 7,000 1,750 -
KINARD, CRAIG S 6,000 1,500 -
KINARD, JOHN C 4,000 1,000 -
KING, GERALD W & EDITH C TTEES FBO KING FAMILY TRUST UTD 01/22/93 12,000 3,000 -
KINSMAN, ROBERT L & ANNETTE M FAMILY LIMITED PARTNERSHIP (CORP) 8,000 2,000 -
KOBORI, MARVIN S DDS PROF CORP PEN PL 4,000 1,000 -
KOKILA, RICHARD A. & KOKILA, NAN M. JTWROS 4,000 1,000 -
KOONCE, JOHN P 5,000 16,269 -
KOONCE, PETER 0 4,250 -
KOURAFAS, NICK T & ELAINE TTEES FBO KOURAFAS, NICK & ELAINE 1993 TRUST 2,000 500 -
KOURAFAS, TOM 1,500 375 -
KOUTURES, GEROGE C IRA 24,336 6,084 -
KOUTOURES, MARIA IRA 20,176 5,044 -
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
KRAZAN, THOMAS P. & KRAZAN, DONNA L. 1,000 250 -
KULICK, EDWARD L TTEE FBO THE KULICK TRUST 1984 UA 10-23-84 10,000 2,500 -
KUNZ, MICHAEL J 532 133 -
KUNZ, PAMELA 1,000 250 -
KUNZ, R KENT & KUNZ, BARBARA J JTWROS 8,000 2,000 -
KUNZ, R KENT & SYLVIA LAMAS TTEES FBO K & B DEVELOPMENT PROF SH TR FBO R KENT 13,336 3,334 -
KUNZ
L. C. LOOKABAUGH CO. 26,668 6,667 -
LACY, FREDERICK 8,000 84,160 -
LAINES, DONALD C. & LAINES, ELLEN J. JT TEN 4,000 1,000 -
LANOTTE, FRANK J SEP/IRA FBO LANOTTE, FRANK J 2,800 700 -
LANOTTE, FRANK J. & LANOTTE, LOUISE A. COM PROP 1,000 250 -
LAVERGNE, K O 1,332 333 -
LEFKOWITZ, MICHAEL TTEE FBO LEFKOWITZ, MICHAEL REVOCABLE TRUST 5,000 1,250 -
LESTER, D. KEVIN 20,000 5,000 -
LEVY, BRET & MATHEWS, AUDREY COM PROP 8,000 2,000 -
LEVY, JOSEPH W 16,000 4,000 -
LEWIS, H. WAYNE & JANET A TTEES THE LEWIS FAMILY LIVING TRUST DTD 4-29-92 20,000 5,000 1%
LEWIS, WAYNE H. & LEWIS, JANET A. 64,000 16,000 1%
LEWTER, MERRI G. 8,000 2,000 -
LINDBERG, DANIEL W 3,200 800 -
LINDLEY, JAMES W 2,000 500 -
LINDLEY, LES & LINDLEY, MARGUERITE COMMUNITY PROPERTY 4,000 1,000 -
LO, BETTY 13,332 3,333 -
LO, BETTY IRA R/O BEAR STEARNS SEC CORP CUST 10,000 2,500 -
LONG, WILLIAM E JR & LONG, JANET A JTWROS 6,000 1,500 -
LOONEY, COLEMAN B 2,000 500 -
LOPERENA, JACK & LOPERENA, JOANNE COMMUNITY PROPERTY 13,000 3,250 -
LOPERENA, LARRY J 2,000 500 -
LOPERENA, LAURIE M 2,000 500 -
LOPERENA, LINDA A 2,000 500 -
LOPERENA, LINDSEY J 2,000 500 -
LORD, JOSEPH M. JR. & LORD, JUDITH JTWROS 1,000 250 -
LOW, GARY K & LOW, SUSAN E JTWROS 8,000 2,000 -
LOWRY, JAMES S. & LOWRY, MARY JULIA F. TIC 8,000 2,000 -
LOWTHER-SMITH, JASON 10,000 2,580 -
LOWTHER, MURIEL I TTEE FBO SURVIVORS TRUST LOWER FAMILY TRUST, A DIVISION OF 20,000 5,000 -
LUCCHETTI, FRANK J & LUCCHETTI, CRISTINA M JTWROS 2,000 500 -
LUCHETTI, RALPH P & LUCCHETTI, DENENE J JTWROS 2,000 500 -
LUSSON, JOHN J 4,000 1,000 -
LYLES, VALERA W. IRA LINCOLN TRUST CUST 4,000 1,000 -
LYLES, VALERA W. 15,652 3,913 -
MAGHAN, BILL & MAGHAN, MARY JTWROS 4,000 1,000 -
MAGHAN, WILLIAM J 0 4,000 -
MAJR ASSOCIATES A CALIFORNIA GENERAL PARTNERSHIP 8,000 2,000 -
MALANCA, JAMES E SEP IRA 4,400 1,100 -
MANFREDA, ANTHONY 10,000 2,500 -
MANZ, THOMAS J & MANZ, VIRGINIA C COMMUNITY PROPERTY 30,000 7,500 -
MARKS, EUNICE E 1,000 250 -
MARSHALL, KATHLEEN 5,000 0 -
MARTIN, DANIEL R 1,000 250 -
MARTIN, SUSAN B 2,000 500 -
MASSEY, BRENT I 8,000 2,000 -
MATTER, THOMAS R 8,000 2,000 -
MAWZ, THOMAS J 13,332 3,333 -
MAYER, ALAN M & GREISMAN, CLARA COM PROP 8,000 2,000 -
MAZZU, ANTHONY & MAZZU, SUSAN DAWAN JTWROS 8,500 1,500 -
MC LAUGHLIN, ANDREW J 6,000 1,500 -
MC AHSTER, JAMES H 2,000 500 -
MCCLAREN, JANET 8,000 2,000 -
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
MCCLAREN, JO ANN 8,000 2,000 -
MCCULLOR, TINA H 2,000 500 -
MCDOUGAL, MARTHA P TTEE OF THE MCGOUGAL, MARTHA P TRUST UA DTD 6-13-94 10,000 2,500 -
MCGILL, D.C. 0 1,000 -
MCGILL, D.C. 4,000 0 -
MCGUINNESS, J. WILLIAM TTEE MCGUINNESS FAMILY TRUST DTD 12/8/92 4,700 1,175 -
MCIC INC 1,000 250 -
MCMAHAN, MARC THOMAS 4,000 1,000 -
MELIKIAN, MARVIN D. & MELIKIAN, NANCY E. 10,000 2,500 -
MEREDITH, JANET L 4,000 1,000 -
MERIDIAN CAPITAL GROUP 0 3,818 -
MEYER, DENNIS C 3,668 917 -
MILLER, CAROLINE M 4,000 1,000 -
MODGLIN, DONALD L & GRACE M TTEES OF THE MODGLIN, DONALD L & GRACE M TRUST 12,000 3,000 -
MONTEREY PENINSULA RADIOLOGICAL HANSON, COURTNEY J. TTEE 8,000 2,000 -
MONTEREY PENINSULA RADIOLOGICAL MED GROUP INC PENSION PL FBO DAVID R HOLLEY C. HANSON 8,000 2,000 -
TTEE
MOORE, CHARLES L. 2,604 651 -
MOORE, JOHN TEMPLE 25,000 25,000 -
MOORE, JOHN TEMPLE TTEE FBO MOORE LIVING TRUST 8,000 2,000 -
MOORE, THOMAS E. & MOORE, MARIE E COM PROP 4,000 1,000 -
MORSE, GLORIA & MORSE, MICHAEL JTWROS 4,000 1,000 -
MORSE, MICHAEL & MORSE, GLORIA 5,000 0 -
MURRAY, EDWIN RENE & MURRAY, PATRICIA RUTH JTWROS 2,000 500 -
MURRAY, JOSEPH R. 2,000 500 -
MUSOLF, BERDYNE TTEE FBO MUSOLF, BERDYNE & LLOYD FAM REV TR DTD 12,000 3,000 -
08/89
MUSSON, GREGORY E. & MUSSON, KAREN A. 2,668 667 -
MYOVICH, DOUG & MYOVICH, CYNTHIA JTWROS 24,000 6,000 -
NALCHAJIAN, RICHARD 8,000 2,000 -
NELSON, ANTHONY 8,000 2,000 -
NELSON, GERALD E. & NELSON, DOROTHY A. 1,336 334 -
NOMINA FINANCE LTD. BVI 200,000 50,000 3%
O'CAOIMH, RONAN 1,000 250 -
OAKLEY, JEFFREY M. & OAKLEY, VALERIE A. JTWROS 8,000 2,000 -
OGILVIE, DEAN 0 10,000 -
OGILVIE, R. DEAN OGILVIE, VICKIE A. COMM PROP 4,000 1,000 -
OKUBO, WARREN T. 4,000 1,000 -
OLIPHANT, LEONARD 50,000 110,000 -
OLSON, JAMES R D.D.S. TTEE OLSON, JAMES R D.D.S. PROFIT SHARING PL 2,000 500 -
OLSON, JAMES R 2,000 500 -
ORR, THOMAS F TTEE ORR FAM REV TR UTD 11/12/93 4,000 1,000 -
OVERSTREET, JOHN J 0 6,130 -
PACINI, DENI J & PACINI, MARJORIE J COM PROP 10,300 2,575 -
PARR, FRANK 4,000 1,000 -
PEARE, DAN C 1,336 334 -
PEERY, JAMES B & JOAN W TTEES PEERY, JAMES B & JOAN W FAM TR U/A DTD 1,336 334 -
02/81
PEERY, JAMES B. M.D. IRA 2,640 660 -
PETERSON, GORDON W & PETERSON, MYRA L JTWROS 1,000 250 -
PINKSTON, ROBERT L. & PINKSTON, LAURIE FARWELL JTWROS 4,000 1,000 -
PINKSTON, ROBERT L. 8,000 2,000 -
PODOLSKY, WILLIAM J & PODOLSKY, KAREN I COMMUNITY PROPERTY 1,000 250 -
POLDER, DICK R. 7,600 1,900 -
POMEROY, CARL F. & POMEROY, DEBORAH D. JTWROS 4,000 1,000 -
PORTMAN, LEO J PORTMAN TRUST 8,000 2,000 -
PORTMAN, LEO J. 8,000 2,000 -
POTOSKY, ROBERT A 1,336 334 -
POWELL, GENE 16,000 4,000 -
PRICKETT, GLEN L & SHIRLEY E TTEES THE GLEN L & SHIRELY PRICKETT LIV TR 2,000 500 -
7-28-93
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
PRICE, ROBERT F & KATHRYN S TTEES PRICE FAMILY TRUST DTD 06/06/94 2,000 500 -
PRIGGER, WILLIAM 0 1,307 -
PROPERTY DEVELOPMENT OF HAWAII INC 0 10,000 -
RAMAKANT, D RAUT & RAUT, MARJORIE S JTWROS 2,000 500 -
RANA, M. CARL & RANA, CARLA S JTWROS 1,000 250 -
RATHBONE, DONALD G & RATHBONE, VICKI A JTWROS 1,000 250 -
RATHBONE, RICHARD N FBO RATHBONE, RICHARD N IRA 1,000 250 -
RATHBONE, RICHARD N. & RATHBONE, SUSAN F. JTWROS 4,500 1,125 -
RATHBONE, ROBERT C & RATHBONE, PATRICIA P JTWROS 1,000 250 -
RATHBONE, SUSAN F FBO RATHBONE, SUSAN F IRA 1,000 250 -
REDMAN, ROBERT TTEE FBO VILLAGE CAPITAL CORP MPP 4,000 1,000 -
REINHARDT, WALTER R. 45,076 11,269 -
RESOURCES TRUST COMPANY CUST FBO BERLINER, WILLIAM P IRA A/C I155285670 4,000 1,000 -
RHODUS, ARIEL 880 0 -
RHODUS, JESSE 880 0 -
RHODUS, NAOMI 880 0 -
RICHARDSON JR., JOE C 400,000 0 6%
RICHARDSON III, JOE C. 1,000 250 6%
RICHARDSON, JOE C. 1,000 0 6%
RICHARDSON, RUBY C. 0 1,750 -
RICKETTS, JAMES M & RICKETTS, VEDA M TTEES RICKETTS FAMILY 8,000 2,000 -
TRUST
RIEDLINGER, WILLIAM A. 4,000 1,000 -
RINEHART, DAYNE T. & RINEHART, RHONDA L. JTWROS 2,000 500 -
RITTER, BARBARA ANN 4,000 1,000 -
ROBERTS, RICHARD 0 298 -
ROBINSON, LAUREN BLAIRE CARLA 0 12,500 -
ROCKY MOUNTAIN ARTIFICIAL LIMB & BRACE INC 3,732 933 -
ROGERS, ERIC & ROGERS, CHERYL JTWROS 1,332 333 -
ROGERS, NEVA R. & ROGERS, COURTNEY G. 1,500 375 -
ROGERS, TRAVIS 0 297 -
ROSSO, HAROLD J & DAVID TTEES OF THE ROSSO, HAROLD J TRUST UTD 5-9-77 6,000 1,500 -
ROSS, LEONARD V. 0 112,516 -
RYSKAMP TAKAYAMA 401K PROFIT SHARING PLAN FBO JAMES J RYSKAMP JR M.D. 5,500 3,875 -
RYSKAMP, TAKAYAMA 8,000 2,000 -
SAN JOSE CARDIAC SURGERY GROUP 8,000 2,000 -
SAN JOSE CARDIAC SURGERY MED GRP MONEY PURCH PEN PL FBO WUERFLEIN DTD 04/01/90 18,076 4,519 -
SANDERS, FAHMIE 568 142 -
SANDERS, JASON A. 636 159 -
SANDERS, JACKIE S. 1,080 270 -
SANDERS, MICHAEL J. 568 142 -
SANDERS, STAN CUST SANDERS, STANLEYJ. 1,080 270 -
SANDERS, STACYJ. 636 159 -
SANDERS, STANLEY J. 8,000 2,000 -
SCHNEIDERS, GERALD S TTEE SCHNEIDERS, GERALD S TRUST 1,332 333 -
SCHOENDUVE, HOWARD W & SCHOENDUVE, MARGUERITE JTWROS 1,000 250 -
SCHOOLEY, JAMES L M.D. INC MONEY PURCHASE PENSION PLAN UAD 2-1-79 4,000 2,606 -
SCHOOLEY, JAMES L M.D. INC MONEY PURCHASE PENSION PLAN UAD 2-1-79 6,424 0 -
SCHROEDER, WALTER W. & SCHROEDER, KAREN JTWROS 12,000 3,000 -
SCHUBERT, STEVE B 8,000 2,000 -
SCHWAB, WAYNE 8,000 2,000 -
SCIARONI, LLOYD G TTEE. SCIARONI FAMILY TRUST DTD 5-22-90 5,200 1,300 -
SCIARONI, LLOYD G. 3,332 833 -
SEITZ, JOHN P. MD 4,000 1,000 -
SENTRA SECURITIES CORPORATION 0 4,315 -
SHAMDANJIAN, ALBERT G. 13,332 3,333 -
SHARP, RITA 1,000 250 -
SHEARER, S.K. M.D. & SHEARER, CATHERINE 9,868 2,467 -
SHEETS, CAROL S & SHEETS, GEORGE K COMMUNITY PROPERTY 2,000 500 -
SHIMIZU, SCOTT E. & SHIMIZU, LORRAINE M. TIC 8,000 2,000 -
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
SHOWS, ALAN & SHOWS, KATHY COMMUNITY PROPERTY 8,000 2,000 -
SIKES, JOHN E. & SIKES, JEAN L. 10,000 2,500 -
SILVER CREEK INVESTMENTS LTD 177,776 44,444 3%
SIMMONS, BILLIE H. TTEE FBO SIMMONS, BILLIE H. TRUST UTD 1/12/88 1,000 250 -
SINGER, ELI & MILLER, DORIN JTWROS 4,000 1,000 -
SLATER & COMPANY 401(K) PEN & PROF SH SLATER, JOHN TTEE 2,700 675 -
SLATER, JOHN H 500 125 -
SLATER, LOUIS C. SLATER, MARIE J. 1,000 250 -
SLATER, LOUIS C. & MARIE J. TTEES SLATER FAMILY LIVING TRUST UTD 5/30/96 500 125 -
SLOCUM, RICHARD C. 4,000 1,000 -
SMALL, SHARON C. TTEE SMALL SEPARATE LIVING TRUST DTD 11/8/96 2,400 600 -
SMART, BARRICK & MICHAEL HEALY CO-TTEES FBO LACY, FREDERICK 401-K DTD 5-14-96 7,600 1,900 -
SMITH, ANDREW D PROFIT SHARING PLAN 8,000 2,800 -
SMITH, JEFF L. 2,668 667 -
SMITH, LEROY W TTEE DOCTORS FINANCAIL MGMT EMPLOYEE BENEFIT TRUST DTD 1-1-84 4,000 1,000 -
SMITH, LEROY W & SMITH, LORENA F COMMUNITY PROPERTY 8,000 2,000 -
SMITH, LEROY W TTEE FBO DR MANAGEMENT BENEFIT TR DTD 01/01/84 8,000 2,000 -
SMITH BARNEY FBO GEORGESON, JAMIE E IRA ROLLOVER CUST 8,000 2,000 -
SMITH BARNEY CUST FBO GEORGESON, JILL T IRA A/C#2136013014091 4,000 1,000 -
SNELL, WILLIAM N 3,600 900 -
SOUTHWORTH, THOMAS G 10,000 0 -
SPENCER, DAN & PAT CARRIVEAU TTEES OF CARRIEAU SPENCER INC 401 K PROFIT SH PL 2,000 500 -
SPROUL, DAVID 5,332 1,333 -
ST. CLOUD INVESTMENTS LTD 0 150,000 -
STAUFFER, CLARENCE & STAUFFER, MILDRED M. 2,400 600 -
STEINHAUSER, J CHRIS 0 125,000 -
STEVENS, MYRON 8,000 2,000 -
STEVENS, SABIN 8,000 2,000 -
STONE, JOHN G STONE, SUSAN M JTWROS 1,332 333 -
STOUT, LANNY R 20,000 39,708 -
SUMMERS, DOUG & SUMMERS, MARY ANN JTWROS 6,000 1,500 -
SUNDERLAND, HOYT & SUNDERLAND, EVELYN JTWROS 1,332 333 -
SUNDERLAND, RICK 1,332 333 -
SURABIAN, GERALD 6,668 1,667 -
SUSKIND, DAVIS A. & SUSKIND, ELIZABETH A. 13,500 3,375 -
SWARTOUT, STERLING 4,000 1,000 -
TAHMAZIAN, BRYAN LUKE TTEE UITIA DTD 2-26-97 5,512 1,378 -
TAKAYAMA, RYSKAMP 401K PROFIT SH PL TR FBO RYSKAMP, JAMES J JR M.D. 24,776 3,694 -
TANNER, NORMAN C. & TANNER, BARBARA L. JT TEN 20,500 5,125 -
TATUM, CONNIE D & TATUM, STEPHEN E JTWORS 2,668 667 -
TATUM, JOHN P 16,000 54,000 -
TELFORD, JOHN T. 6,000 1,500 -
TEMPLE, J MARTIN 9,512 2,378 -
THOMAS, MILES H. & JOAN THOMAS TTEES THOMAS, MILES H FAMILY TRUST UAD 4-22-83 16,000 4,000 -
THOMAS, RICHARD W TTEE THE RANCHO SECURITY TRUST 14,000 3,500 -
THOMAS, RICHARD W. 8,000 2,000 -
THOMPSON, ROBERT J. & THOMPSON, ARLENE M. JTWROS 4,000 1,000 -
THOMAS A KING DDS INC 8,000 2,000 -
TOLFREE, CHARLES & TOLFREE, BETH M. 2,000 500 -
TOLFREE, CHARLES H & BETH M TRUSTEES OF THE TOLFREE FAM TR DTD 1,000 250 -
08/14/96
TORCASO, CHESTER J. & TORCASO, ELAINE G. 4,000 1,000 -
TOTAL BENEFIT SERVICES INC 401 K PLAN FBO AUNE, RICHARD 2,000 500 -
TOTMAN, JAMES W TTEE FBO TOTMAN, JAMES W TRUST UTD 12/18/86 22,000 5,500 -
TRUCK DISPATCH SERVICE INC. PROF SH PL FBO KOURAFAS, JAMES 10,000 2,500 -
TRUCK DISPATCH SERVICE INC. 6,000 1,500 -
TWO GABLES PTY LIMITED 100,000 25,000 1%
ALTERNATE PAGE
Common Percentage
Common Stock Owned
Stock Underlying If More
Security Holder Shares Warrants Than 1%
--------------- ------ -------- -------
VACIN, GARY 1,332 333 -
VATHAYANON, SATHAPORN 2,600 650 -
VAVOULIS, TED 10,000 2,500 -
VILLONE, THOMAS R. 6,000 1,500 -
VISTA MESA LLC 4,000 1,000 -
VOLPE, STEVE 32,000 8,000 -
VOSBURGH, JAY 2,668 667 -
WAGNER, ROLF 0 10,000 -
WALLINGTON INVESTMENTS LTD 177,776 44,444 -
WARPINSKI, JOSEPH G 8,000 2,000 -
WARREN, ELAINE M & WARREN, PHILLIP D TIC 8,000 2,000 -
WEBSTER, GORDON M JR. 2,000 500 -
WEDDON, BRADLEY C 0 1,360 -
WEDDELL, LAURA E 0 661 -
WEIGAND, DALE P. & WEIGAND, TERRI L. JTWROS 3,000 750 -
WEIGAND, PHILIP C TTEE FBO WEIGAND, DOROTHY M TRUST UAD 12-16-87 2,500 625 -
WEYBRIGHT, DENNY 1,500 375 -
WHITEHEAD, ALBERT E LIV TRUST DTD 6-26-97 10,000 2,500 -
WHITE, CHARLES G & WHITE, BRENDA L JTWROS 1,000 250 -
WHITBURN, KAREN B 5,000 0 -
WHITE MARKETING INC A CORPORATION 4,000 1,000 -
WILKES, ELISE R. 1,000 0 -
WILLIAMSON, JOHN F. 2,000 500 -
WILLIAMSON, PATRICIA A IRA 1,000 250 -
WILLIG, W DAVID 1,336 334 -
WILSON, GUY B & WILSON, JEANNETTE FAMILY TRUST UTD 8,000 2,000 -
03/07/90
WINTON, JAMES T. & WINTON, JONOLYN C. COM PROP 8,000 2,000 -
WITWER, JAMES J. M.D. INC. TTEE FBO WITWER, JAMES J. M.D. WITWER EMPL. BEN 8,000 0 -
TR
WITWER, JAMES J. M.D. TTEE FBO EMPLOYEE BENEFIT PLAN 05/31/85 13,336 5,334 -
WOESNER, RANDALL E & JANIS M TTEES FBO WOESNER FAMILY LIVING TRUST 2,000 500 -
WOLF, JOE FAMILY TRUST 4,000 1,000 -
WOLTMAN, RICHARD & WOLTMAN, KAYE 260 -
WOOD, JOHN ALAN & AREKNAS WOOD, ARLENE JTWROS 1,000 250 -
WOODS, KERRY B & WOODS, ROBYN COM PROP 1,336 334 -
WOODWARD III, O JAMES 1,336 334 -
WOOLF, JOHN L. II 12,332 3,083 -
WOOLF, JOHN L. 2,668 667 -
YEE, DESMOND SCHROEDER& ALLEN 0 1,360 -
YONG, TONY 4,800 1,200 -
YUYAMA, DOUG & YUYAMA, JOHN TENANTS IN COMMON 4,740 1,185 -
ZACHRITZ, LILLIAN A. 1,336 334 -
ZANONI, NATHAN A. JR. 5,000 1,250 -
ZINKIN, HAROLD & BETTY FAMILY LIVING TR 2,000 500 -
BROKER WARRANTS 0 150,000 -
====================
7,029,492 2,697,663
====================
</TABLE>
The selling security holders may effect the sale of their Shares from time
to time in transactions, which may include block transactions, in the open
market, in negotiated transactions, through the writing of options on the common
stock, or a combination of such methods of sale, at fixed prices which may be
changed, at market prices prevailing at the time of sale, or at negotiated
prices.
Beta is not aware of any agreements, undertakings or arrangements with any
underwriters or broker-dealers regarding the resale of its securities. The
selling security holders may effect such transactions by selling the shares, as
applicable, directly to purchasers or to or through broker-dealers who may act
as agents or principals. Such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the selling security holders,
and/or the purchasers of their shares, as applicable, for which such
broker-dealers may act as agents or to whom they sell as principal, or both,
which compensation as to a particular broker-dealer might be in excess of
customary commissions. The selling security holders and any broker-dealers that
act in connection with the sale of their shares might be deemed to be
"underwriters" within the meaning of section 2(11) of the Securities Act.
Beta has notified the selling security holders of the prospectus delivery
requirements for sales made by this prospectus and that, if there are material
changes to the stated plan of distribution, a post-effective amendment with
current information would need to be filed before offers are made and no sales
could occur until such amendment is declared effective.
<PAGE>
ALTERNATE PAGE
PLAN OF DISTRIBUTION
7,029,492 shares of common stock and 2,697,663 shares of common stock
underlying warrants will be offered by the selling security holders from time to
time in market transactions at prevailing prices on the Nasdaq Small Cap Market
or a similar market. Beta will not receive any proceeds from possible release by
the selling securities holders of their respective shares of Beta's common
stock. Beta will receive gross proceeds of $14,463,821 if all outstanding
warrants are exercised of which an approximately 5% commission will be paid to
the brokers of record, if applicable. There can be no assurance that any
warrants will be exercised. The selling security holders may effect such
transactions by selling their shares of common stock to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the selling security holders and/or
the purchasers of such shares of common stock for whom such broker-dealer may
act as agents or to whom they may sell as principals, or both. This compensation
to a particular broker-dealer might be in excess of customary commissions. Beta
has agreed to bear all expenses estimated at approximately $90,000 in connection
with the registration of the shares of common stock to which this prospectus
relates. The registration of the 9,652,155 shares of common stock in this
prospectus is conditioned upon Beta successfully completing the minimum offering
of 800,000 shares of its initial public offering.
<PAGE>
ALTERNATE PAGE
================================================================================
You should rely only on the information contained in this document or that we
have referred to you. We have not authorized anyone to provide you with
information that is different. The delivery of this prospectus and any sale made
by this prospectus doesn't imply that there haven't been changes in the affairs
of Beta since the date of this prospectus. This prospectus does not constitute
an offer or solicitation by anyone in any jurisdiction in which such offer or
solicitation is not authorized or in which the person making such offer or
solicitation is not qualified to do so or to anyone to whom it is unlawful to
make such offer or solicitation.
TABLE OF CONTENTS
Additional Information.................................
Prospectus Summary.....................................
Risk Factors...........................................
Use of Proceeds........................................
Dilution...............................................
Capitalization.........................................
Dividends..............................................
Selected Consolidated Financial Data...................
Management's Discussion and Analysis of
Financial Condition and Results of Operations.........
Glossary...............................................
Business...............................................
Properties.............................................
Management.............................................
Executive Compensation.................................
Summary Compensation Table.............................
Principal Shareholders.................................
Resale by Selling Shareholders.........................
Certain Relationships and Related Party
Transactions...........................................
Description of Securities..............................
Shares Eligible for Future Sale........................
Plan of Distribution...................................
Legal Matters..........................................
Experts................................................
Financial Statements...................................
---------------------------
Dealer prospectus delivery obligation. Until ___, 1999 (25 days after the date
of this prospectus), all dealers effecting transactions in the registered
securities, whether or not participating in this distribution, may be required
to deliver a prospectus. This delivery requirement is in addition to the
obligation of dealers to deliver a prospectus when acting as underwriters and
with respect to their unsold allotments or subscriptions.
================================================================================
================================================================================
[Beta Oil & Gas, Inc. Logo]
Beta Oil & Gas, Inc.
7,029,492
SHARES OF
COMMON STOCK AND
2,697,663
SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE
OF WARRANTS
-------------------------
PROSPECTUS
-------------------------
_________, 1999
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
<TABLE>
<S> <C>
SEC Registration Fee $19,588.65
Nasdaq Listing Fee 10,000.00
NASD Filing Fee 6,000.00
Printing Expenses 10,259.00 *
Legal Fees and Expenses 17,000.00 *
Accounting Fees and Expenses 20,000.00 *
Transfer Agent Fees 3,000.00 *
Miscellaneous 4,152.35 *
Expenses
================
Total
$90,000.00
================
</TABLE>
* Estimated
Item 14. Indemnification of Directors and Officers.
Beta's Articles of Incorporation and its Bylaws limit the liability of
directors and officers to the extent permitted by Nevada law. Specifically, the
Articles of Incorporation provide that the directors and officers of Beta will
not be personally liable to Beta or its shareholders for monetary damages for
breach of their fiduciary duties as directors, including gross negligence,
except liability for acts or omissions "which involve intentional misconduct,
fraud or a knowing violation of law not in good faith, or the payment of
dividends in violation of Section 78.300 of the Nevada Revised Statutes."
Beta has obtained a directors and officers liability insurance policy for
the purposes of indemnification which shall cover all elected and appointed
directors and officers of Beta up to $1,000,000 for each claim and $3,000,000 in
the aggregate. Beta believes that the limitation of liability provision in its
Articles of Incorporation, and the directors and officers liability insurance
will facilitate Beta's ability to continue to attract and retain qualified
individuals to serve as directors and officers of Beta.
Insofar as indemnification for liabilities arising under the Securities
Act, as amended, may be permitted to directors, officers, and controlling
persons of Beta, Beta has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore unenforceable. If a claim for indemnification against such
liabilities (other than the payment by Beta of expenses incurred or paid by a
director, officer, or controlling person of Beta in the successful defense of
any action, suitor proceeding) is asserted by such director, officer or
controlling person of Beta in connection with the securities being registered,
Beta will, unless in the opinion of its counsel the matter has been settled by a
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issues.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent for which indemnification will be required
or permitted under Beta's Articles of Incorporation. Beta is not aware of any
threatened litigation or proceeding which may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities.
Beta issued 5,565,648 shares in 1997 and 1,463,844 shares in 1998 of its common
stock and 1,528,222 and 969,441 common stock purchase warrants in 1997 and 1998
through private placements exempt from registration under Section 4(2) of
Securities Act. An institutional private placement, exempt from registration
under Section 4(2) of the Securities Act, was completed to two qualified
institutional investors in January and one qualified accredited investor in
March of 1999 in which the Company issued a total of 429,000 shares of common
stock.
Initial start-up funding was raised through the sale, effective June 23,
1997, of 2,910,000 shares ("founder shares") of Beta's common stock to its
founders and other principals for $0.05 per share. An additional 640,000 common
stock purchase warrants were issued for various services provided to Beta with
each warrant entitling the holder thereof to purchase one share of Beta's common
stock at prices ranging from $2.00 to $5.00 per share.
During the third and fourth quarters of calendar 1997, Beta issued 663,912
equity units at $15 per unit through a private placement. Each unit entitled the
purchaser to four shares of common stock and one warrant exercisable to purchase
one share of common stock at $5.00 for a term of five years. The offering
generated net proceeds, after offering costs, of $9,076,283. Beta issued 224,310
additional common stock purchase warrants with an exercise price of $4.50 per
share for services in connection with the offering.
Commencing on February 12 and terminating on November 2, 1998, Beta issued
364,708 equity units at $20 per unit through a private placement. Each unit
entitled the purchaser to four shares of common stock and one warrant
exercisable to purchase one share of common stock at $7.50 for a term of five
years. The offering generated net proceeds, after offering costs, of $6,548,632.
Beta issued 121,383 additional common stock purchase warrants with an exercise
price of $7.00 per share for services in connection with the offering. In
addition, Beta issued 5,000 shares of common stock and 1,250 warrants in
exchange for certain oil and gas property interests. Beta also issued 482,100
warrants for various services provided to Beta with each warrant entitling the
holder thereof to purchase on share of Beta' common stock at prices ranging from
$3.75 to $7.50.
<PAGE>
The following table summarizes the private placement transactions and
warrants issued from inception (June 6, 1997) through November 2, 1998:
<TABLE>
Exercise
Common Shares Warrants to Purchase Stock $ Price
Shares $ Amount # Warrants Expiration Per Share
<S> <C> <C> <C> <C> <C> <C>
1) Tranche one 2,910,000 $ 145,500 640,000 6/27/02 to $ 2.00 to
10/1/02 5.00
2) Tranche two 2,655,648 9,958,770 663,912 9/5/02 $ 5.00
3) Warrants issued as
commission in tranche
two N/A N/A 224,310 12/30/02 $ 4.50
4) Direct offering expenses
-tranche two - (882,487) -
5) Tranche three 1,458,844 7,294,160 364,708 3/12/03 $ 7.50
6) Warrants issued as
commission in tranche
three N/A N/A 121,383 3/12/03 $ 7.00
7) Direct offering expenses
-tranche three - (745,528) -
8) Common stock issued for
properties 5,000 $ 25,000 1,250 3/12/98 $ 7.50
9) Warrants issued as
additional commissions for N/A N/A 482,100 2/4/03 to $ 5.00 to 7.50
capital raised 3/12/03
10) Tranch four 429,000 2,145,000 - N/A N/A
11) Direct offering expense
tranch four (150,000) - N/A N/A
----------------- -------------- ---------------
7,458,492 $17,790,415 2,497,663
================= ============== ===============
</TABLE>
<PAGE>
Item 16. Exhibits
1.1 Underwriter Agreement (Form)
1.2 Selected Dealer Warrant (Form)
1.3 Selected Dealer Agreement (Form)
3.1 Original and Amended Articles of Incorporation of Registrant.
3.2 Amended and Restated Bylaws of the Registrant, Dated January 5, 1999.
5.1 Legal Opinion As To The Legality Of The Securities Being Registered
--to be filed by amendment.
10.1 Formosa Grande Prospect Agreement, Dated August 1, 1997.
10.2 Texana Prospect Agreement, Dated July 15, 1997.
10.3 Ganado Prospect Agreement, Dated November 1, 1997.
10.4 T.A.C. Resources Agreement, Dated January 21, 1998.
10.5 Lapeyrouse Prospect Agreement, Dated October 13, 1997.
10.6 Rozel (Transition Zone) Prospect Agreement, Dated February 24,1998.
10.7 Stansbury Basin (Australia) Prospect Agreement, Dated February 1998.
10.8 Agreement With Jim Frimodig (Norcal), Dated October 27, 1997.
10.9 Steve Antry Employment Agreement, Dated June 23,1997.
10.10 Steve Fischer, Employment Agreement, Dated June 23, 1997.
10.11 J. Chris Steinhauser Warrant Agreement, Dated January 27, 1998.
10.12 R.T. Fetters Consulting Agreement, Dated June 23, 1997.
10.13 Office Lease, Dated October 1997 .
10.14 BWC Prospect Agreement, Dated April 1, 1998.
10.15 Dahlia Financial Limited Consulting Agreement, Dated September 5,1997.
10.16 St. Cloud Investments, Ltd., Dated March 12, 1998.
10.17 Beta Oil & Gas / Beta Capital Group Reciprocal Agreement. *
10.18 Horwitz & Beam Legal Representation Letter, Dated June , 1997
10.19 Cobra Prospect Agreement Dated January 6, 1999
10.20 Redfish Prospect Agreement Dated January 6, 1999
10.21 Shark Prospect Agreement Dated January 6, 1999
10.22 Cheniere Energy, Inc. Option Agreement Dated January 6, 1999
10.23 Dyad-Australia, Inc. Agreement Dated January 25, 1999
10.24 Note and Common Stock Purchase Agreement Dated January 20, 1999
10.25 Note and Common Stock Purchase Agreement Dated March 19, 1999
10.26 Form of Escrow Agreement
23.1 Consent of Horwitz & Beam.
23.2 Consent of Hein + Associates LLP
23.3 Consent of Veazey & Associates, Inc.*
24 Power of Attorney (see signature page) *
27 Financial Data Schedule
* Previously filed.
Item 17. Undertakings.
(a) Rule 415 Offerings.
The undersigned issuer undertakes that it will:
(1) File, during the period required by Rule 415, a post-effective
amendment to this Registration Statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement; and
(iii)Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bonafide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(b) Request for acceleration of effective date.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended, may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable.
If a claim for indemnification against such liabilities (except the payment
by the issuer of expenses incurred or paid by a director, officer or controlling
person of the issuer in the successful defense of any action, suit or
proceedings) is asserted by such director, officer or controlling person in
connection with the securities being registered, the issuer will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such court.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing this Amendment No. 2 on Form S-1 and authorized
this registration statement to be signed on its behalf by the undersigned, in
Newport Beach, California on April 30, 1999.
BETA OIL & GAS, INC.
By: /s/ Steve Antry
-----------------------------------
Steve Antry, President and Chairman
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement was signed by the following persons in
the capacities and on the dates stated.
Signature Title Date
___________*___ Chairman of the April 30, 1999
Steve Antry Board of Directors
and President
___________*___ Chief Financial Officer, April 30, 1999
J. Chris Steinhauser Principal Accounting
Officer and Director
___________*____ Director April 30, 1999
Lawrence W. Horwitz
___________*___ Director April 30, 1999
R.T. Fetters
___________*___ Director April 30, 1999
Joe Richardson Jr
* By: /s/ Steve Antry
---------------
Steve Antry
Attorney in Fact
UNDERWRITING AGREEMENT
, 1999
Brookstreet Securities Corporation
2361 Campus Drive, Suite 210
Irvine, CA 92715
Dear Ladies and Gentlemen:
Beta Oil & Gas, Inc., a Nevada corporation (the "Company"), proposes to
issue and sell a minimum of 800,000 (the "Minimum Offering") and a maximum of
1,500,000 shares (the "Maximum Offering") of its Common Stock for $6.00 per
share (the "Shares") on a best efforts basis (the "Offering") (exclusive of an
Over-Allotment Option granted to the underwriters to sell an additional 150,000
shares of the Common Stock at the public offering price, as described below).
The Company confirms as follows its agreement with you:
1. Registration Statement and Prospectus: The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the Securities Act of 1933, as amended (the "Act") and the rules
and regulations of the Commission promulgated thereunder (the "Rules and
Regulations"), a registration statement on Form S-1, including a preliminary
prospectus, relating to the Securities. As used in this Agreement, the term
"Registration Statement" means such registration statement, including exhibits,
financial statements and schedules, as amended, when it becomes effective and
any information (if any) contained in the prospectus subsequently filed with the
Commission pursuant to Rule 424(b) under the Act, and the term "Prospectus"
means such prospectus in the final form filed on behalf of the Company with the
Commission pursuant to Rule 424(b) under the Act.
2. Agreement to Sell and Purchase: Upon the basis of the
representations, warranties and agreements herein contained and subject to all
the terms and conditions of this Agreement, you agree to use best efforts to
sell on behalf of the Company the aggregate principal amount of Securities which
are offered in this Offering. The Securities sold and the proceeds therefrom
will be placed in an escrow account. However, if the Company fails to receive
subscriptions for the Minimum Offering within 10 business days from the date of
the final Prospectus, the Offering will be terminated and any subscriptions
received will be promptly refunded to subscribers with interest thereon and
without any deduction therefrom and this Agreement shall terminate. You shall
receive an 8% cash commission for the sale of the Securities made by you after
the Minimum Offering has been sold (the "Commission").
The Company also agrees to pay to you a non-accountable expense
allowance equal to 2% of the aggregate principal amount of Securities sold by
you (the "Nonaccountable Expense Allowance"). In the event that the Offering is
terminated for any reason, the Company shall pay you for any reasonable
accountable expenses you have incurred.
In addition to the Commission and the Nonaccountable Expense Allowance,
you shall be entitled to receive (the "Selected Dealer Warrants") for the
purchase of an amount of shares of Common Stock of the Company equal to 10% of
the number of Securities actually sold by you in the public offering. The
Selected Dealer Warrants shall be issued in the form set forth in the Selected
Dealer Warrant included in the Registration Statement. The Selected Dealer
Warrants shall be exercisable, in whole or in part, for a period of four years
commencing one year from the date of the completion of the Offering at an
exercise price of $7.50 per share. The Selected Dealer Warrants shall be
non-exercisable for one year from the effective date of the Offering, and
non-transferable for one year(whether by sale, transfer, assignment, or
hypothecation) except for (i) transfers to officers of the broker/dealer who are
also shareholders of the broker/dealer; and (ii) transfers occurring by
operation of law.
<PAGE>
It is understood that you may also execute Selected Dealer Agreements
providing for the sale of the Securities by other broker/dealers who are
registered as such with the Commission and who are members of the National
Association of Securities Dealers, Inc. ("NASD") (the "Selected Dealers"). The
Selected Dealers shall receive the Commission, the Nonaccountable Expense
Allowance, and Selected Dealer Warrants in the appropriate amount for the
Securities actually sold by them.
3. Delivery and Payment: Delivery of and payment for any Shares
purchased in accordance with this Agreement shall be made after the effective
date of the Registration Statement (the "Effective Date") at such time, date and
place as may be agreed between you and the Company, but subscription for the
Shares sold in the Minimum Offering shall take place not more than 10 business
days after the Effective Date of the Registration Statement (such time and dates
are referred to herein as the "Initial Closing Date"). Delivery of and payment
for any Shares purchased after the Minimum Offering has occurred, shall occur at
interim periods thereafter (the "Interim Closings") until the Maximum Offering
is sold or the Offering is terminated at which time a final closing will be held
(the "Final Closing").
A list from each selling group member and an escrow statement will be sent by
Beta to Brookstreet for the underwriter's review and approval prior to each
closing and associated request for issuance of shares.
4. Agreements of the Company: The Company agrees with you as follows:
(a) The Company shall use its best efforts to cause the
Registration Statement and any amendments to become effective as promptly as
practicable and will not at any time, whether before or after the effective date
of the Registration Statement, file any amendment to the Registration Statement
or supplement to the Prospectus or file any document under the Act or the
Securities Exchange Act of 1934, as amended (the "Exchange Act") before
termination of the offering of the Shares by you of which you and your counsel
shall not previously have been advised and furnished with a copy, or to which
you or your counsel shall have objected (except if deemed necessary by counsel
for the Company, in which case you shall have the right to terminate this
Agreement upon prompt notice to the Company), or which is not in compliance with
the Act, the Exchange Act, or the Rules and Regulations.
As soon as the Company is advised or obtains knowledge thereof, the
Company will advise you, and as soon as practicable, confirm in writing, (i)
when the Registration Statement, as amended, becomes effective and, if the
provisions of Rule 430A promulgated under the Act will be relied upon, when the
Prospectus has been filed in accordance with said Rule 430A and when any
post-effective amendment to the Registration Statement becomes effective, (ii)
of the issuance by the Commission of any stop order or of the initiation, or the
threatening, of any proceeding suspending the effectiveness of the Registration
Statement or any order preventing or suspending the use of any preliminary
prospectus or the Prospectus, or any amendment or supplement thereto, or the
institution of proceedings for that purpose, (iii) of the issuance by the
Commission or by any state securities commission of any proceedings for the
suspension of the qualification of any Shares for offering or sale in any
jurisdiction or of the initiation, or the threatening, of any proceeding for
that purpose, (iv) of the receipt of any comments from the Commission, and (v)
of any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectus or for additional information.
If the Commission or any state securities commission shall enter a stop order or
suspend such qualification at any time, the Company will make every effort to
obtain promptly the lifting of such order or suspension.
(b) The Company will furnish to you, without charge, three
signed copies of the Registration Statement and any post-effective amendment
thereto, including financial statements and schedules, and all exhibits.
(c) The Company will give you advance notice of its intention
to file any amendment to the Registration Statement or any amendment or
supplement to the Prospectus, and will not file any such amendment or supplement
to which you shall reasonably object in writing or which is not in compliance
with the Act.
<PAGE>
(d) From the date hereof, and thereafter from time to time,
the Company will deliver to you, without charge, as many copies of the
Prospectus, or any amendment or supplement thereto as you may reasonably
request. The Company consents to the use of the Prospectus or any amendment or
supplement thereto by you and by all dealers to whom the Shares may be sold,
both in connection with the offering or sale of the Shares and for such period
of time thereafter as the Prospectus is required to be delivered under the Act
in connection therewith. If during such period of time any event shall occur
which in the reasonable judgment of the Company or your counsel should be set
forth in the Prospectus in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, or if it is
necessary to supplement or amend the Prospectus to comply with law, the Company
will forthwith prepare and duly file with the Commission an appropriate
supplement or amendment thereto and will deliver to you, without charge, such
number of copies thereof as you may reasonably request.
(e) Prior to any public offering of the Shares by you, the
Company will cooperate with you and your counsel in connection with the
registration or qualification of the Shares for offer and sale under the
securities or blue sky laws of such jurisdictions as you request. The Company
will pay all reasonable fees and expenses (including reasonable fees and
expenses of counsel) relating to qualification of the Shares under such
securities or blue sky laws and in connection with the determination of the
eligibility of the Shares for investments under the laws of such jurisdictions
as you may designate, including the reasonable expenses of any opinion of local
counsel required by any state securities or blue sky authorities.
(f) The Company will pay all expenses in connection with (1)
the preparation, printing and filing of the Registration Statement, each
preliminary prospectus, the Prospectus, any legal investment memoranda and the
blue sky Survey, (2) the issuance and delivery of the Shares (other than
transfer taxes),(3) the rating of the Shares by rating agencies, (4) furnishing
such copies of the Registration Statement, the Prospectus and any preliminary
prospectus, all amendments and supplements thereto, as may reasonably be
requested for use in connection with the offering and sale of the Shares by you
or by dealers to whom Shares may be sold, and (5) filings with the "NASD".
(g) The Company will use the net proceeds from the sale of the
Shares in the manner specified in the Prospectus under the caption "Use of
Proceeds."
(h) The Company will appoint and retain, while any of the
Shares remain outstanding, a transfer agent for the Shares, and, if necessary, a
registrar for the Shares (who may be the transfer agent), and will make
arrangements to have available at the offices of the transfer agent certificates
for the Shares in such quantities as may, from time to time, be necessary. As of
the date of this Agreement, the transfer agent for the Shares of the Company is
Oxford Transfer and Registrar, 317 S.W. Alder, #1120, Portland, OR 97204.
(i) The Company shall utilize its best efforts to obtain the
listing of the Shares on the NASDAQ Small Cap Market system.
(j) Neither the Company nor any of the Subsidiaries nor any of
their respective executive officers, directors, principal stockholders or
affiliates (within the meaning of the Rules and Regulations) will take, directly
or indirectly, any action designed to, or which might in the future reasonably
be expected to cause or result in, stabilization or manipulation of the price of
any Shares of the Company in violation of the Exchange Act.
5. Representations and Warranties of the Company: The Company
represents and warrants to you that:
(a) Each preliminary prospectus filed as part of any
Registration Statement as originally filed or as part to any amendment thereto,
or filed pursuant to Rule 424 under the Act, complied when so filed in all
material respects with the Act, and when the Registration Statement becomes
effective and at all times subsequent thereto up to the Closing Date, the
Registration Statement and the Prospectus, and any supplements or amendments
thereto, will comply in all material respects with the provisions of the Act and
the Registration Statement and the Prospectus, and any such supplement or
amendment thereto, at all such times will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated herein or
necessary to make the statements therein not misleading, except that this
representation and warranty does not apply to statements or omissions in the
Registration Statement or the Prospectus or any preliminary prospectus made in
reliance upon information furnished to the Company in writing by you expressly
for use therein.
<PAGE>
(b) This Agreement has been duly authorized and validly
executed and delivered by the Company and constitutes a legal, valid and binding
agreement of the Company, enforceable in accordance with its terms, except that
(i) the enforceability hereof may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect,
relating to creditors' rights generally, (ii) the enforceability thereof may be
limited by the application of equitable principles (whether such enforceability
is considered in a proceeding at law or in equity) and (iii) rights to indemnity
and contribution hereunder may be limited by Federal or state securities laws.
(c) The Shares have been duly authorized, validly issued,
fully paid and nonassessable, and the Company has duly authorized and reserved
for issuance the number of shares of common stock required for the best efforts
offering and the over-allotment option. The Shares are not and will not be
subject to any preemptive or other similar rights of any security holder of the
Company or any of the Subsidiaries (as defined below); the holders thereof will
not be subject to any liability for the Company's acts or omissions solely as
such holders; all corporate action required to be taken for the authorization,
issuance and sale of the Shares has been duly and validly taken; and the
certificates representing the Shares will be in due and proper form. Upon the
issuance and delivery of the Shares pursuant to the terms of this Agreement, you
will acquire good and marketable title thereto free and clear of any lien,
charge, claim, encumbrance, pledge, security interest, defect or other
restriction or equity of any kind whatsoever resulting from the affirmative act
of the Company or from a judgment or nonconsensual lien rendered against the
Company.
(d) The Company is a corporation duly incorporated and validly
existing in good standing under the laws of the State of Nevada. The Company has
full corporate power and authority to own and occupy its properties and carry on
its business as presently conducted and as described in the Prospectus and holds
all licenses and permits and is duly registered or qualified to conduct
business, and is in good standing, in each jurisdiction in which it owns or
leases property or transacts business and in which such licensing, registration
or qualification is necessary except where the failure to be so licensed,
registered or qualified would not have a material adverse effect on the Company
and its Subsidiaries, taken as a whole. The Company has a duly authorized,
issued and outstanding capitalization as set forth in the Registration
Statement. All of the outstanding capital stock or other equity Shares of the
Company and each of the Subsidiaries has been duly and validly authorized and
issued, is fully paid and nonassessable; the holders thereof shall have no
rights of rescission with respect thereto and are not subject to personal
liability for the Company's acts or omissions solely by reason of being such
holders.
(e) There are no legal or governmental proceedings pending, or
to the knowledge of the Company, threatened or contemplated to which the Company
or any of its Subsidiaries is a party or of which the business or property of
the Company or any of its Subsidiaries is the subject which are material to the
Company and its Subsidiaries, taken as whole and which are not disclosed in the
Registration Statement and the Prospectus, and there is no contract or document
concerning the Company or any of its Subsidiaries of a character required to be
described in the Registration Statement or the Prospectus or to be filed as an
exhibit to the Registration Statement which is not described or filed as
required.
<PAGE>
(f) Neither the Company nor any of its Subsidiaries is in
violation of its charter or by-laws or is in default in any respect in the
performance of any obligation, agreement or condition contained in any bond,
debenture, note or any other evidence of indebtedness or in any indenture,
mortgage, deed of trust or any other agreement or instrument of the Company or
of any such Subsidiary, which default would be material to the Company and its
Subsidiaries, taken as a whole and there exists, and at the Closing Date shall
exist, no condition which, with the passage of time or otherwise, would
constitute a default under any such document or instrument or result in the
imposition of any penalty or acceleration of any indebtedness which would be
material to the Company and its Subsidiaries, taken as a whole. The execution
and delivery by the Company of this Agreement, the authorization, issuance and
sale of the Shares, the fulfillment by the Company of this Agreement and the
consummation by the Company of the transactions contemplated by this Agreement
will not conflict with or constitute a breach of, or default (with the passage
of time or otherwise) under, or result in the imposition of a lien on any
properties of the Company or its Subsidiaries or an acceleration of indebtedness
pursuant to, the certificate of incorporation or by-laws of the Company or any
of its Subsidiaries, or any bond, debenture, note or any other evidence of
indebtedness or any indenture, mortgage, deed of trust or any other material
agreement or instrument to which the Company or any of its Subsidiaries is a
party or by which it or any of them is bound or to which any of the property or
assets of the Company or any of its Subsidiaries is subject, or any law,
administrative regulation or order of any court or governmental agency or
authority applicable to the Company or any of its Subsidiaries which in any
event would be material to the Company and its Subsidiaries, taken as a whole.
No consent, approval, authorization or other order of any regulatory body,
administrative agency, or other governmental body is legally required by the
Company or its Subsidiaries for the valid issuance and sale of the Shares,
except such as may be required by the NASD or under the Act or the Shares or
blue sky laws of any jurisdiction.
(g) The consolidated financial statements of the Company and
its Subsidiaries together with the related notes and schedules included in the
Registration Statement and Prospectus comply in all material respects with the
requirements of the Act and fairly present the financial position, income,
change in stockholder's equity, cash flow and the results of operations of the
Company and the Subsidiaries at the respective dates and for the respective
periods to which they apply. There has been no adverse change or development
involving a material prospective change in the condition, financial or
otherwise, or in the earnings, business affairs, position, prospects, value,
operation, properties, business or results of operations of the Company or any
of the Subsidiaries, whether or not arising in the ordinary course of business,
since the date of the financial statements included in the Registration
Statement and the Prospectus, except as set forth in the Registration Statement
and the Prospectus, and the outstanding debt, the property, both tangible and
intangible, and the businesses of each of the Company and the Subsidiaries
described in the Registration Statement and the Prospectus conform in all
material respects to the descriptions thereof contained in the Registration
Statement and the Prospectus. Such consolidated financial statements (including
the related notes and schedules) have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods involved except as otherwise stated therein.
(h) Each of the Company and the Subsidiaries (i) has paid all
federal, state and local taxes for which it is currently liable, including, but
not limited to, withholding taxes and amounts payable under Chapters 21 through
24 of the Internal Revenue Code of 1986, as amended (the "Code"), and has
furnished all information returns it is required to furnish pursuant to the
Code, (ii) has established adequate reserves for such taxes that are not due and
payable and (iii) does not have any tax deficiency or claims outstanding,
proposed or assessed against its respective business or assets.
(i) Subsequent to the respective dates as of which information
is set forth in the Registration Statement and Prospectus, and except as may
otherwise be indicated or contemplated herein or therein, neither the Company
nor any of the Subsidiaries has (i) entered into any material transaction other
than in the ordinary course of business or (ii) declared or paid any dividend or
made any other distribution on or in respect of its capital stock of any class
and there has not been any change in the capital stock, debt (long or short
term) or liabilities or any material change in or affecting the general affairs,
management, financial operations, stockholders' equity or results of operations
of the Company or any of the Subsidiaries.
6. Indemnification: The Company agrees to indemnify you and hold you
harmless, and each person, if any, who controls you, within the meaning of
either Section 15 of the Act or Section 20 of the Exchange Act from and against
any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation) arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement or the Prospectus or in any amendment or supplement
thereto or in any preliminary prospectus, or arising out of or based upon any
omission or alleged omission to state therein a material fact required to be
stated herein or necessary to make the statements therein not misleading.
If any action or proceeding (including any governmental investigation)
shall be brought or asserted against you or any person controlling you in
respect of which indemnity may be sought from the Company, you or such
controlling person shall promptly notify the Company in writing, and the Company
shall assume the defense thereof, including the employment of counsel reasonably
satisfactory to you or such controlling person, as the case may be and the
payment of all expenses. You or any such controlling person shall have the right
to employ separate counsel in any such action and to participate in the defense
thereof at your own cost. The Company shall not be liable for any settlement of
any such action or proceeding effected without its written consent, but if
settled with its written consent, or if there be a final judgment for the
plaintiff in any such action or proceeding, the Company agrees as provided in
the preceding paragraph to indemnify you and hold you or such controlling person
harmless from and against any loss or liability by reason of such settlement or
judgment.
<PAGE>
You agree, severally and not jointly, to indemnify and hold harmless
the Company, its directors and officers, and each person, if any, who controls
the Company within the meaning of either Section 15 of the Act or Section 20 of
the Exchange Act, to the same extent as the foregoing indemnity from the Company
to you, but only with respect to information furnished in writing by you or on
your behalf expressly for use in the Registration Statement, the Prospectus, or
any amendment or supplement thereto, or any preliminary prospectus. In case any
action or proceeding shall be brought against the Company or its directors or
officers or any such controlling person, in respect of which indemnity may be
sought against you, you shall have the rights and duties given to the Company,
and the Company or its directors or officers or such controlling person shall
have the rights and duties given to you, by the preceding paragraph.
7. Conditions of Your Obligations: Your obligations hereunder shall be
subject to the continuing accuracy of the representations and warranties of the
Company herein as of the date hereof and as of each Closing Date as if they had
been made on and as of each Closing Date; the accuracy on and as of each Closing
Date of the statements of officers of the Company made pursuant to the
provisions hereof; and the performance by the Company on and as of each Closing
Date of its covenants and obligations hereunder and to the following further
conditions:
(a) Notification that the Registration Statement has become
effective and that the Prospectus has been filed with the Commission on a timely
basis pursuant to Rule 424(b) under the Act shall be received by you;
(b) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall be pending or contemplated by the Commission; and you shall have
received a certificate, dated as of each Closing Date and signed by the Chairman
or President of the Company (who may, as to proceedings contemplated, rely upon
the best of his information and belief), to that effect and to the effect set
forth in clause (g) of this Section 7;
(c) At each of the Closing Dates you shall have received a
certificate of the Company signed by the principal executive officer and by the
chief financial or chief accounting officer of the Company, dated as of each
Closing Date to the effect that each of such persons has examined the
Registration Statement, the Prospectus, and this Agreement, and that:
(i) the representations and warranties of the
Company in this Agreement are true and correct, as if made on and as of the
Closing Date and the Company has complied with all agreements and covenants
and satisfied all conditions contained in this Agreement on its part to be
performed or satisfied at or prior to the Closing Date; (ii) no stop order
suspending the effectiveness of the Registration Statement or any part
thereof has been issued, and no proceedings for that purpose have been
instituted or are pending or, to the best of each of such person's
knowledge after due inquiry, are contemplated or threatened under the Act;
(iii) the Registration Statement and the Prospectus
and, if any, each amendment and each supplement
thereto, contain all statements and information required to be included therein,
and none of the Registration Statement, the Prospectus or any amendment or
supplement thereto includes any untrue statement of a material fact or omits to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading and none of the Preliminary Prospectus or any
supplement thereto included any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; and
<PAGE>
8
54607.1
(iv) subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus: (a)
neither the Company nor any of the Subsidiaries has incurred up to and including
the Closing Date, other than in the ordinary course of its business, any
material liabilities or obligations, direct or contingent (except as otherwise
contemplated in subclause (d) of this clause (iv)); (b) neither the Company nor
any of the Subsidiaries has paid or declared any dividends or other
distributions on its capital stock; (c) neither the Company nor any of the
Subsidiaries has entered into any material transactions not in the ordinary
course of business; (d) neither the Company nor any of the Subsidiaries has
sustained any material loss or damage to its property or assets, whether or not
insured; (e) there is no material litigation which is pending or, to the best of
the Company's knowledge, threatened against the Company, any of the Subsidiaries
or any affiliated party of any of the foregoing which is required to be set
forth in an amended or supplemented Prospectus which has not been set forth; and
(f) there has occurred no event required to be set forth in an amended or
supplemented Prospectus which has not been set forth.
(d) Prior to each Closing Date (i) there shall have been no
materially adverse change nor development involving a prospective change in the
condition, financial or otherwise, prospects, stockholders' equity or the
business activities of the Company and the Subsidiaries taken as a whole,
whether or not in the ordinary course of business, from the latest dates as of
which such condition is set forth in the Registration Statement and Prospectus;
(ii) there shall have been no transaction, not in the ordinary course of
business, entered into by the Company or any of the Subsidiaries, from the
latest date as of which the financial condition of the Company and the
Subsidiaries is set forth in the Registration Statement and Prospectus which is
adverse to the Company and the Subsidiaries taken as a whole; (iii) neither the
Company nor any of the Subsidiaries shall be in material default under any
provision of any instrument relating to any outstanding indebtedness; (iv)
neither the Company nor any of the Subsidiaries shall have issued any Shares
(other than the Shares or underlying common stock from the exercise of options
or warrants) or declared or paid any dividend or made any distribution in
respect of its capital stock of any class and there has not been any change in
the capital stock, or any change in the debt (long or short term) or liabilities
or obligations (contingent or otherwise) of the Company or any of the
Subsidiaries except as set forth in the Registration Statement or Prospectus or
agreed to in writing by you and the Company; (v) no material amount of the
assets of the Company or any of the Subsidiaries shall have been pledged or
mortgaged other than in the ordinary course of the Company's business, except as
set forth in the Registration Statement and Prospectus; (vi) no action, suit or
proceeding, at law or in equity, shall have been pending or, to the best of the
Company's knowledge, threatened against the Company or any of the Subsidiaries,
or affecting any of their respective properties or businesses, before or by any
court or federal, state or foreign commission board or other administrative
agency wherein an unfavorable decision, ruling or finding may materially
adversely affect the business, operations, prospects, financial condition or
income of the Company and the Subsidiaries taken as a whole, except as set forth
in the Registration Statement and Prospectus; and (vii) no stop order shall have
been issued under the Act and no proceedings therefor shall have been initiated,
threatened or contemplated by the Commission or any state regulatory authority.
8. Effective Date of Agreement: This Agreement shall become effective
upon execution by both Parties hereto.
9. Notice. Any notice, request, instruction, or other document required
by the terms of this Agreement, or deemed by any of the Parties hereto to be
desirable, to be given to any other Party hereto shall be in writing and shall
be given by facsimile, personal delivery, overnight delivery, or mailed by
registered or certified mail, postage prepaid, with return receipt requested, to
the following addresses:
If to the Company:
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92618
Fax: 949/752-5757
ATTN: Steve Antry, President
With a copy to:
Horwitz & Beam
Two Venture Plaza, Suite 350
Irvine, CA 92618
Fax: 949/453-0300
ATTN: Lawrence W. Horwitz, Esq.
<PAGE>
If to you:
Brookstreet Securities Corporation
2361 Campus Drive, Suite 210
Irvine, CA 92715
FAX: 949/852-6806
ATTN: Stanley C. Brooks, President
With a copy to:
Horwitz & Beam
Two Venture Plaza, Suite 350
Irvine, CA 92618
Fax: 949/453-0300
ATTN: Lawrence W. Horwitz, Esq.
The persons and addresses set forth above may be changed from time to
time by a notice sent as aforesaid. If notice is given by facsimile, personal
delivery, or overnight delivery in accordance with the provisions of this
Section, said notice shall be conclusively deemed given at the time of such
delivery. If notice is given by mail in accordance with the provisions of this
Section, such notice shall be conclusively deemed given seven business days
after deposit thereof in the United States mail.
10. Termination: You shall have the right to terminate this Agreement
(i) if any domestic or international event or act or occurrence has or in your
reasonable opinion will in the immediate future have a material adverse effect
on the Company or the Shares market in general or (ii) if trading on the New
York Stock Exchange, the American Stock Exchange or in the NASDAQ exchange shall
have been suspended, or minimum or maximum prices for trading shall have been
fixed, or maximum ranges for prices for Shares shall have been required on the
over-the-counter market by the NASD or by order of the Commission or any other
government authority having jurisdiction; or (iii) if the United States shall
have become involved in a war or major hostilities, or there shall have been an
escalation in an existing war or major hostilities, or a national emergency
shall have been declared in the United States; or (iv) if a banking moratorium
has been declared by a state or federal authority; or (v) if a moratorium in
foreign exchange trading has been declared; or (vi) if the Company or any of the
Subsidiaries shall have sustained a loss material or substantial to the Company
or any of the Subsidiaries by fire, flood, accident, hurricane, earthquake,
theft, sabotage or other calamity or malicious act which, whether or not such
loss shall have been insured, will, in your reasonable opinion, make it
inadvisable to proceed with the delivery of the Shares; or (vii) if there shall
have been such a material adverse change in the conditions or prospects of the
Company or any of the Subsidiaries, or such material adverse change in the
general market, political or economic conditions in the United States or
elsewhere, as in your judgment would make it inadvisable to proceed with the
offering, sale and/or delivery of the Shares.
11. Representations and Agreements to Survive Delivery. All
representations, warranties and agreements contained in this Agreement or
contained in certificates of officers of the Company submitted pursuant hereto
shall be deemed to be representations, warranties and agreements at the Closing
Date, as the case may be, and such representations, warranties and agreements of
the Company and the respective indemnity agreements contained in Section 6
hereof shall remain operative and in full force and effect as of such dates,
regardless of any investigation made by or on behalf of you, the Company, any of
the Subsidiaries or any controlling person, and shall survive termination of
this Agreement or the issuance and delivery of the Shares to you.
12. Entire Agreement; Amendments. This Agreement constitutes the entire
agreement of the parties hereto and supersedes all prior written or oral
agreements, understandings and negotiations with respect to the subject matter
hereof. This Agreement may not be amended except in a writing signed by you and
the Company.
<PAGE>
13. Miscellaneous. This Agreement has been and is made solely for the
benefit of you and the Company and of the controlling persons, directors and
officers referred to in Section 6 hereof, and their respective successors and
assigns, and no other person shall acquire or have any right under or by virtue
of this Agreement. The term "successors and assigns" as used in this Agreement
shall not include a purchaser, as such purchaser, of Shares from you.
This Agreement may be signed in various counterparts which together
shall constitute one and the same agreement.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO AGREEMENTS MADE AND
TO BE PERFORMED ENTIRELY WITHIN SUCH STATE.
Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
BETA OIL & GAS, INC.
--------------------------------------------
BY: Steve Antry
ITS: President
Confirmed as of the date first above mentioned:
BROOKSTREET SECURITIES CORPORATION
- -----------------------------------------------
BY: Stanley C. Brooks
ITS: President
EXHIBIT 1.2
SELECTED DEALER WARRANT (FORM)
<PAGE>
SELECTED DEALER WARRANT AGREEMENT
THIS SELECTED DEALER WARRANT AGREEMENT (the "Agreement"), dated as of
___________, 1999 is made and entered into by and between BETA OIL & GAS, INC.,
a Nevada corporation (the "Company"), and BROOKSTREET SECURITIES CORPORATION
("Warrantholder").
Concurrently herewith, the Company is consummating the sale, in a
public offering (the "Offering") of up to 1,650,000 of shares (the "Public
Offering Shares") of the Company's Common Stock, par value $.001 per share (the
"Common Stock or the "Shares"). The Offering has been registered under the
Securities Act of 1933, as amended (the "Act") and has been underwritten by
Brookstreet Securities Corporation pursuant to an Underwriting Agreement dated
as of ________, 1999 (the "Underwriting Agreement") between the Company and
Brookstreet Securities Corporation. The Underwriting Agreement provides that, on
consummation of the sale of any of Public Offering Shares, the Company shall
sell and issue to broker / dealers participating in the offering, including the
Underwriter ("Selected Dealers") warrants (the "Warrants") entitling the
Selected Dealers to purchase, on the terms and conditions hereinafter set forth,
a number of shares of Company Common Stock (hereinafter referred to as the
"Warrant Shares") equal to ten percent (10%) of the number of Public Offering
Shares sold in the Offering.
In consideration of the foregoing and in satisfaction of the Company's
obligations contained in the Underwriting Agreement and for the purpose of
defining the terms and provisions of the Warrants and the respective rights and
obligations with respect thereto, the Company and the Warrantholder, for value
received, hereby agree as follows:
Section 1. Sale and Issuance of Warrants; Transferability and Form of Warrants.
1.1 Sale and Issuance of the Warrants. The Company agrees that it shall
issue and sell, and the Warrantholder agrees to purchase, on this date, a number
of Warrants equal to ten percent (10%) of the number of Shares that is sold by
the Warrantholder in the Offering, for a purchase price of $.001 per warrant.
Each Warrant will entitle the Warrantholder to purchase one share of the
Company's Common Stock (as hereinafter further defined in Subsection 8.1(h)__
hereof), at the Warrant Price (as defined in Section 7 hereof). Accordingly, the
number of Warrants to be sold and issued on the date hereof by the Company to
the Warrantholder, and the number of Warrant Shares that may be purchased
hereafter on exercise thereof (before giving effect to any adjustments required
by Section 8 hereof), shall be ___,000. The Warrants being sold and issued on
the date hereof shall be evidenced by a Warrant Certificate substantially in the
form of Exhibit A hereto (the "Warrant Certificate"). If additional Shares of
Common Stock are sold hereafter in the Offering, the Company shall sell and
issue to the Selected Dealers, on the terms and conditions set forth herein, a
number of additional Warrants equal to ten percent (10%) of such additional
Shares that are sold by the Selected Dealers (the "Additional Warrants"). The
Additional Warrants, if any, shall be sold and issued on the Interim Closing
Date(s) and Final (as defined in the Underwriting Agreement and shall be
evidenced by a separate Warrant Certificate substantially in the form of Exhibit
A hereto.
1.2 Registration. The Warrants shall be numbered and shall be
registered on the books of the Company when issued.
1.3 Transfer. The Warrants shall be transferable in whole or in part
only on the books of the Company maintained at its principal office in Newport
Beach, California, or wherever its principal office may then be located, upon
delivery thereof duly endorsed by the Warrantholder or by its duly authorized
attorney or representative, accompanied by proper evidence of succession,
assignment or authority to transfer. Upon any registration of transfer, the
Company shall execute and deliver new Warrants to the person or persons entitled
thereto.
1.4 Limitations on Transfer of the Warrants. Subject to the provisions
of Section 11, the Warrants shall not be sold, transferred, assigned or
hypothecated by the Warrantholder, until ___________, 2000, except that the
Warrants may be transferred, in whole or in part, to (i) one or more persons,
each of whom on the date of transfer is an officer or partner of the
transferring Warrantholder; (ii) any other underwriting firm or member of the
selling group which participated in the Public Offering (or the officers or
partners of any such firm); (iii) a successor to the transferring Warrantholder
in merger or consolidation; (iv) a purchaser of all or substantially all of the
transferring Warrantholder's assets; or (v) any person receiving the Warrants
from one or more of the persons listed in this subsection 1.4 at such person's
or persons' death pursuant to a will or trust or the laws of intestate
succession. The Warrants may be divided or combined, upon request to the Company
by the Warrantholder, into a certificate or certificates representing the right
to purchase the same aggregate number of Warrant Shares. Unless the context
indicates otherwise, the term "Warrantholder" shall include any transferee or
transferees of the Warrants pursuant to this subsection 1.3, and the term
"Warrants" shall include any and all warrants outstanding pursuant to this
Agreement, including those evidenced by a certificate or certificates issued
upon division, exchange, substitution or transfer pursuant to this Agreement.
1.5 Form of Warrants. The text of the Warrants and of the form of
election to purchase Warrant Shares shall be substantially as set forth in
Exhibit A attached hereto. The number of Warrant Shares issuable upon exercise
of the Warrants is subject to adjustment upon the occurrence of certain events,
all as hereinafter provided. The Warrants shall be executed on behalf of the
Company by its President or by a Vice President. A Warrant bearing the signature
of an individual who was at the time of signature the proper officer of the
Company shall bind the Company, notwithstanding that such individual shall have
ceased to hold such office prior to the delivery of such Warrant or did not hold
such office on the date of this Agreement. The Warrants shall be dated as of the
date of the initial escrow closing as defined in the Underwriting Agreement and
Final Prospectus..
Section 2. Exchange of Warrant Certificate. Any Warrant certificate may be
exchanged for another certificate or certificates entitling the Warrantholder to
purchase a like aggregate number of Warrant Shares as the certificate or
certificates surrendered then entitled such Warrantholder to purchase. Any
Warrantholder desiring to exchange a Warrant certificate shall make such request
in writing delivered to the Company, and shall surrender, properly endorsed,
with signatures guaranteed, the certificate evidencing the Warrant to be so
exchanged. Thereupon, the Company shall execute and deliver to the person or
persons entitled thereto a new Warrant certificate as so requested.
Section 3. Term of Warrants; Exercise of Warrants.
(a) Subject to the terms of this Agreement, each Warrantholder shall
have the right, at any time during the period commencing at 9:00 a.m., Pacific
Time, on __________, 2000 and ending at 5:00 p.m., Pacific Time, on
____________, 2004 (the "Termination Date"), to purchase from the Company up to
the number of fully paid and nonassessable Shares to which the Warrantholder may
at the time be entitled to purchase pursuant to this Agreement, upon surrender
to the Company, at its principal office, of the certificate evidencing the
Warrants to be exercised, together with the purchase form on the reverse thereof
duly filled in and signed, with signatures guaranteed, and upon payment to the
Company of the Warrant Price (as defined in and determined in accordance with
the provisions of this section 3 and sections 7 and 8 hereof), for the number of
Warrant Shares in respect of which such Warrants are then exercised, but in no
event for less than 100 Warrant Shares (unless less than an aggregate of 100
Warrant Shares are then purchasable under all outstanding Warrants held by a
Warrantholder).
(b) Payment of the aggregate Warrant Price shall be made in cash, or by
check, or any combination thereof. Upon such surrender of the Warrants and
payment of such Warrant Price as aforesaid, the Company shall issue and cause to
be delivered with all reasonable dispatch to or upon the written order of the
Warrantholder, and in such name or names as the Warrantholder may designate, a
certificate or certificates for the number of full Warrant Shares so purchased
upon the exercise of the Warrant, together with cash, as provided in Section 9
hereof, in respect of any fractional Warrant Shares otherwise issuable upon such
surrender. Such certificate or certificates shall be deemed to have been issued
and any person so designated to be named therein shall be deemed to have become
a holder of record of such securities as of the date of surrender of the
Warrants and payment of the Warrant Price, as aforesaid, notwithstanding that
the certificate or certificates representing such securities shall not actually
have been delivered or that the stock transfer books of the Company shall then
be closed. The Warrants shall be exercisable, at the election of each
Warrantholder, either in full or from time to time in part and, in the event
that a certificate evidencing the Warrants is exercised in respect of less than
all of the Warrant Shares specified therein at any time prior to the Termination
Date, a new certificate evidencing the remaining portion of the Warrants shall
be issued by the Company to such Warrantholder.
Section 4. Payment of Taxes. The Company will pay all documentary stamp taxes,
if any, attributable to the initial issuance of the Warrants or the securities
comprising the Warrant Shares; provided, however, the Company shall not be
required to pay any tax which may be payable in respect of any secondary
transfer of the Warrants or the securities comprising the Warrant Shares.
Section 5. Mutilated or Missing Warrants. In case the certificate or
certificates evidencing the Warrants shall be mutilated, lost, stolen or
destroyed, the Company shall, at the request of the Warrantholder, issue and
deliver in exchange and substitution for and upon cancellation of the mutilated
certificate or certificates, or in lieu of and substitution for the certificate
or certificates lost, stolen or destroyed, a new Warrant certificate or
certificates of like tenor and representing an equivalent right or interest, but
only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of such Warrant and payment of the reasonable
out-of-pocket expenses incurred by the Company in issuing a replacement Warrant
Certificate.
Section 6. Reservation of Warrant Shares. There has been reserved, out of its
authorized Capital Stock, such number of shares of Common Stock as shall be
subject to purchase under the Warrants, and the Company shall at all times keep
reserved, for so long as any of the Warrants remain outstanding, such shares of
Common Stock that from time to time are, and such additional Warrant Shares or
other securities that, pursuant to Section 8 hereof, become issuable on exercise
of the Warrants.
Section 7. Warrant Price. The price per Share at which Warrant Shares shall be
purchasable upon the exercise of the Warrants shall be $7.50, subject to any
adjustments thereto required pursuant to Section 8 hereof (and as so adjusted,
the "Warrant Price").
Section 8. Adjustment of Number of Warrant Shares. The number and kind of
securities purchasable upon the exercise of the Warrants and the Warrant Price
shall be subject to adjustment from time to time upon the happening of certain
events, as follows:
8.1 Adjustments. The number of Warrant Shares purchasable upon the
exercise of the Warrants shall be subject to adjustment as follows:
(a) In case the Company shall (i) pay a dividend in Common
Stock or make a distribution in Common Stock, (ii) subdivide its outstanding
Common Stock, (iii) combine its outstanding Common Stock into a smaller number
of shares of Common Stock, or (iv) issue by reclassification of its Common Stock
other securities of the Company, the number of Warrant Shares purchasable upon
exercise of the Warrants immediately prior thereto shall be adjusted so that the
Warrantholder shall be entitled to receive the kind and number of Warrant Shares
or other securities of the Company which it would have owned or would have been
entitled to receive immediately after the happening of any of the events
described above, had the Warrants been exercised immediately prior to the
happening of such event or any record date with respect thereto. Any adjustment
made pursuant to this subsection 8.1(a) shall become effective immediately after
the effective date of such event, retroactive to the record date, if any, for
such event.
(cb) In case the Company shall distribute to all or
substantially all holders of its Common Stock evidences of its indebtedness or
assets (excluding cash dividends or distributions out of earnings) or rights,
options, warrants or convertible securities containing the right to subscribe
for or purchase Common Stock (excluding those referred to in subsection 8.1(ba)
above), then in each case the number of Warrant Shares thereafter purchasable
upon the exercise of the Warrants shall be determined by multiplying the number
of Warrant Shares theretofore purchasable upon exercise of the Warrants by a
fraction, of which the numerator shall be the then Current Market Price on the
date of such distribution, and of which the denominator shall be such Current
Market Price on such date minus the then fair value (determined as provided in
subsection (d) below) of the portion of the assets or evidences of indebtedness
so distributed or of such subscription rights, options, warrants or convertible
securities applicable to one share. Such adjustment shall be made whenever any
such distribution is made and shall become effective on the date of
distribution.
(dc) For the purposes of the adjustments covered by
subsections 8.1(ba) or (cb) hereof, the Common Stock which the holders of any
Common Stock Rights shall be entitled to subscribe for or purchase, whether by
exercise, exchange or conversion or otherwise, shall be deemed issued and
outstanding as of the date of such sale or issuance and the consideration
received by the Company therefor shall be deemed to be the consideration
received by the Company for such Common Stock Rights, plus the consideration or
premiums stated in such Common Stock Rights to be paid for the Common Stock
covered thereby. In case the Company shall sell or issue Below Market Shares, or
Common Stock Rights containing the right to subscribe for or purchase Common
Stock, for a consideration consisting, in whole or in part, of property other
than cash or its equivalent, then, in determining the "price per share" of
Common Stock and the "consideration received by the Company" for purposes of the
first sentence of this subsection 8.1(d), the Company's Board of Directors shall
determine the fair value of said property, and such determination, if reasonable
and based upon the Board of Directors' good faith business judgment, shall be
binding upon the Warrantholder. In determining the "price per share" of Common
Stock, any underwriting discounts or commissions shall not be deducted from the
consideration received by the Company for or in connection with any sales of
Below Market Shares or Common Stock Rights.
(ed) No adjustment in the number of Warrant Shares purchasable
pursuant to the Warrants shall be required unless such adjustment would require
an increase or decrease of at least one percent in the number of Warrant Shares
then purchasable upon the exercise of the Warrants or, if the Warrants are not
then exercisable, the number of Warrant Shares purchasable upon the exercise of
the Warrants on the first date thereafter that the Warrants become exercisable;
provided, however, that any adjustments which by reason of this subsection
8.1(e) are not required to be made immediately shall be carried forward and
taken into account in any subsequent adjustment.
(fe) Whenever the number of Warrant Shares purchasable upon
the exercise of the Warrant is adjusted, as herein provided, the Warrant Price
payable upon exercise of the Warrant shall be adjusted by multiplying such
Warrant Price immediately prior to such adjustment by a fraction, of which (i)
the numerator shall be the number of Warrant Shares purchasable upon the
exercise of the Warrant immediately prior to such adjustment, and (ii) the
denominator shall be the number of Warrant Shares so purchasable immediately
thereafter.
(gf) Whenever the number of Warrant Shares purchasable upon
the exercise of the Warrants is adjusted as herein provided, the Company shall
cause to be promptly mailed to the Warrantholder by first class mail, postage
prepaid, notice of such adjustment and a certificate of the chief financial
officer of the Company setting forth the number of Warrant Shares purchasable
upon the exercise of the Warrants and the Warrant Price after such adjustment, a
brief statement of the transaction or transactions that required such adjustment
and the computation by which such adjustment was made.
(hg) For the purpose of this subsection 8.1, the term "Common
Stock" shall mean (i) the class of stock designated as the Common Stock of the
Company at the date of this Agreement, or (ii) any other class of stock
resulting from successive changes or reclassifications of such Common Stock
consisting solely of changes in par value, or from par value to no par value, or
from no par value to par value. In the event that at any time, as a result of an
adjustment made pursuant to this Section 8, the Warrantholder shall become
entitled to purchase any securities of the Company other than Common Stock, (x)
if the Warrantholder' right to purchase is on any other basis than that
available to all holders of the Company's Common Stock, the Company shall obtain
an opinion of an independent investment banking firm valuing such other
securities, and (y) thereafter the number of such other securities so
purchasable upon exercise of the Warrants shall be subject to adjustment from
time to time in a manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Warrant Shares contained in this Section 8.
(ih) Upon the expiration of any Common Stock Rights, if such
shall not have been exercised prior thereto (the "Expired Rights"), the number
of Warrant Shares purchasable upon exercise of the Warrants then outstanding,
and the Warrant Price thereof, shall, upon such expiration, be readjusted to the
number of Warrant Shares that would have been issuable on exercise of such
outstanding Warrants, and the Warrant Price at which the Warrant Shares would
have been purchasable, if the Expired Rights had never been issued; provided,
however, that no such readjustment shall have the effect of decreasing the
number of Warrant Shares purchasable upon exercise of the Warrants by an amount
in excess of the amount of the adjustment initially made in respect of the
issuance, sale or grant of such Expired Rights.
8.2 No Adjustment for Dividends. Except as provided in subsection 8.1,
no adjustment in respect of any dividends or distributions out of earnings shall
be made during the term of the Warrants or upon the exercise of the Warrants.
8.3 Preservation of Purchase Rights upon Reclassification,
Consolidation, etc. In case of any consolidation of the Company with or merger
of the Company into another corporation or in case of any sale or conveyance to
another corporation of the property, assets or business of the Company as an
entirety or substantially as an entirety (a "Business Combination Transaction"),
the Company or such successor or purchasing corporation, as the case may be,
shall execute with the Warrantholder an agreement that the Warrantholder shall
have the right thereafter, exercisable at any time or from time to time during
the remaining term of the Warrant, upon payment of the Warrant Price in effect
immediately prior to the consummation of such Business Combination Transaction
(as the same may be adjusted thereafter pursuant to the adjustment provisions
referenced below in this section 8.3), to purchase the kind and number or amount
of shares and other securities and property which the Warrantholder would have
owned or have been entitled to receive immediately after the happening of such
consolidation, merger, sale or conveyance had the Warrants been exercised
immediately prior to such Business Combination Transaction. In the event of a
Business Combination Transaction that is implemented by means of a merger
described in Section 368(a)(2)(E) of the Internal Revenue Code of 1986, in which
the Company is the surviving corporation, the right to purchase Warrant Shares
under the Warrants shall terminate on the date of such merger and thereupon the
Warrants shall become null and void, but only if the controlling corporation
shall agree to substitute for the Warrants its warrants (the "Controlling
Corporation Warrants"), which entitle each Warrantholder to purchase upon the
exercise thereof, the kind and amount of shares and other securities and
property which the Warrantholder would have owned or been entitled to receive
had the Warrants been exercised immediately prior to such merger. Any such
agreements referred to in this subsection 8.3 shall provide for adjustments,
which shall be as nearly equivalent as may be practicable to the adjustments
provided for in Section 8 hereof. The provisions of this subsection 8.3 shall
similarly apply to successive Business Combination Transactions. The Company
will not merge or consolidate with or into any other corporation or sell all or
substantially all of its property to another corporation, unless the provisions
of this section 8.3 are complied with.
8.4 Par Value of Warrant Shares of Common Stock. Before taking any
action which would cause an adjustment effectively reducing the portion of the
Warrant Price allocable to each Share below the then par value (if any) per
share of the Common Stock issuable upon exercise of the Warrants, the Company
will take any corporate action which may, in the opinion of its counsel, be
necessary in order that the Company may validly and legally issue fully paid and
nonassessable Common Stock upon exercise of the Warrants.
8.5 Independent Public Accountants. The Company may retain a firm of
independent public accountants of recognized national standing (which may be any
such firm regularly employed by the Company) to make any computation required
under this Section 8, and a certificate signed by such firm shall be conclusive
evidence of the correctness of any computation made under this Section 8.
8.6 Statement on Warrant Certificates. Irrespective of any adjustments
in the number of Shares or other securities issuable upon exercise of Warrants,
Warrant certificates theretofore or thereafter issued may continue to express
the same number of securities as are stated in the similar Warrant certificates
initially issuable pursuant to this Agreement. However, the Company may, at any
time in its sole discretion (which shall be conclusive), make any change in the
form of Warrant certificate that it may deem appropriate and that does not
affect the substance thereof; and any Warrant certificate thereafter issued,
whether upon registration of transfer of, or in exchange or substitution for, an
outstanding Warrant certificate, may be in the form so changed.
Section 9. Fractional Interests; Current Market Price. The Company shall not be
required to issue fractional Warrant Shares on the exercise of any of the
Warrants. If any fraction of a Warrant Share would, except for the provisions of
this Section 9, be issuable on the exercise of the Warrants (or any specified
portion thereof being exercised), the Company shall pay to the Warrantholder, in
lieu of the issuance of such fractional Warrant Share, an amount in cash equal
to the then Current Market Price multiplied by such fraction. For purposes of
this Agreement, the term "Current Market Price" shall mean (i) if the Common
Stock is traded in the over-the-counter market and not in the NASDAQ National
Market System nor on any national securities exchange, the average of the per
share closing bid prices of the Common Stock on the 30 consecutive trading days
immediately preceding the date in question, as reported by NASDAQ or an
equivalent generally accepted reporting service, or (ii) if the Common Stock is
traded in the NASDAQ National Market System or on a national securities
exchange, the average for the 30 consecutive trading days immediately preceding
the date in question of the daily per share closing prices of the Common Stock
in the NASDAQ National Market System or on the principal stock exchange on which
it is listed, as the case may be. For purposes of clause (i) above, if trading
in the Common Stock is not reported by NASDAQ, the bid price referred to in said
clause shall be the lowest bid price as reported in the "pink sheets" published
by National Quotation Bureau, Incorporated. The closing price referred to in
clause (ii) above shall be the last reported sale price or, in case no such
reported sale takes place on such day, the average of the last reported closing
bid and asked prices, in either case in the NASDAQ National Market System or on
the national securities exchange on which the Common Stock is then listed.
Section 10. No Rights as Shareholder; Notices to Warrantholder. Nothing
contained in this Agreement or in the Warrants shall be construed as conferring
upon the Warrantholder or its transferees any rights as a shareholder of the
Company, including the right to vote, receive dividends, consent or receive
notices as a shareholder in respect of any meeting of shareholders for the
election of directors of the Company or any other matter, unless and until the
Warrantholder or such transferee (as the case may be) exercises the Warrants, in
whole or in part, and pays the Warrant Price thereof to the Company.
Notwithstanding the foregoing, however, if at any time prior to the earlier of
the expiration of the Warrants and or their exercise in full, any one or more of
the following events shall occur:
(a) any action which would require an adjustment pursuant
to Section 8.1; or
(b) a dissolution, liquidation or winding up of the Company
(other than in connection with a consolidation, merger or sale of its property,
assets and business as an entirety or substantially as an entirety) shall be
proposed;
then, the Company shall give notice in writing of such event to the
Warrantholder, in the manner provided in Section 14 hereof, at least 20 days
prior to the date fixed as a record date or the date of closing the transfer
books for the determination of the shareholders entitled to any relevant
dividend, distribution, subscription rights or other rights or for the
determination of shareholders entitled to vote on such proposed dissolution,
liquidation or winding up. Such notice shall specify such record date or the
date of closing of the transfer books, as the case may be.
Section 11. Restrictions on Transfer; Registration Rights.
11.1 Transfer Restrictions. The Warrantholder agrees that prior to
making any disposition of the Warrants or the Warrant Shares, other than to
persons or entities identified in clauses (i) through (v), inclusive, of Section
1.4, the Warrantholder shall give written notice to the Company describing
briefly the manner in which any such proposed disposition is to be made; and no
such disposition shall be made if the Company has notified the Warrantholder
that in the opinion of counsel reasonably satisfactory to the Warrantholder a
registration statement or other notification or post-effective amendment thereto
(hereinafter collectively a "Registration Statement") under the Act is required
with respect to such disposition and no such Registration Statement has been
filed by the Company with, and declared effective, if necessary, by, the
Securities and Exchange Commission (the "Commission").
11.2 Registration Rights.
(a) The Company shall be obligated to the owners of the
Warrants and the Warrant Shares to register the Warrant Shares in its a
Registration Statement for the offering. The Company also agrees that, until all
Warrant Shares have been sold, the Company shall keep the Registration Statement
effective pursuant to which such securities are now and have been registered.
(b) All fees, disbursements and out-of-pocket expenses (other
than Warrantholder' brokerage fees and commissions and reasonable legal fees of
counsel to the Warrantholder, if any) in connection with the filing of any
Registration Statement under section 11(a) and in complying with applicable
securities and Blue blue Sky sky laws shall be borne by the Company. The Company
at its expense will supply any Warrantholder and any holder of Warrant Shares
with copies of such Registration Statement and the prospectus included therein
and other related documents, and any opinions and no-action letters in such
quantities as may be reasonably requested by the Warrantholder or holder of
Warrant Shares.
Section 12. Indemnification.
12.1 Indemnification of Warrantholder. The Company agrees to indemnify
and hold harmless each Warrantholder and any holder of such Warrant Shares and
each person, if any, who controls the Warrantholder or any holder of such
Warrant Shares within the meaning of the Act, against any losses, claims,
damages or liabilities, joint or several (which shall, for all purposes of this
Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which such Warrantholder or any
holder of such Warrant Shares or such controlling person may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any such Registration Statement, or any related preliminary prospectus, final
prospectus, or amendment or supplement thereto, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement or omission or alleged
omission made in such Registration Statement, preliminary prospectus, final
prospectus or amendment or supplement thereto in reliance upon, and in
conformity with, written information furnished to the Company by such
Warrantholder or the holder of such Warrant Shares specifically for inclusion
therein . This indemnity will be in addition to any liability which the Company
may otherwise have.
12.1 Indemnification of the Company. The Warrantholder and the holders
of the Warrant Shares agree that they will indemnify and hold harmless the
Company, each other person referred to in subparts (1), (2) and (3) of Section
11(a) of the Act in respect of the Registration Statement and each person, if
any, who controls the Company within the meaning of the Act, against any losses,
claims, damages or liabilities (which shall, for all purposes of this Agreement,
include but not be limited to, all costs of defense and investigation and all
attorneys' fees) to which the Company or any such director, officer or
controlling person may become subject under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in such Registration Statement, or any related
preliminary prospectus, final prospectus or amendment or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in such Registration Statement, preliminary prospectus, final prospectus or
amendment or supplement thereto in reliance upon, and in conformity with,
written information furnished to the Company by the Warrantholder or such holder
of Warrant Shares specifically for inclusion therein. This indemnity agreement
will be in addition to any liability which the Warrantholder or such holder of
Warrant Shares may otherwise have.
12.3 Indemnification Procedures. Promptly after receipt by an
indemnified party under this Section 12 of notice of the commencement of any
action, such indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 12, notify the indemnifying
party of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve the indemnifying party from any liability
which it may have to any indemnified party. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, reasonably assume the defense thereof, subject to the
provisions herein stated, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 12 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation, unless the indemnifying party shall not pursue the
action to its final conclusion. The indemnified party shall have the right to
employ separate counsel in any such action and to participate in the defense
thereof, but the fees and expenses of such counsel shall not be at the expense
of the indemnifying party if the indemnifying party has assumed the defense of
the action with counsel reasonably satisfactory to the indemnified party;
provided, however, that if the indemnified party is a Warrantholder or a holder
of Warrant Shares or a person who controls a Warrantholder or a holder of
Warrant Shares within the meaning of the Act, the fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the employment
of such counsel has been specifically authorized in writing by the indemnifying
party or (ii) the named parties to any such action, including any impleaded
parties, include both a Warrantholder or a holder of Warrant Shares or such
controlling person and the indemnifying party and a Warrantholder or a holder of
Warrant Shares or such controlling person shall have been advised by such
counsel that there may be one or more legal defenses available to a
Warrantholder or a holder of Warrant Shares or controlling person which are not
available to or in conflict with any legal defenses which may be available to
the indemnifying party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of a Warrantholder or a
holder of Warrant Shares or such controlling person, it being understood,
however, that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of more than one separate firm of
attorneys for the Warrantholder, the holders of the Warrant Shares and
controlling persons, which firm shall be designated in writing by a majority in
interest of such holders and controlling persons based upon the value of the
securities included in the Registration Statement). No settlement of any action
against an indemnified party shall be made without the consent of the
indemnified and the indemnifying parties, which shall not be unreasonably
withheld in light of all factors of importance to such parties.
Section 13. Contribution. In order to provide for just and equitable
contribution under the Act in any case in which (i) a Warrantholder or any
holder of the Warrant Shares or controlling person makes a claim for
indemnification pursuant to Section 12 hereof but it is judicially determined
(by the entry of a final judgment or decree by a court of competent jurisdiction
and the expiration of time to appeal or the denial of the last right of appeal)
that such indemnification may not be enforced in such case notwithstanding the
fact that the express provisions of Section 12 hereof provide for
indemnification in such case or (ii) contribution under the Act may be required
on the part of any Warrantholder or any holder of the Warrant Shares or
controlling person, then the Company and any Warrantholder or any such holder of
the Warrant Shares or controlling person shall contribute to the aggregate
losses, claims, damages or liabilities to which they may be subject (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees), in either such case
(after contribution from others) on the basis of relative fault as well as any
other relevant equitable considerations. The relative fault shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company on the one hand or
a Warrantholder or holder of Warrant Shares or controlling person on the other
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The Company and
such holders of such securities and such controlling persons agree that it would
not be just and equitable if contribution pursuant to this Section 13 were
determined by pro rata allocation or by any other method which does not take
account of the equitable considerations referred to in this Section 13. The
amount paid or payable by an indemnified party as a result of the losses,
claims, damages or liabilities (or actions in respect thereof) referred to above
in this Section 13 shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation.
Section 14. Notices. Any notice pursuant to this Agreement by the Company or by
a Warrantholder or a holder of Warrant Shares shall be in writing and shall be
deemed to have been duly given on the date of delivery or refusal indicated on
the return receipt if delivered or mailed by certified mail, return receipt
requested:
14.1 Warrantholder Address. If to the Warrantholder or a holder of
Warrant Shares, at the address set forth in the Selected Dealer Agreement or any
more recent notice of address change delivered to the Company.
14.2 Company Address. If to the Company addressed to it at 901
Dove Street, Suite 230, Newport Beach, California 92660, Attention: President.
Each party may from time to time change the address to which notices to it are
to be delivered or mailed hereunder by notice in accordance herewith to the
other party.
Section 15. Survival of Representations and Warranties. All statements contained
in any schedule, exhibit, certificate or other instrument delivered by or on
behalf of the parties hereto, or in connection with the transactions
contemplated by this Agreement, shall be deemed to be representations and
warranties hereunder. Notwithstanding any investigations made by or on behalf of
the parties to this Agreement, all representations, warranties and agreements
made by the parties to this Agreement or pursuant hereto shall survive.
Section 16. Miscellaneous.
16.1 Applicable Law. This Agreement shall be deemed to be a contract
made under the laws of the State of California and for all purposes shall be
construed in accordance with the laws of said State.
16.2 Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company, the Warrantholder, or the holders of Warrant
Shares shall bind and inure to the benefit of their respective successors and
assigns hereunder. Notwithstanding the foregoing, however, nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Warrantholder and the holders of Warrant Shares, and their
respective permitted transferees (other than transferees who acquire any Warrant
Shares that are free of restrictions on transfer under this Agreement and under
the Act), any legal or equitable right, remedy or claim under this Agreement.
This Agreement shall be for the sole and exclusive benefit of the Company, the
Warrantholder and the holders of Warrant Shares and such permitted transferees
(other than transferees who acquire any Warrant Shares that are free of
restrictions on transfer under this Agreement and under the Act).
16.3 Amendments. This Agreement may be amended only by a written
instrument executed by duly authorized representatives of the Company and the
Warrantholder.
16.4 Severability. In the event any provision of this Agreement becomes
or is declared by a court of competent jurisdiction to be illegal, unenforceable
or void, this Agreement shall continue in full force and effect without said
provision, but only to the extent necessary to cure the infirmity that caused
such provision to be held illegal, unenforceable or void.
16.5 Interpretation. This Agreement is the result of arms'-length
negotiations between the parties hereto and no provision hereof, because of any
ambiguity found to be contained in any of the provisions hereof, shall be
construed against a party by reason of the fact that such party or its legal
counsel was the draftsman of those provisions. Unless otherwise indicated
elsewhere in this Agreement, (i) the term "or" shall not be exclusive, (ii) the
term "including" shall mean "including, but not limited to," and (iii) unless
the context indicates otherwise the terms "herein," "hereof," "hereto,"
"hereunder" and other terms similar to such terms shall refer to this Agreement
as a whole and not merely to the specific section, subsection, paragraph or
clause where such terms may appear.
16.6 Headings. The captions or headings of the sections and subsections
of this Agreement are for convenience of reference only and shall be disregarded
in interpreting, construing or applying any of the provisions of this Agreement.
16.7 Counterparts. This Agreement may be executed in separate
counterparts, each of which shall be an original of and all of which together
shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed, all as of the day and year first above written.
BETA OIL & GAS, INC.
By:
Name: Steve Antry
Title: Chairman and President
BROKER / DEALER:
By:
Name:
Title:
<PAGE>
DRAFT
=========================================================================
Exhibit A
Warrant Certificate No. _____
ELECTED DEALERS WARRANTS TO PURCHASE SHARES OF COMMON STOCK
VOID AFTER 5:00 P.M.,
PACIFIC TIME, ON _________, 2004
BETA OIL & GAS, INC.
INCORPORATED UNDER THE LAWS
OF THE STATE OF NEVADA
This certifies that, for value received,
_____________________________________ the registered holder hereof or
assigns (the "Warrantholder"), is entitled to purchase from BETA OIL
& GAS, INC. (the "Company"), at any time during the period commencing
at 9:00 a.m., Pacific Time, on _________ __, 2000, and before 5:00
p.m., Pacific Time, on _______ __, 2004 at the purchase price per
share of $7.50 (the "Warrant Price"), the number of Shares of Common
Stock of the Company set forth above (the "Warrant Shares"). The
number of Warrant Shares issuable upon exercise of each Warrant
evidenced hereby and the Warrant Price shall be subject to adjustment
from time to time as set forth in the Selected Dealers Warrant
Agreement referred to below.
The Warrants evidenced hereby represent the right
to purchase an aggregate of up to ( ) Shares,
subject to certain adjustments, and are issued
under and in accordance
with a Selected Dealer Warrant Agreement, dated as of ________ __,
1999 (the "Selected Dealer Warrant Agreement"), between the Company
and the Warrantholder and are subject to the terms and provisions
contained in the Selected Dealers Warrant Agreement, to all of which
the Warrantholder by acceptance hereof consents.
The Warrants evidenced hereby may be exercised in whole or in
part by presentation of this Warrant Certificate with the Purchase
Form attached hereto duly executed (with a signature guarantee as
provided thereon) and simultaneous payment of the Warrant Price at
the principal office of the Company. Payment of such price shall be
made at the option of the Warrantholder in cash, or by check, or any
combination thereof.
Upon any partial exercise of the Warrants evidenced
hereby, there shall be signed and issued to the Warrantholder a new
Warrant Certificate in respect of the Warrant Shares as to which the
Warrants evidenced hereby shall not have been exercised. These
Warrants may be exchanged at the office of the Company by surrender
of this Warrant Certificate properly endorsed for one or more new
Warrants of the same aggregate number of Warrant Shares as evidenced
by the Warrant or Warrants exchanged. No fractional Shares of Common
Stock will be issued upon the exercise of rights to purchase
hereunder, but the Company shall pay the cash value of any fraction
upon the exercise of one or more Warrants. These Warrants are
transferable at the office of the Company in the manner and subject
to the limitations set forth in the Selected Dealers Warrant
Agreement.
This Warrant Certificate does not entitle any
Warrantholder to any of the rights of a stockholder of the Company
unless and until the Warrantholder exercises its rights to purchase
Warrant Shares hereunder.
BETA OIL & GAS, INC.
Dated: _____________ __, 1999 By:
===============================================================================
<PAGE>
BETA OIL & GAS, INC.
PURCHASE FORM
BETA OIL & GAS, INC.
9O1 Dove Street, Suite 230
Newport Beach, California 92660
The undersigned hereby irrevocably elects to exercise the right of
purchase represented by the within Warrant Certificate for, and to
purchase thereunder, ____________ Warrant Shares of Common Stock (the
"Warrant Shares") provided for therein, and requests that certificates for
the Warrant Shares be issued in the name of:
(Please Print or Type Name)
(Address, including zip code)
(Social Security No. or Tax I.D. No.)
and, if said number of Warrant Shares shall not be all the Warrant Shares
purchasable hereunder, that a new Warrant Certificate for the balance of
the Warrant Shares purchasable under the within Warrant Certificate be
registered in the name of the undersigned Warrantholder or his Assignee as
below indicated and delivered to the address stated below.
Name of Warrantholder
or Assignee:
(Please Print)
Address:
Signature: Dated:
Note: The above signature must correspond with the name as written upon
the face of this Warrant Certificate in every particular, without
alteration or enlargement or any change whatever, unless these Warrants
have been assigned.
Signatures Guaranteed:
(Signature must be guaranteed by a bank or trust company having an office
or correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers,
Inc.)
ASSIGNMENT
(To be signed only upon assignment of Warrants)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto the assignee named below all of the rights of the undersigned
represented by the attached Warrant with respect to the number of Warrant
Shares covered by the Warrant set forth below:
(Name and Address of Assignee Must Be Printed or Typewritten)
Social Security No.
Name of Assignee or Tax I.D. No. Address No. of Warrant Shares
and does hereby irrevocably constitute and appoint
_________________________________ Attorney to transfer said Warrants on
the books of the Company, with full power of substitution in the premises.
Dated: _____________________________
Signature of Registered Holder
Note: The signature on this assignment must correspond with the
name as it appears upon the face of the within Warrant
Certificate in every particular, without alteration or
enlargement or any change whatever.
Signature Guaranteed:
(Signature must be guaranteed by a bank or trust company having an office
or correspondent in the United States or by a member firm of a registered
securities exchange or the National Association of Securities Dealers,
Inc.)
BETA OIL & GAS, INC.
SELECTED DEALER AGREEMENT
PUBLIC OFFERING OF UP TO 1,650,000 SHARES OF COMMON STOCK
______________________, 1998
=====================
=====================
Ladies and Gentlemen:
Brookstreet Securities Corporation (the "Underwriter") has agreed to
use its best efforts to offer and sell on behalf of Beta Oil & Gas, Inc. (the
"Company") up to 1,650,000 shares of Common Stock, par value $.001 per share
(the "Shares"), all as set forth in the prospectus (the "Prospectus"), which is
part of the registration statement (the "Registration Statement") filed with the
Securities and Exchange Commission (the "Commission") on Form S-1 (File No.
333-68381) under the Securities Act of 1933, as amended (the "Act"), subject to
the terms of the Underwriting Agreement referred to therein (the "Underwriting
Agreement").
1. The Public Offering. The Shares are to be offered to the public by
the Underwriter, on best efforts basis, at a price of $6.00 per share (the
"Public Offering Price"), in accordance with the terms of the Offering set forth
in the Prospectus. The Underwriter has full authority to solicit the services of
other broker/dealers who are registered as such with the Commission and who are
members of the National Association of Securities Dealers, Inc.
("NASD").
2. Appointment of Selected Dealer. By executing this Selected Dealer
Agreement (the "Agreement"), you are appointed as a Selected Dealer to offer and
sell the Shares during the term of the Offering on a nonexclusive basis.
3. Offering by Selected Dealer. By executing this Agreement, you agree
to use your best efforts to offer and sell the Shares in accordance with the
terms and conditions of this Agreement, the Registration Statement, the
Prospectus, and any revisions, supplements or amendments thereof, and the
applicable federal and state securities laws and regulations in connection with
the Offering.
4. Conduct of Offering. On becoming a Selected Dealer and in offering
and selling the Shares, you agree to comply with all applicable requirements of
the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the Conduct Rules of the NASD, including, but not limited to, Rules 2730,
2740, 2420, and 2750 of said Conduct Rules. As a Selected Dealer, you shall be
supplied with such quantities of the Prospectus as, from time to time, you may
reasonably request.
Upon acceptance of your signed Agreement, you shall be informed as to
the states in which the Underwriter has been advised that the Shares have been
qualified for sale under the respective securities or blue sky laws of such
states; however, the Underwriter assumes no obligation or responsibility as to
the right of any Selected Dealer to sell the Shares in any state or as to any
sale made therein.
The Underwriter and the Company reserve the right to refuse to accept
any and all orders or sales secured by you.
5. Escrow Agent. The Escrow Agent for the Offering is Southern
California Bank. Upon your receipt of subscription funds and documents for the
Offering, you hereby agree to immediately forward such funds and documents to:
<PAGE>
Southern California Bank
Escrow Division
Escrow # 012794GG
4100 Newport Place, Suite 130
Newport Beach, CA 92660
Fax: 949/863-2489
6. Closing of Offering. Unless at least 800,000 Shares are sold within
10 days of the date of the Final Prospectus (the "Minimum Offering"), the
Offering will terminate, none of the Shares will be deemed to have been sold and
all proceeds received will be returned in full with interest thereon to
subscribers and no commissions shall be paid to you pursuant to Section 7 of
this Agreement. If the Minimum Offering is sold, the proceeds will be released
from escrow and deposited to the Company's account. Within 10 days after the
date that the Company receives the proceeds from the sale of the Minimum
Offering, the Company shall instruct the Escrow Agent to remit to you the amount
of the commission to be paid to you pursuant to Section 7 of this Agreement.
7. Amount of Sales Commissions. Provided that the proceeds from the
sale of the Minimum Offering are received by the Company, the Company shall pay
you a sales commission in an amount equal to 8% percent of the cash proceeds to
the Company of the purchase price of each Share sold by you (the "Commission").
The Company also agrees to pay to you a non-accountable expense allowance equal
to 2% of the aggregate principal amount of the Shares sold by you (the
"Nonaccountable Expense Allowance"). In the event that the Offering is
terminated for any reason, the Company shall pay you for any reasonable
accountable expenses you have incurred. In addition to the Commission and the
Nonaccountable Expense Allowance, you shall be entitled to receive (the
"Selected Dealer Warrants") for the purchase of an amount of shares of Common
Stock of the Company equal to 10% of the number of Shares actually sold by you
in the public offering. The Selected Dealer Warrants shall be issued in the form
set forth in the Selected Dealer Warrant included in the Registration Statement.
The Selected Dealer Warrants shall be exercisable, in whole or in part, for a
period of four years commencing one year from the date of the completion of the
Offering at an exercise price of $7.50 per share. The Selected Dealer Warrants
shall be non-exercisable for one year from the effective date of the Offering,
and non-transferable for one year (whether by sale, transfer, assignment, or
hypothecation) except for (i) transfers to officers of the broker/dealer who are
also shareholders of the broker/dealer; and (ii) transfers occurring by
operation of law.
8. Relationship of Selected Dealers and the Underwriter. You represent
that you are a member in good standing of the NASD. You are not authorized to,
and you agree not to, give any information or to make any representations other
than as contained in the Prospectus, or to act as agent or sub-agent for the
Underwriter. Nothing herein shall constitute the Selected Dealer as an
association, unincorporated business, or other separate entity of or partners
with the Underwriter, or with each other, but you shall be liable for the
Underwriter's share of any tax, liability, or expense based on any claim to the
contrary. The Underwriter shall not be under any liability to you, except for
obligations expressly assumed by the Underwriter in this Agreement; however, no
obligations on the Underwriter's part shall be implied or inferred herefrom.
9. Effectiveness of Agreement. This Agreement will become effective as
of the date first set forth above.
10. Termination of Agreement. This Agreement may be terminated by
notice hereunder at any time by the Underwriter or the Company, with or without
cause. If not terminated sooner, this Agreement shall terminate concurrently
with the Termination of the Offering. Upon any termination you shall continue to
have the right to receive compensation hereunder for Shares sold by you, for
which you have not yet been compensated.
11. Indemnification and Contribution.
<PAGE>
(a) You hereby indemnify and hold harmless the Company and
each person who controls the Company within the meaning of Section 15 of the Act
against any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and counsel fees) caused by (i) any breach by
you of the representations, warranties or covenants by you contained in or made
pursuant to this Agreement, (ii) the failure by you to give, deliver or send a
copy of the Prospectus as appropriate to any person to whom the Shares are
offered or sold or to offer or sell the Shares in accordance with the provisions
of and applicable rules, regulations and published administrative
interpretations under the Act and the securities or blue sky laws of any
jurisdiction in which the Shares are offered or sold by or through you, (iii)
any unauthorized representations made by you or (iv) any unauthorized conduct
which adversely affects the availability of exemption from registration under
the Act or the rules and regulations thereunder or any provisions of the
securities laws of any jurisdiction.
(b) The Company hereby indemnifies and holds harmless each
person who controls you (within the meaning of Section 15 of the Act) against
any and all losses, claims, damages, liabilities and expenses (including
reasonable costs of investigation and counsel fees) caused by (i) any breach by
the Company of the representations, warranties or covenants by the Company
contained in or made pursuant to this Agreement, (ii) any untrue statement of a
material fact contained in the Prospectus, Registration Statement, or in any
amendment or supplement thereto or (iii) any omission to state in the
Prospectus, Registration Statement or in any amendment or supplement thereto any
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they are made, not
misleading; provided, however, that the Company shall not be responsible for,
nor does the Company indemnify or hold harmless you or your controlling persons
against any losses, claims, damages, liabilities or expenses arising out of or
resulting from the offer or sale of the Shares to any person who was not given,
delivered or sent a copy of the Prospectus as appropriate, or the failure by you
to offer and sell the Shares in accordance with the provisions of and applicable
rules, regulations and published administrative interpretations under the Act
and rules thereunder and the securities or blue sky laws of any jurisdiction in
which the Shares are offered or sold by or through you.
(c) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against the indemnifying party
under this Section, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under this Section. In case any such action is brought against any indemnified
party, and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in and, to the extent that it
may wish, jointly with any other indemnifying party, similarly notified, to
assume the defense thereof, with counsel satisfactory to such indemnified party,
under joint control thereof over the defense in conjunction with the indemnified
party and after notice from the indemnifying party to such indemnified party, of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation and the indemnified
party may, but shall not be obligated to, participate in the defense of its own
expense with its own counsel.
12. Representations and Indemnities to Survive Delivery. The
indemnities, agreements, representations, warranties, and other statements by
you set forth in or made in writing pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
the Company, or any controlling person and will survive delivery of and payment
for the Shares, and the Company, or any controlling person, as the case may be,
shall be entitled to the benefit of the indemnity agreements.
13. Governing Law. This Agreement will be governed by and construed in
accordance with the laws of the State of California.
14. Notices. All communications hereunder will be in writing sent by
certified, first class mail, return receipt requested each party at the address
set forth below. Notices will be effective only when received or when first
attempted to be delivered by the mails. Addresses for notice may be changed by
notice to the other parties hereunder.
<PAGE>
15. Modifications and Waivers. No modification or waiver of any term
hereof shall be effective unless in writing, signed by the party to be charged.
16. Multiple Counterparts. This Agreement is made, and may be executed,
in multiple counterparts, each of which shall constitute an original hereof.
17. Assignability. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective heirs and successors but
shall not be assignable by a party without the prior written consent of the
other party.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
it will become a binding agreement between us in accordance with its terms.
Very truly yours,
BROOKSTREET SECURITIES CORPORATION
----------------------------------
BY: Stanley C. Brooks
ITS: President
SELECTED DEALER
------------------------------------
(Name of Selected Dealer)
------------------------------------
(Signature)
By:_________________________________
Its: _______________________________
------------------------------------
------------------------------------
(Selected Dealer Address)
Tax I.D. No.:_______________________
List states that Selected Dealer is
authorized to conduct business:
------------------------------------
------------------------------------
------------------------------------
ARTICLES OF INCORPORATION
OF
BETA OIL & GAS, INC.
FIRST. The name of this corporation is BETA OIL & GAS, INC.
SECOND. Its resident agent and registered office in the State of
Nevada is as follows: PARACORP at 318 N. Carson Street, Suite 208, Carson City,
Nevada 89701.
THIRD. The total number of shares which the corporation is authorized
to issue is Ten Million (10,000,000) shares of common stock with a par value
of $.001 per share.
FOURTH. The governing body of this corporation shall be known as
directors, and the number of directors may from time to time be increased
or decreased in such manner as shall be provided by the bylaws of the
corporation.
The name and addresse of the first board of directors, which shall
consist of one director, is as follows:
Joe C. Richardson, Jr.
318 N. Carson Street, Suite 208
Carson City, NV 89701
FIFTH. The name and address of the incorporator signing the Articles of
Incorporation is as follows:
Malea Farsai, Esq.
HORWITZ & BEAM
Two Venture Plaza, Suite 380
Irvine, California 92618
SIXTH. At all elections of directors of the corporation, each holder of
stock possessing voting power is entitled to as many votes as equal the
number of shares multiplied by the number of directors to be elected, and he
may cast all of his votes for a single director or may distribute them among
the number to be voted for or any two or more of them, as he may see fit.
SEVENTH. No director or officer of the corporation shall be personally
liable to the corporation or any of its stockholders for damages for breach
of fiduciary duty as a director or officer involving any act or omission of
any such director or officer; provided, however, that the foregoing provision
shall not eliminate or limit the liability of a director or officer (i) for
acts or omissions which involve intentional misconduct, fraud or a knowing
violation of law, or (ii) the payment of dividends in violation of Section
78.300 of the Nevada Revised Statues. Any repeal or modification of this
Article by the stockholders of the corporation shall be prospective only,
and shall not adversely affect any limitation on the personal liability
of a director or officer of the corporation for acts or omissions prior
to such repeal or modification.
I, THE UNDERSIGNED, being the incorporator hereinbefore named, for the
purpose of forming a corporation pursuant to the General Corporation Law of
the State of Nevada, do make and file these Articles of Incorporation,
hereby declaring and certifying that the facts herein stated are true, and
accordingly have hereunto set my hand this day of June, 1997.
/s/ Malea Farsai, Incorporator
STATE OF CALIFORNIA )
) SS.
COUNTY OF ORANGE )
On this day of June, 1997 before me, the undersigned Notary Public,
personally appeared Malea Farsai, personally known to me (or prove to me on the
basis of satisfactory evidence) to be the person whose name is subscribed to
the within Instrument and acknowledged to me that she executed the same in
her authorized capacity, and that by his signature on the instrument the
person, or the entity upon behalf of which the person acted, executed the
instrument.
WITNESS my hand and official seal.
Notary Public
<PAGE>
CERTIFICATE OF ACCEPTANCE OF APPOINTMENT
BY RESIDENT AGENT
The undersigned, , hereby accepts the appointment as Resident Agent of
the above named corporation.
Resident Agent
Dated: By:
Name:
CERTIFICATE OF AMENDMENT OF ARTICLES OF INCORPORATION
FOR
BETA OIL & GAS, INC.
a Nevada corporation
Steve Antry and Lisa Antry each hereby certify that:
1. He is the President and Secretary, respectively, of Beta Oil & Gas,
Inc., a Nevada corporation.
2. Article Three of the Articles of Incorporation of this Corporation
are amended and restated in its entirety to read as follows:
THIRD. The total number of shares which the corporation is authorized
to issue is Fifty Million (50,000,000) shares of common stock with a par
value of $.001 per share.
3. Except as expressly amended by the foregoing Amendment, the Articles
of Incorporation of this Corporation remain in full force and effect.
4. The foregoing Amendment of the Articles of Incorporation has been
duly approved by the board of directors.
5. The foregoing Amendment of the Articles of Incorporation has been
duly approved by the required vote of shareholders in accordance with
Section 78.390 of the Nevada Revised Statutes.
The undersigned further declare under the penalty of perjury under the
laws of the State of Nevada that the matters set forth in this certificate
are true and correct of their own knowledge.
Dated: March __, 1998
/s/ Steve Antry, President
/s/ Lisa Antry, Secretary
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF ____________)
On this _____ day of , 1998, before me, the undersigned Notary Public,
personally appeared , personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within Instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
-------------------------------
Notary Public
(Seal)
STATE OF CALIFORNIA )
) ss.
COUNTY OF ____________)
On this _____ day of , 1998, before me, the undersigned Notary Public,
personally appeared , personally known to me (or proved to me on the basis
of satisfactory evidence) to be the person(s) whose name(s) is/are
subscribed to the within Instrument and acknowledged to me that he/she/they
executed the same in his/her/their authorized capacity(ies), and that by
his/her/their signature(s) on the instrument the person(s), or the entity upon
behalf of which the person(s) acted, executed the instrument.
WITNESS my hand and official seal.
-------------------------------
Notary Public
(Seal)
This document replaces Exhibit 3.2 previously filed.
<PAGE>
AMENDED AND RESTATED BYLAWS
OF
BETA OIL & GAS, INC.
a Nevada corporation
ARTICLE I
OFFICES
Section 1. Principal Office. The principal office for the transaction
of business of the Corporation is hereby fixed and located at 901 Dove Street,
Suite 230, Newport Beach, CA 92660. The location may be changed by approval of a
majority of the authorized directors, and additional offices may be established
and maintained at such other place or places, either within or outside of
Nevada, as the Board of Directors may from time to time designate.
Section 2. Other Offices. Branch or subordinate offices may at any
time be established by the Board of Directors at any place or places where
the Corporation is qualified to do business.
ARTICLE II
DIRECTORS - MANAGEMENT
Section 1. Powers, Standard of Care.
1.1 Powers: Subject to the provisions of the Nevada Revised
Statutes (hereinafter the "Code"), and subject to any limitations in the
Articles of Incorporation of the Corporation relating to action required to be
approved by the Stockholders, as that term is defined in the Code, or by the
outstanding shares, as that term is defined Code, the business and affairs of
the Corporation shall be managed and all corporate powers shall be exercised by
or under the direction of the Board of Directors. The Board of Directors may
delegate the management of the day-to-day operation of the business of the
Corporation to a management company or other persons, provided that the business
and affairs of the Corporation shall be managed, and all corporate powers shall
be exercised, under the ultimate direction of the Board.
1.2 Standard of Care; Liability:
1.2.1Each Director shall exercise such powers and otherwise
perform such duties, in good faith, in the matters such Director
believes to be in the best interests of the Corporation, and with such
care, including reasonable inquiry, using ordinary prudence, as a
person in a like position would use under similar circumstances.
1.2.2 In performing the duties of a Director, a Director shall be
entitled to rely on information, opinions, reports, or statements,
including financial statements and other financial data, in which case
prepared or presented by:
<PAGE>
1.3.1 One or more officers or employees of the Corporation whom
the Director believes to be reliable and competent in the matters
presented,
1.3.2 Counsel, independent accountants or other persons as to
which the Director believes to be within such person's professional or
expert competence, or
1.3.3 A Committee of the Board upon which the Director does not
serve, as to matters within its designated authority, which committee
the Director believes to merit confidence, so long as in any such case
the Director acts in good faith, after reasonable inquiry when the
need therefor is indicated by the circumstances and without knowledge
that would cause such reliance to be unwarranted.
Section 2. Number and Qualification of Directors. The authorized number
of Directors of the Corporation shall be not less than one (1) nor more than six
(6) until changed by a duly adopted amendment to the Articles of Incorporation
or by an amendment to this Section 2 of Article II of these Bylaws or, without
amendment of these Bylaws, the number of directors may be fixed or changed by
resolution adopted by the vote of the majority of directors in office or by the
vote of holders of shares representing a majority of the voting power at any
annual meeting, or any special meeting called for such purpose; but no reduction
of the number of directors shall have the effect of removing any director prior
to the expiration of his term. The number of Directors shall not be less than
two (2) unless all of the outstanding shares of stock are owned beneficially and
of record by less than two (22) stockholders, in which event the number of
Directors shall not be less than the number of stockholders or the minimum
permitted by statute.
Section 3. Election and Term of Office of Directors.
3.1 Directors shall be elected at each annual meeting of the
Stockholders to hold office until the next annual meeting. If any such annual
meeting of Stockholders is not held or the Directors are not elected thereat,
the Directors may be elected at any special meeting of Stockholders held for
that purpose. Each Director, including a Director elected to fill a vacancy,
shall hold office until the expiration of the term for which elected and until a
successor has been elected and qualified.
3.2 Except as may otherwise be provided herein, or in the
Articles of Incorporation by way of cumulative voting rights, the members of the
Board of Directors of this Corporation, who need not be stockholders, shall be
elected by a majority of the votes cast at a meeting of stockholders, by the
holders of shares of stock present in person or by proxy, entitled to vote in
the election.
Section 4. Vacancies.
4.1 Vacancies on the Board of Directors, except for a vacancy
created by the removal of a Director, may be filled by a majority of the
remaining Directors, though less than a quorum, or by a sole remaining Director.
Each Director so elected shall hold office until the next annual meeting of the
Stockholders and until a successor has been elected and qualified. A vacancy in
the Board of Directors created by the removal of a Director may only be filled
by the vote of a majority of the shares entitled to vote represented at a duly
held meeting at which a quorum is present, or by the written consent of the
holders of a majority of the outstanding shares.
<PAGE>
4.2 A vacancy or vacancies on the Board of Directors shall be
deemed to exist in the event of the death, resignation or removal of any
Director, or if the Board of Directors by resolution declares vacant the office
of a Director who has been declared of unsound mind by an order of court or
convicted of a felony.
4.3 The Stockholders may elect a Director or Directors at any
time to fill any vacancy or vacancies, but any such election by written consent
shall require the consent of a majority of the outstanding shares entitled to
vote.
4.4 Any Director may resign, effective on giving written
notice to the Chairman of the Board, the President, the Secretary, or the Board
of Directors, unless the notice specifies a later time for that resignation to
become effective.
4.5 No reduction of the authorized number of Directors shall
have the effect of removing any Director before that Director's term of office
expires.
Section 5. Removal of Directors.
5.1 The entire Board of Directors, or any individual Director,
may be removed from office as provided by Section 78.335 of the Code at any
special meeting of stockholders called for such purpose by vote of the holders
of two-thirds of the voting power entitling them to elect directors in place of
those to be removed, subject to the provisions of Section 5.2.
5.2 No Director may be removed (unless the entire Board is
removed) when the votes cast against removal or not consenting in writing to
such removal would be sufficient to elect such Director if voted cumulatively at
an election at which the same total number of votes were cast (or, if such
action is taken by written consent, all shares entitled to vote, were voted) and
the entire number of Directors authorized at the time of the Directors most
recent election were then being elected; and when by the provisions of the
Articles of Incorporation the holders of the shares of any class or series
voting as a class or series are entitled to elect one or more Directors, any
Director so elected may be removed only by the applicable vote of the holders of
the shares of that class or series.
Section 6. Place of Meetings. Regular meetings of the Board of
Directors shall be held at any place within or outside the state that has been
designated from time to time by resolution of the Board. In the absence of such
resolution, regular meetings shall be held at the principal executive office of
the Corporation. Special meetings of the Board shall be held at any place within
or outside the state that has been designated in the notice of the meeting, or,
if not stated in the notice or there is no notice, at the principal executive
office of the Corporation. Any meeting, regular or special, may be held by
conference telephone or similar communication equipment pursuant to Section
78.320 of the Code, so long as all Directors participating in such meeting can
hear one another, and all such Directors shall be deemed to have been present in
person at such meeting.
<PAGE>
Section 7. Annual Meetings. Immediately following each annual meeting
of Stockholders, the Board of Directors shall hold a regular meeting for the
purpose of organization, the election of officers and the transaction of other
business. Notice of this meeting shall not be required. Minutes of any meeting
of the Board, or any committee thereof, shall be maintained as required by the
Code by the Secretary or other officer designated for that purpose.
Section 8. Other Regular Meetings.
8.1 Other regular meetings of the Board of Directors shall be
held without call at such time as shall from time to time be fixed by the Board
of Directors. Such regular meetings may be held without notice, provided the
time and place of such meetings has been fixed by the Board of Directors, and
further provided the notice of any change in the time of such meeting shall be
given to all the Directors. Notice of a change in the determination of the time
shall be given to each Director in the same manner as notice for such special
meetings of the Board of Directors.
8.2 If said day falls upon a holiday, such meetings shall be held
on the next succeeding day thereafter.
Section 9. Special Meetings/Notices.
9.1 Special meetings of the Board of Directors for any purpose
or purposes may be called at any time by the Chairman of the Board or the
President or any Vice President or the Secretary or any two Directors.
9.2 Notice of the time and place for special meetings shall be
delivered personally or by telephone to each Director or sent by first class
mail or telegram, charges prepaid, addressed to each Director at his or her
address as it is shown in the records of the Corporation. In case such notice is
mailed, it shall be deposited in the United States mail at least four days prior
to the time of holding the meeting. In case such notice is delivered personally,
or by telephone or telegram, it shall be delivered personally or be telephone or
to the telegram company at least 48 hours prior to the time of the holding of
the meeting. Any oral notice given personally or by telephone may be
communicated to either the Director or to a person at the office of the Director
who the person giving the notice has reason to believe will promptly communicate
same to the Director. The notice need not specify the purpose of the meeting,
nor the place, if the meeting is to be held at the principal executive office of
the Corporation.
Section 10. Waiver of Notice.
10.1 The transactions of any meeting of the Board of
Directors, however called, noticed, or wherever held, shall be as valid as
though had at a meeting duly held after the regular call and notice if a quorum
is present and if, either before or after the meeting, each of the Directors not
present signs a written waiver of notice, a consent to holding the meeting or an
approval of the minutes thereof. Waivers of notice or consent need not specify
the purposes of the meeting. All such waivers, consents and approvals shall be
filed with the corporate records or made part of the minutes of the meeting.
10.2 Notice of a meeting shall also be deemed given to any
Director who attends the meeting without protesting, prior thereto or at its
commencement, the lack of notice to such Director.
<PAGE>
Section 11. Quorums. A majority of the authorized number of Directors
shall constitute a quorum for the transaction of business, except to adjourn as
provided in Section 12 of this Article II. Every act or decision done or made by
a majority of the Directors present at a meeting duly held at which a quorum was
present shall be regarded as the act of the Board of Directors, unless a greater
number is required by law or the Articles of Incorporation. A meeting at which a
quorum is initially present may continue to transact business notwithstanding
the withdrawal of Directors, if any action taken is approved by at least a
majority of the required quorum for that meeting.
Section 12. Adjournment. A majority of the directors present,
whether or not constituting a quorum, may adjourn any meeting to
another time and place.
Section 13. Notice of Adjournment. Notice of the time and place of the
holding of an adjourned meeting need not be given, unless the meeting is
adjourned for more than 24 hours, in which case notice of such time and place
shall be given prior to the time of the adjourned meeting to the Directors who
were not present at the time of the adjournment.
Section 14. Sole Director Provided by Articles or Bylaws. In the event
only one Director is required by the Bylaws or the Articles of Incorporation,
then any reference herein to notices, waivers, consents, meetings or other
actions by a majority or quorum of the Board of Directors shall be deemed or
referred as such notice, waiver, etc., by the sole Director, who shall have all
rights and duties and shall be entitled to exercise all of the powers and shall
assume all the responsibilities otherwise herein described, as given to the
Board of Directors.
Section 15. Directors Action by Unanimous Written Consent. Pursuant to
Section 78.315 of the Code, any action required or permitted to be taken by the
Board of Directors may be taken without a meeting and with the same force and
effect as if taken by a unanimous vote of Directors, if authorized by a writing
signed individually or collectively by all members of the Board of Directors.
Such consent shall be filed with the regular minutes of the Board of Directors.
Section 16. Compensation of Directors. Directors, and members as such,
shall not receive any stated salary for their services, but by resolution of the
Board of Directors, a fixed sum and expense of attendance, if any, may be
allowed for attendance at each regular and special meeting of the Board of
Directors; provided, however, that nothing contained herein shall be construed
to preclude any Director from serving the Corporation in any other capacity as
an officer, employee or otherwise receiving compensation for such services.
Section 17. Committees. Committees of the Board of Directors may be
appointed by resolution passed by a majority of the whole Board. Committees
shall be composed of two or more members of the Board of Directors. The Board
may designate one or more Directors as alternate members of any committee, who
may replace any absent member at any meeting of the committee. Committees shall
have such powers as those held by the Board of Directors as may be expressly
delegated to it by resolution of the Board of Directors, except those powers
expressly made non-delegable by the Code.
<PAGE>
Section 18. Meetings and Action of Committees. Meetings and action of
committees shall be governed by, and held and taken in accordance with, the
provisions of Article II, Sections 6, 8, 9, 10, 11, 12, 13 and 15, with such
changes in the context of those Sections as are necessary to substitute the
committee and its members for the Board of Directors and its members, except
that the time of the regular meetings of the committees may be determined by
resolution of the Board of Directors as well as the committee, and special
meetings of committees may also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The Board of Directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these Bylaws.
Section 19. Advisory Directors. The Board of Directors from time to
time may elect one or more persons to be Advisory Directors, who shall not by
such appointment be members of the Board of Directors. Advisory Directors shall
be available from time to time to perform special assignments specified by the
President, to attend meetings of the Board of Directors upon invitation and to
furnish consultation to the Board of Directors. The period during which the
title shall be held may be prescribed by the Board of Directors. If no period is
prescribed, the title shall be held at the pleasure of the Board of Directors.
ARTICLE III
OFFICERS
Section 1. Officers. The principal officers of the Corporation shall be
a President, a Secretary, and a Treasurer. The Corporation may also have, at the
discretion of the Board of Directors, a Chairman of the Board, one or more Vice
Presidents, one or more Assistant Secretaries, one or more Assistant Treasurers,
and such other officers as may be appointed in accordance with the provisions of
Section 3 of this Article III. Any number of offices may be held by the same
person.
Section 2. Election of Officers. The principal officers of the
Corporation, except such officers as may be appointed in accordance with the
provisions of Section 3 or Section 5 of this Article, shall be chosen by the
Board of Directors, and each shall serve at the pleasure of the Board of
Directors, subject to the rights, if any, of an officer under any contract of
employment.
Section 3. Subordinate Officers, Etc. The Board of Directors may
appoint such other officers as the business of the Corporation may require, each
of whom shall hold office for such period, have such authority and perform such
duties as are provided in the Bylaws or as the Board of Directors may from time
to time determine.
Section 4. Removal and Resignation of Officers.
4.1 Subject to the rights, if any, of an officer under any
contract of employment, any officer may be removed, either with or without
cause, by a majority of the Directors at that time in office, at any regular or
special meeting of the Board of Directors, or, except in the case of an officer
chosen by the Board of Directors, by any officer upon whom such power of removal
may be conferred by the Board of Directors.
<PAGE>
4.2 Any officer may resign at any time by giving written
notice to the Board of Directors. Any resignation shall take effect on the date
of the receipt of that notice or at any later time specified in that notice;
and, unless otherwise specified in that notice, the acceptance of the
resignation shall not be necessary to make it effective. Any resignation is
without prejudice to the rights, if any, of the Corporation under any contract
to which the officer is a party.
Section 5. Vacancies. A in any office because of death,
resignation, removal, disqualification or any other cause shall be
filled in the manner prescribed in the Bylaws for regular appointments
to that office.
Section 6. Chairman of the Board.
6.1 The Chairman of the Board, if such an officer be elected,
shall, if present, preside at the meetings of the Board of Directors and
exercise and perform such other powers and duties as may, from time to time, be
assigned by the Board of Directors or prescribed by the Bylaws. If there is no
President, the Chairman of the Board shall, in addition, be the Chief Executive
Officer of the Corporation and shall have the powers and duties prescribed in
Section 7 of this Article III.
Section 7. President. Subject to such supervisory powers, if any, as
may be given by the Board of Directors to the Chairman of the Board, if there is
such an officer, the President shall be the Chief Executive Officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and officers of the
Corporation. The President shall preside at all meetings of the Stockholders
and, in the absence of the Chairman of the Board, or if there be none, at all
meetings of the Board of Directors. The President shall have the general powers
and duties of management usually vested in the office of President of a
corporation, shall be ex officio a member of all the standing committees,
including the Executive Committee, if any, and shall have such other powers and
duties as may be prescribed by the Board of Directors or the Bylaws.
Section 8. Vice President. In the absence or disability of the
President, the Vice Presidents, if any, in order of their rank as fixed by the
Board of Directors, or if not ranked, the Vice President designated by the Board
of Directors, shall perform all the duties of the President, and when so acting,
shall have all the powers of, and be subject to all the restrictions upon, the
President. The Vice Presidents shall have such other powers and perform such
other duties as from time to time may be prescribed for them, respectively, by
the Board of Directors or the Bylaws, the President, or the Chairman of the
Board.
Section 9. Secretary.
9.1 The Secretary shall keep, or cause to be kept, a book of
minutes of all meetings of the Board of Directors and Stockholders at the
principal office of the Corporation or such other place as the Board of
Directors may order. The minutes shall include the time and place of holding the
meeting, whether regular or special, and if a special meeting, how authorized,
the notice thereof given, and the names of those present at Directors' and
committee meetings, the number of shares present or represented at Stockholders'
meetings and the proceedings thereof.
<PAGE>
9.2 The Secretary shall keep, or cause to be kept, at the
principal office of the Corporation or at the office of the Corporation's
transfer agent, a share register, or duplicate share register, showing the names
of the Stockholders and their addresses; the number and classes or shares held
by each; the number and date of certificates issued for the same; and the number
and date of cancellation of every certificate surrendered for cancellation.
9.3 The Secretary shall give, or cause to be given, notice of
all the meetings of the Stockholders and of the Board of Directors required by
the Bylaws or by law to be given. The Secretary shall keep the seal of the
Corporation in safe custody, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 10. Treasurer.
10.1 The Treasurer shall keep and maintain, or cause to be
kept and maintained, in accordance with generally accepted accounting
principles, adequate and correct accounts of the properties and business
transactions of the Corporation, including accounts of its assets, liabilities,
receipts, disbursements, gains, losses, capital, earnings (or surplus) and
shares issued. The books of account shall, at all reasonable times, be open to
inspection by any Director.
10.2 The Treasurer shall deposit all monies and other
valuables in the name and to the credit of the Corporation with such
depositaries as may be designated by the Board of Directors. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, shall render to the President and Directors, whenever they request
it, an account of all of the transactions of the Treasurer and of the financial
condition of the Corporation, and shall have such other powers and perform such
other duties as may be prescribed by the Board of Directors or the Bylaws.
ARTICLE IV
STOCKHOLDERS' MEETINGS
Section 1. Place of Meetings. Meetings of the Stockholders shall be
held at any place within or outside the state of Nevada designated by the Board
of Directors. In the absence of any such designation, Stockholders' meetings
shall be held at the principal executive office of the Corporation.
Section 2. Annual Meeting.
2.1. The annual meeting of the Shareholders shall be held,
each year, as follows:
Time of Meeting: 10:00 A.M.
Date of Meeting: May 15
2.2 If this day shall be a legal holiday, then the meeting
shall be held on the next succeeding business day, at the same time. At the
annual meeting, the Shareholders shall elect a Board of Directors, consider
reports of the affairs of the Corporation and transact such other business as
may be properly brought before the meeting.
2.3 If the above date is inconvenient, the annual meeting of
Shareholders shall be held each year on a date and at a time designated by the
Board of Directors upon proper notice to all Shareholders.
<PAGE>
Section 3. Special Meetings.
3.1 Special meetings of the Stockholders for any purpose or
purposes whatsoever, may be called at any time by the Board of Directors, the
Chairman of the Board, the President, or by one or more Stockholders holding
shares in the aggregate entitled to cast not less than 10% of the votes at any
such meeting. Except as provided in paragraph B below of this Section 3, notice
shall be given as for the annual meeting.
3.2 If a special meeting is called by any person or persons
other than the Board of Directors, the request shall be in writing, specifying
the time of such meeting and the general nature of the business proposed to be
transacted, and shall be delivered personally or sent by registered mail or by
telegraphic or other facsimile transmission to the Chairman of the Board, the
President, any Vice President or the Secretary of the Corporation. The officer
receiving such request shall forthwith cause notice to be given to the
Stockholders entitled to vote, in accordance with the provisions of Sections 4
and 5 of this Article, that a meeting will be held at the time requested by the
person or persons calling the meeting, not less than 35 nor more than 60 days
after the receipt of the request. If the notice is not given within 20 days
after receipt of the request, the person or persons requesting the meeting may
give the notice in the manner provided in these Bylaws or upon application to
the Superior Court. Nothing contained in this paragraph of this Section shall be
construed as limiting, fixing or affecting the time when a meeting of
Stockholders called by action of the Board of Directors may be held.
Section 4. Notice of Meetings - Reports.
4.1 Notice of any Stockholders meetings, annual or special,
shall be given in writing not less than 10 days nor more than 60 days before the
date of the meeting to Stockholders entitled to vote thereat by the Secretary or
the Assistant Secretary, or if there be no such officer, or in the case of said
Secretary or Assistant Secretary's neglect or refusal, by any Director or
Stockholder.
4.2 Such notices or any reports shall be given personally or
by mail or other means of written communication as provided in the Code and
shall be sent to the Stockholder's address appearing on the books of the
Corporation, or supplied by the Stockholder to the Corporation for the purpose
of notice, and in the absence thereof, as provided in the Code by posting notice
at a place where the principal executive office of the Corporation is located or
by publication at least once in a newspaper of general circulation in the county
in which the principal executive office is located.
4.3 Notice of any meeting of Stockholders shall specify the
place, the day and the hour of meeting, and (i) in case of a special meeting,
the general nature of the business to be transacted and that no other business
may be transacted, or (ii) in the case of an annual meeting, those matters which
the Board of Directors, at the date of mailing of notice, intends to present for
action by the Stockholders. At any meetings where Directors are elected, notice
shall include the names of the nominees, if any, intended at the date of notice
to be presented for election.
<PAGE>
4.4 Notice shall be deemed given at the time it is delivered
personally or deposited in the mail or sent by other means of written
communication. The officer giving such notice or report shall prepare and file
in the minute book of the Corporation an affidavit or declaration thereof.
4.5 If action is proposed to be taken at any meeting for
approval of (i) contracts or transactions in which a Director has a direct or
indirect financial interest, pursuant to the Code, (ii) an amendment to the
Articles of Incorporation, pursuant to the Code, (iii) a reorganization of the
Corporation, pursuant to the Code, (iv) dissolution of the Corporation, pursuant
to the Code, or (v) a distribution to preferred Stockholders, pursuant to the
Code, the notice shall also state the general nature of such proposal.
Section 5. Quorum.
5.1 The holders of a majority of the shares entitled to vote
at a Stockholders' meeting, present in person, or represented by proxy, shall
constitute a quorum at all meetings of the Stockholders for the transaction of
business except as otherwise provided by the Code or by these Bylaws.
5.2 The Stockholders present at a duly called or held meeting
at which a quorum is present may continue to transact business until
adjournment, notwithstanding the withdrawal of enough Stockholders to leave less
than a quorum, if any action taken (other than adjournment) is approved by a
majority of the shares required to constitute a quorum.
Section 6. Adjourned Meeting and Notice Thereof.
6.1 Any Stockholders' meeting, annual or special, whether or
not a quorum is present, may be adjourned from time to time by the vote of the
majority of the shares represented at such meeting, either in person or by
proxy, but in the absence of a quorum, no other business may be transacted at
such meeting.
6.2 When any meeting of Stockholders, either annual or
special, is adjourned to another time or place, notice need not be given of the
adjourned meeting if the time and place thereof are announced at a meeting at
which the adjournment is taken, unless a new record date for the adjourned
meeting is fixed, or unless the adjournment is for more than 45 days from the
date set for the original meeting, in which case the Board of Directors shall
set a new record date. Notice of any adjourned meeting shall be given to each
Stockholder of record entitled to vote at the adjourned meeting in accordance
with the provisions of Section 4 of this Article. At any adjourned meeting, the
Corporation may transact any business which might have been transacted at the
original meeting.
Section 7. Waiver or Consent by Absent Stockholders.
7.1 The transactions of any meeting of Stockholders, either
annual or special, however called and noticed, shall be valid as though had at a
meeting duly held after regular call and notice, if a quorum be present either
in person or by proxy, and if, either before or after the meeting, each of the
Stockholders entitled to vote, not present in person or by proxy, sign a written
waiver of notice, or a consent to the holding of such meeting or an approval of
the minutes thereof.
<PAGE>
7.2 The waiver of notice or consent need not specify either
the business to be transacted or the purpose of any regular or special meeting
of Stockholders, except that if action is taken or proposed to be taken for
approval of any of those matters specified in Section E of Section 4 of this
Article, the waiver of notice or consent shall state the general nature of such
proposal. All such waivers, consents or approvals shall be filed with the
corporate records or made a part of the minutes of the meeting.
7.3 Attendance of a person at a meeting shall also constitute
a waiver of notice of such meeting, except when the person objects, at the
beginning of the meeting, to the transaction of any business because the meeting
is not lawfully called or convened, and except that attendance at a meeting is
not a waiver of any right to object to the consideration of matters not included
in the notice of such meeting.
ARTICLE V
AMENDMENTS TO BYLAWS
Section 1. Amendment by Stockholders.
All Bylaws of the Corporation shall be subject to alteration
or repeal, and new Bylaws may be made by the affirmative vote of stockholders
holding of record in the aggregate at least a majority of the outstanding shares
of stock entitled to vote in the election of directors at any annual or special
meeting of stockholders, provided that the notice or waiver of notice of such
meeting shall have summarized or set forth in full therein, the proposed
amendment.
Section 2. Amendment by Directors.
The Board of Directors shall have power to make, adopt, alter,
amend and repeal, from time to time, Bylaws of the Corporation, provided,
however, that the stockholders entitled to vote with respect thereto as in this
Article V above-provided may alter, amend or repeal Bylaws made by the Board of
Directors, except that the Board of Directors shall have no power to change the
quorum for meetings of stockholders or of the Board of Directors or to change
any provisions of the Bylaws with respect to the removal of directors or the
filling of vacancies in the Board resulting from the removal by the
stockholders. If any bylaw regulating an impending election of directors is
adopted, amended or repealed by the Board of Directors, there shall be set forth
in the notice of the next meeting of stockholders for the election of directors,
the Bylaws so adopted, amended or repealed, together with a concise statement of
the changes made.
Section 3. Record of Amendments.
Whenever an amendment or new Bylaw is adopted, it shall be
copies in the corporate book of Bylaws with the original Bylaws, in the
appropriate place. If any Bylaw is repealed, the fact of repeal with the date of
the meeting at which the repeal was enacted or written assent was filed shall be
stated in the corporate book of Bylaws.
<PAGE>
ARTICLE VI
SHARES OF STOCK
Section 1. Certificate of Stock.
1.1 The certificates representing shares of the Corporation's
stock shall be in such form as shall be adopted by the Board of Directors, and
shall be numbered and registered in the order issued. The certificates shall
bear the following: the Corporate Seal, the holder's name, the number of shares
of stock and the signatures of: (1) the Chairman of the Board, the President or
a Vice President and (2) the Secretary, Treasurer, any Assistant Secretary or
Assistant Treasurer.
1.2 No certificate representing shares of stock shall be
issued until the full amount of consideration therefore has been paid, except as
otherwise permitted by law.
1.3 To the extent permitted by law, the Board of Directors may
authorize the issuance of certificates for fractions of a share of stock which
shall entitle the holder to exercise voting rights, receive dividends and
participate in liquidating distributions, in proportion to the fractional
holdings; or it may authorize the payment in cash of the fair value of fractions
of a share of stock as of the time when those entitled to receive such fractions
are determined; or its may authorize the issuance, subject to such conditions as
may be permitted by law, of scrip in registered or bearer form over the
signature of an officer or agent of the corporation, exchangeable as therein
provided for full shares of stock, but such scrip shall not entitle the holder
to any rights of a stockholder, except as therein provided.
Section 2. Lost or Destroyed Certificates.
The holder of any certificate representing shares of stock of
the Corporation shall immediately notify the Corporation of any loss or
destruction of the certificate representing the same. The Corporation may issue
a new certificate in the place of any certificate theretofore issued by it,
alleged to have been lost or destroyed. On production of such evidence of loss
or destruction as the Board of Directors in its discretion may require, the
Board of Directors may, in its discretion, require the owner of the lost or
destroyed certificate, or his legal representatives, to give the Corporation a
bond in such sum as the Board may direct, and with such surety or sureties as
may be satisfactory to the Board, to indemnify the Corporation against any
claims, loss, liability or damage it may suffer on account of the issuance of
the new certificate. A new certificate may be issued without requiring any such
evidence or bond when, in the judgment of the Board of directors, it is proper
to do so.
Section 3. Transfer of Shares.
3.1 Transfer of shares of stock of the Corporation shall be
made on the stock ledger of the Corporation only by the holder of record
thereof, in person or by his duly authorized attorney, upon surrender for
cancellation of the certificate or certificates representing such shares of
stock with an assignment or power of transfer endorsed thereon or delivered
therewith, duly executed, with such proof of the authenticity of the signature
and of authority to transfer and of payment of taxes as the Corporation or its
agents may require.
<PAGE>
3.2 The Corporation shall be entitled to treat the holder of
record of any share or shares of stock as the absolute owner thereof for all
purposes and , accordingly, shall not be bound to recognize any legal, equitable
or other claim to, or interest in, such share or shares of stock on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise expressly provided by law.
Section 4. Record Date.
In lieu of closing the stock ledger of the Corporation, the
Board of Directors may fix, in advance, a date not exceeding sixty (60) days,
nor less than ten (10) days, as the record date for the determination of
stockholders entitled to receive notice of, or to vote at, any meeting of
stockholders, or to consent to any proposal without a meeting, or for the
purpose of determining stockholders entitled to receive payment of any dividends
or allotment of any rights, or for the purpose of any other action. If no record
date is fixed, the record date for the determination of stockholders entitled to
notice of, or to vote at, a meeting of stockholders shall be at the close of
business on the day next preceding the day on which the notice is given, or, if
no notice is given, the day preceding the day on which the meeting is held. The
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the resolution of the directors relating
thereto is adopted. When a determination of stockholders of record entitled to
notice of, or to vote at, any meeting of stockholders has been made, as provided
for herein, such determination shall apply to any adjournment thereof, unless
the directors fix a new record date for the adjourned meeting.
ARTICLE VII
DIVIDENDS
Subject to applicable law, dividends may be declared and paid out of
any funds available therefor, as often, in such amount, and at such time or
times as the Board of Directors may determine.
ARTICLE VIII
FISCAL YEAR
The fiscal year of the Corporation shall be December 31, and may be
changed by the Board of Directors from time to time subject to applicable law.
ARTICLE IX
CORPORATE SEAL
The corporate seal shall be circular in form, and shall have inscribed
thereon the name of the Corporation, the date of its incorporation, and the word
"Nevada" to indicate the Corporation was incorporated pursuant to the laws of
the State of Nevada.
<PAGE>
ARTICLE X
INDEMNITY
Section 1. Any person made a party to any action, suit or proceeding,
by reason of the fact that he, his testator or interstate representative is or
was a director, officer or employee of the Corporation or of any corporation in
which he served as such at the request of the Corporation, shall be indemnified
by the Corporation against the reasonable expenses, including attorneys' fees,
actual and necessarily incurred by him in connection with the defense of such
action, suit or proceedings, or in connection with any appeal therein, except in
relation to matters as to which it shall be adjudged in such action, suit or
proceeding or in connection with any appeal therein that such officer, director
or employee is liable for gross negligence or misconduct in the performance of
his duties.
Section 2. The foregoing right of indemnification shall not be deemed
exclusive of any other rights to which any officer or director or employee may
be entitled apart from the provisions of this section.
Section 3. The amount of indemnity to which any officer or any director
may be entitled shall be fixed by the Board of Directors, except that in any
case in which there is no disinterested majority of the Board available, the
amount shall be fixed by arbitration pursuant to the then existing rules of the
American Arbitration Association.
ARTICLE XI
MISCELLANEOUS
Section 1. Stockholders' Agreements. Notwithstanding anything contained
in this Article XI to the contrary, in the event the Corporation elects to
become a close corporation, an agreement between two or more Stockholders
thereof, if in writing and signed by the parties thereto, may provide that in
exercising any voting rights, the shares held by them shall be voted as provided
therein, and may otherwise modify the provisions contained in Article IV, herein
as to Stockholders' meetings and actions.
Section 2. Subsidiary Corporations. Shares of the Corporation owned by
a subsidiary shall not be entitled to vote on any matter. For the purpose of
this Section, a subsidiary of the Corporation is defined as another corporation
of which shares thereof possessing more than 25% of the voting power are owned
directly or indirectly through one or more other corporations of which the
Corporation owns, directly or indirectly, more than 50% of the voting power.
ARTICLE XII
SHAREHOLDER APPROVAL
Section 1. The Company needs to obtain shareholder approval of a plan
or arrangement under subparagraph 1.1 below, or prior to the issuance of
designated securities under subparagraph 1.2, 1.3, or 1.4 below:
<PAGE>
1.1 when a stock option or purchase plan is to be established
or other arrangement made pursuant to which stock may be acquired by officers or
directors, except for warrants or rights issued generally to security holders of
the company or broadly based plans or arrangements including other employees
(e.g., ESOPs). In the case where shares are issued to a person not previously
employed by the company, as an inducement essential to the individual's entering
into an employment contract with the company, shareholder approval will
generally not be required. The establishment of a plan or arrangement under
which the amount of securities which may be issued does not exceed the lesser of
1 percent of the number of shares of common stock, 1 percent of the voting power
outstanding, or 25,000 shares will not generally require shareholder approval;
1.2 when the issuance will result in a change of control of the
issuer;
1.3 in connection with the acquisition of the stock or assets of
another company if:
a. any director, officer, or substantial shareholder of the
issuer has a 5 percent or greater interest (or such persons
collectively have a 10 percent or greater interest), directly or
indirectly, in the company or assets to be acquired or in the
consideration to be paid in the transaction or series of related
transactions and the present or potential issuance of common stock, or
securities convertible into or exercisable for common stock, could
result in an increase in outstanding common shares or voting power of
5 percent or more; or
b. where, due to the present or potential issuance of common
stock, or securities convertible into or exercisable for common stock,
other than a public offering for cash:
1. the common stock has or will have upon issuance voting power
equal to or in excess of 20 percent of the voting power outstanding
before the issuance of stock or securities convertible into or
exercisable for common stock; or
2. the number of shares of common stock to be issued is or will
be equal to or in excess of 20 percent of the number of shares or
common stock outstanding before the issuance of the stock or
securities; or
1.4 in connection with a transaction other than a public
offering involving:
a. the sale or issuance by the issuer of common stock (or
securities convertible into or exercisable for common stock) at a
price less than the greater of book or market value which together
with sales by officers, directors, or substantial shareholders of the
company equals 20 percent or more of common stock or 20 percent or
more of the voting power outstanding before the issuance; or
b. the sale or issuance by the company of common stock (or
securities convertible into or exercisable common stock) equal to 20
percent or more of the common stock or 20 percent or more of the
voting power outstanding before the issuance for less than the greater
of book or market value of the stock.
<PAGE>
Section 2. Exceptions may be made upon application to Nasdaq when:
2.1 the delay in securing stockholder approval would seriously
jeopardize the financial viability of the enterprise; and
2.2. reliance by the company on this exception is expressly
approved by the Audit Committee or a comparable body of the Board of
Directors.
A company relying on this exception must mail to all
shareholders not later than ten days before issuance of the securities a letter
alerting them to its omission to seek the shareholder approval that would
otherwise be required and indicating that the Audit Committee or a comparable
body of the Board of Directors has expressly approved the exception.
Section 3. Only shares actually issued and outstanding (excluding
treasury shares or shares held by a subsidiary) are to be used in making any
calculation provided for in this section. Unissued shares reserved for issuance
upon conversion of securities or upon exercise of options or warrants will not
be regarded as outstanding.
Section 4. Voting power outstanding as used in this section refers to
the aggregate number of votes which may be cast by holders of those securities
outstanding which entitle the holders thereof to vote generally on all matters
submitted to the company's security holders for a vote.
Section 5. An interest consisting of less than either 5 percent of the
number of shares of common stock or 5 percent of the voting power outstanding of
an issuer or party shall not be considered a substantial interest or cause the
holder of such an interest to be regarded as a substantial security holder.
Section 6. Where shareholder approval is required, the minimum vote
which will constitute shareholder approval shall be a majority of the total
votes cast on the proposal in person or by proxy.
<PAGE>
CERTIFICATE OF SECRETARY
I, the undersigned, certify that:
1. I am the duly elected and acting Secretary of BETA OIL & GAS, INC.,
a Nevada corporation; and
2. The foregoing Amended and Restated Bylaws, consisting of 16 pages,
are the Amended and Restated Bylaws of this Corporation as adopted by the Board
of Directors.
IN WITNESS WHEREOF, I have subscribed my name and affixed the
seal of this Corporation on this 5th day of January, 1999.
--------------------------
/s/Lisa Antry, Secretary
EXPLORATION AGREEMENT
Formosa Grande Project
Jackson and Calhoun Counties, Texas
This Exploration Agreement (the "Agreement") is entered into as of
August 1, 1997, by and between Parallel Petroleum Corporation ("Parallel"),
TAC Resources, Inc. ("TAC"), Allegro Investments, Inc. ("Allegro"), Beta Oil &
Gas, Inc. ("Beta"), Pease Oil and Gas Company ("Pease"), Four-Way Texas L.L.C.
("Four-Way"), Meyer Financial Services, Inc. ("Meyer") and Wes-Tex Drilling
Corp. ("Wes-Tex") all hereinafter collectively referred to as (the "Parties").
WITNESSETH:
WHEREAS, Parallel has acquired, for itself and for the benefit of TAC
and Allegro, seismic and lease options, oil and gas leases and seismic permits
covering an area of approximately 90,000 acres located in Jackson and Calhoun
Counties, Texas, as depicted on the plat attached hereto as Exhibit "A".
WHEREAS, Beta, Pease, Four-Way, Meyer and Wes-Tex propose to acquire
undivided interests in and to the rights granted by such agreements, and to
participate in conducting a 3-D seismic program upon the lands covered thereby.
NOW, THEREFORE, in consideration of the premises, the mutual agreements
and obligations set forth herein, and the mutual benefits to be received
hereunder, the Parties agree as follows:
ARTICLE 1. DEFINITIONS
For the purpose of this Agreement, the following terms shall have the
meanings designated below:
1.1 Area of Mutual Interest "AMI" means the lands outlined on the plat
attached hereto as Exhibit "A".
1.2 "AMI Interests" means any interest in the oil, gas or other
minerals in and under the AMI, including leasehold interests under oil and gas
leases, oil and gas lease options, interests of the farmee under farmout
agreement, and other such interests or rights similar or dissimilar to those
mentioned, including, but not limited to, seismic permits. AMI Interest does
not, however, include nonpossessory interests in the oil, gas and other minerals
in and under the AMI, such as royalty interests, overriding royalty interests,
net profits interests, or other such interests whether similar or dissimilar to
those mentioned.
1.3 "Existing AMI Interests" means the Seismic and Lease Options, Oil
and Gas Leases and Seismic Permits which have been acquired by Parallel as of
December 1, 1997.
1.4 "Subsequently Acquired AMI Interests" means all AMI Interests acquired after
December 1, 1997.
1.5 "Contract Lands" means lands located within the AMI which are
covered by AMI Interests.
1.6 "Initial Interest" means a Party's ownership in Existing AMI
Interests, and the amount of interest a party is entitled to acquire in
Subsequently Acquired AMI Interests, subject to the provisions hereof.
1.7 "Jointly Owned AMI Interest" means an AMI Interest in which the
Parties own an interest pursuant to the terms of this Agreement.
1.8 "Lease Burden" means any royalty, overriding royalty interest, net
profits interest, production payment, carried interest, reversionary working
interest or other charges upon a leasehold interest or the production therefrom.
1.9 "Losses" means any and all losses, liabilities, claims, demands,
penalties, fines, settlements, damages, actions, or suits of whatsoever kind and
nature (but expressly excluding consequential damages), whether or not subject
to litigation, including without limitation (I) claims or penalties arising from
products liability, negligence, statutory liability or violation of any
applicable law or in tort (strict, absolute or otherwise) and (ii) loss of or
damage to any property, and all reasonable out-of-pocket costs, disbursements
and expenses (including, without limitation, legal, accounting, consulting and
investigation expenses and litigation costs) imposed on, incurred by or asserted
against an indemnified Party in connection therewith.
1.10 "Operator" shall mean Parallel Petroleum Corporation.
1.11 "Party" or "Parties" means Parallel, TAC, Allegro, Beta, Pease,
Four-Way, Meyer, Wes-Tex and any other person or entity, singularly or as a
group, which hereafter becomes a party hereto or is otherwise subject to the
terms hereof.
1.12 "Pre-Existing Data" means such data which includes, but is not
limited to: seismic records and related seismic data, electronic and mud logs,
cores and core analyses, field studies (less and except any proprietary
methodology or process used by any Party in such studies), production tests,
engineering, geological, geophysical, paleontological data, interpretive data
and maps prepared by any Party in existence as of the date of this Agreement.
1.13 "Proportionate Share" except as otherwise provided for herein,
shall be calculated by dividing a Party's Initial Interest by the aggregate of
the Initial Interests of all Parties who are to share an interest or an
obligation pursuant to the terms hereof.
1.14 "Prospect" means an area within the AMI which is designated as a
Prospect pursuant to Article 6.3 hereof and within which there is expected to
occur, based on information developed as a result of 3-D Seismic Operations, a
commercial accumulation of oil and/or gas in a specific structural or
stratigraphic trap.
1.15 "Subsequently Created Burden" means a lease burden which is
created by a party subsequent to its acquisition of the interest which is
subject to the burden.
1.16 "Costs Prior to Leasehold Acquisition" means all costs of any type
whatsoever which pertain to this project, covering lands located within or
outside the AMI, including, but not limited to costs of seismic permits, seismic
and lease options, oil and gas leases, and renewals and/or extensions thereof,
land brokerage, legal costs, surface damages, surveying, seismic acquisition,
processing and interpretation, etc., which are incurred prior to Leasehold
Acquisition conducted under the provisions of Article 4 hereof.
1.17 Other terms are defined elsewhere in this Agreement.
ARTICLE 2. INTERESTS AND SHARE OF COSTS OF THE PARTIES
2.1 Area of Mutual Interest. The Parties hereby establish an Area of
Mutual Interest "AMI", same to be comprised of the area outlined on the attached
Exhibit "A", and which shall cover AMI Interests located therein. This AMI shall
continue for a term of seven (7) years, or the expiration of the last Jointly
Owned AMI Interest, whichever is earlier.
2.2 "Interests and Share of Costs of the Parties" The Parties hereby
agree to own, as their Initial Interest, and agree to bear the costs set out
below, as follows:
<TABLE>
Party Initial Interest Share of Costs Share of Costs
Prior to Leasehold for Leasehold
Acquisition Acquisition and
Subsequent Operations
<S> <C> <C> <C>
Parallel .5312500 .5000000 .5312500
TAC .0625000 .0000000 .0625000
Allegro .0312500 .0000000 .0312500
Beta .2000000 .2666666 .2000000
Pease .1250000 .1666667 .1250000
Four-Way .0200000 .0266667 .0200000
Meyer .0100000 .0133333 .0100000
Wes-Tex .0200000 .0266667 .0200000
</TABLE>
Parallel, TAC and Allegro have acquired and presently own the Existing AMI
Interests. Beta, Pease, Four-Way, Meyer and Wes-Tex agree that their respective
costs in the Existing AMI Interests shall be based on $100.00 per net mineral
acre on seismic and lease options, and cost plus 33.33333% on oil and gas leases
and seismic permits. The Existing AMI Interests are presently comprised of
approximately 73,102.116 net mineral acres covered by seismic and lease option,
522.896 net mineral acres covered by seismic permit where cost was $5,228.96,
and 146.890 net mineral acres covered by oil and gas lease where cost was
$7,344.50. Based on the foregoing, the current total cost of Existing AMI
Interests is Seven million three hundred twenty-two thousand seven hundred
eighty-five and 06/100 Dollars ($7,322,785.06). Beta, Pease, Four-Way, Meyer and
Wes-Tex agree to pay Parallel their Proportionate Share of such cost, as
referenced above, in the Existing AMI Interests upon execution of this
Agreement. Beta, Pease, Four-Way, Meyer and Wes-Tex hereby agree that Parallel
shall have the exclusive right to acquire AMI Interests through December 1,
1997, and that same shall be treated in all respects as Existing AMI Interests.
Beta, Pease, Four-Way, Meyer and Wes-Tex agree that they shall be obligated to
accept such interests in the same percentages and pay Parallel for such
interests at the same terms stated herein. Payment for such interests shall be
due within fifteen (15) days after receipt of written notice as set out in
Article 2.4. Interests available to Parallel which costs exceed those stated
above shall be offered to the other Parties as per the procedure set forth in
Article 2.4 below.
2.3 Recording. Parallel agrees to file for record in the office of the
Jackson County Clerk, all Memorandums of Seismic and Lease Options covering the
Existing AMI Interests within fifteen (15) days of the date this Agreement is
executed by all Parties.
2.4 Subsequently Acquired AMI Interests. Any Party acquiring a
Subsequently Acquired AMI Interest, directly or indirectly, shall notify the
other Parties hereto. Such notice shall set forth (i) a description of the
interest acquired, (ii) the total cost of the interest, including all land and
legal costs associated with the acquisition thereof, (iii) the Proportionate
Share of the notified Party and its cost therein, and (iv) any other pertinent
terms of such acquisition, including, but not limited to, copies of the
instruments of conveyance, copies of leases, assignments, subleases, farmout and
other contracts affecting the AMI Interests, copies of paid drafts or checks,
itemized invoices of actual costs incurred by the acquiring Party. Parties shall
have fifteen (15) days from the receipt of this notice to acquire their
Proportionate Share of the Subsequently Acquired AMI Interest. A Party's
election to acquire shall be given in writing and accompanied by Party's payment
of its total cost for such interest. If a Party's election and payment are not
received within such fifteen (15) day period, it shall be conclusively presumed
that such Party has elected not to acquire its Proportionate Share of the
Subsequently Acquired AMI Interest and has forfeited its right thereto. A
Party's failure to exercise its option as to any particular notice shall not
constitute a waiver or release of its right to acquire any interest described in
any subsequent notice delivered hereunder.
2.5 Existing Burdens. Each Party's interest under this agreement in the
AMI Interests, and oil and gas leases which may be acquired thereunder, shall be
subject to and burdened by its proportionate share of all existing operating
agreements, existing and pending pooling and spacing orders and all Lease
Burdens other than Subsequently Created Burdens. Parallel, TAC and Allegro
represent that they have not burdened the Existing AMI Interests acquired or to
be acquired with any liens or Subsequently Created Burdens. Each Party agrees to
perform its Proportionate Share of the obligations under the AMI Interests
acquired pursuant to this Agreement and the other obligations described in this
Article, but only to the extent that such obligations arise after the
acquisition of such AMI Interests by such Party.
2.6 Expiring Options. If any lease options covered hereby will expire
prior to completion of the Seismic Operations contemplated herein, Operator
shall use its best efforts to renew and/or extend such option for a sufficient
period of time to complete the proposed 3-D Seismic Operations thereon and
exercise the lease option thereunder. Payment for extensions and/or renewals
shall be due within fifteen (15) days after receipt of an invoice therefore.
2.7 Assignments. Upon receipt of payment for AMI Interests, Parallel
shall assign to the Parties hereto their Initial Interest in such AMI Interests.
Such assignment shall be recordable in form, shall be subject to this agreement,
shall provide for warranty by, through and under Parallel, but not otherwise,
and shall be subject to the terms and provisions of the AMI Interests assigned.
Notwithstanding such assignments, the Parties hereby grant Operator full right
and authority to conduct Leasehold Acquisition on their behalf under the
provisions of Article 4 hereof.
2.8 AMI Interests Located In and Out of Existing AMI. If an AMI
Interest is found to cover lands located both within and outside the existing
AMI, the entirety of such AMI Interest shall be offered to the other Parties
under the acquisition, notice and election provisions of Article 2.4, and if the
other Parties elect to participate in the acquisition thereof, the description
of the lands comprising the AMI shall be deemed to be amended to extend and
cover all of the lands covered by such interest. The option of the Parties to
participate in the acquisition of such interests shall be limited to the
entirety of the interest acquired.
2.9 Option to Cash Call: Notwithstanding the provisions for the
payments required in Articles 2.2, 2.4, 2.6 and 4, Operator shall the right to
require the other Parties to pay their Proportionate Share of the estimated
costs as provided in such Articles in advance. Such advanced payment shall be
paid within fifteen (15) days of receipt of an invoice therefor.
ARTICLE 3. SEISMIC OPERATIONS
3.1 Existing Seismic, Geologic and Other Subsurface Data. Except as
prohibited by law or by agreements with third parties, upon request, each Party
owning existing seismic data pertaining to lands located within the AMI shall
furnish copies of all such data to the other Parties, together with any geologic
or other subsurface data that could be useful in the interpretation thereof. The
Party receiving such data shall bear the expense of copying it. The Party owning
any seismic or other data which may not be copied, due to legal prohibitions or
by agreements with third parties, shall, upon request, make such data available
to the Party requesting such data during normal business hours.
3.2 Ownership of Pre-Existing Data. Ownership of the Pre-Existing Data
and all reprocessed Pre-Existing Data shall at all times remain vested in the
Party who contributes the Pre-Existing Data for use by the Parties, and the
Parties agree to acknowledge such ownership, including, but not limited to, the
filing with any appropriate governmental authority of such acknowledgment. The
Parties expressly reserve the right to sell, license, or trade the Pre-Existing
Data which it contributes hereunder, to the extent that it has such right to
sell, license or trade the Pre-Existing Data, through its own efforts, or
through the efforts of others duly authorized by such Party and the benefits and
advantages, including monetary consideration, which such Party receives as a
result of such activities shall be the sole property of such Party.
3.3 Management of the 3-D Seismic Operations. Operator shall
exclusively manage and conduct the 3-D Seismic Operations contemplated hereunder
and all operations incident thereto, including, but not limited to, the
acquisition of all geoscientific data, the performance of all 3-D seismic
surveys and other geoscientific work incident thereto, and, subject to the
Operating Agreements, the drilling of all wells on the Prospects. Operator shall
perform all such work through employees, representatives, and contractors of its
selection, and Operator shall and does hereby agree to utilize reasonable
prudence and economic judgment in contracting with third party contractors or
subcontractors. As manager of 3-D Seismic Operations, Operator shall devote such
of its time, attention and efforts to the conduct thereof as it shall in good
faith determine reasonably necessary, but shall otherwise be free to engage in
and pursue all other current and future business projects, programs, prospects,
opportunities, investments and activities without obligation of any kind to or
right of participation therein by the other Parties hereto. In performing its
duties under this Agreement, Operator shall serve as an independent contractor
and not as an agent or employee of the other Parties hereto. Operator shall
utilize reasonable prudence and economic judgment in incurring costs, and shall
further conduct the 3-D Seismic Operations and perform all of its duties under
this Agreement as a reasonable, prudent operator, in a good and workmanlike
manner with due diligence and dispatch, in accordance with good oilfield and
exploratory practice, and in compliance with all applicable laws and
regulations, BUT SHALL HAVE NO LIABILITY TO THE OTHER PARTIES HERETO OR ANY
OTHER OWNER OF RIGHTS OR INTERESTS UNDER THIS AGREEMENT FOR ANY LOSSES SUSTAINED
OR LIABILITIES INCURRED IN CONNECTION WITH THE 3-D SEISMIC OPERATIONS AND/OR THE
CONDUCT OF ANY ACTIVITIES UNDER OR CONTEMPLATED BY THIS AGREEMENT, SAVE AND
EXCEPT AS MAY BE OCCASIONED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF
OPERATOR. EACH OF THE OTHER PARTIES HERETO ACKNOWLEDGES THAT (A) IT HAS READ AND
AGREED TO THE FOREGOING EXCULPATION OF OPERATOR AS A NEGOTIATED AND BARGAINED
FOR ASPECT OF THIS TRANSACTION, (B) THIS EXCULPATION PROVISION IS CONSPICUOUS.
3.4 Ongoing and Future Seismic Operations. The Parties agree to conduct
such operations on all or substantially all of the Contract Lands. The Parties
may, subject to their unanimous written consent, agree to reduce or increase the
acreage on which such operations will be conducted when technical, legal or
operational considerations indicate that such reduction or increase is
warranted. In any event, the Parties agree to pay Operator their respective
shares of the total costs of the 3-D Seismic Operations conducted on all land
covered by AMI Interests as set forth in Article 2.2 hereof. Payment for 3-D
Seismic Operations shall be due within fifteen (15) days after receipt of each
invoice therefore. Operator shall furnish the other Parties hereto with copies
of all applicable contracts and other information pertaining to all 3-D Seismic
Operations conducted hereunder. The Parties shall own their Proportionate Share
of the geophysical data obtained by and resulting from the 3-D Seismic
Operations conducted on the Contract Lands, including, but not limited to all
tapes, seismic sections and any and all other data generated by such 3-D Seismic
Operations. Each Party shall have access to such data and shall receive copies
thereof. The Parties agree to work together in a spirit of cooperation and in
good faith in planning and causing the 3-D Seismic Operations to be conducted as
contemplated herein as well as in sharing the data collected therefrom and the
interpretations thereof. Such interpretations, by any Party, shall in no way be
deemed a representation to any other Party that such interpretations are
accurate or correct. Such interpretations shall be given merely as a means of
sharing such Party's analysis and ideas regarding such data.
3.5 Confidentiality of Seismic Data. Except as provided below, each
Party agrees to keep all seismic data obtained pursuant to Article 3.3
confidential for a period of seven (7) years from the date hereof. After the
expiration of five (5) years from the date hereof any Party may sell the data it
acquired pursuant to Article 3.3. Each Party owning an interest in such data
shall receive its Proportionate Share of the proceeds of any such sale. Any data
acquired from another Party pursuant to Article 3.1 shall forever be kept
confidential by the Parties; provided, however, that the Party who originally
contributed such data may share, sell or otherwise dispose of such data that
does not pertain to a Prospect to a third party after the expiration of one (1)
year from the date hereof, and the other Parties shall have no interest in the
proceeds from such sale. Notwithstanding the foregoing, a Party may disclose
seismic data to (A) a prospective purchaser or farmee of such Party's interest,
provided (i) such disclosure is limited to the Prospect under consideration for
sale or farmout, (ii) the prospective purchaser or farmee must review such data
in the affected Party's offices and may not copy such data until such time as it
has acquired or earned an interest in the Contract Lands, and (iii) such
prospective purchaser or farmee must execute a confidentiality agreement to
prevent further disclosure and unauthorized use of such data; or (B) a third
party who is entitled thereto pursuant to the terms of a lease, lease option or
seismic permit. Any Party may disclose such data to its agents, staff,
representatives and consultants in the normal conduct of its business.
3.6 Review of Seismic Data. The Parties agree to cooperate in good
faith in reviewing the seismic data acquired hereunder. Such data should be
reviewed by the Parties as soon as practicable after the data is available so
that the Parties can make decisions regarding the exercise of lease options.
ARTICLE 4. LEASEHOLD ACQUISITION
As soon as is practicable after the 3-D seismic data has been processed
and interpreted, Operator shall, in its sole discretion, acquire leases within
the AMI, and the Parties agree to pay their Proportionate Share of cost therein,
including all land and legal costs associated with the acquisition thereof. Upon
receipt of payment, which shall be due within fifteen (15) days after receipt of
each invoice therefore, Operator shall promptly execute and deliver recordable
assignments to the Parties reflecting their respective interests in the leases
acquired.
ARTICLE 5. FORFEITURE
Payments due hereunder for Existing AMI Interests under Article 2.2,
renewals and/or extensions acquired under Article 2.6, Seismic Operations under
Article 3.4, and Lease Acquisition under Article 4 shall be mandatory. A Party
failing to timely make any such payment shall be in breach of this Agreement;
and, in the event such payment is not received by Operator, or other Party
entitled thereto, within sixty (60) days after written demand therefore has been
received, such Party shall, without the necessity of any further proceeding,
forfeit all of its right, title and interest under this Agreement to Operator.
Any Party so forfeiting its interest hereunder, hereby appoints Operator as its
Agent and Attorney-in-Fact for the sole and limited purpose of executing an
instrument of conveyance vesting title to the forfeited interest in Operator and
filing same in the appropriate public records.
ARTICLE 6. SALE, FARMOUT OR OTHER DISPOSITION
OF AMI INTERESTS TO A THIRD PARTY
Any Party may sell, assign, farmout or otherwise dispose of all or any
portion of its interest acquired pursuant to or in connection with this
Agreement without consent of any other Party. Operator shall be furnished with a
copy of the assignment or other instrument disposing of such interest within ten
(10) days from the date thereof.
ARTICLE 7. SUBSEQUENT OPERATIONS
7.1 Operator. Operator shall have the right, subject to the terms and
provisions of the attached Operating Agreement, to be the Operator for all
operations conducted within the AMI, and the Parties hereby agree to execute
separate Operating Agreements designating Operator, as Operator, as required.
7.2 Operating Agreement. Except as provided herein, all operations
conducted within the AMI shall be conducted in accordance with the terms of an
Operating Agreement substantially in the form attached hereto as Exhibit "B". A
separate Operating Agreement shall be executed for each Prospect, with the first
well drilled in such Prospect to be designated as the "Initial Well". The share
of costs which each Party must bear and the interest of each Party in the
production from each well drilled under the Prospect Operating Agreement will be
determined on a well-by-well basis in accordance with the terms hereof as
modified by the terms of the Operating Agreement. In the event of conflict
between the terms and provisions hereof and those contained in the Operating
Agreement, the terms and provisions hereof shall prevail.
7.3 Designation of Prospects. As soon as practicable after the data has
been processed and interpreted, Operator shall furnish the other Parties with
maps which reflect designated Prospects, together with a description of the
seismic data, prospective feature and any interpretative data or other maps upon
which such Prospect is based.
7.4 Non-Consent Election on Initial Well. If a Party elects not to
participate in the drilling of the Initial Well in a Prospect, such Party shall
relinquish all of its rights and interests in that Prospect to the Parties
participating in the drilling of such well which elect to acquire their
Proportionate Share of the relinquished interest. A condition precedent to such
relinquishment shall be the reimbursement of the relinquishing Party's leasehold
cost in the relinquished interest by the Parties electing to participate in such
interest, which cost shall be specifically limited to that incurred by such
Party under Article 4 hereof. A Party so relinquishing its interest shall
promptly execute a recordable assignment of its relinquished interest to the
Parties entitled thereto, which interest shall be free of any Subsequently
Created Burdens. Upon receipt of such assignment the Parties receiving the
relinquished interest shall reimburse the relinquishing Party their respective
Proportionate Share of the relinquishing Party's cost in the interest so
assigned.
7.5 Limitation on Number of Wells Drilling. Not more than three (3)
wells shall be drilling on the Contract Lands at any time unless it is necessary
to commence a well in order to perpetuate a lease or otherwise satisfy the terms
of a continuous drilling obligation.
ARTICLE 8. MISCELLANEOUS
8.1 Legal Relationship. This agreement is not intended to create, and
shall not be construed to create, a partnership or other relationship whereby
one party is liable for the actions or debts of another party; it being
understood and agreed that the rights and liabilities of all parties are several
and not joint or collective.
8.2 Entire Agreement. This agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof, superseding
any and all prior agreements, understandings, discussions, negotiations and
commitments of any kind.
8.3 Amendment. The provisions of this agreement may be amended,
supplemented, or waived only if in writing signed by all parties hereto.
8.4 Construction. The parties to this agreement all acknowledge and
agree that this agreement was drafted jointly by them, and that in the event of
any ambiguity, this agreement shall not be construed against any of them on the
basis of the fact or presumption that one party had a greater or lesser hand in
the drafting of the agreement than another party, but rather the terms shall be
given a reasonable interpretation.
8.5 Governing Law. Except to the extent preempted by federal law, this
agreement is to be construed and interpreted in accordance with, and governed
by, the laws of the State of Texas.
8.6 Binding Agreement. This agreement shall bind and inure to the
benefit of the parties hereto and their respective heirs, successors, legal
representatives and assigns.
8.7 Section and Subsection Headings. The article, section and
subsection headings contained in this agreement are for the purpose of
convenience only and are not intended to define or limit the contents hereof or
otherwise be considered in construing and enforcing this agreement.
8.8 Waivers. Any failure by any party hereto to comply with any of its
obligations, agreements or conditions herein contained may be waived in writing,
but not in any other manner, by the party to whom such compliance is owed. No
waiver of, or consent to a change in, any provision of this agreement shall be
deemed to be, or shall constitute, a waiver of or consent to a change in the
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless expressly provided.
8.9 Further Assurances. The parties hereto agree to deliver or cause to
be delivered to each other at all such times as shall be reasonably required,
all such additional instruments, agreements, and other documents, and to perform
all such actions, as any of them may reasonably request for the purpose of
performing any provision of this agreement or evidencing the transactions
contemplated by this agreement.
8.10 Severability. If any term or provision of this agreement or any
application of this agreement is held invalid or unenforceable, the remainder of
this agreement and any other application of the terms and provisions of this
agreement shall not be affected by that holding, but shall be valid and
enforceable.
8.11 Exhibits. All exhibits attached hereto or referred to in this
agreement are incorporated herein and made a part of this agreement.
8.12 Term. The term of this agreement shall be seven (7) years from the
date hereof or until the last expiration of the last Jointly Owned AMI Interest
acquired hereunder, whichever is earlier, with the exception of the
confidentiality requirements of Article 3.5 which shall survive and extend past
that period.
8.13 Notices. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given (a)
when delivered by hand, (b) when sent by facsimile (with receipt confirmed),
provided that a copy is promptly mailed thereafter by first class postage
prepaid registered or certified mail, return receipt requested, (c) when
received by the addressee, if sent by Express Mail, Federal Express, other
express delivery service (receipt requested) or by such other means as the
Parties named below may agree from time to time or (d) five (5) days after being
mailed in the USA, by first class postage prepaid registered or certified mail,
return receipt requested; in each case to the appropriate address and telecopier
number set forth below (or to such other address or telecopier number as a Party
may designate as to itself by notice to the other Parties).
Parallel Petroleum Corporation
110 N. Marienfield, Suite 465
Midland , TX 79701
Attn: Larry Oldham
Telephone Number: (915)684-3727
Telecopier Number: (915)684-3905
TAC Resources, Inc.
P. O. Box 206
Victoria, TX 77902
Attn: Bill Bishop
Telephone Number: (512)573-4969
Telecopier Number: (512)573-9840
Allegro Investments, Inc.
1908 N. Laurent, Suite 370
Victoria, TX 77901
Attn: Chris Thompson
Telephone Number: (512)573-5619
Telecopier Number: (512)576-9643
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attn: Steve Antry
Telephone Number: (714)752-5212
Telecopier Number: (714)752-5757
Pease Oil and Gas Company
751 Horizon Court, Suite 203
P. O. Box 60219
Grand Junction, CO 81506-8758
Attn: Willard Pease, Jr.
Telephone Number: (970)245-5917
Telecopier Number: (970)243-8840
Four-Way Texas L.L.C.
c/o Kissing Bridge Company
11296 State Road
Glenwood, NY 14069
Attn: Bob James
Telephone Number: (716)592-4963
Telecopier Number: (716)592-4228
Meyer Financial Services, Inc.
1005 Liberty Building
Buffalo, NY 14202
Attn: Paul Meyer
Telephone Number: (716)842-2215
Telecopier Number: (716)842-2220
Wes-Tex Drilling Corp.
P. O. Box 3739
Abilene, TX 79604
Attn: Myrle Greathouse
Telephone Number: (915)677-9121
Telecopier Number: (915)677-5140
Each Party shall have the right upon giving thirty (30) days prior written
notice to the other Parties, in the manner herein provided, to change its
address and telecopier number for the purpose of notice.
8.14 Transfers Subject to this Agreement. Any sale, agreement, transfer
or other disposition of an interest in the Contract Lands, however accomplished,
either voluntarily or involuntarily, by operations of law or otherwise, shall be
subject to the terms of this Agreement. Any instruments which convey any
interest in the Contract Lands shall be made expressly subject to the Agreement.
8.15 Counterparts. This agreement may be executed in multiple
counterparts, all of which when taken together shall constitute one and the same
agreement.
8.16 Public Announcements. Each Party hereto agrees that prior to
making any public announcement or statement with respect to the transaction
contemplated in this Agreement, the Party desiring to make such public
announcement or statement shall consult with the other Parties hereto and
exercise their best efforts to (i) agree upon the text of a joint public
announcement or statement to be made by the Parties, (ii) obtain approval of the
other Parties hereto to the extent of a public announcement or statement to be
made solely by one of the Parties, as the case may be. Approval shall be
requested pursuant to Article 8.13 hereof, and any such announcement or
statement shall be deemed approved if no reply to the contrary is received
within twenty-four (24) hours (Saturdays, Sundays and federal legal holidays
excluded) after receipt of such request by the other Parties. Nothing contained
in this paragraph shall be construed to require any Party to obtain approval of
the other Parties hereto to disclose information with respect to the transaction
contemplated by this Agreement to any governmental body to the extent required
by applicable law or by any applicable rules.
8.17 Expenses. Except as specified herein and as the Parties may
otherwise agree, each Party shall be solely responsible for all expenses
incurred by it in connection with any and all transactions that are contemplated
by this Agreement.
8.18 Force Majeure. Should any Party be prevented, wholly or in part,
from complying with any express or implied obligation of this Agreement (other
than the obligation to make money payments), from conducting any operations
provided for under this Agreement, including by way of illustration but not
limitation, the conducting of the 3-D Seismic Operations by reason of scarcity
of or inability to obtain or to use labor, water, equipment or materials in the
open market or transportation thereof from any cause (other than financial)
beyond the control of such Party, or operation of "Force Majeure, any State or
Federal law or any order, ruling or regulation of governmental authority, then
while so prevented, such Party's obligation to comply with such provision or
obligation shall be suspended, and such Party shall not be liable in damages or
otherwise to the other Parties for failure to comply therewith, provided that
the Party claiming suspension shall give written notice and full particulars of
the reason of such inability to perform its obligations to the other Parties
within thirty (30) days after the occurrence of the cause relied on by the Party
claiming suspension.
8.19 Arbitration. The Parties agree that any and all disputes arising
under or relating to this Agreement shall be referred to arbitration pursuant to
the commercial rules of arbitration of the American Arbitration Association.
Venue for such arbitration shall be Houston, Texas USA.
IN WITNESS WHEREOF, this agreement is executed on the date first above written.
Parallel Petroleum Corporation
By:________________________________
Larry C. Oldham, President
TAC Resources, Inc.
By:________________________________
Bill Bishop, President
Allegro Investments, Inc.
By:________________________________
John R. Thompson, President
Beta Oil & Gas, Inc.
By:_/s/____________________________
Steve Antry, President
Pease Oil and Gas Company
By:________________________________
Willard Pease, Jr., President
Four-Way Texas, L.L.C.
By:________________________________
Robert M. James, President
Meyer Financial Services, Inc.
By:________________________________
Paul Meyer, President
Wes-Tex Drilling Corp.
By:________________________________
Myrle Greathouse,
Chairman of the Board
EXHIBIT A
to
FORMOSA GRANDE PROSPECT AGREEMENT, DATED AUGUST 1, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
EXHIBIT B
ATTACHED TO AND MADE A PART OF THAT CERTAIN EXPLORATION AGREEMENT COVERING
THE FORMOSA GRANDE PROJECT DATED AUGUST 1, 1997, BY AND BETWEEN PARALLEL
PETROLEUM CORPORATION ET AL
[STAMP]
OPERATING AGREEMENT
DATED
, 19
--------- --
OPERATOR Parallel Petroleum Corporation
-------------------------------------------------------
CONTRACT AREA
---------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
COUNTY OR PARISH OF STATE OF
---------------------- ------------
COPYRIGHT 1982 - ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 2408 CONTINENTAL LIFE BUILDING.
FORT WORTH, TEXAS, 76102, APPROVED FORM.
A.A.P.L. NO. 610 - 1982 REVISED
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
- ------- ----- ----
<S> <C> <C>
I. DEFINITIONS.....................................................................1
II. EXHIBITS........................................................................1
III. INTERESTS OF PARTIES............................................................2
A. OIL AND GAS INTERESTS........................................................2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION.................................2
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS....................2
D. SUBSEQUENTLY CREATED INTERESTS...............................................2
IV. TITLES..........................................................................2
A. TITLE EXAMINATION............................................................2-3
B. LOSS OF TITLE................................................................3
1. Failure of Title..........................................................3
2. Loss by Non-Payment or Erroneous Payment of Amount Due....................3
3. Other Losses..............................................................3
V. OPERATOR........................................................................4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR.................................4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR................4
1. Resignation or Removal of Operator........................................4
2. Selection of Successor Operator...........................................4
C. EMPLOYEES....................................................................4
D. DRILLING CONTRACTS...........................................................4
VI. DRILLING AND DEVELOPMENT........................................................4
A. INITIAL WELL.................................................................4-5
B. SUBSEQUENT OPERATIONS........................................................5
1. Proposed Operations.......................................................5
2. Operations by Less than All Partners......................................5-6-7
3. Stand-By Time.............................................................7
4. Sidetracking..............................................................7
C. TAKING PRODUCTION IN KIND....................................................7
D. ACCESS TO CONTRACT AREA AND INFORMATION......................................8
E. ABANDONMENT OF WELLS.........................................................8
1. Abandonment of Dry Holes..................................................8
2. Abandonment of Wells that have Produced...................................8-9
3. Abandonment of Non-Consent Operations.....................................9
VII. EXPENDITURES AND LIABILITY OF PARTIES...........................................9
A. LIABILITY OF PARTIES.........................................................9
B. LIENS AND PAYMENT DEFAULTS...................................................9
C. PAYMENTS AND ACCOUNTING......................................................9
D. LIMITATION OF EXPENDITURES...................................................9-10
1. Drill or Deepen...........................................................9-10
2. Rework or Plug Back.......................................................10
3. Other Operations..........................................................10
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES.........................10
F. TAXES........................................................................10
G. INSURANCE....................................................................11
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST................................11
A. SURRENDER OF LEASES..........................................................11
B. RENEWAL OR EXTENSION OF LEASES...............................................11
C. ACREAGE OR CASH CONTRIBUTIONS................................................11-12
D. MAINTENANCE OF UNIFORM INTEREST..............................................12
E. WAIVER OF RIGHTS TO PARTITION................................................12
IX. INTERNAL REVENUE CODE ELECTION..................................................12
X. CLAIMS AND LAWSUITS.............................................................13
XI. FORCE MAJEURE...................................................................13
XII. NOTICES.........................................................................13
XIII. TERM OF AGREEMENT...............................................................13
XIV. COMPLIANCE WITH LAWS AND REGULATIONS............................................14
A. LAWS, REGULATIONS AND ORDERS.................................................14
B. GOVERNING LAW................................................................14
C. REGULATORY AGENCIES..........................................................14
XV. OTHER PROVISIONS................................................................14
XVI. MISCELLANEOUS...................................................................15
</TABLE>
II
<PAGE>
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between Parallel Petroleum
Corporation, 110 N. Marienfield, Suite 465, Midland, TX 79701, hereinafter
designated and referred to as "Operator", and the signatory party or parties
other than Operator, sometimes hereinafter referred to individually herein as
"Non-Operator", and collectively as "Non-Operators"
WITNESSETH:
WHEREAS, the parties to this agreement are owners of oil and gas leases
and/or oil and gas interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these leases
and/or oil and gas interests for the production of oil and gas to the extent
and as hereinafter provided.
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas
condensate, and all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
B. The terms "oil and gas lease", "lease" and "leasehold" shall mean
the oil and gas leases covering tracts of land lying within the Contract Area
which are owned by the parties to this agreement.
C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.
D. The term "Contract Area" shall mean all of the lands, oil and gas
leasehold interests and oil and gas interests intended to be developed and
operated for oil and gas purposes under this agreement. Such lands, oil and
gas leasehold interests and oil and gas interests are described in Exhibit
"A".
E. The term "drilling unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority.
If a drilling unit is not fixed by any such rule or order, a drilling unit
shall be the drilling unit as established by the pattern of drilling in the
Contract Area or as fixed by express agreement of the Drilling Parties.
F. The term "drillsite" shall mean the oil and gas lease or interest on
which a proposed well is to be located.
G. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.
H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean
a party who elects not to participate in a proposed operation.
Unless the context otherwise clearly indicates, words used in the
singular include the plural, the plural includes the singular, and the neuter
gender includes the masculine and the feminine.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
/X/ A. Exhibit "A", shall include the following information:
(1) Identification of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Percentages or fractional interests of parties to this agreement,
(4) Oil and gas leases and/or oil and gas interests subject to this
agreement,
(5) Addresses of parties for notice purposes.
/ / B. Exhibit "B", Form of Lease.
/X/ C. Exhibit "C", Accounting Procedure.
/X/ D. Exhibit "D", Insurance.
If any provision of any exhibit, except Exhibits "E" and "G", is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
-1-
<PAGE>
ARTICLE III.
INTERESTS OF PARTIES
A. OIL AND GAS INTERESTS:
If any party owns an oil and gas interest in the Contract Area, that
interest shall be treated for all purposes of this agreement and during the
term hereof as if it were covered by the form of oil and gas lease attached
hereto as Exhibit "B", and the owner thereof shall be deemed to own both the
royalty interest reserved in such lease and the interest of the lessee
thereunder.
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be owned, by
the parties as their interests are set forth in Exhibit "A". In the same
manner, the parties shall also own all production of oil and gas from the
Contract Area subject to the payment of royalties to the extent of the
leasehold burdens provided for in the Exploration Agreement to which this
Agreement is subject, which shall be borne as hereinafter set forth.
Regardless of which party has contributed the lease(s) and/or oil and
gas interest(s) hereto on which royalty is due and payable, each party
entitled to receive a share of production of oil and gas from the Contract
Area shall bear and shall pay or deliver, or cause to be paid or delivered,
to the extent of its interest in such production, the royalty amount
stipulated hereinabove and shall hold the other parties free from any
liability therefor. No party shall ever be responsible, however, on a price
basis higher than the price received by such party, to any other party's
lessor or royalty owner, and if any such other party's lessor or royalty
owner should demand and receive settlement on a higher price basis, the party
contributing the affected lease shall bear the additional royalty burden
attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment
or crossassignment of interests covered hereby.
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS:
Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty,
production payment or other burden on production in excess of the amount
stipulated in Article III.B., such party so burdened shall assume and alone
bear all such excess obligations and shall indemnify and hold the other
parties hereto harmless from any and all claims and demands for payment
asserted by owners of such excess burden.
D. SUBSEQUENTLY CREATED INTERESTS:
If any party should hereafter create an overriding royalty, production
payment or other burden payable out of production attributable to its working
interest hereunder, or if such a burden existed prior to this agreement and
is not set forth in Exhibit "A", or was not disclosed in writing to all other
parties prior to the execution of this agreement by all parties, or is not a
jointly acknowledged and accepted obligation of all parties (any such
interest being hereinafter referred to as "subsequently created interest"
irrespective of the timing of its creation and the party out of whose working
interest the subsequently created interest is derived being hereinafter
referred to as "burdened party"), and:
1. If the burdened party is required under this agreement to assign or
relinquish to any other party, or parties, all or a portion of its
working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or
production free and clear of said subsequently created interest and
the burdened party shall indemnify and save said other party, or
parties, harmless from any and all claims and demands for payment
asserted by owners of the subsequently created interest, and,
2. If the burdened party fails to pay, when due, its share of expenses
chargeable hereunder, all provisions of Article VII.B. shall be
enforceable against the subsequently created interest in the same
manner as they are enforceable against the working interest of the
burdened party.
ARTICLE IV.
TITLES
A. TITLE EXAMINATION:
Title examination shall be made on the drillsite of any proposed well
prior to commencement of drilling operations or, if the Drilling Parties so
request, title examination shall be made on the leases and/or oil and gas
interests included, or planned to be included, in the drilling unit around
such well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable leases. At the time a well is proposed, each party contributing
leases and/or oil and gas interests to the drillsite, or to be included in
such drilling unit, shall furnish to Operator all abstracts (including
federal lease status reports), title opinions, title papers and curative
material in its possession free of charge. All such information not in the
possession of or made available to Operator by the parties, but necessary for
the examination of the title, shall be obtained by Operator. Operator shall
cause title to be examined by attorneys on its staff or by outside attorneys.
Copies of all title opinions shall be furnished to each party hereto. The
cost incurred by Operator in this title program shall be borne as follows.
-2-
<PAGE>
ARTICLE IV.
CONTINUED
/X/ OPTION NO. 2: Costs incurred by Operator in procuring abstracts curative
materials and fees paid outside attorneys for title examination (including
preliminary, supplemental, shut-in gas royalty opinions and division order
title opinions) shall be borne by the Drilling Parties in the proportion that
the interest of each Drilling Party bears to the total interest of all
Drilling Parties as such interests appear in Exhibit "A". Operator shall make
no charge for services rendered by its staff attorneys or other personnel in
the performance of the above functions.
Operator shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with leases or oil and gas
interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations as well as
the conduct of hearings before governmental agencies for the securing of
spacing or pooling orders. This shall not prevent any party from appearing on
its own behalf at any such hearing.
No well shall be drilled on the Contract Area until after (1) the title
to the drillsite or drilling unit has been examined as above provided, and
(2) the title has been approved by the examining attorney or title has been
accepted by all of the parties who are to participate in the drilling of the
well.
B. LOSS OF TITLE:
3. OTHER LOSSES: All losses incurred, shall be joint losses and shall
be borne by all parties in proportion to their interests. There shall be no
readjustment of interests in the remaining portion of the Contract Area.
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<PAGE>
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
Parallel Petroleum Corporation shall be the Operator of the Contract Area,
and shall conduct and direct and have full control of all operations on the
Contract Area as permitted and required by, and within the limits of this
agreement. It shall conduct all such operations in a good and workmanlike
manner, but it shall have no liability as Operator to the other parties for
losses sustained or liabilities incurred, except such as may result from gross
negligence or willful misconduct.
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
1. RESIGNATION OR REMOVAL OF OPERATOR: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area,
or is no longer capable of serving as Operator, Operator shall be deemed to
have resigned without any action by Non-Operators, except the selection of a
successor. Operator may be removed if it fails or refuses to carry out its
duties hereunder, or becomes insolvent, bankrupt or is placed in
receivership, by the affirmative vote of two (2) or more Non-Operators owning
a majority interest based on ownership as shown on Exhibit "A" remaining
after excluding the voting interest of Operator. Such resignation or removal
shall not become effective until 7:00 o'clock A.M. on the first day of the
calendar month following the expiration of ninety (90) days after the giving
of notice of resignation by Operator or action by the Non-Operators to remove
Operator, unless a successor Operator has been selected and assumes the
duties of Operator at an earlier date. Operator, after effective date of
resignation or removal, shall be bound by the terms hereof as a Non-Operator.
A change of a corporate name or structure of Operator or transfer of
Operator's interest to any single subsidiary, parent or successor corporation
shall not be the basis for removal of Operator.
2. SELECTION OF SUCCESSOR OPERATOR: Upon the resignation or removal of
Operator, a successor Operator shall be selected by the parties. The
successor Operator shall be selected from the parties owning an interest in
the Contract Area at the time such successor Operator is selected. The
successor Operator shall be selected by the affirmative vote of two (2) or
more parties owning a majority interest based on ownership as shown on
Exhibit "A"; provided, however, if an Operator which has been removed fails
to vote or votes only to succeed itself, the successor Operator shall be
selected by the affirmative vote of two (2) or more parties owning a majority
interest based on ownership as shown on Exhibit "A" remaining after excluding
the voting interest of the Operator that was removed.
C. EMPLOYEES:
The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees
shall be the employees of Operator.
D. DRILLING CONTRACTS:
All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing rates in the area and
the rate of such charges shall be agreed upon by the parties in writing
before drilling operations are commenced, and such work shall be performed by
Operator under the same terms and conditions as are customary and usual in
the area in contracts of independent contractors who are doing work of a
similar nature.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A.
Operator shall make reasonable tests of all formations encountered
during drilling which give indication of containing oil and gas in quantities
sufficient to test, unless this agreement shall be limited in its application
to a specific formation or formations in which event Operator shall be
required to test only the formation or formations to which this agreement may
apply.
[STAMP]
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<PAGE>
ARTICLE VI
CONTINUED
If, in Operator's judgment, the well will not produce oil or gas in
paying quantities, and it wishes to plug and abandon the well as a dry hole,
the provisions of Article VI.E.1. shall thereafter apply.
B. SUBSEQUENT OPERATIONS:
1. PROPOSED OPERATIONS: Should any party hereto desire to drill any well
on the Contract Area other than the well provided for in Article VI.A., or to
rework, deepen or plug back a dry hole drilled at the joint expense of all
parties or a well jointly owned by all the parties and not then producing in
paying quantities, the party desiring to drill, rework, deepen or plug back
such a well shall give the other parties written notice of the proposed
operation, specifying the work to be performed, the location, proposed depth,
objective formation and the estimated cost of the operation. The parties
receiving such a notice shall have thirty (30) days after receipt of the
notice within which to notify the party wishing to do the work whether they
elect to participate in the cost of the proposed operation and to pay their
proportionate share of the estimated cost. If a drilling rig is on location,
notice of a proposal to rework, plug back or drill deeper may be given by
telephone and the response period shall be limited to forty-eight (48) hours,
exclusive of Saturday, Sunday and legal holidays and to pay their proportionate
share of the estimated cost of such operations. Failure of a party receiving
such notice to reply within the period above fixed shall constitute an election
by that party not to participate in the cost of the proposed operation. Any
notice given by telephone shall be promptly confirmed in writing.
If all parties elect to participate in such a proposed operation as
provided above Operator shall, within ninety (90) days after expiration of
the notice period of thirty (30) days (or as promptly as possible after the
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
complete it with due diligence at the risk and expense of all parties hereto;
provided, however, said commencement date may be extended upon written notice
of same by Operator to the other parties, for a period of up to thirty (30)
additional days if, in the sole opinion of Operator, such additional time is
reasonably necessary to obtain permits from governmental authorities, surface
rights (including rights-of-way) or appropriate drilling equipment, or to
complete title examination or curative matter required for title approval or
acceptance. Notwithstanding the force majeure provisions of Article XI, if
the actual operation has not been commenced within the time provided
(including any extension thereof as specifically permitted herein) and if any
party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance with
the provisions hereof as if no prior proposal had been made.
2. OPERATIONS BY LESS THAN ALL PARTIES: If any party receiving such
notice as provided in Article VI.B.1. or VII.D.1. (Option No. 2) elects not
to participate in the proposed operation, then, in order to be entitled to
the benefits of this Article, the party or parties giving the notice and such
other parties as shall elect to participate in the operation shall, within
ninety (90) days after the expiration of the notice period of thirty (30)
days (or as promptly as possible after the expiration of the forty-eight (48)
hour period when a drilling rig is on location, as the case may be) actually
commence the proposed operation and complete it with due diligence. Operator
shall perform all work for the account of the Consenting Parties; provided,
however, if no drilling rig or other equipment is on location, and if
Operator is a Non-Consenting Party, the Consenting Parties shall either (a)
request Operator to perform the work required by such proposed operation for
the account of the Consenting Parties, or (b) designate one (1) of the
Consenting Parties as Operator to perform such work. Consenting Parties,
when conducting operations on the Contract Area pursuant to this Article
VI.B.2. shall comply with all terms and conditions of this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period,
shall advise the Consenting Parties of the total interest of the parties
approving such operation and its recommendation as to whether the Consenting
Parties should proceed with the operation as proposed. Each Consenting Party,
within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after receipt of such notice, shall advise the proposing party of
its desire to (a) limit participation to such party's interest as shown on
Exhibit "A" or (b) carry its proportionate part of Non-Consenting Parties'
interests, and failure to advise the proposing party shall be deemed an
election under (a). In the event a drilling rig is on location, the time
permitted for such a response shall not exceed a total of forty-eight (48)
hours (INCLUSIVE of Saturday, Sunday and legal holidays). The proposing
party, at its election, may withdraw such proposal if there is insufficient
participation and shall promptly notify all parties of such decision.
Notwithstanding the foregoing, an election by a Consenting Party under this
paragraph to acquire its proportionate share of such Non-Consenting Parties'
Interest requires the simultaneous tender to the Operator of its
proportionate share of the estimated cost attributable to such
Non-Consenting Parties' Interest.
The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same
under the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the
Consenting Parties shall plug and abandon the well and restore the surface
location at their sole cost, risk and expense. If any well drilled, reworked,
deepened or plugged back under the provisions of the Article results in a
producer of oil and/or gas in paying quantities, the Consenting Parties shall
complete and equip the well to produce at their sole cost and risk,
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<PAGE>
ARTICLE VI
CONTINUED
and the well shall then be turned over to Operator and shall be operated by
it at the expense and for the account of the Consenting Parties. Upon
commencement of operations for the drilling, reworking, deepening or plugging
back of any such well by Consenting Parties in accordance with the
provisions of this Article, each Non-Consenting Party shall be deemed to have
relinquished to Consenting Parties, and the Consenting Parties shall own and
be entitled to receive, in proportion to their respective interests, all of
such Non-Consenting Party's interest in the well and its share of production
therefrom until the proceeds of the sale of such share, calculated at the
well, or market value thereof if such share is not sold, (after deducting
production taxes, excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.D. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts) shall equal the total of the following:
(a) 100% of each such Non-Consenting Party's share of the cost of any
newly acquired surface equipment beyond the wellhead connections (including,
but not limited to, stock tanks, separators, treaters, pumping equipment and
piping), plus 100% of each such Non-Consenting Party's share of the cost of
operation of the well commencing with first production and continuing until
each such Non-Consenting Party's relinquished interest shall revert to it
under other provisions of this Article, it being agreed that each
Non-Consenting Party's share of such costs and equipment will be that
interest which would have been chargeable to such Non-Consenting Party had it
participated in the well from the beginning of the operations and
(b) 300% of that portion of the costs and expenses of reworking, deepening,
plugging back, and testing after deducting any cash contributions received under
Article VIII.C., and 300% of that portion of the cost of newly acquired
equipment in the well (to and including the wellhead connections), which would
have been chargeable to such Non-Consenting Party if it had participated
therein.
An election not to participate in the drilling or the deepening of a
well shall be deemed an election not to participate in any reworking or
plugging back operation proposed in such a well, or portion thereof, to which
the initial Non-Consent election applied that is conducted at any time prior
to full recovery by the Consenting Parties of the Non-Consenting Party's
recoupment account. Any such reworking or plugging back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the
Consenting Parties one hundred percent (100%) of that portion of the costs
of the reworking or plugging back operation which would have been chargeable
to such Non-Consenting Party had it participated therein. If such a reworking
or plugging back operation is proposed during such recoupment period, the
provisions of this Article VI.B. shall be applicable as between said
Consenting Parties in said well.
During the period of time Consenting Parties are entitled to receive
Non-Consenting Party's share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all production,
severance, excise, gathering and other taxes, and all royalty, overriding
royalty and other burdens applicable to Non-Consenting Party's share of
production not excepted by Article III.D.
In the case of any reworking, plugging back or deeper drilling
operation, the Consenting Parties shall be permitted to use, free of cost,
all casing, tubing and other equipment in the well, but the ownership of all
such equipment shall remain unchanged; and upon abandonment of a well after
such reworking, plugging back or deeper drilling, the Consenting Parties
shall account for all such equipment to the owners thereof, with each party
receiving its proportionate part in kind or in value, less cost of salvage.
Within sixty (60) days after the completion of any reworking, deepening
or plugging back operation under this Article, the party conducting such
operations for the Consenting Parties shall furnish each Non-Consenting Party
with an inventory of the equipment in and connected to the well, and an
itemized statement of the cost of deepening, plugging back, testing,
completing and equipping the well for production; or, at its option, the
operating party, in lieu of an itemized statement of such costs of operation
may submit a detailed statement of monthly billings. Each month thereafter,
during the time the Consenting Parties are being reimbursed as provided
above, the party conducting the operations for the Consenting Parties shall
furnish the Non-Consenting Parties with an itemized statement of all costs
and liabilities incurred in the operation of the well, together with a
statement of the quantity of oil and gas produced from it and the amount of
proceeds realized from the sale of the well's working interest production
during the preceding month. In determining the quantity of oil and gas
produced during any month, Consenting Parties shall use industry accepted
methods such as, but not limited to, metering or periodic well tests. Any
amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by
a Non-Consenting Party had it participated therein shall be credited against
the total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it
as above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
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<PAGE>
ARTICLE VI
CONTINUED
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto,
and the production therefrom as such Non-Consenting Party would have been
entitled to had it participated in the drilling, reworking, deepening or
plugging back of said well. Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and the
Accounting Procedure attached hereto.
Notwithstanding the provisions of this Article VI.B.2., it is agreed
that without the mutual consent of all parties, no wells shall be completed
in or produced from a source of supply from which a well located elsewhere on
the Contract Area is producing, unless such well conforms to the then
existing well spacing pattern for such source of supply.
Notwithstanding anything contained herein to the contrary, the foregoing
provisions for this Article VI. do not apply to the drilling or completion of a
well drilled hereunder.
The Non-Consenting Parties to the drilling of any well hereunder shall
relinquish all of their interest in such well and the leases under which such
well is drilled except insofar as such leases cover the land comprising the
spacing or proration unit for any wells which such Non-Consenting Party has
participated in drilling and completed as provided herein. To evidence such
forfeiture, such Non-Consenting Parties shall execute and deliver to the
Consenting Parties a recordable assignment of the interest forfeited in
accordance with instructions furnished to the Non-Consenting Parties by the
Operator pertaining to the interests of Consenting Parties in the forfeited
interest.
3. STAND-BY TIME: When a well which has been drilled or deepened has
reached its authorized depth and all tests have been completed, and the
results thereof furnished to the parties, stand-by costs incurred pending
response to a party's notice proposing a reworking, deepening, plugging back
or completing operation in such a well shall be charged and borne as part of
the drilling or deepening operation just completed. Stand-by costs subsequent
to all parties responding, or expiration of the response time permitted,
whichever first occurs, and prior to agreement as to the participating
interests of all Consenting Parties pursuant to the terms of the second
grammatical paragraph of Article VI.B.2. shall be charged to and borne as
part of the proposed operation, but if the proposal is subsequently withdrawn
because of insufficient participation, such stand-by costs shall be allocated
between the Consenting Parties in the proportion each Consenting Party's
interest as shown on Exhibit "A" bears to the total interest as shown on
Exhibit "A" of all Consenting Parties.
4. SIDETRACKING: Except as hereinafter provided, those provisions of
this agreement applicable to a "deepening" operation shall also be applicable
to any proposal to directionally control and intentionally deviate a well
from vertical so as to change the bottom hole location (herein called
"sidetracking"), unless done to straighten the hole or to drill around junk
in the hole or because of other mechanical difficulties. Any party having the
right to participate in a proposed sidetracking operation that does not own
an interest in the affected well bore at the time of the notice shall, upon
electing to participate, tender to the well bore owners its proportionate
share (equal to its interest in the sidetracking operation) of the value of
that portion of the existing well bore to be utilized as follows:
(a) If the proposal is for sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the
initial drilling of the well down to the depth at which the sidetracking
operation is initiated.
(b) If the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable
materials and equipment down to the depth at which the sidetracking operation
is initiated, determined in accordance with the provisions of Exhibit "C",
less the estimated cost of salvaging and the estimated costs of plugging and
abandoning.
In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be
limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal
holidays; provided, however, any party may request and receive up to eight
(8) additional days after expiration of the forty-eight (48) hours within
which to respond by paying for all stand-by time incurred during such
extended response period. If more than one party elects to take such
additional time to respond to the notice, stand-by costs shall be allocated
between the parties taking additional time to respond on a day-to-day basis
in the proportion each electing party's interest as shown on Exhibit "A"
bears to the total interest as shown on Exhibit "A" of all the electing
parties. In all other instances the response period to a proposal for
sidetracking shall be limited to thirty (30) days.
C. TAKING PRODUCTION IN KIND:
Each party shall take in kind or separately dispose of its proportionate
share of all oil and gas produced from the Contract Area, exclusive of
production which may be used in development and producing operations and in
preparing and treating oil and gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the risking in kind or
separate disposition by any party of its proportionate share of the
production shall be borne by such party. Any party risking its share of
production in kind shall be
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<PAGE>
ARTICLE VI
CONTINUED
required to pay for only its proportionate share of such part of Operator's
surface facilities which it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.D., shall be entitled to receive
payment directly from the purchaser thereof for its share of all production.
In the event any party shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the oil
produced from the Contract Area. Operator shall have the right, subject to
the revocation at will by the party owning it, but not the obligation, to
purchase such oil or sell it to others at any time and from time to time, for
the account of the non-taking party at the best price reasonably obtainable
under the circumstances in the area for such production. Any such purchase or
sale by Operator shall be subject always to the right of the owner of the
production to exercise at any time its right to take in kind, or separately
dispose of, its share of all oil not previously delivered to a purchaser. Any
purchase or sale by Operator of any other party's share of oil shall be only
for such reasonable periods of time as are consistent with the minimum needs
of the industry under the particular circumstances, but in no event for a
period in excess of one (1) year.
In the event one or more parties' separate disposition of its share of
the gas causes splitstream deliveries to separate pipelines and/or
deliveries which on a day-to-day basis for any reason are not exactly equal
to a party's respective proportionate share of total gas sales to be
allocated to it, the balancing or accounting between the respective accounts
of the parties shall be in accordance with any gas balancing agreement
between the parties hereto, whether such an agreement is attached as Exhibit
"E", or is a separate agreement.
D. ACCESS TO CONTRACT AREA AND INFORMATION:
Each party shall have access to the Contract Area at all reasonable
times, at its sole cost and risk to inspect or observe operations, and shall
have access at reasonable times to information pertaining to the development
or operation thereof, including Operator's books and records relating
thereto. Operator, upon request, shall furnish each of the other parties with
copies of all forms or reports filed with governmental agencies, daily
drilling reports, well logs, tank tables, daily gauge and run tickets and
reports of stock on hand at the first of each month, and shall make available
samples of any cores or cuttings taken from any well drilled on the Contract
Area. The cost of gathering and furnishing information to Non-Operator, other
than that specified above, shall be charged to the Non-Operator that requests
the information.
E. ABANDONMENT OF WELLS:
1. ABANDONMENT OF DRY HOLES. Any well which has been drilled or deepened
under the terms of this agreement and is proposed to be completed as a dry
hole shall not be plugged and abandoned without the consent of such
parties participating in the drilling of such well. Should Operator, after
diligent effort, be unable to contact any party, or should any party fail to
reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after receipt of notice of the proposal to plug and abandon such
well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening such well. Any party who
objects to plugging and abandoning such well shall have the right to take
over the well and conduct further operations in search of oil and/or gas
subject to the provisions of Article VIII.
2. ABANDONMENT OF WELLS THAT HAVE PRODUCED. Except for any well in
which, Non-Consent operation has been conducted hereunder for which the
Consenting Parties have not been fully reimbursed as herein provided, any
well which has been completed as a producer shall not be plugged and
abandoned without the consent of such parties. If such parties owning a
current interest in such consent to such abandonment, the well shall be
plugged and abandoned in accordance with applicable regulations and at the
cost, risk and expense of such the parties hereto. If, within thirty (30)
days after receipt of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to
continue its operation from the interval(s) of the formation(s) then open to
production shall tender to each of the other parties owning an interest in
such well its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of
Exhibit "C", less the estimated cost of salvaging and the estimated cost of
plugging and abandoning. Each abandoning party shall assign the non-abandoning
parties, without warranty, express or implied, as to title or as to quantity,
or fitness for use of the equipment and material, all of its interest in the
well and related equipment, together with its interest in the leasehold
estate as to, but only as to, the interval or intervals of the formation or
formations then open to production. If the interest of the abandoning party
is or includes an oil and gas interest, such party shall execute and deliver
to the non-abandoning party or parties an oil and gas lease, limited to the
interval or intervals of the formation or formations then open to production,
for a term of one (1) year and so long thereafter as oil and/or gas is
produced from the interval or intervals of the formation or formations
covered thereby, such lease to be on the form attached as Exhibit
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<PAGE>
ARTICLE VI
CONTINUED
"B". The assignments or leases so limited shall encompass the "drilling unit"
upon which the well is located. The payments by, and the assignments or
leases to, the assignees shall be in a ratio based upon the relationship of
their respective percentage of participation in the Contract Area to the
aggregate of the percentages of participation in the Contract Area of all
assignees. There shall be no readjustment of interests in the remaining
portion of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interests in the operation of or production from the well in
the interval or intervals then open other than the royalties retained in any
lease made under the terms of this Article. Upon request, Operator shall
continue to operate the assigned well for the account of the non-abandoning
parties at the rates and charges contemplated by this agreement, plus any
additional cost and charges which may arise as the result of the separate
ownership of the assigned well. Upon proposed abandonment of the producing
interval(s) assigned or leased, the assignor or lessor shall then have the
opinion to repurchase its prior interest in the well (using the same
valuation formula) and participate in further operations therein subject to
the provisions hereof.
3. ABANDONMENT OF NON-CONSENT OPERATIONS: The provisions of Article
VI.E.1. or VI.E.2. above shall be applicable as between Consenting Parties in
the event of the proposed abandonment of any well excepted from said
Articles; provided, however, no well shall be permanently plugged and
abandoned unless and until all parties having the right to conduct further
operations therein have been notified of the proposed abandonment and
afforded the opportunity to elect to take over the well in accordance with
the provisions of this Article VI.E.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the
parties liable as partners.
B. LIENS AND PAYMENT DEFAULTS:
Each Non-Operator grants to Operator a lien upon its oil and gas rights
in the Contract Area, and a security interest in its share of oil and/or gas
when extracted and its interest in all equipment, to secure payment of its
share of expense, together with interest thereon at the rate provided in
Exhibit "C". To the extent that Operator has a security interest under the
Uniform Commercial Code of the state, Operator shall be entitled to exercise
the rights and remedies of a secured party under the Code. The bringing of a
suit and the obtaining of judgment by Operator for the secured Indebtedness
shall not be deemed an election of remedies or otherwise affect the lien
rights or security interest as security for the payment thereof. In addition,
upon default by any Non-Operator in the payment of its share of expense,
Operator shall have the right, without prejudice to other rights or remedies,
to collect from the purchaser the proceeds from the sale of such
Non-Operator's share of oil and/or gas until the amount owed by such
Non-Operator, plus interest, has been paid. Each purchaser shall be entitled
to rely upon Operator's written statement concerning the amount of any
default. Operator grants a like lien and security interest to the
Non-Operators to secure payment of Operator's proportionate share of expense.
If any party fails or is unable to pay its share of expense within sixty
(60) days after rendition of a statement therefor by Operator, the
non-defaulting parties, including Operator, shall, upon request by Operator,
pay the unpaid amount in the proportion that the interest of each such
party bears to the interest of all such parties. Each party so paying its
share of the unpaid amount shall, to obtain reimbursement thereof, be
subrogated to the security rights described in the foregoing paragraph.
C. PAYMENTS AND ACCOUNTING:
Except as herein otherwise specifically provided, Operator shall
promptly pay and discharge expenses incurred in the development and operation
of the Contract Area pursuant to this agreement and shall charge each of the
parties hereto with their respective proportionate shares upon the expense
basis provided in Exhibit "C". Operator shall keep an accurate record of the
joint account hereunder, showing expenses incurred and charges and credits
made and received.
Operator, at its election, shall have the right from time to time to
demand and receive from the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of
such estimated expense, together with an invoice for its share thereof. Each
such statement and invoice for the payment in advance of estimated expense
shall be submitted on or before the 20th day of the next preceding month.
Each party shall pay to Operator its proportionate share of such estimate
within fifteen (15) days after such estimate and invoice is received. If any
party fails to pay its share of said estimate within said time, the amount
due shall bear interest as provided in Exhibit "C" until paid. Proper
adjustment shall be made monthly between advances and actual expense to the
end that each party shall bear and pay its proportionate share of actual
expenses incurred, and no more.
D. LIMITATION OF EXPENDITURES:
1. DRILL OR DEEPEN: Without the consent of all parties, no well shall be
drilled or deepened, except any well drilled or deepened pursuant to the
provisions of Article VI.B.2. of this agreement. Consent to the drilling or
deepening shall include:
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ARTICLE VII
CONTINUED
/X/ OPTION NO. 1: All necessary expenditures for the drilling or deepening,
testing, completing and equipping of the well, including necessary tankage
and/or surface facilities.
2. REWORK OR PLUG BACK: Without the consent of all parties, no well
shall be reworked or plugged back except a well reworked or plugged back
pursuant to the provisions of Article VI.B.2. of this agreement. Consent to
the reworking or plugging back of a well shall include all necessary
expenditures in conducting such operations and completing and equipping of
said well, including necessary tankage and/or surface facilities.
3. OTHER OPERATIONS: Without the consent of all parties, Operator shall
not undertake any single project reasonably estimated to require an
expenditure in excess of Twenty-Five Thousand and No/100---Dollars ($25,000.00)
except in connection with a well, the drilling, reworking, deepening
completing, recompleting, or plugging back of which has been previously
authorized by or pursuant to this agreement; provided, however, that, in case
of explosion, fire, flood or other sudden emergency, whether of the same or
different nature, Operator may take such steps and incur such expenses as in
its opinion are required to deal with the emergency to safeguard life and
property but Operator, as promptly as possible, shall report the emergency to
the other parties. If Operator prepares an authority for expenditure (AFE)
for its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of
Twenty-Five Thousand and No/100-----Dollars ($ 25,000.00) but less than
the amount first set forth above in this paragraph.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
Rentals, shut-in well payments and minimum royalties which may be
required under the terms of any lease shall be paid by the party or parties
who subjected such lease to this agreement at its or their expense. In the
event two or more parties own and have contributed interests in the same
lease to this agreement, such parties may designate one of such parties to
make said payments for and on behalf of all such parties. Any party may
request, and shall be entitled to receive, proper evidence of all such
payments. In the event of failure to make proper payment of any rental,
shut-in well payment or minimum royalty through mistake or oversight where
such payment is required to continue the lease in force, any loss which
results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.
Operator shall notify Non-Operator of the anticipated completion of a
shut-in gas well, or the shutting in or return to production of a producing
gas well, at least five (5) days (excluding Saturday, Sunday and legal
holidays), or at the earliest opportunity permitted by circumstances, prior
to taking such action, but assumes no liability for failure to do so. In the
event of failure by Operator to so notify Non-Operator, the loss of any lease
contributed hereto by Non-Operator for failure to make timely payments of any
shut-in well payment shall be borne jointly by the parties hereto under the
provisions of Article IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay
all such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties or
production payments) on leases and oil and gas interests contributed by such
Non-Operator. If the assessed valuation of any leasehold estate is reduced by
reason of its being subject to outstanding excess royalties, over-riding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or owners of such
leasehold estate, and Operator shall adjust the charge to such owner or
owners so as to reflect the benefit of such reduction. 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.
Operator shall bill the other parties for their proportionate shares of all
tax payments in the manner provided in Exhibit "C".
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and
prosecute the protest to a final determination, unless all parties agree to
abandon the protest prior to final determination. During the pendency of
administrative or judicial proceedings, Operator may elect to pay, under
protest, all such taxes and any interest and penalty. When any such protested
assessment shall have been finally determined, Operator shall pay the tax for
the joint account, together with any interest and penalty accrued, and the
total cost shall then be assessed against the parties, and be paid by them,
as provided in Exhibit "C".
Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes* imposed upon or with respect to the
production or handling of such party's share of oil and/or gas produced under
the terms of this agreement.
* Including excise taxes
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ARTICLE VII.
CONTINUED
G. Insurance:
At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations
are being conducted; PROVIDED, HOWEVER, that Operator may be a self-insurer
for liability under said compensation laws in which event the only charge
that shall be made to the joint account shall be as provided in Exhibit "C".
Operator shall also carry or provide insurance for the benefit of the joint
account of the parties as outlined in Exhibit "D", attached to and made a
part hereof. Operator shall require all contractors engaged in work on or for
the Contract Area to comply with the workmen's compensation law of the state
where the operations are being conducted and to maintain such other insurance
as Operator may require.
In the event automobile public liability insurance is specified in said
Exhibit "D", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automobile equipment.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. Surrender of Leases:
The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any lease
or in any portion thereof, and the other parties do not agree or consent
thereto, the party desiring to surrender shall assign, without express or
implied warranty of title, all of its interest in such lease, or portion
thereof, and any well material and equipment which may be located thereon and
any rights in production thereafter secured, to the parties not consenting
to such surrender. If the interest of the assigning party is or includes an
oil and gas interest, the assigning party shall execute and deliver to the
party or parties not consenting to such surrender an oil and gas lease
covering such oil and gas interest for a term of one (1) year and so long
thereafter as oil and/or gas is produced from the land covered thereby, such
lease to be on the form attached hereto as Exhibit "B". Upon such assignment
or lease, the assigning party shall be relieved from all obligations
thereafter accruing, but not theretofore accrued, with respect to the
interest assigned or leased and the operation of any well attributable
thereto, and the assigning party shall have no further interest in the
assigned or leased premises and its equipment and production other than the
royalties retained in any lease made under the terms of this Article. The
party assignee or lessee shall pay to the party assignor or lessor the
reasonable salvage value of the latter's interest in any wells and equipment
attributable to the assigned or leased acreage. The value of all material
shall be determined in accordance with the provisions of Exhibit "C", less
the estimated cost of salvaging and the estimated cost of plugging and
abandoning. If the assignment or lease is in favor of more than one party,
the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as
it was immediately before the assignment, lease or surrender in the balance
of the Contract Area; and the acreage assigned, leased or surrendered and
subsequent operations thereon, shall not thereafter be subject to the terms
and provisions of this agreement.
B. Renewal or Extension of Leases:
If any party secures a renewal of any oil and gas lease subject to this
agreement, all other parties shall be notified promptly, and shall have the
right for a period of thirty (30) days following receipt of such notice in
which to elect to participate in the ownership of the renewal lease, insofar
as such lease affects lands within the Contract Area, by paying to the party
who acquired it their several proper proportionate shares of the acquisition
cost allocated to that part of such lease within the Contract Area, which
shall be in proportion to the interests held at that time by the parties in
the Contract Area.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate
of the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal lease. Any renewal lease in
which less than all parties elect to participate shall not be subject to this
agreement.
Each party who participates in the purchase of a renewal lease shall be
given an assignment of its proportionate interest therein by the acquiring
party.
The provisions of this Article shall apply to renewal leases whether
they are for the entire interest covered by the expiring lease or cover only
a portion of its area or an interest therein. Any renewal lease taken before
the expiration of its predecessor lease, or taken or contracted for within
six (6) months after the expiration of the existing lease shall be subject to
this provision; but any lease taken or contracted for more than six (6)
months after the expiration of an existing lease shall not be deemed a
renewal lease and shall not be subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
oil and gas leases.
C. Acreage or Cash Contributions:
While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost
of such drilling or other operation. If the contributions be in the form of
acreage, the party to whom the contribution is made shall promptly tender an
assignment of the acreage, without warranty of title, to the Drilling Parties
in the proportions
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ARTICLE VIII
CONTINUED
said Drilling Parties shared the cost of drilling the well. Such acreage
shall become a separate Contract Area and, to the extent possible, be governed
by provisions identical to this agreement. Each party shall promptly notify
all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage
outside the Contract Area which are in support of a well drilled inside the
Contract Area.
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration
shall not be deemed a contribution as contemplated in this Article VIII C.
D. Maintenance of Uniform Interest:
For the purpose of maintaining uniformity of ownership in the oil and
gas leasehold interests covered by this agreement, no party shall sell,
encumber, transfer or make other disposition of its interests in the leases
embraced within the Contract Area and in wells, equipment and production
unless such disposition covers either:
1. the entire interest of the party in all leases and equipment and
production, or
2. an equal undivided interest in all leases and equipment and
production in the Contract Area.
Every such sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such
co-owners to appoint a single trustee or agent with full authority to receive
notices, approve expenditures, receive billings for and approve and pay such
party's share of the joint expenses, and to deal generally with, and with
power to bind, the co-owners of such party's interest within the scope of the
operations embraced in this agreement, however, all such co-owners shall have
the right to enter into and execute all contracts or agreements for the
disposition of their respective shares of the oil and gas produced from the
Contract Area and they shall have the right to receive, separately, payment of
the sale proceeds thereof.
E. Waiver of Rights to Partition:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in
the Contract Area waives any and all rights it may have to partition and have
set aside to it in severalty its undivided interest therein.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the
rights and liabilities hereunder are several and not joint or collective, or
that this agreement and operations hereunder shall not constitute a
partnership, if, for federal income tax purposes, this agreement and the
operations hereunder are regarded as a partnership, each party hereby
affected elects to be excluded from the application of all of the provisions
of Subchapter "K", Chapter J, Subtitle "A", of the Internal Revenue Code of
1954, as permitted and authorized by Section 761 of the Code and the
regulations promulgated thereunder. Operator is authorized and directed to
execute on behalf of each party hereby affected such evidence of this
election as may be required by the Secretary of the Treasury of the United
States or the Federal Internal Revenue Service, including specifically, but
not by way of limitation, all of the returns, statements, and the data
required by Federal Regulations 1.761. Should there be any requirements that
each party hereby affected give further evidence of this election, each such
party shall execute such documents and furnish such other evidence as may be
required by the Federal Internal Revenue Service or as may be necessary to
evidence this election. No such party shall give any notices or take any
other action inconsistent with the election made hereby. If any present or
future income tax laws of the state or states in which the Contract Area is
located or any future income tax laws of the United States contain provisions
similar to those in Subchapter "K", Chapter J, Subtitle "A", of the Internal
Revenue Code of 1954, under which an election similar to that provided by
Section 761 of the Code is permitted, each party hereby affected shall make
such election as may be permitted or required by such laws. In making the
foregoing election, each such party states that the income derived by such
party from operations hereunder can be adequately determined without the
computation of partnership taxable income.
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ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
Twenty-five thousand and 00/100 Dollars ($25,000.00) and if the payment is in
complete settlement of such claim or suit. If the amount required for
settlement exceeds the above amount, the parties hereto shall assume and take
over the further handling of the claim or suit, unless such authority is
delegated to Operator. All costs and expenses of handling, settling, or
otherwise discharging such claim or suit shall be at the joint expense of the
parties participating in the operation from which the claim or suit arises.
If a claim is made against any party or if any party is sued on account of
any matter arising from operations hereunder over which such individual has
no control because of the rights given Operator by this agreement, such party
shall immediately notify all other parties, and the claim or suit shall be
treated as any other claim or suit involving operations hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
make money payments, that party shall give to all other parties prompt
written notice of the force majeure with reasonably full particulars
concerning it, thereupon, the obligations of the party giving the notice, so
far as they are affected by the force majeure, shall be suspended during, but
no longer than, the continuance of the force majeure. The affected party
shall use all reasonable diligence to remove the force majeure situation as
quickly as practicable.
The requirement that any force majeure shall be remodeled with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the party involved, contrary to its wishes, how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.
The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy,
war, blockade, public riot, lightning, fire, storm, flood, explosion,
governmental action, governmental delay, restraint or inaction,
unavailability of equipment, and any other cause, whether of the kind
specifically enumerated above or otherwise, which is not reasonably within
the control of the party claiming suspension.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties and required by
any of the provisions of this agreement, unless otherwise specifically
provided, shall be given in writing by mail or telegram, postage or charges
prepaid, or by telex or telecopier and addressed to the parties to whom the
notice is given at the addresses listed in Exhibit "A". The originating
notice given under any provision hereof shall be deemed given only when
received by the party to whom such notice is directed, and the time for such
party to give any notice in response thereto shall run from the date the
originating notice is received. The second or any responsive notice shall be
deemed given when deposited in the mail or with the telegraph company, with
postage or charges prepaid, or sent by telex or telecopier. Each party shall
have the right to change its address at any time, and from time to time, by
giving written notice thereof to all other parties.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the oil and
gas leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas
interest contributed by any other party beyond the term of this agreement.
/ / OPTION NO. 1: So long as any of the oil and gas leases subject to this
agreement remain or are continued in force as to any part of the Contract
Area, whether by production, extension, renewal or otherwise.
/X/ OPTION NO. 2: In the event the well described in Article VI.A., or any
subsequent well drilled under any provision of this agreement, results in
production of oil and/or gas in paying quantities, this agreement shall
continue in force so long as any such well or wells produce, or are capable
of production, and for an additional period of 60 days from cessation of
all production; provided, however, if, prior to the expiration of such
additional period, one or more of the parties are engaged in drilling,
reworking, deepening, plugging back, testing or attempting to complete a well
or wells hereunder, this agreement shall continue in force until such
operations have been completed and if production results therefrom, this
agreement shall continue in force as provided herein. In the event the well
described in Article VI.A., or any subsequent well drilled hereunder, results
in a dry hole, and no other well is producing, or capable of producing oil
and/or gas from the Contract Area, this agreement shall terminate unless
drilling, deepening, plugging back or reworking operations are commenced
within 60 days from the date of abandonment of said well.
It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached
prior to the date of such termination.
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<PAGE>
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and
orders of any duly constituted regulatory body of said state; and to all
other applicable federal, state and local laws, ordinances, rules,
regulations and orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including, but not
limited to, matters of performance, non-performance, breach, remedies,
procedures, rights, duties and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state
of Texas shall govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production
of wells, on tracts offsetting or adjacent to the Contract Area.
With respect to operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of
action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or predecessor or successor agencies to
the extent such interpretation or application was made in good faith. Each
Non-Operator further agrees to reimburse Operator for any amounts applicable
to such Non-Operator's share of production that Operator may be required to
refund, rebate or pay as a result of such an incorrect interpretation or
application, together with interest and penalties thereon owing by Operator
as a result of such incorrect interpretation or application.
Non-Operators authorize Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold
hereunder or to any other person or entity pursuant to the requirements of
the "Crude Oil Windfall Profit Tax Act of 1980", as same may be amended from
time to time ("Act"), and any valid regulations or rules which may be issued
by the Treasury Department from time to time pursuant to said Act. Each
party hereto agrees to furnish any and all certifications or other
information which is required to be furnished by said Act in a timely manner
and in sufficient detail to permit compliance with said Act.
ARTICLE XV.
OTHER PROVISIONS
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<PAGE>
ARTICLE XV
OTHER PROVISIONS
A. REWORKING OPERATIONS
Notwithstanding any language set out in Article VI (B) to the contrary,
each non-consenting party to a reworking operation on a well conducted
pursuant to Article VI (B) shall, upon commencement of such operations, be
deemed to have relinquished to consenting parties, and the consenting parties
shall own and be entitled to receive, in proportion to their respective
interests, all of such non-consenting party's interest in the well, its
leasehold operating rights and share of production therefrom, only insofar as
the interval or intervals of the formation or formations which are being
reworked and to which such non-consenting party does not desire to join in
the reworking thereof, until the proceeds or market value thereof (after
deducting production taxes, windfall profits taxes, royalty, overriding
royalty and other interests payable out of, or measured by the production
from such well, only insofar as the production secured from the interval or
intervals of the formation or formations which are subject to said reworking
operations accruing with respect to such interest until it reverts) shall
equal the total of those certain costs as further described in subparagraphs
(a) and (b) of the third grammatical paragraph under Article VI (B) 2, hereof.
B. NONDISCRIMINATION
In connection with the performance of work under this agreement, the
Operator agrees to comply with all of the provisions of Section 202 (1) to
(7) inclusive, of Executive Order 11246 (30 F.R. 12319), which are hereby
incorporated by reference in this agreement, and of all provisions of said
Executive Order 11246 and all rules, regulations and relevant orders of the
Secretary of Labor.
C. COVENANTS RUN WITH THE LAND
The terms, provisions, covenants and conditions of this agreement shall
be deemed to be covenants running with the lands, the lease or leases and
leasehold estates covered hereby, and all of the terms, provisions, covenants
and conditions of this agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective heirs, executors,
administrators, personal representatives and assigns.
D. LAWS AND REGULATIONS
All of the provisions of this agreement are expressly subject to all
applicable laws, orders, rules and regulations of any governmental body or
agency having jurisdiction in the premises, and all operations contemplated
hereby shall be conducted in conformity therewith. Any provisions of this
agreement which is inconsistent with any such laws, orders, rules or
regulations is hereby modified so as to conform therewith, and this
agreement, as so modified, shall continue in full force and effect.
E. PRIORITY OF OPERATIONS
If at any time there is more than one operation proposed in connection
with any well subject to this agreement, then unless all participating
parties agree on the sequence of such operations, such proposals shall be
considered and disposed of in the following order or priority:
1. Proposals to do additional testing, coring or logging.
2. Proposals to attempt a completion in the objective zone.
3. Proposals to plug back and attempt completions in shallower
zones, in ascending order.
4. Proposals to side-track the well to reach any zone not below the
original authorized objective.
5. Proposals to deepen the well, in descending order.
F. REGULATORY PROVISIONS
1. LIQUID HYDROCARBONS.
Non-Operators hereby authorize Operator to file with the purchaser of
crude oil or other liquid hydrocarbons or with any other person required by
law, any statement or certification required by any
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<PAGE>
rule, regulation or order issued thereunder or by any other law, rule,
regulation relating to the pricing of crude oil and other liquid hydrocarbons
or the taxation thereof. To the extent that Operator may by law be authorized
to do so, Non-Operators hereby authorized Operator to agree with any
purchaser to relieve Operator (in whole or in part as Operator may determine)
of any filing or certification requirements. In making any filing ore
certification with any purchaser or crude oil or other liquid hydrocarbons,
each Non-Operator shall be solely responsible for furnishing to Operator or
such purchaser or any other person required by law any exemption certificate,
independent producer certificate or any other evidence required by law to
entitle Non-Operator to higher price for the sale of his production or for a
lower rate of tax thereon, and upon a Non-Operator's failure to furnish same,
Operator shall certify to such purchaser for such Non-Operator's interest the
lower price and/or higher rate of tax. Operator shall have not duty to seek
any refunds on behalf of any Non-Operator of any overpayment of any tax to
which any Non-Operator may be entitled by law.
2. REFUNDS.
In the event any Non-Operator receives a greater sum for the sale of its
share of production than that to which such Non-Operator is entitled, such
Non-Operator shall promptly refund any excess sums so collected to the person
entitled thereto together with any interest thereon required by law. In the
event Operator is required for any reason to may any such refund on any
Non-Operator's behalf and such Non-Operator refuses upon Operator's request
to reimburse Operator for the amount so paid, then Operator, in addition to
any other rights or remedies which it may have as a result of making such
refund, (i) shall have the lien provided by Article VII.B to secure such
reimbursement and (ii) shall be authorized to collect from Non-Operator's
purchaser of production all revenues attributable to Non-Operator's share of
production until the full amount required to be paid or refunded by
Non-Operator has been recovered.
3. OPERATOR'S LIABILITY.
Operator shall use its best judgement in making any of the filings and
certification referred to above and in prosecuting any filings and
applications. However, in no event shall Operator have any liability to any
Non-operator in making and prosecuting any such filing or in rendering any
statement or certification, absent bad faith, gross negligence or willful
misconduct. Any penalties incurred as a result of any incorrect
certification, statement or filing shall, in absence of bad faith, gross
negligence or willful misconduct, be charged to the parties owning the
production to which the penalty pertains. In no event shall any error by
Operator relieve any Non-Operator of the liability for any refund under
Paragraph 3 above.
G. OPERATOR PROTECTION
1. ASSIGNMENT.
No assignment or other transfer or disposition of an interest subject to
this Agreement shall be effective as to Operator or the other parties hereto
until the first day of the month following the month in which (i) Operator
received an authentic copy of the instrument evidencing such assignment,
transfer or disposition AND (ii) the person receiving such assignment,
transfer or disposition has become obligated by instrument satisfactory to
Operator to observe, perform and be bound by all of the covenants, terms and
conditions of this Agreement. Prior to such date, neither Operator nor any
other party shall be required to recognize such assignment, transfer, or
disposition for any purpose but may continue to deal exclusively with the
party making such assignment, transfer, or disposition in all matters under
this Agreement including billings. No assignment or other transfer or
disposition of an interest subject to this Agreement shall relieve a party of
its obligations accrued prior to the effective date aforesaid. Further, no
assignment, transfer or other disposition shall relieve any party of its
liability for its share of costs and expenses which may be incurred in any
operation to which such party has previously agreed or consented prior to the
effective date aforesaid for the drilling, testing, completing and equipping,
re-working, recompleting, side-tracking, deepening, plugging-back, or
plugging and abandoning of a well even though such operation is performed
after said effective date, subject to such party's right to elect not to
participate in completion operations under Article VI.B and Article VII.D,
Option No. 2, not previously consented to.
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2. ATTORNEYS FEES.
In the event any party hereto shall ever be required to bring legal
proceedings in order to collect any sums due from any party under this
Agreement, then party or parties shall also be entitled to recover all court
costs, costs of collection and a reasonable attorney's fee, which the lien
provided for herein shall also secure.
H. PERPETUITIES
It is not the intent of the parties that any provision herein violate
any applicable law regarding the rule against perpetuities, the suspension of
the absolute power of alienation or other rule regarding the vesting or
duration of estates, and this agreement shall be construed as not violating
such rule to the extent the same can be so construed consistent with the
intent of the parties. In the event, however, any provision hereof is
determined to violate such rule, then such provision shall nevertheless be
effective for the maximum period (but not longer than the maximum period)
permitted by such rule which will result in no violation.
I. NO THIRD PARTY BENEFICIARY CONTRACT
This Agreement is made solely for the benefit of those persons who are
parties hereto (including those persons succeeding to all or part of the
interest of an original party, if such succession is recognized under the
other provisions hereof), and no other person shall have or claim or be
entitled to enforce any rights, benefits or obligations under this Agreement.
J. OPERATOR'S REORGANIZATION AND STATUS CHANGE
1. Notwithstanding, the second sentence of Article V.B.1., in the event
of a transfer of all Operator's interest to a corporation which controls, is
controlled by or is under common control with Operator, such transferee shall
automatically become the successor Operator without the approval of
Non-Operators.
2. For the purpose of Article V.B., Operator shall be considered to own
an interest in the Contract Area if it is a general partner of a limited
partnership which owns an interest in the Contract Area or if its owns a
carried or reversionary working interest in the Contract Area.
K. BANKRUPTCY
If, following the granting of relief under the Bankruptcy Code to any
party hereto as debtor thereunder, this Agreement should be held to be an
executory contract within the meaning of 11 U.S.C. Section 365 the Operator,
or (if the Operator is the debtor in bankruptcy) any other party, shall be
entitled to a determination by debtor or any trustee for debtor within thirty
(30) days from the date an order for relief in entered under the Bankruptcy
Code as to the rejection or assumption of this Operating Agreement. In the
event of an assumption, Operator or said other party shall be entitled to
adequate assurances as to future performance of debtor's obligation hereunder
and the protection of the interest of all other parties.
L. OBLIGATIONS WELLS
Notwithstanding any provisions contained in this Operating Agreement to
the contrary, if a party hereto elects not to participate in the drilling or
completion of a well which must be drilled in order to perpetuate a lease or
a farmout agreement which is subject hereto, upon such election, such party
shall promptly assign all of its interest in such lease or farmout agreement
to the parties who elected to participate in the drilling and completing of
such well in the proportions of their interests in such well.
M. SUBJECT TO EXPLORATION AGREEMENT
This Operating Agreement is executed in connection with and pursuant to
that certain Exploration Agreement dated August 1, 1997, between the parties
hereto. In the event of a conflict between any of the terms of this Operating
Agreement and said Agreement, the terms of said Exploration Agreement shall
apply.
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N. PAYMENT OF LEASE BURDENS
Notwithstanding any provision of this Operating Agreement to the
contrary, unless the purchaser of production or other third party pays such
burdens directly, Operator shall pay all royalties, overriding royalties and
other burdens on or payable out of the interest of any Non-Operator electing
by written notice to Operator to have Operator make such payments, provided
(i) such Non-Operator make adequate arrangements for the receipt by Operator
of the revenues necessary to make such payments, and (ii) the owners of such
interests execute Operator's division order or otherwise satisfy Operator
with respect to entitlement to such payments.
P. MARKETING OF NON-OPERATOR PRODUCTION
Notwithstanding anything to the contrary contained herein, Operator
hereby covenants and agrees that should any Non-Operator request, Operator
will market Non-Operators share of any production from operations upon the
Contract Area under the same terms that Operator is marketing its share of
said production.
Q. COUNTERPART EXECUTION
This agreement may be executed in counterparts, each of which so
executed shall be given the effect of execution of the original agreement.
Failure of any party hereto to execute this agreement shall not render it
ineffective as to any party hereto who does execute same. If this agreement
is executed in counterparts, the signature pages of the parties to the
various counterparts may be combined by Operator in one or more copies of
this agreement and treated and given effect for all purposes, including
recording, as separate and complete instructions.
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ARTICLE XVI.
MISCELLANEOUS
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and to their respective heirs, devisees, legal
representatives, successors and assigns.
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
IN WITNESS WHEREOF, this agreement shall be effective as of _________ day
of _____________, 19__.
OPERATOR
- --------------------------------- ---------------------------------
NON-OPERATORS
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
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EXHIBIT "A"
OPERATOR INTEREST
NON-OPERATOR INTEREST
(with address, phone, fax #)
to be completed at the time the Operating Agreement is executed
<PAGE>
EXHIBIT "B"
There is not an Exhibit "B" to this agreement
<PAGE>
EXHIBIT "c"
Attached to and made a part of ______________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
ACCOUNTING PROCEDURES
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-Operator" 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
and/or contract labor directly employed on the Joint Property in a 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 Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of 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 Nations Bank on the first day of the month in which delinquency occurs
plus 1% or 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 within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical
inventory of Controllable Material as provided for in Section V.
COPYRIGHT-C- 1985 by the Council of Petroleum Accountants Societies.
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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 within 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 I. 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
more than once each year without prior approval of Operator, except
upon the registration or removal of the Operator, and shall be made at
the expense of those Non-Operators approving 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 this Accounting Procedure and
if the agreement to which this Accounting Procedure is attached contains
no contrary provisions in 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 or consultants
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 or consultants directly
employed on the Joint Property if such charges are excluded from the
overhead rates.
(4) Salaries and wages of Technical Employees or consultants either
temporarily or permanently assigned to and directly employed in the
operation of 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 imposed 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 or consultants whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II.
4. EMPLOYEE BENEFITS
Operator's current costs of 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.
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.
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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
receiving 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 available 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 ten percent (10%) 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 in paragraph 8A above, Operator may elect to use
average commercial rates prevailing 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
Association.
9. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or 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, examination of title, payment of judgements 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.
12. INSURANCE
Net premiums paid for insurance required to be carried 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 expenditures 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.
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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:
( ) shall be covered by the overhead rates, or
(X) shall not be covered by the overhead rates
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services 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. OVERHEAD - FIXED RATE BASIS
(1) Operator shall charge the Joint Account at the following rates
per well per month.
Drilling Well Rate $ 5,000.00
(Prorated for less than a full month)
Producing Well Rate $ 500.00
(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 is
later, except that no charge shall be made during
suspension 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 a period of five (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 a multi-completed well in
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 on 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
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4. AMENDMENT OF RATES
The overhead rates provided for in this Section III may be amended from
time to time only by mutual arrangement 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
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or 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:
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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 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.
(d) Macaroni tubing (size less than 2 1/4 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 1/4 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, or point of manufacture, plus transportation costs,
if applicable, to the railway receiving point nearest the Joint
Property. Unused new tabulars will be priced as provided above in
Paragraph 2 A(1) and (2).
B. GOOD USED MATERIAL (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 which 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 as 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.
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(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 completion 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-cents-) per hundred weight on
all tubular 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 Material 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 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 the the Joint Account.
-7-
<PAGE>
EXHIBIT "D"
INSURANCE AND INDEMNITY
Without in any way limiting the Operator's and Non-Operator's liability
pursuant to this agreement, Operator shall, at all times while operations are
conducted under this agreement, maintain for the benefit of all parties
hereto, insurance at the types an in the maximum amounts as follows. Premiums
for such insurance shall be charged to the joint account.
All such insurance shall be maintained in full force and effect during
the terms of this agreement; however, such insurance may be canceled, altered
or amended as deemed necessary by Operator. If so required, Operator agrees
to have its insurance carrier furnish certificates of insurance evidencing
such insurance coverage.
Operator and non-operating working interest owners agree to mutually
waive subrogation in favor of each other on all insurance carried by each
party and/or to obtain such waiver from the insurance carrier if so required
by the insurance contract.
Non-operating working interest owners agree that the limits and coverage
carried by Operator are adequate and shall hold Operator harmless if any
claim exceeds such limit or is not covered by such policy.
<TABLE>
<CAPTION>
MINIMUM LIMITS
KIND POLICY FORM OF LIABILITY
- ---- ----------- ------------
<S> <C> <C>
Workman's Compensation Statutory Statutory
Comprehensive General Liability Comprehensive $500,000
(including coverage under all sections Combined Single Limit
of policy)
Motor Vehicle Comprehensive B.I. ($1,000,000)
(including non-ownership liability P.D. ($1,000,000)
and hired automobile coverage) Combined Single Limits
Umbrella Liability $2,000,000
Operator's Extra Expense * Control of well seepage, pollution & $1,000,000
containment replacement cost redrill
evacuation
</TABLE>
* On an individual election basis.
EXPLORATION AGREEMENT
Texana Project
Jackson County, Texas
This Exploration Agreement (the "Agreement") is entered into as of July
15, 1997, by and between TAC Resources, Inc. ("TAC"), Parallel Petroleum
Corporation ("Parallel"), Unit Petroleum Company ("Unit"), Beta Oil & Gas, Inc.
("Beta") and Pease Oil and Gas Company ("Pease") all hereinafter collectively
referred to as (the "Parties").
WITNESSETH:
WHEREAS, TAC has acquired seismic and lease options, oil and gas leases
and seismic permits covering an area of approximately 25,000 acres located in
Jackson County, Texas, as depicted on the plat attached hereto as Exhibit "A".
WHEREAS, Parallel, Unit, Beta and Pease propose to acquire undivided
interests in and to the rights granted by such agreements, and to participate in
conducting a 3-D seismic program upon the lands covered thereby.
NOW, THEREFORE, in consideration of the premises, the mutual agreements
and obligations set forth herein, and the mutual benefits to be received
hereunder, the Parties agree as follows:
ARTICLE 1. DEFINITIONS
For the purpose of this Agreement, the following terms shall have the
meanings designated below:
1.1 Area of Mutual Interest "AMI" means the lands outlined on the plat
attached hereto as Exhibit "A".
1.2 "AMI Interests" means any interest in the oil, gas or other
minerals in and under the AMI, including leasehold interests under oil and gas
leases, oil and gas lease options, interests of the farmee under farmout
agreement, and other such interests or rights similar or dissimilar to those
mentioned, including, but not limited to, seismic permits. AMI Interest does
not, however, include nonpossessory interests in the oil, gas and other minerals
in and under the AMI, such as royalty interests, overriding royalty interests,
net profits interests, or other such interests whether similar or dissimilar to
those mentioned.
1.3 "Existing AMI Interests" means the Seismic and Lease Options, Oil
and Gas Leases and Seismic Permits which have been acquired by TAC as of August
1, 1997.
1.4 "Subsequently Acquired AMI Interests" means all AMI Interests
acquired after August 1, 1997.
1.5 "Contract Lands" means lands located within the AMI which are
covered by AMI Interests.
1.6 "Initial Interest" means a Party's ownership in Existing AMI
Interests, and the amount of interest a party is entitled to acquire in
Subsequently Acquired AMI Interests, subject to the provisions hereof.
1.7 "Jointly Owned AMI Interest" means an AMI Interest in which the
Parties own an interest pursuant to the terms of this Agreement.
1.8 "Lease Burden" means any royalty, overriding royalty interest, net
profits interest, production payment, carried interest, reversionary working
interest or other charges upon a leasehold interest or the production therefrom.
1.9 "Losses" means any and all losses, liabilities, claims, demands,
penalties, fines, settlements, damages, actions, or suits of whatsoever kind and
nature (but expressly excluding consequential damages), whether or not subject
to litigation, including without limitation (I) claims or penalties arising from
products liability, negligence, statutory liability or violation of any
applicable law or in tort (strict, absolute or otherwise) and (ii) loss of or
damage to any property, and all reasonable out-of-pocket costs, disbursements
and expenses (including, without limitation, legal, accounting, consulting and
investigation expenses and litigation costs) imposed on, incurred by or asserted
against an indemnified Party in connection therewith.
1.10 "Operator" shall have the meaning as it is given in the Operating
Agreement in the form attached hereto as Exhibit "B".
1.11 "Party" or "Parties" means TAC, Parallel, Unit, Beta and Pease and
any other person or entity, singularly or as a group, which hereafter becomes a
party hereto or is otherwise subject to the terms hereof.
1.12 "Pre-Existing Data" means such data which includes, but is not
limited to: seismic records and related seismic data, electronic and mud logs,
cores and core analyses, field studies (less and except any proprietary
methodology or process used by any Party in such studies), production tests,
engineering, geological, geophysical, paleontological data, interpretive data
and maps prepared by any Party in existence as of the date of this Agreement.
1.13 "Proportionate Share" except as otherwise provided for herein,
shall be calculated by dividing a Party's Initial Interest by the aggregate of
the Initial Interests of all Parties who are to share an interest or an
obligation pursuant to the terms hereof. In circumstances where one or more
Parties do not participate in such an interest or obligation, "Proportionate
Share" shall be determined by dividing a Party's Initial Interest by the total
Initial Interests of all Party's participating therein.
1.14 "Prospect" means an area within the AMI which is designated as a
Prospect pursuant to Article 4.1 hereof and within which there is expected to
occur, based on information developed as a result of 3-D Seismic Operations, a
commercial accumulation of oil and/or gas in a specific structural or
stratigraphic trap.
1.15 "Subsequently Created Burden" means a lease burden which is
created by a party subsequent to its acquisition of the interest which is
subject to the burden, except the overriding royalty interest provided for in
Article 2.5 hereof.
1.16 "Costs Prior to Leasehold Acquisition" means all costs of any type
whatsoever which pertain to this project, covering lands located within or
outside the AMI, including, but not limited to costs of seismic permits, seismic
and lease options, oil and gas leases, and renewals thereof, land brokerage,
legal costs, surface damages, surveying, seismic acquisition and interpretation,
etc., which are incurred prior to Leasehold Acquisition conducted under the
provisions of Article 4 hereof.
1.17 Other terms are defined elsewhere in this Agreement.
ARTICLE 2. INTERESTS AND SHARE OF COSTS OF THE PARTIES
2.1 Area of Mutual Interest. The Parties hereby establish an Area of
Mutual Interest "AMI", same to be comprised of the area outlined on the attached
Exhibit "A", and which shall cover AMI Interests located therein. This AMI shall
continue for a term of three (3) years, or the expiration of the last Jointly
Owned AMI Interest, whichever is earlier.
2.2 "Interests and Share of Costs of the Parties" The Parties hereby
agree to own, as their Initial Interest; and agree to bear the costs set out
below, as follows:
<TABLE>
Party Initial Interest Share of Costs Share of Costs for
Prior to Leasehold Leasehold Acquisition
Acquisition and Subsequent Operations
<S> <C> <C> <C>
TAC .2500000 .0625000 .2500000
Parallel .1750000 .2187500 .1750000
Unit .2500000 .3125000 .2500000
Beta .2000000 .2500000 .2000000
Pease .1250000 .1562500 .1250000
</TABLE>
TAC has acquired and now owns the Existing AMI Interests. Parallel, Unit, Beta
and Pease agree that their costs in the Existing AMI Interests shall be based on
$75.00 per net mineral acre on seismic and lease options, and cost plus 25% on
oil and gas leases and seismic permits. The Existing AMI Interests are presently
comprised of approximately 23,183.908 net mineral acres covered by seismic and
lease option, and 300.5 net mineral acres covered by seismic permit where cost
was $25.00/net mineral acre. Based on the foregoing, the current total cost of
Existing AMI Interests is One million seven hundred forty-eight thousand one
hundred eighty-three and 73/100 Dollars ($1,748,183.73). Parallel, Unit, Beta
and Pease agree to pay TAC their portion of such cost, as referenced above, in
the Existing AMI Interests upon execution of this Agreement. Parallel, Unit,
Beta and Pease hereby agree that TAC shall have the exclusive right to acquire
AMI Interests through August 1, 1997, and that same shall be treated in all
respects as Existing AMI Interests. Parallel, Unit, Beta and Pease agree that
they shall be obligated to accept such interests in the same percentages and pay
TAC for such interests at the same terms stated herein. Payment for such
interests shall be due within fifteen (15) days after receipt of written notice
as set out in Article 2.4. Interests available to TAC which costs exceed those
stated above shall be offered to the other Parties as per the procedure set
forth in Article 2.4 below.
2.3 Recording. TAC agrees to file for record in the office of the
Jackson County Clerk, all Memorandums of Seismic and Lease Options covering the
Existing AMI Interests within fifteen (15) days of the date this Agreement is
executed by all Parties.
2.4 Subsequently Acquired AMI Interests. Any Party acquiring a
Subsequently Acquired AMI Interest, directly or indirectly, shall notify the
other Parties hereto. Such notice shall set forth (i) a description of the
interest acquired, (ii) the total cost of the interest, including all land and
legal costs associated with the acquisition thereof, (iii) the Proportionate
Share of the notified Party and its cost therein, and (iv) any other pertinent
terms of such acquisition, including, but not limited to, copies of the
instruments of conveyance, copies of leases, assignments, subleases, farmout and
other contracts affecting the AMI Interests, copies of paid drafts or checks,
itemized invoices of actual costs incurred by the acquiring Party. Parties shall
have fifteen (15) days from the receipt of this notice to acquire their
Proportionate Share of the Subsequently Acquired AMI Interest. A Party's
election to acquire shall be given in writing and accompanied by Party's payment
of its total cost for such interest. If a Party's election and payment are not
received within such fifteen (15) day period, it shall be conclusively presumed
that such Party has elected not to acquire its Proportionate Share of the
Subsequently Acquired AMI Interest and has forfeited its right thereto. A
Party's failure to exercise its option as to any particular notice shall not
constitute a waiver or release of its right to acquire any interest described in
any subsequent notice delivered hereunder.
2.5 Existing Burdens. Each Party's interest under this agreement in the
AMI Interests, and oil and gas leases which may be acquired thereunder, shall be
subject to and burdened by its proportionate share of all existing operating
agreements, existing and pending pooling and spacing orders and all Lease
Burdens other than Subsequently Created Burdens. TAC represents that, except as
hereinafter provided, it has not burdened the Existing AMI Interests acquired or
to be acquired with any liens or Subsequently Created Burdens. Each Party agrees
to perform its Proportionate Share of the obligations under the AMI Interests
acquired pursuant to this Agreement and the other obligations described in this
Article, but only to the extent that such obligations arise after the
acquisition of such AMI Interests by such Party. Notwithstanding the foregoing,
the Parties agree that they shall bear, their Proportionate Share of an
overriding royalty interest to be owned by Bayou Black Royalty Company, Inc. on
all oil and gas leases acquired pursuant to this Agreement (including leases
acquired by exercising lease options in which the Parties own an interest, and
in extensions and renewals thereof ) equal to two percent (2%) of eight-eighths
(8/8ths), provided that such overriding royalty interest shall be reduced in the
proportion that the undivided mineral interest covered by any such lease bears
to the entire mineral interest in the lands covered by such lease.
2.6 Expiring Options. If any lease options covered hereby will expire
prior to completion of the Seismic Operations contemplated herein, Operator
shall use its best efforts to renew such option for a sufficient period of time
to complete the proposed 3-D Seismic Operations thereon and exercise the lease
option thereunder. The acquisition of such renewal shall be handled under the
acquisition, notice and election provisions of Article 2.4.
2.7 Assignments. Upon receipt of payment for AMI Interests, TAC shall
assign to the Parties hereto their Initial Interest in and to all right, title
and interest owned by TAC in such AMI Interests. Such assignment shall be
recordable in form, shall be subject to this agreement, shall provide for
warranty by, through and under TAC, but not otherwise, and shall be subject to
the terms and provisions of the AMI Interests assigned.
2.8 AMI Interests Located In and Out of Existing AMI. If an AMI
Interest is found to cover lands located both within and outside the existing
AMI, the entirety of such AMI Interest shall be offered to the other Parties
under the acquisition, notice and election provisions of Article 2.3 and Article
2.4, and if the other Parties elect to participate in the acquisition thereof,
the description of the lands comprising the AMI shall be deemed to be amended to
extend and cover all of the lands covered by such interest. The option of the
Parties to participate in the acquisition of such interests shall be limited to
the entirety of the interest acquired.
ARTICLE 3. SEISMIC OPERATIONS
3.1 Existing Seismic, Geologic and Other Subsurface Data. Except as
prohibited by law or by agreements with third parties, upon request, each Party
owning existing seismic data pertaining to lands located within the AMI shall
furnish copies of all such data to the other Parties, together with any geologic
or other subsurface data that could be useful in the interpretation thereof. The
Party receiving such data shall bear the expense of copying it. The Party owning
any seismic or other data which may not be copied, due to legal prohibitions or
by agreements with third parties, shall, upon request, make such data available
to the Party requesting such data during normal business hours.
3.2 Ownership of Pre-Existing Data. Ownership of the Pre-Existing Data
and all reprocessed Pre-Existing Data shall at all times remain vested in the
Party who contributes the Pre-Existing Data for use by the Parties, and the
Parties agree to acknowledge such ownership, including, but not limited to, the
filing with any appropriate governmental authority of such acknowledgment. The
Parties expressly reserve the right to sell, license, or trade the Pre-Existing
Data which it contributes hereunder, to the extent that it has such right to
sell, license or trade the Pre-Existing Data, through its own efforts, or
through the efforts of others duly authorized by such Party and the benefits and
advantages, including monetary consideration, which such Party receives as a
result of such activities shall be the sole property of such Party.
3.3 Management of the 3-D Seismic Operations. Operator shall
exclusively manage and conduct the 3-D Seismic Operations contemplated hereunder
and all operations incident thereto, including, but not limited to, the
acquisition of all geoscientific data, the performance of all 3-D seismic
surveys and other geoscientific work incident thereto (other than analysis
and/or interpretation), and, subject to the Operating Agreements, the drilling
of all wells on the Prospects. Operator shall perform all such work through
employees, representatives, and contractors of its selection, and Operator shall
and does hereby agree to utilize reasonable prudence and economic judgment in
contracting with third party contractors or subcontractors. As manager of 3-D
Seismic Operations, Operator shall devote such of its time, attention and
efforts to the conduct thereof as it shall in good faith determine reasonably
necessary, but shall otherwise be free to engage in and pursue all other current
and future business projects, programs, prospects, opportunities, investments
and activities without obligation of any kind to or right of participation
therein by the other Parties hereto. In performing its duties under this
Agreement, Operator shall serve as an independent contractor and not as an agent
or employee of the other Parties hereto. Operator shall utilize reasonable
prudence and economic judgment in incurring costs, and shall further conduct the
3-D Seismic Operations and perform all of its duties under this Agreement as a
reasonable, prudent operator, in a good and workmanlike manner with due
diligence and dispatch, in accordance with good oilfield and exploratory
practice, and in compliance with all applicable laws and regulations, BUT SHALL
HAVE NO LIABILITY TO THE OTHER PARTIES HERETO OR ANY OTHER OWNER OF RIGHTS OR
INTERESTS UNDER THIS AGREEMENT FOR ANY LOSSES SUSTAINED OR LIABILITIES INCURRED
IN CONNECTION WITH THE 3-D SEISMIC OPERATIONS AND/OR THE CONDUCT OF ANY
ACTIVITIES UNDER OR CONTEMPLATED BY THIS AGREEMENT, SAVE AND EXCEPT AS MAY BE
OCCASIONED BY THE GROSS NEGLIGENCE OR WILLFUL MISCONDUCT OF OPERATOR. EACH OF
THE OTHER PARTIES HERETO ACKNOWLEDGES THAT (A) IT HAS READ AND AGREED TO THE
FOREGOING EXCULPATION OF OPERATOR AS A NEGOTIATED AND BARGAINED FOR ASPECT OF
THIS TRANSACTION, (B) THIS EXCULPATION PROVISION IS CONSPICUOUS.
3.4 Ongoing and Future Seismic Operations. The Parties agree to conduct
such operations on all or substantially all of the Contract Lands. The Parties
may, subject to the unanimous written consent of all Parties, agree to reduce or
increase the acreage on which such operations will be conducted when technical,
legal or operational considerations indicate that such reduction or increase is
warranted. In any event, the Parties agree to pay their respective shares of the
total costs of the 3-D Seismic Operations conducted on all land covered by AMI
Interests as set forth in Article 2.2 hereof. Operator shall furnish the other
Parties hereto with copies of all applicable contracts and other information
pertaining to all 3-D Seismic Operations conducted hereunder. The Parties shall
own their Proportionate Share of the geophysical data obtained by and resulting
from the 3-D Seismic Operations conducted on the Contract Lands, including, but
not limited to all tapes, seismic sections and any and all other data generated
by such 3-D Seismic Operations. Each Party shall have access to such data and
shall receive copies thereof. The Parties agree to work together in a spirit of
cooperation and in good faith in planning and causing the 3-D Seismic Operations
to be conducted as contemplated herein as well as in sharing the data collected
therefrom and the interpretations thereof. Such interpretations, by any Party,
shall in no way be deemed a representation to any other Party that such
interpretations are accurate or correct. Such interpretations shall be given
merely as a means of sharing such Party's analysis and ideas regarding such
data.
3.5 Confidentiality of Seismic Data. Except as provided below, each
Party agrees to keep all seismic data obtained pursuant to Article 3.3
confidential for a period of five (5) years from the date hereof. After the
expiration of five (5) years from the date hereof any Party may sell the data it
acquired pursuant to Article 3.2. Each Party owning an interest in such data
shall receive its Proportionate Share of the proceeds of any such sale. Any data
acquired from another Party pursuant to Article 3.1 shall forever be kept
confidential by the Parties; provided, however, that the Party who originally
contributed such data may share, sell or otherwise dispose of such data that
does not pertain to a Prospect to a third party after the expiration of one (1)
year from the date hereof, and the other Parties shall have no interest in the
proceeds from such sale. Notwithstanding the foregoing, a Party may disclose
seismic data to (A) a prospective purchaser or farmee of such Party's interest,
provided (i) such disclosure is limited to the Prospect under consideration for
sale or farmout, (ii) the prospective purchaser or farmee must review such data
in the affected Party's offices and may not copy such data until such time as it
has acquired or earned an interest in the Contract Lands, and (iii) such
prospective purchaser or farmee must execute a confidentiality agreement to
prevent further disclosure and unauthorized use of such data; or (B) a third
party who is entitled thereto pursuant to the terms of a lease, lease option or
seismic permit. Any Party may disclose such data to its agents, staff,
representatives and consultants in the normal conduct of its business.
3.6 Review of Seismic Data. The Parties agree to cooperate in good
faith in reviewing the seismic data acquired hereunder. Such data should be
reviewed by the Parties as soon as practicable after the data is available so
that the Parties can make decisions regarding the exercise of lease options.
ARTICLE 4. LEASEHOLD ACQUISITION
4.1 Designation of Prospects. As soon as practicable after the data has
been processed and interpreted, Operator shall establish Prospects within the
AMI. Operator shall designate such Prospects on a map which reflects the outline
of the lands to be included within each such Prospect. Promptly after
designating such Prospects, Operator shall furnish the other Parties with such
maps which reflect the designated Prospects, together with a description of the
seismic data, prospective feature and any interpretative data or other maps upon
which such Prospect is based. The other Parties shall have fifteen (15) days
after receipt of such notice in which to elect in writing whether or not they
will participate in the designated Prospects. If a Party fails to furnish
Operator with its written election to participate within such fifteen (15) day
period, it shall be conclusively presumed to have elected not to participate in
the Prospect or Prospects so designated. Any Party not participating in a
Prospect shall promptly assign all of its interest in the lands lying within
such Prospect to the Parties participating in such Prospect. A Party's election
hereunder may be on a Prospect by Prospect basis, and a Party's failure to
participate in any or all Prospects contained in any particular notice shall not
constitute a waiver or release of the right to participate in a Prospect or
Prospects described in any subsequent notice delivered hereunder.
4.2 Acquisition of Leases Within Prospects. The Parties participating
in a Prospect will acquire and pay their Proportionate Share for leases covering
each Prospect upon the terms provided in the applicable lease options or upon
such other terms as the Parties may mutually agree upon if some lands within the
Prospect are unleased and not covered by a lease option. As soon as possible
after designating Prospects, Operator shall provide written notice to the
Parties participating in such Prospects of the leases to be acquired therein,
which notice shall set forth (i) a description of the lands and interests to be
acquired, (ii) the total cost of such interests, including all land and legal
costs associated with the acquisition thereof, (iii) the Proportionate Share of
the notified Party and its cost therein, and (iv) any other pertinent terms of
such acquisition, including, but not limited to, copies of the instruments and
other contracts affecting same. Payment for such leases shall be due within
fifteen (15) days after receipt of the above notice.
4.3 Minimum Acreage Obligation. In the event the lease options covering
a Prospect require minimum acreage selection in excess of the acreage included
within the boundaries of the Prospect, then each Party participating in such
Prospect must acquire and pay its Proportionate Share of the cost of the acreage
necessary to fulfill such minimum acreage selection requirements.
ARTICLE 5. SALE, FARMOUT OR OTHER DISPOSITION
OF AMI INTERESTS TO A THIRD PARTY
Any Party may sell, assign, farmout or otherwise dispose of all or any
portion of its interest acquired pursuant to or in connection with this
Agreement without consent of any other Party.
ARTICLE 6. SUBSEQUENT OPERATIONS
6.1 Operator. Operator shall have the right, subject to the terms and
provisions of the attached Operating Agreement, to be the Operator for all
operations conducted within the AMI, and the Parties hereby agree to execute
separate Operating Agreements designating Operator, as Operator, as required.
6.2 Operating Agreement. Except as provided herein, all operations
conducted within the AMI shall be conducted in accordance with the terms of an
Operating Agreement substantially in the form attached hereto as Exhibit "B". A
separate Operating Agreement shall be executed for each Prospect, with the first
well drilled in such Prospect to be designated as the "Initial Well". The share
of costs which each Party must bear and the interest of each Party in the
production from each well drilled under the Prospect Operating Agreement will be
determined on a well-by-well basis in accordance with the terms hereof as
modified by the terms of the Operating Agreement. In the event of conflict
between the terms and provisions hereof and those contained in the Operating
Agreement, the terms and provisions hereof shall prevail.
6.3 Limitation on Number of Wells Drilling. Not more than three (3)
wells shall be drilling on the Contract Lands at any time unless it is necessary
to commence a well in order to perpetuate a lease or otherwise satisfy the terms
of a continuous drilling obligation.
6.4 Non-Consent Election on Initial Well. If a Party elects not to
participate in the drilling of the Initial Well in a Prospect established under
Article 4.1 hereof, such Party shall relinquish all of its rights and interests
in that Prospect to the Parties participating in the drilling of such well. A
Party so relinquishing its interest shall promptly execute a recordable
assignment of its relinquished interest to the Parties entitled thereto. The
interest so assigned shall be free of any Subsequently Created Burdens.
ARTICLE 7. MISCELLANEOUS
7.1 Indemnification with Regard to Existing Matters. TAC agrees to
fully indemnify, defend and hold harmless all other Parties to this Agreement
against all Losses arising out of, in connection with, or relating to TAC's sole
ownership or operation of the Existing AMI prior to the date of this Agreement,
including, but not limited to, breach of contract or monetary damage, regardless
of fault or strict liability imposed by statute, rule or regulation, so long and
only in the event that all actions, activities and/or conduct giving rise to the
claim for such Losses relate to activities of TAC which occurred in the period
prior to the date of this Agreement.
7.2 Legal Relationship. This agreement is not intended to create, and
shall not be construed to create, a partnership or other relationship whereby
one party is liable for the actions or debts of another party; it being
understood and agreed that the rights and liabilities of all parties are several
and not joint or collective.
7.3 Entire Agreement. This agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof, superseding
any and all prior agreements, understandings, discussions, negotiations and
commitments of any kind.
7.4 Amendment. The provisions of this agreement may be amended,
supplemented, or waived only if in writing signed by all parties hereto.
7.5 Construction. The parties to this agreement all acknowledge and
agree that this agreement was drafted jointly by them, and that in the event of
any ambiguity, this agreement shall not be construed against any of them on the
basis of the fact or presumption that one party had a greater or lesser hand in
the drafting of the agreement than another party, but rather the terms shall be
given a reasonable interpretation.
7.6 Governing Law. Except to the extent preempted by federal law, this
agreement is to be construed and interpreted in accordance with, and governed
by, the laws of the State of Texas.
7.7 Binding Agreement. This agreement shall bind and inure to the
benefit of the parties hereto and their respective heirs, successors, legal
representatives and assigns.
7.8 Section and Subsection Headings. The article, section and
subsection headings contained in this agreement are for the purpose of
convenience only and are not intended to define or limit the contents hereof or
otherwise be considered in construing and enforcing this agreement.
7.9 Waivers. Any failure by any party hereto to comply with any of its
obligations, agreements or conditions herein contained may be waived in writing,
but not in any other manner, by the party to whom such compliance is owed. No
waiver of, or consent to a change in, any provision of this agreement shall be
deemed to be, or shall constitute, a waiver of or consent to a change in the
provisions hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless expressly provided.
7.10 Further Assurances. The parties hereto agree to deliver or cause
to be delivered to each other at all such times as shall be reasonably required,
all such additional instruments, agreements, and other documents, and to perform
all such actions, as any of them may reasonably request for the purpose of
performing any provision of this agreement or evidencing the transactions
contemplated by this agreement.
7.11 Severability. If any term or provision of this agreement or any
application of this agreement is held invalid or unenforceable, the remainder of
this agreement and any other application of the terms and provisions of this
agreement shall not be affected by that holding, but shall be valid and
enforceable.
7.12 Exhibits. All exhibits attached hereto or referred to in this
agreement are incorporated herein and made a part of this agreement.
7.13 Term. The term of this agreement shall be three (3) years from the
date hereof or until the last expiration of the last Jointly Owned AMI Interest
acquired hereunder, whichever is earlier, with the exception of the
confidentiality requirements of Article 3.5 which shall survive and extend past
that period.
7.14 Notices. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly given (a)
when delivered by hand, (b) when sent by facsimile (with receipt confirmed),
provided that a copy is promptly mailed thereafter by first class postage
prepaid registered or certified mail, return receipt requested, (c) when
received by the addressee, if sent by Express Mail, Federal Express, other
express delivery service (receipt requested) or by such other means as the
Parties named below may agree from time to time or (d) five (5) days after being
mailed in the USA, by first class postage prepaid registered or certified mail,
return receipt requested; in each case to the appropriate address and telecopier
number set forth below (or to such other address or telecopier number as a Party
may designate as to itself by notice to the other Parties).
TAC Resources, Inc.
P. O. Box 206
Victoria, TX 77902
Attn: Bill Bishop
Telephone Number: (512)573-4969
Telecopier Number: (512)573-9840
Parallel Petroleum Corporation
110 N. Marienfield, Suite 465
Midland , TX 79701
Attn: Larry Oldham
Telephone Number: (915)684-3727
Telecopier Number: (915)684-3905
Unit Petroleum Company
24 Greenway Plaza, Suite 501
Houston, TX 77046
Attn: Jim Kahlden
Telephone Number: (713)960-8870
Telecopier Number: (713)960-8801
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attn: Steve Antry
Telephone Number: (714)752-5212
Telecopier Number: (714)752-5757
Pease Oil and Gas Company
751 Horizon Court, Suite 203
P. O. Box 60219
Grand Junction, CO 81506-8758
Attn: Willard Pease, Jr.
Telephone Number: (970)245-5917
Telecopier Number: (970)243-8840
Each Party shall have the right upon giving thirty (30) days prior written
notice to the other Parties, in the manner herein provided, to change its
address and telecopier number for the purpose of notice.
7.15 Transfers Subject to this Agreement. Any sale, agreement, transfer
or other disposition of an interest in the Contract Lands, however accomplished,
either voluntarily or involuntarily, by operations of law or otherwise, shall be
subject to the terms of this Agreement. Any instruments which convey any
interest in the Contract Lands shall be made expressly subject to the Agreement.
7.16 Counterparts. This agreement may be executed in multiple
counterparts, all of which when taken together shall constitute one and the same
agreement.
7.17 Public Announcements. Each Party hereto agrees that prior to
making any public announcement or statement with respect to the transaction
contemplated in this Agreement, the Party desiring to make such public
announcement or statement shall consult with the other Parties hereto and
exercise their best efforts to (i) agree upon the text of a joint public
announcement or statement to be made by the Parties, (ii) obtain approval of the
other Parties hereto to the extent of a public announcement or statement to be
made solely by one of the Parties, as the case may be. Approval shall be
requested pursuant to Article 7.14 hereof, and any such announcement or
statement shall be deemed approved if no reply to the contrary is received
within twenty-four (24) hours (Saturdays, Sundays and federal legal holidays
excluded) after receipt of such request by the other Parties. Nothing contained
in this paragraph shall be construed to require any Party to obtain approval of
the other Parties hereto to disclose information with respect to the transaction
contemplated by this Agreement to any governmental body to the extent required
by applicable law or by any applicable rules.
7.18 Expenses. Except as specified herein and as the Parties may
otherwise agree, each Party shall be solely responsible for all expenses
incurred by it in connection with any and all transactions that are contemplated
by this Agreement.
7.19 Force Majeure. Should any Party be prevented, wholly or in part,
from complying with any express or implied obligation of this Agreement (other
than the obligation to make money payments), from conducting any operations
provided for under this Agreement, including by way of illustration but not
limitation, the conducting of the 3-D Seismic Operations by reason of scarcity
of or inability to obtain or to use labor, water, equipment or materials in the
open market or transportation thereof from any cause (other than financial)
beyond the control of such Party, or operation of "Force Majeure, any State or
Federal law or any order, ruling or regulation of governmental authority, then
while so prevented, such Party's obligation to comply with such provision or
obligation shall be suspended, and such Party shall not be liable in damages or
otherwise to the other Parties for failure to comply therewith, provided that
the Party claiming suspension shall give written notice and full particulars of
the reason of such inability to perform its obligations to the other Parties
within thirty (30) days after the occurrence of the cause relied on by the Party
claiming suspension.
7.20 Arbitration. The Parties agree that any and all disputes arising
under or relating to this Agreement shall be referred to arbitration pursuant to
the commercial rules of arbitration of the American Arbitration Association.
Venue for such arbitration shall be Houston, Texas USA.
IN WITNESS WHEREOF, this agreement is executed on the date first above written.
TAC Resources, Inc.
By:_________________________________
Bill Bishop, President
Parallel Petroleum Corporation
By:________________________________
Larry C. Oldham, President
Unit Petroleum Company
By:________________________________
Phillip M. Keeley, Sr.,
Sr. Vice-President
Beta Oil & Gas, Inc.
By:_/s/_____________________________
Steve Antry, President
Pease Oil and Gas Company
By:_________________________________
Willard Pease, Jr., President
EXHIBIT A
to
TEXANA PROSPECT AGREEMENT, DATED JULY 15, 1997
(CONFIDENTIAL TREATMENT REQUESTED
<PAGE>
EXHIBIT B
(ATTACHED TO AND MADE A PART OF THAT CERTAIN EXPLORATION AGREEMENT COVERING
THE FORMOSA GRANDE PROJECT DATED AUGUST 1, 1997, BY AND BETWEEN PARALLEL
PETROLEUM CORPORATION ET AL)
[STAMP]
OPERATING AGREEMENT
DATED
, 19
--------- --
OPERATOR ALLEGRO INVESTMENTS, INC.
-------------------------------------------------------
CONTRACT AREA
---------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
COUNTY OR PARISH OF STATE OF
---------------------- ------------
COPYRIGHT 1982 - ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 2408 CONTINENTAL LIFE BUILDING,
FORT WORTH, TEXAS, 76102, APPROVED FORM.
A.A.P.L. NO. 610 - 1982 REVISED
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
- ------- ----- ----
<S> <C> <C>
I. DEFINITIONS.....................................................................1
II. EXHIBITS........................................................................1
III. INTERESTS OF PARTIES............................................................2
A. OIL AND GAS INTERESTS........................................................2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION.................................2
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS....................2
D. SUBSEQUENTLY CREATED INTERESTS...............................................2
IV. TITLES..........................................................................2
A. TITLE EXAMINATION............................................................2-3
B. LOSS OF TITLE................................................................3
1. Failure of Title..........................................................3
2. Loss by Non-Payment or Erroneous Payment of Amount Due....................3
3. Other Losses..............................................................3
V. OPERATOR........................................................................4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR.................................4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR................4
1. Resignation or Removal of Operator........................................4
2. Selection of Successor Operator...........................................4
C. EMPLOYEES....................................................................4
D. DRILLING CONTRACTS...........................................................4
VI. DRILLING AND DEVELOPMENT........................................................4
A. INITIAL WELL.................................................................4-5
B. SUBSEQUENT OPERATIONS........................................................5
1. Proposed Operations.......................................................5
2. Operations by Less than All Partners......................................5-6-7
3. Stand-By Time.............................................................7
4. Sidetracking..............................................................7
C. TAKING PRODUCTION IN KIND....................................................7
D. ACCESS TO CONTRACT AREA AND INFORMATION......................................8
E. ABANDONMENT OF WELLS.........................................................8
1. Abandonment of Dry Holes..................................................8
2. Abandonment of Wells that have Produced...................................8-9
3. Abandonment of Non-Consent Operations.....................................9
VII. EXPENDITURES AND LIABILITY OF PARTIES...........................................9
A. LIABILITY OF PARTIES.........................................................9
B. LIENS AND PAYMENT DEFAULTS...................................................9
C. PAYMENTS AND ACCOUNTING......................................................9
D. LIMITATION OF EXPENDITURES...................................................9-10
1. Drill or Deepen...........................................................9-10
2. Rework or Plug Back.......................................................10
3. Other Operations..........................................................10
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES.........................10
F. TAXES........................................................................10
G. INSURANCE....................................................................11
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST................................11
A. SURRENDER OF LEASES..........................................................11
B. RENEWAL OR EXTENSION OF LEASES...............................................11
C. ACREAGE OR CASH CONTRIBUTIONS................................................11-12
D. MAINTENANCE OF UNIFORM INTEREST..............................................12
E. WAIVER OF RIGHTS TO PARTITION................................................12
IX. INTERNAL REVENUE CODE ELECTION..................................................12
X. CLAIMS AND LAWSUITS.............................................................13
XI. FORCE MAJEURE...................................................................13
XII. NOTICES.........................................................................13
XIII. TERM OF AGREEMENT...............................................................13
XIV. COMPLIANCE WITH LAWS AND REGULATIONS............................................14
A. LAWS, REGULATIONS AND ORDERS.................................................14
B. GOVERNING LAW................................................................14
C. REGULATORY AGENCIES..........................................................14
XV. OTHER PROVISIONS................................................................14
XVI. MISCELLANEOUS...................................................................15
</TABLE>
II
<PAGE>
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between ALLEGRO INVESTMENTS, INC.
P.O. BOX 2337, VICTORIA, TEXAS 77902, hereinafter designated and referred to as
"Operator", and the signatory party or parties other than Operator, sometimes
hereinafter referred to individually herein as "Non-Operator", and
collectively as "Non-Operators"
WITNESSETH:
WHEREAS, the parties to this agreement are owners of oil and gas leases
and/or oil and gas interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these leases
and/or oil and gas interests for the production of oil and gas to the extent
and as hereinafter provided.
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas
condensate, and all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
B. The terms "oil and gas lease", "lease" and "leasehold" shall mean
the oil and gas leases covering tracts of land lying within the Contract Area
which are owned by the parties to this agreement.
C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.
D. The term "Contract Area" shall mean all of the lands, oil and gas
leasehold interests and oil and gas interests intended to be developed and
operated for oil and gas purposes under this agreement. Such lands, oil and
gas leasehold interests and oil and gas interests are described in Exhibit
"A".
E. The term "drilling unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority.
If a drilling unit is not fixed by any such rule or order, a drilling unit
shall be the drilling unit as established by the pattern of drilling in the
Contract Area or as fixed by express agreement of the Drilling Parties.
F. The term "drillsite" shall mean the oil and gas lease or interest on
which a proposed well is to be located.
G. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.
H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean
a party who elects not to participate in a proposed operation.
Unless the context otherwise clearly indicates, words used in the
singular include the plural, the plural includes the singular, and the neuter
gender includes the masculine and the feminine.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
/X/ A. Exhibit "A", shall include the following information:
(1) Identification of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Percentages or fractional interests of parties to this agreement,
(4) Oil and gas leases and/or oil and gas interests subject to this
agreement,
(5) Addresses of parties for notice purposes.
/ / B. Exhibit "B", Form of Lease.
/X/ C. Exhibit "C", Accounting Procedure.
/X/ D. Exhibit "D", Insurance.
If any provision of any exhibit, except Exhibits "E" and "G", is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
-1-
<PAGE>
ARTICLE III.
INTERESTS OF PARTIES
A. OIL AND GAS INTERESTS:
If any party owns an oil and gas interest in the Contract Area, that
interest shall be treated for all purposes of this agreement and during the
term hereof as if it were covered by the form of oil and gas lease attached
hereto as Exhibit "B", and the owner thereof shall be deemed to own both the
royalty interest reserved in such lease and the interest of the lessee
thereunder.
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be owned, by
the parties as their interests are set forth in Exhibit "A". In the same
manner, the parties shall also own all production of oil and gas from the
Contract Area subject to the payment of royalties to the extent of the
Leasehold Burdens provided for in the Exploration Agreement to which this
Agreement is subject, which shall be borne as hereinafter set forth.
Regardless of which party has contributed the lease(s) and/or oil and
gas interest(s) hereto on which royalty is due and payable, each party
entitled to receive a share of production of oil and gas from the Contract
Area shall bear and shall pay or deliver, or cause to be paid or delivered,
to the extent of its interest in such production, the royalty amount
stipulated hereinabove and shall hold the other parties free from any
liability therefor. No party shall ever be responsible, however, on a price
basis higher than the price received by such party, to any other party's
lessor or royalty owner, and if any such other party's lessor or royalty
owner should demand and receive settlement on a higher price basis, the party
contributing the affected lease shall bear the additional royalty burden
attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment
or crossassignment of interests covered hereby.
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS:
Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty,
production payment or other burden on production in excess of the amount
stipulated in Article III.B., such party so burdened shall assume and alone
bear all such excess obligations and shall indemnify and hold the other
parties hereto harmless from any and all claims and demands for payment
asserted by owners of such excess burden.
D. SUBSEQUENTLY CREATED INTERESTS:
If any party should hereafter create an overriding royalty, production
payment or other burden payable out of production attributable to its working
interest hereunder, or if such a burden existed prior to this agreement and
is not set forth in Exhibit "A", or was not disclosed in writing to all other
parties prior to the execution of this agreement by all parties, or is not a
jointly acknowledged and accepted obligation of all parties (any such
interest being hereinafter referred to as "subsequently created interest"
irrespective of the timing of its creation and the party out of whose working
interest the subsequently created interest is derived being hereinafter
referred to as "burdened party"), and:
1. If the burdened party is required under this agreement to assign or
relinquish to any other party, or parties, all or a portion of its
working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or
production free and clear of said subsequently created interest and
the burdened party shall indemnify and save said other party, or
parties, harmless from any and all claims and demands for payment
asserted by owners of the subsequently created interest, and,
2. If the burdened party fails to pay, when due, its share of expenses
chargeable hereunder, all provisions of Article VII.B. shall be
enforceable against the subsequently created interest in the same
manner as they are enforceable against the working interest of the
burdened party.
ARTICLE IV.
TITLES
A. TITLE EXAMINATION:
Title examination shall be made on the drillsite of any proposed well
prior to commencement of drilling operations or, if the Drilling Parties so
request, title examination shall be made on the leases and/or oil and gas
interests included, or planned to be included, in the drilling unit around
such well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable leases. At the time a well is proposed, each party contributing
leases and/or oil and gas interests to the drillsite, or to be included in
such drilling unit, shall furnish to Operator all abstracts (including
federal lease status reports), title opinions, title papers and curative
material in its possession free of charge. All such information not in the
possession of or made available to Operator by the parties, but necessary for
the examination of the title, shall be obtained by Operator. Operator shall
cause title to be examined by attorneys on its staff or by outside attorneys.
Copies of all title opinions shall be furnished to each party hereto. The
cost incurred by Operator in this title program shall be borne as follows:
-2-
<PAGE>
ARTICLE IV.
CONTINUED
/X/ OPTION NO. 2: Costs incurred by Operator in procuring abstracts
currative materials and fees paid outside attorneys for title examination
(including preliminary, supplemental, shut-in gas royalty opinions and
division order title opinions) shall be borne by the Drilling Parties in the
proportion that the interest of each Drilling Party bears to the total
interest of all Drilling Parties as such interests appear in Exhibit "A".
Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.
Operator shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with leases or oil and gas
interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations as well as
the conduct of hearings before governmental agencies for the securing of
spacing or pooling orders. This shall not prevent any party from appearing on
its own behalf at any such hearing.
No well shall be drilled on the Contract Area until after (1) the title
to the drillsite or drilling unit has been examined as above provided, and
(2) the title has been approved by the examining attorney or title has been
accepted by all of the parties who are to participate in the drilling of the
well.
B. LOSS OF TITLE:
3. OTHER LOSSES: All losses incurred, shall be joint losses and shall
be borne by all parties in proportion to their interests. There shall be no
readjustment of interests in the remaining portion of the Contract Area.
-3-
<PAGE>
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
ALLEGRO INVESTMENTS, INC. shall be the Operator of the Contract Area,
and shall conduct and direct and have full control of all operations on the
Contract Area as permitted and required by, and within the limits of this
agreement. It shall conduct all such operations in a good and workmanlike
manner, but it shall have no liability as Operator to the other parties for
losses sustained or liabilities incurred, except such as may result from
gross negligence or willful misconduct.
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
1. RESIGNATION OR REMOVAL OF OPERATOR: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area,
or is no longer capable of serving as Operator, Operator shall be deemed to
have resigned without any action by Non-Operators, except the selection of a
successor. Operator may be removed if it fails or refuses to carry out its
duties hereunder, or becomes insolvent, bankrupt or is placed in
receivership by the affirmative vote of two (2) or more Non-Operators owning
a majority interest based on ownership as shown on Exhibit "A" remaining
after excluding the voting interest of Operator. Such resignation or removal
shall not become effective until 7:00 o'clock A.M. on the first day of the
calendar month following the expiration of ninety (90) days after the giving
of notice of resignation by Operator or action by the Non-Operators to remove
Operator, unless a successor Operator has been selected and assumes the
duties of Operator at an earlier date. Operator, after effective date of
resignation or removal, shall be bound by the terms hereof as a Non-Operator.
A change of a corporate name or structure of Operator or transfer of
Operator's interest to any single subsidiary, parent or successor corporation
shall not be the basis for removal of Operator.
2. SELECTION OF SUCCESSOR OPERATOR: Upon the resignation or removal of
Operator, a successor Operator shall be selected by the parties. The
successor Operator shall be selected from the parties owning an interest in
the Contract Area at the time such successor Operator is selected. The
successor Operator shall be selected by the affirmative vote of two (2) or
more parties owning a majority interest based on ownership as shown on
Exhibit "A"; provided, however, if an Operator which has been removed fails
to vote or votes only to succeed itself, the successor Operator shall be
selected by the affirmative vote of two (2) or more parties owning a majority
interest based on ownership as shown on Exhibit "A" remaining after excluding
the voting interest of the Operator that was removed.
C. EMPLOYEES:
The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees
shall be the employees of Operator.
D. DRILLING CONTRACTS:
All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing rates in the area and
the rate of such charges shall be agreed upon by the parties in writing
before drilling operations are commenced, and such work shall be performed by
Operator under the same terms and conditions as are customary and usual in
the area in contracts of independent contractors who are doing work of a
similar nature.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. Operator shall make reasonable tests of all formations encountered
during drilling which give indication of containing oil and gas in quantities
sufficient to test, unless this agreement shall be limited in its application
to a specific formation or formations in which event Operator shall be
required to test only the formation or formations to which this agreement may
apply.
[STAMP]
-4-
<PAGE>
ARTICLE VI
CONTINUED
If, in Operator's judgment, the well will not produce oil or gas in
paying quantities, and it wishes to plug and abandon the well as a dry hole,
the provisions of Article VI.E.1. shall thereafter apply.
B. SUBSEQUENT OPERATIONS:
1. PROPOSED OPERATIONS: Should any party hereto desire to drill any well
on the Contract Area other than the well provided for in Article VI.A., or to
rework, deepen or plug back a dry hole drilled at the joint expense of all
parties or a well jointly owned by all the parties and not then producing in
paying quantities, the party desiring to drill, rework, deepen or plug back
such a well shall give the other parties written notice of the proposed
operation, specifying the work to be performed, the location, proposed depth,
objective formation and the estimated cost of the operation. The parties
receiving such a notice shall have thirty (30) days after receipt of the
notice within which to notify the party wishing to do the work whether they
elect to participate in the cost of the proposed operation. If a drilling rig
is on location, notice of a proposal to rework, plug back or drill deeper may
be given by telephone and the response period shall be limited to
forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays.
Failure of a party receiving such notice to reply within the period above
fixed shall constitute an election by that party not to participate in the
cost of the proposed operation. Any notice given by telephone shall be
promptly confirmed in writing.
If all parties elect to participate in such a proposed operation as
provided above Operator shall, within ninety (90) days after expiration of
the notice period of thirty (30) days (or as promptly as possible after the
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
complete it with due diligence at the risk and expense of all parties hereto;
provided, however, said commencement date may be extended upon written notice
of same by Operator to the other parties, for a period of up to thirty (30)
additional days if, in the sole opinion of Operator, such additional time is
reasonably necessary to obtain permits from governmental authorities, surface
rights (including rights-of-way) or appropriate drilling equipment, or to
complete title examination or curative matter required for title approval or
acceptance. Notwithstanding the force majeure provisions of Article XI, if
the actual operation has not been commenced within the time provided
(including any extension thereof as specifically permitted herein) and if any
party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance with
the provisions hereof as if no prior proposal had been made.
2. OPERATIONS BY LESS THAN ALL PARTIES: If any party receiving such
notice as provided in Article VI.B.1. or VII.D.1. (Option No. 2) elects not
to participate in the proposed operation, then, in order to be entitled to
the benefits of this Article, the party or parties giving the notice and such
other parties as shall elect to participate in the operation shall, within
ninety (90) days after the expiration of the notice period of thirty (30)
days (or as promptly as possible after the expiration of the forty-eight (48)
hour period when a drilling rig is on location, as the case may be) actually
commence the proposed operation and complete it with due diligence. Operator
shall perform all work for the account of the Consenting Parties; provided,
however, if no drilling rig or other equipment is on location, and if
Operator is a Non-Consenting Party, the Consenting Parties shall either (a)
request Operator to perform the work required by such proposed operation for
the account of the Consenting Parties, or (b) designate one (1) of the
Consenting Parties as Operator to perform such work. Consenting Parties,
when conducting operations on the Contract Area pursuant to this Article
VI.B.2. shall comply with all terms and conditions of this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period,
shall advise the Consenting Parties of the total interest of the parties
approving such operation and its recommendation as to whether the Consenting
Parties should proceed with the operation as proposed. Each Consenting Party,
within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after receipt of such notice, shall advise the proposing party of
its desire to (a) limit participation to such party's interest as shown on
Exhibit "A" or (b) carry its proportionate part of Non-Consenting Parties'
interests, and failure to advise the proposing party shall be deemed an
election under (a). In the event a drilling rig is on location, the time
permitted for such a response shall not exceed a total of forty-eight (48)
hours (INCLUSIVE of Saturday, Sunday and legal holidays). The proposing
party, at its election, may withdraw such proposal if there is insufficient
participation and shall promptly notify all parties of such decision.
Notwithstanding the foregoing, an election by a Consenting Party under this
paragraph to acquire its proportionate share of such Non-Consenting Parties'
Interest requires the simultaneous tender to the Operator of its
proportionate share of the estimated cost attributable to such
Non-Consenting Parties' Interest.
The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same
under the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the
Consenting Parties shall plug and abandon the well and restore the surface
location at their sole cost, risk and expense. If any well drilled, reworked,
deepened or plugged back under the provisions of the Article results in a
producer of oil and/or gas in paying quantities, the Consenting Parties shall
complete and equip the well to produce at their sole cost and risk,
-5-
<PAGE>
ARTICLE VI
CONTINUED
and the well shall then be turned over to Operator and shall be operated by
it at the expense and for the account of the Consenting Parties. Upon
commencement of operations for the drilling, reworking, deepening or plugging
back of any such well by Consenting Parties in accordance with the
provisions of this Article, each Non-Consenting Party shall be deemed to have
relinquished to Consenting Parties, and the Consenting Parties shall own and
be entitled to receive, in proportion to their respective interests, all of
such Non-Consenting Party's interest in the well and its share of production
therefrom until the proceeds of the sale of such share, calculated at the
well, or market value thereof if such share is not sold, (after deducting
production taxes, excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.D. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts) shall equal the total of the following:
(a) 100% of each such Non-Consenting Party's share of the cost of any
newly acquired surface equipment beyond the wellhead connections (including,
but not limited to, stock tanks, separators, treaters, pumping equipment and
piping), plus 100% of each such Non-Consenting Party's share of the cost of
operation of the well commencing with first production and continuing until
each such Non-Consenting Party's relinquished interest shall revert to it
under other provisions of this Article, it being agreed that each
Non-Consenting Party's share of such costs and equipment will be that
interest which would have been chargeable to such Non-Consenting Party had it
participated in the well from the beginning of the operations and
(b) 300% of that portion of the costs and expenses of reworking,
deepening, plugging back, and testing after deducting any cash contributions
received under Article VIII.C., and 300% of that portion of the cost of newly
acquired equipment in the well (to and including the wellhead connections),
which would have been chargeable to such Non-Consenting Party if it had
participated therein.
An election not to participate in the drilling or the deepening of a
well shall be deemed an election not to participate in any reworking or
plugging back operation proposed in such a well, or portion thereof, to which
the initial Non-Consent election applied that is conducted at any time prior
to full recovery by the Consenting Parties of the Non-Consenting Party's
recoupment account. Any such reworking or plugging back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the
Consenting Parties one hundred percent (100%) of that portion of the costs
of the reworking or plugging back operation which would have been chargeable
to such Non-Consenting Party had it participated therein. If such a reworking
or plugging back operation is proposed during such recoupment period, the
provisions of this Article VI.B. shall be applicable as between said
Consenting Parties in said well.
During the period of time Consenting Parties are entitled to receive
Non-Consenting Party's share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all production,
severance, excise, gathering and other taxes, and all royalty, overriding
royalty and other burdens applicable to Non-Consenting Party's share of
production not excepted by Article III.D.
In the case of any reworking, plugging back or deeper drilling
operation, the Consenting Parties shall be permitted to use, free of cost,
all casing, tubing and other equipment in the well, but the ownership of all
such equipment shall remain unchanged; and upon abandonment of a well after
such reworking, plugging back or deeper drilling, the Consenting Parties
shall account for all such equipment to the owners thereof, with each party
receiving its proportionate part in kind or in value, less cost of salvage.
Within sixty (60) days after the completion of any reworking, deepening
or plugging back operation under this Article, the party conducting such
operations for the Consenting Parties shall furnish each Non-Consenting Party
with an inventory of the equipment in and connected to the well, and an
itemized statement of the cost of deepening, plugging back, testing,
completing and equipping the well for production; or, at its option, the
operating party, in lieu of an itemized statement of such costs of operation
may submit a detailed statement of monthly billings. Each month thereafter,
during the time the Consenting Parties are being reimbursed as provided
above, the party conducting the operations for the Consenting Parties shall
furnish the Non-Consenting Parties with an itemized statement of all costs
and liabilities incurred in the operation of the well, together with a
statement of the quantity of oil and gas produced from it and the amount of
proceeds realized from the sale of the well's working interest production
during the preceding month. In determining the quantity of oil and gas
produced during any month, Consenting Parties shall use industry accepted
methods such as, but not limited to, metering or periodic well tests. Any
amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by
a Non-Consenting Party had it participated therein shall be credited against
the total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it
as above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
-6-
<PAGE>
ARTICLE VI
continued
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto,
and the production therefrom as such Non-Consenting Party would have been
entitled to had it participated in the drilling, reworking, deepening or
plugging back of said well. Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and the
Accounting Procedure attached hereto.
Notwithstanding the provisions of this Article VI.B.2., it is agreed
that without the mutual consent of all parties, no wells shall be completed
in or produced from a source of supply from which a well located elsewhere on
the Contract Area is producing, unless such well conforms to the then
existing well spacing pattern for such source of supply.
Notwithstanding anything contained herein to the contrary, the foregoing
provisions of this Article VI do not apply to the drilling or completion of a
well drilled hereunder.
The Non-Consenting Parties to the drilling of any well hereunder shall
relinquish all of their interest in the Contract Land (as defined in Article
I.D. hereof) except the land comprising the spacing or proration unit for any
well which such Non-Consenting Party has participated in the drilling and
completed as provided herein. To evidence such forfeiture, such
Non-Consenting Party shall execute and deliver to the Consenting Parties a
recordable assignment of the interest forfeited in accordance with
instructions furnished to the Non-Consenting Party by the Operator pertaining
to the interests of the Consenting Parties in the forfeited interests.
3. STAND-BY TIME: When a well which has been drilled or deepened has
reached its authorized depth and all tests have been completed, and the
results thereof furnished to the parties, stand-by costs incurred pending
response to a party's notice proposing a reworking, deepening, plugging back
or completing operation in such a well shall be charged and borne as part of
the drilling or deepening operation just completed. Stand-by costs subsequent
to all parties responding, or expiration of the response time permitted,
whichever first occurs, and prior to agreement as to the participating
interests of all Consenting Parties pursuant to the terms of the second
grammatical paragraph of Article VI.B.2. shall be charged to and borne as
part of the proposed operation, but if the proposal is subsequently withdrawn
because of insufficient participation, such stand-by costs shall be allocated
between the Consenting Parties in the proportion each Consenting Party's
interest as shown on Exhibit "A" bears to the total interest as shown on
Exhibit "A" of all Consenting Parties.
4. SIDETRACKING: Except as hereinafter provided, those provisions of
this agreement applicable to a "deepening" operation shall also be applicable
to any proposal to directionally control and intentionally deviate a well
from vertical so as to change the bottom hole location (herein called
"sidetracking"), unless done to straighten the hole or to drill around junk
in the hole or because of other mechanical difficulties. Any party having the
right to participate in a proposed sidetracking operation that does not own
an interest in the affected well bore at the time of the notice shall, upon
electing to participate, tender to the well bore owners its proportionate
share (equal to its interest in the sidetracking operation) of the value of
that portion of the existing well bore to be utilized as follows:
(a) If the proposal is for sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the
initial drilling of the well down to the depth at which the sidetracking
operation is initiated.
(b) If the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable
materials and equipment down to the depth at which the sidetracking operation
is initiated, determined in accordance with the provisions of Exhibit "C",
less the estimated cost of salvaging and the estimated costs of plugging and
abandoning.
In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be
limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal
holidays; provided, however, any party may request and receive up to eight
(8) additional days after expiration of the forty-eight (48) hours within
which to respond by paying for all stand-by time incurred during such
extended response period. If more than one party elects to take such
additional time to respond to the notice, stand-by costs shall be allocated
between the parties taking additional time to respond on a day-to-day basis
in the proportion each electing party's interest as shown on Exhibit "A"
bears to the total interest as shown on Exhibit "A" of all the electing
parties. In all other instances the response period to a proposal for
sidetracking shall be limited to thirty (30) days.
C. TAKING PRODUCTION IN KIND:
Each party shall take in kind or separately dispose of its proportionate
share of all oil and gas produced from the Contract Area, exclusive of
production which may be used in development and producing operations and in
preparing and treating oil and gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the risking in kind or
separate disposition by any party of its proportionate share of the
production shall be borne by such party. Any party risking its share of
production in kind shall be
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<PAGE>
ARTICLE VI
continued
required to pay for only its proportionate share of such part of Operator's
surface facilities which it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.D., shall be entitled to receive
payment directly from the purchaser thereof for its share of all production.
In the event any party shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the oil
produced from the Contract Area. Operator shall have the right, subject to
the revocation at will by the party owning it, but not the obligation, to
purchase such oil or sell it to others at any time and from time to time, for
the account of the non-taking party at the best price reasonably obtainable
under the circumstances in the area for such production. Any such purchase or
sale by Operator shall be subject always to the right of the owner of the
production to exercise at any time its right to take in kind, or separately
dispose of, its share of all oil not previously delivered to a purchaser. Any
purchase or sale by Operator of any other party's share of oil shall be only
for such reasonable periods of time as are consistent with the minimum needs
of the industry under the particular circumstances, but in no event for a
period in excess of one (1) year.
In the event one or more parties' separate disposition of its share of
the gas causes splitstream deliveries to separate pipelines and/or
deliveries which on a day-to-day basis for any reason are not exactly equal
to a party's respective proportionate share of total gas sales to be
allocated to it, the balancing or accounting between the respective accounts
of the parties shall be in accordance with any gas balancing agreement
between the parties hereto, whether such an agreement is attached as Exhibit
"E", or is a separate agreement.
D. ACCESS TO CONTRACT AREA AND INFORMATION:
Each party shall have access to the Contract Area at all reasonable
times, at its sole cost and risk to inspect or observe operations, and shall
have access at reasonable times to information pertaining to the development
or operation thereof, including Operator's books and records relating
thereto. Operator, upon request, shall furnish each of the other parties with
copies of all forms or reports filed with governmental agencies, daily
drilling reports, well logs, tank tables, daily gauge and run tickets and
reports of stock on hand at the first of each month, and shall make available
samples of any cores or cuttings taken from any well drilled on the Contract
Area. The cost of gathering and furnishing information to Non-Operator, other
than that specified above, shall be charged to the Non-Operator that requests
the information.
E. ABANDONMENT OF WELLS:
1. ABANDONMENT OF DRY HOLES. Any well which has been drilled or deepened
under the terms of this agreement and is proposed to be completed as a dry
hole shall not be plugged and abandoned without the consent of such
parties participating in the drilling of such well. Should Operator, after
diligent effort, be unable to contact any party, or should any party fail to
reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after receipt of notice of the proposal to plug and abandon such
well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening such well. Any party who
objects to plugging and abandoning such well shall have the right to take
over the well and conduct further operations in search of oil and/or gas
subject to the provisions of Article VIII.
2. ABANDONMENT OF WELLS THAT HAVE PRODUCED. Except for any well in
which, Non-Consent operation has been conducted hereunder for which the
Consenting Parties have not been fully reimbursed as herein provided, any
well which has been completed as a producer shall not be plugged and
abandoned without the consent of such parties. If such parties owning a
current interest in such consent to such abandonment, the well shall be
plugged and abandoned in accordance with applicable regulations and at the
cost, risk and expense of such the parties hereto. If, within thirty (30)
days after receipt of notice of the purposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to
continue its operation from the interval(s) of the formation(s) then open to
production shall tender to each of the other parties owning an interest in
such well its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of
Exhibit "C", less the estimated cost of salvaging and the estimated cost of
plugging and abandoning. Each abandoning party shall assign the non-abandoning
parties, without warranty, express or implied, as to title or as to quantity,
or fitness for use of the equipment and material, all of its interest in the
well and related equipment, together with its interest in the leasehold
estate as to, but only as to, the interval or intervals of the formation or
formations then open to production. If the interest of the abandoning party
is or includes an oil and gas interest, such party shall execute and deliver
to the non-abandoning party or parties an oil and gas lease, limited to the
interval or intervals of the formation or formations then open to production,
for a term of one (1) year and so long thereafter as oil and/or gas is
produced from the interval or intervals of the formation or formations
covered thereby, such lease to be on the form attached as Exhibit
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<PAGE>
ARTICLE VI
CONTINUED
"B". The assignments or leases so limited shall encompass the "drilling unit"
upon which the well is located. The payments by, and the assignments or
leases to, the assignees shall be in a ratio based upon the relationship of
their respective percentage of participation in the Contract Area to the
aggregate of the percentages of participation in the Contract Area of all
assignees. There shall be no readjustment of interests in the remaining
portion of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interests in the operation of or production from the well in
the interval or intervals then open other than the royalties retained in any
lease made under the terms of this Article. Upon request, Operator shall
continue to operate the assigned well for the account of the non-abandoning
parties at the rates and charges contemplated by this agreement, plus any
additional cost and charges which may arise as the result of the separate
ownership of the assigned well. Upon proposed abandonment of the producing
interval(s) assigned or leased, the assignor or lessor shall then have the
opinion to repurchase its prior interest in the well (using the same
valuation formula) and participate in further operations therein subject to
the provisions hereof.
3. ABANDONMENT OF NON-CONSENT OPERATIONS: The provisions of Article
VI.E.1. or VI.E.2. above shall be applicable as between Consenting Parties in
the event of the proposed abandonment of any well excepted from said
Articles; provided, however, no well shall be permanently plugged and
abandoned unless and until all parties having the right to conduct further
operations therein have been notified of the proposed abandonment and
afforded the opportunity to elect to take over the well in accordance with
the provisions of this Article VI.E.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the
parties liable as partners.
B LIENS AND PAYMENT DEFAULTS:
Each Non-Operator grants to Operator a lien upon its oil and gas rights
in the Contract Area, and a security interest in its share of oil and/or gas
when extracted and its interest in all equipment, to secure payment of its
share of expense, together with interest thereon at the rate provided in
Exhibit "C". To the extent that Operator has a security interest under the
Uniform Commercial Code of the state, Operator shall be entitled to exercise
the rights and remedies of a secured party under the Code. The bringing of a
suit and the obtaining of judgment by Operator for the secured Indebtedness
shall not be deemed an election of remedies or otherwise affect the lien
rights or security interest as security for the payment thereof. In addition,
upon default by any Non-Operator in the payment of its share of expense,
Operator shall have the right, without prejudice to other rights or remedies,
to collect from the purchaser the proceeds from the sale of such
Non-Operator's share of oil and/or gas until the amount owed by such
Non-Operator, plus interest, has been paid. Each purchaser shall be entitled
to rely upon Operator's written statement concerning the amount of any
default. Operator grants a like lien and security interest to the
Non-Operators to secure payment of Operator's proportionate share of expense.
C. PAYMENTS AND ACCOUNTING:
Except as herein otherwise specifically provided, Operator shall
promptly pay and discharge expenses incurred in the development and operation
of the Contract Area pursuant to this agreement and shall charge each of the
parties hereto with their respective proportionate shares upon the expense
basis provided in Exhibit "C". Operator shall keep an accurate record of the
joint account hereunder, showing expenses incurred and charges and credits
made and received.
Operator, at its election, shall have the right from time to time to
demand and receive from the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of
such estimated expense, together with an invoice for its share thereof. Each
such statement and invoice for the payment in advance of estimated expense
shall be submitted on or before the 20th day of the next preceding month.
Each party shall pay to Operator its proportionate share of such estimate
within fifteen (15) days after such estimate and invoice is received. If any
party fails to pay its share of said estimate within said time, the amount
due shall bear interest as provided in Exhibit "C" until paid. Proper
adjustment shall be made monthly between advances and actual expense to the
end that each party shall bear and pay its proportionate share of actual
expenses incurred, and no more.
D. LIMITATION OF EXPENDITURES:
1. DRILL OR DEEPEN: Without the consent of all parties, no well shall be
drilled or deepened, except any well drilled or deepened pursuant to the
provisions of Article VI.B.2. of this agreement. Consent to the drilling or
deepening shall include:
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<PAGE>
ARTICLE VII
CONTINUED
/X/ OPTION NO. 1: All necessary expenditures for the drilling or deepening,
testing, completing and equipping of the well, including necessary tankage
and/or surface facilities.
2. REWORK OR PLUG BACK: Without the consent of all parties, no well
shall be reworked or plugged back except a well reworked or plugged back
pursuant to the provisions of Article VI.B.2. of this agreement. Consent to
the reworking or plugging back of a well shall include all necessary
expenditures in conducting such operations and completing and equipping of
said well, including necessary tankage and/or surface facilities.
3. OTHER OPERATIONS: Without the consent of all parties, Operator shall
not undertake any single project reasonably estimated to require an
expenditure in excess of Twenty-Five Thousand and No/100--Dollars ($ 25,000.00)
except in connection with a well, the drilling, reworking, deepening
completing, recompleting, or plugging back of which has been previously
authorized by or pursuant to this agreement; provided, however, that, in case
of explosion, fire, flood or other sudden emergency, whether of the same or
different nature, Operator may take such steps and incur such expenses as in
its opinion are required to deal with the emergency to safeguard life and
property but Operator, as promptly as possible, shall report the emergency to
the other parties. If Operator prepares an authority for expenditure (AFE)
for its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of
Twenty-Five Thousand and No/100---Dollars ($ 25,000.00) but less than the
amount first set forth above in this paragraph.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES.
Rentals, shut-in well payments and minimum royalties which may be
required under the terms of any lease shall be paid by the party or parties
who subjected such lease to this agreement at its or their expense. In the
event two or more parties own and have contributed interests in the same
lease to this agreement, such parties may designate one of such parties to
make said payments for and on behalf of all such parties. Any party may
request, and shall be entitled to receive, proper evidence of all such
payments. In the event of failure to make proper payment of any rental,
shut-in well payment or minimum royalty through mistake or oversight where
such payment is required to continue the lease in force, any loss which
results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.
Operator shall notify Non-Operator of the anticipated completion of a
shut-in gas well, or the shutting in or return to production of a producing
gas well, at least five (5) days (excluding Saturday, Sunday and legal
holidays), or at the earliest opportunity permitted by circumstances, prior
to taking such action, but assumes no liability for failure to do so. In the
event of failure by Operator to so notify Non-Operator, the loss of any lease
contributed hereto by Non-Operator for failure to make timely payments of any
shut-in well payment shall be borne jointly by the parties hereto under the
provisions of Article IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay
all such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties or
production payments) on leases and oil and gas interests contributed by such
Non-Operator. If the assessed valuation of any leasehold estate is reduced by
reason of its being subject to outstanding excess royalties, over-riding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall insure to the benefit of the owner or owners of such
leasehold estate, and Operator shall adjust the charge to such owner or
owners so as to reflect the benefit of such reduction. 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.
Operator shall bill the other parties for their proportionate shares of all
tax payments in the manner provided in Exhibit "C".
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and
prosecute the protest to a final determination, unless all parties agree to
abandon the protest prior to final determination. During the pendency of
administrative or judicial proceedings. Operator may elect to pay, under
protest, all such taxes and any interest and penalty. When any such protested
assessment shall have been finally determined. Operator shall pay the tax for
the joint account, together with any interest and penalty accrued, and the
total cost shall then be assessed against the parties, and be paid by them,
as provided in Exhibit "C".
Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes* imposed upon or with respect to the
production or handling of such party's share of oil and/or gas produced under
the terms of this agreement.
* Including excise taxes
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<PAGE>
ARTICLE VII.
CONTINUED
G. INSURANCE:
At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations
are being conducted; PROVIDED, HOWEVER, that Operator may be a self-insurer
for liability under said compensation laws in which event the only charge
that shall be made to the joint account shall be as provided in Exhibit "C".
Operator shall also carry or provide insurance for the benefit of the joint
account of the parties as outlined in Exhibit "D", attached to and made a
part hereof. Operator shall require all contractors engaged in work on or for
the Contract Area to comply with the workmen's compensation law of the state
where the operations are being conducted and to maintain such other insurance
as Operator may require.
In the event automobile public liability insurance is specified in said
Exhibit "D", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automotive equipment.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. SURRENDER OF LEASES:
The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any lease
or in any portion thereof, and the other parties do not agree or consent
thereto, the party desiring to surrender shall assign, without express or
implied warranty of title, all of its interest in such lease, or portion
thereof, and any well, material and equipment which may be located thereon and
any rights in production thereafter secured, to the parties not consenting
to such surrender. If the interest of the assigning party is or includes an
oil and gas interest, the assigning party shall execute and deliver to the
party or parties not consenting to such surrender an oil and gas lease
covering such oil and gas interest for a term of one (1) year and so long
thereafter as oil and/or gas is produced from the land covered thereby, such
lease to be on the form attached hereto as Exhibit "B". Upon such assignment
or lease, the assigning party shall be relieved from all obligations
thereafter accruing, but not theretofore accrued, with respect to the
interest assigned or leased and the operation of any well attributable
thereto, and the assigning party shall have no further interest in the
assigned or leased premises and its equipment and production other than the
royalties retained in any lease made under the terms of this Article. The
party assignee or lessee shall pay to the party assignor or lessor the
reasonable salvage value of the latter's interest in any wells and equipment
attributable to the assigned or leased acreage. The value of all material
shall be determined in accordance with the provisions of Exhibit "C", less
the estimated cost of salvaging and the estimated cost of plugging and
abandoning. If the assignment or lease is in favor of more than one party,
the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as
it was immediately before the assignment, lease or surrender in the balance
of the Contract Area; and the acreage assigned, leased or surrendered, and
subsequent operations thereon, shall not thereafter be subject to the terms
and provisions of this agreement.
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal of any oil and gas lease subject to this
agreement, all other parties shall be notified promptly, and shall have the
right for a period of thirty (30) days following receipt of such notice in
which to elect to participate in the ownership of the renewal lease, insofar
as such lease affects lands within the Contract Area, by paying to the party
who acquired it their several proper proportionate shares of the acquisition
cost allocated to that part of such lease within the Contract Area, which
shall be in proportion to the interests held at that time by the parties in
the Contract Area.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate
of the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal lease. Any renewal lease in
which less than all parties elect to participate shall not be subject to this
agreement.
Each party who participates in the purchase of a renewal lease shall be
given an assignment of its proportionate interest therein by the acquiring
party.
The provisions of this Article shall apply to renewal leases whether
they are for the entire interest covered by the expiring lease or cover only
a portion of its area or an interest therein. Any renewal lease taken before
the expiration of its predecessor lease, or taken or contracted for within
six (6) months after the expiration of the existing lease shall be subject to
this provision; but any lease taken or contracted for more than six (6)
months after the expiration of an existing lease shall not be deemed a
renewal lease and shall not be subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
oil and gas leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost
of such drilling or other operation. If the contribution be in the form of
acreage, the party to whom the contribution is made shall promptly tender an
assignment of the acreage, without warranty of title, to the Drilling Parties
in the proportions
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<PAGE>
ARTICLE VIII
CONTINUED
said Drilling Parties shared the cost of drilling the well. Such acreage
shall become a separate Contract Area and, to the extent possible, be governed
by provisions identical to this agreement. Each party shall promptly notify
all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage
outside the Contract Area which are in support of a well drilled inside the
Contract Area.
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration
shall not be deemed a contribution as contemplated in this Article VIII.C.
D. MAINTENANCE OF UNIFORM INTEREST:
For the purpose of maintaining uniformity of ownership in the oil and
gas leasehold interests covered by this agreement, no party shall sell,
encumber, transfer or make other disposition of its interest in the leases
embraced within the Contract Area and in wells, equipment and production
unless such disposition covers either:
1. the entire interest of the party in all leases and equipment and
production, or
2. an equal undivided interest in all leases and equipment and
production in the Contract Area.
Every such sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such
co-owners to appoint a single trustee or agent with full authority to receive
notices, approve expenditures, receive billings for and approve and pay such
party's share of the joint expenses, and to deal generally with, and with
power to bind, the co-owners of such party's interest within the scope of the
operations embraced in this agreement; however, all such co-owners shall have
the right to enter into and execute all contracts or agreements for the
disposition of their respective shares of the oil and gas produced from the
Contract Area and they shall have the right to receive, separately, payment of
the sale proceeds thereof.
E. WAIVER OF RIGHTS TO PARTITION:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in
the Contract Area waives any and all rights it may have to partition and have
set aside to it in severalty its undivided interest therein.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the
rights and liabilities hereunder are several and not joint or collective, or
that this agreement and operations hereunder shall not constitute a
partnership, if, for federal income tax purposes, this agreement and the
operations hereunder are regarded as a partnership, each party hereby
affected elects to be excluded from the application of all of the provisions
of Subchapter "K", Chapter 1, Subtitle "A", of the Internal Revenue Code of
1954, as permitted and authorized by Section 761 of the Code and the
regulations promulgated thereunder. Operator is authorized and directed to
execute on behalf of each party hereby affected such evidence of this
election as may be required by the Secretary of the Treasury of the United
States or the Federal Internal Revenue Service, including specifically, but
not by way of limitation, all of the returns, statements, and the data
required by Federal Regulations 1.761. Should there be any requirements that
each party hereby affected give further evidence of this election, each such
party shall execute such documents and furnish such other evidence as may be
required by the Federal Internal Revenue Service or as may be necessary to
evidence this election. No such party shall give any notices or take any
other action inconsistent with the election made hereby. If any present or
future income tax laws of the state or states in which the Contract Area is
located or any future income tax laws of the United States contain provisions
similar to those in Subchapter "K", Chapter 1, Subtitle "A", of the Internal
Revenue Code of 1954, under which an election similar to that provided by
Section 761 of the Code is permitted, each party hereby affected shall make
such election as may be permitted or required by such laws. In making the
foregoing election, each such party states that the income derived by such
party from operations hereunder can be adequately determined without the
computation of partnership taxable income.
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ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
Twenty-Five Thousand and No/100---Dollars ($ 25,000.00) and if the payment is
in complete settlement of such claim or suit. If the amount required for
settlement exceeds the above amount, the parties hereto shall assume and take
over the further handling of the claim or suit, unless such authority is
delegated to Operator. All costs and expenses of handling, settling, or
otherwise discharging such claim or suit shall be at the joint expense of the
parties participating in the operation from which the claim or suit arises.
If a claim is made against any party or if any party is sued on account of
any matter arising from operations hereunder over which such individual has
no control because of the rights given Operator by this agreement, such party
shall immediately notify all other parties, and the claim or suit shall be
treated as any other claim or suit involving operations hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
make money payments, that party shall give to all other parties prompt
written notice of the force majeure with reasonably full particulars
concerning it, thereupon, the obligations of the party giving the notice, so
far as they are affected by the force majeure, shall be suspended during, but
no longer than, the continuance of the force majeure. The affected party
shall use all reasonable diligence to remove the force majeure situation as
quickly as practicable.
The requirement that any force majeure shall be remodeled with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the party involved, contrary to its wishes, how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.
The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy,
war, blockade, public riot, lightning, fire, storm, flood, explosion,
governmental action, governmental delay, restraint or inaction,
unavailability of equipment, and any other cause, whether of the kind
specifically enumerated above or otherwise, which is not reasonably within
the control of the party claiming suspension.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties and required by
any of the provisions of this agreement, unless otherwise specifically
provided, shall be given in writing by mail or telegram, postage or charges
prepaid, or by telex or telecopier and addressed to the parties to whom the
notice is given at the addresses listed in Exhibit "A". The originating
notice given under any provision hereof shall be deemed given only when
received by the party to whom such notice is directed, and the time for such
party to give any notice in response thereto shall run from the date the
originating notice is received. The second or any responsive notice shall be
deemed given when deposited in the mail or with the telegraph company, with
postage or charges prepaid, or sent by telex or telecopier. Each party shall
have the right to change its address at any time, and from time to time, by
giving written notice thereof to all other parties.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the oil and
gas leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas
interest contributed by any other party beyond the term of this agreement.
/X/ OPTION NO. 1: For one year after the termination of the last existing
lease which is subject hereto.
/ / OPTION NO. 2: In the event the well described in Article VI.A., or any
subsequent well drilled under any provision of this agreement, results in
production of oil and/or gas in paying quantities, this agreement shall
continue in force so long as any such well or wells produce, or are capable
of production, and for an additional period of _____ days from cessation of
all production; provided, however, if, prior to the expiration of such
additional period, one or more of the parties hereto are engaged in drilling,
reworking, deepening, plugging back, testing or attempting to complete a well
or wells hereunder, this agreement shall continue in force until such
operations have been completed and if production results therefrom, this
agreement shall continue in force as provided herein. In the event the well
described in Article VI.A., or any subsequent well drilled hereunder, results
in a dry hole, and no other well is producing, or capable of producing oil
and/or gas from the Contract Area, this agreement shall terminate unless
drilling, deepening, plugging back or reworking operations are commenced
within _____ days from the date of abandonment of said well.
It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached
prior to the date of such termination.
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ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and
orders of any duly constituted regulatory body of said state; and to all
other applicable federal, state and local laws, ordinances, rules,
regulations and orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including, but not
limited to, matters of performance, non-performance, breach, remedies,
procedures, rights, duties and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state
of Texas shall govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production
of wells, on tracts offsetting or adjacent to the Contract Area.
With respect to operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of
action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or predecessor or successor agencies to
the extent such interpretation or application was made in good faith. Each
Non-Operator further agrees to reimburse Operator for any amounts applicable
to such Non-Operator's share of production that Operator may be required to
refund, rebate or pay as a result of such an incorrect interpretation or
application, together with interest and penalties thereon owing by Operator
as a result of such incorrect interpretation or application.
Non-Operators authorize Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold
hereunder or to any other person or entity pursuant to the requirements of
the "Crude Oil Windfall Profit Tax Act of 1980", as same may be amended from
time to time ("Act"), and any valid regulations or rules which may be issued
by the Treasury Department from time to time pursuant to said Act. Each
party hereto agrees to furnish any and all certifications or other
information which is required to be furnished by said Act in a timely manner
and in sufficient detail to permit compliance with said Act.
ARTICLE XV.
OTHER PROVISIONS
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ARTICLE XV
OTHER PROVISIONS
A. REWORKING OPERATIONS
Notwithstanding any language set out in Article VI (B) to the contrary,
each non-consenting party to a reworking operation on a well conducted
pursuant to Article VI (B) shall, upon commencement of such operations, be
deemed to have relinquished to consenting parties, and the consenting parties
shall own and be entitled to receive, in proportion to their respective
interests, all of such non-consenting party's interest in the well, its
leasehold operating rights and share of production therefrom, only insofar as
the interval or intervals of the formation or formations which are being
reworked and to which such non-consenting party does not desire to join in
the reworking thereof, until the proceeds or market value thereof (after
deducting production taxes, windfall profits taxes, royalty, overriding
royalty and other interests payable out of, or measured by the production
from such well, only insofar as the production secured from the interval or
intervals of the formation or formations which are subject to said reworking
operations accruing with respect to such interest until it reverts) shall
equal the total of those certain costs as further described in subparagraphs
(a) and (b) of the third grammatical paragraph under Article VI (B) 2, hereof.
B. NONDISCRIMINATION
In connection with the performance of work under this agreement, the
Operator agrees to comply with all of the provisions of Section 202 (1) to
(7) inclusive, of Executive Order 11246 (30 F.R. 12319), which are hereby
incorporated by reference in this agreement, and of all provisions of said
Executive Order 11246 and all rules, regulations and relevant orders of the
Secretary of Labor.
C. COVENANTS RUN WITH THE LAND
The terms, provisions, covenants and conditions of this agreement shall
be deemed to be covenants running with the lands, the lease or leases and
leasehold estates covered hereby, and all of the terms, provisions, covenants
and conditions of this agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective heirs, executors,
administrators, personal representatives and assigns.
D. LAWS AND REGULATIONS
All of the provisions of this agreement are expressly subject to all
applicable laws, orders, rules and regulations of any governmental body or
agency having jurisdiction in the premises, and all operations contemplated
hereby shall be conducted in conformity therewith. Any provisions of this
agreement which is inconsistent with any such laws, orders, rules or
regulations is hereby modified so as to conform therewith, and this
agreement, as so modified, shall continue in full force and effect.
E. PRIORITY OF OPERATIONS
If at any time there is more than one operation proposed in connection
with any well subject to this agreement, then unless all participating
parties agree on the sequence of such operations, such proposals shall be
considered and disposed of in the following order or priority:
1. Proposals to do additional testing, coring or logging.
2. Proposals to attempt a completion in the objective zone.
3. Proposals to plug back and attempt completions in shallower
zones, in ascending order.
4. Proposals to side-track the well to reach any zone not below the
original authorized objective.
5. Proposals to deepen the well, in descending order.
F. REGULATORY PROVISIONS
1. LIQUID HYDROCARBONS.
Non-Operators hereby authorize Operator to file with the purchaser of
crude oil or other liquid hydrocarbons or with any other person required by
law, any statement or certification required by any
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rule, regulation or order issued thereunder or by any other law, rule,
regulation relating to the pricing of crude oil and other liquid hydrocarbons
or the taxation thereof. To the extent that Operator may by law be authorized
to do so, Non-Operators hereby authorized Operator to agree with any
purchaser to relieve Operator (in whole or in part as Operator may determine)
of any filing or certification requirements. In making any filing ore
certification with any purchaser or crude oil or other liquid hydrocarbons,
each Non-Operator shall be solely responsible for furnishing to Operator or
such purchaser or any other person required by law any exemption certificate,
independent producer certificate or any other evidence required by law to
entitle Non-Operator to higher price for the sale of his production or for a
lower rate of tax thereon, and upon a Non-Operator's failure to furnish same,
Operator shall certify to such purchaser for such Non-Operator's interest the
lower price and/or higher rate of tax. Operator shall have not duty to seek
any refunds on behalf of any Non-Operator of any overpayment of any tax to
which any Non-Operator may be entitled by law.
2. REFUNDS.
In the event any Non-Operator receives a greater sum for the sale of its
share of production than that to which such Non-Operator is entitled, such
Non-Operator shall promptly refund any excess sums so collected to the person
entitled thereto together with any interest thereon required by law. In the
event Operator is required for any reason to may any such refund on any
Non-Operator's behalf and such Non-Operator refuses upon Operator's request
to reimburse Operator for the amount so paid, then Operator, in addition to
any other rights or remedies which it may have as a result of making such
refund, (i) shall have the lien provided by Article VII.B to secure such
reimbursement and (ii) shall be authorized to collect from Non-Operator's
purchaser of production all revenues attributable to Non-Operator's share of
production until the full amount required to be paid or refunded by
Non-Operator has been recovered.
3. OPERATOR'S LIABILITY.
Operator shall use its best judgement in making any of the filings and
certification referred to above and in prosecuting any filings and
applications. However, in no event shall Operator have any liability to any
Non-operator in making and prosecuting any such filing or in rendering any
statement or certification, absent bad faith, gross negligence or willful
misconduct. Any penalties incurred as a result of any incorrect
certification, statement or filing shall, in absence of bad faith, gross
negligence or willful misconduct, be charged to the parties owning the
production to which the penalty pertains. In no event shall any error by
Operator relieve any Non-Operator of the liability for any refund under
Paragraph 3 above.
G. OPERATOR PROTECTION
1. ASSIGNMENT.
No assignment or other transfer or disposition of an interest subject to
this Agreement shall be effective as to Operator or the other parties hereto
until the first day of the month following the month in which (i) Operator
received an authentic copy of the instrument evidencing such assignment,
transfer or disposition AND (ii) the person receiving such assignment,
transfer or disposition has become obligated by instrument satisfactory to
Operator to observe, perform and be bound by all of the covenants, terms and
conditions of this Agreement. Prior to such date, neither Operator nor any
other party shall be required to recognize such assignment, transfer, or
disposition for any purpose but may continue to deal exclusively with the
party making such assignment, transfer, or disposition in all matters under
this Agreement including billings. No assignment or other transfer or
disposition of an interest subject to this Agreement shall relieve a party of
its obligations accrued prior to the effective date aforesaid. Further, no
assignment, transfer or other disposition shall relieve any party of its
liability for its share of costs and expenses which may be incurred in any
operation to which such party has previously agreed or consented prior to the
effective date aforesaid for the drilling, testing, completing and equipping,
re-working, recompleting, side-tracking, deepening, plugging-back, or
plugging and abandoning of a well even though such operation is performed
after said effective date, subject to such party's right to elect not to
participate in completion operations under Article VI.B and Article VII.D,
Option No. 2, not previously consented to.
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2. ATTORNEYS FEES.
In the event any party hereto shall ever be required to bring legal
proceedings in order to collect any sums due from any party under this
Agreement, then party or parties shall also be entitled to recover all court
costs, costs of collection and a reasonable attorney's fee, which the lien
provided for herein shall also secure.
H. PERPETUITIES
It is not the intent of the parties that any provision herein violate any
applicable law regarding the rule against perpetuities, the suspension of the
absolute power of alienation or other rule regarding the vesting or duration
of estates, and this agreement shall be construed as not violating such rule
to the extent the same can be so construed consistent with the intent of the
parties. In the event, however, any provision hereof is determined to
violate such rule, then such provision shall nevertheless be effective for
the maximum period (but not longer than the maximum period) permitted by
such rule which will result in no violation.
I. NO THIRD PARTY BENEFICIARY CONTRACT
This Agreement is made solely for the benefit of those persons who are
parties hereto (including those persons succeeding to all or part of the
interest of an original party, if such succession is recognized under the
other provisions hereof), and no other person shall have or claim or be
entitled to enforce any rights, benefits or obligations under this Agreement.
J. OPERATOR'S REORGANIZATION AND STATUS CHANGE
1. Notwithstanding, the second sentence of Article V.B.1., in the event
of a transfer of all Operator's interest to a corporation which controls, is
controlled by or is under common control with Operator, such transferee shall
automatically become the successor Operator without the approval of
Non-Operators.
2. For the purpose of Article V.B., Operator shall be considered to own
an interest in the Contract Area if it is a general partner of a limited
partnership which owns an interest in the Contract Area or if its owns a
carried or reversionary working interest in the Contract Area.
K. BANKRUPTCY
If, following the granting of relief under the Bankruptcy Code to any
party hereto as debtor thereunder, this Agreement should be held to be an
executory contract within the meaning of 11 U.S.C. Section 365 the Operator,
or (if the Operator is the debtor in bankruptcy) any other party, shall be
entitled to a determination by debtor or any trustee for debtor within thirty
(30) days from the date an order for relief in entered under the Bankruptcy
Code as to the rejection or assumption of this Operating Agreement. In the
event of an assumption, Operator or said other party shall be entitled to
adequate assurances as to future performance of debtor's obligation
hereunder and the protection of the interest of all other parties.
L. OBLIGATIONS WELLS
Notwithstanding any provisions contained in this Operating Agreement to
the contrary, if a party hereto elects not to participate in the drilling or
completion of a well which must be drilled in order to perpetuate a lease or
a farmout agreement which is subject hereto, upon such election, such party
shall promptly assign all of its interest in such lease or farmout agreement
to the parties who elected to participate in the drilling and completing of
such well in the proportions of their interests in such well.
M. SUBJECT TO EXPLORATION AGREEMENT
This Operating Agreement is executed in connection with and pursuant to
that certain Exploration Agreement dated August 1, 1997, between the parties
hereto. In the event of a conflict between any of the terms of this Operating
Agreement and said Agreement, the terms of said Exploration Agreement shall
apply.
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N. PAYMENT OF LEASE BURDENS
Notwithstanding any provision of this Operating Agreement to the
contrary, unless the purchaser of production or other third party pays such
burdens directly, Operator shall pay all royalties, overriding royalties and
other burdens on or payable out of the interest of any Non-Operator electing
by written notice to Operator to have Operator make such payments, provided
(i) such Non-Operator make adequate arrangements for the receipt by Operator
of the revenues necessary to make such payments, and (ii) the owners of such
interests execute Operator's division order or otherwise satisfy Operator
with respect to entitlement to such payments.
O. OPERATOR REMOVAL
Notwithstanding any other provision to the contrary, operators may be
removed at any time by a vote in percentage interest, not in numbers, of 51%
or more by the parties. In this case, Operator will be given written notice
of its removal which shall become effective not more than ninety (90) days
after the date of such notice. All parties to this contract shall select by
majority vote in interest, not in numbers, a new Operator who shall assume
the responsibilities and duties, and have the rights prescribed for Operator
by this agreement. The retiring Operator shall deliver to its successor all
records and information necessary to be discharged by the new Operator of its
duties and obligations. However, such party shall continue to be responsible
to Operator for its proportionate share of the costs of developing and
operating the Unit Area to the effective date of Operator's removal, and for
this purpose, this agreement shall continue in force and effect between
Operator and such party until all past accounts have been paid in full.
P. MARKETING OF NON-OPERATOR PRODUCTION
Notwithstanding anything to the contrary contained herein, Operator
hereby covenants and agrees that should any Non-Operator request, Operator
will market Non-Operators share of any production from operations upon the
Contract Area under the same terms that Operator is marketing its share of
said production.
Q. COUNTERPART EXECUTION
This agreement may be executed in counterparts, each of which so executed
shall be given the effect of execution of the original agreement. Failure of
any party hereto to execute this agreement shall not render it ineffective as
to any party hereto who does execute same. If this agreement is executed in
counterparts, the signature pages of the parties to the various counterparts
may be combined by Operator in one or more copies of this agreement and
treated and given effect for all purposes, including recording, as separate
and complete instructions.
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ARTICLE XVI.
MISCELLANEOUS
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and to their respective heirs, devisees, legal
representatives, successors and assigns.
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
IN WITNESS WHEREOF, this agreement shall be effective as of _________ day
of _____________, 19__.
OPERATOR
- --------------------------------- ---------------------------------
NON-OPERATORS
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
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EXHIBIT "A"
OPERATOR INTEREST
NON-OPERATOR INTEREST
(with address, phone, fax #)
to be completed at the time the Operating Agreement is executed
<PAGE>
EXHIBIT "B"
There is not an Exhibit "B" to this agreement
<PAGE>
EXHIBIT
Attached to and made a part of ______________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
ACCOUNTING PROCEDURES
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-Operator" 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
and/or contract labor directly employed on the Joint Property in a 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 Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of 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 NationsBank on the first day of the month in which delinquency occurs
plus 1% or 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 within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical
inventory of Controllable Material as provided for in Section V.
COPYRIGHT-C- 1985 by the Council of Petroleum Accountants Societies.
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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 within 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 I. 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
more than once each year without prior approval of Operator, except
upon the registration or removal of the Operator, and shall be made at
the expense of those Non-Operators approving 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 this Accounting Procedure and
if the agreement to which this Accounting Procedure is attached contains
no contrary provisions in 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 or consultants
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 or consultants directly
employed on the Joint Property if such charges are excluded from the
overhead rates.
(4) Salaries and wages of Technical Employees or consultants either
temporarily or permanently assigned to and directly employed in the
operation of 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 imposed 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 or consultants whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II.
4. EMPLOYEE BENEFITS
Operator's current costs of 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.
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.
-2-
<PAGE>
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
receiving 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 available 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 ten percent (10%) 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 in paragraph 8A above, Operator may elect to use
average commercial rates prevailing 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
Association.
9. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or 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, examination of title, payment of judgements 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.
12. INSURANCE
Net premiums paid for insurance required to be carried 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 expenditures 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.
-3-
<PAGE>
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 charges 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:
( ) shall be covered by the overhead rates, or
(X) shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services 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. OVERHEAD - FIXED RATE BASIS
(1) Operator shall charge the Joint Account at the following rates
per well per month:
Drilling Well Rate $ 5,000.00
(Prorated for less than a full month)
Producing Well Rate $ 500.00
(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 is
later, except that no charge shall be made during
suspension 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 a period of five (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 a multi-completed well in
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 on 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
-4-
<PAGE>
4. AMENDMENT OF RATES
The overhead rates provided for in this Section III may be amended from
time to time only by mutual arrangement 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
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or 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:
-5-
<PAGE>
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 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.
(d) Macaroni tubing (size less than 2 1/4 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 1/4 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, or point of manufacture, plus transportation costs,
if applicable, to the railway receiving point nearest the Joint
Property. Unused new tabulars will be priced as provided above in
Paragraph 2 A(1) and (2).
B. GOOD USED MATERIAL (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 which 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 as 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.
-6-
<PAGE>
(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 completion 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-cents-) per hundred weight on
all tubular 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 Material 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 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 the the Joint Account.
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<PAGE>
EXHIBIT "D"
INSURANCE AND INDEMNITY
Without in any way limiting the Operator's and Non-Operator's liability
pursuant to this agreement, Operator shall, at all times while operations are
conducted under this agreement, maintain for the benefit of all parties
hereto, insurance at the types an in the maximum amounts as follows. Premiums
for such insurance shall be charged to the joint account.
All such insurance shall be maintained in full force and effect during
the terms of this agreement; however, such insurance may be canceled, altered
or amended as deemed necessary by Operator. If so required, Operator agrees
to have its insurance carrier furnish certificates of insurance evidencing
such insurance coverage.
Operator and non-operating working interest owners agree to mutually
waive subrogation in favor of each other on all insurance carried by each
party and/or to obtain such waiver from the insurance carrier if so required
by the insurance contract.
Non-operating working interest owners agree that the limits and coverage
carried by Operator are adequate and shall hold Operator harmless if any
claim exceeds such limit or is not covered by such policy.
<TABLE>
<CAPTION>
MINIMUM LIMITS
KIND POLICY FORM OF LIABILITY
- ---- ----------- ------------
<S> <C> <C>
Workman's Compensation Statutory Statutory
Comprehensive General Liability Comprehensive $500,000
(including coverage under all sections Combined Single Limit
of policy)
Motor Vehicle Comprehensive B.I. ($1,000,000)
(including non-ownership liability P.D. ($1,000,000)
and hired automobile coverage) Combined Single Limits
Umbrella Liability $2,000,000
Operator's Extra Expense * Control of well seepage, pollution & $1,000,000
containment replacement cost redrill
evacuation
</TABLE>
* On an individual election basis.
EXPLORATION AGREEMENT
This Agreement is made and entered into this 1st day of November,
1997, by and between PARALLEL PETROLEUM CORPORATION ("Parallel"), SUE-ANN
PRODUCTION COMPANY ("Sue-Ann"), TAC RESOURCES, INC.("TAC"), ALLEGRO INVESTMENTS,
INC. ("Allegro"), (said Parties being sometimes hereinafter collectively
referred to as "Parallel/Sue-Ann"), BETA OIL & GAS, INC. ("Beta"), PEASE OIL
& GAS COMPANY ("Pease"), MEYER FINANCIAL SERVICES, INC. ("Meyer"), and
FOUR-WAY TEXAS, L.L.C. ("Four-Way") (said parties being sometimes hereinafter
collectively referred to as "Beta/Pease");
WITNESSETH:
WHEREAS, Parallel/Sue-Ann have identified the lands outlined on the map
attached as Exhibit "A" hereto, except the lands and depths covered by the
Leases described on Exhibit "B" hereto (the "Excluded Lands") , as an area that
they desire to jointly explore for the production of oil and gas;
WHEREAS, Parallel/Sue-Ann have acquired the Leases and Seismic Options
(as those terms are defined below) described in Exhibits "C-1" and "C-2" hereto
(such Leases and Options being collectively referred to as the "Existing Leases
and Options") covering the interests in the lands described in such agreements;
WHEREAS, Parallel/Sue-Ann desire to conduct 3-D Seismic Operations
across most of the Contract Lands; and
WHEREAS, Beta, Pease, Meyer and Four-Way desire to acquire the
undivided interests in the Existing Leases and Options and participate in the
3-D Seismic Operations to be conducted by Parallel/Sue-Ann, all as described
below;
NOW, THEREFORE, in consideration of the premises, the mutual covenants,
agreements and obligations set forth herein, and the mutual benefits to be
received hereunder, the Parties hereto agree as follows:
ARTICLE 1. DEFINITIONS
For the purposes of this Agreement, the following terms shall have the
meanings designated below:
<PAGE>
1.1 "3-D Seismic Operations" means all operations which are necessary
to produce a three-dimensional seismic data grid over the portion of the
Contract Lands on which the Parties conduct such operations, including the
processing and interpretation of such data.
1.2 "Contract Lands" shall mean the lands lying within the area
outlined by the bold, solid line on Exhibit "A" hereto, except the Excluded
Lands; provided, however, the "Contract Lands" may be enlarged or contracted to
the same extent that all of the Parties agree to expand or contract the 3-D
Seismic Operations to be conducted pursuant to Section 4.2 hereof.
1.3 "Existing Leases and Options" means those Leases and Seismic
Options (as such terms are defined below) which are described in Exhibits "C-1"
and "C-2" hereto, including any such Leases and Options which are renewed or
extended pursuant to Article 2.3 hereof.
1.4 "Initial Interest" means a Party's initial interest hereunder as
set forth in Article 3.1 hereof. 1.5 "Jointly-Owned Lease" means a
Lease (as defined below) in which two or more of the Parties own an
interest pursuant
to the terms of this Agreement.
1.6 "Lease" means oil and gas lease, oil, gas and mineral lease,
unleased mineral interest, or sublease thereof, operating rights or other rights
or partial interest therein, which authorize the owner thereof to explore any
portion of the Contract Lands for (and/or produce) oil and/or gas therefrom, and
the right to acquire any of the foregoing. This term also includes top leases,
farmout agreements or any other type of agreement under which the right to
explore and/or develop a portion of the Contract Lands can be earned including
Seismic Options (as defined below).
1.7 "Lease Burden" means any production sale contract, lien,
encumbrance, royalty, overriding royalty interest, net profits interest,
production payment, carried interest, reversionary working interest or other
charge upon a leasehold interest or the production therefrom.
1.8 "Net Mineral Acres" are calculated by multiplying the undivided
interest in the minerals covered by a Lease or Seismic Option times the number
of gross acres covered by such Lease or Seismic Option times a Party's undivided
interest in such Lease or Seismic Option.
1.9 "Party" means either Parallel, Sue-Ann, TAC, Allegro, Beta, Pease,
Meyer or Four-Way or any other person or entity which hereafter becomes a party
hereto or is otherwise subject to the terms hereof.
<PAGE>
1.10 "Proportionate share", except as otherwise provided for
hereinbelow, shall be calculated by dividing a Party's Initial Interest
percentage by the aggregate of the Initial Interests of all of the Parties who
are to share an interest or an obligation pursuant to the terms hereof. In
circumstances where one or more Parties do not participate in a project or
acquisition, "proportionate share" shall be determined with reference to the
Parties who participate in such project or acquisition.
1.11 "Prospect" means an area, designated as a Prospect pursuant to
Article 5.1 hereof, within which there is expected to occur, based upon the
information developed as a result of 3-D Seismic Operations, a commercial
accumulation of oil and/or gas in a specific structural or stratigraphic trap.
1.12 "Seismic Option" or "Option" means an agreement which entitles a
Party to conduct 3-D Seismic Operations on a portion of the Contract Lands with
an option to acquire a Lease covering all or a portion of such lands.
1.13 "Subsequently Created Burden" means a Lease Burden which is
created by a Party subsequent to its acquisition of the interest which is
subject to the burden.
1.14 Other terms are defined elsewhere in this Agreement.
ARTICLE 2. ACQUISITION OF INTEREST IN EXISTING LEASES AND OPTIONS
2.1 Initial Acquisition. Beta, Pease, Meyer and Four-Way agree to
acquire from Parallel the following interest set forth opposite their name in
the Existing Leases and Options:
Beta ..................................................20%
Pease ...............................................12.5%
Meyer ..................................................2%
Four-Way ...............................................1%
For such interests, Beta, Pease, Meyer and Four-Way agree to pay Parallel the
sum of One Hundred Thirty-Three and 33/100 Dollars ($133.33) per Net Mineral
Acre covered by the respective undivided interests in the Existing Leases and
Options so acquired by such Parties. Parallel has represented to Beta, Pease,
Meyer and Four-Way that the Existing Leases and Options described in Exhibits
"C-1" and "C-2" hereto cover at least 17,654 Net Mineral Acres. Accordingly,
Beta, Pease, Meyer and Four-Way initially shall pay Parallel the sum set forth
opposite their name for the interest each acquires under this Article 2.1:
Beta ..........................................$470,773.00
Pease .........................................$294,216.00
<PAGE>
Meyer ..........................................$47,077.00
Four-Way .......................................$23,539.00
Beta, Pease, Meyer and Four-Way shall pay Parallel such sums upon the complete
execution hereof. Upon receipt of such payment, each such Party will be assigned
its respective percentage interest (as set forth above in this Article 2.1) in
the Existing Leases and Options. In the event it is determined that the Existing
Leases and Options cover less than 17,654 Net Mineral Acres, Parallel shall
refund to Beta, Pease, Meyer and Four-Way the amounts that such Parties overpaid
for their respective Initial Interests acquired under this Article 2.1. If it is
determined that the Existing Leases and Options cover more than 17,654 Net
Mineral Acres, Beta, Pease, Meyer and Four-Way shall pay Parallel an additional
sum equal to their proportionate share of the number of Net Mineral Acres
covered by the Existing Leases and Options in excess of 17,654 Net Mineral
Acres.
2.2 Subsequently-Acquired Leases and Options. All of the Parties hereto
agree to acquire and pay their proportionate share (as provided hereinbelow) of
the cost of any Leases or Seismic Options, including a Lease or an option in
renewal of an expiring Lease or Option as provided in Article 2.3 (a
"Subsequently-Acquired Lease or Option"), which are acquired by a Party from an
unaffiliated third party prior to the conclusion of 3-D Seismic Operations. For
the purposes of this Article 2.2, the proportionate shares of the interests and
costs of a Subsequently-Acquired Lease or Option of the Parties comprising
Parallel/Sue-Ann shall be as follows:
Parallel.................................................79.125%
Sue-Ann..................................................16.875%
TAC.......................................................1.000%
Allegro...................................................3.000%
<PAGE>
Beta, Pease, Meyer and Four-Way agree to purchase their proportionate share of
such Subsequently-Acquired Leases or Options from Parallel for a price equal to
the actual total cost thereof plus one-third (1/3) of such total cost thereof.
The Party initially acquiring such interest shall promptly notify the other
Parties comprising Parallel/Sue-Ann of the acquisition of such interest. Such
notice shall contain the same information as is required in Article 6.3 for an
AMI Interest. The other Parties comprising Parallel/Sue-Ann shall promptly
reimburse the acquiring Party for their proportionate share of the actual total
cost thereof. Upon receipt of a Party's proportionate share of the costs of
acquiring such interest, the acquiring party shall promptly assign to such Party
its proportionate share of such interest (as set forth above in this Article
2.2). Upon Parallel's acquisition of its proportionate share of a
Subsequently-Acquired Lease or Option, it shall notify Beta, Pease, Meyer and
Four-Way of such acquisition and invoice them for their proportionate share
thereof at a price equal to the total cost of acquiring such Lease or Option
plus one-third (1/3) of such total cost. Upon receipt of the purchase price from
such Party Parallel shall promptly assign to such Party its proportionate share
of such interest.
2.3 Expiring Options. If any Leases or Options covered hereby will
expire prior to the completion of the 3-D Seismic Operations contemplated herein
and the exercise of the Options to acquire Leases under such Options, the Party
originally acquiring such expiring Lease or Option shall use its best efforts to
renew such Leases or Options for a sufficient period of time to complete the
proposed 3-D Seismic Operations thereon and exercise any such Options
thereunder. All such renewals shall be treated in the same manner as set forth
in Article 2.2, above, pertaining to Subsequently-Acquired Leases and Options.
ARTICLE 3. INTERESTS OF THE PARTIES
3.1 Initial Interests of the Parties. The Initial Interests of
the Parties hereunder will be as follows:
--------------------------------
Parallel.......................................... 43.625%
Sue-Ann........................................... 16.875%
TAC.............................................. 1.000%
Allegro.......................................... 3.000%
Beta.............................................. 20.000%
Pease............................................. 12.500%
Meyer .......................................... 2.000%
Four-Way ....................................... 1.000%
<PAGE>
All Existing Leases and Options will be owned by the Parties in accordance with
their respective Initial Interests. All Subsequently-Acquired Seismic Options
will be owned in the same proportions as the Parties' Initial Interests,
provided that each Party has paid its proportionate share of the cost thereof as
provided in Section 2.2. If a Party fails to pay for its proportionate share of
a Subsequently-Acquired Seismic Option, such Seismic Option will be owned by the
Parties who paid their original proportionate share of the costs thereof. Such
Parties will pay their proportionate share of the total cost thereof and such
interests shall be owned by such Parties in the proportions that their
respective Initial Interests hereunder bear to the aggregate of such Parties'
Initial Interests.
3.2 Existing Burdens. Each Party's interest under this Agreement, in
the Leases and Seismic Options covered hereby and the Leases acquired and to be
acquired pursuant hereto, shall be subject to and burdened by its proportionate
share of all existing operating agreements, existing and pending pooling and
spacing orders and all Lease Burdens other than Subsequently Created Burdens.
Each Party hereto hereby assumes and agrees to perform its proportionate share
of the obligations under all Leases and Seismic Options and the Leases acquired
pursuant to this Agreement and the other obligations described in this Article,
but only to the extent that such obligations arise after the acquisition of such
Leases and Seismic Options by such Party.
ARTICLE 4. SEISMIC OPERATIONS
4.1 Existing Seismic, Geologic and Other Subsurface Data. Except as
prohibited by law or by agreements with third parties, upon request, each Party
owning existing seismic data pertaining to the Contract Lands shall furnish
copies of all of such data to any Party requesting such data, together with any
geologic or other subsurface data that could be useful in the interpretation of
such seismic data. The Party requesting such data shall bear the expense of
copying it. The Party owning any seismic or other data which may not be copied
shall, upon request, make such data available to the Party requesting such data
during normal business hours.
4.2 3-D Seismic Operations. Parallel shall serve as Operator in
conducting all 3-D Seismic Operations. All Parties agree to conduct such
operations on all or substantially all of the Contract Lands. The Parties may,
by unanimous agreement, reduce the number of sections on which such operations
will be conducted (for example, where technical, legal or operational
considerations indicate that such reduction is warranted). Beta and Pease desire
to participate in such 3-D Seismic Operations. The Parties shall bear the
following proportions of the total cost of all 3-D Seismic Operations:
Parallel........................................ 31.79166%
Sue-Ann......................................... 16.87500%
TAC............................................ 1.00000%
Allegro....................................... 3.00000%
Beta............................................ 26.66667%
<PAGE>
Pease........................................... 16.66667%
Meyer.......................................... 2.66667%
Four-Way ..................................... 1.33333%
Subject to Article 5.1.1, the data that is obtained from such 3-D Seismic
Operations shall be owned by the Parties in the proportions of their Initial
Interests hereunder. The Parties agree to work together in a spirit of
cooperation and in good faith in planning and causing the 3-D Seismic Operations
to be conducted as contemplated and provided herein, as well as in sharing the
data collected therefrom and the interpretations thereof. Such interpretations
shall in no way be deemed a representation that such interpretations are
accurate or correct. Such interpretations shall be given merely as a means of
sharing such Party's analysis and ideas regarding such data.
4.3 Confidentiality of Seismic Data. Except as provided below, each
Party agrees to keep all seismic data obtained pursuant to Article 4.2
confidential for a period of seven (7) years from the date hereof. After the
expiration of seven (7) years from the date hereof, any Party may sell the data
it acquired pursuant to Article 4.2. Each Party owning an interest in such data
shall receive its proportionate share of the proceeds of any such sale. Any data
acquired from another Party pursuant to Article 4.1 shall forever be kept
confidential by the Parties; provided, however, that the Party who originally
contributed such data may share, sell or otherwise dispose of such data that
does not pertain to a Prospect to a third party after the expiration of one (1)
year from the date hereof, and the other Parties shall have no interest in the
proceeds from such sale. Notwithstanding the foregoing, a Party may disclose
seismic data to a prospective purchaser or farmee of such Party's interest,
provided (i) such disclosure is limited to the Prospect under consideration for
sale or farmout, (ii) the prospective purchaser or farmee must review such data
in the affected Party's offices and may not copy such data, and (iii) such
prospective purchaser or farmee must execute a confidentiality agreement to
prevent further disclosure and unauthorized use of such data.
4.4 Review of Seismic Data. The Parties agree to cooperate in good
faith in reviewing the seismic data obtained hereunder. Such data should be
reviewed by the Parties as soon as practicable after the data for a particular
area is available so that the Parties can make a decision as to whether or not
to exercise any of the Options to acquire Leases under any of the Seismic
Options pertaining to such area.
<PAGE>
ARTICLE 5. EXERCISE OF OPTIONS
5.1 Designation of Prospects. The Parties shall cooperate in good faith
to establish Prospects within the Contract Lands as soon as practicable after
the data for an area has been processed and interpreted. Any Party may designate
a Prospect within seven (7) years from the date hereof by giving the other
Parties written notice of such designation. Such notice shall contain a map
which reflects the outline of the lands to be included within such Prospect,
together with a description of the seismic data, prospective feature and any
interpretative data or maps upon which such Prospect is based. The Parties
receiving notice of the designation of a Prospect shall have fourteen (14) days
after receipt of such notice in which to elect in writing whether or not they
will participate in such Prospect. Any Party which has not furnished the Party
designating a Prospect with its written election to participate in a Prospect
within said fourteen-day period conclusively shall be presumed to have elected
not to participate in the Prospect so designated. Any Party not participating in
a Prospect shall promptly assign all of its interest in the Options or Leases
covering lands lying within such Prospect to the Parties participating in such
Prospect, in the proportions of their respective interests therein.
<PAGE>
5.1.1 Extension; Additional Seismic Operations. In the event a
Prospect includes lands lying on the border of the Contract Lands, one or more
of the Parties participating in such Prospect may propose the conducting of
additional 3-D Seismic Operations to obtain seismic data on lands lying outside
of the Contract Lands but reasonably anticipated to be underlain by the feature
for which such Prospect was designated. In the event all Parties
participating in such Prospect agree to participate in the additional seismic
operations, the Prospect shall be enlarged to cover the lands included in
such proposed additional shooting and all such Parties shall bear their
proportionate share of the costs of such additional seismic operations. A
Party participating in the original Prospect may elect not to participate in
expanding the Prospect by conducting additional 3-D Seismic Operations, in
which event the lands covered by the additional 3-D Seismic Operations shall
constitute a separate Prospect in which only the Parties conducting such
operations will participate. Notwithstanding the foregoing, the expanded
Prospect shall not include any lands on which (i) the Parties electing to
participate in the expanded Prospect are unable to obtain a Lease or an Option
from a third party or (ii) a Party owns a Lease or Option which has been
committed to an agreement with a third party prior to the date hereof.
5.2 Acquisition of Leases Within Prospects. The Parties
participating in a Prospect will acquire and pay for Leases covering lands
within such Prospects upon the terms provided for in the applicable
Seismic Options or upon such other terms as the Parties can mutually agree upon
if some Leases are not governed by the terms of a Seismic Option.
5.3 Minimum Acreage Obligation. In the event the Leases acquired by
Parties electing to participate in Prospects do not satisfy the minimum acreage
selection requirements under one or more of the Seismic Options, then each Party
must acquire and pay for its proportionate share of the Leases which must be
acquired in order to fulfill any such minimum acreage selection requirements.
ARTICLE 6. AREA OF MUTUAL INTEREST
6.1 Establishment of Area of Mutual Interest. The Contract Lands are
hereby established as an Area of Mutual Interest for a term of seven (7) years
from the date of this Agreement. Thereafter, those lands lying within a Prospect
which has been designated as provided in Article 5.1 shall be established as an
Area of Mutual Interest for the Parties then owning an interest in such Prospect
for as long as any Jointly-Owned Lease covering lands within such Prospect is in
force and effect as to such land.
6.2 Acquisition of Interest. After all of the 3-D Seismic Operations
have been completed (through the interpretation of the data obtained therefrom),
except as otherwise provided in this Article 6, if during the term of the Area
of Mutual Interest a Party (the "Acquiring Party") acquires from an unaffiliated
third party a Lease covering lands lying within such Area of Mutual Interest (an
"AMI Interest"), the other Parties (the "Non-Acquiring Parties") shall have the
first and prior right to acquire their proportionate share of such interest upon
the terms set forth below. If an AMI Interest covers lands lying within a
Prospect in which a Party has elected not to participate pursuant to Articles
5.1 or 8.4 hereof, such Party shall offer one hundred percent (100%) of such
interest to the Parties participating in such Prospect.
<PAGE>
6.3 Notification. The Acquiring Party shall notify the Non-Acquiring
Parties in writing of the acquisition of an AMI Interest. Such notice shall set
forth (i) a description of the interest acquired, (ii) the total cost of the
interest, including all land and legal costs associated with the acquisition
thereof, (iii) the proportionate share of such interest that the Non-Acquiring
Parties are entitled to acquire, and (iv) any other pertinent terms of such
acquisition, including copies of such Leases, assignments, bank drafts or other
evidence of payment for such interest.
6.4 Election Period. The Non-Acquiring Parties shall have ten (10) days
from the receipt of such notice to elect to acquire. If any Non-Acquiring Party
elects to acquire its proportionate share of the AMI Interest, such election
shall be given in writing to the Acquiring Party within ten (10) days after
receipt of notice of the acquisition of the interest. If the Acquiring Party has
not received an election in writing from a Non-Acquiring Party within said
ten-day period, such Non-Acquiring Party conclusively shall be presumed to have
elected not to acquire its proportionate share of the AMI Interest.
6.5 Binding Obligation. An election by a Non-Acquiring Party to acquire
its proportionate share of a AMI Interest shall constitute a binding obligation
of such Non-Acquiring Party to pay its proportionate share of the total cost of
the AMI Interest within thirty (30) days from the date that the Non-Acquiring
Party receives notice of the acquisition of such interest. If the Non-Acquiring
Party elects to acquire its proportionate share of an AMI Interest, the notice
of acquisition shall be deemed to be an invoice for the Non-Acquiring Party's
proportionate share of the total cost of such interest. If a Party fails to pay
its proportionate share of the cost of such an AMI Interest within said
thirty-day period, such Party shall then be conclusively deemed to have elected
not to acquire its proportionate share of such interest and the Acquiring
Parties shall have the right to acquire their proportionate share of such
interest.
6.6 Assignment of AMI Interest. The Acquiring Party shall execute and
deliver an Assignment to each Non-Acquiring Party which elects to acquire its
proportionate share of an AMI Interest as soon as practical after receiving the
Non-Acquiring Party's proportionate share of the total cost thereof.
<PAGE>
6.7 Renewal and Extension Leases. Except as required in Article 2.3, if
a Party shall at any time acquire a renewal or extension of a Jointly-Owned
Lease (a "Renewal or Extension Lease"), each Non-Acquiring Party shall have the
first and prior right to acquire its proportionate share thereof. The
acquisition of a Renewal or Extension Lease pursuant to this Article 6.7 shall
be treated just as if it was an AMI Interest under Article 6.3 hereof. For the
purposes of this provision, the term "Renewal or Extension Lease" shall mean any
Lease which is acquired before the expiration of a prior Jointly-Owned Lease or
taken or contracted for within one (1) year from the expiration of a
Jointly-Owned Lease, but shall not include an Option acquired in renewal of an
Expiring Option as provided in Article 2.3.
ARTICLE 7. SALE, FARMOUT OR OTHER DISPOSITION OF AN INTEREST TO A
THIRD PARTY
Any Party may farm out or otherwise dispose of all or a portion of its
interest in any Jointly-Owned Lease to a third party. The Party desiring to
sell, farm out or otherwise dispose of such interest must notify the other
Parties in writing of all of the terms of such trade.
ARTICLE 8. SUBSEQUENT OPERATIONS
8.1 Operator. Sue-Ann shall have the first and prior right to be the
Operator for all operations conducted on the Contract Lands except the 3-D
Seismic Operations, provided that it has elected to participate in the
acquisition of the Leases covering the portion of the Contract Lands on which
such operations are to be conducted. Except as otherwise hereinabove provided, a
majority in interest of the Parties participating in a well may mutually agree
that any of them or some third party may serve as Operator for any such well.
Except as otherwise agreed by the Parties, any Party participating in a Prospect
may, by forty-five (45) days' prior written notice to the other participating
Parties, cause the commencement of drilling operations on the Initial Well to be
drilled on such Prospect; subject, however, to the provisions of Article 8.3.
8.2 Operating Agreement. Except as provided herein, all operations
conducted on the Contract Lands shall be conducted in accordance with the terms
of an Operating Agreement substantially in the form attached as Exhibit "D"
hereto. A separate Operating Agreement shall be executed for each Prospect, with
the first well drilled in such Prospect to be designated as the Initial Well. A
commencement date for such Initial Well will be included in the Operating
Agreement upon execution only if agreed to by all participating Parties at that
time; otherwise, the commencement date will be determined pursuant to Article
8.1. The share of costs which each Party must bear and the interest of each
Party in the production from each well drilled under the Operating Agreement
will be determined on a well-by-well basis.
8.3 Limitation on Number of Wells Drilling. Only two (2) exploratory
wells shall be drilling on the Contract Lands at any time unless it is necessary
to commence a well while another well is being drilled in order to perpetuate a
Lease or otherwise satisfy the terms of a continuous drilling obligation.
<PAGE>
8.4 Non-Consent Election on the Drilling of a Well. If a Party elects
not to participate in the drilling of any well in a Prospect established under
Section 5.1 hereof, such Party shall relinquish all of its rights and interests
in that Prospect proportionately to the other Parties who elect to participate
in the drilling of such well save and except such non-consenting Party's
interest in any wells in such Prospect in which such Party participated in
drilling and the proration unit or spacing unit therefor, provided that the well
in which such Party elected not to participate is commenced within the time
prescribed provided in the applicable Operating Agreement.
ARTICLE 9. REMEDIES FOR NON-PAYMENT
All of the payments required to be made by a Party hereunder shall be
made on or before such payments are due. The failure of any Party to pay an
amount due hereunder by the date that it is due shall constitute a breach of
this Agreement. The remedies for failure to make the payments required by
Article 6.5 (pertaining to the acquisition of an AMI Interest), Article 6.7
(pertaining to Renewal and Extension Leases) and the payments required under an
applicable Operating Agreement shall be governed by the provisions of such
Articles or the Operating Agreement (as the case may be). For all other payments
to be made hereunder, the Party to whom such a payment is not made when due
shall have the right to make written demand on the Party from whom such payment
is past due. If the Party receiving such written demand fails to make the
required payment within sixty (60) days from the date that it receives such
written demand, such Party shall relinquish all of its interest under this
Agreement (including, but not limited to all of the interest that it acquired
pursuant to the terms hereof in any Leases, Options, seismic data and wells
drilled on the Contract Lands) to the Party to whom such payment is owed. The
Party so relinquishing its interest hereby designates the Party to whom such
payment is owed as its agent and attorney-in-fact for the limited purpose of
such instrument of conveyance as is necessary to convey the relinquished
interests to the Party to whom the payment is owed. The Party receiving such
relinquished interest shall then offer the other Parties their proportionate
share of such relinquished interest. Each of the other Parties who pay their
proportionate share of the sum of money that was owed by the Party relinquishing
its interest to the Party offering such interest within fourteen (14) days from
its receipt of such offer, shall be entitled to their proportionate share of
such relinquished interests and the Party offering such interest shall, as soon
as practicable, execute an instrument conveying such interest to such Parties.
<PAGE>
ARTICLE 10. MISCELLANEOUS
10.1 Term and Applicability of Agreement. Except as otherwise provided
for herein, the provisions of this Agreement shall remain in force and effect
for a term of seven (7) years from the date hereof except that it shall apply to
each Jointly-Owned Lease and the lands included within the Prospect in which the
lands covered by such Jointly-Owned Lease are situated for as long as such
Jointly-Owned Lease remains in force and effect.
10.2 Governing Law. The laws of the State of Texas shall apply in
all matters concerning this Agreement.
10.3 Entire Agreement. This Agreement, including all of the
exhibits attached hereto, constitute the entire agreement of the Parties
concerning the subject matter hereof, and there are no other understandings,
obligations, relationships or agreements, written or oral, pertaining to
the subject matter of this Agreement. This Agreement supersedes, replaces and
shall be in lieu of that certain Exploration Agreement dated
October 22, 1996, between Parallel and Sue-Ann, insofar only as this Agreement
covers the lands and depths covered by the Exploration Agreement dated October
22, 1996. Otherwise, the Exploration Agreement dated October 22, 1996 shall
remain in force as to the lands and depths covered thereby which are not covered
by this Agreement.
10.4 Inurement. This Agreement shall be binding upon and shall inure to
the benefit of the successors and assigns of the Parties and the terms and
provisions hereof shall constitute covenants running with the lands subject
hereto to the extent that such provisions apply to such lands.
10.5 Notices. All notices required to be given hereunder shall be given
in writing. Any such notice shall be deemed to be given upon receipt thereof by
the Party who is to receive the notice. The receipt of a notice by electronic
facsimile (fax) shall be considered as delivery of such notice. If notice by fax
is received other than during normal business hours, it shall be deemed received
on the next business day. All notices required hereunder shall be given to the
Parties as follows:
If to Parallel: Parallel Petroleum Corporation
110 N. Marienfeld, Suite 465
Midland, Texas 79701
Attn: Mr. Larry C. Oldham
or
Fax No.: 915-684-3905
<PAGE>
If to Sue-Ann: Sue-Ann Production Company
1908 N. Laurent, Suite 570
Victoria, Texas 77901
Attn: Mr. Richard Marshall
or
Fax No.: 512-576-6099
If to Beta: Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, California 92660
Attn: Mr. Steve Antry
or
Fax No.: 714-752-5757
If to Pease: Pease Oil & Gas Company
751 Horizon Court
Grand Junction, Colorado 81506
Attn: Mr. Willard Pease, Jr.
or
Fax No.: 970-243-8840
If to TAC: TAC Resources, Inc.
P.O. Box 206
Victoria, Texas 77902
Attn: Mr. Bill Bishop
or
Fax No.: 512-573-9840
If to Allegro: Allegro Investments, Inc.
1908 N. Laurent, Suite 370
Victoria, Texas 77901
Attn: Mr. Chris Thompson
or
Fax No.: 512-576-9643
If to Meyer: Meyer Financial Services, Inc.
5645 Harris Hill Road
Williamsville, NY 14221
Attn: Mr. Jeffrey Meyer
or
Fax No.: 716-741-1075
<PAGE>
If to Four-Way: Four-Way Texas, L.L.C.
c/o Kissing Bridge Company
11296 State Road
Glenwood, NY 14069
Attn: Mr. Bob James
or
Fax No.: 716-592-4228
10.6 Transfers Subject to this Agreement. Any sale, agreement, transfer
or other disposition of an interest in the Contract Lands however accomplished,
either voluntarily or involuntarily, by operation of law or otherwise, shall be
subject to the terms of this Agreement. Any instruments which convey any
interest in the Contract Lands shall be made expressly subject to this
Agreement.
10.7 Singular and Plural. When the context requires, the use of a
singular noun or pronoun shall be deemed plural and vice versa.
10.8 Further Assurances. Each of the Parties agrees to perform such
other acts and execute and deliver such other instruments as may be necessary in
order to effectuate the terms of this Agreement.
10.9 Relationship of the Parties. The Parties do not intend to create a
partnership by entering into this Agreement. The Parties agree that for the
purposes of federal income taxation, they are not to be taxed as a partnership
and each Party will elect to be excluded from the application of all of the
provisions of Subchapter "K", Chapter 1, Subtitle "A", of the Internal Revenue
Code of 1986, as amended ("Code"), as permitted and authorized by Section 761 of
the Code and the regulations promulgated thereunder. The liability of the
Parties hereunder shall be several, not joint or collective.
10.10 Memorandum of Operating Agreement. The Parties agree to execute
and record in the Records of Jackson County, Texas, a Memorandum of this
Exploration Agreement, in the form attached as Exhibit "E" hereto.
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement in
multiple counterparts as of the date first above written.
PARALLEL PETROLEUM CORPORATION
By:
Printed Name:
Title:
SUE-ANN PRODUCTION COMPANY
By:/s/
Printed Name:Larry Oldham
Title:President
TAC RESOURCES, INC.
By:
Printed Name:
Title:
ALLEGRO INVESTMENTS, INC.
By:
Printed Name:
Title:
BETA OIL & GAS, INC.
By:
Printed Name:
Title:
PEASE OIL & GAS COMPANY
By:
Printed Name:
Title:
<PAGE>
MEYER FINANCIAL SERVICES, INC.
By:
Printed Name:
Title:
FOUR-WAY TEXAS, L.L.C.
By:
Printed Name:
Title:
STATE OF TEXAS )
)
COUNTY OF MIDLAND )
This instrument was acknowledged before me this _______ day of
_______________, 1997, by ___________________________________________________,
_______________________ of Parallel Petroleum Corporation, a Texas corporation,
on behalf of said corporation.
Notary Public, State of Texas
STATE OF TEXAS )
)
COUNTY OF )
This instrument was acknowledged before me this _______ day of
_______________, 1997, by ___________________________________________________,
_______________________ of Sue-Ann Production Company, a ________________
corporation, on behalf of said corporation.
Notary Public, State of Texas
STATE OF TEXAS )
)
COUNTY OF )
This instrument was acknowledged before me this _______ day of
_______________, 1997, by ___________________________________________________,
_______________________ of TAC Resources, Inc., a _______________ corporation,
on behalf of said corporation.
Notary Public, State of Texas
<PAGE>
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this _______ day of
_______________, 1997, by ___________________________________________________,
_______________________ of Allegro Investments, Inc., a _______________
corporation, on behalf of said corporation.
Notary Public, State of
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this _______ day of
_______________, 1997, by ___________________________________________________,
_______________________ of Beta Oil & Gas, Inc., a _______________ corporation,
on behalf of said corporation.
Notary Public, State of
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this _______ day of
_______________, 1997, by ___________________________________________________,
_______________________ of Pease Oil & Gas Company, a _________________
corporation, on behalf of said corporation.
Notary Public, State of
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this _______ day of
_______________, 1997, by ___________________________________________________,
_______________________ of Meyer Financial Services, Inc., a _______________
corporation, on behalf of said corporation.
Notary Public, State of
<PAGE>
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this _______ day of
_______________, 1997, by ___________________________________________________,
_______________________ of Four-Way Texas, L.L.C., a _______________ limited
liability company, on behalf of said limited liability company.
Notary Public, State of
<PAGE>
EXHIBIT A
to
GANADO PROSPECT AGREEMENT, DATED NOVEMBER 1, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
EXHIBIT B
to
GANADO PROSPECT AGREEMENT, DATED NOVEMBER 1, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
EXHIBIT C-1
to
GANADO PROSPECT AGREEMENT, DATED NOVEMBER 1, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
EXHIBIT C-2
to
GANADO PROSPECT AGREEMENT, DATED NOVEMBER 1, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
<PAGE>
EXHIBIT "D"
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
[STAMP]
OPERATING AGREEMENT
DATED
November 1, 1997,
----------------
OPERATOR Sue-Ann Production Company
--------------------------------------------------------------------
CONTRACT AREA Ganado
---------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
COUNTY OF Jackson STATE OF Texas
----------------------- -----------------------
COPYRIGHT 1989 -- ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS 76137, APPROVED FORM.
A.A.P.L. NO. 610 - 1989
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
- ------- ----- ----
<S> <C> <C>
I. DEFINITIONS................................................................. 1
II. EXHIBITS.................................................................... 1
III. INTERESTS OF PARTIES........................................................ 2
A. OIL AND GAS INTERESTS:................................................... 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:............................ 2
C. SUBSEQUENTLY CREATED INTERESTS:.......................................... 2
IV. TITLES...................................................................... 2
A. TITLE EXAMINATION:....................................................... 2
B. LOSS OR FAILURE OF TITLE:................................................ 3
1. Failure of Title...................................................... 3
2. Loss by Non-Payment or Erroneous Payment of Amount Due................ 3
3. Other Losses.......................................................... 3
4. Curing Title.......................................................... 3
V. OPERATOR.................................................................... 4
A. DESIGNATION AND RESPONSIBILITY OF OPERATOR:.............................. 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:........... 4
1. Resignation or Removal of Operator.................................... 4
2. Selection of Successor Operator....................................... 4
3. Effect of Bankruptcy.................................................. 4
C. EMPLOYEES AND CONTRACTORS:............................................... 4
D. RIGHTS AND DUTIES OF OPERATOR:........................................... 4
1. Competitive Rates and use of Affiliates............................... 4
2. Discharge of Joint Account Obligations................................ 4
3. Protection from Liens................................................. 4
4. Custody of Funds...................................................... 5
5. Access to Contract Area and Records................................... 5
6. Filing and Furnishing Government Reports.............................. 5
7. Drilling and Testing Operations....................................... 5
8. Cost Estimates........................................................ 5
9. Insurance............................................................. 5
VI. DRILLING AND DEVELOPMENT.................................................... 5
A. INITIAL WELL:............................................................ 5
B. SUBSEQUENT OPERATIONS:................................................... 5
1. Proposed Operations................................................... 5
2. Operations by Less Than All Parties................................... 6
3. Stand-By Costs........................................................ 7
4. Deepening............................................................. 8
5. Sidetracking.......................................................... 8
6. Order of Preference of Operations..................................... 8
7. Conformity to Spacing Pattern......................................... 9
8. Paying Wells.......................................................... 9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:........................ 9
1. Completion............................................................ 9
2. Rework, Recomplete or Plug Back....................................... 9
D. OTHER OPERATIONS:........................................................ 9
E. ABANDONMENT OF WELLS:.................................................... 9
1. Abandonment of Dry Holes.............................................. 9
2. Abandonment of Wells That Have Produced............................... 10
3. Abandonment of Non-Consent Operations................................. 10
F. TERMINATION OF OPERATIONS:............................................... 10
G. TAKING PRODUCTION IN KIND................................................ 10
(Option 1) Gas Balancing Agreement....................................... 10
(Option 2) No Gas Balancing Agreement.................................... 11
VII. EXPENDITURES AND LIABILITY OF PARTIES....................................... 11
A. LIABILITY OF PARTIES:.................................................... 11
B. LIENS AND SECURITY INTERESTS:............................................ 11
C. ADVANCES:................................................................ 12
D. DEFAULTS AND REMEDIES:................................................... 12
1. Suspension of Rights.................................................. 13
2. Suit for Damages...................................................... 13
3. Deemed Non-Consent.................................................... 13
4. Advance Payment....................................................... 13
5. Costs and Attorney's Fees............................................. 13
E. RENTALS SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:..................... 13
F. TAXES:................................................................... 13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST............................ 14
A. SURRENDER OF LEASES:..................................................... 14
B. RENEWAL OR EXTENSION OF LEASES:.......................................... 14
C. ACREAGE OR CASH CONTRIBUTIONS:........................................... 14
<PAGE>
TABLE OF CONTENTS
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:............................. 15
E. WAIVER OF RIGHTS TO PARTITION:........................................... 15
IX. INTERNAL REVENUE CODE ELECTION.............................................. 15
X. CLAIMS AND LAWSUITS......................................................... 15
XI. FORCE MAJEURE............................................................... 16
XII. NOTICES..................................................................... 16
XIII. TERM OF AGREEMENT........................................................... 16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS........................................ 16
A. LAWS, REGULATIONS AND ORDERS:............................................ 16
B. GOVERNING LAW:........................................................... 16
C. REGULATORY AGENCIES:..................................................... 16
XV. MISCELLANEOUS............................................................... 17
A. EXECUTION:............................................................... 17
B. SUCCESSORS AND ASSIGNS:.................................................. 17
C. COUNTERPARTS:............................................................ 17
D. SEVERABILITY:............................................................ 17
XVI. OTHER PROVISIONS............................................................ 17
</TABLE>
<PAGE>
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between Sue-Ann Production Company,
hereinafter designated and referred to as "Operator," and the signatory
party or parties other than Operator, sometimes hereinafter referred to
individually as "Non-Operator," and collectively as "Non-Operators."
WITNESSETH:
WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A," and the
parties hereto have reached an agreement to explore and develop those Leases
and/or Oil and Gas Interests for the production of Oil and Gas to the extent
and as hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "AFE" shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be
incurred in conducting an operation hereunder.
B. The term "Completion" or "Complete" shall mean a single operation
intended to complete as well as a producer of Oil and Gas in one or more
Zones, including, but not limited to, the selling of production casing,
perforating, well stimulation and production testing conducted in such
operation.
C. The term "Contract Area" shall mean all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A."
D. the term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated
AFE, whichever is the lesser.
E. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.
F. The term "Drilling Unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority.
If a Drilling Unit is not fixed by any such rule or order, a Drilling Unit
shall be the drilling unit as established by the pattern of drilling to the
Contract Area unless fixed by express agreement of the Drilling Parties.
G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.
H. The term "Initial Well" shall mean the well required to be drilled
by the parties hereto as provided in Article VI.A.
I. The term "Non-Consent Well" shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.
J. The Terms "Non-Drilling Party" and "Non-Consenting Party" shall mean
a party who elects not to participate in a proposed operation.
K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other
marketable substances produced therewith, unless an intent to limit the
inclusiveness of this term is specifically stated.
L. The term "Oil and Gas Interests" or "Interests" shall mean unleased
fee and mineral interests in Oil and Gas in tracts of land lying within the
Contract Area which are owned by parties to this agreement.
M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean
the oil and gas leases or interests therein covering tracts of land lying
within the Contract Area which are owned by the parties to this agreement.
N. The term "Plug Back" shall mean a single operation whereby a deeper
Zone is abandoned in order to attempt a Completion in a shallower Zone.
O. The term "Recompletion" or "Recomplete" shall mean an operation
whereby a Completion in one Zone is abandoned in order to attempt a
Completion in a different Zone within the existing wellbore.
P. The term "Rework" shall mean an operation conducted in the wellbore
of a well after it is Completed to secure, restore, or improve production in
a Zone which is currently open to production in the wellbore. Such operations
include, but are not limited to, well stimulation operations but exclude any
routine repair or maintenance work or drilling, Sidetracking, Deepening,
Completing, Recompleting, or Plugging Back of a well.
Q. The term "Sidetrack" shall mean the directional control and
intentional deviation of a well from vertical so as to change the bottom hole
location unless done to straighten the hole or to drill around junk in the
hole to overcome other mechanical difficulties.
R. The term "Zone" shall mean a stratum of earth containing or thought
to contain a common accumulation of Oil and Gas separately producible from
any other common accumulation of Oil and Gas.
Unless the context otherwise clearly indicates, words used in the
singular include the plural, the word "person" includes natural and
artificial persons, the plural includes the singular, and any gender includes
the masculine, feminine, and neuter.
ARTICLE II
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
/X/ A. Exhibit "A," shall include the following information:
(1) Description of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Parties to agreement with addresses and telephone numbers for
notice purposes,
(4) Percentages or fractional interests of parties to this
agreement,
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to
this agreement,
(6) Burdens on production.
/X/ B. Exhibit "B," Form of Lease.
/X/ C. Exhibit "C," Accounting Procedure.
/X/ D. Exhibit "D," Insurance.
/X/ E. Exhibit "E," Gas Balancing Agreement.
/X/ H. Other: Memorandum of Operating Agmt., Security Agmt. & Financial
Statement.
<PAGE>
If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
A. OIL AND GAS INTERESTS:
If any party owns an Oil and Gas Interest in the Contract Area, that
Interest shall be treated for all purposes of this agreement and during the
term hereof as if it were covered by the form of Oil and Gas Lease attached
hereto as Exhibit "B," and the owner thereof shall be deemed to own both
royalty interest in such lease and the interest of the lessee thereunder.
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be owned, by
the parties as their interests are set forth in Exhibit "A." In the same
manner, the parties shall also own all production of Oil and Gas from the
Contract Area subject, however, to the payment of royalties and other burdens
on production as described hereafter.
Regardless of which party has contributed any Oil and Gas Lease or Oil
and Gas Interest on which royalty or other burdens may be payable and except
as otherwise expressly provided in this agreement, each party shall pay or
deliver, or cause to be paid or delivered, all burdens on its share of the
production from the Contract Area up to, but not in excess of, * and shall
indemnify, defend and hold the other parties free from any liability
therefor. Except as otherwise expressly provided in this agreement, if any
party has contributed hereto any Lease or Interest which is burdened with any
royalty, overriding royalty, production payment or other burden on production
in excess of the amounts stipulated above, such party so burdened shall
assume and alone bear all such excess obligations and shall indemnify, defend
and hold the other parties hereto harmless from any and all claims
attributable to such excess burden. However, so long as the Drilling Unit for
the productive Zone(s) is identical with the Contract Area, each party shall
pay or deliver, or cause to be paid or delivered, all burdens on production
from the Contract Area due under the terms of the Oil and Gas Lease(s) which
such party has contributed to this agreement, and shall indemnify, defend and
hold the other parties free from any liability therefor.
No party shall ever be responsible, on a price basis higher than the
price received by such party, to any other party's lessor or royalty owner,
and if such other party's lessor or royalty owner should demand and receive
settlement on a higher price basis, the party contributing the affected Lease
shall bear the additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. SUBSEQUENTLY CREATED INTERESTS:
If any party has contributed hereto a Lease or interest that is burdened
with an assignment of production given as security for the payment of money,
or if, after the date of this agreement, any party creates an overriding
royalty, production payment, net profits interest, assignment of production
or other burden payable out of production attributable to its working
interest hereunder, such burden shall be deemed a "Subsequently Created
Interest." Further, if any party has contributed hereto a Lease or Interest
burdened with an overriding royalty, production payment, net profits
interest, or other burden payable out of production created prior to the date
of this agreement, and such burden is not shown on Exhibit "A," such burden
also shall be deemed a Subsequently Created Interest to the extent such
burden causes the burdens on such party's Lease or Interest to exceed the
amount stipulated in Article III.B. above.
The party whose interest is burdened with the Subsequently Created
Interest (the "Burdened Party") shall assume and alone bear, pay and
discharge the Subsequently Created Interest and shall indemnify, defend and
hold harmless the other parties from and against any liability therefor.
Further, if the Burdened Party fails to pay, when due, its share of expenses
chargeable hereunder, all provisions of Article VII.B. shall be enforceable
against the Subsequently Created Interest in the same manner as they are
enforceable against the working interest of the Burdened Party. If the
Burdened Party is required under this agreement to assign or relinquish to
any other party, or parties, all or a portion of its working interest and/or
the production attributable thereto, said other party, or parties, shall
receive said assignment and/or production free and clear of said Subsequently
Created Interest, and the Burdened Party shall indemnify, defend and hold
harmless said other party, or parties, from any and all claims and demands
for payment asserted by owners of the Subsequently Created Interest.
ARTICLE IV.
TITLES
A. TITLE EXAMINATION:
Title examination shall be made on the Drillsite of any proposed well
prior to commencement of drilling operations and, if Operator so elects,
title examination shall be made on the entire Drilling Unit, or maximum
anticipated Drilling Unit, of the well. The opinion will include the
ownership of the working interest, minerals, royalty, overriding royalty and
production payments under the applicable Leases. Each party contributing
Leases and/or Oil and Gas Interests to be included in the Drillsite or
Drilling Unit, if appropriate, shall furnish to Operator all abstracts
(including federal lease status reports), title opinions, title papers and
curative material in its possession free of charge. All such information not
in the possession of or made available to Operator by the parties, but
necessary for the examination of the title, shall be obtained by Operator.
Operator shall cause title to be examined by attorneys on its staff or by
outside attorneys. Copies of all title opinions shall be furnished to each
Drilling Party. Costs incurred by Operator in procuring abstracts, fees paid
outside attorneys for title examination (including preliminary, supplemental,
shut-in royalty opinions and division order title opinions) and other direct
charges as provided in Exhibit "C" shall be borne by the Drilling Parties in
the proportion that the interest of each Drilling Party bears to the total
interest of all Drilling Parties as such interests appear in Exhibit "A."
Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any
other orders necessary or appropriate to the conduct of operations hereunder.
This shall not prevent any party from appearing on its own behalf at such
hearings. Costs incurred by Operator, including fees paid to outside
attorneys, which are associated with hearings before governmental agencies,
and which costs are necessary and proper for the activities contemplated
under this agreement, shall be direct charges to the joint account and shall
not be covered by the administrative overhead charges as provided in Exhibit
"C."
<PAGE>
Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.
No well shall be drilled on the Contract Area until after (1) the title
to the Drillsite or Drilling Unit, if appropriate, has been examined as above
provided; and (2) the title has been approved by the examining attorney or
title has been accepted by Operator.
B. LOSS OR FAILURE OF TITLE:
3. LOSSES: All losses of Leases or Interests committed to this
agreement, shall be joint losses and shall be borne by all
parties in proportion to their interests shown on Exhibit "A". This shall
include but not be limited to the loss of any Lease or Interest through
failure to develop or because express or implied covenants have not been
performed (other than performance which requires only the payment of money),
and the loss of any Lease by expiration at the end of its primary term if it
is not renewed or extended. There shall be no readjustment of interests in
the remaining portion of the Contract Area on account of any joint loss.
4. CURING TITLE: In the event of a Failure of Title under any Lease or
Interest acquired by any party hereto within a ninety (90) day period
covering all or a portion of the interest that has failed or was lost shall
be offered at cost to the Drilling Parties, and the provisions of Article
VIII.B. shall not apply to such acquisition.
<PAGE>
ARTICLE V
OPERATOR
A. DESIGNATIONS AND RESPONSIBILITIES OF OPERATOR:
SUE-ANN PRODUCTION COMPANY shall be the Operator of the Contract Area,
and shall conduct and direct and have full control of all operations on the
Contract Area as permitted and required by, and within the limits of this
agreement. In its performance of services hereunder for the Non-Operators,
Operator shall be an independent contractor not subject to the control or
direction of the Non-Operators except as to the type of operation to be
undertaken in accordance with the election procedures contained in this
agreement. Operator shall not be deemed, or hold itself our as, the agent of
the Non-Operators with authority to bind them to any obligation or liability
assumed or incurred by Operator as to any third party. Operator shall conduct
its activities under this agreement as a reasonable prudent operator, in a
good and workmanlike manner, with due diligence and dispatch, in accordance
with good oilfield practice, and in compliance with applicable law and
regulation, but in no event shall it have any liability as Operator to the
other parties for losses sustained or liabilities incurred except such as may
result from gross negligence or willful misconduct.
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
1. RESIGNATION OR REMOVAL OF OPERATOR: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area, or
is no longer capable of serving as Operator. Operator shall be deemed to have
resigned without any action by Non-Operators, except the selection of a
successor. Operator may be removed only for good cause by the affirmative
vote of Non-Operators owning a majority interest based on ownership as shown
on Exhibit "A" remaining after excluding the voting interest of Operator;
such vote shall not be deemed effective until a written notice has been
delivered to the Operator by a Non-Operator detailing the alleged default and
Operator has failed to cure the default within thirty (30) days from its
receipt of the notice or, if the default concerns an operation then being
conducted, within forty-eight (48) hours of its receipt of the notice. For
purposes hereof, "good cause" shall mean not only gross negligence or willful
misconduct but also the material breach of or inability to meet the standards
of operation contained in Article V.A. or material failure or inability to
perform its obligations under this agreement.
Subject to Article VII.D.I., such resignation or removal shall not
become effective until 7:00 o'clock A.M. on the first day of the calendar
month following the expiration of ninety (90) days after the giving of notice
of resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of
Operator at an earlier date. Operator, after effective date of resignation or
removal, shall be bound by the terms hereof as a Non-Operator. A change of a
corporate name or structure of Operator or transfer of Operator's interest to
any single subsidiary, parent or successor corporation shall not be the basis
for removal of Operator.
2. SELECTION OF SUCCESSOR OPERATOR: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of two (2) or more parties owning a majority interest based
on ownership as shown on Exhibit "A": provided, however, if an Operator which
has been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative
vote of the party or parties owning a majority interest based on ownership as
shown on Exhibit "A" remaining after excluding the voting interest of the
Operator that was removed or resigned. The former Operator shall promptly
deliver to the successor Operator all records and data relating to the
operations conducted by the former Operator to the extent such records and
data are not already in the possession of the successor operator. Any cost of
obtaining or copying the former Operator's records and data shall be charged
to the joint account.
3. EFFECT OF BANKRUPTCY: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any
action by Non-Operators, except the selection of a successor. If a petition
for relief under the federal bankruptcy laws is filed by or against Operator,
and the removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant
to the Bankruptcy Code, and an election to reject this agreement by Operator
as a debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or
more parties owning a majority interest based on ownership as shown on
Exhibit "A." In the event there are only two (2) parties to this agreement,
during the period of time the operating committee controls operations, a
third party acceptable to Operator, Non-Operator and the federal bankruptcy
court shall be selected as a member of the operating committee, and all
actions shall require the approval of two (2) members of the operating
committee without regard for their interest in the Contract Area based on
Exhibit "A."
C. EMPLOYEES AND CONTRACTORS:
The number of employees or contractors used by Operator in conducting
operations hereunder, their selection, and the hours of labor and the
compensation for services performed shall be determined by Operator, and all
such employees or contractors shall be the employees or contractors of
Operator.
D. RIGHTS AND DUTIES OF OPERATOR:
1. COMPETITIVE RATES AND USE OF AFFILIATES: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall
not exceed the prevailing rates in the area and the rate of such charges
shall be agreed upon by the parties in writing before drilling operations are
commenced, and such work shall be performed by Operator under the same terms
and conditions as are customary and usual in the area in contracts of
independent contractors who are doing work of a similar nature. All work
performed or materials supplied by affiliates or related parties of Operator
shall be performed or supplied at competitive rates, pursuant to written
agreement, and in accordance with customs and standards prevailing in the
industry.
2. DISCHARGE OF JOINT ACCOUNT OBLIGATIONS: Except as herein otherwise
specifically provided. Operator shall promptly pay and discharge expenses
incurred in the development and operation of the Contract Area pursuant to
this agreement and shall charge each of the parties hereto with their
respective proportionate shares upon the expense basis provided in Exhibit
"C." Operator shall keep an accurate record of the joint account hereunder,
showing expenses incurred and charges and credits made and received.
3. PROTECTION FROM LIENS: Operator shall pay, or cause to be paid,
as and when they become due and payable, all accounts of contractors and
suppliers and wages and salaries for services rendered or performed, and for
materials supplied on, to or in respect of the Contract Area or any
operations for the joint account thereof, and shall keep the Contract Area
free from
<PAGE>
liens and encumbrances resulting therefrom except for those resulting from a
bona fide dispute as to services rendered or materials supplied.
4. CUSTODY OF FUNDS: Operator shall hold for the account of the
Non-Operators any funds of the Non-Operators advanced or paid to the
Operator, either for the conduct of operations hereunder or as a result of
the sale of production from the Contract Area, and such funds shall remain
the funds of the Non-Operators on whose account they are advanced or paid
until used for their intended purpose or otherwise delivered to the
Non-Operators or applied toward the payment of debts as provided in Article
VII.B. Nothing in this paragraph shall be construed to establish a fiduciary
relationship between Operator and Non-Operators for any purpose other than to
account for Non-Operator funds as herein specifically provided. Nothing in
this paragraph shall require the maintenance by Operator of separate accounts
for the funds of Non-Operators unless the parties otherwise specifically
agree.
5. ACCESS TO CONTRACT AREA AND RECORDS: Operator shall, except as
otherwise provided herein, permit each Non-Operator or its duly authorized
representative, at the Non-Operator's sole risk and cost, full and free
access at all reasonable times to all operations of every kind and character
being conducted for the joint account on the Contract Area and to the records
of operations conducted thereon or production therefrom, including Operator's
books and records relating thereto. Such access rights shall not be exercised
in a manner interfering with Operator's conduct of an operation hereunder and
shall not obligate Operator to furnish any geologic or geophysical data of an
interpretive nature unless the cost of preparation of such interpretive data
was charged to the joint account. Operator will furnish to each Non-Operator
upon request copies of any and all reports and information obtained by
Operator in connection with production and related items, including, without
limitation, meter and chart reports, production purchaser statements, run
tickets and monthly gauge reports, but excluding purchase contracts and
pricing information to the extent not applicable to the production of the
Non-Operator seeking the information. Any audit of Operator's records
relating to amounts expended and the appropriateness of such expenditures
shall be conducted in accordance with the audit protocol specified in
Exhibit "C."
6. FILING AND FURNISHING GOVERNMENTAL REPORTS: Operator will file, and
upon written request promptly furnish copies to each requesting Non-Operator
not in default of its payment obligations, all operational notices, reports
or applications required to be filed by local, State, Federal or Indian
agencies or authorities having jurisdiction over operations hereunder. Each
Non-Operator shall provide to Operator on a timely basis all information
necessary to Operator to make such filings.
7. DRILLING AND TESTING OPERATIONS: The following provisions shall
apply to each well drilled hereunder, including but not limited to the
Initial Well:
(a) Operator will promptly advise Non-Operators of the date on
which the well is spudded, or the date on which drilling operations are
commenced.
(b) Operator will send to Non-Operators such reports, test results
and notices regarding the progress of operations on the well as the
Non-Operators shall reasonably request, including, but not limited to, daily
drilling reports, completion reports, and well logs.
(c) Operator shall adequately test all Zones encountered which may
reasonably be expected to be capable of producing Oil and Gas in paying
quantities as a result of examination of the electric log or any other logs
or cores or tests conducted hereunder.
8. COST ESTIMATES: Upon request of any Consenting Party, Operator shall
furnish estimates of current and cumulative costs incurred for the joint
account at reasonable intervals during the conduct of any operation pursuant
to this agreement. Operator shall not be held liable for errors in such
estimates so long as the estimates are made in good faith.
9. INSURANCE: At all times while operations are conducted hereunder,
Operator shall comply with the workers compensation law of the state where
the operations are being conducted; provided, however, that Operator may be a
self-insurer for liability under said compensation laws in which event the
only charge that shall be made to the joint account shall be as provided in
Exhibit "C." Operator shall also carry or provide insurance for the benefit
of the joint account of the parties as outlined in Exhibit "D" attached
hereto and made a part hereof. Operator shall require all contractors engaged
in work on or for the Contract Area to comply with the workers compensation
law of the state where the operations are being conducted and to maintain
such other insurance as Operator may require.
In the event automobile liability insurance is specified in said Exhibit
"D," or subsequently receives the approval of the parties, no direct charge
shall be made by Operator for premiums paid for such insurance for Operator's
automotive equipment.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. INITIAL WELL:
On or before the ________ day of ____________, 19__, Operator shall
commence the drilling or reworking of the Initial Well at the following
location:
and shall thereafter continue the drilling or reworking of the well with due
diligence to
The drilling of the Initial Well and the participation therein by all parties
is obligatory, subject to Article VI.C.1. as to participation in Completion
operations and Article VI.F. as to termination of operations and Article XI
as to occurrence of force material.
B. SUBSEQUENT OPERATIONS:
1. PROPOSED OPERATIONS: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party should
desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a
well no longer capable of producing in paying quantities in which such party
has not otherwise relinquished its interest in the proposed objected Zone
under this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest
in such objective Zone
<PAGE>
under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing to do the
work whether they elect to participate in and pay their proportionate share
of the estimated cost of the proposed operations. If a drilling rig is on
location, notice of a proposal to Rework, Sidetrack, Recomplete, Plug Back or
Deepen may be given by telephone and the response period shall be limited to
twenty four (24) hours, but the parties shall have fourteen (14) days to pay
their proportionate share of the estimated cost of the proposed operation,
exclusive of Saturday, Sunday and legal holidays. Failure of a party to whom
such notice is delivered to reply and pay their proportionate share of the
estimated costs of the proposed operation within the period above fixed shall
constitute an election by that party not to participate in the proposed
operation. Any proposal by a party to conduct an operation conflicting with
the operation initially proposed shall be delivered to all parties within the
time and in the manner provided in Article VI.B.6.
If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced within the time
period hereafter set forth, and Operator shall, no later than ninety (90)
days after expiration of the notice period of thirty (30) days (or as
promptly as practicable after the expiration of the twenty-four (24) hour
period when a drilling rig is on location, as the case may be), actually
commence the proposed operation and thereafter complete it with due diligence
at the risk and expense of the parties participating therein; provided,
however, said commencement date may be extended upon written notice of same
by Operator to the other parties, for a period of up to thirty (30)
additional days if, in the sole opinion of Operator, such additional time is
reasonably necessary to obtain permits from governmental authorities, surface
rights (including rights-of-way) or appropriate drilling equipment, or to
complete title examination or executive matters required for tide approval or
acceptance. If the actual operation has not been commenced within the time
provided (including any extension thereof as specifically permitted herein or
in the force majeure provisions of Article XI) and if any party hereto still
desires to conduct said operation, written notice proposing same must be
resubmitted to the other parties in accordance herewith as if no prior
proposal had been made. Those parties that did not participate in the
drilling of a well for which a proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed
Deepening or Sidetracking operation, reimburse the Drilling Parties in
accordance with Article VI.B.4. in the event of a Deepening operation and in
accordance with Article VI.B.5. in the event of a Sidetracking operation.
2. OPERATIONS BY LESS THAN ALL PARTIES:
(a) DETERMINATION OF PARTICIPATION. If any party to whom such
notice is delivered as provided in Article VI.B.1. or elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such
other parties as shall elect to participate in the operation shall, no later
than ninety (90) days after the expiration of the notice period of thirty
(30) days (or as promptly as practicable after the expiration of the
twenty-four (24) hour period when a drilling rig is on location, as the case
may be) actually commence the proposed operation and complete it with due
diligence. Operator shall perform all work for the account of the Consenting
Parties; provided, however, if no drilling rig or other equipment is on
location, and if Operator is a Non-Consenting Party, the Consenting Parties
shall either: (i) request Operator to perform the work required by such
proposed operation for the account of the Consenting Parties, or (ii)
designate one of the Consenting Parties as Operator to perform such work. The
rights and duties granted to and imposed upon the Operator under this
agreement are granted to and imposed upon the party designated as Operator
for an operation in which the original Operator is a Non-Consenting Party.
Consenting Parties, when conducting operations on the Contract Area pursuant
to this Article VI.B.2., shall comply with all terms and conditions of this
agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period,
shall advise all Parties of the total interest of the parties approving such
operation and its recommendation as to whether the Consenting Parties should
proceed with the operation as proposed. Each Consenting Party, within
twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays)
after delivery of such notice, shall advise the proposing party of its desire
to (i) limited participation to such party's interest as shown on Exhibit "A"
or (ii) carry only its proportionate part (determined by dividing such
party's interest in the Contract Area by the interests of all Consenting
Parties in the Contract Area) of Non-Consenting Parties' interests, or (iii)
carry its proportionate part (determined as provided in (ii)) of
Non-Consenting Parties' interests together with all or a portion of its
proportionate part of any Non-Consenting Parties' interests that any
Consenting Party did not elect to take. Any interest of Non-Consenting
Parties that is not carried by a Consenting Party shall be deemed to be
carried by the party proposing the operation if such party does not withdraw
its proposal. Failure to advise the proposing party within the time required
shall be deemed an election under (i). In the event a drilling rig is on
location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of twenty-four (24) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election,
may withdraw such proposal if there is less than 100% participation and shall
notify all parties of such decision within ten (10) days, or within
twenty-four (24) hours if a drilling rig is on location, following expiration
of the applicable response period. If 100% subscription to the proposed
operation is obtained, the proposing party shall promptly notify the
Consenting Parties of their proportionate interests in the operation and the
party serving as Operator shall commence such operation within the period
provided in Article VI.B.1., subject to the same extension right as provided
therein.
(b) RELINQUISHMENT OF INTEREST FOR NON-PARTICIPATION. The entire
cost and risk of conducting such operations shall be borne by the Consenting
Parties in the proportions they have elected to bear same under the terms of
the preceding paragraph. Consenting Parties shall keep the leasehold estates
involved in such operations free and clear of all liens and encumbrances of
every kind created by or arising from the operations of the Consenting
Parties. If such an operation results in a dry hole, then subject to Article
VI.B.6. and VI.E.3., the Consenting Parties shall plug and abandon the well
and restore the surface location at their sole cost, risk and expense;
provided, however, that those Non-Consenting Parties that participated in the
drilling, Deepening or Sidetracking of the wall shall remain liable for, and
shall pay, their proportionate shares of the cost of plugging and abandoning
the well and restoring the surface location insofar only as those costs were
not increased by the subsequent operations of the Consenting Parties. If any
well drilled, Reworked, Sidetracked, Deepened, Recompleted or Plugged Back
under the provisions of this Article results in a well capable of producing
Oil and/or Gas in paying quantities, the Consenting Parties shall Complete
and equip the well to produce at their sole cost and risk, and the well shall
then be turned over to Operator (if the Operator did not conduct the
operation) and shall be operated by it at the expense and for the account of
the Consenting Parties. Upon commencement of operations for the drilling,
Reworking, Sidetracking, Recompleting, Deepening or Plugging Back of any such
well by Consenting Parties in accordance with the provisions of this Article,
each Non-Consenting Party shall be deemed to have relinquished to Consenting
Parties, and the Consenting Parties shall own and be entitled to receive, in
proportion to their respective interests, all of such Non-Consenting Party's
interest in the well and share of production therefrom in accordance with
Article XVI.A.1.
<PAGE>
3. STANDBY-COSTS: When a well which has been drilled or Deepened has
reached its authorized depth and all tests have been completed and the results
thereof furnished to the parties, or when operations on the well have been
otherwise terminated pursuant to Article VI.F., stand-by costs incurred
pending response to a party's notice proposing a Reworking,
<PAGE>
Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation
in such a well (including the period required under Article VI.B.6. to resolve
competing proposals) shall be charged and borne as part of the drilling or
Deepening operation just completed. Standy-by costs subsequent to all
parties responding, or expiration of the response time permitted, whichever
first occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph
of Article VL.B.2. (a), shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of
insufficient participating, such stand-by costs shall be allocated between
the Consenting Parties in the proportion each Consenting Party's interest as
shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of
all Consenting Parties.
In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive
up to five (5) additional days after expiration of the forty-eight hour
response period specified in Article VI.B.1. within which to respond by
paying for all stand-by costs and other costs incurred during such extended
the response period; Operator may require such party to pay the estimated
stand-by time in advance as a condition to extending the response period. If
more than one party elects to take such additional time to respond to the
notice, standby costs shall be allocated between the parties taking
additional time to respond on a day-to-day basis in the proportion each
electing party's interest as shown on Exhibit "A" bears to the total interest
as shown on Exhibit "A" of all the electing parties.
4. DEEPENING: If less than all the parties elect to participate in a
drilling, Sidetracking, or Deepening operation proposed pursuant to Article
XVI.A. the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article XVI.A shall relate only and be limited to
the lesser of (i) the total depth actually drilled or (ii) the objective
depth or Zone of which the parties were given notice under Article VI.B.1.
("Initial Objective"). Such well shall not be Deepened beyond the Initial
Objective without first complying with this Article to afford the
Non-Consenting Parties the opportunity to participate in the Deepening
operation.
In the event any Consenting Party desires to drill or Deepen a
Non-Censent Well to a depth below the Initial Objective, such party shall give
notice thereof, complying with the requirements of Article VI.B.1., to all
parties (including Non-Consenting Parties). Thereupon, Articles VI.B.1. and
2. shall apply and all parties receiving such notice shall have the right to
participate or not participate in the Deepening of such well pursuant to said
Articles VI.B.1. and 2. If a Deepening operation is approved pursuant to such
provisions, and if any Non-Consenting Party elects to participate in the
Deepening operation, such Non-Consenting party shall pay or make
reimbursement (as the case may be) of the following costs and expenses:
(a) If the proposal to Deepen is made prior to the Completion of such
well as a well capable of producing in paying quantities, such Non-Consenting
Party shall pay (or reimburse Consenting Parties for, as the case may be)
that share of costs and expenses incurred in connection with the drilling of
said well from the surface to the Initial Objective which Non-Consenting
Party would have paid had such Non-Consenting Party agreed to participate
therein, plus the Non-Consenting Party's share of the cost of Deepening and
of participating in any furhter operations on the well in accordance with the
other provisions of this Agreement, provided, however, all costs for testing
and Completion or attempted Completion of the well incurred by Consenting
Parties prior to the point of acrual operations to Deepen beyond the Initial
Objective shall be for the sole account of Consenting Parties.
(b) If the proposal is made for a Non-Consent Well that has been
previously Completed as a well capable of producing in paying quantities, but
is no longer capable of producing in paying quantities, such Non-Consenting
Party shall pay (or reimburse Consenting Parties for, as the case may be) its
proportionate share of all costs of drilling, Completing, and equipping said
well from the surface to the Initial Objective, calculated in the manner
provided in paragraph (a) above, less those costs recouped by the Consenting
Parties from the sale of production from the well. The Non-Consenting Party
shall also pay its proportionate share of all costs of re-entering said well.
The Non-Consenting Parties' proportionate part (based on the percentage of
such well Non-Consenting Party would have owned had it previously
participated in such Non-Consent Well) of the costs of salvable materials and
equipment remaining in the hole and salvable surface equipment used in
connection with such well shall be determined in accordance with Exhibit "C".
if the Consenting Parties have recouped the cost of drilling, Completing,
and equipping the well at the time such Deepening operation is conducted,
then a Non-Consenting Party may participate in the Deepening of the well with
no payment for costs incurred prior to re-entering the well for Deepening.
The foregoing shall not imply a right of any Consenting Party to propose
any Deepening for a Non-Consent Well prior to the drilling of such well to
its Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.
5. SIDETRACKING: Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore
at the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore
to be utilized as follows:
(a) If the proposal is for Sidetracking an existing dry hole,
reimbursement shall be on the basis of the acrual costs incurred in the
intial drilling of the well down to the depth at which the Sidetracking
operation is initiated.
(b) If the proposal is for Sidetracking a well which has previously
produced, reimbursement shall be on the basis of such party's proportionate
share of drilling and equipping costs incurred in the initial drilling of the
well down to the depth at which the Sidetracking operation is conducted,
calculated in the manner described in Article VI.B.4(b) above. Such party's
proportionate share of the cost of the well's salvable materials and
equipment down to the depth at which the Sidetracking operation is initiated
shall be determined in accordance with the provisions of Exhibit "C".
6. ORDER OF PREFERENCE OF OPERATIONS. Except as otherwise specifically
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, exclusive of Saturday, Sunday and legal holidays, from delivery of the
initial proposal, if a drilling rig is on location for the well on which such
operation is to be conducted, to deliver to all parties entitled to
participate in the proposed operation such party's alternative proposal, such
alternate proposal to contain the same information required to be included in
the initial proposal. Each party receiving such proposals shall elect by
delivery of notice to Operator within five (5) days after expiration of the
proposal period, or within twenty-four (24) hours (exclusive of Saturday,
Sunday and legal holidays) if a drilling rig is on location for the well that
is the subject of the porposals, to participate in one of the competing
proposals. Any party not electing within the time required shall be deemed
not to have voted. The proposal receiving the vote of parties owning the
largest aggregate percentage interest of the parties voting shall have
priority over all other competing proposals; in the case of a tie vote, the
<PAGE>
initial proposal shall prevail. Operator shall deliver notice of such result
to all parties entitled to participate in the operation within five (5) days
after expiration of the election period (or within twenty-four (24) hours,
exclusive of Saturday, Sunday and legal holidays, if a drilling rig is on
location). Each party shall then have two (2) days (or twenty-four (24)
hours if a rig is on location) from receipt of such notice to elect by
delivery of notice to Operator to participate in such operation or to
relinquish interest in the affected well pursuant to the provisions of
Article VI.B.2; failure by a party to deliver notice within such period shall
be deemed an election NOT to participate in the prevailing proposal.
7. CONFORMITY TO SPACING PATTERN. Notwithstanding the provisions of this
Article VI.B.2., it is agreed that no wells shall be proposed to be drilled to
or Completed in or produced from a Zone from which a well located elsewhere
on the Contract Area is producing, unless such well conforms to the
then-existing well spacing pattern for such Zone.
8. PAYING WELLS. No party shall conduct any Reworking, Deepening,
Plugging Back, Completion, Recompletion, or Sidetracking operation under this
agreement with respect to any well then capable of producing in paying
quantities except with the consent of all parties that have not relinquished
interests in the well at the time of such operation.
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:
1. COMPLETION: Without the consent of all parties, no well shall be
drilled, Deepened or Sidetracked, except any well drilled, Deepened or
Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.
Consent to the drilling, Deepening or Sidetracking shall include:
/ / OPTION NO. 1: All necessary expenditures for the drilling,
Deepening or Sidetracking, testing, Completing and equipping of the
well, including necessary tankage and/or surface facilities.
/X/ OPTION NO. 2: All necessary expenditures for the drilling,
Deepening or Sidetracking and testing of the well. When such well
has reached its authorized depth, and all logs, cores and other
tests have been completed, and the results thereof furnished to the
parties, Operator shall give immediate notice to the Non-Operators
having the right to participate in a Completion attempt whether or
not Operator recommends attempting to Complete the well, together
with Operator's AFB for Completion costs if not previously
provided. The parties receiving such notice shall have forty-eight
(48) hours (exclusive of Saturday, Sunday and legal holidays) in
which to elect by delivery of notice to Operator to participate in
a recommended Completion attempt or to make a Completion proposal
with an accompanying AFE. Operator shall deliver any such
Completion proposal, or any Completion proposal conflicting with
Operator's proposal, to the other parties entitled to participate
in such Completion in accordance with the procedures specified in
Article VI.B.6. Election to participate in a Completion attempt
shall include consent to all necessary expenditures for the
Completing and equipping of such well, including necessary tankage
and/or surface facilities but excluding any stimulation operation
not contained on the Completion AFE. Failure of any party
receiving such notice to reply within the period above fixed shall
constitute an election by that party NOT to participate in the cost
of the Completion attempt; provided, that Article VI.B.6 shall
control in the case of conflicting Completion proposals. If one or
more, but less than all of the parties, elect to attempt a
Completion, the provisions of Article VI.B.2. hereof (the phrase
"Reworking, Sidetracking, Deepening, Recompleting or Plugging
Back" as contained in Article VI.B.2., shall be deemed to include
"Completing") shall apply to the operations thereafter conducted by
less than all parties; provided, however, that Article VI.B.2.
shall apply separately to each separate Completion or Recompletion
attempt undertaken hereunder, and an election to become a
Non-Consenting Party as to one Completion or Recompletion attempt
shall not prevent a party from becoming a Consenting Party in
subsequent Completion or Recompletion attempts regardless whether
the Consenting Parties as to earlier Completions or Recompletions
have recouped their costs pursuant to Article VI.B.2.; provided
further, that any recoupment of costs by a Consenting Party shall
be made solely from the production attributable to the Zone in
which the Completion attempt is made. Election by a previous
Non-Consenting Party to participate in a subsequent Completion or
Recompletion attempt shall require such party to pay its
proportionate share of the cost of salvable materials and equipment
installed in the well pursuant to the previous Completion or
Recompletion attempt, insofar and only insofar as such materials
and equipment benefit the Zone in which such party participates in
a Completion attempt.
2. REWORK, RECOMPLETE OR PLUG BACK: No well shall be Reworked,
Recompleted or Plugged Back except a well Reworked, Recompleted, or Plugged
Back pursuant to the provisions of Article VI.B.2. of this agreement.
Consent to the Reworking, Recompleting or Plugging Back of a well shall
include all necessary expenditures in conducting such operations and
Completing and equipping of said well, including necessary tankage and/or
surface facilities.
D. OTHER OPERATIONS:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Thirty-Five Thousand and No/100 Dollars
($35,000.00) except in connection with the drilling, Sidetracking, Reworking,
Deepening, Completing, Recompleting or Plugging Back of a well that has been
previously authorized by or pursuant to this agreement; provided, however,
that, in case of explosion, fire, flood or other sudden emergency, whether of
the same or different nature, Operator may take such steps and incur such
expenses as in its opinion are required to deal with the emergency to
safeguard life and property but Operator, as promptly as possible, shall
report the emergency to the other parties. If Operator prepares an AFE for
its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of Fifteen
Thousand Dollars ($15,000.00). Any party who has not relinquished its
interest in a well shall have the right to propose that Operator perform
repair work or undertake the installation of artificial lift equipment or
ancillary production facilities such as salt water disposal wells or to
conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or
other transportation or marketing facilities, the installation of which
shall be governed by separate agreement between the parties) reasonably
estimated to require an expenditure in excess of the amount first set forth
above in this Article VI.D. (except in connection with an operation required
to be proposed under Articles VI.B.1. or VI.C.1. Option No. 2, which shall
be governed exclusively by those Articles). Operator shall deliver such
proposal to all parties entitled to participate therein. If within thirty
(30) days thereof Operator secures the written consent of any party or
parties owning at least _______% of the interests of the parties entitled to
participate in such operation, each party having the right to participate in
such project shall be bound by the terms of such proposal and shall be
obligated to pay its proportionate share of the costs of the proposed
project as if it had consented to such project pursuant to the terms of the
proposal.
E. ABANDONMENT OF WELLS:
1. ABANDONMENT OF DRY HOLES: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be
<PAGE>
plugged and abandoned without the consent of all parties. Should Operator,
after diligent effort, be unable to contact any party, or should any party
fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday
and legal holidays) after delivery of notice of the proposal to plug and
abandon such well, such party shall be deemed to have consented to the
proposed abandonment. All such wells shall be plugged and abandoned in
accordance with applicable regulations and at the cost, risk and expense of
the parties who participated in the cost of drilling or Deepening such well.
Any party who objects to plugging and abandoning such well by notice
delivered to Operator within forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays) after delivery of notice of the proposed plugging
shall take over the well as of the end of such forty-eight (48) hour notice
period and conduct further operations in search of Oil and/or Gas subject to
the provisions of Article VI.B.; failure of such party to provide proof
reasonably satisfactory to Operator of its financial capability to conduct
such operations or to take over the well within such period or thereafter to
conduct operations on such well or plug and abandon such well shall entitle
Operator to retain or take possession of the well and plug and abandon the
well. The party taking over the well shall indemnify Operator (if Operator is
an abandoning party) and the other abandoning parties against liability for
any further operations conducted on such well except for the costs of
plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.
2. ABANDONMENT OF WELLS THAT HAVE PRODUCED: Except for any well in which
a Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and
at the cost, risk and expense of all the parties hereto. Failure of a party
to reply within sixty (60) days of delivery of notice of proposed abandonment
shall be deemed an election to consent to the proposal. If within sixty (60)
days after delivery of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to
continue its operation from the Zone then open to production shall be
obligated to take over the well as of the expiration of the applicable notice
period and shall indemnify Operator (if Operator is an abandoning party) and
the other abandoning parties against liability for any further operations on
the well conducted by such parties. Failure of such party or parties to
provide proof reasonably satisfactory to Operator of their financial
capability to conduct such operations or to take over the well within the
required period or thereafter to conduct operations on such well shall
entitle Operator to retain or take possession of such well and plug and
abandon the well.
Parties taking over a well as provided herein shall tender to each of
the other parties its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of
Exhibit "C," less the estimated cost of salvaging and the estimated cost of
plugging and abandoning and restoring the surface; provided, however, that in
the event the estimated plugging and abandoning and surface restoration costs
and the estimated cost of salvaging are higher than the value of the well's
salvable material and equipment, each of the abandoning parties shall tender
to the parties continuing operations their proportionate shares of the
estimated excess cost. Each abandoning party shall assign to the
non-abandoning parties, without warranty, express or implied, as to title or
as to quantity, or fitness for use of the equipment and material, all of its
interest in the wellbore of the well and related equipment, together with its
interest in the Leasehold insofar and only insofar as such Leasehold covers
the right to obtain production from that wellbore in the Zone then open to
production. If the interest of the abandoning party is or includes an Oil
and Gas Interest, such party shall execute and deliver to the non-abandoning
party or parties an oil and gas lease, limited to the wellbore and the Zone
then open to production, for a term of one (1) year and so long thereafter as
Oil and/or Gas is produced from the Zone covered thereby, such lease to be on
the form attached as Exhibit "B." The assignments or leases so limited shall
encompass the Drilling Unit upon which the well is located. The payments by,
and the assignments or leases to, the assignees shall be in a ratio based
upon the relationship of their respective percentage of participation in the
Contract Area to the aggregate of the percentages of participation in the
Contract Area of all assignees. There shall be no readjustment of interests
in the remaining portions of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone then open other than the royalties retained in any lease made under the
terms of this Article. Upon request, Operator shall continue to operate the
assigned well for the account of the non-abandoning parties at the rates and
charges contemplated by this agreement, plus any additional cost and charges
which may arise as the result of the separate ownership of the assigned well.
Upon proposed abandonment of the producing Zone assigned or leased, the
assignor or lessor shall then have the option to repurchase its prior
interest in the well (using the same valuation formula) and participate in
further operations therein subject to the provisions hereof.
3. ABANDONMENT OF NON-CONSENT OPERATIONS: The provisions of Article
VI.E.1. or VI.E.2. above shall be applicable as between Consenting Parties in
the event of the proposed abandonment of any well excepted from said
Articles; provided, however, no well shall be permanently plugged and
abandoned unless and until all parties having the right to conduct further
operations therein have been notified of the proposed abandonment and afforded
the opportunity to elect to take over the well in accordance with the
provisions of this Article VI.E.; and provided further, that Non-Consenting
Parties who own an interest in a portion of the well shall pay their
proportionate shares of abandonment and surface restoration costs for such
well as provided in Article VI.B.2(b).
F. TERMINATION OF OPERATIONS:
Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not
be terminated without consent of parties bearing _____% of the costs of
such operation; provided, however, that in the event granite or
other practically impenetrable substance or condition in the hole is
encountered which renders further operations impractical, Operator may
discontinue operations and give notice of such condition in the manner
provided in Article VI.B.1; and the provisions of Article VI.B. or VI.E.
shall thereafter apply to such operation, as appropriate.
G. TAKING PRODUCTION IN KIND:
/X/ OPTION NO.1: Gas Balancing Agreement Attached
Each party shall take in kind or separately dispose of its
proportionate share of all Oil and Gas produced from the Contract
Area, exclusive of production which may be used in development and
producing operations and in preparing and treating Oil and Gas for
marketing purposes and production unavoidably lost. Any extra
expenditure incurred in the taking in kind or separate disposition
by any party of its proportionate share of the production shall be
borne by such party. Any party taking its share of production in
kind shall be required to pay for only its proportionate share of
such part of Operator's surface facilities which it uses.
Each party shall execute such division orders and contracts as may
be necessary for the sale of its interest in production from the
Contract Area, and, except as provided in Article VII.B., shall be
entitled to receive payment
<PAGE>
directly from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary to take in
kind or separately dispose of its proportionate share of the Oil
produced from the Contract Area, Operator shall have the right,
subject to the revocation at will by the party owning it, but not
the obligation, to purchase such Oil or sell it to others at any
time and from time to time, for the account of the non-taking party.
Any such purchase or sale by Operator may be terminated by Operator
upon at least ten (10) days written notice to the owner of said
production and shall be subject always to the right of the owner of
the production upon at least ten (10) days written notice to
Operator to exercise at any time its right to take in kind, or
separately dispose of, its share of all Oil not previously delivered
to a purchaser. Any purchase or sale by Operator of any other
party's share of Oil shall be only for such reasonable periods of
time as are consistent with the minimum needs of the industry under
the particular circumstances, but in no event for a period in excess
of one (1) year.
Any such sale by Operator shall be in a manner commercially
reasonable under the circumstances but Operator shall have no duty
to share any existing market or to obtain a price equal to that
received under any existing market. The sale or delivery by
Operator of a non-taking party's share of Oil under the terms of any
existing contract of Operator shall not give the non-taking party
any interest in or make the non-taking party a party to said
contract. No purchase shall be made by Operator without first
giving the non-taking party at least ten (10) days written notice of
such intended purchase and the price to be paid or the pricing basis
to be used.
All parties shall give timely written notice to Operator of
their Gas marketing arrangements for the following month, excluding
price, and shall notify Operator immediately in the event of a
change in such arrangements. Operator shall maintain records of all
marketing arrangements, and of volumes actually sold or transported,
which records shall be made available to Non-Operators upon
reasonable request.
In the event one or more parties' separate disposition of its
share of the Gas causes split-stream deliveries to separate
pipelines and/or deliveries which on a day-to-day basis for any
reason are not exactly equal to a party's respective proportionate
share of total Gas sales to be allocated to it, the balancing or
accounting between the parties shall be in accordance with any Gas
balancing agreement between the parties hereto, whether such an
agreement is attached as Exhibit "E" or is a separate agreement.
Operator shall give notice to all parties of the first sales of Gas
from any well under this agreement.
/ / OPTION NO. 2: NO GAS BALANCING AGREEMENT:
Each party shall take in kind or separately dispose of its
proportionate share of all Oil and Gas produced from the Contract
Area, exclusive of production which may be used in development and
producing operations and in preparing and treating Oil and Gas for
marketing purposes and production unavoidably lost. Any extra
expenditure incurred in the taking in kind or separate disposition
by any party of its proportionate share of the production shall be
borne by such party. Any party taking its share of production in
kind shall be required to pay for only its proportionate share of
such part of Operator's surface facilities which it uses.
Each party shall execute such division orders and contracts as
may be necessary for the sale of its interest in production from
the Contract Area, and, except as provided in Article VII.B., shall
be entitled to receive payment directly from the purchaser thereof
for its share of all production.
If any party fails to make the arrangements necessary to take in
kind or separately dispose of its proportionate share of the Oil
and/or Gas produced from the Contract Area, Operator shall have the
right, subject to the revocation at will by the party owning it, but
not the obligation, to purchase such Oil and/or Gas or sell it to
others at any time and from time to time, for the account of the
non-taking party. Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to
the owner of said production and shall be subject always to the
right of the owner of the production upon at least (10) days written
notice to Operator to exercise its right to take in kind, or
separately dispose of, its share of all Oil and/or Gas not
previously delivered to a purchaser, provided, however, that the
effective date of any such revocation may be deferred at Operator's
election for a period not to exceed ninety (90) days if Operator has
committed such production to a purchase contract having a term
extending beyond such ten (10) -day period. Any purchase or sale
by Operator of any other party's share of Oil and/or Gas shall be
only for such reasonable periods of time as are consistent with the
minimum needs of the industry under the particular circumstances,
but in no event for a period in excess of one (1) year.
Any such sale by Operator shall be in a manner commercially
reasonable under the circumstances, but Operator shall have no duty
to share any existing market or transportation arrangement or to
obtain a price or transportation fee equal to that received under
any existing market or transportation arrangement. The sale or
delivery by Operator of a non-taking party's share of production
under the terms of any existing contract of Operator shall not give
the non-taking party any interest in or make the non-taking party a
party to said contract. No purchase of Oil and Gas and no sale of
Gas shall be made by Operator without first giving the non-taking
party ten days written notice of such intended purchase or sale and
the price to be paid or the pricing basis to be used. Operator
shall give notice to all parties of the first sale of Gas from any
well under this Agreement.
All parties shall give timely written notice to Operator of
their Gas marketing arrangements for the following month, excluding
price, and shall notify Operator immediately in the event of a
change in such arrangements. Operator shall maintain records of all
marketing arrangements, and of volumes actually sold or transported,
which records shall be made available to Non-Operators upon
reasonable request.
ARTICLE VII
EXPENDITURES AND LIABILITY OF PARTIES*
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally, and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not
the intention of the parties to create, nor shall this agreement be construed
as creating, a mining or other partnership, joint venture, agency
relationship or association, or to render the parties liable as partners,
co-venturers, or principals. In their relations with each other under this
agreement, the parties shall not be considered fiduciaries or to have
established a confidential relationship but rather shall be free to act on an
arm's-length basis in accordance with their own respective self-interest,
subject, however, to the obligation of the parties to act in good faith in
their dealings with each other with respect to activities hereunder.
* See Supplemental Security Provisions - Article XVI.C.
<PAGE>
B. LIENS AND SECURITY INTERESTS:
Each party grants to the other parties hereto a lien upon any interest it
now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas
Interests in the Contract Area, and a security interest and/or purchase money
security interest in any interest it now owns or hereafter acquires in the
personal property and fixtures on or used or obtained for use in connection
therewith, to secure performance of all of its obligations under this
agreement including but not limited to payment of expense, interest and fees,
the proper disbursement of all monies paid hereunder, the assignment or
relinquishment of interest in Oil and Gas Leases as required hereunder, and
the proper performance of operations hereunder. Such lien and security
interest granted by each party hereto shall include such party's leasehold
interests, working interests, operating rights, and royalty and overriding
royalty interests in the Contract Area now owned or hereafter acquired and in
lands pooled or unitized therewith or otherwise becoming subject to this
agreement, the Oil and Gas when extracted therefrom and equipment situated
thereon or used or obtained for use in connection therewith (including,
without limitation, all wells, tools, and tubular goods), and accounts
(including, without limitation, accounts arising from gas imbalances or from
the sale of Oil and/or Gas at the wellhead), contract rights, inventory and
general intangibles relating thereto or arising therefrom, and all proceeds
and products of the foregoing.
To perfect the lien and security agreement provided herein, each party
hereto shall execute and acknowledge the recording supplement and/or any
financing statement prepared and submitted by any party hereto in conjunction
herewith or at any time following execution hereof, and Operator is
authorized to file this agreement or the recording supplement executed
herewith as a lien or mortgage in the applicable real estate records and as a
financing statement with the proper officer under the Uniform Commercial Code
in the state in which the Contract Area is situated and such other states as
Operator shall deem appropriate to perfect the security interest granted
hereunder. Any party may file this agreement, the recording supplement
executed herewith, or such other documents as it deems necessary as a lien or
mortgage in the applicable real estate records and/or a financing statement
with the proper officer under the Uniform Commercial Code.
Each party represents and warrants to the other parties hereto that the
lien and security interest granted by such party to the other parties shall be
a first and prior lien, and each party hereby agrees to maintain the priority
of said lien and security interest against all persons acquiring an interest
in Oil and Gas Leases and Interests covered by this agreement by, through or
under such party. All parties acquiring an interest in Oil and Gas Leases
and Oil and Gas Interests covered by this agreement, whether by assignment,
merger, mortgage, operation of law, or otherwise, shall be deemed to have
taken subject to the lien and security interest granted by this Article VII.B.
as to all obligations attributable to such interest hereunder whether or not
such obligations arise before or after such interest is acquired.
To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they
shall be entitled to exercise the rights and remedies of a secured party under
the Code. The bringing of a suit and the obtaining of judgment by a party
for the secured indebtedness shall not be deemed an election of remedies or
otherwise affect the lien rights or security interest as security for the
payment thereof. In addition, upon default by any party in the payment of
its share of expenses, interests or fees, or upon the improper use of funds
by the Operator, the other parties shall have the right, without prejudice to
other rights or remedies, to collect from the purchaser the proceeds from the
sale of such defaulting party's share of Oil and Gas until the amount owed by
such party, plus interest as provided in "Exhibit C," has been received, and
shall have the right to offset the amount owed against the proceeds from the
sale of such defaulting party's share of Oil and Gas. All purchasers of
production may rely on a notification of default from the non-defaulting
party or parties stating the amount due as a result of the default, and all
parties waive any recourse available against purchasers for releasing
production proceeds as provided in this paragraph.
If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution
proceedings pursuant to the provisions of this agreement, to the extent
allowed by governing law, the defaulting party waives any available right of
redemption from and after the date of judgment, any required valuation or
appraisement of the mortgaged or secured property prior to sale, any
available right to stay execution or to require a marshalling of assets and
any required bond in the event a receiver is appointed. In addition, to the
extent permitted by applicable law, each party hereby grants to the other
parties a power of sale as to any property that is subject to the lien and
security rights granted hereunder, such power to be exercised in the manner
provided by applicable law or otherwise in a commercially reasonable manner
and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize
the provisions of Oil and Gas lien law or other lien law of any state in
which the Contract Area is situated to enforce the obligations of each party
hereunder. Without limiting the generality of the foregoing, to the extent
permitted by applicable law, Non-Operators agree that Operator may invoke or
utilize the mechanics' or materialmen's lien law of the state in which the
Contract Area is situated in order to secure the payment to Operator of any
sum due hereunder for services performed or materials supplied by Operator.
C. ADVANCES:
Operator, at its election, shall have the right from time to time to
demand and receive from one or more of the other parties payments in advance
of their respective shares of the estimated amount of the expense to be
incurred in operations hereunder during the next succeeding month, which
right may be exercised only by submission to each such party of an itemized
statement of such estimated expense, together with an invoice for its share
thereof. Each such statement and invoice for the payment in advance of
estimated expense shall be submitted on or before the 20th day of the next
preceding month. Each party shall pay to Operator its proportionate share of
such estimate within fifteen (15) days after such estimate and invoice is
received. If any party fails to pay its share of said estimate within said
time, the amount due shall bear interest as provided in Exhibit "C" until
paid. Proper adjustment shall be made monthly between advances and actual
expense to the end that each party shall bear and pay its proportionate share
of actual expenses incurred, and no more.
D. DEFAULTS AND REMEDIES:
If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the
remedies provided in Article VII.B. or elsewhere in this agreement, the
remedies specified below shall be applicable/For purposes of this Article
VII.D., all notices and elections shall be delivered and shall be in
addition, not in substitution, to those remedies provided in XVI.C.2.. 3..
<PAGE>
only by Operator, except that Operator shall deliver any such notice and
election requested by a non-defaulting Non-Operator, and when Operator is the
party in default, the applicable notices and elections can be delivered by
any Non-Operator. Election of any one or more of the following remedies
shall not preclude the subsequent use of any other remedy specified below or
otherwise available to a non-defaulting party.
1. SUSPENSION OF RIGHTS: Any party may deliver to the party in default
a Notice of Default, which shall specify the default, specify the action to
be taken to cure the default, and specify that failure to take such action
will result in the exercise of one or more of the remedies provided in this
Article. If the default is not cured within thirty (30) days of the delivery
of such Notice of Default, all of the rights of the defaulting party granted
by this agreement may upon notice be suspended until the default is cured,
without prejudice to the right of the non-defaulting party or parties to
continue to enforce the obligations of the defaulting party previously
accrued or thereafter accruing under this agreement. If Operator is the
party in default, the Non-Operators shall have in addition the right, by vote
of Non-Operators owning a majority in interest in the Contract Area after
excluding the voting interest of Operator, to appoint a new Operator
effective immediately. The rights of a defaulting party that may be
suspended hereunder at the election of the non-defaulting parties shall
include, without limitation, the right to receive information as to any
operation conducted hereunder during the period of such default, the right to
elect to participate in an operation proposed under Article VI.B. of this
agreement, the right to participate in an operation being conducted under
this agreement even if the party has previously elected to participate in
such operation, and the right to receive proceeds of production from any well
subject to this agreement.
2. SUIT FOR DAMAGES: Non-defaulting parties or Operator for the benefit
of non-defaulting parties may sue (at joint account expense) to collect the
amounts in default, plus interest accruing on the amounts recovered from the
date of default until the date of collection at the rate specified in Exhibit
"C" attached hereto. Nothing herein shall prevent any party from suing any
defaulting party to collect consequential damages accruing to such party as a
result of the default.
3. DEEMED NON-CONSENT: The non-defaulting party may deliver a written
Notice of Non-Consent Election to the defaulting party at any time after the
expiration of the thirty-day cure period following delivery of the Notice of
Default, in which event if the billing is for the drilling of a new well or
the Plugging Back, Sidetracking, Reworking or Deepening of a well which is to
be or has been plugged as a dry hole, or for the Completion or Recompletion
of any well, the defaulting party will be conclusively deemed to have elected
not to participate in the operation and to be a Non-Consenting Party with
respect thereto under Article VI.B. or VI.C., as the case may be, to the
extent of the costs unpaid by such party, notwithstanding any election to
participate theretofore made. If election is made to proceed under this
provision, then the non-defaulting parties may not elect to sue for the
unpaid amount pursuant to Article VII.D.2.
Until the delivery of such Notice of Non-Consent Election to the
defaulting party, such party shall have the right to cure its default by
paying its unpaid share of costs plus interest at the rate set forth in
Exhibit "C," provided, however, such payment shall not prejudice the rights
of the non-defaulting parties to pursue remedies for damages incurred by the
non-defaulting parties as a result of the default. Any interest relinquished
pursuant to this Article VII.D.3. shall be offered to the non-defaulting
parties in proportion to their interests, and the non-defaulting parties
electing to participate in the ownership of such interest shall be required
to contribute their shares of the defaulted amount upon their election to
participate therein.
4. ADVANCE PAYMENT: If a default is not cured within thirty (30) days of
the delivery of a Notice of Default, Operator, or Non-Operators if Operator
is the defaulting party, may thereafter require advance payment from the
defaulting party of such defaulting party's anticipated share of any item of
expense for which Operator, or Non-Operators, as the case may be, would be
entitled to reimbursement under any provision of this agreement, whether or
not such expense was the subject of the previous default. Such right
includes, but is not limited to, the right to require advance payment for the
estimated costs of drilling a well or Completion of a well as to which an
election to participate in drilling or Completion has been made. If the
defaulting party fails to pay the required advance payment, the
non-defaulting parties may pursue any of the remedies provided in this
Article VII.D. or any other default remedy provided elsewhere in this
agreement. Any excess of funds advanced remaining when the operation is
completed and all costs have been paid shall be promptly returned to the
advancing party.
5. COSTS AND ATTORNEYS' FEES: In the event any party is required to
bring legal proceedings to enforce any financial obligation of a party
hereunder, the prevailing party in such action shall be entitled to recover
all court costs, costs of collection, and a reasonable attorney's fee, which
the lien provided for herein shall also secure.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
Rentals, shut-in well payments and minimum royalties which may be
required under the terms of any lease shall be paid by the party or parties
who subjected such lease to this agreement at its or their expense. In the
event two or more parties own and have contributed interests in the same
lease to this agreement, such parties may designate one of such parties to
make said payments for and on behalf of all such parties. Any party may
request, and shall be entitled to receive, proper evidence of all such
payments. In the event of failure to make proper payment of any rental,
shut-in well payment or minimum royalty through mistake or oversight where
such payment is required to continue the lease in force, any loss which
results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.
Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well,
at least five (5) days (excluding Saturday, Sunday and legal holidays) prior
to taking such action, or at the earliest opportunity permitted by
circumstances, but assumes no liability for failure to do so. In the event
of failure by Operator to so notify Non-Operators, the loss of any lease
contributed hereto by Non-Operators for failure to make timely payments of
any shut-in well payment shall be borne jointly by the parties hereto under
the provisions of Article IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay
all such taxes assessed thereon before they become deliquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties
and production payments) on Leases and Oil and Gas Interests contributed by
such Non-Operator. If the assessed valuation of any Lease is reduced by
reason of its being subject to outstanding excess royalties, overriding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or owners of such Lease,
and Operator shall adjust the charge to such owner or owners so as to
reflect the benefit of such reduction. 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. Operator shall bill
the other parties for their proportionate shares of all tax payments in the
manner provided in Exhibit "C."
<PAGE>
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and
prosecute the protest to a final determination, unless all parties agree to
abandon the protest prior to final determination. During the pendency of
administrative or judicial proceedings, Operator may elect to pay, under
protest, all such taxes and any interest and penalty. When any such
protested assessment shall have been finally determined, Operator shall pay
the tax for the joint account, together with any interest and penalty
accrued, and the total cost shall then be assessed against the parties, and
be paid by the, as provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes imposed upon or with respect to the
production or handling of such party's share of Oil and Gas produced under
the terms of this agreement.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. SURRENDER OF LEASES:
The Leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any Lease
or in any portion thereof, such party shall give written notice of the
proposed surrender to all parties, and the parties to whom such notice is
delivered shall have thirty (30) days after delivery of the notice within
which to notify the party proposing the surrender whether they elect to
consent thereto. Failure of a party to whom such notice is delivered to
reply within said 30-day period shall constitute a consent to the surrender
of the Leases described in the notice. If all parties do not agree or
consent thereto, the party desiring to surrender shall assign, without
express or implied warranty of title, all of its interest in such Lease, or
portion thereof, and any well, material and equipment which may be located
thereon, and any rights in production thereafter secured, to the parties not
consenting to such surrender. If the interest of the assigning party is or
includes an Oil and Gas Interest, the assigning party shall execute and
deliver to the party or parties not consenting to such surrender an oil and
gas lease covering such Oil and Gas Interest for a term of one (1) year and
so long thereafter as Oil and/or Gas is produced from the land covered
thereby, such lease to be on the form attached hereto as Exhibit "B." Upon
such assignment or lease, the assigning party shall be relieved from all
obligations thereafter accruing, but not theretofore accrued, with respect to
the interest assigned or leased and the operation of any well attributable
thereto, and the assigning party shall have not further interest in the
assigned or leased premises and its equipment and production other than the
royalties retained in any lease made under the terms of this Article. The
party assignee or lessee shall pay to the party assignor or lessor the
reasonable salvage value of the latter's interest in any well's salvable
materials and equipment attributable to the assigned or leased acreage. The
value of all salvable materials and equipment shall be determined in
accordance with the provisions of Exhibit "C," less the estimated cost of
salvaging and the estimated cost of plugging and abandoning and restoring the
surface. If such value is less than such costs, then the party assignor or
lessor shall pay to the party assignee or lessee the amount of such deficit.
If the assignment or lease is in favor of more than one party, the interest
shall be shared by such parties in the proportions that the interest of each
bears to the total interest of all such parties. If the interest of the
parties to whom the assignment is to be made varies according to depth, then
the interest assigned shall similarly reflect such variances.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as
it was immediately before the assignment, lease or surrender in the balance
of the Contract Area; and the acreage assigned, leased or surrendered, and
subsequent operations thereon, shall not thereafter be subject to the terms
and provisions of this agreement but shall be deemed subject to an Operating
Agreement in the form of this agreement.
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal or replacement of an Oil and Gas Lease
or Interest subject to this agreement, then all other parties shall be
notified promptly upon such acquisition or, in the case of a replacement
Lease taken before expiration of an existing Lease, promptly upon expiration
of the existing Lease. The parties notified shall have the right for a
period of thirty (30) days following delivery of such notice in which to
elect to participate in the ownership of the renewal or replacement Lease,
insofar as such Lease affects lands within the Contract Area, by paying to
the party who acquired it their proportionate shares of the acquisition cost
allocated to that part of such Lease within the Contract Area, which shall be
in proportion to the interests held at that time by the parties in the
Contract Area. Each party who participates in the purchase of a renewal or
replacement Lease shall be given an assignment of its proportionate interest
therein by the acquiring party.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties
who elect to participate therein, in a ration based upon the relationship of
their respective percentage of participation in the Contract Area to the
aggregate of the percentages of participation in the Contract Area of all
parties participating in the purchase of such renewal or replacement Lease.
The acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated
in Exhibit "A," but any renewal or replacement Lease in which less than all
parties elect to participate shall not be subject to this agreement but shall
be deemed subject to a separate Operating Agreement in the form of this
agreement.
If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or
replacement Leases and their right to receive an assignment of interest
shall also reflect such depth variances.
The provisions of this Article shall apply to renewal or replacement
Leases whether they are for the entire interest covered by the expiring Lease
or cover only a portion of its area or an interest therein. Any renewal or
replacement Lease taken before the expiration of its predecessor Lease, or
taken or contracted for or becoming effective within six (6) months after the
expiration of the existing Lease, shall be subject to this provision so long
as this agreement is in effect at the time of such acquisition or at the time
the renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
Oil and Gas Leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost
of such drilling or other operation. If the contribution be in the form of
acreage, the party to whom the contribution is made shall promptly tender an
assignment of the acreage, without warranty of title, to the Drilling Parties
in the proportions said Drilling Parties shared the cost of drilling the
well. Such acreage shall become a separate Contract Area and, to the extent
possible, be governed by provisions identical to this agreement. Each party
shall promptly notify all other parties of any acreage or cash contributions
it may obtain in support of any well or any other operation on the Contract
Area. The above provisions shall also be applicable to optional rights to
earn acreage outside the Contract Area which are in support of well drilled
inside the Contract Area.
<PAGE>
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:
For the purpose of maintaining uniformity of ownership in the Contract
Area in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer
or make other disposition of its interest in the Oil and Gas Leases and Oil
and Gas Interests embraced within the Contract Area or in wells, equipment
and production unless such disposition covers either:
1. the entire interest of the party in all Oil and Gas Leases, Oil
and Gas Interests, wells, equipment and production; or
2. an equal undivided percent of the party's present interest in
all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production in the Contract Area.
Every sale, encumbrance, transfer or other disposition made by any party
shall be made expressly subject to this agreement and shall be made without
prejudice to the right of the other parties, and any transferee of an
ownership interest in any Oil and Gas Lease or Interest shall be deemed a
party to this agreement as to the interest conveyed from and after the
effective date of the transfer of ownership; provided, however, that the
other parties shall not be required to recognize any such sale, encumbrance,
transfer or other disposition for any purpose hereunder until thirty (30)
days after they have received a copy of the instrument of transfer or other
satisfactory evidence thereof in writing from the transferor or transferee. No
assignment or other disposition of interest by a party shall relieve such
party of obligations previously incurred by such party hereunder with respect
to the interest transferred, including without limitation the obligation of a
party to pay all costs attributable to an operation conducted hereunder in
which such party has agreed to participate prior to making such assignment,
and the lien and security interest gained by Article VII.B. shall continue to
burden the interest transferred to secure payment of any such obligations.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such
co-owners to appoint a single trustee or agent with full authority to
receive notices, approve expenditures, receive billings for and approve and
pay such party's share of the joint expenses, and to deal generally with, and
with power to bind, the co-owners of such party's interest within the scope
of the operations embraced in this agreement; however, all such co-owners
shall have the right to enter into and execute all contracts or agreements
for the disposition of their respective shares of the Oil and Gas produced
from the Contract Area and they shall have the right to receive, separately,
payment of the sale proceeds thereof.
E. WAIVER OF RIGHTS TO PARTITION:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in
the Contract Area waives any and all rights it may have to partition and
have set aside to it in severalty its undivided interest therein.
/ / (OPTIONAL: CHECK IF APPLICABLE.)
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as a partnership, and if the parties have not
otherwise agreed to form a tax partnership pursuant to Exhibit "G" or other
agreement between them, each party thereby affected elects to be excluded
from the application of all of the provisions of Subchapter "K," Chapter 1,
Subtitle "A," of the Internal Revenue Code of 1986, as amended ("Code"), as
permitted and authorized by Section 761 of the Code and the regulations
promulgated thereunder. Operator is authorized and directed to execute on
behalf of each party hereby affected such evidence of this election as may be
required by the Secretary of the Treasury of the United States or the Federal
Internal Revenue Service, including specifically, but not by way of
limitation, all of the returns, statements, and the data required by Treasury
Regulations Section 1.761. Should there be any requirement that each party
hereby affected give further evidence of this election, each such party shall
execute such documents and furnish such other evidence as may be required by
the Federal Internal Revenue Service or as may be necessary to evidence this
election. No such party shall give any notices or take any other action
inconsistent with the election made hereby. If any present or future income
tax laws of the state or states in which the Contract Area is located or any
future income tax laws of the United States contain provisions similar to
those in Subchapter "K," Chapter l, Subtitle "A," of the Code, under which an
election similar to that provided by Section 761 of the Code is permitted,
each party hereby affected shall make such election as may be permitted or
required by such laws. In making the foregoing election, each such party
states that the income derived by such party from operations hereunder can be
adequately determined without the computation of partnership taxable income.
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
Ten Thousand and No/00 Dollars ($10,000.00) and if the payment is in complete
settlement of such claim or suit. If the amount required for settlement
exceeds the above amount, the parties hereto shall assume and take over the
further handling of the claim or suit, unless such authority is delegated to
Operator. All costs and expenses of handling, settling, or otherwise
discharging such claim or suit shall be at the joint expense of the parties
participating in the operation from which the claim or suit arises. If a
claim is made against any party or if any party is sued on account of any
matter arising from operations hereunder over which such individual has no
control because of the rights given Operator by this agreement, such party
shall immediately notify all other parties, and the claim or suite shall be
treated as any other claim or suit involving operations hereunder.
<PAGE>
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
indemnify or make money payments or furnish security, that party shall give
to all other parties prompt written notice of the force majeure with
reasonably full particulars concerning it; thereupon, the obligations of the
party giving the notice, so far as they are affected by the force majeure,
shall be suspended during, but no longer than, the continuance of the force
majeure. The term "force majeure", as here employed, shall mean an act of
God, strike, lockout, or other industrial disturbance, act of the public
enemy, war, blockade, public riot, lightning, fire, storm, flood or other act
of nature, explosion, governmental action, governmental delay, restraint or
inaction, unavailability of equipment, and any other cause, whether of the
kind specifically enumerated above or otherwise, which is not reasonably
within the control of the party claiming suspension.
The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall
be in writing and delivered in person or by United States mail, courier
service, telegram, telex, telecopier or any other form of facsimile, postage
or charges prepaid, and addressed to such parties at the addresses listed on
Exhibit "A." All telephone or oral notices permitted by this agreement shall
be confirmed immediately thereafter by written notice. The originating notice
given under any provision hereof shall be deemed delivered only when received
by the party to whom such notice is directed, and the time for such party to
deliver any notice in response thereto shall run from the date the
originating notice is received. "Receipt" for purposes of this agreement with
respect to written notice delivered hereunder shall be actual delivery of the
notice to the address of the party to be notified specified in accordance
with this agreement, or to the telecopy, facsimile or telex machine of such
party. The second or any responsive notice shall be deemed delivered when
deposited in the United States mail or at the office of the courier or
telegraph service, or upon transmittal by telex, telecopy or facsimile, or
when personally delivered to the party to be notified, provided, that when
response is required within 24 or 48 hours, such response shall be given
orally or by telephone, telex, telecopy or other facsimile within such
period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties.
If a party is not available to receive notice orally or by telephone when a
party attempts to deliver a notice required to be delivered within 24 or 48
hours, the notice may be delivered in writing by any other method specified
herein and shall be deemed delivered in the same manner provided above for
any responsive notice.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and
Gas Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas
Interest contributed by any other party beyond the term of this agreement.
/ / OPTION NO. 1: So long as any of the Oil and Gas Leases subject to
this agreement remain or are continued in force as to any part of
the Contract Area, whether by production, extension, renewal or
otherwise.
/X/ OPTION NO. 2: In the event the well described in Article VI.A., or
any subsequent well drilled under any provision of this agreement,
results in the Completion of a well as a well capable of production
of Oil and/or Gas in paying quantities, this agreement shall
continue in force so long as any such well is capable of production,
and for an additional period of 90 days thereafter; provided,
however, if, prior to the expiration of such additional period, one
or more of the parties hereto are engaged in drilling, Reworking,
Deepening, Sidetracking, Plugging Back, testing or attempting to
Complete or Re-complete a well or wells hereunder, this agreement
shall continue in force until such operations have been completed
and if production results therefrom, this agreement shall continue in
force as provided herein. In the event the well described in Article
VI.A., or any subsequent well drilled hereunder, results in a dry
hole, and no other well is capable of producing Oil and/or Gas from
the Contract Area, this agreement shall terminate unless drilling,
Deepening, Sidetracking, Completing, Re-Completing, Plugging Back or
Reworking operations are commenced within 60 days from the date of
abandonment of said well. "Abandonment" for such purposes shall mean
either (i) a decision by all parties not to conduct any further
operations on the well or (ii) the elapse of 180 days from the
conduct of any operations on the well, whichever first occurs.
The termination of this agreement shall not relieve any party hereto from
any expense, liability or other obligation or any remedy therefor which has
accrued or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all
obligations hereunder, in the event a memorandum of this Operating Agreement
has been filed of record, Operator is authorized to file of record in all
necessary recording offices a notice of termination, and each party hereto
agrees to execute such a notice of termination as to Operator's interest,
upon request of Operator, if Operator has satisfied all its financial
obligations.
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the applicable laws of the state in
which the Contract Area is located, to the valid rules, regulations, and
orders of any duly constituted regulatory body of said state; and to all
other applicable federal, state, and local laws, ordinances, rules,
regulations and orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including but not
limited to matters of performance, non-performance, breach, remedies,
procedures, rights, duties, and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state
of Texas shall govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or
<PAGE>
orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on
tracts offsetting or adjacent to the Contract Area.
With respect to the operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of
action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or Federal Energy Regulatory Commission
or predecessor or successor agencies to the extent such interpretation or
application was made in good faith and does not constitute gross negligence.
Each Non-Operator further agrees to reimburse Operator for such
Non-Operator's share of production or any refund, fine, levy or other
governmental sanction that Operator may be required to pay as a result of
such an incorrect interpretation or application, together with interest and
penalties thereon owing by Operator as a result of such incorrect
interpretation or application.
ARTICLE XV.
MISCELLANEOUS
A. EXECUTION:
This agreement shall be binding upon each Non-Operator when this
agreement or a counterpart thereof has been executed by such Non-Operator
and Operator notwithstanding that this agreement is not then or thereafter
executed by all of the parties to which it is tendered or which are listed on
Exhibit "A" as owning an interest in the Contract Area or which own, in fact,
an interest in the Contract Area. Operator may, however, by written notice to
all Non-Operators who have become bound by this agreement as aforesaid, given
at any time prior to the actual spud date of the Initial Well but in no event
later than five days prior to the date specified in Article VI.A. for
commencement of the Initial Well, terminate this agreement if Operator in its
sole discretion determines that there is insufficient participation to justify
commencement of drilling operations. In the event of such a termination by
Operator, all further obligations of the parties hereunder shall cease as of
such termination. In the event any Non-Operator has advanced or prepaid any
share of drilling or other costs hereunder, all sums so advanced shall be
returned to such Non-Operator without interest. In the event Operator
proceeds with drilling operations for the Initial Well without the execution
hereof by all persons listed on Exhibit "A" as having a current working
interest in such well, Operator shall indemnify Non-Operators with respect to
all costs incurred for the Initial Well which would have been charged to such
person under this agreement if such person had executed the same and Operator
shall receive all revenues which would have been received by such person
under this agreement if such person had executed the same.
B. SUCCESSORS AND ASSIGNS:
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, devisees, legal
representatives, successors and assigns, and the terms hereof shall be deemed
to run with the Leases or Interests included within the Contract Area.
C. COUNTERPARTS:
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
D. SEVERABILITY:
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws, this agreement shall not be
severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.
ARTICLE XVI.
OTHER PROVISIONS
See addendum attached hereto.
<PAGE>
ARTICLE XV
OTHER PROVISIONS
A. OPERATIONS BY LESS THAN ALL PARTIES
1. RELINQUISHMENT OF INTEREST FOR NON-PARTICIPATION: Notwithstanding
the provisions of Article VI.B.2.(b), upon commencement of operations for the
deepening, reworking, recompleting or plugging back of any well by the
consenting parties subject to the provisions of Article VI.B.1. and Article
VI.B.2., each non-consenting party shall be deemed to have relinquished to
the consenting parties all of such non-consenting party's right, title and
interest in the wellbore, machinery and equipment used in connection
therewith, proceeds of production therefrom and proration or production unit
attributable thereto. Within fourteen (14) days following the election by
such non-consenting party to stand out under the provisions hereof, it shall
execute and deliver to the Operator, individually and for the benefit of the
consenting parties, an assignment and bill of sale (with special warranty of
title) conveying all of its right, title and interest in the underlying oil
and gas lease(s) insofar as it or they cover the well, equipment and
proration or production unit attributable to same. If a party elects not to
participate in the drilling of a well proposed hereunder, such party shall
relinquish all of its interest in the lands covered hereby proportionately to
the parties who elect to participate in the drilling of such well, save and
except such non-consenting party's interest in any wells in which such party
participated in drilling and the spacing unit therefor, provided that the well
in which such non-consenting party elected not to participate in drilling is
in fact commenced within the time provided in Article VI.B hereof.
2. PARTICIPATE IN SUBSEQUENT OPERATIONS: Only those parties which
participated in the initial drilling, deepening, reworking, plugging back or
recompletion of any well shall have the right to propose and participate in
any subsequent reworking, plugging back or recompletion operations as to such
well, or any portion thereof, and shall be entitled to receive notice and
participate in such operations, pursuant to Article VI.B.1. Likewise, should
any party who participated in the initial drilling, deepening, reworking,
plugging back or recompletion of any well elect not to participate in such
subsequent operations, then in such event it shall relinquish it's right, title
and interest in accordance with the provisions of Article VI.B.2(b), hereof.
3. RIGHT TO PARTICIPATE IN DEEPENING OR SIDETRACKING OPERATIONS:
Notwithstanding the foregoing, in the event any well drilled, reworked,
recompleted or plugged back by the consenting parties should be deepened or
side-tracked, then in such event the consenting parties will give notice to
the non-consenting parties pursuant to the provisions of Article VI.B.1.,
whereupon such non-consenting party shall have the right to elect to
participate in the deepening or sidetracking operation upon making payment or
reimbursement of the costs and expenses as provided in Article VI.B.4. and
Article VI.B.5.
4. ADDITIONAL DEEPENING, REWORKING, RECOMPLETION OR PLUGGING BACK
OPERATIONS: Only those parties who participated in the subsequent deepening,
reworking, recompleting or plugging back operating shall have the right to
propose and participate in any additional deepening, reworking, recompleting
or plugging back operations in such well, or portion thereof, to which the
initial election applied and shall be entitled to receive such notice and to
participate in such additional operations pursuant to Article XVI.B.1.
Failure of any party to elect to participate in the additional operations
shall be subject to the non-consenting party to the forfeiture provisions of
Article XVI.A.1.
The provisions of this Article shall not apply to the takeover of the
well by non-consenting parties in the event all consenting parties elect to
permanently plug and abandon the same, but such right of non-consenting party
shall be governed by Article VI.E.
B. NONDISCRIMINATION
In connection with the performance of work under this agreement, the
Operator agrees to comply with all of the provisions of Section 202 (1) to
(7) inclusive, of Executive Order 11246 (30 F.R. 12319), which are hereby
incorporated by reference in this agreement, and all provisions of said
Executive Order 11246 and all rules, regulations and relevant orders of the
Secretary of Labor.
<PAGE>
C. COVENANTS RUN WITH THE LAND
The terms, provisions, covenants and conditions of this agreement shall
be deemed to be covenants running with the lands, the lease or leases and
leasehold estates covered hereby, and all of the terms, provisions, covenants
and conditions of this agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective heirs, executors,
administrators, personal representatives and assigns.
D. LAWS AND REGULATIONS
All of the provisions of this agreement are expressly subject to all
applicable laws, orders, rules and regulations of any governmental body or
agency having jurisdiction in the premises, and all operations contemplated
hereby shall be conducted in conformity therewith. Any provision of this
agreement which is inconsistent with any such laws, orders, rules or
regulations is hereby modified so as to conform therewith, and this
agreement, as so modified, shall continue in full force and effect.
E. PRIORITY OF OPERATIONS
If at any time there is more than one operation proposed in connection
with any well subject to this agreement, then unless all participating
parties agree on the sequence of such operations, such proposals shall be
considered and disposed of in the following order of priority:
1. Proposals to do additional testing, coring or logging.
2. Proposals to attempt a completion in the objective zone.
3. Proposals to plug back and attempt completions in shallower zones,
in ascending order.
4. Proposals to side-track the well to reach any zone not below the
original authorized objective.
5. Proposals to deepen the well, in descending order.
F. REGULATORY PROVISIONS
1. LIQUID HYDROCARBONS.
Non-Operators hereby authorize Operator to file with the purchaser of
crude oil or other liquid hydrocarbons or with any other person required by
law, any statement or certification required by any rule, regulation or order
issued thereunder or by any other law, rule, or regulation relating to the
pricing of crude oil and other liquid hydrocarbons or the taxation thereof.
To the extent that Operator may by law be authorized to do so, Non-Operators
hereby authorize Operator to agree with any purchaser to relieve Operator (in
whole or in part as Operator may determine) of any filing or certification
requirements. In making any filing or certification with any purchaser or
crude oil or other liquid hydrocarbons, each Non-Operator shall be solely
responsible for furnishing to Operator or such purchaser or any other person
required by law any exemption certificate, independent producer certificate
or any other evidence required by law to entitle Non-Operator to a higher
price for the sale of his production or for a lower rate of tax thereon, and
upon a Non-Operator's failure to furnish the same, Operator shall certify to
such purchaser for such Non-Operator's interest the lower price and/or higher
rate of tax. Operator shall have no duty to seek any refunds on behalf of any
Non-Operator of any overpayment of any tax to which any Non-Operator may be
entitled by law.
2. REFUNDS.
In the event any Non-Operator receives a greater sum for the sale of its
share of production than that to which such Non-Operator is entitled, such
Non-Operator shall promptly refund any excess sums so collected to the person
entitles thereto together with any interest thereon required by law. In the
event Operator is required for any reason to make any such refund on any
Non-Operator's behalf and such Non-Operator refuses upon Operator's request
to reimburse Operator for the amount so paid, then Operator, in addition to
any other rights or remedies which it may have as a result of making such
refund, (i) shall have the lien provided by Article VII.B to secure such
reimbursement and (ii) shall be authorized to collect from Non-Operator's
purchaser of production all revenues attributable to Non-Operator's share of
production until the full amount required to be paid or refunded by
Non-Operator has been recovered.
<PAGE>
3. OPERATOR'S LIABILITY.
Operator shall use its best judgment in making any of the filings and
certifications referred to above and in prosecuting any filings and
applications. However, in no event shall Operator have any liability to any
Non-Operator in making and prosecuting any such filing or in rendering any
statement or certification, absent bad faith, gross negligence or willful
misconduct. Any penalties incurred as a result of any incorrect
certification, statement or filing shall, in absence of bad faith, gross
negligence or willful misconduct, be charged to the parties owning the
production to which the penalty pertains. In no event shall any error by
Operator relieve any Non-Operator of the liability for any refund under
Paragraph 3 above.
G. OPERATOR PROTECTION
1. ASSIGNMENT.
No assignment or other transfer or disposition of an interest subject to
this Agreement shall be effective as to Operator or the other parties hereto
until the first day of the month following the month in which (i) Operator
receives an authenticated copy of the instrument evidencing such assignment,
transfer or disposition AND (ii) the person receiving such assignment,
transfer or disposition has become obligated by instrument satisfactory to
Operator to observe, perform and be bound by all of the covenants, terms and
conditions of this Agreement. Prior to such date, neither Operator nor any
other party shall be required to recognize such assignment, transfer or
disposition for any purpose but may continue to deal exclusively with the
party making such assignment, transfer, or disposition in all matters under
this Agreement including billings. No assignment or other transfer or
disposition of an interest subject to this Agreement shall relieve a party of
its obligations accrued prior to the effective date aforesaid. Further, no
assignment, transfer or other disposition shall relieve any party of its
liability for its share of costs and expenses which may be incurred in any
operation to which such party has previously agreed or consented prior to the
effective date aforesaid for the drilling, testing, completing and equipping,
reworking, recompleting, side-tracking, deepening, plugging-back, or plugging
and abandoning of a well even though such operation is performed after said
effective date, subject however to such party's right to elect not to
participate in completion operations under Article VI.B. and Article VII.D.,
Option No. 2, not previously consented to.
2. ATTORNEYS FEES.
In the event any party hereto shall ever be required to bring legal
proceedings in order to collect any sums due from any party under this
Agreement, then party or parties shall also be entitled to recover all court
costs, costs of collection and a reasonable attorney's fee, which the lien
provided for herein shall also secure.
H. PERPETUITIES
It is not the intent of the parties that any provision herein violate
any applicable law regarding the rule against perpetuities, the suspension
of the absolute power of alienation or other rule regarding the vesting or
duration of estates, and this agreement shall be construed as not violating
such rule to the extent the same can be so construed consistent with the
intent of the parties. In the event, however, any provision hereof is
determined to violate such rule, then such provision shall nevertheless be
effective for the maximum period (but not longer than the maximum period)
permitted by such rule which will result in no violation.
I. NO THIRD-PARTY BENEFICIARY CONTRACT
This Agreement is made solely for the benefit of those persons who are
parties hereto (including those persons succeeding to all or part of the
interest of an original party if such succession is recognized under the
other provisions hereof), and no other person shall have or claim or be
entitled to enforce any rights, benefits or obligations under this Agreement.
J. OPERATOR'S REORGANIZATION AND STATUS CHANGE
1. Notwithstanding, the second sentence of Article V.B.1, in the event
of a transfer of all Operator's interest to a corporation which controls, is
controlled by or is under common control
<PAGE>
with Operator, such transferee shall automatically become the successor
Operator without the approval of Non-Operators.
2. For the purposes of Article V.B., Operator shall be considered to
own an interest in the Contract Area if it is a general partner of a limited
partnership which owns an interest in the Contract Area or if it owns a
carried or reversionary working interest in the Contract Area.
K. BANKRUPTCY
If, following the granting of relief under the Bankruptcy Code to any
party hereto as debtor thereunder, this Agreement should be held to be an
executory contract within the meaning of 11 U.S.C. Section 365, then the
Operator, or (if the Operator is the debtor in bankruptcy) any other party,
shall be entitled to a determination by debtor or any trustee for debtor
within thirty (30) days from the date an order for relief is entered under
the Bankruptcy Code as to the rejection or assumption of this Operating
Agreement. In the event of an assumption, Operator or said other party shall
be entitled to adequate assurances as to future performance of debtor's
obligation hereunder and the protection of the interest of all other parties.
L. OBLIGATION WELLS
Notwithstanding any provision contained in this Operating Agreement to
the contrary, if a party hereto elects not to participate in the drilling or
completion of a well which must be drilled in order to perpetuate a lease or
a farmout agreement which is subject hereto, upon such election, such party
shall promptly assign all of its interest in such lease or farmout agreement
to the parties who elected to participate in the drilling an completing of
such well in the proportions of their interests in such well.
M. SUBJECT TO EXPLORATION AGREEMENT
This Operating Agreement is executed in connection with and pursuant to
that certain Exploration Agreement dated November 1, 1997, between the
parties hereto. In the event of a conflict between any of the terms of this
Operating Agreement and said Exploration Agreement, the terms of said
Exploration Agreement shall apply.
N. PAYMENT OF LEASE BURDENS
Notwithstanding any provision of this Operating Agreement to the
contrary, unless the purchaser of production or other third party pays such
burdens directly, Operator shall pay all royalties, overriding royalties and
other burdens on or payable out of the interest of any Non-Operator electing
by written notice to Operator to have Operator make such payments, provided
(i) such Non-Operator makes adequate arrangements for the receipt by Operator
of the revenues necessary to make such payments, and (ii) the owners of such
interests execute Operator's division order or otherwise satisfy Operator
with respect to entitlement to such payments.
O. OPERATOR REMOVAL
Notwithstanding any other provision to the contrary, operators may be
removed at any time by a vote in percentage interest, not in numbers, of 51%
or more by the parties. In this case, Operator will be given written notice
of its removal which shall become effective not more than ninety (90) days
after the date of such notice. All parties to this contract shall select by
majority vote in interest, not in numbers, a new Operator who shall assume
the responsibilities and duties, and have the rights prescribed for Operator
by this agreement. The retiring Operator shall deliver to its successor all
records and information necessary to be discharged by the new Operator of its
duties and obligations. However, such party shall continue to be responsible
to Operator for its proportionate share of the costs of development and
operating the Unit Area to the effective date of Operator's removal, and for
this purpose, this agreement shall continue in force and effect between
Operator and such party until all past accounts have been paid in full.
<PAGE>
FORM 610
MODEL FORM OPERATING AGREEMENT - 1989
IN WITNESS WHEREOF, this agreement shall be effective as of the ____ day
of _________________, 1997.
ATTEST OR WITNESS: OPERATOR
SUB-ANN PRODUCTION COMPANY
By
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
-----------------------------------
NON-OPERATORS
SEE ATTACHED
-----------------------------------
By
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
-----------------------------------
-----------------------------------
By
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
-----------------------------------
-----------------------------------
By
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
-----------------------------------
<PAGE>
NON-OPERATORS
PARALLEL PETROLEUM CORPORATION
By:
--------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------
TAC RESOURCES, INC.
By:
--------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------
ALLEGRO INVESTMENTS, INC.
By:
--------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------
BETA OIL & GAS, INC.
By:
--------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------
PEASE OIL & GAS COMPANY
By:
--------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------
MEYER FINANCIAL SERVICES, INC.
By:
--------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------
FOUR-WAY TEXAS, L.L.C.
By:
--------------------------------
Printed Name:
--------------------------------
Title:
--------------------------------
-18-A-
<PAGE>
STATE OF TEXAS )
)
COUNTY OF )
This instrument was acknowledged before me this ____ day of _________,
1997, by ___________________________, ________________ of Sue-Ann Production
Company, a __________ corporation, on behalf of said corporation.
----------------------------------------
Notary Public, State of Texas
STATE OF TEXAS )
)
COUNTY OF MIDLAND )
This instrument was acknowledged before me this ____ day of _________,
1997, by ___________________________, ________________ of Parallel Petroleum
Corporation, a Texas corporation, on behalf of said corporation.
----------------------------------------
Notary Public, State of Texas
STATE OF TEXAS )
)
COUNTY OF )
This instrument was acknowledged before me this ____ day of _________,
1997, by ___________________________, ________________ of TAC Resources,
Inc., a __________ corporation, on behalf of said corporation.
----------------------------------------
Notary Public, State of Texas
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ____ day of _________,
1997, by ___________________________, ________________ of Allegro
Investments, Inc., a __________ corporation, on behalf of said corporation.
----------------------------------------
Notary Public, State of ________________
-18-B-
<PAGE>
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ____ day of _________,
1997, by ___________________________, ________________ of Beta Oil & Gas,
Inc., a __________ corporation, on behalf of said corporation.
----------------------------------------
Notary Public, State of ________________
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ____ day of _________,
1997, by ___________________________, ________________ of Pease Oil & Gas
Company, a __________ corporation, on behalf of said corporation.
----------------------------------------
Notary Public, State of ________________
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ____ day of _________,
1997, by ___________________________, ________________ of Meyer Financial
Services, Inc., a __________ corporation, on behalf of said corporation.
----------------------------------------
Notary Public, State of Texas
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ____ day of _________,
1997, by ___________________________, ________________ of Four-Way Texas,
L.L.C., a __________ limited liability company, on behalf of said limited
liability company.
----------------------------------------
Notary Public, State of ________________
-18-C-
<PAGE>
EXHIBIT A
of
EXHIBIT D
to
GANADO PROSPECT AGREEMENT, DATED NOVEMBER 1, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
EXHIBIT A-1
of
EXHIBIT D
to
GANADO PROSPECT AGREEMENT, DATED NOVEMBER 1, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
EXHIBIT "B"
OIL, GAS AND MINERAL LEASE
This AGREEMENT made this ________ day of ________ 19__, between
lessor (whether one or more), whose address is: _________________________,
and ____________________________________________, lessee, WITNESSETH:
1. Lessor, in consideration of _________________________ Dollars,
receipt of which is hereby acknowledged, and of the covenants and agreements
of lessee hereinafter contained, does hereby grant, lease and let unto lessee
the land covered hereby for the purposes and with the exclusive right of
exploring, drilling, mining and operating for, producing and owning oil, gas,
sulphur and all other minerals (whether or not similar to those mentioned),
together with the right to make surveys on said land, lay pipe lines,
establish and utilize facilities for surface or subsurface disposal of salt
water, construct roads and bridges, dig canals, build tanks, power stations,
telephone lines, employee houses and other structures on said land,
necessary or useful in lessee's operations in exploring, drilling for,
producing, treating, storing and transporting minerals produced from the land
covered hereby or any other land adjacent thereto. The land covered hereby,
herein called "said land",
is located in the County of _______, State of _________, and is described as
follows:
This lease also covers and includes, in addition to that above described, all
land, if any, contiguous or adjacent to or adjoining the land above described
and (a) owned or claimed by lessor by limitation, prescription, possession,
reversion or unrecorded instrument or (b) as to which lessor has a preference
right of acquisition. Lessor agrees to execute any supplemental instrument
requested by lessee for a more complete or accurate description of said land.
For the purpose of determining the amount of any bonus, or other payment
hereunder, said land shall be deemed to contain _______ acres, whether
actually containing more or less, and the above recital of acreage in any
tract shall be deemed to be the true acreage thereof. Lessor accepts the
bonus as lump sum considerations for this lease and all rights and options
hereunder.
2. Unless sooner terminated or longer kept in force under other
provisions hereof, this lease shall remain in force for a term of ten (10)
years from the date hereof, hereinafter called "primary term", and as long
thereafter as operations, as hereinafter defined, are conducted upon said
land with no cessation for more than ninety (90) days consecutive days.
3. As a royalty, lessee covenants and agrees: (a) To deliver to
the credit of lessor, in the pipe line to which lessee may connect its wells,
the equal one-eighth part of all oil produced and saved by lessee from said
land, or from time to time, at the option of lessee, to pay lessor the
average posted market price of such one-eighth part of such oil at the wells
as of the day it is run to the pipe line or storage tanks, lessor's interest,
in either case, to bear one-eighth of the cost of treating oil to render it
marketable pipe line oil; (b) To pay lessor on gas and casinghead gas
produced from said land (1) when sold by lessee, one-eighth of the amount
realized by lessee, computed at the mouth of the well, or (2) when used by
lessee off said land or in the manufacture of gasoline or other products,
the market value, at the mouth of the well, of one-eighth of such gas and
casinghead gas; (c) To pay lessor on all other minerals mined and marketed
or utilized by lessee from said land, one-tenth either in kind or value at
the well or mine at lessee's election, except that on sulphur mined and
marketed the royalty shall be one dollar ($1.00) per long ton. If, at the
expiration of the primary term or at any time or times thereafter, there is
any well on said land or on lands with which said land or any portion thereof
has been pooled, capable of producing oil or gas, and all such wells are
shut-in, this lease shall, nevertheless, continue in force in though
operations were being conducted on said land for so long as said wells are
shut-in, and thereafter this lease may be continued in force as if no shut-in
had occurred. Lessee covenants and agrees to use reasonable diligence to
produce, utilize, or market the minerals capable of being produced from said
wells, but in the exercise of such diligence, lessee shall not be obligated
in install or furnish facilities other than well facilities and ordinary
lease facilities of flow lines, separator, and lease tank, and shall not be
required to settle labor trouble or to market gas upon terms unacceptable to
lessee. If, at any time or times after the expiration of the primary term,
all such wells are shut-in for a period of ninety consecutive days, and
during such time there are no operations on said land, then at or before the
expiration of said ninety day period, lessee shall pay or tender, by check or
draft of lessee, as royalty, a sum equal to one dollar ($1.00) for each acre
of land then covered hereby. Lessee shall make like payments or tenders at
or before the end of each anniversary of the expiration of said ninety day
period if upon such anniversary this lease is being continued in force solely
by reason of the provisions of this paragraph. Each such payment or tender
shall be made to the parties who at the time of payment would be entitled to
receive the royalties which would be paid under this lease if the wells were
producing, and may be deposited in the ____________ bank at _________________
________________________________, or its successors, which shall continue as
the depositories, regardless of changes in the ownership of shut-in royalty.
If at any time that lessee pays or tenders shut-in royalty, two or more
parties are, or claim to be, entitled to receive same, lessee may, in lieu of
any other method of payment herein provided, pay or tender such shut-in
royalty, in the manner above specified, either jointly to such parties or
separately to each in accordance with their respective ownerships thereof, as
lessee may elect. Any payment hereunder may be made by check or draft of
lessee deposited in the mail or delivered to the party entitled to receive
payment or to a depository bank provided for above on or before the late date
for payment. Nothing herein shall impair lessee's right to release as
provided in paragraph 5 hereof. In the event of assignment of this lease in
whole or in part, liability for payment hereunder shall rest exclusively on
the them owner or owners of this lease, severally as to acreage owned by each.
4. Lessee is hereby granted the right, as its option to pool or
unitize any land covered by this lease with any other land covered by this
lease, and/or with any other land, lease, or leases, as to any or all
minerals or horizons, so as to establish units containing not more than 80
surface acres, plus 10% acreage tolerance: provided, however, units may be
established as to any one or more horizons, or existing units may be enlarged
as to any one or more horizons, so as to contain not more than 640 surface
acres plus 10% acreage tolerance, if limited to one or more of the following:
(1) gas, other than casinghead gas, (2) liquid hydrocarbons (condensate)
which are not liquids in the subsurface reservoir, (3) minerals produced from
wells classified as gas wells by the conservation agency having jurisdiction.
If larger units than any of those herein permitted, either at the time
established, or after enlargement, are required under any governmental rule
or order, for the drilling or operation of a well at a regular location, or
for obtaining maximum allowable from any well to be drilled, drilling, or
already drilled, any such unit may be established or enlarged to conform to
the size required by such governmental order or rule. Lessee shall exercise
said option as to each desired unit by executing an instrument identifying
such unit and filing it for record in the public office in which this lease
is recorded. Each of said options may be exercised by lessee at any time and
from time to time while this lease is in force, and whether before or after
production has been established either on said land, or on the portion of
said land included in the unit, or on other land unitized therewith. A unit
established hereunder shall be valid and effective for all purposes of this
lease even though there may be mineral, royalty, or leasehold interests in
lands within the unit which are not effectively pooled or unitized. Any
operations conducted on any part of such unitized land shall be considered,
for all purposes, except the payment of royalty, operations conducted upon
said land under this lease. There shall be allocated to the land covered by
this lease within each such unit (or to each separate tract within the unit
if this lease covers separated tracts within the unit) that proportion of the
total production of unitized minerals from the unit, after deducting any used
in lease or unit operations, which the number of surface acres in such land
(or in each such separate tract) covered by this lease within the unit bears
to the total number of surface acres in the unit, and the production so
allocated shall be considered for all purposes, including payment or delivery
of royalty, overriding royalty and any other payments out of production, to
be the entire production of unitized minerals from the land to which
allocated in the same manner as though produced therefrom under the terms of
this lease. The owner of the reversionary estate of any term royalty or
mineral estate agrees that the accrual of royalties pursuant to this
paragraph or of shut-in royalties from a well on the unit shall satisfy any
limitation of term requiring production of oil or gas. The formation of any
unit hereunder which includes land not covered by this lease shall not have
the effect of exchanging or transferring any interest under this lease
(including, without limitation, any shut-in royalty which may become payable
under this lease) between parties owning interests in land covered by this
lease and parties owning interests in land not covered by this lease and
parties owning interests in land not covered by this lease. Neither shall it
impair the right of lessee to release as provided in paragraph 5 hereof,
except that lessee may not so release as to lands within a unit while there
are operations thereon for unitized minerals unless all pooled leases are
released as to lands within the unit. At any time while this lease is in
force lessee may dissolve any unit established hereunder by filing for record
in the public office where this lease is recorded a declaration to that
effect, if at that time no operations are being conducted thereon for
unitized minerals. Subjects to the provisions of this paragraph 4, a unit
once established hereunder shall remain in force so long as any lease subject
thereto shall remain in force. If this lease now or hereafter covers
separate tracts, no pooling or unitization of royalty interests as between
any such separate tracts is intended or shall be implied or result merely
from the inclusion of such separate tracts within this lease shall
nevertheless have the right to pool or unitize as provided in this paragraph
4 with consequent allocation of production as herein provided. As used in
this paragraph 4, the words "separate tract" may mean any tract with royalty
ownership differing, now or hereafter, either as to parties or amounts, from
that as to any other part of the leased premises.
5. Lessee may at any time and from time to time execute and
deliver to lessor or file for record a release or releases of this lease as
to any part or all of said land or of any mineral or horizon thereunder, and
thereby be relieved of all obligations as to the released acreage or
interest.
6. Whenever used in this lease the word "operations" shall mean
operations for and any of the following: drilling, testing, completing,
reworking, recompleting, deepening, plugging back or repairing of a well in
search for or in an endeavor to obtain production of oil, gas, sulphur or
other minerals, excavating a mine, production of oil, gas, sulphur or other
mineral, whether or not in paying quantities.
7. Lessee shall have the use, free from royalty, of water, other
than from lessor's water wells, and of oil and gas produced from said land in
all operations hereunder. Lessee shall have the right at any time to remove
all machinery and fixtures placed on said land, including the right to draw
and remove casing. No well shall be drilled nearer than 200 feet to the
house or barn now on said land without the consent of the lessor. Lessee
shall pay for damages caused by its operations to growing crops and timber
on said land.
8. The rights and estate of any party hereto may be assigned from
time to time in whole or in part and as to any mineral or horizon. All of
the covenants, obligations, and considerations of this lease shall extend to
and be binding upon the parties hereto, their heirs, successors, assigns, and
successive assigns. No change or division in the ownership of said land,
royalties, or other moneys, or any part thereof, howsoever effected, shall
increase the obligations or diminish the rights of lessee, including, but not
limited to, the location and drilling of wells and the measurements of
production. Notwithstanding any other actual or constructive knowledge or
notice thereof of or to lessee, its successors or assigns, no change or
division in the ownership of said land or of the royalties, delay rental, or
other moneys, or the right to receive the same, howsoever effected, shall be
binding upon the then record owner of this lease until thirty (30) days after
there has been furnished to such record owner at his or its principal place
of business by lessor or lessor's heirs, successors, or assigns, notice of
such change or division, supported by either originals or duly certified
copies of the instruments which have been properly filed for record and which
evidence such change or division, and of such court records and proceedings,
transcripts, or other documents as shall be necessary in the opinion of such
record owner to establish the validity of such change or division. If any
such change of ownership occurs by reason of the death of the owner, lessee
may, nevertheless pay or tender such royalties, or other moneys, or part
thereof, to the credit of the decedent in a depository bank provided for
above.
9. In the event lessor considers that lessee has not complied with
all its obligations hereunder, both express and implied, lessor shall notify
lessee in writing, setting out specifically in what respects lessee has
breached this contract. Lessee shall then have sixty (60) days after receipt
of said notice within which to meet or commence to meet all or any part of
the breaches alleged by lessor. The service of said notice shall be
precedent to the bringing of any action by lessor on said lease for any
cause, and no such action shall be brought until the lapse of sixty (60) days
after service of such notice on lessee. Neither the service of said notice nor
the doing of any acts by lessee aimed to meet all or any of the alleged
breaches shall be deemed and admission or presumption that lessee has failed
to perform all its obligations hereunder. If this lease is cancelled for any
cause, it shall nevertheless remain in force and effect as to (1) sufficient
acreage around each well as to which there are operations to constitute a
drilling or maximum allowable unit under applicable governmental regulations,
(but in no event less than forty acres), such acreage to be designated by
lessee as nearly as practicable in the form of a square centered at the well,
or in such shape as then existing spacing rules require, and (2) any part of
said land included in a pooled unit on which there are operations. Lessee
shall also have such easements on said land as are necessary to operations on
the acreage so retained.
10. Lessor hereby warrants and agrees to defend title to said land
against the claims of all persons whomsoever. Lessor's right and interest
hereunder shall be charged primarily with any mortgages, taxes or other
liens, or interest and other charges on said land, but lessor agrees that
lessee shall have the right at any time to pay or reduce same for lessor,
either before or after maturity, and be subrogated to the rights of the
holder thereof and to deduct amounts so paid from royalties or other payments
payable or which may become payable to lessor and/or assigns under this
lease. If this lease covers a less interest in the oil, gas, sulphur, or
other minerals in all or any part of said land than the entire and undivided
fee simple estate (whether lessor's interest is herein specified or not), or
no interest therein, then the royalties and other moneys accruing form any
part as to which this lease covers less than such full interest, shall be
paid only in the proportion which the interest therein, if any, covered by
this lease, bears to the whole and undivided fee simple estate therein. All
royalty interest covered by this lease (whether or not owned by lessor) shall
be paid out of the royalty herein provided. This lease shall be binding upon
[ILLEGIBLE]
<PAGE>
EXHIBIT "C"
Attached to and made a part of that certain Operating Agreement between
Sue-Ann Production Company, as Operator, and those parties designated hereon
as Non-Operators.
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
and/or contract labor directly employed on the Joint Property in a 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 Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of 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 Victoria National Bank on the first day of the month in
which delinquency occurs plus 1% or 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 within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical inventory
of Controllable Material as provided for in Section V.
COPYRIGHT-C- 1985 by the Council of Petroleum Accountants Societies.
-1-
<PAGE>
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 within 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
more 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 approving 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 this Accounting Procedure and if
the agreement to which this Accounting Procedure is attached contains no
contrary provisions in 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 on
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 of
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 imposed
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 these employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
4. EMPLOYEE BENEFITS
Operator's current costs of 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-
<PAGE>
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 receiving 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 available 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 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 in paragraph 8A above, Operator may elect to use
average commercial rates prevailing 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
Association.
9. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or 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 judgements 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-
<PAGE>
12. INSURANCE
Net premiums paid for insurance required to be carried 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:
( ) 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:
( ) 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 services 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
( ) shall not be covered by the overhead rates.
A. OVERHEAD - FIXED RATE BASIS
(1) Operator shall charge the Joint Account at the following rates
per well per month:
Drilling Well Rate $ See page 4-A
--------------
(Prorated for less than a full month)
Producing Well Rate $ See Page 4-A
---------------
(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-
<PAGE>
ADDENDUM
Overhead - Drilling and Producing - Fixed Rate Basis
A. OVERHEAD - FIXED RATE BASIS
(1) Operator shall charge the Joint Account at the following rates per
month:
<TABLE>
<CAPTION>
Depth Drilling Well Rate Producing Well Rate
----- ------------------ -------------------
<S> <C> <C>
3,000 Feet & Above $3,760 $376
3,001 Feet - 5,000 Feet $5,050 $505
5,001 Feet - 7,500 Feet $5,640 $564
7,501 Feet & Below $6,340 $634
</TABLE>
-4A-
<PAGE>
is later, except that no charge shall be made during
suspension 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 a period of five (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 a multi-completed well in
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
on 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 (_____%) of the cost of development
of the Joint Property exclusive of costs provided under
Paragraph 10 of Section 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, redrilling, 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
original 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 as a 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-
<PAGE>
Account for overhead based on the following rates for any Major
Construction project in excess of $______________:
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 are 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. % of total costs through $100,000; plus
-----------
B. % of total costs in excess of $100,000 but less than
-----------
$1,000,000; plus
C. % 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
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or 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 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-
<PAGE>
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 per weight
of tubing transferred, to the railway receiving point
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 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, or 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.(1) and (2).
B. GOOD USED MATERIAL (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 which 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 as
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-
<PAGE>
(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 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 charges to the Joint Account
at the rate of twenty-five cents (25-cents-) per hundred weight
on all tubular 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 Material 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-
<PAGE>
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.
<PAGE>
EXHIBIT "D"
Attached to and made a part of that certain Operating Agreement dated
November 1, 1997, between Sue-Ann Production Company, as Operator, and
Parallel Petroleum Corporation, et al, as Non-Operators
INSURANCE COVERAGE
OPERATOR SHALL SECURE AND MAINTAIN DURING THE TERM OF THIS AGREEMENT INSURANCE
TO COVER OPERATOR'S OPERATIONS ON THE LEASE ACREAGE COVERED BY THIS
AGREEMENT, AS FOLLOWS:
<TABLE>
<CAPTION>
LIMITS
------
EACH EACH
PERSON OCCURRENCE AGGREGATE
------ ---------- ---------
<S> <C> <C> <C>
WORKERS' COMPENSATION STATUTORY STATUTORY STATUTORY
EMPLOYER'S LIABILITY
ACCIDENT $100,000 -0- -0-
SICKNESS $100,000 -0- $ 500,000
GENERAL LIABILITY
BODILY INJURY &
PROPERTY DAMAGE,
COMBINED SINGLE
LIMIT -0- $1,000,000 $1,000,000
EXCESS UMBRELLA LIABILITY -0- $1,000,000 $1,000,000
*ENERGY EXPLORATION &
DEVELOPMENT INSURANCE
(BLOWOUT/REDRILL) -0- $3,000,000 -0-
DEDUCTIBLE $ 75,000
</TABLE>
*OPERATOR HAS BLOWOUT INSURANCE ON WELLS ONLY WHILE THEY ARE BEING DRILLED.
PRODUCING WELLS AND WORKOVERS ARE NOT INSURED. COVERAGE UNDER THIS POLICY
INCLUDES NON-OPERATOR'S INTEREST UNLESS NON-OPERATOR ELECTS TO PROVIDE THEIR
OWN INSURANCE AND NOTIFIES OPERATOR, IN WRITING, PRIOR TO SPUDDING, AND
FURNISHES OPERATOR WITH A CERTIFICATE OF INSURANCE EVIDENCING SUCH INSURANCE.
NON-OPERATOR WILL BE BILLED FOR THEIR PRO RATA SHARE OF THE COST OF SUCH
INSURANCE.
IT IS UNDERSTOOD AND AGREED THAT THE OPERATOR IS NOT A WARRANTOR OF THE
FINANCIAL RESPONSIBILITY OF THE INSURER WITH WHOM SUCH INSURANCE IS CARRIED,
AND THAT, EXCEPT FOR WILLFUL NEGLIGENCE, OPERATOR SHALL NOT BE LIABLE TO
NON-OPERATOR FOR ANY LOSS SUFFERED ON ACCOUNT OF THE INSUFFICIENCY OF THE
INSURANCE CARRIED, OR OF INSURER WITH WHOM CARRIED. OPERATOR SHALL NOT BE
LIABLE TO NON-OPERATOR FOR ANY LOSS ACCRUING BY REASON OF OPERATOR'S
INABILITY TO PROCURE OR MAINTAIN THE INSURANCE ABOVE MENTIONED. OPERATOR
AGREES THAT IF AT ANY TIME DURING THE LIFE OF THIS AGREEMENT IT IS UNABLE TO
OBTAIN OR MAINTAIN SUCH INSURANCE, IT SHALL IMMEDIATELY NOTIFY NON-OPERATOR
IN WRITING OF SUCH FACT.
<PAGE>
EXHIBIT "E"
Attached to and made a part of that certain Operating Agreement
dated November 1, 1997, between Sue-Ann Production Company, as
Operator, and Parallel Petroleum Corporation, et al, as
Non-Operators
BALANCING AGREEMENT
The parties of the Operating Agreement to which this agreement is
attached, own the working interest in the gas rights underlying the Unit Area
covered by such Operating Agreement in accordance with the percentages of
participation as set forth in Exhibit "A" to said Agreement.
In accordance with the terms of the Operating Agreement, each party
thereto has the right to take in kind its share of gas produced from the Unit
Area and market or otherwise dispose of same. In the event any party hereto
is not at any time taking or marketing its share of gas, or has contracted to
sell its share of gas produced from the Unit Area to a purchaser which does
not at any time take the full share of gas attributable to the interest of
such party, the terms of this agreement shall automatically become operative.
During the period when any party hereto is not marketing or otherwise
disposing of its share of gas produced from any proration unit within the
Unit Area, the other parties hereto shall be entitled to produce, in addition
to their own share of production, that portion of such other party's share of
production which said party is unable to market or otherwise dispose of and
shall be entitled to take such gas production and deliver same to its or
their purchaser(s). All parties hereto shall share in and own the liquid
hydrocarbons recovered from such gas by lease equipment in accordance with
their respective interests and subject to the aforesaid Operating Agreement,
but the party or parties taking such gas shall own all of such gas delivered
to its or their purchaser(s).
An account shall be established for each party not marketing or
otherwise disposing of its share of the gas produced, which account shall be
credited with an amount of gas equal to such party's full share of the gas
produced, less its share of gas used in lease operations, vented or lost, and
less that portion marketed or otherwise disposed of by such party. The
operator will maintain a current over and under account of the gas balance
between the parties and will furnish all parties hereto monthly statements
showing the total quantity of gas produced, the amount used in lease
operations, vented or lost, the total quantity of liquid hydrocarbons
recovered therefrom, and the monthly and cumulative over and under account of
each party.
Exhibit "E"
<PAGE>
Each party hereto will make settlement with the royalty owners to whom
it is accountable, just as if such party were marketing or otherwise
disposing of its share, and its share only, of such gas production. Each
party hereto agrees to hold each other harmless from any and all claims for
royalty payments asserted by royalty owners to whom each party is
accountable. The term "royalty owner" shall include owners of royalty,
overriding royalties, production payments and similar interests.
After notice to the operator, any party at any time may begin marketing
or otherwise disposing of its share of the gas produced from a proration unit
with respect to which it has an under account balance. In addition to such
share, said party, until it has balanced the gas account as to its interest,
shall be entitled to take a share of gas determined by multiplying
thirty-three and one-third percent (33-1/3%) of the interest in the current
production of the party or parties having an over account balance by a
fraction, the numerator of which is the interest in the proration unit of
such party with the under account balance and the denominator of which is the
total percentage interest in such proration unit of all parties having an
under account balance and who are currently marketing or otherwise disposing
of gas shall pay the production taxes due on such gas.
Nothing herein shall be construed to deny any party the right, from time
to time, to produce and deliver to its purchaser its full share of the
allowable gas production to meet the deliverability tests required by its
purchaser.
Should production of gas from a proration unit be permanently
discontinued before the gas account is balanced, settlement will be made
between those parties credited with under account and over account balances.
In making such settlement, the party or parties credited with an under
account balance will be paid by the party or parties credited with an over
account balance a sum of money equal to that received attributable to such
over account, less applicable taxes theretofore paid. For gas sold or
delivered into interstate commerce said sum shall be computed at the price
received for the sale of the gas. For gas sold or delivered into interstate
commerce said sum shall be computed at the rate collected, not subject to
possible refund, as provided by the Federal Power Commission, plus additional
collected amount which is ultimately not required to be refunded, such
additional collected amount to be accounted for at such time as final
determination is made with respect thereto.
Nothing herein shall change or affect each party's obligation to pay its
proportionate share of all costs and liabilities incurred, as provided in the
aforesaid Operating Agreement.
Exhibit "E" - Page 2
<PAGE>
This agreement shall constitute a separate agreement as to each
proration unit within the Unit Area. It shall inure to the benefit of and be
binding upon the parties hereto, their successors, legal representatives and
assigns. It shall become effective in accordance with its terms and shall
remain in force and effect as long as the Operating Agreement to which it is
attached remains in effect.
Exhibit "E" - Page 3
<PAGE>
EXHIBIT "H"
Attached to and made a part of that certain Operating Agreement dated
November 1, 1997, between Sue-Ann Production Company, as Operator, and
Parallel Petroleum Corporation, et al, as Non-Operators
MEMORANDUM OF OPERATING AGREEMENT,
SECURITY AGREEMENT AND FINANCIAL STATEMENT
STATE OF TEXAS Section
Section
COUNTY OF Section
It is the intention of this instrument to reflect as a matter of record in
all recording offices where necessary the creation, validity, priority and
continuing effect of the liens and security interests created under that certain
Model Form Operating Agreement, A.A.P.L. Form 160-1989, dated November 1, 1997,
wherein Sue-Ann Production Company is named Operator ("Operator") and those
signatory parties hereto are Non-Operators ("Non-Operators"), and pertaining to
all oil, gas and other mineral estates of whatever nature owned by said parties
in and under the lands described in Exhibit "A" attached hereto (the "Contact
Area").
In order to secure performance of all their obligations under said
Operating Agreement (including, without limitation, the obligation for payment
of expenses, interest and fees for development and operation of the Contract
Area), and to perfect the liens and security interest therein, each of the
undersigned hereby grants to each of the other undersigned parties a lien and
security interest upon all of the interest of each such party in all (i) oil,
gas and other mineral interests of whatever nature in the Contract Area and in
all lands pooled or unitized therewith, including, without limitation, oil and
gas leasehold interests, oil, gas and mineral leasehold interests, production
payments, royalty interests, overriding royalty interests, and net profits
interests, whether now owned or hereafter acquired therein; (ii) oil, gas and
other hydrocarbons and other minerals when extracted from the Contract Area or
from lands pooled or unitized herewith; (iii) accounts rising in connection with
said property (including, without limitation, accounts arising from the sale of
oil, gas and other hydrocarbons and other minerals at the wellhead of wells
located in the Contract Area or on lands pooled or unitized therewith); (iv)
fixtures now or hereafter attached to or located on said property; (v)
equipment, tools, wells, tanks, tubing goods and materials now or hereafter
located on or used or obtained in connection with said property; (vi) inventory,
contract rights, instruments, chattel paper and general intangibles which relate
to or arise in connection with said-property; and (vii) proceeds from the items
in which a lien or security interest is granted herein.
Some of the personal property encumbered by said Operating Agreement
hereby are, or are to become, fixtures in the Contract Area, or on lands
pooled or unitized therewith, and the interest of each party in and to the
oil, gas and other hydrocarbons and other minerals when extracted, and the
accounts arising from the sale thereof, will be financed at the wellhead of
the wells located in the Contract Area or on lands pooled or unitized
therewith. The lien and security interest granted by each party extends and
shall extend to all proceeds and products of all the property described
herein as being subject to said lien and security interest. This instrument
is to be filed for record or indexed as a financing statement in the Real
Estate Records in each of the counties where the Contract Area, or part
thereof, is located.
A signed copy hereof may also serve as a financing statement under the
Uniform Commercial Code, and a photographic or other reproduction hereof is
sufficient as a financing statement.
In addition to the purposes as stated hereinabove, this instrument is
intended to give notice to third parties of the respective rights of each of
the parties hereto under the referenced Operating Agreement and the rights of
each party to undivided interests in the oil, gas and other minerals in the
Contract Area, notwithstanding the fact that the Real Estate Records of the
county where the Contract Area is located may show different rights than are
reflected hereby. All of the terms and provisions of the referenced
Operating Agreement are incorporated in and made a part hereof. A fully
executed copy of said Operating Agreement is available for review at the
offices of Operator.
Exhibit "H" - page 1
<PAGE>
Each signatory party hereof shall be deemed to have ratified and confirmed said
Operating Agreement as to all of its terms and conditions.
This instrument may be executed in several original counterparts by each
of the undersigned, all of which shall be identical except that, to facilitate
recording, there may be omitted from certain counterparts the parts of Exhibit
"A" containing descriptions which relate to land located in counties other than
the county in which the particular counterpart is to be recorded. Each
counterpart shall be deemed an original binding upon each party executing the
same, and all counterparts shall together constitute one and the same
instrument. Operator is authorized to assemble individual counterparts into one
instrument for recording purposes.
For purposes of Uniform Commercial Code filings, and because liens are
granted to and give to each party hereto, each party shall be deemed both Debtor
and Secured Party.
Dated and effective as of the date of the above-described Operating
Agreement.
OPERATOR:
---------
SUE-ANN PRODUCTION COMPANY
By: /s/ R. A. Marshall
----------------------------------------
Printed Name: R. A. Marshall
------------------------------
Title: President
-------------------------------------
NON-OPERATORS:
PARALLEL PETROLEUM CORPORATION
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
TAC RESOURCES, INC.
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
ALLEGRO INVESTMENTS, INC.
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
BETA OIL & GAS, INC.
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
Exhibit "H" - page 2
<PAGE>
PEASE OIL & GAS COMPANY
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
MEYER FINANCIAL SERVICES, INC.
By:
----------------------------------------
Printed Name:
------------------------------
Title:
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FOUR-WAY TEXAS, L.L.C.
By:
----------------------------------------
Printed Name:
------------------------------
Title:
-------------------------------------
Exhibit "H" - page 3
<PAGE>
STATE OF TEXAS )
)
COUNTY OF VICTORIA )
This instrument was acknowledged before me this 20th day of April, 1999,
by R. A. Marshall, President of Sue-Ann Production Company, a Texas Corporation,
on behalf of said corporation.
CAROL L. GAYLE
[SEAL] NOTARY PUBLIC /s/ Carol K. Gayle
STATE OF TEXAS ------------------------------------
My Commission Expires 10-10-2000 Notary Public, State of Texas
STATE OF TEXAS )
)
COUNTY OF MIDLAND )
This instrument was acknowledged before me this ______ day of _________,
1997, by ____________________________________________, ______________________ of
Parallel Petroleum Corporation, a Texas corporation, on behalf of said
corporation.
------------------------------------
Notary Public, State of Texas
STATE OF TEXAS )
)
COUNTY OF )
This instrument was acknowledged before me this ______ day of _________,
1997, by ____________________________________________, ______________________ of
TAC Resources, Inc., a ____________ corporation, on behalf of said corporation.
------------------------------------
Notary Public, State of Texas
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ______ day of _________,
1997, by ____________________________________________, _____________________ of
Allegro Investments, Inc., a ____________ corporation, on behalf of said
corporation.
------------------------------------
Notary Public, State of ____________
Exhibit "H" - page 4
<PAGE>
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ______ day of _________,
1997, by ____________________________________________, ______________________ of
Beta Oil & Gas, Inc., a ____________ corporation, on behalf of said corporation.
------------------------------------
Notary Public, State of ____________
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ______ day of _________,
1997, by ____________________________________________, ______________________ of
Pease Oil & Gas Company, a ____________ corporation, on behalf of said
corporation.
------------------------------------
Notary Public, State of ____________
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ______ day of _________,
1997, by ____________________________________________, ______________________ of
Meyer Financial Services, Inc., a ____________ corporation, on behalf of said
corporation.
------------------------------------
Notary Public, State of ____________
STATE OF )
)
COUNTY OF )
This instrument was acknowledged before me this ______ day of _________,
1997, by ____________________________________________________________________ of
Four-Way Texas, L.L.C., a ________________ limited liability company, on behalf
of said limited liability company.
------------------------------------
Notary Public, State of ____________
Exhibit "H" - page 5
AGREEMENT
THIS AGREEMENT is dated January 21, 1998, and is by and between Beta
Oil & Gas, Inc., 901 Dove Street, Suite 230, Newport Beach, CA 92660 ("Beta")
and TAC Resources, Inc., 1908 N. Laurent, Suite 380, Victoria, TX 77901
("TAC") and Allegro Investments, Inc., 1908 N. Laurent, Suite 370, Victoria,
TX 77901 ("Allegro").
WHEREAS, Beta wishes to purchase and TAC wishes to sell certain
interests owned by TAC under that certain Exploration Agreement dated July 15,
1997, as amended, covering the Texana Project; and Beta wishes to purchase and
TAC and Allegro wish to sell certain interests owned by TAC and Allegro under
that certain Exploration Agreement dated August 1, 1997, as amended, covering
the Formosa Grande Project.
NOW, THEREFORE, for Ten and 00/100 Dollars ($10.00) and other
valuable consideration and the mutual covenants and agreements contained
herein the parties hereby agree as follows.
1. Conveyance. TAC hereby agrees to convey Beta five percent (5%)
interest in the Texana Project, and TAC and Allegro hereby agree to
convey Beta five percent (5%) interest in the Formosa Grande Project
for a total sum of One rnillion two hundred seventy-five thousand and
00/100 Dollars ($1,275,000.00). Upon receipt of payment in full as
described below, TAC shall execute and deliver to Beta an amendment
identical in form to that attached hereto as Exhibit "A" covering the
interest to be transferred in the Texana Project, and TAC and Allegro
shall execute and deliver to Beta an amendment identical in form to
that attached hereto as Exhibit "B" covering the interest to be
transferred in the Formosa Grande Project.
2. Payment. TAC and Allegro agree and direct that all payments made
hereunder shall be made to TAC at the address shown above. Upon
execution of this Agreement, Beta shall pay TAC the sum of Four
hundred twenty-five thousand and 00/100 Dollars ($425,000.00). and
shall thereafter make two additional payments in the amount of
$425,000.00 each to TAC. The first such payment shall be due on or
before March 1, 1998 and the second due on or before April 1, 1998.
TAC and Allegro shall have the option prior to the making of either
of such additional payments to require that all or a portion of such
payments be made in the form of Beta stock on the basis of $5 00 per
share
3. Forfeiture. In the event Beta fails to timely make any of the
above payments this Agreement shall terminate and be of no further
force or effect. It is agreed that upon such termination Beta shall
forfeit the right to receive any interest hereunder, regardless of
partial payment, and TAC and Allegro shall be entitled to retain all
payments received.
This agreement constitutes the entire agreement among the parties
hereto with respect to the subject matter hereof, superseding any and all
prior agreements, understandings, discussions, negotiations and commitments of
any kind.
The provisions of this agreement may be amended, supplemented, or
waived only if in writing signed by all parties hereto.
This agreement shall bind and inure to the benefit of the parties
hereto and their respective heirs, successors, legal representatives and
assigns.
<PAGE>
This agreement may be executed in multiple counterparts, all of
which when taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, this instrument is executed on the date first above
written.
Beta Oil & Gas, Inc.
/s/ Steve Antry, President
TAC Resources, Inc
/s/ Bill Bishop, President
Allegro Investments, Inc.
/s/ John C. Thompson, President
<PAGE>
Exhibit "A"
(Attached to and made a part of that certain
Agreement dated January 21, 1998, by and
between Beta Oil & Gas, Inc., TAC Resources,
Inc. and Allegro
Investments, Inc,)
FIRST AMENDMENT TO EXPLORATION AGREEMENT
TEXANA PROJECT
JACKSON COUNTY, TEXAS
This First Amendment to Exploration Agreement (the "Amendment") is entered into
this ____ day of March, 1998, by and between Parallel Petroleum Corporation
("Parallel"), TAC Resources, Inc. ("TAC"), Beta Oil & Gas, Inc. ("Beta"), Pease
Oil and Gas Company ("Pease"), and Unit Petroleum Company ("Unit"), all
hereinafter collectively referred to as (the "Parties"), in order to amend that
certain Exploration Agreement dated July 15, 1997, (the "Agreement").
Whereas, Beta has acquired a portion of the interest owned by TAC under the
Agreement, and
Whereas, in order to evidence this acquisition the Agreement is hereby amended
as follows:
Article 2.2 is hereby amended as follows:
"2.2 "Interest and Share of Cost of the Parties." The Parties hereby
agree to own, as their Initial Interest, and agree to bear the costs set out
below as follows:
<TABLE>
Party Initial Interest Share of Costs Share of Costs for
Prior to Leasehold Leasehold Acquisition
Acquisition and Subsequent Operations
<S> <C> <C> <C>
TAC .2000000 .0625000 .2000000
Parallel .1750000 .2187500 .1750000
Unit .2500000 .3125000 .2500000
Beta .2500000 .2500000 .2500000
Pease .1250000 .1562500 .1250000
</TABLE>
TAC has acquired and now owns the Existing AMI Interests. Parallel, Unit, Beta
and Pease agree that their costs in the Existing AMI Interests shall be based on
$75.00 per net mineral acre on seismic and lease options, and cost plus 25% on
oil and gas leases and seismic permits. The Existing AMI Interests are presently
comprised of approximately 23,183.908 net mineral acres covered by seismic and
lease option, and 300.5 net mineral acres covered by seismic permit where cost
was $25.00/net mineral acre. Based on the foregoing, the current total cost of
Existing AMI Interests is One million seven hundred forty-eight thousand one
hundred eighty-three and 73/100 Dollars ($1,748,183.73). Parallel, Unit, Beta
and Pease agree to pay TAC their portion of such cost, as referenced above, in
the Existing AMI Interests upon execution of this Agreement. Parallel, Unit,
Beta and Pease hereby agree that TAC shall have the exclusive right to acquire
AMI Interests through August 1, 1997, and that same shall be treated in all
respects as Existing AMI Interests. Parallel, Unit, Beta and Pease agree that
they shall be obligated to accept such interests in the same percentages and pay
TAC for such interests at the same terms stated herein.
Payment for such interests shall be due within fifteen (15) days after receipt
of written notice as set out in Article 2.4. Interests available to TAC which
costs exceed those stated above shall be offered to the other Parties as per the
procedure set forth in Article 2.4 below."
The Parties agree that the provisions of this Amendment shall become a part of
the Agreement, as if originally included therein, and do hereby adopt ratify and
confirm the Agreement, as amended, in all of its terms and provisions.
This Agreement may be executed in multiple counterparts, all of which when taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, this instrument is executed on the date first above written.
Parallel Petroleum Corporation
By:
Larry C. Oldham, President
TAC Resources, Inc.
By:
Bill Bishop, President
Beta Oil & Gas, Inc.
By:
Steve Antry, President
Pease Oil and Gas Company
By:
Willard Pease, Jr., President
Unit Petroleum Company
By:
Phillip M. Keeley, Sr. Vice President
<PAGE>
Exhibit "B"
(Attached to and made a part of that certain
Agreement dated January 21, 1998, by and
between Beta Oil & Gas, Inc., TAC Resources,
Inc. and Allegro
Investments, Inc,)
SECOND AMENDMENT TO EXPLORATION AGREEMENT
FORMOSA GRANDE PROJECT
JACKSON AND CALHOUN COUNTIES, TEXAS
This Second Amendment to Exploration Agreement (the "Amendment") is entered into
this ____ day of March, 1998, by and between Parallel Pet:roleum Corporation
("Parallel"), TAC Resources, Inc. ("TAC"), Allegro Investments, Inc.
("Allegro"), Beta Oil & Gas, Inc. ("Beta"), Pease Oil and Gas Company ("Pease"),
Four-Way Texas L.L.C. ("Four-Way"), Meyer Financial Services, Inc. ("Meyer") and
Wes-Tex Drilling Corp. ("Wes-Tex"), FGL, Inc. ("FGL"), Camway, Inc. ("Camway"),
Mert L. Cooper ("Cooper"), CKC Investments, Inc. ("CKC") and LWC of Austin, Inc.
("LWC") all hereinafter collectively referred to as (the "Parties"), in order to
amend that certain Exploration Agreement dated August 1, 1997, as amended in
that certain First Amendment to Exploration Agreement dated October 6, 1997,
(the "Agreement").
Whereas, Beta has acquired a portion of the interest owned by TAC and Allegro
under the Agreement, and
Whereas, in order to evidence this acquisition the Agreement is hereby amended
as follows:
Article 2.2 is herebv amended as follows:
"2.2 "Interest and Share of Cost of the Parties." The Parties hereby
agree to own, as their Initial Interest, and agree to
bear the costs set out below as follows:
<TABLE>
Party Initial Interest Share of Costs Share of Costs
Prior to Leasehold for Leasehold
Acquisition Acquisition and
Subsequent Operations
<S> <C> <C> <C>
Parallel .4337500 .3700000 .4337500
TAC .0291667 .0000000 .0291670
Allegro .0145833 .0000000 .0145830
Beta .2500000 .2666666 .2500000
Pease .1250000 .1666667 .1250000
Four-Way .0200000 .0266667 .0200000
Meyer .0100000 .0133333 .0100000
Wes-Tex .0200000 .0266667 .0200000
FGL .0700000 .0933333 .0700000
Camway .0050000 .0066667 .0050000
Cooper .0100000 .0133333 .0100000
CKC .0100000 .0133333 .0100000
LWC .0025000 .0033333 .0025000
</TABLE>
Parallel, TAC and Allegro have acquired and presently own the Existing AMI
Interests. Beta, Pease, Four-Way, Meyer, Wes-Tex, FGL, Camway, Cooper, CKC and
LWC agree that their respective costs in the Existing AMI Interests shall be
based on $100.00 per net mineral acre on seismic and lease options, and cost
plus 33.33333% on oil and gas leases and seismic permits. The Existing AMI
Interests are presently comprised of approximately 73,102.116 net mineral acres
covered by seismic and lease option, 522.896 net mineral acres covered by
seismic permit where cost was $5,228.96, and 146.890 net mineral acres covered
by oil and gas lease where cost was $7,344.50. Based on the foregoing, the
current total cost of Existing AMI Interests is Seven million three hundred
twenty-two thousand seven hundred eighty-five and 06/100 Dollars
($7,322,785.06). Beta, Pease, Four-Way, Meyer, Wes-Tex, FGL, Camway, Cooper, CKC
and LWC agree to pay Parallel their Proportionate Share of such cost, as
referenced above, in the Existing AMI Interests upon execution of this
Agreement. Beta, Pease, Four-Way, Meyer, Wes-Tex, FGL, Camway, Cooper, CKC and
LWC hereby agree that Parallel shall have the exclusive right to acquire AMI
Interests through December 1, 1997, and that same shall be treated in all
respects as Existing AMI Interests. Beta, Pease, Four-Way, Meyer, Wes-Tex, FGL,
Camway, Cooper, CKC and LWC agree that they shall be obligated to accept such
interests in the same percentages and pay Parallel for such interests at the
same terms stated herein. Payment for such interests shall be due within fifteen
(15) days after receipt of written notice as set out in Article 2.4. Interests
available to Parallel which costs exceed those stated above shall be offered to
the other Parties as per the procedure set forth in Article 2.4 below."
The Parties agree that the provisions of this Amendment shall become a part of
the Agreement as if originally included therein, and do hereby adopt ratify and
confirm the Agreement, as amended, in all of its terms and provisions.
This Agreement may be executed in multiple counterparts, all of which when taken
together shall constitute one and the same agreement.
IN WITNESS WHEREOF, this instrument is executed on the date first above written.
Parallel Petroleum Corporation
By:
Larry C. Oldham, President
TAC Resources, Inc.
By:
Bill Bishop, President
FGL, Inc.
By:
Guy Griffith, President
Camway, Inc.
By:
Guy Griffith, President
CKC Investments, Inc.
By:
Mert L. Cooper, President
LWC of Austin, Inc.
By:
Lewis Lee, President
October 13, 1997
BETA OIL & GAS, INC.
901 Dove Street, Suite 230
Newport Beach, California 92660
Attention: Steve Antry
President
Re: Purchase and Sale Agreement
Lapeyrouse Area
Terrebonne Parish, Louisiana
Gentlemen:
This will evidence the "Purchase and Sale Agreement" provided for in
Article 5 of that certain Letter of Intent dated September 18, 1997 between Beta
Oil & Gas, Inc. ("Beta" herein) and Laurent Oil & Gas, Inc. ("Laurent" herein)
relative to Laurent's "Look-Back Interests", hereinafter defined.
1. Laurent represents that Laurent has the exclusive right to acquire the
following described undivided interests ("Look-Back Interests" herein) in and to
those oil, gas and mineral leases and geophysical options set out and described
in Exhibits "A" through "D" hereto ("Leases" herein) and made a part hereof for
all purposes:
(a)6.25% as to rights between the surface and the stratigraphic
equivalent depth of the base of the Duval Sand,
(b)75.0% of 6.25% or 4.6875% as to rights between the stratigraphic
equivalent depth of the base of the Duval Sand and one hundred
feet (100') below the stratigraphic equivalent depth of the
base of the Dularge Sand, and
(c)25.0% of 6.25% or 1.5625% as to rights below one hundred feet (100')
below the stratigraphic equivalent depth of the base of the
Dularge Sand,
in and to the Leases described in Exhibit A within the boundaries of the
"Contract Area", defined in that certain 3-D Seismic Participation Agreement
dated May 30, 1996 by Fina Oil and Chemical Company, et al (Group Leases),
(d)50.0% of 6.25%, or 3.125% between the surface and one hundred feet
(100.0') below the stratigraphic equivalent depth of the base
of the Dularge Sand, and
(e)25.0% of 6.25%, or 1.5625% below one hundred feet (100.0') below the
stratigraphic equivalent depth of the base of the Dularge
Sand,
in and to those Leases described in Exhibits B and C within the boundaries of
the Contract Area (AMI Leases),
(f)6.25% interest, all rights to all depths,
in and to those Leases described in Exhibit A, outside the boundaries of the
Contract Area, and Exhibit D (Starboard West and South Leases),
(g)50.0% of 6.25%, or 3.125% between the surface and one hundred feet
(100.0') below the stratigraphic equivalent depth of the base
of the Dularge Sand, and
(h)25.0% of 6.25%, or 1.5625% below one hundred feet (100.0') below the
stratigraphic equivalent depth of the base of the Dularge
Sand,
in and to any lease, geophysical option or other contract for the right to
explore for oil or gas or creating a mineral servitude within the boundaries of
the Contract Area, other than the Leases,
(i)6.25%, all rights to all depths,
in and to any lease, geophysical option and any other contract for the right to
explore for oil or gas or creating a mineral servitude outside the boundaries of
the Contract Area but within the boundaries of the "Area of Mutual Interest" for
Exploration Agreement - Starboard dated February 19, 1996 by Frontier Natural
Gas Corporation, et al, ("Exploration Agreement - Starboard"), and
(j)the 2-d and 3-d Data to be acquired by Laurent under the "Frontier
Agreement" hereinafter defined.
2. Laurent further represents that the Look-Back Interests are subject to the
following:
(a)That certain Letter Agreement dated April 27, 1995 between Frontier
Natural Gas Corporation, Polaris Exploration Corporation and
Laurent, as amended by Amendment of Letter Agreement dated
August 14, 1996 ("Frontier Agreement" herein).
(b)The lessors' royalties.
(c)An overriding royalty in favor of Laurent in the amount of 3.0%
on Leases with lessor's royalty of 25.0% or less.
(d)An overriding royalty in favor of Laurent in the amount of 1.5%
on Leases with lessor's royalty of more than 25.0%.
3. Now therefore, for and in consideration of the sum of Four Hundred Fifty-six
Thousand Two Hundred Fifty Dollars ($456,250), paid and payable as follows:
(a) $45,625.00 earnest money and "Down Payment" received by Laurent on
October 9, 1997, as provided in the Letter of Intent to extend the
closing date by 15 days.
(b) $ 33,935.56 to South Coast Exploration Company.
$ 33,935.56 to SOCO Exploration, L.P.
$ 90,494.83 to Frontier Natural Gas Corporation.
$ 22,623.71 to HarCor Energy, Inc.
$ 7,541.24 to Matagorda Production Company.
-----------
$188,530.90
upon receipt by Beta of assignments from such parties of the Look-Back
Interests.
(c) $222,094.10 to Laurent upon receipt by Beta of such assignments of
the Look-Back Interests.
The checks in payment under (b) above have been delivered in escrow with Polaris
Exploration Corporation to be distributed as provided in this Paragraph 3.
Laurent does hereby bargain, grant, sell, assign and convey unto Beta, all
Laurent's rights, title and interest in and to the Look-Back Interests. The sums
specified are payable in cash, as consideration for Laurent's rights to the
Look-Back Interests under the Frontier Agreement and which sums of money are
non-refundable.
The assignments of the Look-Back Interests shall be considered "received" by
Beta when delivered to Beta at the address listed above, or to Beta's attorney,
Mr. Robert Redfearn, 1100 Poydras Street, 30th Floor, Energy Centre, New
Orleans, Louisiana 70163. Assignments need not be recorded in the Parish or
approved by the State Mineral Board to be considered received.
6. This Agreement and the rights herein conveyed are made without warranty,
express or implied, even to the return of the purchase price, except as against
the acts or omissions by, through or under Laurent, but such rights are conveyed
with complete transfer and subrogation of all rights and actions in warranty
against all other parties.
7. This Agreement is subject to the terms and provisions of the Letter of
Intent; provided, however, in the event of a conflict between this Purchase and
Sale Agreement and the Letter of Intent, the provisions of this Purchase and
Sale Agreement shall take precedence.
8. The assignments of the Look-Back Interests shall be on forms of assignment
substantially the same as the assignment attached hereto, marked Exhibit "E" and
made a part hereof for all purposes.
9. Beta expressly agrees to fully protect, defend, indemnify and hold Laurent
free and harmless from and against each and every claim, demand, liability or
cause of action, on account of personal injury or death, property damage or
lease maintenance matters (including the payment of royalties) arising after the
date of this Agreement related directly or indirectly to the interests herein
conveyed, operations related thereto or the agreements referenced herein,
including, but not limited to, any costs, expenses, damages, attorneys' fees or
losses in connection therewith which may be made or asserted by Beta, its
employees, agents or servants, or by Laurent, its employees, agents or servants,
or by third persons. Beta further agrees to fully protect, indemnify and hold
Laurent and its officers, executives, supervisors, employees, successors and
assigns free and harmless from and against each and every claim, demand,
liability or cause of action on account of environmental damage arising out of
or in connection with the interests herein conveyed, including, but not limited
to, any costs, attorneys' fees or losses in connection therewith which may be
made or asserted by any Federal, State or local agency. Beta agrees to fully
assume and bear all of the obligations of Laurent with respect to the Look-Back
Interests and the Leases, as provided for in the Frontier Agreement, Exploration
Agreement - Starboard and 3-D Seismic Participation Agreement, including, but
not limited to, the cost of acquiring Leases following the effective date of
this Agreement.
10. If Beta elects to surrender a Lease or interest therein or other oil, gas
and mineral lease or interest within the Area of Mutual Interest for the
Frontier Agreement, including oil, gas and mineral leases acquired outside the
definition of Look-Back Interest, Beta shall give Laurent written notice of such
election at least sixty (60) days before such surrender date, and if Laurent
elects to acquire such Lease, lease or interest therein, Beta shall assign all
interest to Laurent thirty (30) days in advance of the proposed surrender date,
free and clear of any burdens against the leasehold estate except those
described in Section 4 above.
11. This Agreement is effective as of May 19, 1997.
* * *
If the foregoing correctly reflects your understanding of our
Agreement, kindly sign one copy in the space provided below and return the same
to Laurent, on or before November 15, 1997.
Very truly yours,
LAURENT OIL & GAS, INC.
By:_/s/_________________________
J. Scott Laurent
President
ACCEPTED AND AGREED TO this the _____ day of November, 1997.
BETA OIL & GAS, INC.
By:/s/________________________
Steve Antry
President
<PAGE>
EXHIBITS A - D
to
LAPEYROUSE PROSPECT AGREEMENT, DATED OCTOBER 13, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
February 24, 1998
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, California 92660
Attn: Mr. R. T. Fetters
Re: Joint Exploration Agreement
Dear Mr. Fetters:
The purpose of this Joint Exploration Agreement (this "Agreement") is to set
forth the agreements between Rozel Energy, L.L.C. ("Rozel") and Beta Oil & Gas,
Inc. ("Beta"), with respect to Beta providing certain funding to Rozel for the
acquisition of oil and gas leases in exchange for Beta receiving from Rozel the
right to participate for a working interest in prospects generated on such
leases. The following numbered paragraphs of this Agreement reflect our
agreement regarding this matter.
1. Lease Acquisition Funding by Beta. Beta shall provide lease acquisition
funds (the "Lease Acquisition Funds") to Rozel for Rozel's use in the
acquisition of state and federal oil and gas leases within the area
outlined on Exhibit "A" attached hereto and made a part hereof (the
"Program Area"), pursuant to the following terms:
(a) Beta shall provide a total of $3,000,000 (the "Total
Commitment") to Rozel for a period of one (1) year commencing
March 1, 1998 and ending February 28, 1999 (the "Commitment
Period"), which Total Commitment includes any overhead
reimbursement fees paid by Beta to Rozel pursuant to Section
2(c) below.
(b) As part of the Total Commitment, Beta shall provide a minimum
of $750,000, and a maximum of $1,000,000 for Rozel to utilize
in the March 18, 1998, federal lease sale. If Beta provides
more than $750,000 to Rozel, and the amount over $750,000 (the
"Excess Amount") is not utilized in the acquisition of a
federal lease due to bid rejection, then Rozel immediately
shall reimburse the Excess Amount to Beta. Any remaining
amount shall be retained by Rozel in the Account described in
Section 5 below for Rozel's use in state lease sales pursuant
to Section 1(c).
<PAGE>
(c) The remaining balance of the Total Commitment that is not
utilized in the March 15, 1998, federal lease sale, shall be
provided by Beta to Rozel for Rozel to utilize in state lease
acquisitions during the Commitment Period. Beta's commitment
hereunder shall not require Beta to provide more than $750,000
during any one quarter of the Commitment Period on a
cumulative basis (for example, at the conclusion of June 1998
the required cumulative amount provided by Beta shall not
exceed $1,500,000, and at the end of September 1998 the
required cumulative amount provided by Beta shall not exceed
$2,250,000).
(d) Notwithstanding anything herein to the contrary, Rozel's
bidding on and any acquisition of any federal or state leases
shall be in Rozel's sole discretion, including, without
limitation, Rozel's determination of the leases on which Rozel
bids and the amounts of such bids.
2. Right to Participate in Prospects. In consideration for Beta providing
the lease acquisition funds pursuant to the Total Commitment as
described in Section 1 hereof, Beta shall have the right to review all
Prospects (as hereinafter defined) generated by Rozel within the
Program Area on leases acquired by Rozel utilizing Lease Acquisition
Funds, and the right (but not the obligation) to participate on a
Prospect-by-Prospect basis in such Prospects, on the following terms
and conditions:
(a) Upon Rozel's acquisition of a leasehold interest utilizing
Lease Acquisition Funds and Beta's election to participate in
a Prospect generated by Rozel on such leasehold, and if at
least a 25% WI was available for acquisition by Rozel, Beta
shall pay 12.5% of all WI (as hereinafter defined) costs
through the wellhead of the initial test well on such
Prospect, and shall earn a 9.375% WI for such initial test
well on such Prospect. Thereafter, Beta shall have a 9.375% WI
in all future activities on such Prospect, including, without
limitation, platform construction, pipeline installation and
any additional drilling on such Prospect. Upon Beta's
election to participate in a Prospect, Beta shall enter into
an operating agreement with Rozel and the other participants
in such Prospect. In the event of any conflict between the
terms and provisions of this Agreement and the terms and
provisions of such operating agreement, the terms
and provisions of this Agreement shall govern. The BIWI and
the ORI described in Section 2(c) shall not be subject to or
bound by any security interests, liens, encumbrances,
forfeiture provisions, burdens, obligations or other
provisions limiting or diminishing the value of such interests
which arise under or pursuant to such operating agreement.
<PAGE>
(b) If less than a 25% WI is available for acquisition by Rozel on
a Prospect, Beta shall have the right to participate for 50%
of the WI that is available to Rozel on the same basis as in
the preceding Section 2(a) (i.e., on a one-third for
one-quarter basis). If more than a 25% WI is available for
acquisition by Rozel on a Prospect, and Rozel elects, in its
sole discretion, to make any portion of such excess WI
available to Beta, Beta may (but is not obligated to) elect to
participate for such additional WI on the same basis as in the
preceding Section 2(a).
(c) Beta's WI shall be subject to its proportionate share of all
lease burdens, including, without limitation, (i) the
landowner's royalty, any overriding royalties, and any other
royalties or other encumbrances and burdens that affect the
leasehold interest, and (ii) the reservation by Rozel of a
back-in after payout Working Interest (the "BIWI") equal to
6.25% of 8/8ths WI, proportionately reduced, and the ORI (as
hereinafter defined), each of which shall be reserved to Rozel
or its designee. Payout of the BIWI shall occur with respect
to each Prospect on the date on which the Prospect Revenues
(as hereinafter defined) equal Prospect Expenses (as
hereinafter defined).
(d) For each Prospect in which Beta elects to participate, Beta
shall pay $50,000 per one-eighth WI of Beta (or prorated
portion thereof) to Rozel as a fixed overhead reimbursement to
Rozel. Pursuant to Section 1(a) hereof, such overhead
reimbursements by Beta to Rozel shall be deducted from the
Total Commitment.
(e) Upon the acquisition of any lease by Rozel utilizing Lease
Acquisition Funds under this Agreement, there shall
immediately be created an AMI (as hereinafter defined) with
respect to the Prospect on such lease, without further action
by the parties. Provided Beta participates for its WI in the
initial test well on such Prospect pursuant to Section 2(a),
Beta shall thereafter have the right to participate for its WI
in any subsequent lease acquisitions within such AMI.
Likewise, if Beta participates in the initial test well on a
Prospect, or if Beta has reviewed any geophysical, geologic,
or other information provided by Rozel describing such
Prospect, Beta shall not acquire any direct or indirect
interest in any lease or well within such AMI. If Beta
acquires such an interest within the AMI in violation of the
foregoing provision, in addition to Rozel's other rights and
remedies at law or in equity, Rozel shall have the right to
require that Beta convey all such rights to Rozel in exchange
for payment by Rozel to Beta of the direct out-of-pocket costs
that Beta paid to acquire such interest. Upon any such
conveyance by Beta to Rozel, Beta shall retain its rights
described in this Agreement to acquire its WI in such
leasehold interest.
<PAGE>
3. Utilization of Lease Acquisition Funds. Rozel shall utilize the Lease
Acquisition Funds solely for the acquisition of state and/or federal
oil and gas leases within the Program Area. If Rozel acquires any
federal or state leases within the Program Area in lease sales during
the Commitment Period, Rozel shall utilize the Lease Acquisition Funds
available in the Account. If adequate Lease Acquisition Funds are not
available to Rozel in the Account for any reason, and as a result Rozel
acquires state or federal oil and gas leases without utilizing Lease
Acquisition Funds, Beta shall have no rights, and Rozel shall have no
obligations to Beta, regarding any Prospect generated with respect to
such state and federal oil and gas leases. Any Lease Acquisition Funds
that are expended by Rozel on Prospects in which Beta elects not to
participate in the initial test well, shall be repaid to the Account
described below (or directly to Beta if the Commitment Period has
expired) if and when Rozel either sells its interest in or drills the
Prospect, whichever occurs first.
4. Prospects. Rozel shall have sole responsibility for the generation of
Prospects, and to the extent it generates Prospects, Rozel shall keep
Beta informed on a timely basis of such developments. Upon Rozel
utilizing Lease Acquisition Funds to acquire a Prospect to Beta, Rozel
shall allow Beta to review at Rozel's office such Prospect, subject to
Beta entering into a mutually acceptable form of confidentiality
agreement with Rozel. Rozel shall notify Beta in writing with a
description of the proposed initial test well on any Prospect in which
Beta has the right to participate hereunder. Beta shall notify Rozel
in writing of Beta's election to participate in such initial test well
for Beta's WI within two weeks of Beta's receipt of such notice from
Rozel. If Beta fails to so notify Rozel within such two-week period,
Beta shall be deemed to have elected not to participate in such initial
test well. If Beta participates in such initial test well, the
drilling of any subsequent wells shall be pursuant to the terms of the
applicable operating agreement for such Prospect.
5. Lease Acquisition Fund Account. Upon execution of this Agreement, Beta
shall set up an interest bearing account (the "Account") with Bank One
in Lafayette, Louisiana, in the name of Rozel. Beta shall establish
and maintain a minimum balance of $100,000 in this account beginning on
or before April 15, 1998. To the extent additional funds are required
for a lease acquisition by Rozel, subject to Beta's limits on its
commitments hereunder, Beta shall wire transfer the required funds to
the Account within fifteen days of Rozel's request, or within such
shorter period which Rozel may request based on the availability of the
applicable lease. Subject to the obligation of Rozel to return any
Excess Amount (as described in Section 1(b) hereof), any funds
withdrawn by Rozel from the Account for lease acquisition purposes that
are not expended at either a federal or state lease sale, shall be
immediately deposited back into the Account. Notwithstanding anything
herein to the contrary, if Rozel acquires a state or federal oil and
gas lease without utilizing any Lease Acquisition Funds, because the
Total Commitment has been reached, the quarterly commitment limit of
$750,000 has been reached, or Beta fails for any reason to place
sufficient funds in the Account, Beta shall have no rights with respect
to such lease or any Prospects developed thereon.
6. Miscellaneous.
(a) For purposes of this Agreement, in addition to the other terms
defined herein, the following terms shall have the following
respective meanings:
(i) "AMI" means an area of mutual interest encompassing
the surface area comprising a Prospect and the
surface area within a distance of one and one-half
miles beyond the outside boundary of such Prospect;
provided, however, that an AMI shall not include
Blocks 9 and 10, Eugene Island Area, Blocks 41, 43,
and 67, Ship Shoal Area, and Block 15, Grand Isle
Area, and any area contained within the boundaries of
a then existing AMI.
(ii) "NRI" means, with respect to any leasehold interest,
the interest in and to all production of oil, gas and
other minerals produced, saved or sold from, under or
by virtue of such leasehold interest after giving
effect to all valid lessor royalties, overriding
royalties, production payments, carried interests and
other encumbrances or charges against production
therefrom.
(iii) "ORI" means the overriding royalty interest of Rozel,
or its designee, in and to oil, gas and other
minerals produced from any leasehold interest, free
of the expenses of production and operation, other
than processing or transportation costs, which
interest shall burden Beta's WI in such leasehold
interest. The ORI shall be reserved by Rozel in all
leasehold interests as follows:
(1) If the NRI to all owners of the WI
in the leasehold interest is greater
than or equal to 83%, the ORI on
such leasehold interest shall be 4%
of 8/8ths, proportionately reduced
to Beta's WI in such leasehold
interest.
(2) If the total NRI to all owners of
the WI in the leasehold interest is
greater than or equal to 76% and
less than 83%, the ORI on such
leasehold interest shall be 3% of
8/8ths, proportionately reduced to
Beta's WI in such leasehold
interest.
(3) If the total NRI to all owners of
the WI in the leasehold interest is
less than 76%, the ORI on such
leasehold interest shall be the
greater of (a) 2% of 8/8ths or (b)
the difference between the NRI to
the owners of the WI and 73%,
proportionately reduced to Beta's WI
in such leasehold interest.
<PAGE>
(iv) "Prospect" means an area within the Program Area
which Rozel has analyzed and is believed to contain
one or more geological structures which are believed
to have the potential of producing oil, gas and/or
other minerals in commercial quantities and which is
designated as a "Prospect" by Rozel.
(v) "Prospect Expenses" means as to each Prospect, the
aggregate third party and direct overhead costs and
expenses incurred by Beta in connection with the
acquisition, ownership and development of such
Prospect, including, without limitation, the costs
and expenses associated with acquiring the leasehold
interest within the Prospect Area. Prospect Expenses
also shall include exploring such leasehold interests
for minerals (including, without limitation, the cost
of drilling one or more wells) and developing
minerals from the Prospect Area (including, without
limitation, all drilling and operating costs incurred
with respect to such Prospect).
(vi) "Prospect Revenues" means as to each Prospect, the
aggregate gross proceeds received by Beta from
production attributable to wells on such Prospect,
less and after deducting from such gross proceeds
Beta's share of (1) all burdens on production in
existence at the time the first well is spudded on
such Prospect (including the ORI but excluding any
burdens not affecting the interests, if any, held by
Beta), attributable to the wells on such Prospect and
paid after the date on which Beta acquires an
interest in such Prospect, and (2) all ad valorem,
excise, production, severance and like taxes incurred
after the first well is spudded on such Prospect.
(vii) "WI" means working interest, which is the percentage
interest that an owner of an oil, gas or other
mineral lease must contribute to, or be liable for,
production and operating expenses of such oil, gas or
other mineral lease. A WI owner is entitled to share
in revenue from such oil, gas or other mineral lease
equal to its WI less all burdens attributable to such
owner's WI.
(b) If any one or more of the provisions of this Agreement shall
for any reason be held by a court of competent jurisdiction to
be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect
the remaining provisions of this Agreement, and this Agreement
shall be construed as if such invalid, illegal or
unenforceable provision had never been a part hereof. This
Agreement shall be construed in accordance with the laws of
the State of Texas, without giving effect to any conflict of
law rules or provisions.
<PAGE>
(c) This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and
supercedes all previous communications, representations or
agreements, whether oral or written, with respect to the
subject matter herein. No agreement or understanding varying
or extending the terms hereof will be binding on either party
unless in writing and executed by an authorized representative
of each party. A benefit, right or duty provided by this
Agreement shall be deemed waived only when expressly agreed in
writing between the parties. The waiver of one instance of any
act, omission, condition or requirement shall not constitute a
continuing waiver unless specifically stated in the aforesaid
written waiver.
(d) This Agreement is not intended to create, nor shall it be
construed as creating, any mining partnership, joint venture
or other partnership, or any agency relationship between Beta
and Rozel or their employees or representatives.
Please have an authorized representative of Beta sign this Agreement in the
space provided below to confirm the agreements set forth herein and return a
signed copy to the undersigned.
Very truly yours,
ROZEL ENERGY, L.L.C.
/s/
By:
C. William Rogers, Manager
ACKNOWLEDGED AND AGREED
effective this ___ day of February, 1998
BETA OIL & GAS, INC.
By:/s/
Name:R. Thomas Fetters
Title:Director
<PAGE>
EXHIBIT A
to
ROZEL (TRANSITION ZONE) PROSPECT AGREEMENT, DATED FEBRUARY 24, 1998
(CONFIDENTIAL TREATMENT REQUESTED)
February ____, 1998
BETAustralia, LLC
901 Dove Street, Suit 230
Newport Beach, California 92660
Attention: Steve Antry, President
Gentlemen:
BETAustralia, LLC ("Farmee") has agreed to acquire, and Wagner
(Australia) Ltd. ("Wagner") and Brown (Australia) Ltd. ("Brown") (individually a
"Farmor" and collectively, "Farmors") have agreed to transfer, convey and
assign, a five percent (5%) undivided interest in each of two petroleum
exploration licenses, P.E.L. 53 and P.E.L. 59, issued by the government of South
Australia, as varied and amended from time to time (as so varied and amended,
the "Licenses") on the terms and conditions set forth in this letter agreement.
<PAGE>
1. To earn a five percent (5%) undivided interest in the Licenses, Farmee
agrees to pay (a) ten percent (10%) of the Drilling Costs (as defined
below) of the Initial Wells (as defined below), subject to the
limitation set forth below and (b) six and seven-tenths percent (6.7%)
of the Completion Costs (as defined below), if any, of the Initial
Wells, subject to the limitation set forth below. As used in this
letter agreement, "Initial Wells" means the first exploration well
drilled by the parties to the Operating Agreements (as defined in
Paragraph 8 below) on the structural play shown on Exhibit A attached
to this letter agreement (the "Structural Play") with a stated
objective that includes the Winulta formation and the first exploration
well drilled by the parties to the Operating Agreements on the reef
play shown on Exhibit A attached to this letter agreement (the "Reef
Play") with a stated objective that includes the Parara/Koolywurtie
formation. The "Drilling Costs" of an Initial Well for purposes of
this letter agreement shall include (i) all costs of drilling and
open-hole testing the well (including all costs of drilling and testing
any sidetrack or substitute well, should the initial wellbore fail to
reach its objective depth), (ii) if no production casing is set or
production tests are not run, all costs incurred through plugging and
abandoning the well, and (iii) all overhead charges applicable to the
preceding costs under the Operating Agreements. The "Completion Costs"
of an Initial Well for purposes of this letter agreement shall include
(i) all costs of setting and perforating production casing or setting
a liner in the Initial Well, (ii) all costs of production or pressure
tests, and (iii) all overhead charges applicable to the preceding costs
under the Operating Agreements. Drilling Costs and Completion Costs
shall include costs incurred both prior to and after the date of this
letter agreement but shall not include any costs attributable to
operations carried out prior to March 17, 1997, costs of rig
mobilization and demobilization to and from the drillsite License or
any costs beyond the wellhead(s), including, but not limited to, the
costs of platform(s) and the costs of any equipment or facilities for
processing, handling, separating, dehydrating, treating, compressing,
gathering or transporting production from the License(s).
Notwithstanding the foregoing, should the total Drilling Costs of
either Initial Well exceed U.S. $4,819,787.00 or should the total
Completion Costs of either Initial Well exceed U.S. $2,213,305.00,
Farmee shall be obligated to pay only a five percent (5%) share of
those Drilling Costs or Completion Costs of such Initial Well, as
applicable, which are in excess of such amount, and such cost
limitation shall not affect the interest earned by Farmee under the
terms of this letter agreement. The dollar figures set forth in the
preceding sentence for each Initial Well shall be deemed revised to
equal the applicable amounts set forth in the Authority for Expenditure
for such Initial Well when each such Authority for Expenditure is
issued. The parties agree that the Initial Well on the Reef Play shall
be drilled prior to the Initial Well on the Structural Play. The
parties further agree that the two Initial Wells shall be drilled
before any other well is drilled on either License.
2. The Drilling Costs and Completion Costs payable by Farmee under the
terms of Paragraph 1 above shall be paid in accordance with Operator's
periodic cash calls and billings under the Operating Agreements and
subject to the terms and provisions of the Operating Agreements.
3. In addition to the Drilling Costs and Completion Costs of the Initial
Wells, Farmee shall pay in accordance with the provisions of the
Operating Agreements a five percent (5%) share of rig mobilization
and demobilization costs for the Initial Wells and all other costs
incurred pursuant to the Operating Agreements in connection with the
ownership and operation of the Licenses, whether prior to or after the
date of this letter agreement, but excluding costs incurred for
geological and geophysical data acquired by Farmors prior to
September 25, 1996 and any costs, debts or liabilities attributable to
operations carried out prior to March 17, 1997 (including,
specifically, all costs and liabilities attributable to the
November 1996 incident involving the Maersk Victory Rig). The parties
agree that time is of the essence for all payments owing under this
letter agreement.
<PAGE>
4. In consideration of Farmee's agreements contained in this letter
agreement and subject to satisfaction of all of Farmee's earning
obligations under this letter agreement in accordance with paragraphs
1 and 2 above, Farmors have executed and delivered to Farmee,
simultaneously with their execution and delivery of this Agreement,
assignments in substantially the form of Exhibit B attached hereto (the
"Assignments"), transferring, conveying and assigning to Farmee a five
percent (5%) undivided interest in the Licenses (the "Assigned
Interest"), with an undivided one-half of the Assigned Interest being
conveyed by each Farmor. The Assignments are subject to a
proportionate share of obligations to the government of South Australia
(the "Government") and existing overriding royalty interests equal to
four percent (4%) of 8/8ths of production (the "Third Party Overriding
Royalties"), to the consent of the Government, and to the consent of
the present parties to the Operating Agreements, and are further
subject to the reservation and exception of the Overriding Royalty
described in Paragraph 7 below. The Assignments contain a special
warranty of title from each Farmor warranting against all persons
claiming by, through or under such Farmor, but not otherwise, title to
an undivided two and one-half percent(2.5%) interest under each License
having at least an undivided two and three-fortieths percent (2.075%)
net revenue interest in production from the License (after deduction of
royalties, overriding royalties and other burdens on production). The
Assignments are subject to obligations to the Government, the terms of
the Overriding Royalty, the terms of the Third Party Overriding
Royalties and any applicable standard exceptions to title. Farmors
and Farmee agree to use all reasonable efforts to obtain the
Government's approval of the Assignments and agree to make such changes
to the form of the Assignments (provided they do not alter the
substance of the deal between the parties) as may be reasonably
requested by the Government. If the Government should fail to approve
the Assignments within one hundred eighty (180) days after submission
of the application, then Farmee shall furnish to the Government the
technical and/or financial assurances reasonably necessary to obtain
such approval. Nothing in this letter agreement shall be deemed to
impact that certain letter agreement among Farmors, Forcenergy
International Inc. and Canyon (Australia) PTY. Limited dated
September 25, 1996 (the "Forcenergy Agreement") or that certain letter
agreement among Farmors and Hanley OAD IV (Australia),L.L.C. dated
March 17, 1997 (the "Hanley Agreement" and, together with the
Forcenergy Agreement, the "Prior Letter Agreements").
<PAGE>
5. In the event that (a) Farmee does not satisfy all of Farmee's earning
obligations under this letter agreement in accordance with paragraphs
1 and 2 above by paying all amounts payable under such paragraphs on or
before the dates due and (b) either Farmor terminates this letter
agreement under Paragraph 9, the Assigned Interest shall automatically
revert to Farmors, free and clear of any liens or encumbrances
attaching during the period of Farmee's ownership, in the proportions
one-half to Wagner and one-half to Brown. To provide additional
evidence of such reversion, Farmee has executed and delivered to
Farmors, simultaneously with its execution and delivery of this
Agreement, reassignments in substantially the form of Exhibit C
attached hereto (the "Reassignments") transferring, conveying and
assigning to Farmors the Assigned Interest. The Reassignments are
subject to a proportionate share of obligations to the Government, and
to the Third Party Overriding Royalties and to the consent of the
Government and to the consent of the present parties to the Operating
Agreements, and are further subject to the Overriding Royalty. The
Reassignments contain a special warranty of title from Farmee
warranting against all persons claiming by, through or under Farmee,
but not otherwise, title to an undivided five percent (5%) interest
under each License having at least an undivided four and
three-twentieths percent (4.15%) net revenue interest in production
from the License (after deduction of royalties, overriding royalties
and other burdens on production), subject only to encumbrances
burdening the Assigned Interest prior to the date of the Assignment and
any applicable standard exceptions to title. Farmors shall hold the
Reassignments until filed or returned in accordance with this letter
agreement. If and only if Farmee has failed to pay on or before the
date due any amount payable under paragraphs 1 and 2 of this letter
agreement and either Farmor has terminated this letter agreement under
Paragraph 9, Farmors are authorized to insert the effective date of
termination as the effective date in each of the Reassignments, to
insert the resulting percentage ownership of each party in the
appropriate blanks in the Reassignments, and to file the Reassignments
with the Government. Farmee and Farmors shall each use all reasonable
efforts to obtain the Government's approval of the Reassignments and
agree to make such changes to the form of the Reassignments (provided
they do not alter the substance of the deal between the parties) as may
be reasonably requested by the Government. Should Farmee earn the
Assigned Interest under the terms of this Agreement, the Reassignments
shall be void and Farmors shall return the Reassignments to Farmee.
6. Farmee shall bear and pay any stamp duty payable under the South
Australian Stamp Duties Act with respect to this letter agreement and
the Assignments and with respect to any Reassignments. Farmee shall be
responsible for lodging this letter agreement and the Assignments for
stamping and Farmors shall be responsible (subject to receipt of
payment from Farmee) for lodging the Reassignments for stamping. Each
party shall bear and pay its own legal fees and all taxes, fees or
similar costs (except stamp duty) assessed against such party by the
Government or any other governmental authority in connection with the
Assignments, Reassignments and other transactions contemplated by this
letter agreement. Any taxes, fees or similar costs (except stamp duty)
incurred in connection with the Assignments or Reassignments and not
assessed against a particular party shall be paid by Farmee.
7. In each Assignment, each Farmor shall reserve an overriding royalty
interest equal to three-fortieths of one percent (0.075%) of 8/8's of
all oil, gas and other substances that may be produced and saved under
the applicable License, for a total reservation by both Farmors of
three-twentieths of one percent (0.15%) (the "Overriding Royalty").
The Overriding Royalty shall be free and clear of all costs of
exploring, drilling, appraising, developing, and operating each License
but shall bear its proportionate share of all costs of separating,
treating, gathering, compressing, processing, transporting and
marketing such production, and its proportionate share of any liability
for property taxes or taxes determined by gross production. Each
Farmor shall have the option to take its Overriding Royalty for any six
month period in kind by written notice to Farmee at least ten (10) days
prior to the first day of the first month of such period. If a Farmor
does not elect to take its Overriding Royalty in kind, Farmee shall pay
the Farmor, or arrange for the Farmor to be paid, the following amounts
with respect to sales of production from each License attributable to
any month in which the Farmor is not taking in kind:
(a) In the case of sales of oil or gas to
non-affiliates in arm's length transactions, Farmee shall pay
each Farmor for which it is marketing production 1.5% of the
gross proceeds received by Farmee from such sale less 1.5% of
deductible costs incurred by Farmee in connection with the
production sold; or
<PAGE>
(b) In the case of sales of production to an
affiliate or otherwise disposed of in a non-arm's length
transaction, Farmee shall pay to each Farmor for which it is
marketing production 1.5% of the market value of the oil or
gas sold by Farmee in such sale less 1.5% of deductible costs
incurred by Farmee in connection with the production sold.
"Market value," for purposes of this Paragraph, shall mean the
product of the quantity of oil or gas in question and the
highest price actually received in an arm's-length sale to a
non-affiliate by either Farmor during the month in question
or, if there was no such sale, then the prevailing price for
oil or gas of similar quality in Adelaide during the month in
question.
All payments to the Farmor shall be due within thirty (30) business
days after the applicable sales proceeds are received by Farmee.
8. The activities of the parties with respect to the Licenses shall be
subject to the laws and regulations of the Government and any other
government authority having jurisdiction and to the terms of the
Licenses. Operations by the parties on the Licenses shall be conducted
pursuant to the terms of the two Operating Agreements dated
September 25, 1996, one for P.E.L. 53 and one for P.E.L. 59, attached
to this letter agreement as Exhibit D, as amended from time to time
(as so amended, the "Operating Agreements"). Canyon (Australia) PTY.
Limited, ACN 053 781 909, a corporation organized under the laws of
Australia and an affiliate of Farmors ("Canyon"), is the operator under
each Operating Agreement (the "Operator"). Simultaneously with its
execution of this Agreement, Farmee has executed a document evidencing
its intention to be bound by the terms of each Operating Agreement
substantially in the form of Exhibit E. In the event of a conflict
between the provisions of this letter agreement and the provisions of
either Operating Agreement, the provisions of this letter agreement
shall prevail.
9. Either Farmor may terminate this letter agreement by written notice to
Farmee if before earning its interests hereunder, Farmee fails to pay
any of the Drilling Costs or Completion Costs when due and fails to pay
all past due amounts within five business days of written notice of its
default. This remedy shall be in addition to any remedies available to
Farmors under the terms of the Operating Agreements. Following either
Farmor's termination of this letter agreement under this Paragraph 9,
the Reassignments described in Paragraph 5 shall become effective and
Farmee shall have no further rights hereunder. Without limiting the
generality of the preceding sentence, upon any termination under this
Paragraph 9 Farmee shall lose all rights to receive an Assigned
Interest in the Licenses and shall have no right to receive a refund of
any amounts previously paid pursuant to this letter agreement. Farmee
shall execute a release and any other instruments reasonably requested
by either Farmor to evidence the termination of this letter agreement
and reversion of the Assigned Interest. Farmee shall remain liable
for any amounts then owing under Paragraph 2 of this letter agreement
plus interest thereon from the date due until paid at the rate provided
for late payments in the P.E.L. 53 Operating Agreement.
<PAGE>
10. Representations.
a. Each Farmor represents to Farmee that:
i. Such Farmor is a limited partnership duly organized
and validly existing under the laws of the State of
Texas, U.S.A.
ii. Such Farmor has the all necessary power and authority
under its agreement of limited partnership and the
partnership laws of the State of Texas, U.S.A. to
execute, deliver and perform this letter agreement,
the Assignments and the Reassignments.
iii. The execution, delivery and performance of this
letter agreement and the Assignments and the
execution, acceptance and performance of the
Reassignments by such Farmor have been duly
authorized by all necessary partnership action
(including any necessary general partner action) on
the part of such Farmor.
iv. This letter agreement, the Assignments and the
Reassignments have been duly executed and delivered
on behalf of such Farmor.
v. There are no suits, actions or proceedings pending,
or to the best knowledge of such Farmor, threatened,
against such Farmor before any court or governmental
authority, which relate to the Licenses or, if
adversely determined, would prevent the consummation
of the transactions contemplated hereby other than
suits, actions or proceedings relating to operations
prior to the date of this letter agreement for which
Farmee will have no liability.
vi. The execution, delivery and performance of this
letter agreement, the Assignments and the
Reassignments do not and will not contravene or
violate (i) the agreement of limited partnership of
such Farmor, (ii) to the best of such Farmor's
knowledge, any law, statute, rule or regulation of
any governmental authority having jurisdiction over
such Farmor, (iii) any material contract to which
such Farmor is a party or, to the best of such
Farmor's knowledge, by which the Assigned Interest
is bound or (iv) to the best of such Farmor's
knowledge, any writ, order or decision of any court
or governmental authority binding on such Farmor or
the Assigned Interest.
vii. Such Farmor has not directly or indirectly employed
any broker, finder or intermediary to whom Farmee
shall have any liability in connection with the
transactions contemplated hereby.
<PAGE>
viii. Such Farmor has and at the time of delivery of the
Assignments will have title to the Assigned Interest
that is free and clear of all encumbrances asserted
by persons claiming by, through or under such Farmor,
or, to the knowledge of such Farmor, by, through or
under any predecessor in title, other than
obligations to the Government, the Third Party
Overriding Royalties and the Overriding Royalty (the
net cumulative effect of which does not cause the net
revenue interest attributable to the undivided
interest in the Assigned Interest that is assigned
by such Assignor to be less than 2.075%), but subject
to the Operating Agreements, the terms of the
Licenses, and all applicable laws, rules and
regulations.
ix. Except for agreements relating to the Third Party
Overriding Royalties, agreements relating to the
acquisition of geological and geophysical data,
agreements relating to the drilling of the Initial
Wells, the Prior Letter Agreements and related
documents, agreements related to the acquisition of
P.E.L. 53 by Farmors and the agreements contemplated
by this letter agreement, neither the Licenses nor
the Assigned Interest are subject to any agreement or
contract to which such Farmor is a party or, to the
knowledge of such Farmor, by which the Licenses or
Assigned Interest are otherwise bound.
x. No third party has a preferential right to purchase
the Assigned Interest (or any portion thereof) and,
except for necessary consents from the Government and
the parties to the Operating Agreements, no third
party consent is required to effect the assignment of
the Assigned Interest.
xi. No oil or gas drilling or production operations have
been conducted under the Licenses.
b. Farmee represents to each Farmor that:
i. Farmee is a limited liability corporation duly
organized, validly existing, and in good standing
under the laws of the state of California.
ii. Farmee has the necessary corporate power and
authority to execute, deliver and perform this letter
agreement, the Assignments and the Reassignments.
iii. The execution, delivery and performance of this
letter agreement and the Reassignments and the
execution, acceptance and performance of the
Assignments by Farmee have been duly authorized by
all necessary corporate action (including any
necessary shareholder action) on the part of Farmee.
<PAGE>
iv. This letter agreement, the Assignments and the
Reassignments have been duly executed and delivered
on behalf of Farmee.
v. There are no suits, actions or proceedings pending,
or to the best knowledge of Farmee, threatened,
against Farmee before any court or governmental
authority, which, if adversely determined, would
prevent the consummation of the transactions
contemplated hereby.
vi. The execution, delivery and performance of this
letter agreement, the Assignments and the
Reassignments do not and will not contravene or
violate (i) the articles of incorporation or bylaws
of Farmee, (ii) to the best of Farmee's knowledge,
any law, statute, rule or regulation of any
governmental authority having jurisdiction over
Farmee, (iii) any material contract to which Farmee
is a party or (iv) to the best of Farmee's knowledge,
any writ, order or decision of any court or
governmental authority binding on Farmee.
vii. Farmee has not directly or indirectly employed any
broker, finder or intermediary to whom either Farmor
shall have any liability in connection with the
transactions contemplated hereby.
viii. Farmee has the financial resources available to it to
meet its obligations under this letter agreement.
ix. Except for obtaining the approval of the Government
as described in Paragraphs 4 and 5 and obtaining the
consent of the parties to the Operating Agreements,
no approval, authorization, waiver, or order of any
court or governmental authority is or was necessary
for the execution, delivery and performance of this
letter agreement, the Assignments and the
Reassignments by Farmee.
x. Farmee at the time of delivery of the Reassignments
will have title to the Assigned Interest that is free
and clear of all encumbrances asserted by persons
claiming by, through or under Farmee, but subject to
encumbrances burdening the Assigned Interest prior to
the date of the Assignments, the Operating
Agreements, the terms of the Licenses, and all
applicable laws, rules and regulations.
<PAGE>
c. Except as expressly set forth above in this Paragraph 10, or
as expressly contained in the Assignments and Reassignments,
each Farmor, and Farmee, make no, and disclaim any,
representations or warranties, whether express or implied,
as to title or any other matter. WITHOUT LIMITING THE
GENERALITY OF THE PRECEDING SENTENCE, ALL PERSONAL PROPERTY
INCLUDED IN THE ASSIGNED INTEREST IS ASSIGNED AS IS, AND EACH
FARMOR (AND FARMEE) MAKES NO, AND DISCLAIMS AND NEGATES ANY,
REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, AS TO (i)
MERCHANTABILITY, (ii) FITNESS FOR ANY PARTICULAR PURPOSE,
(iii) CONDITION AND (iv) CONFORMITY TO MODELS OR SAMPLES OF
MATERIALS.
11. Farmors have prior to the date hereof and shall from time to time
hereafter provide Farmee with access to or copies of geological,
geophysical, engineering, financial, and other confidential information
in connection with the Licenses. All such information shall be
maintained by Farmee in confidence and shall not be disclosed by Farmee
other than in accordance with the applicable Operating Agreement.
Furthermore, all parties agree to maintain the contents of this letter
agreement in confidence and to not disclose the same to any third party
without the prior written consent of the others except to the extent
disclosure would be allowed if such contents were confidential
information under the Operating Agreements and except for disclosure by
Farmors to the parties to the Prior Letter Agreements as Farmors deem
appropriate to comply with their obligations under those agreements.
If this letter agreement terminates and the Assigned Interest reverts
to Farmors, Farmee shall return all confidential information received
from Farmors, together with all copies and extracts thereof, promptly
upon request by Farmors and shall not thereafter disclose such
confidential information to any person or use such confidential
information for any purpose.
12. Farmee may not assign, pledge, encumber or otherwise transfer all or
any part of its rights in this letter agreement, the Operating
Agreements or the Assigned Interest prior to earning its interest under
this letter agreement without the prior written consent of Farmors.
After any such assignment, both Farmee and the assignee shall be liable
for Farmee's obligations under this letter agreement. Except as set
forth in this Paragraph, the rights of either party to assign, pledge,
encumber or otherwise transfer its interest in the Licenses, or to
withdraw in whole or in part from the Licenses and the Operating
Agreements, shall be governed by the terms of the Licenses and the
Operating Agreements.
13. The representations and warranties in this letter agreement shall
survive the execution and delivery of the Assignments and (a) the
satisfaction of Farmee's obligations under Paragraphs 1 and 2 or (b)
reversion of the Assigned Interest to Farmors, as applicable, for a
period of one year from (a) or (b), as applicable, after which they
shall terminate and be of no further effect.
14. If not terminated sooner pursuant to Paragraph 9, this letter agreement
shall terminate upon the earlier of (a) termination of the Licenses and
any petroleum production license(s) issued in connection therewith or
(b) upon mutual written agreement of Farmors and Farmee to terminate
the same.
<PAGE>
15. This letter agreement shall be construed in accordance with, and the
rights and obligations of the parties governed by, the laws of the
State of Texas, U.S.A. Each party consents to be subject to the
jurisdiction of the courts of Texas for the limited purpose of the
enforcement of this letter agreement.
16. It is not the intention of the parties to create, nor shall this letter
agreement be construed as creating, a mining or other partnership or
other association or otherwise render the parties liable as partners.
The liability of the parties hereto shall be several and not joint or
collective. Nothing in this letter agreement or the Operating
Agreements shall preclude any party, or its affiliates, from engaging
in any business or purchasing any property of any sort whatsoever,
whether or not in competition with operations under this letter
agreement or the Operating Agreements, without consulting the other
parties or inviting or allowing the other parties to participate
therein, except for the restrictions on use of confidential information
by Farmee contained in Paragraph 11.
17. Unless otherwise specifically provided, all notices under this letter
agreement shall be given in writing and in the English language and
shall be delivered in accordance with the notices article in the P.E.L.
53 Operating Agreement, as supplemented by the Accession Agreement
attached to this letter agreement as Exhibit E.
18. This letter agreement (including the Exhibits) constitutes the entire
understanding of the parties with respect to the subject matter hereof
and supersedes any prior agreements, whether written or oral. This
letter agreement may be amended only in a writing signed by all
parties.
19. This letter agreement shall be binding upon and inure to the benefit of
the parties and their respective permitted successors and assigns.
20. Each party agrees to execute and deliver such further documents and
take such further actions as the other may reasonably request to
consummate and assure the effectiveness of the transactions
contemplated by this letter agreement.
21. As provided in each Operating Agreement, if Canyon ceases to serve as
Operator, whether through resignation or removal, and another affiliate
of either Farmor is not appointed as successor Operator, then the party
holding the largest participating interest in each Operating Agreement
who is not affiliated with Farmors shall become Operator under that
Operating Agreement without the need for a vote. In the event two
parties are tied for the largest non-affiliated participating interest,
the successor Operator shall be chosen as provided in each Operating
Agreement.
<PAGE>
22. If between the date of this letter agreement and the date of spudding
the first Initial Well, either Farmor enters into any agreement(s)
transferring an interest in the Licenses, or either of them, to a third
party or allowing a third party to earn an interest in the Licenses, or
either of them, then Farmors shall offer to Farmee the right to acquire
or earn the Assigned Interest on the same terms and conditions as
agreed with said third party(ies), pro rated based on the relative
size of the third party interest and the Assigned Interest, and shall
provide Farmee with a copy of any such agreement promptly after it has
been entered into. Farmee shall then have ten (10) days from receipt
of such notice and a copy of the third party agreement, or until the
date of spudding of the first Initial Well, whichever is earlier, in
which to give Farmors written notice of its election to acquire or
earn the Assigned Interest pursuant to the financial terms of such
third party agreement, as so prorated, in place of the provisions of
Paragraphs 1, 2, 3, 4, 5 and 7 of this letter agreement. Should Farmee
fail to give such written notice within said time period, such failure
shall be conclusively deemed to be an election by Farmee not to acquire
or earn the Assigned Interest based on the financial terms of such
third party agreement and to continue to earn the Assigned Interest
pursuant to this letter agreement. Should Farmee elect to acquire or
earn the Assigned Interest based on the financial terms of such third
party agreement, then Paragraphs 1, 2, 3, 4, 5 and 7 of this letter
agreement shall be replaced or modified as necessary to reflect the
financial terms of such third party agreement, as prorated, and except
as so modified, this letter agreement shall remain in force and effect.
If the third party agreement requires the third party or its affiliates
to provide services in connection with the Licenses in addition to or
in lieu of cash, Farmee shall have the right to acquire or earn the
Assigned Interest on the same terms and conditions, as described above,
by providing the same services itself, or through an affiliate, if
Farmee or its affiliate are qualified to provide such services.
Farmee may not delegate the performance of such services to a third
party, and if neither Farmee nor its affiliates are qualified to
provide such services, the rights granted in this Paragraph 22 shall
not apply.
23. Subject to Section 42 of the Petroleum Act, 1940, this letter agreement
shall have no effect until approved by the Minister of Mines and Energy
of South Australia. In addition, Farmors and Farmee agree that to the
extent required by applicable law, they shall provide notice of this
letter agreement to the Australian Foreign Investment Review Board.
24. This letter agreement may be executed in any number of counterparts,
and by different parties in separate counterparts, all of which shall
be considered to be one agreement.
<PAGE>
If the foregoing accurately sets forth your understanding,
please execute two originals of this letter agreement in the space provided
below, retain one fully executed original for your files, and return the other
to the undersigned. This letter agreement will expire unless a signed copy is
received by the undersigned on or before 5:00 p.m. on February ____, 1998.
Very truly yours,
WAGNER (AUSTRALIA), LTD.
By: Elkhorn Oil & Gas, LLC, General Partner
By:
Name:
Title:
BROWN (AUSTRALIA), LTD.
By: Elkhorn Oil & Gas, LLC, General Partner
By:
Name:
Title:
AGREED TO AND ACCEPTED THIS
____ DAY OF February, 1998
BETAUSTRALIA, LLC
By: Beta Oil & Gas, Inc., Managing Member
By: /s/
Steve Antry, President
EXHIBIT A - E
to
STANSBURY BASIN (AUSTRALIA) AGREEMENT, DATED FEBRUARY 1998
NOT INCLUDED PURSUANT TO RULE 409 OF REGULATION C
AREA OF MUTUAL INTEREST AGREEMENT
This Area of Mutual Interest Agreement ("Agreement"), dated October 27,
1997 ("Effective Date"), is entered into by and between Jim Frimodig, an
individual ("Frimodig") and Beta Oil & Gas, Inc., a Nevada corporation ("Beta"),
concerning the parties' joint participation in acquiring and operating oil and
gas interests covering the lands hereinafter described.
RECITALS
A. WHEREAS, Frimodig is a petroleum engineer who is experienced in
identifying geological properties as viable candidates for oil and gas
exploration and/or development, which properties cover lands in areas within the
State of California generally known as the Sacramento Basin and the San Joaquin
Basin (such geological properties sometimes referred to herein as "Prospects");
and
B. WHEREAS, Frimodig intends to identify Prospects for the purpose of
acquiring oil and gas interests thereon, and to caused to be drilled thereon one
or more exploratory and/or development wells for oil and gas; and
C. WHEREAS, Frimodig may identify other geological properties as viable
candidates for oil and gas exploration and/or development, which properties are
outside the areas of mutual interest specifically set forth herein ("Outside
Prospects"), and/or he may identify other prospects which are inside or outside
such areas of mutual interest, and which are owned by others but available for
purchase ("Acquisitions"); and
D. WHEREAS, Beta is a Nevada corporation in good standing engaged in
the business of exploration for and the acquisition and development of oil and
gas properties, and desires the opportunity to participate in any of the
Prospects, Outside Prospects, and Acquisitions identified and/or acquired by
Frimodig; and
E. WHEREAS, Frimodig and Beta desire to enter into this Agreement (1)
to identify certain areas of mutual interest concerning the Prospects and to
acquire oil and gas interests thereon, (2) to identify and acquire oil and gas
interests in Outside Prospects, and (3) to identify Acquisitions, all with the
goal of providing the parties the opportunity to jointly participate therein as
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants, conditions
and restrictions hereinafter set forth, and the promises to be kept and
performed by the parties hereto, it is agreed as follows:
I. AREAS OF MUTUAL INTEREST. Two (2) areas of mutual interest are hereby
established under this Agreement, as follows:
A. Sacramento Basin Forbes 3-D Project Area. The Sacramento Basin
Forbes 3-D Project Area ("Sacramento AMI") is hereby established covering the
following described lands:
Township 21 North, Range 2 West: All
Township 21 North, Range 3 West: All
Township 21 North, Range 4 West: East Half
Township 22 North, Range 2 West: All
Township 22 North, Range 3 West: All
Township 22 North, Range 4 West: East Half
Township 23 North, Range 2 West: All
Township 23 North, Range 3 West: All
Township 23 North, Range 4 West: East Half
all in the Counties of Butte, Glenn and Tehama, State of California, MDB&M, and
as depicted on the map attached hereto as Exhibit "A" and by this reference made
a part hereof.
B. San Joaquin Basin Pliocene 2-D Project Area. The San Joaquin Basin
Pliocene 2-D Project Area ("San Joaquin AMI") is hereby established covering the
following described lands:
Township 26 South, Range 22 East: East Half
Township 26 South, Range 23 East: All
Township 26 South, Range 24 East: All
Township 27 South, Range 22 East: East Half
Township 27 South, Range 23 East: All
Township 27 South, Range 24 East: All
Township 28 South, Range 22 East: East Half
Township 28 South, Range 23 East: All
Township 28 South, Range 24 East: All
all in Counties of Kern and Kings, State of California, MDB&M, and as depicted
on the map attached hereto as Exhibit "B" and by this reference made a part
hereof.
C. Sacramento AMI.
1. Identification of Prospects; Payment of Costs. Frimodig
will identify Prospects within the Sacramento AMI which he, in his sole
discretion, determines to exhibit reasonable seismic bright spot and amplitude
verses offset (AVO) characteristics. Beta shall pay 100% of the costs of: (a)
approximately 10 square miles of 3-D seismic shooting and proceesing, (b)
obtaining oil and gas interests and/or seismic options within such area, and (c)
drilling and completing three wells thereon at locations selected by Frimodig.
Upon completion of the 3-D seismic shooting, the size of the Sacramento AMI will
be redefined to encompass only the area covered by the seismic shooting, or the
area covered by oil and gas interests, or the area covered by seismic options.
The phrase "oil and gas interest" and "oil and gas interests" as used in this
Agreement shall include, without limitation, mineral, royalty or leasehold
interests, or an option to acquire such interests.
2. Acquisition of Oil and Gas Interests; Assignment to Beta.
The terms of any acquisition of oil and gas interests shall be at the sole
discretion of Frimodig. Provided that the following principal terms are not
exceeded:
a. For Leases - 1/5 Royalty or less, 3 year term or
greater and $30/acre rent or less.
b. For Seismic Options - 1 year option term or
greater, $10/acre option payment or less and lease
terms as set forth in I.C.2a.
It is understood that all oil and gas interests shall be acquired in the name of
Frimodig or his duly authorized agent. Within thirty (30) days after acquiring
any oil and gas interests, Frimodig shall deliver to Beta a duly executed and
recordable assignment of an undivided 75% interest therein, reserving, only for
the benefit of independent geologist/geophysicist compensation, an overriding
royalty interest not to exceed 2% of 8/8ths. Any such assignment shall be
without warranty of title, express or implied, except as relates to the acts of
Frimodig.
3. Prospect Fee. In addition to other costs paid by Beta
hereunder, Beta shall pay Frimodig a prospect fee of $30,000.00 for each of the
first three (3) wells drilled within the Sacramento AMI, each such payment to be
due upon the spudding of each such well.
4. Operating Agreement. Concurrent with the initial assignment
to Beta provided above, the parties hereto shall be deemed to have entered into
an Operating Agreement in substantially the same form as the Operating Agreement
attached hereto as Exhibit "C" and by this reference made a part hereof. Except
as otherwise expressly provided in this Agreement, the Operating Agreement shall
govern all operations on any Prospect within the Sacramento AMI. The Operating
Agreement shall designate Frimodig, or his duly authorized agent, as operator.
5. Cost of First Three Wells. Notwithstanding anything to the
contrary contained herein or in the Operating Agreement, Beta shall be
responsible for 100% of the costs of drilling and completing (through the tanks,
if completed as a producer, and plugged and abandoned, if a dry hole) the first
three (3) wells within the Sacramento AMI (regardless of whether such wells, or
any of them, are exploratory or development in nature). Thereafter, all
operations on said three (3) wells, if any, and all other operations within the
Sacramento AMI shall be governed by the Operating Agreement. It is understood
and agreed that Beta shall not be entitled to any form of reimbursement with
respect to its payment of a disproportionate share (i.e., 100% instead of 75%)
of the costs associated with the first three (3) wells.
6. Other Wells Within the Sacramento AMI. As to each well,
other than the first 3 wells, within the Sacramento AMI identified by Frimodig,
Beta shall pay Frimodig a prospect fee $10,000.00, each such payment to be due
upon the spudding of each such well. All operations on each such Prospect, and
the parties' respective shares thereof, shall be governed by the Operating
Agreement.
D. San Joaquin AMI.
1. Identification of Prospects; Payment of Costs. Frimodig
will identify Prospects within the San Joaquin AMI which he, in his sole
discretion, determines to exhibit reasonable seismic bright spot and AVO
characteristics. Beta shall pay 100% of the costs of: (a) approximately 50 miles
of 2-D seismic data and proceesing, (b) obtaining and renewing oil and gas
interests covering approximately 320 acres, and (c) drilling and completing two
wells thereon at locations selected by Frimodig.
2. Acquisition of Oil and Gas Interests; Assignment to Beta.
The terms of any acquisition of oil and gas interests shall be at the sole
discretion of Frimodig provided that the following principal terms are not
exceeded:
a. For Leases - 1/5 Royalty or less, 3 year term or
greater and $30/acre rent or less.
b. For Seismic Options - 1 year option term or
greater, $10/acre option payment or less and lease
terms as set forth in I.D.2a.
It is understood that all oil and gas interests shall be acquired in the name
of Frimodig or his duly authorized agent. Within thirty (30) days after
acquiring any oil and gas interests, Frimodig shall deliver to Beta a duly
executed and recordable assignment of an undivided 75% interest therein,
reserving, only for the benefit of independent geologist/geophysicist
compensation, an overriding royalty interest not to exceed 2.5% of 8/8ths. Any
such assignment shall be without warranty of title, express or implied, except
as relates to the acts of Frimodig.
3. Prospect Fee. In addition to other costs paid by Beta
hereunder, Beta shall pay Frimodig a prospect fee of $25,000.00 for each of the
first two (2) wells drilled within the San Joaquin AMI, each such payment to e
due upon the spudding of each such well.
4. Operating Agreement. Concurrent with the initial assignment
to Beta provided above, the parties hereto shall be deemed to have entered into
the Operating Agreement attached hereto as Exhibit "C." Except as expressly
provided in this Agreement, the Operating Agreement shall govern all operations
on any Prospect within the San Joaquin AMI. The Operating Agreement shall
designate Frimodig, or his duly authorized agent, as operator.
5. Cost of First Two Wells. Notwithstanding anything to the
contrary contained herein or in the Operating Agreement, Beta shall be
responsible for 100% of the costs of drilling and completing (through to the
tanks, if completed as a producer, and plugged and abandoned, if a dry hold) the
first two (2) wells within the San Joaquin AMI (regardless of whether such
wells, or any of them, are exploratory or development in nature). Thereafter,
all operations on said two (2) wells, if any, shall be governed by the Operating
Agreement. It is understood and agreed that Beta shall not be entitled to any
form of reimbursement with respect to its payment of a disproportionate share
(i.e., 100% instead of 75%) of the costs and expenses associated with the first
two (2) wells.
6. Other Wells Within the San Joaquin AMI. As to each
Prospect, other than the first 2 wells, within the San Joaquin AMI identified by
Frimodig, Beta shall pay Frimodig a prospect fee of $10,000.00, each such
payment to be due upon the spudding of each such well. All operations on each
such Prospect, and the parties' respective shares thereof, shall be governed by
the Operating Agreement.
II. BETA'S INITIAL PAYMENT
Concurrent with its execution of this Agreement, Beta shall pay
Frimodig the sum of $175,000.00, as an advanced payment, to be used by Frimodig
toward initial coses associated with the purchase of seismic shooting and
processing, purchasing seismic data and processing, and obtaining oil and gas
interests and/or seismic options covering lands within the Sacramento AMI or the
San Joaquin AMI under the terms of this Agreement. The initial payment also
includes an advance of prospect fees for one Sacramento AMI well ($30,000) and
one San Joaquin AMI well ($25,000), for a total of $55,000 to be used at
Frimodig's discretion. An estimated schedule of costs to casing point for the
first five (5) wells in both AMI's, including the initial payment, is shown in
Exhibit D. Beta understands that its obligation to pay 100% of the costs of such
oil and gas interests, seismic and drilling as set forth in this Agreement may
be more or less than the amount referenced in Exhibit D. Beta also agrees that
the time estimated for such acquisitions and drilling as forth in this Agreement
may be shorter or longer than referenced in Exhibit D. Beta agrees to pay within
15 days of being cash called by Frimodig, as estimated in Exhibit D, any and all
other costs required of it hereunder, or under the Operating Agreement, failing
which shall be deemed a material breach.
However, notwithstanding anything to the contrary contained in the
Agreement, in the event a cash call for oil and gas interests, seismic or
drilling will cause costs to exceed by more than 25% the estmiated amount seet
forth in Exhibit D, Beta shall have the election to either (1) terminate its
rights and obligations under this Agreement applicable to the particular cash
call, or (2) approve such cash call. Beta shall notify Frimodig in writing
within three (3) days after receiving the cash call whether it elects to (1)
terminate or (2) approve. Beta's failure to timely notify Frimodig of its
election shall be deemed an election to a approve the cash call. If Beta elects
to terminate, Beta shall, continue to be responsible for payment of all costs
properly attributable to it which were incurred prior to the date of its
election.
III. OUTSIDE PROSPECTS, & PRODUCING PROPERTY ACQUISITIONS
A. Identification of Outside Prospects; Beta's Option to Participate.
Frimodig may, but is not obligated to, identify one or more Outside Prospects
which he, in his sole discretion, determines to be viable candidates for
acquiring oil and gas interests thereon for purposes of drilling exploratory
and/or development wells. As to each Outside Prospect identified by Frimodig,
Beta shall have the option to participate therein for a minimum of 50% working
interest. If Beta elects to participate, the parties will enter into another AMI
agreement similar to this Agreement, but specific to the area covered by the
Outside Prospect, which includes, without limitation, the following general
terms:
1. As to Beta's participation, it shall pay Frimodig a
non-refundable prospect generation fee of $15,000.00 of 8/8ths for each well
drilled.
2. As to Beta's participation, it shall provide Frimodig with
a 10% of 8/8th carried working interest on all costs to casing point for each
well drilled.
3. Beta's right to participate in any Outside Prospects shall
terminate at the end of the year 2000.
B. Identification of Producing Property Acquisitions; Beta's Option to
Participate. Frimodig may, but is not obligated to, identify one or more
Producing Party Acquisitions which he, in his sole discretion, determines to be
viable candidates for acquiring oil and gas interests thereon for purposes of
particating in the operation of producing wells. As to each Producing Party
Acquisition identified by Frimodig, Beta shall have the option to participate
therein for a minimum of 50% working interest. If Beta elects to participate,
the parties will enter into another AMI agreement similar to this Agreement, but
specific to the area covered by the Producing Party Acquisition, which includes,
without limitation, the following general terms:
1. Frimodig shall not be entitled to any finder's fee.
2. As to Beta's particpation, it shall provide Frimodig with a
2.5% of 8/8th carried working interest in all acquired properties.
3. Beta's right to participate in any Producing Party
Acquisition shall terminate at the end of the year 2000.
IV. RENEWALS AND EXTENSIONS
As to each Prospect within the Sacramento AMI or the San Joaquin AMI,
it is understood and agreed that in the event any oil and gas interest covered
hereby expires and a new oil and gas interest (including, without limitation,
new lease, top lease, renewal, extension or other instrument affecting the
acreage covered thereby, or a portion thereof), is acquired by either party
hereto, or by any party representing or acting on behalf of such party (the
"acquiring party"), within one (1) year from the latest expiration date of any
oil and gas interest thereon, such new oil and gas interest shall become subject
to this Agreement to the same effect as though it originally covered such
prospect if, and only if, the other party (the "non-acquiring party") elects to
participate in such acquisition.
In that regard, the acquiring party shall immediately notify the
non-acquiring party in writing of such acquisition, including all relevant
details relating thereto. The non-acquiring party shall have thirty (30) days
thereafter to notify the acquiring party in writing of its election to
participate in such acquisition. If the non-acquiring party elects to so
participate, it shall reimburse the acquiring party for the non-acquiring
party's percentage interest of the acquisition costs. Promptly after receipt of
such payment, the acquiring party shall deliver to the non-acquiring party a
duly executed and recordable assignment of the non-acquiring party's percentage
interest in and to the new oil and gas interest. Such assignment shall be
without warranty of title, express or implied, except that the acquiring party
shall warrant such new oil and gas interest is free and clear of any and all
liens and encumbrances by, through, and under the acquiring party, but not
otherwise. Failure to timely elect to participate in such acquisition shall be
deemed an election not to participate. The phrase "non-acquiring party's
percentage interest" as used in this paragraph means such party's interest in
the prospect in which the new oil and gas interest was acquired.
The parties hereto specifically agree that the provisions of this
Article III shall remain in effect notwithstanding a termination of the rights
and obligations provided for in this Agreement.
V. BETA'S CASH REQUIREMENTS AND LIQUIDATED DAMAGES
A. Beta's Cash Requirements. Beta understands that Frimodig's efforts
to identify prospects and acquire oil and gas interests thereon will require the
purchase of seismic, seismic processing and/or geological data relating thereto.
In that regard, Beta shall at all times during the terms of this Agreement and
as estimated by Exhibit D, promptly advance funds when cash called within 15
days and/or pay accounts within 15 days of being invoiced by Frimodig. Beta's
failure to perform either of these requirments shall be deemed a material breach
of this Agreement, the result of which shall be, at Frimodig's election, Beta's
forfeiture of any and all further rights under this Agreement, and at any time
before the first five (5) wells have been drilled, payment of the amount set
forth in paragraph V.B.
B. Liquidated Damages. If Beta fails to advance funds when cash called
by Frimodig, as estimated in Exhibit D, within 15 days and/or pay accounts
within 15 days of being invoiced by Frimodig, then Frimodig, at his option, may
terminate this Agreement and all rights and obligations hereunder by giving
written notice thereof to Beta. Thereupon, Frimodig shall be relieved of any
obligation to identify and/or acquire oil and gas interests on any prospect, and
at any time before the first three wells in the Sacramento AMI and two wells in
the San Joaquin AMI have been drilled, Frimodig shall be entitled to immediate
payment from Beta of the sum of $100,000.00 as liquidated damages, and each
party hereto shall return to the other party any and all documents rightfully
belonging such other party. Frimodig shall not be entitled to liquidated damages
if after 18 months of the execution of this Agreement, he fails to identify the
five (5) prospects as set forth in paragraph I.C.1 and I.D.1.
Frimodig and Beta agree that it would be extremely impractical and
difficult to estimate the amount of damages Frimodig might suffer in the event
of Beta's default hereunder. The parties hereby agree that the delivery of the
above-noted liquidated damages to Frimodig in the event of Beta's default
represents a fair and reasonable estimate of said damages.
Frimodig's Initials:__________ Beta's Initials:__________
VI. OPERATING AGREEMENT
A. As to each Prospect with the Sacramento AMI and the San Joaquin AMI,
the parties agree that the Operating Agreement attached hereto as Exhibit "C"
and by this reference made a part hereof shall automatically become effective
and, except as expressly provided in this Agreement, shall govern all operations
as to each such Prospect. Frimodig, or his designated agent, shall act as
operator.
B. Notwithstanding anything to the contrary contained herein or in the
Operating Agreement, it is understood and agreed that, as to the first five (5)
wells drilled hereunder (i.e., three (3) wells within the Sacramento AMI and two
(2) wells within the San Joaquin AMI, as set forth above), Beta shall pay 100%
of all costs associated with drilling and completing such wells through the
tanks (if completed as a producer of oil or gas), or plugged and abandoned (if a
dry hole). Thereafter, all operations on said five (5) wells, if any, shall be
governed by the Operating Agreement.
VII. ASSIGNABILITY
It is understood and agreed that this Agreement and any assignment or
sublease which either party hereto may become entitled to under the terms hereof
shall not be assigned or subleased, in whole or in part, without the other
party's prior written consent, and the granting of any such consent by either
party shall not have the effect of waiving this limitation on any future or
additional assignments or subletting thereof. Every such assignment or sublease
made without the appropriate party's prior written consent shall be void. A
party's prior written consent to any assignment hereunder shall not be
unreasonably withheld.
VIII. TITLE
Irrespective of any provision contained herein to the contrary, it is
specifically understood and agreed that Frimodig makes no warranty whatsoever
regarding the title to any oil and gas interest acquired hereunder.
Specifically, Frimodig does not warrant the title to nor represent that the oil
and gas interests cover a full interest in the lands covered thereby. It is
agreed that Frimodig shall not be required to furnish any preliminary title
reports, abstracts of title, or similar documentation regarding title to any oil
and gas interests acquired hereunder, and Frimodig shall have no obligation to
purchase any policies of title insurance or title opinions, nor shall Frimodig
be obligated to do any curative work in connection with the title to any of the
oil and gas interests, except as specifically required for the drillsite leases
as set forth in Article IV of the Operating Agreement, attached as Exhibit C.
Any assignment from Frimodig will be without warranty, either express or
implied, except as to Frimodig's own acts. Furthermore, should any oil and gas
interest require written consent to assign, Frimodig's assignment to Beta shall
be subject to Frimodig's ability to secure such consent, and Frimodig shall not
be liable to Beta for its inability to obtain such consent in any manner.
IX. INSURANCE
Frimodif shall carry the insurance provided for in the Operating
Agreement with respect to all operations conducted by Frimodig wihtin the AMIs,
including operations conducted and to be conducted at the sole cost, risk and
expense of Beta. Such insurance shall be charged to the parties and carried for
the mutual benefit and protection of both Frimodig and Beta.
X. DISCLOSURES
Beta agrees to notify Frimodig five days in advance of any type of
disclosure to any third party regarding any of the terms of this Agreement or
any details relating to the Sacramento AMI or San Joaquin AMI.
XI. NOTICES
Any notice, request, instruction or other document to be delivered
hereunder by any party hereto to any other party shall be in writing and
delivered personally, via telecopy (with receipt confirmed) or by registered or
certified mail, postage prepaid:
If to Frimodig: Jim Frimodig
P. O. Box 99243
San Diego, CA 92167
Phone: (619) 539-6901
Fax: (619) 488-7055
If to Beta: Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Phone: (714) 752-5212
Fax: (714) 752-5757
or at such other address for a party as shall be specified by like notice. Any
notice that is delivered personally in the manner provided herein shall be
deemed to have been duly given to the party to whom it is directed upon actual
receipt by such party (or its agents for notices hereunder). Any notice that is
addressed and mailed in the manner herein provided shall be conclusively
presumed to have been duly given to the party to which it is addressed at the
close of business, local time of the recipient, on the third day after the day
it is so placed in the mail. Any notice that is sent by telecopy shall be deemed
to have been duly given to the party to which it is addressed upon telephonic
confirmation of the same as provided herein. A copy of any notice delivered by
telecopy shall promptly be mailed in the manner herein provided to the party to
which such notice was given.
XII. REPRESENTATIONS AND WARRANTIES OF THE PARTIES
A. Except as may otherwise be set forth in this Agreement, Frimodig
hereby represents and warrants to and covenants with Beta as follows:
1. Effect of Agreement; Consent. The execution and delivery of
this Agreement by Frimodig and the consummation by Frimodig of the transactions
contemplated hereby do not require the consent, approval, clearance, waiver,
order or authorization of any other person.
2. No Misleading Statements. This Agreement, and the
information referred to herein, when taken as a whole, do not include any untrue
statement of a material fact and do not omit any material fact necessary to make
the statements contained herein or therein not misleading.
3. Execution and Delivery. Frimodig has full power and
authority to execute and deliver this Agreement and to perform his obligations
hereunder. This Agreement has been duly executed and delivered by Frimodig and
constitutes a legal, valid and binding obligation of Frimodig, enforceable
against him in accordance with its terms, except as such enforceability may be
limited by or subject to (a) any bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to creditor's rights generally and (b)
general principles or equity (regardless of whether such enforceability is
considered in a proceeding in equity or at law).
B. Except as may otherwise be set forth in this Agreement, Beta hereby
represents and warrants to and covenants with Frimodig as follows:
1. Corporate Organization. Beta is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Nevada and has all requisite corporate power and authority to carry on its
business in the State of California as it is now being conducted, and to execute
and deliver this Agreement and to consummate the transactions contemplated
hereby.
2. No Misleading Statements. This Agreement, and the
information referred to herein, when taken as a whole, do not include any untrue
statement of a material fact and do not omit any material fact necessary to make
the statements contained herein or therein not misleading.
3. Due Authorization, Execution and Delivery; Effect of
Agreement. The execution and delivery by Beta of this Agreement and the
consummation by Beta of the transactions contemplated hereby have been duly
authorized by all necessary corporate action on the part of Beta. This Agreement
has been duly and validly executed and delivered by Beta and constitutes the
legal, valid and binding obligation of Beta, enforceable against it in
accordance with its terms, except as such enforceability may be limited by or
subject to (a) any bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to creditor's rights generally and (b) general principles
or equity (regardless of whether such enforceability is considered in a
proceeding in equity or at law).
4. Consents. No consent, approval or authorization of, or
exemption by, or filing with, any person or entity is required in connection
with the execution, delivery or performance by Beta of this Agreement or the
taking of any other action contemplated hereby.
XII. GENERAL PROVISIONS
A. Agreement Subject to Laws. This Agreement is subject to all valid
and applicable Federal, State and local laws, rules, orders and regulations and
all operations hereunder shall be conducted in conformity therewith.
B. Successor and Assigns. This Agreement will inure to the benefit of
and be binding upon the parties hereto, and their respective successors and
permitted assigns. Neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any parties hereto without the prior
written consent of the other parties hereto. Any assignment without such consent
being first obtained shall be void.
C. Expenses. Except as may otherwise be provided in this Agreement or
the Operating Agreement, each party hereto shall be responsible for the payment
of the fees and expenses of their respective counsel, accountants and other
experts in the negotiation and preparation of this Agreement.
D. Modification and Waiver. Any of the terms or conditions of this
Agreement may be waived in writing at any time by the party which is entitled to
the benefits thereof. No waiver of any of the provisions of this Agreement shall
be deemed to or shall constitute a waiver of any other provisions hereof
(whether or not similar).
E. Further Assurances. The parties agree to take all such further
actions and execute, acknowledge and deliver all such further documents that are
necessary or useful in carrying out the purpose and intent of this Agreement, to
the extent permitted by applicable law.
F. Invalidity. Except as may otherwise be provided, if any term or
other provision of this Agreement is invalid, illegal or incapable of being
enforced by any rule of law, or public policy, all other conditions and
provisions of this Agreement shall nevertheless remain in full force and effect.
Upon such determination that any term or other provision is invalid, illegal or
incapable of being enforced, the parties hereto shall negotiate in good faith to
modify this Agreement so as to effect the original intent of the parties as
closely as possible in an acceptable manner to the end that the transactions
contemplated hereby are fulfilled to the extent possible.
G. Attorneys' Fees. In the event of any claim, dispute or controversy
arising out of or relating to this Agreement, the prevailing party in such
action or proceeding shall be entitled to recover its reasonable attorneys' fees
and costs. The court shall determine who is the "prevailing party," whether or
not the dispute or controversy proceeds to final judgment.
H. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall for all purposes be deemed to be an original
and all of which shall constitute the same instrument.
I. Headings. Headings used in this Agreement are included for
convenience only and shall not be deemed to constitute part of this Agreement
or to affect its construction.
J. Gender and Number. Masculine, feminine, or neuter gender
and the singular and the plural number, shall each be considered to include
the other whenever the context so requires.
K. Governing Law; Interpretation. This Agreement shall be construed in
accordance with and governed by the laws of the State of California (regardless
of the laws that might otherwise govern under applicable California principles
of conflict of laws) as to all matters, including, but not limited to, matters
of validity, construction, effect, performance and remedies.
L. Jurisdiction. Any legal action or proceeding with respect to this
Agreement may be brought in the federal or state courts for the County of Kern,
in the State of California, and by execution and delivery of this Agreement, the
parties hereto hereby accept the jurisdiction of the aforesaid courts.
M. No Warranties. No representation, warranty, or recommendation is
made by either party, their respective agents, employees, or attorneys regarding
the legal sufficiency, legal effect, or tax consequences of this Agreement or
the transaction, and each signatory is advised to submit this Agreement to his
respective attorney before signing it.
N. Survival. The warranties, representations and indemnities contained
in this Agreement, and in any other instrument delivered pursuant hereto, shall
survive the date hereof and shall remain in full force and effect thereafter.
O. Time of Essence. Time is of the essence in this Agreement and a
failure of this condition shall be a material breach hereof.
P. Conflict. In the event of any conflict between the terms of this
Agreement and the terms of the Operating Agreement attached hereto, the terms of
this Agreement shall prevail.
Q. Entire Agreement. This Agreement constitutes the sole understanding
of the parties hereto with respect to the matters provided for herein and
supersedes any previous agreements and understandings between the parties with
respect to the subject matter hereof. No amendment, modification or alteration
of this Agreement shall be binding unless in writing and duly executed by all
parties hereto.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the Effective Date, and each party acknowledges receipt of a
fully executed copy of this Agreement.
BETA OIL & GAS, INC.,
a Nevada corporation
/s/ By /s/
Jim Frimodig Steve Antry, President
<PAGE>
EXHIBIT A
to
AGREEMENT WITH JIM FRIMODIG (NORCAL), DATED OCTOBER 27, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
EXHIBIT B
to
AGREEMENT WITH JIM FRIMODIG (NORCAL), DATED OCTOBER 27, 1997
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
<PAGE>
EXHIBIT "C"
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
[STAMP]
OPERATING AGREEMENT
DATED
October 27, 1997,
----------------
OPERATOR Jim Frimodig
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CONTRACT AREA Sacremento AMI, San Joaquin AMI
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COUNTY OF Various STATE OF California
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COPYRIGHT 1989 -- ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS 76137, APPROVED FORM.
A.A.P.L. NO. 610 - 1989
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
- ------- ----- ----
<S> <C> <C>
I. DEFINITIONS................................................................. 1
II. EXHIBITS.................................................................... 1
III. INTERESTS OF PARTIES........................................................ 2
A. OIL AND GAS INTERESTS:................................................... 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:............................ 2
C. SUBSEQUENTLY CREATED INTERESTS:.......................................... 2
IV. TITLES...................................................................... 2
A. TITLE EXAMINATION:....................................................... 2
B. LOSS OR FAILURE OF TITLE:................................................ 3
1. Failure of Title...................................................... 3
2. Loss by Non-Payment or Erroneous Payment of Amount Due................ 3
3. Other Losses.......................................................... 3
4. Curing Title.......................................................... 3
V. OPERATOR.................................................................... 4
A. DESIGNATION AND RESPONSIBILITY OF OPERATOR:.............................. 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:........... 4
1. Resignation or Removal of Operator.................................... 4
2. Selection of Successor Operator....................................... 4
3. Effect of Bankruptcy.................................................. 4
C. EMPLOYEES AND CONTRACTORS:............................................... 4
D. RIGHTS AND DUTIES OF OPERATOR:........................................... 4
1. Competitive Rates and use of Affiliates............................... 4
2. Discharge of Joint Account Obligations................................ 4
3. Protection from Liens................................................. 4
4. Custody of Funds...................................................... 5
5. Access to Contract Area and Records................................... 5
6. Filing and Furnishing Government Reports.............................. 5
7. Drilling and Testing Operations....................................... 5
8. Cost Estimates........................................................ 5
9. Insurance............................................................. 5
VI. DRILLING AND DEVELOPMENT.................................................... 5
A. INITIAL WELL:............................................................ 5
B. SUBSEQUENT OPERATIONS:................................................... 5
1. Proposed Operations................................................... 5
2. Operations by Less Than All Parties................................... 6
3. Stand-By Costs........................................................ 7
4. Deepening............................................................. 8
5. Sidetracking.......................................................... 8
6. Order of Preference of Operations..................................... 8
7. Conformity to Spacing Pattern......................................... 9
8. Paying Wells.......................................................... 9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:........................ 9
1. Completion............................................................ 9
2. Rework, Recomplete or Plug Back....................................... 9
D. OTHER OPERATIONS:........................................................ 9
E. ABANDONMENT OF WELLS:.................................................... 9
1. Abandonment of Dry Holes.............................................. 9
2. Abandonment of Wells That Have Produced............................... 10
3. Abandonment of Non-Consent Operations................................. 10
F. TERMINATION OF OPERATIONS:............................................... 10
G. TAKING PRODUCTION IN KIND................................................ 10
(Option 1) Gas Balancing Agreement....................................... 10
(Option 2) No Gas Balancing Agreement.................................... 11
VII. EXPENDITURES AND LIABILITY OF PARTIES....................................... 11
A. LIABILITY OF PARTIES:.................................................... 11
B. LIENS AND SECURITY INTERESTS:............................................ 11
C. ADVANCES:................................................................ 12
D. DEFAULTS AND REMEDIES:................................................... 12
1. Suspension of Rights.................................................. 13
2. Suit for Damages...................................................... 13
3. Deemed Non-Consent.................................................... 13
4. Advance Payment....................................................... 13
5. Costs and Attorney's Fees............................................. 13
E. RENTALS SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:..................... 13
F. TAXES:................................................................... 13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST............................ 14
A. SURRENDER OF LEASES:..................................................... 14
B. RENEWAL OR EXTENSION OF LEASES:.......................................... 14
C. ACREAGE OR CASH CONTRIBUTIONS:........................................... 14
<PAGE>
TABLE OF CONTENTS
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:............................. 15
E. WAIVER OF RIGHTS TO PARTITION:........................................... 15
F. PREFERENTIAL RIGHT TO PURCHASE:.......................................... 15
IX. INTERNAL REVENUE CODE ELECTION.............................................. 15
X. CLAIMS AND LAWSUITS......................................................... 15
XI. FORCE MAJEURE............................................................... 16
XII. NOTICES..................................................................... 16
XIII. TERM OF AGREEMENT........................................................... 16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS........................................ 16
A. LAWS, REGULATIONS AND ORDERS:............................................ 16
B. GOVERNING LAW:........................................................... 16
C. REGULATORY AGENCIES:..................................................... 16
XV. MISCELLANEOUS............................................................... 17
A. EXECUTION:............................................................... 17
B. SUCCESSORS AND ASSIGNS:.................................................. 17
C. COUNTERPARTS:............................................................ 17
D. SEVERABILITY:............................................................ 17
XVI. OTHER PROVISIONS............................................................ 17
</TABLE>
<PAGE>
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between Jim Frimodig hereinafter
designated and referred to as "Operator," and the signatory party or parties
other than Operator, sometimes hereinafter referred to individually as
"Non-Operator," and collectively as "Non-Operators."
WITNESSETH:
WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A," and the
parties hereto have reached an agreement to explore and develop those Leases
and/or Oil and Gas Interests for the production of Oil and Gas to the extent
and as hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "AFE" shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be
incurred in conducting an operation hereunder.
B. The term "Completion" or "Complete" shall mean a single operation
intended to complete as well as a producer of Oil and Gas in one or more
Zones, including, but not limited to, the selling of production casing,
perforating, well stimulation and production testing conducted in such
operation.
C. The term "Contract Area" shall mean all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A."
D. the term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated
AFE, whichever is the lesser.
E. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.
F. The term "Drilling Unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority.
If a Drilling Unit is not fixed by any such rule or order, a Drilling Unit
shall be the drilling unit as established by the pattern of drilling to the
Contract Area unless fixed by express agreement of the Drilling Parties.
G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.
H. The term "Initial Well" shall mean the well required to be drilled
by the parties hereto as provided in Article VI.A.
I. The term "Non-Consent Well" shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.
J. The Terms "Non-Drilling Party" and "Non-Consenting Party" shall mean
a party who elects not to participate in a proposed operation.
K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other
marketable substances produced therewith, unless an intent to limit the
inclusiveness of this term is specifically stated.
L. The term "Oil and Gas Interests" or "Interests" shall mean unleased
fee and mineral interests in Oil and Gas in tracts of land lying within the
Contract Area which are owned by parties to this agreement.
M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean
the oil and gas leases or interests therein covering tracts of land lying
within the Contract Area which are owned by the parties to this agreement.
N. The term "Plug Back" shall mean a single operation whereby a deeper
Zone is abandoned in order to attempt a Completion in a shallower Zone.
O. The term "Recompletion" or "Recomplete" shall mean an operation
whereby a Completion in one Zone is abandoned in order to attempt a
Completion in a different Zone within the existing wellbore.
P. The term "Rework" shall mean an operation conducted in the wellbore
of a well after it is Completed to secure, restore, or improve production in
a Zone which is currently open to production in the wellbore. Such operations
include, but are not limited to, well stimulation operations but exclude any
routine repair or maintenance work or drilling, Sidetracking, Deepening,
Completing, Recompleting, or Plugging Back of a well.
Q. The term "Sidetrack" shall mean the directional control and
intentional deviation of a well from vertical so as to change the bottom hole
location unless done to straighten the hole or to drill around junk in the
hole to overcome other mechanical difficulties.
R. The term "Zone" shall mean a stratum of earth containing or thought
to contain a common accumulation of Oil and Gas separately producible from
any other common accumulation of Oil and Gas.
Unless the context otherwise clearly indicates, words used in the
singular include the plural, the word "person" includes natural and
artificial persons, the plural includes the singular, and any gender includes
the masculine, feminine, and neuter.
ARTICLE II
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
/X/ A. Exhibit "A," shall include the following information:
(1) Description of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Parties to agreement with addresses and telephone numbers for
notice purposes,
(4) Percentages or fractional interests of parties to this
agreement,
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to
this agreement,
(6) Burdens on production.
/X/ C. Exhibit "C," Accounting Procedure.
/X/ D. Exhibit "D," Insurance.
<PAGE>
If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be owned, by
the parties as their interests are set forth in Exhibit "A." In the same
manner, the parties shall also own all production of Oil and Gas from the
Contract Area subject, however, to the payment of royalties and other burdens
on production as described hereafter.
Regardless of which party has contributed any Oil and Gas Lease or Oil
and Gas Interest on which royalty or other burdens may be payable and except
as otherwise expressly provided in this agreement, each party shall pay or
deliver, or cause to be paid or delivered, all burdens on its share of the
production from the Contract Area and shall indemnify, defend and hold the
other parties free from any liability therefor. Except as otherwise expressly
provided in this agreement, if any party has contributed hereto any Lease or
Interest which is burdened with any royalty, overriding royalty, production
payment or other burden on production in excess of the amounts stipulated
above, such party so burdened shall assume and alone bear all such excess
obligations and shall indemnify, defend and hold the other parties hereto
harmless from any and all claims attributable to such excess burden. However,
so long as the Drilling Unit for the productive Zone(s) is identical with the
Contract Area, each party shall pay or deliver, or cause to be paid or
delivered, all burdens on production from the Contract Area due under the
terms of the Oil and Gas Lease(s) which such party has contributed to this
agreement, and shall indemnify, defend and hold the other parties free from
any liability therefor.
No party shall ever be responsible, on a price basis higher than the
price received by such party, to any other party's lessor or royalty owner,
and if such other party's lessor or royalty owner should demand and receive
settlement on a higher price basis, the party contributing the affected Lease
shall bear the additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. SUBSEQUENTLY CREATED INTERESTS:
If any party has contributed hereto a Lease or interest that is burdened
with an assignment of production given as security for the payment of money,
or if, after the date of this agreement, any party creates an overriding
royalty, production payment, net profits interest, assignment of production
or other burden payable out of production attributable to its working
interest hereunder, such burden shall be deemed a "Subsequently Created
Interest." Further, if any party has contributed hereto a Lease or Interest
burdened with an overriding royalty, production payment, net profits
interest, or other burden payable out of production created prior to the date
of this agreement, and such burden is not shown on Exhibit "A," such burden
also shall be deemed a Subsequently Created Interest to the extent such
burden causes the burdens on such party's Lease or Interest to exceed the
amount stipulated in Article III.B. above.
The party whose interest is burdened with the Subsequently Created
Interest (the "Burdened Party") shall assume and alone bear, pay and
discharge the Subsequently Created Interest and shall indemnify, defend and
hold harmless the other parties from and against any liability therefor.
Further, if the Burdened Party fails to pay, when due, its share of expenses
chargeable hereunder, all provisions of Article VII.B. shall be enforceable
against the Subsequently Created Interest in the same manner as they are
enforceable against the working interest of the Burdened Party. If the
Burdened Party is required under this agreement to assign or relinquish to
any other party, or parties, all or a portion of its working interest and/or
the production attributable thereto, said other party, or parties, shall
receive said assignment and/or production free and clear of said Subsequently
Created Interest, and the Burdened Party shall indemnify, defend and hold
harmless said other party, or parties, from any and all claims and demands
for payment asserted by owners of the Subsequently Created Interest.
ARTICLE IV.
TITLES
A. TITLE EXAMINATION:
Title examination shall be made on the Drillsite of any proposed well
prior to commencement of drilling operations and, if Operator so elects,
title examination shall be made on the entire Drilling Unit, or maximum
anticipated Drilling Unit, of the well. The opinion will include the
ownership of the working interest, minerals, royalty, overriding royalty and
production payments under the applicable Leases. Each party contributing
Leases and/or Oil and Gas Interests to be included in the Drillsite or
Drilling Unit, if appropriate, shall furnish to Operator all abstracts
(including federal lease status reports), title opinions, title papers and
curative material in its possession free of charge. All such information not
in the possession of or made available to Operator by the parties, but
necessary for the examination of the title, shall be obtained by Operator.
Operator shall cause title to be examined by attorneys on its staff or by
outside attorneys. Copies of all title opinions shall be furnished to each
Drilling Party. Costs incurred by Operator in procuring abstracts, fees paid
outside attorneys for title examination (including preliminary, supplemental,
shut-in royalty opinions and division order title opinions) and other direct
charges as provided in Exhibit "C" shall be borne by the Drilling Parties in
the proportion that the interest of each Drilling Party bears to the total
interest of all Drilling Parties as such interests appear in Exhibit "A."
Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any
other orders necessary or appropriate to the conduct of operations hereunder.
This shall not prevent any party from appearing on its own behalf at such
hearings. Costs incurred by Operator, including fees paid to outside
attorneys, which are associated with hearings before governmental agencies,
and which costs are necessary and proper for the activities contemplated
under this agreement, shall be direct charges to the joint account and shall
not be covered by the administrative overhead charges as provided in Exhibit
"C."
<PAGE>
Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.
No well shall be drilled on the Contract Area until after (1) the title
to the Drillsite or Drilling Unit, if appropriate, has been examined as above
provided; and (2) the title has been approved by the examining attorney or
title has been accepted by Operator.
B. LOSS OR FAILURE OF TITLE:
3. LOSSES: All losses of Leases or Interests committed to this
agreement, shall be joint losses and shall be borne by all parties in
proportion to their interests shown on Exhibit "A". This shall include but
not be limited to the loss of any Lease or Interest through failure to
develop or because express or implied covenants have not been performed
(other than performance which requires only the payment of money), and the
loss of any Lease by expiration at the end of its primary term if it is not
renewed or extended. There shall be no readjustment of interests in the
remaining portion of the Contract Area on account of any joint loss.
4. CURING TITLE: In the event of a Failure of Title under any Lease or
Interest acquired by any party hereto within a ninety (90) day period
covering all or a portion of the interest that has failed or was lost shall
be offered at cost to the Drilling Parties, and the provisions of Article
VIII.B. shall not apply to such acquisition.
<PAGE>
ARTICLE V
OPERATOR
A. DESIGNATIONS AND RESPONSIBILITIES OF OPERATOR:
Jim Frimodig shall be the Operator of the Contract Area, and shall
conduct and direct and have full control of all operations on the Contract
Area as permitted and required by, and within the limits of this agreement.
In its performance of services hereunder for the Non-Operators, Operator
shall be an independent contractor not subject to the control or direction of
the Non-Operators except as to the type of operation to be undertaken in
accordance with the election procedures contained in this agreement. Operator
shall not be deemed, or hold itself our as, the agent of the Non-Operators
with authority to bind them to any obligation or liability assumed or
incurred by Operator as to any third party. Operator shall conduct its
activities under this agreement as a reasonable prudent operator, in a good
and workmanlike manner, with due diligence and dispatch, in accordance with
good oilfield practice, and in compliance with applicable law and regulation,
but in no event shall it have any liability as Operator to the other parties
for losses sustained or liabilities incurred except such as may result from
gross negligence or willful misconduct.
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
1. RESIGNATION OR REMOVAL OF OPERATOR: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, or is no longer capable of serving as Operator. Operator
shall be deemed to have resigned without any action by Non-Operators, except
the selection of a successor. Operator may be removed only for good cause by
the affirmative vote of Non-Operators owning a majority interest based on
ownership as shown on Exhibit "A" remaining after excluding the voting
interest of Operator; such vote shall not be deemed effective until a written
notice has been delivered to the Operator by a Non-Operator detailing the
alleged default and Operator has failed to cure the default within thirty
(30) days from its receipt of the notice or, if the default concerns an
operation then being conducted, within forty-eight (48) hours of its receipt
of the notice. For purposes hereof, "good cause" shall mean not only gross
negligence or willful misconduct but also the material breach of or inability
to meet the standards of operation contained in Article V.A. or material
failure or inability to perform its obligations under this agreement.
Subject to Article VII.D.I., such resignation or removal shall not
become effective until 7:00 o'clock A.M. on the first day of the calendar
month following the expiration of ninety (90) days after the giving of notice
of resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of
Operator at an earlier date. Operator, after effective date of resignation or
removal, shall be bound by the terms hereof as a Non-Operator. A change of a
corporate name or structure of Operator or transfer of Operator's interest to
any single subsidiary, parent or successor corporation shall not be the basis
for removal of Operator.
2. SELECTION OF SUCCESSOR OPERATOR: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of two (2) or more parties owning a majority interest based
on ownership as shown on Exhibit "A": provided, however, if an Operator which
has been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative
vote of the party or parties owning a majority interest based on ownership as
shown on Exhibit "A" remaining after excluding the voting interest of the
Operator that was removed or resigned. The former Operator shall promptly
deliver to the successor Operator all records and data relating to the
operations conducted by the former Operator to the extent such records and
data are not already in the possession of the successor operator. Any cost of
obtaining or copying the former Operator's records and data shall be charged
to the joint account.
3. EFFECT OF BANKRUPTCY: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any
action by Non-Operators, except the selection of a successor. If a petition
for relief under the federal bankruptcy laws is filed by or against Operator,
and the removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant
to the Bankruptcy Code, and an election to reject this agreement by Operator
as a debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or
more parties owning a majority interest based on ownership as shown on
Exhibit "A." In the event there are only two (2) parties to this agreement,
during the period of time the operating committee controls operations, a
third party acceptable to Operator, Non-Operator and the federal bankruptcy
court shall be selected as a member of the operating committee, and all
actions shall require the approval of two (2) members of the operating
committee without regard for their interest in the Contract Area based on
Exhibit "A."
C. EMPLOYEES AND CONTRACTORS:
The number of employees or contractors used by Operator in conducting
operations hereunder, their selection, and the hours of labor and the
compensation for services performed shall be determined by Operator, and all
such employees or contractors shall be the employees or contractors of
Operator.
D. RIGHTS AND DUTIES OF OPERATOR:
1. COMPETITIVE RATES AND USE OF AFFILIATES: All wells drilled on the
Contract Area shall be drilled on a competitive contract basis at the usual
rates prevailing in the area. If it so desires, Operator may employ its own
tools and equipment in the drilling of wells, but its charges therefor shall
not exceed the prevailing rates in the area and the rate of such charges
shall be agreed upon by the parties in writing before drilling operations are
commenced, and such work shall be performed by Operator under the same terms
and conditions as are customary and usual in the area in contracts of
independent contractors who are doing work of a similar nature. All work
performed or materials supplied by affiliates or related parties of Operator
shall be performed or supplied at competitive rates, pursuant to written
agreement, and in accordance with customs and standards prevailing in the
industry.
2. DISCHARGE OF JOINT ACCOUNT OBLIGATIONS: Except as herein otherwise
specifically provided. Operator shall promptly pay and discharge expenses
incurred in the development and operation of the Contract Area pursuant to
this agreement and shall charge each of the parties hereto with their
respective proportionate shares upon the expense basis provided in Exhibit
"C." Operator shall keep an accurate record of the joint account hereunder,
showing expenses incurred and charges and credits made and received.
3. PROTECTION FROM LIENS: Operator shall pay, or cause to be paid,
as and when they become due and payable, all accounts of contractors and
suppliers and wages and salaries for services rendered or performed, and for
materials supplied on, to or in respect of the Contract Area or any
operations for the joint account thereof, and shall keep the Contract Area
free from
<PAGE>
liens and encumbrances resulting therefrom except for those resulting from a
bona fide dispute as to services rendered or materials supplied.
4. CUSTODY OF FUNDS: Operator shall hold for the account of the
Non-Operators any funds of the Non-Operators advanced or paid to the
Operator, either for the conduct of operations hereunder or as a result of
the sale of production from the Contract Area, and such funds shall remain
the funds of the Non-Operators on whose account they are advanced or paid
until used for their intended purpose or otherwise delivered to the
Non-Operators or applied toward the payment of debts as provided in Article
VII.B. Nothing in this paragraph shall be construed to establish a fiduciary
relationship between Operator and Non-Operators for any purpose other than to
account for Non-Operator funds as herein specifically provided. Nothing in
this paragraph shall require the maintenance by Operator of separate accounts
for the funds of Non-Operators unless the parties otherwise specifically
agree.
5. ACCESS TO CONTRACT AREA AND RECORDS: Operator shall, except as
otherwise provided herein, permit each Non-Operator or its duly authorized
representative, at the Non-Operator's sole risk and cost, full and free
access at all reasonable times to all operations of every kind and character
being conducted for the joint account on the Contract Area and to the records
of operations conducted thereon or production therefrom, including Operator's
books and records relating thereto. Such access rights shall not be exercised
in a manner interfering with Operator's conduct of an operation hereunder and
shall not obligate Operator to furnish any geologic or geophysical data of an
interpretive nature unless the cost of preparation of such interpretive data
was charged to the joint account. Operator will furnish to each Non-Operator
upon request copies of any and all reports and information obtained by
Operator in connection with production and related items, including, without
limitation, meter and chart reports, production purchaser statements, run
tickets and monthly gauge reports, but excluding purchase contracts and
pricing information to the extent not applicable to the production of the
Non-Operator seeking the information. Any audit of Operator's records
relating to amounts expended and the appropriateness of such expenditures
shall be conducted in accordance with the audit protocol specified in
Exhibit "C."
6. FILING AND FURNISHING GOVERNMENTAL REPORTS: Operator will file, and
upon written request promptly furnish copies to each requesting Non-Operator
not in default of its payment obligations, all operational notices, reports
or applications required to be filed by local, State, Federal or Indian
agencies or authorities having jurisdiction over operations hereunder. Each
Non-Operator shall provide to Operator on a timely basis all information
necessary to Operator to make such filings.
7. DRILLING AND TESTING OPERATIONS: The following provisions shall
apply to each well drilled hereunder, including but not limited to the
Initial Well:
(a) Operator will promptly advise Non-Operators of the date on
which the well is spudded, or the date on which drilling operations are
commenced.
(b) Operator will send to Non-Operators such reports, test results
and notices regarding the progress of operations on the well as the
Non-Operators shall reasonably request, including, but not limited to, daily
drilling reports, completion reports, and well logs.
(c) Operator shall adequately test all Zones encountered which may
reasonably be expected to be capable of producing Oil and Gas in paying
quantities as a result of examination of the electric log or any other logs
or cores or tests conducted hereunder.
8. COST ESTIMATES: Upon request of any Consenting Party, Operator shall
furnish estimates of current and cumulative costs incurred for the joint
account at reasonable intervals during the conduct of any operation pursuant
to this agreement. Operator shall not be held liable for errors in such
estimates so long as the estimates are made in good faith.
9. INSURANCE: At all times while operations are conducted hereunder,
Operator shall comply with the workers compensation law of the state where
the operations are being conducted; provided, however, that Operator may be a
self-insurer for liability under said compensation laws in which event the
only charge that shall be made to the joint account shall be as provided in
Exhibit "C." Operator shall also carry or provide insurance for the benefit
of the joint account of the parties as outlined in Exhibit "D" attached
hereto and made a part hereof. Operator shall require all contractors engaged
in work on or for the Contract Area to comply with the workers compensation
law of the state where the operations are being conducted and to maintain
such other insurance as Operator may require.
In the event automobile liability insurance is specified in said Exhibit
"D," or subsequently receives the approval of the parties, no direct charge
shall be made by Operator for premiums paid for such insurance for Operator's
automotive equipment.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. INITIAL WELL:
The drilling of the Initial Well and the participation therein by all parties
is obligatory, subject to Article VI.C.1. as to participation in Completion
operations and Article VI.F. as to termination of operations and Article XI
as to occurrence of force material.
B. SUBSEQUENT OPERATIONS:
1. PROPOSED OPERATIONS: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party should
desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a
well no longer capable of producing in paying quantities in which such party
has not otherwise relinquished its interest in the proposed objected Zone
under this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Back such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest
in such objective Zone
<PAGE>
under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing to do the
work whether they elect to participate in and pay their proportionate share
of the estimated cost of the proposed operations. If a drilling rig is on
location, notice of a proposal to Rework, Sidetrack, Recomplete, Plug Back or
Deepen may be given by telephone and the response period shall be limited to
twenty four (24) hours, but the parties shall have fourteen (14) days to pay
their proportionate share of the estimated cost of the proposed operation,
exclusive of Saturday, Sunday and legal holidays. Failure of a party to whom
such notice is delivered to reply and pay their proportionate share of the
estimated costs of the proposed operation within the period above fixed shall
constitute an election by that party not to participate in the proposed
operation. Any proposal by a party to conduct an operation conflicting with
the operation initially proposed shall be delivered to all parties within the
time and in the manner provided in Article VI.B.6.
If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced within the time
period hereafter set forth, and Operator shall, no later than ninety (90)
days after expiration of the notice period of thirty (30) days (or as
promptly as practicable after the expiration of the twenty-four (24) hour
period when a drilling rig is on location, as the case may be), actually
commence the proposed operation and thereafter complete it with due diligence
at the risk and expense of the parties participating therein; provided,
however, said commencement date may be extended upon written notice of same
by Operator to the other parties, for a period of up to thirty (30)
additional days if, in the sole opinion of Operator, such additional time is
reasonably necessary to obtain permits from governmental authorities, surface
rights (including rights-of-way) or appropriate drilling equipment, or to
complete title examination or executive matters required for tide approval or
acceptance. If the actual operation has not been commenced within the time
provided (including any extension thereof as specifically permitted herein or
in the force majeure provisions of Article XI) and if any party hereto still
desires to conduct said operation, written notice proposing same must be
resubmitted to the other parties in accordance herewith as if no prior
proposal had been made. Those parties that did not participate in the
drilling of a well for which a proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed
Deepening or Sidetracking operation, reimburse the Drilling Parties in
accordance with Article VI.B.4. in the event of a Deepening operation and in
accordance with Article VI.B.5. in the event of a Sidetracking operation.
2. OPERATIONS BY LESS THAN ALL PARTIES:
(a) DETERMINATION OF PARTICIPATION. If any party to whom such
notice is delivered as provided in Article VI.B.1. or elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such
other parties as shall elect to participate in the operation shall, no later
than ninety (90) days after the expiration of the notice period of thirty
(30) days (or as promptly as practicable after the expiration of the
twenty-four (24) hour period when a drilling rig is on location, as the case
may be) actually commence the proposed operation and complete it with due
diligence. Operator shall perform all work for the account of the Consenting
Parties; provided, however, if no drilling rig or other equipment is on
location, and if Operator is a Non-Consenting Party, the Consenting Parties
shall either: (i) request Operator to perform the work required by such
proposed operation for the account of the Consenting Parties, or (ii)
designate one of the Consenting Parties as Operator to perform such work. The
rights and duties granted to and imposed upon the Operator under this
agreement are granted to and imposed upon the party designated as Operator
for an operation in which the original Operator is a Non-Consenting Party.
Consenting Parties, when conducting operations on the Contract Area pursuant
to this Article VI.B.2., shall comply with all terms and conditions of this
agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period,
shall advise all Parties of the total interest of the parties approving such
operation and its recommendation as to whether the Consenting Parties should
proceed with the operation as proposed. Each Consenting Party, within
twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays)
after delivery of such notice, shall advise the proposing party of its desire
to (i) limited participation to such party's interest as shown on Exhibit "A"
or (ii) carry only its proportionate part (determined by dividing such
party's interest in the Contract Area by the interests of all Consenting
Parties in the Contract Area) of Non-Consenting Parties' interests, or (iii)
carry its proportionate part (determined as provided in (ii)) of
Non-Consenting Parties' interests together with all or a portion of its
proportionate part of any Non-Consenting Parties' interests that any
Consenting Party did not elect to take. Any interest of Non-Consenting
Parties that is not carried by a Consenting Party shall be deemed to be
carried by the party proposing the operation if such party does not withdraw
its proposal. Failure to advise the proposing party within the time required
shall be deemed an election under (i). In the event a drilling rig is on
location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of twenty-four (24) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election,
may withdraw such proposal if there is less than 100% participation and shall
notify all parties of such decision within ten (10) days, or within
twenty-four (24) hours if a drilling rig is on location, following expiration
of the applicable response period. If 100% subscription to the proposed
operation is obtained, the proposing party shall promptly notify the
Consenting Parties of their proportionate interests in the operation and the
party serving as Operator shall commence such operation within the period
provided in Article VI.B.1., subject to the same extension right as provided
therein.
(b) RELINQUISHMENT OF INTEREST FOR NON-PARTICIPATION. The entire
cost and risk of conducting such operations shall be borne by the Consenting
Parties in the proportions they have elected to bear same under the terms of
the preceding paragraph. Consenting Parties shall keep the leasehold estates
involved in such operations free and clear of all liens and encumbrances of
every kind created by or arising from the operations of the Consenting
Parties. If such an operation results in a dry hole, then subject to Article
VI.B.6. and VI.E.3., the Consenting Parties shall plug and abandon the well
and restore the surface location at their sole cost, risk and expense;
provided, however, that those Non-Consenting Parties that participated in the
drilling, Deepening or Sidetracking of the wall shall remain liable for, and
shall pay, their proportionate shares of the cost of plugging and abandoning
the well and restoring the surface location insofar only as those costs were
not increased by the subsequent operations of the Consenting Parties. If any
well drilled, Reworked, Sidetracked, Deepened, Recompleted or Plugged Back
under the provisions of this Article results in a well capable of producing
Oil and/or Gas in paying quantities, the Consenting Parties shall Complete
and equip the well to produce at their sole cost and risk, and the well shall
then be turned over to Operator (if the Operator did not conduct the
operation) and shall be operated by it at the expense and for the account of
the Consenting Parties. Upon commencement of operations for the drilling,
Reworking, Sidetracking, Recompleting, Deepening or Plugging Back of any such
well by Consenting Parties in accordance with the provisions of this Article,
each Non-Consenting Party shall be deemed to have relinquished to Consenting
Parties, and the Consenting Parties shall own and be entitled to receive, in
proportion to their respective interests, all of such Non-Consenting Party's
interest in the well and share of production therefrom in accordance with
Article XVI.A.1.
<PAGE>
Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.1. Option No. 2, all of such Non-Consenting Party's interest in the
production obtained from the operation in which the Non-Consenting Party did
not elect to participate. Such relinquishment shall be effective until the
proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold (after deducting applicable ad valorem,
production, severance, and excise taxes, royalty, overriding royalty and
other interests not excepted by Article III.C. payable out of or measured by
the production from such well accruing with respect to such interest until
it reverts), shall equal the cost of the following:
(i) 100% of each such Non-Consenting Party's share of the cost of any
newly acquired surface equipment beyond the wellhead connections (including
but not limited to stock tanks, separators, treaters, pumping equipment and
piping), plus 100% of each such Non-Consenting Party's share of the cost of
operation of the well commencing with first production and continuing until
each such Non-Consenting Party's relinqiushed interest shall revert to it
under other provisions of this Article, it being agreed that each
Non-Consenting Party's share of such costs and equipment will be that
interest which would have been chargeable to such Non-Consenting Party had it
participated in the well from the beginning of the operations; and
(ii) 400% of (a) that portion of the costs and expenses of drilling,
Reworking, Sidetracking, Deepening, Plugging Back, testing, Completing, and
Recompleting, after deducting any cash contributions received under Article
VIII.C., and of (b) that portion of the cost of newly acquired equipment in
the well (to and including the wellhead connections), which would have been
chargeable to such Non-Consenting Party if it had participated therein.
Notwithstanding anything to the contrary in this Article VI.B., if the
well does not reach the deepest objective Zone described in the notice
proposing the well for reasons other than the encountering of granite or
practically impenetrable substance or other condition in the hole rendering
further operations impracticable, Operator shall give notice thereof to each
Non-Consenting Party who submitted or voted for an alternative proposal under
Article VI.B.6. to drill the well to a shallower Zone than the deepest
objective Zone proposed in the notice under which the well was drilled, and
each such Non-Consenting Party shall have the option to participate in the
initial proposed Completion of the well by paying its share of the cost of
drilling the well to its actual depth, calculated in the manner provided in
Article VI.B.4. (a). If any such Non-Consenting Party does not elect to
participate in the first Completion proposed for such well, the
relinquishment provisions of this Article VI.B.2. (b) shall apply to such
party's interest.
(c) REWORKING, RECOMPLETING OR PLUGGING BACK. An election not to
participate in the drilling, Sidetracking or Deepening of a well shall be
deemed an election not to participate in any Reworking or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
amount. Similarly, an election not to participate in the Completing or
Recompleting of a well shall be deemed an election not to participate in any
Reworking operation proposed in such a well, or portion thereof, to which the
initial non-consent election applied that is conducted at any time prior to
full recovery by the Consenting Parties of the Non-Consenting Party's
recoupment amount. Any such Reworking, Recompleting of Plugging Back
operation conducted during the recoupment period shall be deemed part of the
cost of operation of said well and there shall be added to the sums to be
recouped by the Consenting Parties ____% of that portion of the costs of the
Reworking, Recompleting or Plugging Back operation which would have been
chargeable to such Non-Consenting Party had it participated therein. If such
a Reworking, Recompleting or Plugging Back operation is proposed during such
recoupment period, the provisions of this Article VI.B. shall be applicable
as between said Consenting Parties in said well.
(d) RECOUPMENT MATTERS. During the period of time Consenting Parties
are entitled to receive Non-Consenting Party's share of production, or the
proceeds therefrom, Consenting Parties shall be responsible for the payment
of all ad valorem, production, severance, excise, gathering and other taxes,
and all royalty, overriding royalty and other burdens applicable to
Non-Consenting Party's share of production not excepted by Article III.C.
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting
or Deepening operation, the Consenting Parties shall be permitted to use,
free of cost, all casing, tubing and other equipment in the well, but the
ownership of all such equipment shall remain unchanged; and upon abandonment
of a well after such Reworking, Sidetracking, Plugging Back, Recompleting or
Deepening, the Consenting Parties shall account for all such equipment to the
owners thereof, with each party receiving its proportionate part in kind or
in value, less cost of salvage.
Within ninety (90) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting,
and equipping the well for production; or, at its option, the operating
party, in lieu of an itemized statement of such costs of operation, may
submit a detailed statement of monthly billings. Each month thereafter,
during the time the Consenting Parties are being reimbursed as provided
above, the party conducting the operations for the Consenting Parties shall
furnish the Non-Consenting Parties with an itemized statement of all costs
and liabilities incurred in the operation of the well, together with a
statement of the quantity of Oil and Gas produced from it and the amount of
proceeds realized from the sale of the well's working interest produciton
during the preceding month. In determining the quantity of Oil and Gas
produced during any month, Consenting Parties shall use industry accepted
methods such as but not limited to metering or periodic well tests. Any
amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by
a Non-Consenting Party had it participated, therein shall be credited against
the total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it
as above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished
interest of such Non-Consenting Party shall automatically revert to it as of
7:00 a.m. on the day following the day on which such recoupment occurs, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto,
and the production therefrom as such Non-Consenting Party would have been
entitled to had it participated in the drilling, Sidetracking, Reworking,
Deepening, Recompleting or Plugging Back of said well. Thereafter, such
Non-Consenting Party shall be charged with and shall pay its proportionate
part of the further costs of the operation of said well in accordance with
the terms of this agreement and Exhibit "C" attached hereto.
3. STANDBY-COSTS: When a well which has been drilled or Deepened has
reached its authorized depth and all tests have been completed and the results
thereof furnished to the parties, or when operations on the well have been
otherwise terminated pursuant to Article VI.F., stand-by costs incurred
pending response to a party's notice proposing a Reworking,
<PAGE>
Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation
in such a well (including the period required under Article VI.B.6. to resolve
competing proposals) shall be charged and borne as part of the drilling or
Deepening operation just completed. Standy-by costs subsequent to all
parties responding, or expiration of the response time permitted, whichever
first occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph
of Article VL.B.2. (a), shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of
insufficient participating, such stand-by costs shall be allocated between
the Consenting Parties in the proportion each Consenting Party's interest as
shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of
all Consenting Parties.
In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive
up to five (5) additional days after expiration of the forty-eight hour
response period specified in Article VI.B.1. within which to respond by
paying for all stand-by costs and other costs incurred during such extended
the response period; Operator may require such party to pay the estimated
stand-by time in advance as a condition to extending the response period. If
more than one party elects to take such additional time to respond to the
notice, standby costs shall be allocated between the parties taking
additional time to respond on a day-to-day basis in the proportion each
electing party's interest as shown on Exhibit "A" bears to the total interest
as shown on Exhibit "A" of all the electing parties.
4. DEEPENING: If less than all the parties elect to participate in a
drilling, Sidetracking, or Deepening operation proposed pursuant to Article
XVI.A. the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article XVI.A shall relate only and be limited to
the lesser of (i) the total depth actually drilled or (ii) the objective
depth or Zone of which the parties were given notice under Article VI.B.1.
("Initial Objective"). Such well shall not be Deepened beyond the Initial
Objective without first complying with this Article to afford the
Non-Consenting Parties the opportunity to participate in the Deepening
operation.
In the event any Consenting Party desires to drill or Deepen a
Non-Censent Well to a depth below the Initial Objective, such party shall give
notice thereof, complying with the requirements of Article VI.B.1., to all
parties (including Non-Consenting Parties). Thereupon, Articles VI.B.1. and
2. shall apply and all parties receiving such notice shall have the right to
participate or not participate in the Deepening of such well pursuant to said
Articles VI.B.1. and 2. If a Deepening operation is approved pursuant to such
provisions, and if any Non-Consenting Party elects to participate in the
Deepening operation, such Non-Consenting party shall pay or make
reimbursement (as the case may be) of the following costs and expenses:
(a) If the proposal to Deepen is made prior to the Completion of such
well as a well capable of producing in paying quantities, such Non-Consenting
Party shall pay (or reimburse Consenting Parties for, as the case may be)
that share of costs and expenses incurred in connection with the drilling of
said well from the surface to the Initial Objective which Non-Consenting
Party would have paid had such Non-Consenting Party agreed to participate
therein, plus the Non-Consenting Party's share of the cost of Deepening and
of participating in any furhter operations on the well in accordance with the
other provisions of this Agreement, provided, however, all costs for testing
and Completion or attempted Completion of the well incurred by Consenting
Parties prior to the point of acrual operations to Deepen beyond the Initial
Objective shall be for the sole account of Consenting Parties.
(b) If the proposal is made for a Non-Consent Well that has been
previously Completed as a well capable of producing in paying quantities, but
is no longer capable of producing in paying quantities, such Non-Consenting
Party shall pay (or reimburse Consenting Parties for, as the case may be) its
proportionate share of all costs of drilling, Completing, and equipping said
well from the surface to the Initial Objective, calculated in the manner
provided in paragraph (a) above, less those costs recouped by the Consenting
Parties from the sale of production from the well. The Non-Consenting Party
shall also pay its proportionate share of all costs of re-entering said well.
The Non-Consenting Parties' proportionate part (based on the percentage of
such well Non-Consenting Party would have owned had it previously
participated in such Non-Consent Well) of the costs of salvable materials and
equipment remaining in the hole and salvable surface equipment used in
connection with such well shall be determined in accordance with Exhibit "C".
if the Consenting Parties have recouped the cost of drilling, Completing,
and equipping the well at the time such Deepening operation is conducted,
then a Non-Consenting Party may participate in the Deepening of the well with
no payment for costs incurred prior to re-entering the well for Deepening.
The foregoing shall not imply a right of any Consenting Party to propose
any Deepening for a Non-Consent Well prior to the drilling of such well to
its Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.
5. SIDETRACKING: Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore
at the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore
to be utilized as follows:
(a) If the proposal is for Sidetracking an existing dry hole,
reimbursement shall be on the basis of the acrual costs incurred in the
intial drilling of the well down to the depth at which the Sidetracking
operation is initiated.
(b) If the proposal is for Sidetracking a well which has previously
produced, reimbursement shall be on the basis of such party's proportionate
share of drilling and equipping costs incurred in the initial drilling of the
well down to the depth at which the Sidetracking operation is conducted,
calculated in the manner described in Article VI.B.4(b) above. Such party's
proportionate share of the cost of the well's salvable materials and
equipment down to the depth at which the Sidetracking operation is initiated
shall be determined in accordance with the provisions of Exhibit "C".
6. ORDER OF PREFERENCE OF OPERATIONS. Except as otherwise specifically
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, exclusive of Saturday, Sunday and legal holidays, from delivery of the
initial proposal, if a drilling rig is on location for the well on which such
operation is to be conducted, to deliver to all parties entitled to
participate in the proposed operation such party's alternative proposal, such
alternate proposal to contain the same information required to be included in
the initial proposal. Each party receiving such proposals shall elect by
delivery of notice to Operator within five (5) days after expiration of the
proposal period, or within twenty-four (24) hours (exclusive of Saturday,
Sunday and legal holidays) if a drilling rig is on location for the well that
is the subject of the porposals, to participate in one of the competing
proposals. Any party not electing within the time required shall be deemed
not to have voted. The proposal receiving the vote of parties owning the
largest aggregate percentage interest of the parties voting shall have
priority over all other competing proposals; in the case of a tie vote, the
<PAGE>
initial proposal shall prevail. Operator shall deliver notice of such result
to all parties entitled to participate in the operation within five (5) days
after expiration of the election period (or within twenty-four (24) hours,
exclusive of Saturday, Sunday and legal holidays, if a drilling rig is on
location). Each party shall then have two (2) days (or twenty-four (24)
hours if a rig is on location) from receipt of such notice to elect by
delivery of notice to Operator to participate in such operation or to
relinquish interest in the affected well pursuant to the provisions of
Article VI.B.2; failure by a party to deliver notice within such period shall
be deemed an election NOT to participate in the prevailing proposal.
7. CONFORMITY TO SPACING PATTERN. Notwithstanding the provisions of this
Article VI.B.2., it is agreed that no wells shall be proposed to be drilled to
or Completed in or produced from a Zone from which a well located elsewhere
on the Contract Area is producing, unless such well conforms to the
then-existing well spacing pattern for such Zone.
8. PAYING WELLS. No party shall conduct any Reworking, Deepening,
Plugging Back, Completion, Recompletion, or Sidetracking operation under this
agreement with respect to any well then capable of producing in paying
quantities except with the consent of all parties that have not relinquished
interests in the well at the time of such operation.
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:
1. COMPLETION: Without the consent of all parties, no well shall be
drilled, Deepened or Sidetracked, except any well drilled, Deepened or
Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.
Consent to the drilling, Deepening or Sidetracking shall include:
/ / OPTION NO. 1: All necessary expenditures for the drilling,
Deepening or Sidetracking, testing, Completing and equipping of the
well, including necessary tankage and/or surface facilities.
/X/ OPTION NO. 2: All necessary expenditures for the drilling,
Deepening or Sidetracking and testing of the well. When such well
has reached its authorized depth, and all logs, cores and other
tests have been completed, and the results thereof furnished to the
parties, Operator shall give immediate notice to the Non-Operators
having the right to participate in a Completion attempt whether or
not Operator recommends attempting to Complete the well, together
with Operator's AFB for Completion costs if not previously
provided. The parties receiving such notice shall have forty-eight
(48) hours (exclusive of Saturday, Sunday and legal holidays) in
which to elect by delivery of notice to Operator to participate in
a recommended Completion attempt or to make a Completion proposal
with an accompanying AFE. Operator shall deliver any such
Completion proposal, or any Completion proposal conflicting with
Operator's proposal, to the other parties entitled to participate
in such Completion in accordance with the procedures specified in
Article VI.B.6. Election to participate in a Completion attempt
shall include consent to all necessary expenditures for the
Completing and equipping of such well, including necessary tankage
and/or surface facilities but excluding any stimulation operation
not contained on the Completion AFE. Failure of any party
receiving such notice to reply within the period above fixed shall
constitute an election by that party NOT to participate in the cost
of the Completion attempt; provided, that Article VI.B.6 shall
control in the case of conflicting Completion proposals. If one or
more, but less than all of the parties, elect to attempt a
Completion, the provisions of Article VI.B.2. hereof (the phrase
"Reworking, Sidetracking, Deepening, Recompleting or Plugging
Back" as contained in Article VI.B.2., shall be deemed to include
"Completing") shall apply to the operations thereafter conducted by
less than all parties; provided, however, that Article VI.B.2.
shall apply separately to each separate Completion or Recompletion
attempt undertaken hereunder, and an election to become a
Non-Consenting Party as to one Completion or Recompletion attempt
shall not prevent a party from becoming a Consenting Party in
subsequent Completion or Recompletion attempts regardless whether
the Consenting Parties as to earlier Completions or Recompletions
have recouped their costs pursuant to Article VI.B.2.; provided
further, that any recoupment of costs by a Consenting Party shall
be made solely from the production attributable to the Zone in
which the Completion attempt is made. Election by a previous
Non-Consenting Party to participate in a subsequent Completion or
Recompletion attempt shall require such party to pay its
proportionate share of the cost of salvable materials and equipment
installed in the well pursuant to the previous Completion or
Recompletion attempt, insofar and only insofar as such materials
and equipment benefit the Zone in which such party participates in
a Completion attempt.
2. REWORK, RECOMPLETE OR PLUG BACK: No well shall be Reworked,
Recompleted or Plugged Back except a well Reworked, Recompleted, or Plugged
Back pursuant to the provisions of Article VI.B.2. of this agreement.
Consent to the Reworking, Recompleting or Plugging Back of a well shall
include all necessary expenditures in conducting such operations and
Completing and equipping of said well, including necessary tankage and/or
surface facilities.
D. OTHER OPERATIONS:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Fifeteen Thousand and No/100 Dollars
($15,000.00) except in connection with the drilling, Sidetracking, Reworking,
Deepening, Completing, Recompleting or Plugging Back of a well that has been
previously authorized by or pursuant to this agreement; provided, however,
that, in case of explosion, fire, flood or other sudden emergency, whether of
the same or different nature, Operator may take such steps and incur such
expenses as in its opinion are required to deal with the emergency to
safeguard life and property but Operator, as promptly as possible, shall
report the emergency to the other parties. If Operator prepares an AFE for
its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of Ten
Thousand Dollars ($10,000.00). Any party who has not relinquished its
interest in a well shall have the right to propose that Operator perform
repair work or undertake the installation of artificial lift equipment or
ancillary production facilities such as salt water disposal wells or to
conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or
other transportation or marketing facilities, the installation of which
shall be governed by separate agreement between the parties) reasonably
estimated to require an expenditure in excess of the amount first set forth
above in this Article VI.D. (except in connection with an operation required
to be proposed under Articles VI.B.1. or VI.C.1. Option No. 2, which shall
be governed exclusively by those Articles). Operator shall deliver such
proposal to all parties entitled to participate therein. If within thirty
(30) days thereof Operator secures the written consent of any party or
parties owning at least 80% of the interests of the parties entitled to
participate in such operation, each party having the right to participate in
such project shall be bound by the terms of such proposal and shall be
obligated to pay its proportionate share of the costs of the proposed
project as if it had consented to such project pursuant to the terms of the
proposal.
E. ABANDONMENT OF WELLS:
1. ABANDONMENT OF DRY HOLES: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be
<PAGE>
plugged and abandoned without the consent of all parties. Should Operator,
after diligent effort, be unable to contact any party, or should any party
fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday
and legal holidays) after delivery of notice of the proposal to plug and
abandon such well, such party shall be deemed to have consented to the
proposed abandonment. All such wells shall be plugged and abandoned in
accordance with applicable regulations and at the cost, risk and expense of
the parties who participated in the cost of drilling or Deepening such well.
Any party who objects to plugging and abandoning such well by notice
delivered to Operator within forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays) after delivery of notice of the proposed plugging
shall take over the well as of the end of such forty-eight (48) hour notice
period and conduct further operations in search of Oil and/or Gas subject to
the provisions of Article VI.B.; failure of such party to provide proof
reasonably satisfactory to Operator of its financial capability to conduct
such operations or to take over the well within such period or thereafter to
conduct operations on such well or plug and abandon such well shall entitle
Operator to retain or take possession of the well and plug and abandon the
well. The party taking over the well shall indemnify Operator (if Operator is
an abandoning party) and the other abandoning parties against liability for
any further operations conducted on such well except for the costs of
plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.
2. ABANDONMENT OF WELLS THAT HAVE PRODUCED: Except for any well in which
a Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and
at the cost, risk and expense of all the parties hereto. Failure of a party
to reply within sixty (60) days of delivery of notice of proposed abandonment
shall be deemed an election to consent to the proposal. If within sixty (60)
days after delivery of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to
continue its operation from the Zone then open to production shall be
obligated to take over the well as of the expiration of the applicable notice
period and shall indemnify Operator (if Operator is an abandoning party) and
the other abandoning parties against liability for any further operations on
the well conducted by such parties. Failure of such party or parties to
provide proof reasonably satisfactory to Operator of their financial
capability to conduct such operations or to take over the well within the
required period or thereafter to conduct operations on such well shall
entitle Operator to retain or take possession of such well and plug and
abandon the well.
Parties taking over a well as provided herein shall tender to each of
the other parties its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of
Exhibit "C," less the estimated cost of salvaging and the estimated cost of
plugging and abandoning and restoring the surface; provided, however, that in
the event the estimated plugging and abandoning and surface restoration costs
and the estimated cost of salvaging are higher than the value of the well's
salvable material and equipment, each of the abandoning parties shall tender
to the parties continuing operations their proportionate shares of the
estimated excess cost. Each abandoning party shall assign to the
non-abandoning parties, without warranty, express or implied, as to title or
as to quantity, or fitness for use of the equipment and material, all of its
interest in the wellbore of the well and related equipment, together with its
interest in the Leasehold insofar and only insofar as such Leasehold covers
the right to obtain production from that wellbore in the Zone then open to
production. If the interest of the abandoning party is or includes an Oil
and Gas Interest, such party shall execute and deliver to the non-abandoning
party or parties an oil and gas lease, limited to the wellbore and the Zone
then open to production, for a term of one (1) year and so long thereafter as
Oil and/or Gas is produced from the Zone covered thereby. The assignments or
leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees
shall be in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all assignees. There
shall be no readjustment of interests in the remaining portions of the
Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone then open other than the royalties retained in any lease made under the
terms of this Article. Upon request, Operator shall continue to operate the
assigned well for the account of the non-abandoning parties at the rates and
charges contemplated by this agreement, plus any additional cost and charges
which may arise as the result of the separate ownership of the assigned well.
Upon proposed abandonment of the producing Zone assigned or leased, the
assignor or lessor shall then have the option to repurchase its prior
interest in the well (using the same valuation formula) and participate in
further operations therein subject to the provisions hereof.
3. ABANDONMENT OF NON-CONSENT OPERATIONS: The provisions of Article
VI.E.1. or VI.E.2. above shall be applicable as between Consenting Parties in
the event of the proposed abandonment of any well excepted from said
Articles; provided, however, no well shall be permanently plugged and
abandoned unless and until all parties having the right to conduct further
operations therein have been notified of the proposed abandonment and afforded
the opportunity to elect to take over the well in accordance with the
provisions of this Article VI.E.; and provided further, that Non-Consenting
Parties who own an interest in a portion of the well shall pay their
proportionate shares of abandonment and surface restoration costs for such
well as provided in Article VI.B.2(b).
F. TERMINATION OF OPERATIONS:
Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not
be terminated without consent of parties bearing 80% of the costs of
such operation; provided, however, that in the event granite or
other practically impenetrable substance or condition in the hole is
encountered which renders further operations impractical, Operator may
discontinue operations and give notice of such condition in the manner
provided in Article VI.B.1; and the provisions of Article VI.B. or VI.E.
shall thereafter apply to such operation, as appropriate.
G. TAKING PRODUCTION IN KIND:
/ / OPTION NO.1: Gas Balancing Agreement Attached
Each party shall take in kind or separately dispose of its
proportionate share of all Oil and Gas produced from the Contract
Area, exclusive of production which may be used in development and
producing operations and in preparing and treating Oil and Gas for
marketing purposes and production unavoidably lost. Any extra
expenditure incurred in the taking in kind or separate disposition
by any party of its proportionate share of the production shall be
borne by such party. Any party taking its share of production in
kind shall be required to pay for only its proportionate share of
such part of Operator's surface facilities which it uses.
Each party shall execute such division orders and contracts as may
be necessary for the sale of its interest in production from the
Contract Area, and, except as provided in Article VII.B., shall be
entitled to receive payment
<PAGE>
directly from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary to take in
kind or separately dispose of its proportionate share of the Oil
produced from the Contract Area, Operator shall have the right,
subject to the revocation at will by the party owning it, but not
the obligation, to purchase such Oil or sell it to others at any
time and from time to time, for the account of the non-taking party.
Any such purchase or sale by Operator may be terminated by Operator
upon at least ten (10) days written notice to the owner of said
production and shall be subject always to the right of the owner of
the production upon at least ten (10) days written notice to
Operator to exercise at any time its right to take in kind, or
separately dispose of, its share of all Oil not previously delivered
to a purchaser. Any purchase or sale by Operator of any other
party's share of Oil shall be only for such reasonable periods of
time as are consistent with the minimum needs of the industry under
the particular circumstances, but in no event for a period in excess
of one (1) year.
Any such sale by Operator shall be in a manner commercially
reasonable under the circumstances but Operator shall have no duty
to share any existing market or to obtain a price equal to that
received under any existing market. The sale or delivery by
Operator of a non-taking party's share of Oil under the terms of any
existing contract of Operator shall not give the non-taking party
any interest in or make the non-taking party a party to said
contract. No purchase shall be made by Operator without first
giving the non-taking party at least ten (10) days written notice of
such intended purchase and the price to be paid or the pricing basis
to be used.
All parties shall give timely written notice to Operator of
their Gas marketing arrangements for the following month, excluding
price, and shall notify Operator immediately in the event of a
change in such arrangements. Operator shall maintain records of all
marketing arrangements, and of volumes actually sold or transported,
which records shall be made available to Non-Operators upon
reasonable request.
In the event one or more parties' separate disposition of its
share of the Gas causes split-stream deliveries to separate
pipelines and/or deliveries which on a day-to-day basis for any
reason are not exactly equal to a party's respective proportionate
share of total Gas sales to be allocated to it, the balancing or
accounting between the parties shall be in accordance with any Gas
balancing agreement between the parties hereto, whether such an
agreement is attached as Exhibit "E" or is a separate agreement.
Operator shall give notice to all parties of the first sales of Gas
from any well under this agreement.
/X/ OPTION NO. 2: NO GAS BALANCING AGREEMENT:
Each party shall take in kind or separately dispose of its
proportionate share of all Oil and Gas produced from the Contract
Area, exclusive of production which may be used in development and
producing operations and in preparing and treating Oil and Gas for
marketing purposes and production unavoidably lost. Any extra
expenditure incurred in the taking in kind or separate disposition
by any party of its proportionate share of the production shall be
borne by such party. Any party taking its share of production in
kind shall be required to pay for only its proportionate share of
such part of Operator's surface facilities which it uses.
Each party shall execute such division orders and contracts as
may be necessary for the sale of its interest in production from
the Contract Area, and, except as provided in Article VII.B., shall
be entitled to receive payment directly from the purchaser thereof
for its share of all production.
If any party fails to make the arrangements necessary to take in
kind or separately dispose of its proportionate share of the Oil
and/or Gas produced from the Contract Area, Operator shall have the
right, subject to the revocation at will by the party owning it, but
not the obligation, to purchase such Oil and/or Gas or sell it to
others at any time and from time to time, for the account of the
non-taking party. Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to
the owner of said production and shall be subject always to the
right of the owner of the production upon at least (10) days written
notice to Operator to exercise its right to take in kind, or
separately dispose of, its share of all Oil and/or Gas not
previously delivered to a purchaser, provided, however, that the
effective date of any such revocation may be deferred at Operator's
election for a period not to exceed ninety (90) days if Operator has
committed such production to a purchase contract having a term
extending beyond such ten (10) -day period. Any purchase or sale
by Operator of any other party's share of Oil and/or Gas shall be
only for such reasonable periods of time as are consistent with the
minimum needs of the industry under the particular circumstances,
but in no event for a period in excess of one (1) year.
Any such sale by Operator shall be in a manner commercially
reasonable under the circumstances, but Operator shall have no duty
to share any existing market or transportation arrangement or to
obtain a price or transportation fee equal to that received under
any existing market or transportation arrangement. The sale or
delivery by Operator of a non-taking party's share of production
under the terms of any existing contract of Operator shall not give
the non-taking party any interest in or make the non-taking party a
party to said contract. No purchase of Oil and Gas and no sale of
Gas shall be made by Operator without first giving the non-taking
party ten days written notice of such intended purchase or sale and
the price to be paid or the pricing basis to be used. Operator
shall give notice to all parties of the first sale of Gas from any
well under this Agreement.
All parties shall give timely written notice to Operator of
their Gas marketing arrangements for the following month, excluding
price, and shall notify Operator immediately in the event of a
change in such arrangements. Operator shall maintain records of all
marketing arrangements, and of volumes actually sold or transported,
which records shall be made available to Non-Operators upon
reasonable request.
ARTICLE VII
EXPENDITURES AND LIABILITY OF PARTIES*
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally, and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not
the intention of the parties to create, nor shall this agreement be construed
as creating, a mining or other partnership, joint venture, agency
relationship or association, or to render the parties liable as partners,
co-venturers, or principals. In their relations with each other under this
agreement, the parties shall not be considered fiduciaries or to have
established a confidential relationship but rather shall be free to act on an
arm's-length basis in accordance with their own respective self-interest,
subject, however, to the obligation of the parties to act in good faith in
their dealings with each other with respect to activities hereunder.
<PAGE>
B. LIENS AND SECURITY INTERESTS:
Each party grants to the other parties hereto a lien upon any interest it
now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas
Interests in the Contract Area, and a security interest and/or purchase money
security interest in any interest it now owns or hereafter acquires in the
personal property and fixtures on or used or obtained for use in connection
therewith, to secure performance of all of its obligations under this
agreement including but not limited to payment of expense, interest and fees,
the proper disbursement of all monies paid hereunder, the assignment or
relinquishment of interest in Oil and Gas Leases as required hereunder, and
the proper performance of operations hereunder. Such lien and security
interest granted by each party hereto shall include such party's leasehold
interests, working interests, operating rights, and royalty and overriding
royalty interests in the Contract Area now owned or hereafter acquired and in
lands pooled or unitized therewith or otherwise becoming subject to this
agreement, the Oil and Gas when extracted therefrom and equipment situated
thereon or used or obtained for use in connection therewith (including,
without limitation, all wells, tools, and tubular goods), and accounts
(including, without limitation, accounts arising from gas imbalances or from
the sale of Oil and/or Gas at the wellhead), contract rights, inventory and
general intangibles relating thereto or arising therefrom, and all proceeds
and products of the foregoing.
To perfect the lien and security agreement provided herein, each party
hereto shall execute and acknowledge the recording supplement and/or any
financing statement prepared and submitted by any party hereto in conjunction
herewith or at any time following execution hereof, and Operator is
authorized to file this agreement or the recording supplement executed
herewith as a lien or mortgage in the applicable real estate records and as a
financing statement with the proper officer under the Uniform Commercial Code
in the state in which the Contract Area is situated and such other states as
Operator shall deem appropriate to perfect the security interest granted
hereunder. Any party may file this agreement, the recording supplement
executed herewith, or such other documents as it deems necessary as a lien or
mortgage in the applicable real estate records and/or a financing statement
with the proper officer under the Uniform Commercial Code.
Each party represents and warrants to the other parties hereto that the
lien and security interest granted by such party to the other parties shall be
a first and prior lien, and each party hereby agrees to maintain the priority
of said lien and security interest against all persons acquiring an interest
in Oil and Gas Leases and Interests covered by this agreement by, through or
under such party. All parties acquiring an interest in Oil and Gas Leases
and Oil and Gas Interests covered by this agreement, whether by assignment,
merger, mortgage, operation of law, or otherwise, shall be deemed to have
taken subject to the lien and security interest granted by this Article VII.B.
as to all obligations attributable to such interest hereunder whether or not
such obligations arise before or after such interest is acquired.
To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they
shall be entitled to exercise the rights and remedies of a secured party under
the Code. The bringing of a suit and the obtaining of judgment by a party
for the secured indebtedness shall not be deemed an election of remedies or
otherwise affect the lien rights or security interest as security for the
payment thereof. In addition, upon default by any party in the payment of
its share of expenses, interests or fees, or upon the improper use of funds
by the Operator, the other parties shall have the right, without prejudice to
other rights or remedies, to collect from the purchaser the proceeds from the
sale of such defaulting party's share of Oil and Gas until the amount owed by
such party, plus interest as provided in "Exhibit C," has been received, and
shall have the right to offset the amount owed against the proceeds from the
sale of such defaulting party's share of Oil and Gas. All purchasers of
production may rely on a notification of default from the non-defaulting
party or parties stating the amount due as a result of the default, and all
parties waive any recourse available against purchasers for releasing
production proceeds as provided in this paragraph.
If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution
proceedings pursuant to the provisions of this agreement, to the extent
allowed by governing law, the defaulting party waives any available right of
redemption from and after the date of judgment, any required valuation or
appraisement of the mortgaged or secured property prior to sale, any
available right to stay execution or to require a marshalling of assets and
any required bond in the event a receiver is appointed. In addition, to the
extent permitted by applicable law, each party hereby grants to the other
parties a power of sale as to any property that is subject to the lien and
security rights granted hereunder, such power to be exercised in the manner
provided by applicable law or otherwise in a commercially reasonable manner
and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize
the provisions of Oil and Gas lien law or other lien law of any state in
which the Contract Area is situated to enforce the obligations of each party
hereunder. Without limiting the generality of the foregoing, to the extent
permitted by applicable law, Non-Operators agree that Operator may invoke or
utilize the mechanics' or materialmen's lien law of the state in which the
Contract Area is situated in order to secure the payment to Operator of any
sum due hereunder for services performed or materials supplied by Operator.
C. ADVANCES:
Operator, at its election, shall have the right from time to time to
demand and receive from one or more of the other parties payments in advance
of their respective shares of the estimated amount of the expense to be
incurred in operations hereunder during the next succeeding month, which
right may be exercised only by submission to each such party of an itemized
statement of such estimated expense, together with an invoice for its share
thereof. Each such statement and invoice for the payment in advance of
estimated expense shall be submitted on or before the 20th day of the next
preceding month. Each party shall pay to Operator its proportionate share of
such estimate within fifteen (15) days after such estimate and invoice is
received. If any party fails to pay its share of said estimate within said
time, the amount due shall bear interest as provided in Exhibit "C" until
paid. Proper adjustment shall be made monthly between advances and actual
expense to the end that each party shall bear and pay its proportionate share
of actual expenses incurred, and no more.
D. DEFAULTS AND REMEDIES:
If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the
remedies provided in Article VII.B. or elsewhere in this agreement, the
remedies specified below shall be applicable/For purposes of this Article
VII.D., all notices and elections shall be delivered and shall be in
addition, not in substitution, to those remedies provided in XVI.C.2.. 3..
<PAGE>
only by Operator, except that Operator shall deliver any such notice and
election requested by a non-defaulting Non-Operator, and when Operator is the
party in default, the applicable notices and elections can be delivered by
any Non-Operator. Election of any one or more of the following remedies
shall not preclude the subsequent use of any other remedy specified below or
otherwise available to a non-defaulting party.
1. SUSPENSION OF RIGHTS: Any party may deliver to the party in default
a Notice of Default, which shall specify the default, specify the action to
be taken to cure the default, and specify that failure to take such action
will result in the exercise of one or more of the remedies provided in this
Article. If the default is not cured within thirty (30) days of the delivery
of such Notice of Default, all of the rights of the defaulting party granted
by this agreement may upon notice be suspended until the default is cured,
without prejudice to the right of the non-defaulting party or parties to
continue to enforce the obligations of the defaulting party previously
accrued or thereafter accruing under this agreement. If Operator is the
party in default, the Non-Operators shall have in addition the right, by vote
of Non-Operators owning a majority in interest in the Contract Area after
excluding the voting interest of Operator, to appoint a new Operator
effective immediately. The rights of a defaulting party that may be
suspended hereunder at the election of the non-defaulting parties shall
include, without limitation, the right to receive information as to any
operation conducted hereunder during the period of such default, the right to
elect to participate in an operation proposed under Article VI.B. of this
agreement, the right to participate in an operation being conducted under
this agreement even if the party has previously elected to participate in
such operation, and the right to receive proceeds of production from any well
subject to this agreement.
2. SUIT FOR DAMAGES: Non-defaulting parties or Operator for the benefit
of non-defaulting parties may sue (at joint account expense) to collect the
amounts in default, plus interest accruing on the amounts recovered from the
date of default until the date of collection at the rate specified in Exhibit
"C" attached hereto. Nothing herein shall prevent any party from suing any
defaulting party to collect consequential damages accruing to such party as a
result of the default.
3. DEEMED NON-CONSENT: The non-defaulting party may deliver a written
Notice of Non-Consent Election to the defaulting party at any time after the
expiration of the thirty-day cure period following delivery of the Notice of
Default, in which event if the billing is for the drilling of a new well or
the Plugging Back, Sidetracking, Reworking or Deepening of a well which is to
be or has been plugged as a dry hole, or for the Completion or Recompletion
of any well, the defaulting party will be conclusively deemed to have elected
not to participate in the operation and to be a Non-Consenting Party with
respect thereto under Article VI.B. or VI.C., as the case may be, to the
extent of the costs unpaid by such party, notwithstanding any election to
participate theretofore made. If election is made to proceed under this
provision, then the non-defaulting parties may not elect to sue for the
unpaid amount pursuant to Article VII.D.2.
Until the delivery of such Notice of Non-Consent Election to the
defaulting party, such party shall have the right to cure its default by
paying its unpaid share of costs plus interest at the rate set forth in
Exhibit "C," provided, however, such payment shall not prejudice the rights
of the non-defaulting parties to pursue remedies for damages incurred by the
non-defaulting parties as a result of the default. Any interest relinquished
pursuant to this Article VII.D.3. shall be offered to the non-defaulting
parties in proportion to their interests, and the non-defaulting parties
electing to participate in the ownership of such interest shall be required
to contribute their shares of the defaulted amount upon their election to
participate therein.
4. ADVANCE PAYMENT: If a default is not cured within thirty (30) days of
the delivery of a Notice of Default, Operator, or Non-Operators if Operator
is the defaulting party, may thereafter require advance payment from the
defaulting party of such defaulting party's anticipated share of any item of
expense for which Operator, or Non-Operators, as the case may be, would be
entitled to reimbursement under any provision of this agreement, whether or
not such expense was the subject of the previous default. Such right
includes, but is not limited to, the right to require advance payment for the
estimated costs of drilling a well or Completion of a well as to which an
election to participate in drilling or Completion has been made. If the
defaulting party fails to pay the required advance payment, the
non-defaulting parties may pursue any of the remedies provided in this
Article VII.D. or any other default remedy provided elsewhere in this
agreement. Any excess of funds advanced remaining when the operation is
completed and all costs have been paid shall be promptly returned to the
advancing party.
5. COSTS AND ATTORNEYS' FEES: In the event any party is required to
bring legal proceedings to enforce any financial obligation of a party
hereunder, the prevailing party in such action shall be entitled to recover
all court costs, costs of collection, and a reasonable attorney's fee, which
the lien provided for herein shall also secure.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
Rentals, shut-in well payments and minimum royalties which may be
required under the terms of any lease shall be paid by the party or parties
who subjected such lease to this agreement at its or their expense. In the
event two or more parties own and have contributed interests in the same
lease to this agreement, such parties may designate one of such parties to
make said payments for and on behalf of all such parties. Any party may
request, and shall be entitled to receive, proper evidence of all such
payments. In the event of failure to make proper payment of any rental,
shut-in well payment or minimum royalty through mistake or oversight where
such payment is required to continue the lease in force, any loss which
results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.
Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well,
at least five (5) days (excluding Saturday, Sunday and legal holidays) prior
to taking such action, or at the earliest opportunity permitted by
circumstances, but assumes no liability for failure to do so. In the event
of failure by Operator to so notify Non-Operators, the loss of any lease
contributed hereto by Non-Operators for failure to make timely payments of
any shut-in well payment shall be borne jointly by the parties hereto under
the provisions of Article IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay
all such taxes assessed thereon before they become deliquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties
and production payments) on Leases and Oil and Gas Interests contributed by
such Non-Operator. If the assessed valuation of any Lease is reduced by
reason of its being subject to outstanding excess royalties, overriding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or owners of such Lease,
and Operator shall adjust the charge to such owner or owners so as to
reflect the benefit of such reduction. 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. Operator shall bill
the other parties for their proportionate shares of all tax payments in the
manner provided in Exhibit "C."
<PAGE>
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and
prosecute the protest to a final determination, unless all parties agree to
abandon the protest prior to final determination. During the pendency of
administrative or judicial proceedings, Operator may elect to pay, under
protest, all such taxes and any interest and penalty. When any such
protested assessment shall have been finally determined, Operator shall pay
the tax for the joint account, together with any interest and penalty
accrued, and the total cost shall then be assessed against the parties, and
be paid by the, as provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes imposed upon or with respect to the
production or handling of such party's share of Oil and Gas produced under
the terms of this agreement.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. SURRENDER OF LEASES:
The Leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any Lease
or in any portion thereof, such party shall give written notice of the
proposed surrender to all parties, and the parties to whom such notice is
delivered shall have thirty (30) days after delivery of the notice within
which to notify the party proposing the surrender whether they elect to
consent thereto. Failure of a party to whom such notice is delivered to
reply within said 30-day period shall constitute a consent to the surrender
of the Leases described in the notice. If all parties do not agree or
consent thereto, the party desiring to surrender shall assign, without
express or implied warranty of title, all of its interest in such Lease, or
portion thereof, and any well, material and equipment which may be located
thereon, and any rights in production thereafter secured, to the parties not
consenting to such surrender. If the interest of the assigning party is or
includes an Oil and Gas Interest, the assigning party shall execute and
deliver to the party or parties not consenting to such surrender an oil and
gas lease covering such Oil and Gas Interest for a term of one (1) year and
so long thereafter as Oil and/or Gas is produced from the land covered
thereby, such lease to be on the form attached hereto as Exhibit "B." Upon
such assignment or lease, the assigning party shall be relieved from all
obligations thereafter accruing, but not theretofore accrued, with respect to
the interest assigned or leased and the operation of any well attributable
thereto, and the assigning party shall have not further interest in the
assigned or leased premises and its equipment and production other than the
royalties retained in any lease made under the terms of this Article. The
party assignee or lessee shall pay to the party assignor or lessor the
reasonable salvage value of the latter's interest in any well's salvable
materials and equipment attributable to the assigned or leased acreage. The
value of all salvable materials and equipment shall be determined in
accordance with the provisions of Exhibit "C," less the estimated cost of
salvaging and the estimated cost of plugging and abandoning and restoring the
surface. If such value is less than such costs, then the party assignor or
lessor shall pay to the party assignee or lessee the amount of such deficit.
If the assignment or lease is in favor of more than one party, the interest
shall be shared by such parties in the proportions that the interest of each
bears to the total interest of all such parties. If the interest of the
parties to whom the assignment is to be made varies according to depth, then
the interest assigned shall similarly reflect such variances.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as
it was immediately before the assignment, lease or surrender in the balance
of the Contract Area; and the acreage assigned, leased or surrendered, and
subsequent operations thereon, shall not thereafter be subject to the terms
and provisions of this agreement but shall be deemed subject to an Operating
Agreement in the form of this agreement.
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal or replacement of an Oil and Gas Lease
or Interest subject to this agreement, then all other parties shall be
notified promptly upon such acquisition or, in the case of a replacement
Lease taken before expiration of an existing Lease, promptly upon expiration
of the existing Lease. The parties notified shall have the right for a
period of thirty (30) days following delivery of such notice in which to
elect to participate in the ownership of the renewal or replacement Lease,
insofar as such Lease affects lands within the Contract Area, by paying to
the party who acquired it their proportionate shares of the acquisition cost
allocated to that part of such Lease within the Contract Area, which shall be
in proportion to the interests held at that time by the parties in the
Contract Area. Each party who participates in the purchase of a renewal or
replacement Lease shall be given an assignment of its proportionate interest
therein by the acquiring party.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties
who elect to participate therein, in a ration based upon the relationship of
their respective percentage of participation in the Contract Area to the
aggregate of the percentages of participation in the Contract Area of all
parties participating in the purchase of such renewal or replacement Lease.
The acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated
in Exhibit "A," but any renewal or replacement Lease in which less than all
parties elect to participate shall not be subject to this agreement but shall
be deemed subject to a separate Operating Agreement in the form of this
agreement.
If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or
replacement Leases and their right to receive an assignment of interest
shall also reflect such depth variances.
The provisions of this Article shall apply to renewal or replacement
Leases whether they are for the entire interest covered by the expiring Lease
or cover only a portion of its area or an interest therein. Any renewal or
replacement Lease taken before the expiration of its predecessor Lease, or
taken or contracted for or becoming effective within six (6) months after the
expiration of the existing Lease, shall be subject to this provision so long
as this agreement is in effect at the time of such acquisition or at the time
the renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
Oil and Gas Leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost
of such drilling or other operation. If the contribution be in the form of
acreage, the party to whom the contribution is made shall promptly tender an
assignment of the acreage, without warranty of title, to the Drilling Parties
in the proportions said Drilling Parties shared the cost of drilling the
well. Such acreage shall become a separate Contract Area and, to the extent
possible, be governed by provisions identical to this agreement. Each party
shall promptly notify all other parties of any acreage or cash contributions
it may obtain in support of any well or any other operation on the Contract
Area. The above provisions shall also be applicable to optional rights to
earn acreage outside the Contract Area which are in support of well drilled
inside the Contract Area.
<PAGE>
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:
For the purpose of maintaining uniformity of ownership in the Contract
Area in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer
or make other disposition of its interest in the Oil and Gas Leases and Oil
and Gas Interests embraced within the Contract Area or in wells, equipment
and production unless such disposition covers either:
1. the entire interest of the party in all Oil and Gas Leases, Oil
and Gas Interests, wells, equipment and production; or
2. an equal undivided percent of the party's present interest in
all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production in the Contract Area.
Every sale, encumbrance, transfer or other disposition made by any party
shall be made expressly subject to this agreement and shall be made without
prejudice to the right of the other parties, and any transferee of an
ownership interest in any Oil and Gas Lease or Interest shall be deemed a
party to this agreement as to the interest conveyed from and after the
effective date of the transfer of ownership; provided, however, that the
other parties shall not be required to recognize any such sale, encumbrance,
transfer or other disposition for any purpose hereunder until thirty (30)
days after they have received a copy of the instrument of transfer or other
satisfactory evidence thereof in writing from the transferor or transferee. No
assignment or other disposition of interest by a party shall relieve such
party of obligations previously incurred by such party hereunder with respect
to the interest transferred, including without limitation the obligation of a
party to pay all costs attributable to an operation conducted hereunder in
which such party has agreed to participate prior to making such assignment,
and the lien and security interest gained by Article VII.B. shall continue to
burden the interest transferred to secure payment of any such obligations.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such
co-owners to appoint a single trustee or agent with full authority to
receive notices, approve expenditures, receive billings for and approve and
pay such party's share of the joint expenses, and to deal generally with, and
with power to bind, the co-owners of such party's interest within the scope
of the operations embraced in this agreement; however, all such co-owners
shall have the right to enter into and execute all contracts or agreements
for the disposition of their respective shares of the Oil and Gas produced
from the Contract Area and they shall have the right to receive, separately,
payment of the sale proceeds thereof.
E. WAIVER OF RIGHTS TO PARTITION:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in
the Contract Area waives any and all rights it may have to partition and
have set aside to it in severalty its undivided interest therein.
/X/ (OPTIONAL: CHECK IF APPLICABLE.)
Should any part desire to sell all or anyy part of its interests under
this agreement, or its rights and interests in the Contract Area, it shall
promptly give written notice to the other parties, ith full information
concerning its proposed disposition, which shall include the name and addres
of th prospective transferee (who must be ready, willing and able to
purchase), the purchase price, a legal desacription sufficient to identify
the property, and all other terms of the offer. The other parties shall then
have an optional prior right, for a period of ten (10) days after the notice
is deliverd, to purchase for the stated consideration on the same terms and
conditions the interest which the othe part proposes to sell; and, if this
optional right is exercised, the purchasing parties shall share the purchased
interest in the proportions that the interest of each vears to the total
interest of all purchasing parties. However, there shall be no preferential
right to purchase in those cases where any party wishes to mortgage its
interest, or to transfer title to its interests to its mortgagees in lieu of
or pursuant to forclosure of a mortgage of its interstrs, or ot dispose of
its interst bymerger, reorganization, consolidation,or by sale of all or
substantially all of its Oil and Gaassets to any part, or by transfer of its
interst to a subsidiary or parent company or to a subsidiary of aparent
company, or of any company in which such party owns a majority of the stock.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as a partnership, and if the parties have not
otherwise agreed to form a tax partnership pursuant to Exhibit "G" or other
agreement between them, each party thereby affected elects to be excluded
from the application of all of the provisions of Subchapter "K," Chapter 1,
Subtitle "A," of the Internal Revenue Code of 1986, as amended ("Code"), as
permitted and authorized by Section 761 of the Code and the regulations
promulgated thereunder. Operator is authorized and directed to execute on
behalf of each party hereby affected such evidence of this election as may be
required by the Secretary of the Treasury of the United States or the Federal
Internal Revenue Service, including specifically, but not by way of
limitation, all of the returns, statements, and the data required by Treasury
Regulations Section 1.761. Should there be any requirement that each party
hereby affected give further evidence of this election, each such party shall
execute such documents and furnish such other evidence as may be required by
the Federal Internal Revenue Service or as may be necessary to evidence this
election. No such party shall give any notices or take any other action
inconsistent with the election made hereby. If any present or future income
tax laws of the state or states in which the Contract Area is located or any
future income tax laws of the United States contain provisions similar to
those in Subchapter "K," Chapter l, Subtitle "A," of the Code, under which an
election similar to that provided by Section 761 of the Code is permitted,
each party hereby affected shall make such election as may be permitted or
required by such laws. In making the foregoing election, each such party
states that the income derived by such party from operations hereunder can be
adequately determined without the computation of partnership taxable income.
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
Fifeteen Thousand and No/00 Dollars ($15,000.00) and if the payment is in
complete settlement of such claim or suit. If the amount required for
settlement exceeds the above amount, the parties hereto shall assume and take
over the further handling of the claim or suit, unless such authority is
delegated to Operator. All costs and expenses of handling, settling, or
otherwise discharging such claim or suit shall be at the joint expense of the
parties participating in the operation from which the claim or suit arises.
If a claim is made against any party or if any party is sued on account of
any matter arising from operations hereunder over which such individual has
no control because of the rights given Operator by this agreement, such party
shall immediately notify all other parties, and the claim or suite shall be
treated as any other claim or suit involving operations hereunder.
<PAGE>
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
indemnify or make money payments or furnish security, that party shall give
to all other parties prompt written notice of the force majeure with
reasonably full particulars concerning it; thereupon, the obligations of the
party giving the notice, so far as they are affected by the force majeure,
shall be suspended during, but no longer than, the continuance of the force
majeure. The term "force majeure", as here employed, shall mean an act of
God, strike, lockout, or other industrial disturbance, act of the public
enemy, war, blockade, public riot, lightning, fire, storm, flood or other act
of nature, explosion, governmental action, governmental delay, restraint or
inaction, unavailability of equipment, and any other cause, whether of the
kind specifically enumerated above or otherwise, which is not reasonably
within the control of the party claiming suspension.
The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; how all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall
be in writing and delivered in person or by United States mail, courier
service, telegram, telex, telecopier or any other form of facsimile, postage
or charges prepaid, and addressed to such parties at the addresses listed on
Exhibit "A." All telephone or oral notices permitted by this agreement shall
be confirmed immediately thereafter by written notice. The originating notice
given under any provision hereof shall be deemed delivered only when received
by the party to whom such notice is directed, and the time for such party to
deliver any notice in response thereto shall run from the date the
originating notice is received. "Receipt" for purposes of this agreement with
respect to written notice delivered hereunder shall be actual delivery of the
notice to the address of the party to be notified specified in accordance
with this agreement, or to the telecopy, facsimile or telex machine of such
party. The second or any responsive notice shall be deemed delivered when
deposited in the United States mail or at the office of the courier or
telegraph service, or upon transmittal by telex, telecopy or facsimile, or
when personally delivered to the party to be notified, provided, that when
response is required within 24 or 48 hours, such response shall be given
orally or by telephone, telex, telecopy or other facsimile within such
period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties.
If a party is not available to receive notice orally or by telephone when a
party attempts to deliver a notice required to be delivered within 24 or 48
hours, the notice may be delivered in writing by any other method specified
herein and shall be deemed delivered in the same manner provided above for
any responsive notice.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and
Gas Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas
Interest contributed by any other party beyond the term of this agreement.
/ / OPTION NO. 1: So long as any of the Oil and Gas Leases subject to
this agreement remain or are continued in force as to any part of
the Contract Area, whether by production, extension, renewal or
otherwise.
/X/ OPTION NO. 2: In the event the well described in Article VI.A., or
any subsequent well drilled under any provision of this agreement,
results in the Completion of a well as a well capable of production
of Oil and/or Gas in paying quantities, this agreement shall
continue in force so long as any such well is capable of production,
and for an additional period of 90 days thereafter; provided,
however, if, prior to the expiration of such additional period, one
or more of the parties hereto are engaged in drilling, Reworking,
Deepening, Sidetracking, Plugging Back, testing or attempting to
Complete or Re-complete a well or wells hereunder, this agreement
shall continue in force until such operations have been completed
and if production results therefrom, this agreement shall continue in
force as provided herein. In the event the well described in Article
VI.A., or any subsequent well drilled hereunder, results in a dry
hole, and no other well is capable of producing Oil and/or Gas from
the Contract Area, this agreement shall terminate unless drilling,
Deepening, Sidetracking, Completing, Re-Completing, Plugging Back or
Reworking operations are commenced within 180 days from the date of
abandonment of said well. "Abandonment" for such purposes shall mean
either (i) a decision by all parties not to conduct any further
operations on the well or (ii) the elapse of 180 days from the
conduct of any operations on the well, whichever first occurs.
The termination of this agreement shall not relieve any party hereto from
any expense, liability or other obligation or any remedy therefor which has
accrued or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all
obligations hereunder, in the event a memorandum of this Operating Agreement
has been filed of record, Operator is authorized to file of record in all
necessary recording offices a notice of termination, and each party hereto
agrees to execute such a notice of termination as to Operator's interest,
upon request of Operator, if Operator has satisfied all its financial
obligations.
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the applicable laws of the state in
which the Contract Area is located, to the valid rules, regulations, and
orders of any duly constituted regulatory body of said state; and to all
other applicable federal, state, and local laws, ordinances, rules,
regulations and orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including but not
limited to matters of performance, non-performance, breach, remedies,
procedures, rights, duties, and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state
of California shall govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or
<PAGE>
orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on
tracts offsetting or adjacent to the Contract Area.
With respect to the operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of
action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or Federal Energy Regulatory Commission
or predecessor or successor agencies to the extent such interpretation or
application was made in good faith and does not constitute gross negligence.
Each Non-Operator further agrees to reimburse Operator for such
Non-Operator's share of production or any refund, fine, levy or other
governmental sanction that Operator may be required to pay as a result of
such an incorrect interpretation or application, together with interest and
penalties thereon owing by Operator as a result of such incorrect
interpretation or application.
ARTICLE XV.
MISCELLANEOUS
A. EXECUTION:
This agreement shall be binding upon each Non-Operator when this
agreement or a counterpart thereof has been executed by such Non-Operator
and Operator notwithstanding that this agreement is not then or thereafter
executed by all of the parties to which it is tendered or which are listed on
Exhibit "A" as owning an interest in the Contract Area or which own, in fact,
an interest in the Contract Area. Operator may, however, by written notice to
all Non-Operators who have become bound by this agreement as aforesaid, given
at any time prior to the actual spud date of the Initial Well but in no event
later than five days prior to the date specified in Article VI.A. for
commencement of the Initial Well, terminate this agreement if Operator in its
sole discretion determines that there is insufficient participation to justify
commencement of drilling operations. In the event of such a termination by
Operator, all further obligations of the parties hereunder shall cease as of
such termination. In the event any Non-Operator has advanced or prepaid any
share of drilling or other costs hereunder, all sums so advanced shall be
returned to such Non-Operator without interest. In the event Operator
proceeds with drilling operations for the Initial Well without the execution
hereof by all persons listed on Exhibit "A" as having a current working
interest in such well, Operator shall indemnify Non-Operators with respect to
all costs incurred for the Initial Well which would have been charged to such
person under this agreement if such person had executed the same and Operator
shall receive all revenues which would have been received by such person
under this agreement if such person had executed the same.
B. SUCCESSORS AND ASSIGNS:
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, devisees, legal
representatives, successors and assigns, and the terms hereof shall be deemed
to run with the Leases or Interests included within the Contract Area.
C. COUNTERPARTS:
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
D. SEVERABILITY:
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws, this agreement shall not be
severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.
ARTICLE XVI.
OTHER PROVISIONS
<PAGE>
IN WITNESS WHEREOF, this agreement shall be effective as of the 27 day
of October, 1997.
ATTEST OR WITNESS: OPERATOR
SUB-ANN PRODUCTION COMPANY
By /s/ Jim Frimodig
- ----------------------------------- -----------------------------------
Jim Frimodig
- ----------------------------------- -----------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
-----------------------------------
NON-OPERATORS
Beta Oil & Gas, Inc.
-----------------------------------
By
- ----------------------------------- -----------------------------------
Steve Antry
- ----------------------------------- -----------------------------------
Type or print name
Title President
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
-----------------------------------
-----------------------------------
By
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
-----------------------------------
-----------------------------------
By
- ----------------------------------- -----------------------------------
- ----------------------------------- -----------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
-----------------------------------
<PAGE>
ACKNOWLEDGMENTS
Note: The following forms of acknowledgement are the hort forms approved
by the Uniform Law on Notorial Acts. The validity and effects of these forms
in any state will depend upon the statutes of that state.
Individual acknowledgment:
State of )
---------------
) ss.
Country of
------------- )
This instrument was acknowledged before me on
by .
- ------------------------------------ ---------------------------------------
(Seal, if any)
-------------------------------------
Title (and Rank)
--------------------
My commission expires:
--------------
Acknowledgment in represntative capacity:
State of )
---------------
) ss.
Country of
------------- )
This instrument was acknowledged before me on
by .
- ------------------------------------ ---------------------------------------
of
- ------------------- --------------------------------------------------------
(Seal, if any)
-------------------------------------
Title (and Rank)
--------------------
My commission expires:
--------------
<PAGE>
EXHIBIT "A"
Attached to and made part of that certain Operating Agreement datd October
27, 1997, between Jim Frimodig, as Operator and Non-Operating participant,
Beta Oil & Gas, Inc.
1. Description of land subject to this agreement.
The Agrea of Mutual interest defined in that certain Agreement dated
October 27, 1997 by and between Jim Frimodig and Beta Oil & Gas, Inc.,
incorporated herein and made a part thereof.
2. Restrictions, if any, as to depths, formation, or substances.
None.
3. Parties to this agreement.
Operator: Jim Frmodig
P.O. Box 99243
San Diego, CA 92169
Non-Operator: Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
(714) 752-5212
4. Percentages of fractional interest of parties to this agreement.
The Area of Mutual interest defined in that certain Agreement dated
October 27, 1997 by and between Jim Frimodig an Beta Oil & Gas, Inc.,
incorporated herein and made part thereof.
5. Oil & Gas Leases and/or interest subject to this agreement.
Oil and Gas Leases and/or interests are to be obtained purusant to
this agreement: however as of the date hereof neither Frmodig or Beta
hold any such interests.
6. Burdens on production:
The Area of Mutual interst defined in that certain Agrement dated
October 27, 1997 by and between Jim Frimodig and Beta Oil & Gas, Inc.,
incorproated herein and made a part thereof.
<PAGE>
EXHIBIT "C"
Attached to and made a part of that certain Area of Mutual Interest Agreement
dated October 27, 1997, between Jim Frimodig and Beta Oil & Gas, Inc.
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
and/or contract labor directly employed on the Joint Property in a 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 Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of 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 Bank of America, Los Angeles on the first day of the
month in which delinquency occurs plus 1% or 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 within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical inventory
of Controllable Material as provided for in Section V.
COPYRIGHT-C- 1985 by the Council of Petroleum Accountants Societies.
-1-
<PAGE>
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 within 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
more 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 approving 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 this Accounting Procedure and if
the agreement to which this Accounting Procedure is attached contains no
contrary provisions in 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 on
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 of
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 imposed
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 these employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
4. EMPLOYEE BENEFITS
Operator's current costs of 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-
<PAGE>
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 receiving 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 available 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
personal directly engaged on the Joint Property if such charges are
excluded from the overhead rates. The cost of professional consultant
services and contract services of technical personnel 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 in paragraph 8A above, Operator may elect to use
average commercial rates prevailing 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
Association.
9. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or 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 judgements 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-
<PAGE>
12. INSURANCE
Net premiums paid for insurance required to be carried 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:
( ) shall be covered by the overhead rates, or
(X ) shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services 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. OVERHEAD - FIXED RATE BASIS
(1) Operator shall charge the Joint Account at the following rates
per well per month:
Drilling Well Rate $ 0
(Prorated for less than a full month)
Producing Well Rate $ As published yearly by Ernst & Young,
median rates for Pacific Coast onshore.
(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-
<PAGE>
is later, except that no charge shall be made during
suspension 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 a period of five (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 a multi-completed well in
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
on 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 (_____%) of the cost of development
of the Joint Property exclusive of costs provided under
Paragraph 10 of Section 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, redrilling, 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
original 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 as a 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-
<PAGE>
Account for overhead based on the following rates for any Major
Construction project in excess of $______________:
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 are 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
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or 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 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
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<PAGE>
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 per weight
of tubing transferred, to the railway receiving point
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 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, or 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.(1) and (2).
B. GOOD USED MATERIAL (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 which 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 as
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-
<PAGE>
(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 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 charges to the Joint Account
at the rate of twenty-five cents (25-cents-) per hundred weight
on all tubular 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 Material 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-
<PAGE>
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.
<PAGE>
EXHIBIT "D"
Attached to and made part of that certain Operating Agreement dated October
27, 1997, between Jim Frmodig,, as Operator and Non-Operating partiicpants,
Beta Oil & Gas, Inc.
INSURANCE
Operator shall carry the following minimum insurance:
TYPES OF INSURANCE LIMITS
- ------------------------- --------------------
Workmens' Compensation Insurance As required by law
Employers Liability Insurance $100,000.00
Comprehensive Liability Insurance:
Bodily Injury $1,000,000 combined single limit
Bodily Injury $1,000,000 combined single limit
Property Damage $1,000,000 combined single limit
Comprehensive Automobile Liability:
Bodily Injury $1,000,000 combined single limit
Bodily Injury $1,000,000 combined single limit
Property Damage $1,000,000 combined single limit
Umbrella Liability $2,000,000
<PAGE>
EXHIBIT "D"
FIRST FIVE WELLS EXPENDITURE FORECAsT
COMPLETION COSTS NOT INCLUDED
$,000$
<TABLE>
<CAPTION>
Year 1997 1998
Month Oct Nov Dec Jan Feb Mar Apr May Jun Jul Totals
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
San Joaquin AMI
Leasing 20 20
Seismic 40 40
Drilling 120 120 240
G&A 25 25 50
Sacramento AMI
Leasing 80 40 40 40 40 240
Seimsmic 150 150 300
Drilling 170 170 170 510
G&A 30 30 30 90
Total 175 40 180 185 40 150 150 170 200 200 1,490
</TABLE>
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made, entered into, and
effective as of _________________, 1997 ("Effective Date"), by and between Beta
Oil & Gas, Inc. ( the "COMPANY") and Steve Antry ("Employee").
RECITALS
WHEREAS, COMPANY desires to benefit from Employee's expertise in
financing and operating oil and gas companies;
WHEREAS, Employee desires to accept such employment, subject to the
conditions and terms set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties hereto hereby agree as follows:
AGREEMENT
1. Terms and Duties.
COMPANY hereby employs Employee as President of the Company as of the
date first set forth above and Employee agrees to enter into and remain in the
employ of COMPANY until this Agreement is terminated as provided hereinbelow.
Employee shall faithfully and diligently perform all professional duties and
acts as President, as may be required by the Board of Directors of the Company.
2. Exclusivity.
Employee agrees to perform Employee's services efficiently and to the
best of Employee's ability. Employee agrees throughout the term of this
Agreement to devote the majority of hisl time, energy and skill to the business
of the COMPANY and to the promotion of the best interests of the COMPANY. The
Company understands that nothing contained in this Agreement shall prohibit
Employee from continuing in his positions as the Chairman of the Board of Beta
Capital Group, Inc. and as a member of the Board of Directors of Pease Oil &
Gas, Inc. The Employee understands that he must obtain the consent of the Board
of Directors of the Company to commit to any additional positions which would
require utilization of his business time.
3. Compensation.
<PAGE>
Subject to the termination of this Agreement as provided herein,
COMPANY shall compensate Employee for his services hereunder at an annual salary
of $150,000 ("Salary") commencing October 1, 1997, payable in monthly
installments in accordance with the COMPANY's practices, less normal payroll
deductions. The Employee shall also be reimbursed for all expenses associated
with the maintenance and operation of Employee's car, up to $1,000 per month
plus gasoline expenses. In addition to the Salary as defined above, COMPANY
agrees to pay Employee a bonus, at times and in amounts determined by the Board
of Directors of the COMPANY. Employee shall be entitled to such other benefits
and salary increases as the Board of Directors may determine.
4. Disability of Employee.
Employee shall be considered disabled if, due to illness or injury,
either physical or mental, Employee is unable to perform Employee's customary
duties as an employee of COMPANY for more than thirty (30) days in the aggregate
out of a period of twelve (12) `consecutive months. The determination that
Employee is disabled shall be made by the Board of Directors of COMPANY, based
in part upon a physician's certification from a physician selected by the Board
of Directors of COMPANY and reasonably satisfactory to Employee. Employee agrees
to timely submit to any required medical or other examination.
If Employee is determined to be disabled, COMPANY shall have the option
of terminating this Agreement in its entirety upon fourteen (14) days written
notice, subject to the provisions of Section 6 below, to Employee stating the
date of termination, which date may be any time selected by COMPANY, but after
the date of the notice.
6. Termination and Liquidated Damages.
COMPANY shall have the right to terminate Employee "for cause" and
"without cause."
For purposes of this Agreement, the term "cause" shall be: (a) any
felonious conduct or material fraud by Employee in connection with the COMPANY;
(b) any embezzlement or misappropriation of funds or property of COMPANY by
Employee; (c) gross negligence by Employee; and (d) Employee's willful and
intentional misconduct in the performance of his material duties and
obligations, in each case after written notice to Employee specifying the cause
for termination, and, in the case of the causes described in (c) and (d) above,
the passage of not less than thirty (30) days after receipt of such notice,
during which time Employee shall have the right to respond to COMPANY's notice
and cure the breach or other event giving rise to the termination. In the event
that Employee is able to cure, this Agreement shall continue in full force and
effect. In the event of "for cause" termination, the COMPANY shall not have the
right to terminate or otherwise cancel any securities issued by the COMPANY to
the Employee.
COMPANY shall have the right to terminate Employee "without cause" upon
the payment of the "Severance Benefits." Severance Benefits shall mean, for
purposes of this Agreement, the payment of the following:
<PAGE>
(a) options to acquire the common stock of the COMPANY in an amount
equal to 10% of the then issued and outstanding shares containing a five-year
term, piggyback registration rights and an exercise price equal to 60% of the
fair market value of the shares during the sixty-day period of time preceding
the termination notice, such amount not to exceed $3.00 per share; and
(b) a cash payment equal to two times the aggregate compensation
payable to the Employee during the remaining term of this Agreement;
(c) in the event of termination "without cause," all unvested
securities issued by the COMPANY to the Employee shall immediately vest and the
COMPANY shall not have the right to terminate or otherwise cancel any securities
issued by the COMPANY to the Employee.
7. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their respective devisees, legatees, heirs, legal
representatives, successors, and permitted assigns. The preceding sentence shall
not affect any restriction on assignment set forth elsewhere in this Agreement.
8. Arbitration.
If a dispute or claim shall arise with respect to any of the terms or
provisions of this Agreement, or with respect to the performance by either of
the parties under this Agreement, then either party may, with notice as herein
provided, require that the dispute be submitted under the Commercial Arbitration
Rules of the American Arbitration Association.
9. Notices.
Any notice, request, demand, or other communication given pursuant to
the terms of this Agreement shall be deemed given upon delivery, if hand
delivered, or forty-eight (48) hours after deposit in the United States mail,
postage prepaid, and sent certified or registered mail, return receipt
requested, correctly addressed to the principal business address of the party to
which the communication is addressed.
10. Assignment.
Subject to all other provisions of this Agreement, any attempt to
assign or transfer this Agreement or any of the rights conferred hereby, by
judicial process or otherwise, to any person, firm, COMPANY, or corporation
without the prior written consent of the other party except for a transfer of
COMPANY's rights to a subsidiary or affiliate of COMPANY, shall be invalid, and
may, at the option of such other party, result in an incurable event of default
resulting in termination of this Agreement and all rights hereby conferred.
<PAGE>
11. Choice of Law.
This Agreement and the rights of the parties hereunder shall be
governed by and construed in accordance with the laws of the State of California
including all matters of construction, validity, performance, and enforcement
and without giving effect to the principles of conflict of laws.
12. Entire Agreement.
Except as provided herein, this Agreement, including exhibits, contains
the entire agreement of the parties, and supersedes all existing negotiations,
representations, or agreements and all other oral, written, or other
communications between them concerning the subject matter of this Agreement.
There are no representations, agreements, arrangements, or understandings, oral
or written, between and among the parties hereto relating to the subject matter
of this Agreement that are not fully expressed herein.
13. Severability.
If any provision of this Agreement is unenforceable, invalid, or
violates applicable law, such provision, or unenforceable portion of such
provision, shall be deemed stricken and shall not affect the enforceability of
any other provisions of this Agreement.
14. Captions.
The captions in this Agreement are inserted only as a matter of
convenience and for reference and shall not be deemed to define, limit, enlarge,
or describe the scope of this Agreement or the relationship of the parties, and
shall not affect this Agreement or the construction of any provisions herein.
15. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which shall together constitute
one and the same instrument.
16. Modification.
No change, modification, addition, or amendment to this Agreement shall
be valid unless in writing and signed by all parties hereto.
17. Attorneys' Fees.
<PAGE>
Except as otherwise provided herein, if a dispute should arise between
the parties including, but not limited to arbitration, the prevailing party
shall be reimbursed by the nonprevailing party for all reasonable expenses
incurred in resolving such dispute, including reasonable attorneys' fees
exclusive of such amount of attorneys' fees as shall be a premium for result or
for risk of loss under a contingency fee arrangement.
18. Taxes.
Any income taxes required to be paid in connection with the payments
due hereunder, shall be borne by the party required to make such payment. Any
withholding taxes in the nature of a tax on income shall be deducted from
payments due, and the party required to withhold such tax shall furnish to the
party receiving such payment all documentation necessary to prove the proper
amount to withhold of such taxes and to prove payment to the tax authority of
such required withholding.
20. Not for the Benefit of Creditors or Third Parties.
The provisions of this Agreement are intended only for the regulation
of relations among the parties. This Agreement is not intended for the benefit
of creditors of the parties or other third parties and no rights are granted to
creditors of the parties or other third parties under this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the Effective Date.
"COMPANY"
BETA OIL & GAS, INC.
By:/s/
Title:
"Employee"
/s/
-----------------------------------
<PAGE>
ADDENDUM
This Addendum is attached to and is a part of that certain EMPLOYMENT
AGREEMENT by and between BETA OIL & GAS, INC., a Nevada corporaation
("Company"), and STEVE ANTRY, an individial ("Employee"), dated________,
1997, (the "Agreement").
1. Compensation. Notwithstanding anything to the contrary contained in
the Agreement, Employee and Company agree that section 6(b) of the Agreement
should read as follows:
(b) a cash payment equal to two times the aggregate annual compensation
payable to the Employee during the remaining term of this Agreement;
2. No Modification. Except as specifically amended, modified, and
supplemented by this Addendum, the terms and provisions of the Agreement shall
remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the Effective Date.
"COMPANY"
BETA OIL & GAS, INC.
By:_/s/_____________________________
Name: _Steve Antry
Title:President
By:______________________________
Name: ___________________________
Title:_____________________________
"Employee"
By: /s/____________________________
Name: Steve Antry
By: ______________________________
Name: ___________________________
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
_________________, 1997 by and between Beta Oil & Gas, Inc. ( the "COMPANY") and
Steven Fischer ("Employee").
RECITALS
WHEREAS, COMPANY desires to benefit from Employee's expertise in
financing and operating oil and gas companies;
WHEREAS, Employee desires to accept such employment, subject to the
conditions and terms set forth herein.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties hereto hereby agree as follows:
AGREEMENT
1. Terms and Duties.
COMPANY shall employ Employee as Vice- President of Capital Markets
commencing immediately and terminating upon the date which is four years from
the Effective Date. Employee shall faithfully and diligently perform all
professional duties and acts as may be required by the Board of Directors of the
Company. The Effective Date shall mean, for purposes of this Agreement, the date
upon which the Employee's employment agreement is executed.
2. Exclusivity.
Employee agrees to perform Employee's services efficiently and to the
best of Employee's ability. Employee agrees throughout the term of this
Agreement to devote the majority of his time, energy and skill to the business
of the COMPANY and to the promotion of the best interests of the COMPANY. The
Employee understands that he must obtain the consent of the Board of Directors
of the Company to commit to any additional positions which would require
utilization of his business time.
3. Compensation.
<PAGE>
Subject to the termination of this Agreement as provided herein,
COMPANY shall compensate Employee for his services hereunder at an annual salary
of $60,000 ("Salary"), payable in monthly installments in accordance with the
COMPANY's practices, less normal payroll deductions beginning on March 1, 1999.
In addition to the Salary as defined above, COMPANY agrees to pay Employee a
bonus, at times and in amounts determined by the Board of Directors of the
COMPANY. Employee shall be entitled to such other benefits and salary increases
as the Board of Directors may determine.
4. Disability of Employee.
Employee shall be considered disabled if, due to illness or injury,
either physical or mental, Employee is unable to perform Employee's customary
duties as an employee of COMPANY for more than thirty (30) days in the aggregate
out of a period of twelve (12) consecutive months. The determination that
Employee is disabled shall be made by the Board of Directors of COMPANY, based
in part upon a physician's certification from a physician selected by the Board
of Directors of COMPANY and reasonably satisfactory to Employee. Employee agrees
to timely submit to any required medical or other examination.
If Employee is determined to be disabled, COMPANY shall have the option
of terminating this Agreement in its entirety upon fourteen (14) days written
notice, subject to the provisions of Section 6 below, to Employee stating the
date of termination, which date may be any time selected by COMPANY, but after
the date of the notice.
6. Termination and Liquidated Damages.
COMPANY shall have the right to terminate Employee "for cause".
For purposes of this Agreement, the term "cause" shall be: (a) any
felonious conduct or material fraud by Employee in connection with the COMPANY;
(b) any embezzlement or misappropriation of funds or property of COMPANY by
Employee; (c) gross negligence by Employee; and (d) Employee's willful and
intentional misconduct in the performance of his material duties and
obligations, in each case after written notice to Employee specifying the cause
for termination, and, in the case of the causes described in (c) and (d) above,
the passage of not less than thirty (30) days after receipt of such notice,
during which time Employee shall have the right to respond to COMPANY's notice
and cure the breach or other event giving rise to the termination. In the event
that Employee is able to cure, this Agreement shall continue in full force and
effect. In the event of "for cause" termination, the COMPANY shall not have the
right to terminate or otherwise cancel any securities issued by the COMPANY to
the Employee.
7. Binding Effect.
This Agreement shall be binding upon and inure to the benefit of the
parties hereto, their respective devisees, legatees, heirs, legal
representatives, successors, and permitted assigns. The preceding sentence shall
not affect any restriction on assignment set forth elsewhere in this Agreement.
<PAGE>
8. Arbitration.
If a dispute or claim shall arise with respect to any of the terms or
provisions of this Agreement, or with respect to the performance by either of
the parties under this Agreement, then either party may, with notice as herein
provided, require that the dispute be submitted under the Commercial Arbitration
Rules of the American Arbitration Association.
9. Notices.
Any notice, request, demand, or other communication given pursuant to
the terms of this Agreement shall be deemed given upon delivery, if hand
delivered, or forty-eight (48) hours after deposit in the United States mail,
postage prepaid, and sent certified or registered mail, return receipt
requested, correctly addressed to the principal business address of the party to
which the communication is addressed.
10. Assignment.
Subject to all other provisions of this Agreement, any attempt to
assign or transfer this Agreement or any of the rights conferred hereby, by
judicial process or otherwise, to any person, firm, COMPANY, or corporation
without the prior written consent of the other party except for a transfer of
COMPANY's rights to a subsidiary or affiliate of COMPANY, shall be invalid, and
may, at the option of such other party, result in an incurable event of default
resulting in termination of this Agreement and all rights hereby conferred.
11. Choice of Law.
This Agreement and the rights of the parties hereunder shall be
governed by and construed in accordance with the laws of the State of California
including all matters of construction, validity, performance, and enforcement
and without giving effect to the principles of conflict of laws.
12. Entire Agreement.
Except as provided herein, this Agreement, including exhibits, contains
the entire agreement of the parties, and supersedes all existing negotiations,
representations, or agreements and all other oral, written, or other
communications between them concerning the subject matter of this Agreement.
There are no representations, agreements, arrangements, or understandings, oral
or written, between and among the parties hereto relating to the subject matter
of this Agreement that are not fully expressed herein.
<PAGE>
13. Severability.
If any provision of this Agreement is unenforceable, invalid, or
violates applicable law, such provision, or unenforceable portion of such
provision, shall be deemed stricken and shall not affect the enforceability of
any other provisions of this Agreement.
14. Captions.
The captions in this Agreement are inserted only as a matter of
convenience and for reference and shall not be deemed to define, limit, enlarge,
or describe the scope of this Agreement or the relationship of the parties, and
shall not affect this Agreement or the construction of any provisions herein.
15. Counterparts.
This Agreement may be executed in one or more counterparts, each of
which shall be deemed an original, but all of which shall together constitute
one and the same instrument.
16. Modification.
No change, modification, addition, or amendment to this Agreement shall
be valid unless in writing and signed by all parties hereto.
17. Attorneys' Fees.
Except as otherwise provided herein, if a dispute should arise between
the parties including, but not limited to arbitration, the prevailing party
shall be reimbursed by the nonprevailing party for all reasonable expenses
incurred in resolving such dispute, including reasonable attorneys' fees
exclusive of such amount of attorneys' fees as shall be a premium for result or
for risk of loss under a contingency fee arrangement.
18. Taxes.
Any income taxes required to be paid in connection with the payments
due hereunder, shall be borne by the party required to make such payment. Any
withholding taxes in the nature of a tax on income shall be deducted from
payments due, and the party required to withhold such tax shall furnish to the
party receiving such payment all documentation necessary to prove the proper
amount to withhold of such taxes and to prove payment to the tax authority of
such required withholding.
<PAGE>
20. Not for the Benefit of Creditors or Third Parties.
The provisions of this Agreement are intended only for the regulation
of relations among the parties. This Agreement is not intended for the benefit
of creditors of the parties or other third parties and no rights are granted to
creditors of the parties or other third parties under this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the Effective Date.
"COMPANY"
BETA OIL & GAS, INC.
/s/
By:Steve Antry
Title:President
"Employee"
/s/Steven Fischer
WARRANT AGREEMENT
THIS WARRANT AGREEMENT (this "Agreement") is made and entered into as
of January 27, 1998, between BETA OIL & GAS, INC., a Nevada corporation (the
"Company") and J. CHRIS STEINHAUSER, an individual ("Holder").
R E C I T A L S
WHEREAS, the Company proposes to issue to Holder 100,000 warrants (the
"Warrants"), each such Warrant entitling the holder thereof to purchase one
share of Common Stock, $0.001 par value, of the Company (the "Shares" or the
"Common Stock"); and
WHEREAS, the Warrants which are the subject of this Agreement will be
issued by the Company to Holder as part of consideration payable to Holder in
connection with services rendered by the Holder to the Company as Chief
Financial Officer of the Company.
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
A G R E E M E N T
1. Warrant Certificates. The warrant certificates to be delivered
pursuant to this Agreement (the "Warrant Certificates") shall be in the form set
forth in Exhibit A, attached hereto and made a part hereof, with such
appropriate insertions, omissions, substitutions and other variations as are
required or permitted by this Warrant Agreement.
2. Vesting. The warrants shall vest as follows: (a) 25,000 warrants
shall be immediately vested upon the execution of this Agreement; (b) 25,000
warrants shall vest upon the date which is Holder's one year anniversary of
employment with the Company; (c) 25,000 warrants shall vest upon the date which
is Holder's two year anniversary of employment with the Company; and (d) 25,000
warrants shall vest upon the date which is Holder's three year anniversary of
employment with the Company. If Holder shall cease his employment with the
Company, for any reason, Holder shall be entitled only to those warrants which
vested as of the date of termination of employment. All nonvested warrants shall
be forfeited.
3. Right to Exercise Warrants. Subject to the provisions of paragraph 2
above, each Warrant may be exercised from the date of this Agreement until 11:59
P.M. (Los Angeles time) on the date that is five years after the date of this
Agreement (the "Expiration Date"). Each Warrant not exercised on or before the
Expiration Date shall expire.
Each Warrant shall entitle its holder to purchase from the Company one
share of Common Stock at an exercise price of $3.75 per share, subject to
adjustment as set forth below ("Exercise Price").
<PAGE>
The Company shall not be required to issue fractional shares of capital
stock upon the exercise of this Warrant or to deliver Warrant Certificates which
evidence fractional shares of capital stock. In the event that a fraction of an
Exercisable Share would, except for the provisions of this paragraph 2, be
issuable upon the exercise of this Warrant, the Company shall pay to the Holder
exercising the Warrant an amount in cash equal to such fraction multiplied by
the current market value of the Exercise Share. For purposes of this paragraph
2, the current market value shall be determined as follows:
(a) if the Exercise Shares are traded in the over-the-counter
market and not on any national securities exchange and not in the NASDAQ
Reporting System, the average of the mean between the last bid and asked prices
per share, as reported by the National Quotation Bureau, Inc., or an equivalent
generally accepted reporting service, for the last business day prior to the
date on which this Warrant is exercised, or, if not so reported, the average of
the closing bid and asked prices for an Exercise Share as furnished to the
Company by any member of the National Association of Securities Dealers, Inc.,
selected by the Company for that purpose.
(b) if the Exercise Shares are listed or traded on a national
securities exchange or in the NASDAQ Reporting System, the closing price on the
principal national securities exchange on which they are so listed or traded or
in the NASDAQ Reporting System, as the case may be, on the last business day
prior to the date of the exercise of this Warrant. The closing price referred to
in this Clause (b) shall be the last reported sales price or, in case no such
reported sale takes place on such day, the average of the reported closing bid
and asked prices, in either case on the national securities exchange on which
the Exercise Shares are then listed on in the NASDAQ Reporting System; or
(c) if no such closing price or closing bid and asked prices
are available, as determined in any reasonable manner as may be prescribed by
the Board of Directors of the Company.
4. Mutilated or Missing Warrant Certificates. In case any of the
Warrant Certificates shall be mutilated, lost, stolen or destroyed prior to its
expiration date, the Company shall issue and deliver, in exchange and
substitution for and upon cancellation of the mutilated Warrant Certificate, or
in lieu of and in substitution for the Warrant Certificate lost, stolen or
destroyed, a new Warrant Certificate of like tenor and representing an
equivalent right or interest.
5. Reservation of Shares. The Company will at all times reserve and
keep available, free from preemptive rights, out of the aggregate of its
authorized but unissued Shares or its authorized and issued Shares held in its
treasury for the purpose of enabling it to satisfy its obligation to issue
Shares upon exercise of Warrants, the full number of Shares deliverable upon the
exercise of all outstanding Warrants.
The Company covenants that all Shares which may be issued upon exercise
of Warrants will be validly issued, fully paid and nonassessable outstanding
Shares of the Company.
6. Rights of Holder. The Holder shall not, by virtue of anything
contained in this Warrant Agreement or otherwise, prior to exercise of this
Warrant, be entitled to any right whatsoever, either in law or equity, of a
stockholder of the Company, including without limitation, the right to receive
dividends or to vote or to consent or to receive notice as a shareholder in
respect of the meetings of shareholders or the election of directors of the
Company of any other matter.
<PAGE>
7. Investment Intent. Holder represents and warrants to the Company
that Holder is acquiring the Warrants for investment and with no present
intention of distributing or reselling any of the Warrants.
8. Certificates to Bear Language. The Warrants and the certificate or
certificates therefor shall bear the following legend by which each holder shall
be bound:
"THE WARRANTS REPRESENTED BY THIS CERTIFICATE AND THE SHARES
OF COMMON STOCK (OR OTHER SECURITIES) ISSUABLE UPON EXERCISE
THEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE
OF SUCH REGISTRATION OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL THAT AN EXEMPTION FROM
REGISTRATION UNDER SUCH ACT IS AVAILABLE."
The Shares and the certificate or certificates evidencing any
such Shares shall bear the following legend:
"THE SHARES (OR OTHER SECURITIES) REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933. THE SHARES MAY NOT BE SOLD OR TRANSFERRED IN
THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL
THAT AN EXEMPTION FROM REGISTRATION UNDER SUCH ACT IS
AVAILABLE."
Certificates for Warrants without such legend shall be issued if such
warrants or shares are sold pursuant to an effective registration statement
under the Securities Act of 1933 (the "Act") or if the Company has received an
opinion from counsel reasonably satisfactory to counsel for the Company, that
such legend is no longer required under the Act.
9. Registration Rights. The Company is obligated to register the shares
of Common Stock underlying the Warrants in any subsequent registration statement
filed by the Company with the Securities and Exchange Commission, so that
holders of such Common Stock shall be entitled to sell the same simultaneously
with and upon the terms and conditions as the securities sold for the account of
the Company are being sold pursuant to any such registration statement, subject
to such lock-up provisions as may be proposed by the underwriter of said
registration statement and agreed to by the investors (the "Piggyback
Registration Right"). In such registration, the Company shall pay all its
expenses and filing fees and shall make a reasonable number of copies of the
registration statement and any prospectus available to holders. The Company will
not pay any selling commissions or similar expenses incurred by Seller or of any
counsel or other representative of a seller.
<PAGE>
10. Adjustment of Number of Shares and Class of Capital Stock
Purchasable. The Number of Shares and Class of Capital Stock purchasable under
this Warrant Agreement are subject to adjustment from time to time as set forth
in this Section.
(a) Adjustment for Change in Capital Stock. If the Company:
(i) pays a dividend or makes a distribution on its Common
Stock, in each case, in shares of its Common Stock;
(ii) subdivides its outstanding shares of Common
Stock into a greater number of
shares;
(iii) combines its outstanding shares of Common Stock into
a smaller number of shares;
(iv) makes a distribution on its Common Stock in
shares of its capital stock other than Common Stock; or
(v) issues by reclassification of its shares of Common
Stock any shares of its capital stock;
then the number and classes of shares purchasable upon exercise of each Warrant
in effect immediately prior to such action shall be adjusted so that the holder
of any Warrant thereafter exercised may receive the number and classes of shares
of capital stock of the Company which such holder would have owned immediately
following such action if such holder had exercised the Warrant immediately prior
to such action.
For a dividend or distribution the adjustment shall become
effective immediately after the record date for the dividend or distribution.
For a subdivision, combination or reclassification, the adjustment shall become
effective immediately after the effective date of the subdivision, combination
or reclassification.
If after an adjustment the holder of a Warrant upon exercise
of it may receive shares of two or more classes of capital stock of the Company,
the Board of Directors of the Company shall in good faith determine the
allocation of the adjusted Exercise Price between or among the classes of
capital stock. After such allocation, that portion of the Exercise Price
applicable to each share of each such class of capital stock shall thereafter be
subject to adjustment on terms comparable to those applicable to Common Stock in
this Agreement. Notwithstanding the allocation of the Exercise Price between or
among shares of capital stock as provided by this Section 9, a Warrant may only
be exercised in full by payment of the entire Exercise Price currently in
effect.
<PAGE>
(b) Consolidation, Merger or Sale of the Company. If the
Company is a party to a consolidation, merger or transfer of assets which
reclassifies or changes its outstanding Common Stock, the successor corporation
(or corporation controlling the successor corporation or the Company, as the
case may be) shall by operation of law assume the Company's obligations under
this Warrant Agreement. Upon consummation of such transaction the Warrants shall
automatically become exercisable for the kind and amount of securities, cash or
other assets which the holder of a Warrant would have owned immediately after
the consolidation, merger or transfer if the holder had exercised the Warrant
immediately before the effective date of such transaction. As a condition to the
consummation of such transaction, the Company shall arrange for the person or
entity obligated to issue securities or deliver cash or other assets upon
exercise of the Warrant to, concurrently with the consummation of such
transaction, assume the Company's obligations hereunder by executing an
instrument so providing and further providing for adjustments which shall be as
nearly equivalent as may be practical to the adjustments provided for in this
Section 9.
11. Successors. All the covenants and provisions of this Agreement by
or for the benefit of the Company or Holder shall bind and inure to the benefit
of their respective successor and assigns hereunder.
12. Counterparts. This Agreement may be executed in any number of
counterparts and each of such counterparts shall for all proposes be deemed to
be an original, and such counterparts shall together constitute by one and the
same instrument.
13. Notices. All notices or other communications under this Warrant
shall be in writing and shall be deemed to have been given if delivered by hand
or mailed by certified mail, postage prepaid, return receipt requested,
addressed as follows: if to the Company: Beta Oil & Gas, Inc., 901 Dove Street,
Suite Suite 230, Newport Beach, California, 92660, Attention: Chief Executive
Officer, and to the Holder: at the address of the Holder appearing on the books
of the Company or the Company's transfer agent, if any.
Either the Company or the Holder may from time to time change the
address to which notices to it are to be mailed hereunder by notice in
accordance with the provisions of this Paragraph 12.
14. Supplements and Amendments. The Company may from time to time
supplement or amend this Warrant Agreement without the approval of any Holders
of Warrants in order to cure any ambiguity or to be correct or supplement any
provision contained herein which may be defective or inconsistent with any other
provision, or to make any other provisions in regard to matters or questions
herein arising hereunder which the Company may deem necessary or desirable and
which shall not materially adversely affect the interest of the Holder.
15. Severability. If for any reason any provision, paragraph or term of
this Warrant Agreement is held to be invalid or unenforceable, all other valid
provisions herein shall remain in full force and effect and all terms,
provisions and paragraphs of this Warrant shall be deemed to be severable.
16. Governing Law and Venue. This Warrant shall be deemed to be a
contract made under the laws of the State of California and for all purposes
shall be governed and construed in accordance with the laws of said State. Any
proceeding arising under this Warrant Agreement shall be instituted in Orange
County, State of California.
<PAGE>
17. Headings. Paragraphs and subparagraph headings, used herein are
included herein for convenience of reference only and shall not affect the
construction of this Warrant Agreement nor constitute a part of this Warrant
Agreement for any other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed, as of the date and year first above written.
<PAGE>
"COMPANY" "HOLDER"
BETA OIL & GAS, INC. J. CHRIS STEINHAUSER
/s/
- --------------------------------- /s/
BY: Steve Antry J. Chris Steinhauser
ITS: President
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
EXHIBIT A
NUMBER __ WARRANT
Warrant to Purchase
Shares
BETA OIL & GAS, INC. see reverse for
COMMON STOCK PURCHASE WARRANT certain definitions
will be void if not exercised prior to 11:59 P.M. Pacific Time on __________, 2002
This Certifies that for value received,
the registered holder or assigns ("Holder"),
<PAGE>
is entitled to purchase from Beta Oil & Gas, Inc., a Nevada corporation (the
"Company") at any time after 9:00 A.M. Eastern Time on January 27, 1998 at the
purchase price per share of $3.75 (the "Warrant Price"), the number of shares of
Common Stock of the Company set forth above (the "Shares"). The number of shares
purchasable upon exercise of each warrant evidenced hereby and the Warrant Price
per Share shall be subject to adjustment from time to time as set forth in the
Warrant Agreement referred to below. The Warrants expire on January 27, 2003.
Holders will not have any rights or privileges of shareholders of the Company
prior to exercise of the Warrants. Holders of the Warrants evidenced hereby and
the shares of Common Stock issuable upon exercise hereof have certain rights
with respect to registration with the Securities and Exchange Commission of the
Warrants and Common Stock issuable upon exercise hereof. These registration
rights are set forth in that certain Warrant Agreement of even date herewith
pursuant to which this Warrant Certificate has been issued. Further, the Warrant
Agreement includes certain vesting provisions which may affect the Holder's
right to exercise the Warrants. The Warrant evidenced hereby may be exercised in
whole or in part by presentation of this Warrant certificate with the Purchase
Form on the reverse side hereof fully executed (with a signature guarantee as
provided on the reverse side hereof) and simultaneous payment of the Warrant
Price (subject to adjustment) at the principal office of the Company. Payment of
such price shall be made at the option of the holder in cash or by certified
check or bank draft. The Warrants evidenced hereby are part of a duly authorized
issue of Common Stock Purchase Warrants with rights to purchase an aggregate of
up to 400,000 shares of Common Stock of the Company. Upon any partial exercise
of the Warrant evidenced hereby, there shall be countersigned and issued to the
Holder a new Warrant Certificate in respect of the Shares as to which the
Warrants evidenced hereby shall not have been exercised. This Warrant
Certificate may be exchanged at the office of the Company by surrender of this
Warrant Certificate properly endorsed with a signature guarantee either
separately or in combination with one or more other Warrants for one or more new
Warrants to purchase the same aggregate number of Shares as evidenced by the
Warrant or Warrants exchanged. No fractional Shares will be issued upon the
exercise of rights to purchase hereunder, but the Company shall pay the cash
value of any fraction upon the exercise of one or more Warrants. The Holder
hereof may be treated by the Company and all other persons dealing with this
Warrant Certificate as the absolute owner hereof for all purposes and as the
person entitled to exercise the rights represented hereby, any notice to the
contrary notwithstanding, and until such transfer is on such books, the Company
may treat the Holder as the owner for all purposes.
<PAGE>
Dated: __________, 1998 BETA
OIL & GAS, INC.
Secretary
Chief Executive Officer
SEE LEGEND ON REVERSE
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF
CERTAIN STATES, AND MAY NOT BE OFFERED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED
OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO (i) AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT AND ANY APPLICABLE STATE LAWS, (ii) TO THE EXTENT
APPLICABLE, RULE 144 UNDER THE ACT (OR ANY SIMILAR RULE UNDER THE ACT RELATING
TO THE DISPOSITION OF SECURITIES), OR (iii) AN OPINION OF COUNSEL, IF SUCH
OPINION SHALL BE REASONABLY SATISFACTORY TO COUNSEL TO THE ISSUER, THAT AN
EXEMPTION FROM REGISTRATION UNDER THE ACT AND APPLICABLE STATE LAW IS AVAILABLE.
ELECTION TO PURCHASE
The undersigned hereby elects irrevocably to exercise the within
Warrant and to purchase _______________________ shares of Common Stock of Beta
Oil & Gas, Inc. and hereby makes payment of $_________ (at the rate of $________
per share) in payment of the Exercise Price pursuant hereto. Please issue the
shares as to which this Warrant is exercised in accordance with the instructions
given below.
The undersigned represents and warrants that the exercise of the within
Warrant was solicited by the member firm of the National Association of
Securities Dealers, Inc. ("NASD") listed below. If not solicited by an NASD
member, please write "unsolicited" in the space below.
------------------------------------------------------
(Insert Name of NASD Member or "Unsolicited")
Dated: ________________, 19______
Signature: _____________________________________________
INSTRUCTIONS FOR REGISTRATION OF SHARES
Name (print) __________________________________________________________________
Address (print) ________________________________________________________________
ASSIGNMENT
FOR VALUE RECEIVED, ____________________________________ does hereby
sell, assign and transfer unto
___________________________________________________, the right to purchase
________________shares of Common Stock of Beta Oil & Gas, Inc., evidenced by the
within Warrant, and does hereby irrevocably constitute and appoint
__________________________________________ attorney to transfer such right on
the books of Beta Oil & Gas, Inc., with full power of substitution on the
premises.
Dated: ________________, 19______
Signature: _____________________________________________
Notice: The signature of Election to Purchase or Assignment must correspond with the name as written upon the
face of the within Warrant in every particular without alteration or enlargement or any change whatsoever. The
signature(s) must by guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan
Associations and Credit Unions with membership in an approved signature
guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15.
-----------------------------------------
Signature Guarantee
</TABLE>
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is entered into as of June
23, 1997 (the "Effective Date"), by and between Beta Oil & Gas, Inc. (the
"Company"), and R. Thomas Fetters ("Consultant").
RECITALS
WHEREAS, the Company desires to retain the Consultant to provide the
services set forth in Exhibit A hereto for the benefit of the Company (the
"Consulting Services");
WHEREAS, Consultant is engaged in the business of providing the
Consulting Services and desires to provide the Consulting Services to the
Company in accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties hereto hereby agree as follows:
A G R E E M E N T
1. Appointment and Duties. The Company hereby engages Consultant to
perform the Consulting Services commencing upon the date of this Agreement and
terminating in accordance with the terms set forth in Exhibit A. Consultant
agrees to accept such engagement upon the terms and conditions set forth herein.
Consultant shall faithfully and diligently perform the Consulting Services.
2. Compensation. Subject to the termination of this Agreement as
provided herein, the Company shall compensate Consultant for the performance
of the Consulting Services hereunder upon the terms and conditions set
forth in attached Exhibit B hereto.
3. Non-Exclusive; Non-Disclosure.
3.1 Consultant agrees to perform Consultant's Consulting
Services efficiently and to the best of Consultant's ability. Notwithstanding
the foregoing, the Company acknowledges and agrees that Consultant's engagement
with The Company is not exclusive and that Consultant is engaged in other
business endeavors and reserves the right to continue to do so throughout the
terms of this Agreement.
<PAGE>
3.2 Consultant acknowledges that Consultant may have access to
proprietary information regarding the business operations of the Company and
agrees to keep all such information secret and confidential and not to use or
disclose any such information to any individual or organization without the
Company's prior written consent.
4. Independent Contractor. Both the Company and the Consultant agree
that the Consultant will act as an independent contractor in the performance of
its duties under this Agreement. Nothing contained in this Agreement shall be
construed to imply that Consultant, or any employee, agent or other authorized
representative of Consultant, is a partner, joint venturer, agent, officer or
employee of The Company.
5. Term; Termination.
(a) Consultant may terminate this Agreement immediately for
cause at any time without notice. For purposes of this subsection (b), "cause"
for termination by Consultant shall be (i) a breach by The Company of any
material covenant or obligation hereunder; or (ii) the voluntary or involuntary
dissolution of the Company.
(b) The Company may terminate this Agreement for cause at any
time without notice. For purposes of this subsection (b), "cause" for
termination shall be: (i) any felonious conduct or material fraud by Consultant
in connection with The Company; (ii) any embezzlement or misappropriation of
funds or property of The Company by Consultant; (iii) any material breach of or
material failure to perform any covenant or obligation of Consultant under this
Agreement; or (iv) gross negligence by Consultant in the performance of his
duties under this Agreement.
6. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto their respective devisees, legatees, heirs,
legal representatives, successors, and permitted assigns. The preceding sentence
shall not affect any restriction on assignment set forth elsewhere in this
Agreement.
7. Notices. Any notice, request, demand, or other communication given
pursuant to the terms of this Agreement shall be deemed given upon delivery, if
hand delivered, or forty-eight (48) hours after deposit in the United States
mail, postage prepaid, and sent certified or registered mail, return receipt
requested, correctly addressed to the addresses of the parties indicated below
or at such other address as such party shall in writing have advised the other
party.
If to the Company: Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: Steve Antry
<PAGE>
If to Consultant: R. Thomas Fetters
101 Red Brick Circle
Lafayette, LA 70503
8. Entire Agreement. Except as provided herein, this Agreement contains
the entire agreement of the parties, and supersedes all existing negotiations,
representations, or agreements and all other oral, written, or other
communications between them concerning the subject matter of this Agreement.
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same instrument.
10. Modification. No change, modification, addition, or amendment to
this Agreement shall be valid unless in writing and signed by all parties
hereto.
11. Attorneys' Fees. Except as otherwise provided herein, if a dispute
should arise between the parties including, but not limited to arbitration, the
prevailing party shall be reimbursed by the non-prevailing party for all
reasonable expenses incurred in resolving such dispute, including reasonable
attorneys' fees exclusive of such amount of attorneys' fees as shall be a
premium for result or for risk of loss under a contingency fee arrangement. In
the event of such a dispute, it shall be resolved at the Orange County,
California office of the American Arbitration Association.
12. Assignment. Neither party shall assign its rights or obligations
under this Agreement without the express prior written consent of the other
party.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the Effective Date.
The Company
BETA OIL & GAS, INC.
By: /s/
Steve Antry, President
The Consultant
/s/
R. THOMAS FETTERS
<PAGE>
EXHIBIT "A"
Description of Consulting Services
During the twelve-month period of time commencing upon the date of this
Agreement Consultant agrees to utilize approximately 50% of his time in
providing the Consulting Services. Upon conclusion of this twelve month period
of time, in the event the Board of Directors of the Company is satisfied with
the performance of the Consultant, the Consultant shall be offered a two-year
extension of his Consulting Agreement. The Consulting Services shall mean, for
purposes of this Agreement, consulting with Company management in connection
with all aspects of the Company's exploration, development and production
projects. Nothing contained herein shall restrict the ability of the Consultant
to continue as a member of the Board of Directors of Pease Oil & Gas, Inc., XCL,
Inc. or Global Minerals, Inc.. Consultant agrees to serve on the Board of
Directors of the Company while he is a consultant/employee. Upon the Company
commencing trading in the public securities markets, the Company shall maintain
errors and omissions insurance through the term of this Agreement.
<PAGE>
EXHIBIT "B"
Compensation
The Consultant shall receive the following Compensation for the
provision of the Consulting Services (commencing upon the receipt by the Company
of at least $3 million pursuant to its July 1997 Private Placement Memorandum):
$5,000 per month plus all reasonable expenses incurred on
behalf of the Company (all amounts in excess of $500 per month shall require the
previous approval of the Company).
<PAGE>
ADDENDUM TO CONSULTING AGREEMENT
Pursuant to the Consulting Agreement (the "Agreement") entered into as
of _____________________, 1997 (the "Effective Date"), by and between Beta Oil &
Gas, Inc. (the "Company"), and R. Thomas Fetters ("Consultant"), it is hereby
agreed that in the event the Consultant is offered a position as a full-time
employee of the Company, his compensation shall be increased to a salary of
$125,000 per annum.
The Company
BETA OIL & GAS, INC.
By: /s/
Steve Antry, President
The Consultant
/s/
R. THOMAS FETTERS
<PAGE>
EXTENSION OF CONSULTING AGREEMENT
DATED 6-23-97 BETWEEN
BETA OIL & GAS, INC. AND R.THOMAS. FETTERS
WHEREAS, The Company and Consultant both agree to a two (2) year extension of
the Consulting Agreement as discussed in Exhibit "B" (2) of the Agreement by
today signing below with an effective date of June 23, 1998.
The Company
BETA OIL & GAS, INC.
By:/s/
Steve Antry, President
The Consultant
/s/R. THOMAS FETTERS
FIRST AMENDMENT TO LEASE
DATED November 23, 1993
This amendment to Lease is entered into as of the 24th day of June, 1997, THE
INTEGRITY FUND II ("Landlord") and Steve Antry and Lisa Antry d.b.a. Beta
Capital Group, Inc.
("Tenant").
RECITALS
A. Pursuant to that certain Lease dated November 23, 1993 for approximately 483
and 1401 square feet of that certain building at 901 Dove St. Suite 225 and
Suite 230. Newport Beach CA 92660 (the 'Building') between Landlord and Tenant
(the "Lease") All capitalized terms in this Amendment shall have the meaning
defined in the Lease unless otherwise specified herein.
B. Landlord and Tenant mutually agree upon lease renewal.
NOW THEREFORE, for good and valuable consideration, the receipt of which is
hereby acknowledged, Landlord and Tenant hereby agree to amend the Lease as
follows:
1. Lease of Twenty Four (24) months from 10/1/97 to expire on 9/30/99. The
rate shall be $1.35 per square foot for all twenty four months.
2. Tenant will have a twelve month option at a rate of $1.40 per Square Foot.
Option must be exercised 90 days prior to lease expiration or forfeited
3. Paint suites with Building Standard Paint
4. Name change from Beta Capital to Beta Oil And Gas, Inc.
IN WITNESS WHEREOF, the parties hereto have duly executed this Amendment Lease
as of the date first written above.
LANDLORD: TENANT:
THE INTEGRITY FUND II Steve Antry and Lisa Antry
d.b.a. Beta Oil & Gas, Inc.
By:______________ By:____________________
/s/Debra Wodarck /s/Lisa Antry
<PAGE>
OFFER TO LEASE
To: The Integrity Fund
1. The undersigned offeror, having inspected the premises or plans thereof
hereby offers to lease premises as outlined in Schedules "A" and "B" and under
the terms and conditions as set forth in the Lease attached hereto and forming a
part hereof and initialed by the parties.
2. Cash/Cheque for $ 394.33 (for a total deposit of $2,166.60) payable to you as
a deposit to be held by THE INTEGRITY FUND pending completion or other
termination of this agreement, is attached hereto to apply as a deposit on Basic
Rent and/or as security deposit which will be returned if this Offer is not
accepted.
3. The lease shall be drawn by you in accordance with the attached lease and
shall be executed by both parties herewith. The lease cancels the prior lease
signed November 23, 1993 and any associated remaining deposits and rent will be
transferred to this lease.
4. It is further understood that all representations made by THE INTEGRITY FUND
or any of its representatives, are set out in this agreement.
5. This Offers shall be irrevocable until October 5, l994, after which time if
not accepted this Offer shall be null and void.
DATED this third day of October, 1994.
Beta Capital Group, Inc.
Offeror's Name
/s/Steve Antry President
Signature Title
Signature Title
(Note. If a corporation, give title of signing officer and affix seal.)
The Integrity Fund hereby accepts the above Offer.
DATED this 3rd day of October, 1994
THE INTEGRITY FUND
Per:/s/The Integrity Fund
<PAGE>
INDEX
Page
1. LEASED PREMISES.....................................................1
2. TERM................................................................1
(a)Term............................................................1
(b) Delay in Occupancy.............................................1
(c) Overholding....................................................2
3. RENT
(a) Basic Rent.......................................................2
(b) Additional Rent..................................................2
(i) Taxes..........................................................2
(ii) Operating Costs...............................................2
(c) Payment Additional Rent................................................2
(d) Accrual of Rent..................................................3
(e) Recovery of Rent.................................................3
(f) Limitations......................................................3
4. SECURITY DEPOSIT....................................................3
5. GENERAL COVENANTS
(a) Landlord's Covenant..............................................3
(b) Tenants Covenant.................................................3
6. USE AND OCCUPANCY
(a) Use.............................................................3
(b) Waste, Nuisance, etc...................................................4
(c) Insurance Risks..................................................4
(d) Compliance with Law..............................................4
(e) Environmental Compliance...............................................4
(f) Rules and Regulations............................................4
7. ASSIGNMENT AND SUB-LETTING
(a) No Assignment Without Consent...................................4
(b) Assignment or Sub-letting Procedures...................................4
(c) Assumption of Obligations:.............................................5
(d) Tenants Continuing Obligations...................................5
8. REPAIR AND DAMAGE
(a) Landlord's Repairs to Building and Property......................5
(b) Landlord's Repairs to the Leased Premises........................5
(c) Tenant's Repairs.................................................5
(d) Indemnification..................................................5
(e) Damage and Destruction...........................................5
9. INSURANCE AND LIABILITY
(a) Landlord's Insurance.............................................6
(b) Tenant's Insurance...............................................6
(c) Limitation of Landlord's Liability...............................7
(d) Indemnity of Landlord............................................7
(e) Definition of "Insured Damage"...................................7
10. EVENTS OF DEFAULT AND REMEDIES
(a) Events of Default and Remedies...................................8
(b) Payment of Rent, etc. on Termination 9
<PAGE>
ADDITIONAL PROVISIONS Page
11. Relocation of Fixed Premises.........................................9
12. Subordination and Attornment.........................................9
13. Certificates.........................................................9
14. Inspection of and Access to the Leased Premises.....................10
15. Delay...............................................................10
16. Waiver..............................................................10
17. Sale, Demolition and Renovation.....................................10
18. Public Taking.......................................................10
19. Registration of Lease...............................................11
20. Lease Entire Agreement..............................................11
21 Notices.............................................................11
22. Interpretation......................................................11
23. Extent of Lease Obligations.........................................11
24. Use and Occupancy Prior to Term.....................................12
25. Schedules...........................................................12
Definitions of Principal Terms Paragraph Page
Additional Rent........................................3(b) 2
Additional Services....................................4(a) D-1
Basic Rent.............................................3(a) 2
Building..................................................1 1
Debts, Liabilities & Obligations..........................4 3
Fiscal Period..........................................3(c) 2
Insured Damage.........................................9(e) 7
Landlord................................................... 1, 10
Landlord's Taxes.......................................2(a) C-1
Leased Premises...........................................1 1
Leasehold Improvements....................................1 F-1
Landlord's Work...........................................2 F-2
Operating Costs...........................................5 D-2
Property..................................................1 1
Public Taking............................................18 10
Rent ..................................................3(d) 3
Taxes..................................................2(b) C-1
Tenant..................................................... 1
Tenant's Proportionate Share...........................2(d) C-1
Tenant's Proportionate Share..............................7 D-2
Tenant's Taxes.........................................2(c) C-1
Term...................................................2(a) 1
<PAGE>
THIS AGREEMENT made this Third day of October 1994
BETWEEN:
THE INTEGRITY FUND), a California Limited Partnership
in the City of Irvine
Of Orange County
(hereinafter called the "Landlord")
OF THE FIRST PART
and
BETA CAPITAL GROUP, INC.
Having an office at 901 Dove Street
In the City of Newport Beach County
Of Orange
(hereinafter called the "Tenant")
OF THE SECOND PART
In consideration of the rents, covenants and agreements hereinafter contained,
the Landlord
and Tenant hereby agree as follows:
1. LEASED PREMISES
Leased Premises: The Landlord does demise and lease to the Tenant the premises
(the "Leased Premises")located in a building (the "Building")
having a municipal address of
in the City of Newport Beach, California
and known as 901 Dove Street
(the Leased Premises, the Building, together with the
lands described in Schedule "A" attached hereto and
present and future improvements, additions and changes
thereto being herein called the "Property"), the Leased
Premises consisting of approximately
square feet (1,884 square feet on the second floor(s)
as outlined in red on the plan or plans marked
Schedule(s) "B" Premises attached hereto, excluding the
exterior surfaces of the exterior walls of the Leased
Premises.
2. TERM
Term (a) TO HAVE AND TO HOLD the Leased Premises for and
during the term of three years and zero days / months
(the "Term") to be computed from the 1st day of
October, 1994, and to be fully complete and ended on
the 30th day of September , 1997 unless otherwise
terminated.
Delay in Occupancy (b) If the Leased Premises or any part thereof are not
ready for occupancy on the date of commencement of the
Term, no part of the "Rent" (as hereinafter defined) or
only a proportionate part thereof, in the event that
the Tenant shall occupy a part of the Leased Premises,
shall be payable for the period prior to the date when
the entire Leased Premises are ready for occupancy and
the full Rent shall accrue only after such last
mentioned date. The Tenant agrees to accept any such
abatement of Rent in full settlement of all claims
which the Tenant might otherwise have by reason of the
Leased Premises not being ready for occupancy on the
date of commencement of the Term, provided that when
the Landlord has completed construction of such part of
the Leased Premises as it is obliged hereunder to
construct, the Tenant shall not be entitled to any
abatement of Rent for any delay in occupancy due to the
Tenant's failure or delay to provide plans or to
complete any special installations or other work
required for its purposes or due to any other reason
nor shall the Tenant be entitled abatement of Rent for
any delay in occupancy if the Landlord has been unable
to complete construction of the Leased Premises by
reason of such failure or delay by the Tenant.
A certificate of the Landlord as to the date the
Leased Premises were ready for occupancy and such
construction as the Landlord is obliged to complete is
substantially completed, or as to the date upon which
the same would have been ready for occupancy and
completed respectively but failure or delay of the
Tenant, shall be conclusive and binding on the Tenant
and Rent in full shall accrue and become payable from
the date set out in the said certificate.
Notwithstanding any delay in occupancy, the expiry date
of this Lease shall remain unchanged.
Overholding (c) If at the expiration of the Term or sooner
termination hereof, the Tenant shall remain in
possession without any further written agreement or in
circumstances where a tenancy thereby be created by
implication of law or otherwise, a tenancy from year to
year shall not be created by implication of law or
otherwise, but the Tenant shall be deemed to be a
monthly only, at 125% "Basic Rent" (as hereinafter
defined) payable monthly in advance plus "Additional
Rent" (as hereinafter defined) and otherwise upon and
subject to the same terms and conditions herein
contained, excepting provisions for renewal (if any)
and leasehold improvement allowances (if any),
contained herein, and nothing, including the acceptance
of any Rent by the Landlord for periods other than
monthly periods, shall extend this Lease to the
contrary except an agreement in writing between the
Landlord and the Tenant and the Tenant hereby
authorizes the Landlord to apply any moneys received
from the Tenant in payment of such monthly Rent.
3. RENT
Basic Rent (a) The Tenant shall without deduction or right of
offset pay to the Landlord yearly and every year during
the Term as rental (herein called 'Basic Rent"), the
sum of Twenty-Five Thousand Nine Hundred and
Ninety-Nine Dollars and Twenty cents ($25 ,999.20) of
lawful money of the jurisdiction in which the Leased
Premises are located in equal monthly installment of
Two Thousand One Hundred Sixty-six dollars and Sixty
cents ($2,166.60) each in advance on the first day of
each month during the Term, the first payment to be
made the first day of October, 1994.
Additional Rent (c) The Tenant shall, without deduction or right
of offset pay to the Landlord yearly and every year
during the Term as additional rental (herein called
"Additional Rent")
(i) the amounts of any Taxes payable by the Tenant to
the Landlord pursuant to the provisions of Schedule "C"
attached hereto; and
(ii) the amounts required to be paid to the Landlord
pursuant to the provisions of Schedule "D" attached
hereto.
Payment Additional Rent (c) Additional Rent shall be paid and
adjusted with reference to a fiscal period of twelve
(12) calendar months ("Fiscal Period"), which shall be
a calendar year unless the Landlord shall from time to
time have selected a Fiscal Period which is not a
calendar year by written notice to the Tenant.
The Landlord shall advise the Tenant in writing of
its estimate of the Additional Rent to be payable by
the Tenant during the Fiscal Period (or broken portion
of the Fiscal Period, as the case may be, if applicable
at the commencement or end of the Term or because of a
change in Fiscal Period), which commenced upon the
commencement date of the Term and for each succeeding
Fiscal Period or broken portion thereof which commences
during the Term. Such estimate shall in every case be a
reasonable estimate and, if requested by the Tenant,
shall be accompanied by reasonable particulars of the
manner in which it was calculated. The Additional Rent
payable by the Tenant shall be paid in equal monthly
installments in advance at the same time as payment of
Basic Rent is due hereunder based on the Landlord's
estimate as aforesaid. From time to time, the Landlord
may re-estimate, on a reasonable basis, the amount of
Additional Rent for any Fiscal Period or broken portion
thereof, in which case the Landlord shall advise the
Tenant in writing of such re-estimate and fix new equal
monthly installments for the remaining balance of such
Fiscal Period or broken portion thereof. After the end
of each such Fiscal period or broken portion thereof
the Landlord shall submit to the Tenant a statement of
the actual Additional Rent payable in respect of such
Fiscal Period or broken portion thereof and a
calculation of the amounts by which the Additional Rent
payable by the Tenant exceeds or less than (as the case
may be) the aggregate installments paid by the Tenant
on account of Additional Rent for such Fiscal Period.
Within thirty (30) days after the submission of such
statement either the Tenant shall pay to the Landlord
any amount by which the amount found payable by the
Tenant with respect to such Fiscal Period or broken
portion thereof exceeds the aggregate of the monthly
payments made by it on account thereof during such
Fiscal Period or broken portion thereof, or the
Landlord to the Tenant any amount by which the amount
found payable as aforesaid is less than the aggregate
of such monthly payments.
Accrual of Rent (d) Basic Rent and Additional Rent (herein collectively
called "Rent") shall be considered as accruing from
day to day, and Rent for an irregular period of less
than one year or less the calendar month shall be
apportioned and adjusted by the Landlord for the Fiscal
Periods of the Landlord in which the tenancy created
hereby commences and expires. Where the calculation of
Additional Rent for a period cannot be made until
after the termination of this Lease, the obligation of
the Tenant to pay Additional Rent shall survive the
termination hereof and Additional Rent for such period
shall be payable by the Tenant upon demand by the
Landlord. If the Term commences or expires on any day
other than the first or the last day of a month, Rent
for such fraction of a month shall be apportioned and
adjusted as aforesaid and paid by the Tenant on the
commencement date of the Term.
Recovery of Rent (e) Rent and any other amounts required to be
paid by the Tenant to the Landlord under this Lease
shall be deemed to be and be treated as rent and
payable and recoverable as rent, and the Landlord shall
have all rights against the Tenant for default in any
payment of rent and other amounts as in the case of
arrears in rent.
Limitations (f) The information set out in statements, documents or
other writings setting out the amount of Additional
Rent submitted to the Tenant under or pursuant to this
Lease shall be binding on Tenant and deemed to be
accepted by it and shall not be subject to amendment
for any reason unless the Tenant gives written notice
to the Landlord within sixty (60) days of the
Landlord's submission of such statement, document, or
writing identifying the statement, document or writing
and setting out in reasonable detail the reason why
such statement, document or writing should not be
binding on the Tenant.
4. SECURITY DEPOSIT
Security Deposit The Tenant shall pay to the Landlord on execution
of this Lease by the Tenant the sum of Three Hundred
Ninety-Four Dollars and Thirty-Three cents Dollars
($394.33) as an additional deposit for a total deposit
of $2,166.60 to the Landlord to stand as security
for the payment by the Tenant of any and all present
an future debts and liabilities of the Tenant to the
Landlord and for the performance by the Tenant of all
of its obligations arising under or in connection with
this Lease (the "Debts, Liabilities & Obligations").
The Landlord shall not be required to keep the deposit
separate from its general funds. In the event of the
Landlord disposing of its interest in this Lease,
the Landlord shall credit the deposit to its successor
and thereupon shall have no liability to the Tenant
to repay the security deposit to the Tenant. Subject
to the foregoing and to the Tenant not being in default
under this Lease, the Landlord shall repay the
security deposit to the Tenant without interest at
the end of the Term or sooner termination of the
Lease provided that all Debts, Liabilities and
Obligations of the Tenant to the Landlord are paid
and performed in full, failing which the Landlord
may on notice to the Tenant elect to retain the
security deposit and to apply it in reduction of
the Debts, Liabilities and Obligations and the Tenant
shall remain fully liable to the Landlord for payment
and performance of the remaining Debts, Liabilities
and Obligations.
5. GENERAL COVENANTS
Landlord's Covenant (a) The Landlord covenants with the Tenant:
(i) for quiet enjoyment; and
(ii) To observe and perform all the covenants and
obligations of the Landlord herein.
Tenants' Covenant (a) The Tenant covenants with the Landlord:
(i) to pay Rent: and
(ii) To observe and perform all the covenants
and obligations of the Tenant herein.
6. USE AND OCCUPANCY
Use The Tenant covenants with the Landlord:
(a) to use the Leased Premises for any purpose other
than an office for the conduct of the Tenant's
business which is general office use.
Waste, Nuisance, etc. (b) not to commit, or permit, any waste,
injury or damage to the Property including the
Leasehold Improvements and any trade fixtures therein,
any loading of the floors thereof in excess of the
maximum degree of loading as determined by the Landlord
acting reasonably, any nuisance or any use or manner of
use causing annoyance to other tenants and occupants of
the Property or to the Landlord;
Insurance Risks (c) not to do, omit or permit to be done or
omitted to be done upon the Property anything which
would cause to be increased the Landlord's cost of
insurance or the costs of insurance of' another tenant
of the Property against perils as to which the Landlord
or such other tenant has insured or which shall cause
any policy of insurance on the Property to be subject
to cancellation;
Compliance with Law (d) to comply at its own expense with all
governmental laws, regulations and requirements
pertaining to the occupation and use of the Leased
Premises, the condition of the Leasehold Improvements,
trade fixtures, furniture and equipment installed by or
on behalf of therein and the snaking by the Tenant of
any repairs, changes or improvements therein;
Environmental Compliance (e) (i) to conduct and maintain its
business and operations at the Leased Premises comply
in all respects with common law and with all present
and future applicable federal, provincial/state, local,
municipal, governmental or quasi. Government by-laws,
rules, regulations, licenses, orders, guidelines,
directives, permits, decisions, requirements concerning
occupational or public health and safety or the
environment and any order, injunction, judgment,
declaration, notice or demand issued there
("Environmental Laws").
(ii) not to permit or suffer
any substance which is hazardous or is prohibited,
restricted, regulated or controlled under any
Environmental Law to be present at, on or in the Leased
Premises, unless it has received the prior written
consent of the Landlord which consent may be
arbitrarily withheld.
Rules and Regulations (f) to observe and perform, and to
cause its employees, invitees and others over whom the
Tenant can reasonably be expected to exercise control
to observe and perform, the Rules and Regulations
contained in Schedule "E" hereto, and such further and
other reasonable rules and regulation amendments and
additions therein as may hereafter be made by the
Landlord and notified in writing to the Tenant, except
that no change or addition may be made that is
inconsistent with this Lease unless as may be required
by governmental regulation or unless the Tenant
consents thereto. The imposition of such Rules and
Regulations shall not create or imply any obligation
the Landlord to enforce them or create any liability of
the Landlord for their non-enforcement otherwise.
7. ASSIGNMENT AND SUB-LETTING
No Assignment (a) The Tenant covenants that it will not assign this
and Subletting Lease or sub-let the Leased Premises in whole or in part
without the prior written consent of the Landlord, which
consent the Landlord covenants not to withhold
unreasonably (i) as to any assignee or sub-lessee who
is in a satisfactory financial condition, agrees
to use the Leased Premises for those purposes permitted
hereunder and is otherwise satisfactory to the
Landlord, and (ii) as to any portion of the Leased
Premises which, in the Landlord's sole judgment, is a
proper and rational division of the Leased Premises
subject to the Landlord's right of termination arising
under this paragraph. Without limitation, the Tenant
shall for the purpose of this paragraph be considered
to assign or sub-let in any case where it permits the
Leased Premises or any portion thereof to be, or the
Leased Premises or any portion thereof are, occupied
by persons other than the Tenant, its employees and
others engaged in carrying on the business of the
Tenant, whether pursuant to assignment, sub-letting,
license or other right, or where any of' the foregoing
occurs by operation of law.
Assignment or (b) The Tenant shall not assign this Lease or sub-let
Sub-Letting Procedures the whole or any part of the Leased Premises unless:
(i) it shall have received or procured a bona fide
written offer to take an assignment sub-lease
which is not inconsistent with this Lease, and the
acceptance of which would not breach any provision
of this Lease if this paragraph is complied with
and which the Tenant has determined to accept
subject to this paragraph being complied with, and
(ii) it shall have first requested and obtained the
consent in writing of the Landlord thereto.
Any request for consent shall be in writing and
accompanied by a copy of the offer certified by the
Tenant to be true and complete, and the Tenant shall
furnish to the Landlord all information available to
the Tenant and requested by the Landlord as to the
responsibility, financial standing and business of the
proposed assignee or sub-tenant. Notwithstanding the
provisions sub-paragraph (a), within twenty (20) days
after the receipt by the Landlord of such request,
consent and of all information which the Landlord shall
have requested hereunder, the Landlord shall have the
right upon written notice of termination submitted to
the Tenant, if the request is assign this Lease or
sub-let the whole of the Leased Premises, to cancel and
terminate this Lease, or if the request is to sub-let a
part of the Leased Premises, to cancel and terminate
this Lease with respect to such part, in each case as
of a termination date to be stipulated in the notice of
termination which shall be not less than thirty (30)
days or more than sixty (60) days following the giving
of such notice. In such event the Tenant shall
surrender the whole or part, as the case may be, of the
Leased Premises in accordance with such notice of
termination and Base Rent Additional Rent shall be
apportioned and paid to the date of surrender and, if a
part only of the Leased Premises is surrendered, Basic
Rent and Additional Rent shall after the date of
surrender abate proportionately. If such consent shall
be given the Tenant shall assign or sub-let, as the
case may be, only upon the terms set out in the offer
submitted to the Landlord as aforesaid and not
otherwise.
Assumption of (c) No assignment or sub-letting of this Lease shall be
Obligation effective unless the assignee or sub-lessee shall
execute an assumption agreement on the Landlord's
form, assuming all the obligations of the Tenant
hereunder, and shall pay to the Landlord its reasonable
fee for processing the assignment sub-letting.
Tenant's Continuing (d) The Tenant agrees that any consent to an assignment
Obligation or sub-letting of this Lease or Leased Premises, shall
not thereby Release the Tenant of its obligations
hereunder.
8. REPAIR & DAMAGE
Landlord's Repairs to (a) The Landlord covenants with the Tenant to keep in a
Building & Property good and reasonable state of repair and decoration:
(i) those portions of the Property consisting of the
entrance, lobbies, stairways, corridors,
landscaped areas, parking areas, and other
facilities from time to time provided for use
in common by the Tenant and other tenants of the
Building or Property, and the exterior portions
(including foundations and roofs) of all buildings
and structures from time to time forming part of
the Property and affecting its general
appearance;
(ii) the Building (other than the Leased Premises
and premises of other tenants) including
systems for interior climate control, the
elevators and escalators (if any),
entrances, lobbies, stairways, corridors and
washrooms from time to time provided for
common use by the Tenant and other tenants
of the Building or Property and the systems
provided for use in common by the Tenant and
other tenants of the Building or Property
and the systems provided for bringing
utilities to the Leased Premises.
Landlord's Repairs to (b)The Landlord covenants with the Tenant to repair, so
the Leased Premises far as reasonably feasible, and as expeditiously as
reasonably feasible, defects in standard demising
walls or in structural elements, exterior walls of
the Building, suspended ceiling, electrical
and mechanical installations standard to the Building
installed by the Landlord in the Leased Premises (if
and to the extent that such defects are sufficient to
impair the Tenant's use of the Leased Premises while
using them in a manner consistent with this Lease) and
"Insured Damage" (as herein defined). The Landlord
shall in no event be required to make repairs to
Leasehold Improvements made by the Tenant, or by the
Landlord on behalf of the Tenant or another tenant or
to make repairs to wear and tear within the Leased
Premises.
Tenant's Repairs (c) The Tenant covenants with the Landlord
to repair, maintain and keep at the Tenant's cost,
except insofar as the obligation to repair rests upon
the Landlord pursuant to this paragraph the Leased
Premises, including Leasehold Improvements in good and
substantial repair. reasonable wear and tear excepted,
provided that this obligation shall not extend to
structural elements or to exterior glass or to repairs
which the Landlord would be required to make under this
paragraph for the exclusion therefrom of defects not
sufficient to impair the Tenant's use of the Leased
Premises while using them in a manner consistent with
this Lease. The Landlord may enter Leased Premises at
all reasonable times and view the condition thereof and
the Tenant covenants with the Landlord to repair,
sustain and keep the Leased Premises in good and
substantial repair according to notice in writing,
reasonable wear and tear excepted. If the Tenant shall
fail to repair as aforesaid after reasonable notice to
do so, the Landlord may effect the repairs and the
Tenant shall pay the reasonable cost thereof to the
Landlord on demand, The Tenant covenants with Landlord
that the Tenant will at the expiration of the Term or
sooner termination thereof peaceably surrender the
Leased Premises and appurtenances in good and
substantial repair condition, reasonable wear and tear
excepted.
Indemnification (d) If any part of the Property becomes out of repair,
damaged or destroyed through negligence of, or misuse
by, the Tenant or its employees, agents, invitees or
others under its control, the Tenant shall pay the
Landlord on demand the expense of repairs or
replacement including the Landlord's reasonable
administration charge thereof, necessitated by such
negligence or misuse.
Damage and Destruction (e) It is agreed between the Landlord and the Tenant
that:
(i) In the event of damage to the Property or to any
part thereof, if the damage is such the Leased
Premises or any substantial part thereof is
rendered not reasonably capable of use and
occupancy by the Tenant for the purposes of its
business for any period of in excess of ten (10)
days, then
(e) (i) (1) unless the damage was caused by
the fault or negligence of the Tenant or
its employees, agents, invitees, or
others under its control, from the date
of the occurrence of the damage and until
the Leased Premises are again reasonably
capable for use and occupancy as
aforesaid, the Rent payable pursuant to
this Lease from time to time in
proportion to the part or parts of the
Leased reasonably capable of such use and
occupancy, and
(2) unless this Lease is terminated
as hereinafter provided the Landlord or
the Tenant as the case may be (according
to the nature of the damage and their
obligations to repair as provided in
sub-paragraphs (a), (b) and (c) of this
paragraph) shall repair such damage with
all reasonable diligence, but to the
extent of the Leased Premises is not
reasonably capable of such use and
occupancy by reason of damage which the
Tenant is obligated to repair hereunder,
any abatement of Rent to which the
Tenant would otherwise be entitled
hereunder shall not extend later than the
time by which, in the reasonable opinion
of the Landlord, repairs by the Tenant
ought to have been completed with
reasonable diligence; and
(ii) if the Leased Premises are substantially damaged
or destroyed by any cause and if in the
reasonable opinion of the Landlord given in
writing within thirty (30) days occurrence the
damage cannot reasonably be repaired within one
hundred and eighty (180) days after the
occurrence thereof, then the Lease shall
terminate, in which event neither the Landlord
nor the Tenant shall be bound to repair as
provided in sub-paragraphs (a), (b) and (c) of
this paragraph, and the Tenant shall instead
deliver up possession of the Leased Premises to
the Landlord with reasonable expedition and Rent
shall be apportioned and paid to the date of the
occurrence; and
(iii)if premises whether of the Tenant or other
tenants of the Property comprising in the
aggregate half or more of the total number of
square feet of rentable office area in the
Property or half or more of the total number of
square feet of rentable office area in the
Building (as determined by the Landlord) or
portions of the Property which affect access or
services essential thereto, are substantially
damaged or destroyed by any cause and if in the
reasonable opinion of the Landlord the damage
cannot reasonably be repaired one hundred and
eighty (180) days after the occurrence thereof,
then the Landlord by written notice to the
Tenant given within thirty (30) days after the
occurrence of such damage or destruction,
terminate this Lease, in which event neither the
Landlord nor the Tenant shall be bound to repair
as provided in sub-paragraphs (a) (b) and (c)
paragraph, and the Tenant shall instead deliver
up possession of the Leased Premises to the
Landlord with reasonable expedition but in any
event within sixty (60) days delivery of such
notice of termination, and Rent shall be
apportioned and paid to upon which possession is
so delivered up (but subject to any abatement to
which the Tenant may be entitled under
sub-paragraph (e) (i) of this paragraph).
9.INSURANCE AND LIABILITY
Landlord's Insurance (a) The Landlord shall take out and
keep in force during the Term insurance with respect to
the Property except for the "Leasehold Improvements"
(as hereinafter defined) in the Leased Premises The
insurance to be maintained by the Landlord shall be in
respect of perils and to amount on terms and conditions
which from time to time are insurable at a reasonable
premium and are normally insured by reasonable prudent
owners of properties similar to the Property from time
to time determined at reasonable intervals by insurance
advisors selected b Landlord, and whose opinion shall
be conclusive. Unless and until the insurance advisors
state that any such perils are not customarily insured
against by owners of properties similar to the
Property, the perils to be insured against by the
Landlord shall include, without limitation, public
liability, boilers and machinery, fire and extended
perils and may include at the option of the Landlord
losses suffered by the Landlord in its capacity as
Landlord through business interruption. The insurance
to be maintained by the Landlord shall contain a waiver
by the insurer of any of subrogation or indemnity or
any other claim over which the insurer might otherwise
be entitled against the Tenant or the agents or
employees of the Tenant.
Tenant's Insurance (b) The Tenant shall take out and keep in force during
the Term:
(i) comprehensive general public liability
insurance all on an occurrence basis with
respect the business carried on, in or from
the Leased Premises and the Tenant's use
and occupancy of the Leased Premises and
of any other part of the Property, with
coverage for any one occurrence or claim
of not less than One Million Dollars
($1,000,000) or such other amount as the
Landlord may reasonably require upon not
less than one (1) month notice at any time
during the Term, which Insurance shall
include the Landlord as a named insured and
shall protect the Landlord in respect of
claims by the Tenant as if the Landlord
were separately insured;
(ii) insurance in respect of fire and such
other perils as are from time to time in
extended coverage endorsement covering the
Leasehold Improvements, trade fixtures and
the furniture and equipment in the Leased
Premises for not less than 80% of the full
replacement cost thereof and which
insurance shall include the Landlord as
insured as the Landlord's interest may
appear; and
(iii) Insurance against such other perils and in
such amounts as the Landlord may from time
to time reasonably require upon not less
than ninety (90) days written notice
requirement to be made on the basis that
the required insurance is customary at the
time for prudent tenants of properties
similar to the Property.
All insurance required to be maintained by the Tenant
shall be on terms and with insurers satisfactory to the
Landlord. Each policy shall contain a waiver by the
insurer of any subrogation or indemnity or any other
claim over to which the insurer might otherwise be
entitled against the Landlord or the agents or
employees of the Landlord, and shall also contain an
undertaking by the insurer that no material change
adverse to the Landlord or the Tenant will be made, and
the policy will not lapse or be canceled, except after
not less than thirty (30) days written notice to the
Landlord of the intended change, lapse or cancellation.
The Tenant shall furnish to the Landlord, if and
whenever requested by it, certificates or other
evidences acceptable to the Landlord as to the
insurance from time to time effected by the Tenant and
its renewal or continuation in force, together with
evidence as to the method of determination of full
replace cost of the Tenant's Leasehold Improvements,
trade fixtures, furniture and equipment, and if the
Landlord reasonably concludes that the all replacement
cost has been underestimated, the Tenant shall
forthwith arrange for any consequent increase in
coverage required under sub-paragraph (b). If the
Tenant shall fall to take out, renew and keep in force
such insurance, or if the evidences submitted to the
Landlord are unacceptable to the Landlord (or no such
evidences are submitted within a reasonable period
after request therefor by the Landlord), then the
Landlord may give the Tenant written notice requiring
compliance with this sub-paragraph and specifying the
respects in which the Tenant is not then in compliance
with this sub-paragraph. If the Tenant does not within
forty-eight (48) hours provide appropriate evidence of
compliance with this sub-paragraph the Landlord may
(but shall not be obligated to) obtain some or all of
the additional coverage or other insurance which the
Tenant shall have failed to obtain, without prejudice
to any other rights of the Landlord under this Lease or
otherwise, and the Tenant shall pay all premiums and
other reasonable expenses incurred by the Landlord to
the Landlord on demand.
Limitation of Landlords (c) The Tenant agrees that the Landlord shall not be
Liability liable for any bodily injury or death of, or loss or
damage to any property belonging to, the Tenant or its
employees, invitees or licensee any other
person in, on or about the Property unless resulting
from the actual willful misconduct or gross negligence
of the Landlord or its own employees. In no event shall
the Landlord be liable for any damage which is caused
by steam, water, rain or snow or other thing which may
leak into, issue or flow from any part of the Property
or from the pipes or plumbing works, including
sprinkler system (if any) therein or from any other
place or for any damage caused by or attributable to
the condition or arrangement of any electric or other
wiring or of sprinkler heads (if any) or for any damage
caused by anything done or omitted by any other tenant.
Indemnity of Landlord (d) Except with respect to claims or
liabilities in respect of any damage which is Insured
Damage to the extent of the cost of repairing such
Insured Damage, the Tenant agrees to indemnify and save
harmless the Landlord in respect of:
(i) all claims for bodily injury or death,
property damage or other loss or damage
arising from the conduct of any work or any
act or omission of the Tenant or any assign
sub-tenant, agent, employee, contractor,
invitee or licensee of the Tenant, and in
respect of all costs, expenses and
liabilities incurred by the Landlord in
connection with arising out of all such
claims, including the expenses of any action
or proceeds pertaining thereto, and
(ii) any loss, cost, (including, without
limitation, lawyers' fees and
disbursements), expense or damage suffered
by the Landlord arising from any breach by
the Tenant of any of covenants and
obligations under this Lease.
Definition of (e) For purposes of this Lease, 'Insured Damage' means
"Insured Damage" that part of any damage occurring to Property of which
the entire cost of repair (or the entire cost of repair
other than a deductible amount properly collectable
by the Landlord as part of the Additional Rent) is
actually recovered by the Landlord under a policy or
policies of insurance from time to time effected by
the Landlord pursuant to sub-paragraph (a) Where an
applicable policy of insurance contains an exclusion
for damages recoverable from a third party,
claims as to which the exclusion applies shall
considered to constitute Insured Damage only if the
Landlord successfully recovers from the third party.
10. EVENTS OF DEFAULT AND REMEDIES
Events of Default (a) In event of the happening of any one of the following
and Remedies events:
(i) the Tenant shall have to pay
an installment of Basic Rent or of Addition
or any other amount payable hereunder when
due, and such failure shall be continuing
for a period of more than thirty (30) days
after the date such installment or amount
due;
(ii) there shall be a default of or with any
condition, covenant, agreement or
obligation on the part of the Tenant to be
kept, observed or performed hereunder
(other than a condition, covenant,
agreement or other obligation to pay Basic
Rent, Additional Rent or any other amount
of money) and such default shall be
continuing for a period of more than twenty
(20) days after written notice by the
Landlord to the Tenant specifying the
default and requiring that it discontinue;
(iii) if any policy of insurance upon the
Property or any part thereof from time to
effected by the Landlord shall be canceled
or about to be canceled by the insurer by
reason of the use or occupation of the
Leased Premises by the Tenant or any
assignee, sub-tenant or licensee of the
Tenant or anyone permitted by the Tenant to
be upon Leased Premises and the Tenant
after receipt of notice in writing from the
Landlord shall have failed to take such
immediate steps in respect of such use or
occupation shall enable the Landlord to
reinstate or avoid cancellation (as the
case may be) of such policy of insurance,
(iv) the Leased Premises shall, without the
prior written consent of the Landlord, be
used by any other persons than the Tenant
or its permitted assigns or sub-tenants or
for purpose other than for which they were
leased or occupied or by any persons whose
occupancy is prohibited by this Lease,
(v) the Leased Premises shall be vacated or
abandoned, or remain unoccupied without
prior written consent of the Landlord for
thirty (30) consecutive days or more while
capable of being occupied,
(vi) the balance of the Term of this Lease or
any of the goods and chattels of the Tenant
located in the Leased Premises, shall at
any time be seized in execution or
attachment or
(vii) the Tenant shall make any assignment for
the benefit of creditors or become bankrupt
or insolvent or take the benefit of any
statute for bankrupt or insolvent debtors
or, corporation, shall take any steps or
suffer any order to be made for its
winding--up or other termination of its
corporate existence; or a trustee, receiver
or receiver-manager, or agent or other like
person shall be appointed of any of the
assets of the Tenant,
the Landlord shall have the following rights and remedies all of
which are cumulative and alternative and not to the exclusion of
any other or additional rights and remedies in law or equity
available to the Landlord by statute or otherwise.
(A) to remedy or attempt to remedy any default
of the Tenant, and in so doing to make any
payments due or alleged to be due by the
Tenant to third parties and to enter upon
the Leased Premises to do any work or other
things therein, and in such event all
reasonable expenses of the Landlord in
remedying or attempting to remedy such
default shall be payable by the Tenant to
the Landlord on demand;
(B) with respect to unpaid overdue Rent, to the
payment by the Tenant of the Rent and of
interest (which said interest shall be
deemed included herein in the term "Rent")
thereon at a rate equal to the lesser of
three percent (3%) above the prime
commercial loan rate charged to borrowers
having the highest credit rating from time
to time by the Landlord's principal bank
from the date upon which the same was due
until actual payment thereof and the
maximum amount allowed under the laws of
the jurisdiction in which the Building is
located; tenant to have 10 day grace
period.
(C) to terminate this Lease forthwith. In the
event that Landlord shall elect to so
terminate this Lease then Landlord may
recover from Tenant:
(i) the worth at the time of award of
any unpaid rent which had been
earned at time of such termination;
plus
(ii) the worth at the time of award of
the amount by which the unpaid rent
which would have been earned after
termination until the time of award
exceeds the amount of such rental
loss that Tenant proves could have
been reasonably avoided; plus
(iii) the worth at the time of award of
the amount by which the unpaid rent
for the balance of the term after
the time of award exceeds the amount
of such rent loss that Tenant proves
could be reasonably avoided; plus
(iv) any other amount necessary to
compensate Landlord for all the
detriment proximately caused by
Tenant's failure to perform the
Tenant obligations under this Lease
or which in the ordinary course of
things would be likely to result
therefrom. As used in sub-paragraphs
l0(C)(i) and (ii) above, the "worth
at the time of award" is computed by
allowing interest at the maximum
rate permitted by law per annum. As
used in sub-paragraph 10(C)(iii)
above, the "worth at the time of
award" is computed by discounting
such amount at the discount rate of
the Reserve Bank of San Francisco
at the time of award plus one
percent (1%).
(D) to enter the Leased Premises as agent of
the Tenant and as such agent to re-let to
receive the rent therefor and as the agent
of the Tenant to take possession furniture
or other property thereon and upon giving
ten (10) days written notice Tenant to store
the same at the expense and risk of the
Tenant or to sell or otherwise dispose
of the same at public or private sale
without further notice and to apply proceeds
thereof and any rent derived from re-letting
the Leased Premises upon account of the Rent
due and to become due under this Lease and
the Tenant shall be liable to the Landlord
for the deficiency if any.
(E) to maintain Tenant's rights to possession
and continue said Lease in full force and
effect whether or not Tenant shall have
abandoned the Leased Premises. In such
event, Landlord shall be entitled to enforce
all of its rights and remedies under this
Lease including the right to recover Rent
as it becomes due under the terms of the
Lease.
(b) The Tenant shall pay to the Landlord on demand all
costs and expenses, including a lawyers' fees and
costs incurred by the Landlord in enforcing any
of the obligations of the Tenant under this Lease.
ADDITIONAL PROVISIONS
Relocation of 11. (deleted)
Leased Premises
Subordination 12. This Lease and all rights of the Tenant
and Attornment hereunder are subject and subordinate to all
under-lying leases and charges, or mortgages now or
hereafter existing (including charges, and mortgages by
way of debenture, note, bond, deeds of trust and
mortgage and all instruments supplemental thereto)
which may now or hereafter affect the Property or any
part thereof and to all renewals, modifications,
consolidations, replacements and extensions thereof
provided the lessor, chargee, mortgagee or trustee
agrees to accept this Lease if not in default; and in
recognition of the foregoing the Tenant agrees that it
will, whenever requested, attorn to such lessor,
chargee, mortgagee as a tenant upon all the terms of
this Lease. The Tenant agrees to execute promptly
whenever requested by the Landlord or by the holder of
any such lease, charge, or mortgage an instrument of
subordination or of attornment, as the case may be, as
may be required of it.
Certificates 13. The Tenant agrees that it shall promptly
whenever requested by the Landlord from time to time
execute and deliver to the Landlord, and if required by
the Landlord, to any lessor, chargee, mortgagee
(including any trustee) or other person designated by
the Landlord, an acknowledgment in writing as to the
then status of this Lease, Including as to whether it
is in full force and effect, modified or unmodified,
confirming the Basic Rent and Additional Rent payable
hereunder and the State of the accounts between
Landlord and the Tenant, the existence or non-existence
of defaults, and any other matters pertaining to this
Lease as to which the Landlord shall request an
acknowledgment.
Of and Access 14. The Landlord shall be permitted at any time and
To the Leased Premises from time to time to enter and its authorized agents,
employees and contractors enter the Leased Premises for
the purposes of inspections, window cleaning,
maintenance, providing Janitorial service, making a
or improvements to the Leased Premises or the Property,
or to have access to utilities services (including all
ducts and access panels (if any), which the Tenant
agrees not to and the Tenant shall provide free and
unhampered access for the purpose and untitled to
compensation for Any inconvenience, nuisance or
discomfort caused thereby. Landlord and its authorized
agents and employees shall be permitted entry to the
Leased Premises for the purpose of exhibiting them to
prospective tenants. The Landlord in exercising rights
under this paragraph shall do so to the extent
reasonably necessary so as to minimize interference
with the Tenant's use and enjoyment of the Leased
Premises provided that in emergency the Landlord or
persons authorized by It may enter the Leased Premises
without minimizing interference.
Delay 15. Except as herein otherwise expressly provided, if
and whenever and to the extent that either the Landlord
or the Tenant shall be prevented, delayed or restricted
in the any obligation hereunder in respect of the
supply or provision of any service or utilities making
of any repair, the doing of any work or any other thing
(other than the payment moneys required to be paid by
the Tenant to the Landlord hereunder) by reason of.
(a) strikes or work stoppages;
(b) being unable to obtain any material, service,
utility or labour required to fulfil obligation;
(c)any statute, law or regulation of, or inability to
obtain any permission from government authority
having lawful jurisdiction preventing, delaying or
restricting such fulfillment;
or
(d) other unavoidable occurrence.
the time for fulfillment of such obligation shall be
extended during the period in which circumstance
operates to prevent, delay or restrict the fulfillment
thereof, and the other to this Lease shall not be
entitled to compensation for any inconvenience,
nuisance or discomfort thereby occasioned; provided
that nevertheless the Landlord will use its best
efforts to maintain services essential to the use and
enjoyment of the Leased Premises and provided further
that the Landlord shall be prevented, delayed or
restricted in the fulfillment of any such obligation
hereunder by reason of any of the circumstances set out
in sub-paragraph (c) of this Paragraph 15 and to
fulfill such obligation could not, in the reasonable
opinion of the Landlord, be completed without
substantial additions to or renovations of the
Property, the Landlord may sixty (60) days written
notice to the Tenant terminate this Lease.
Waiver 16. If either the Landlord or the Tenant shall
overlook, excuse, condone or suffer any default,
breach, non-observance, improper compliance or
non-compliance by the other of any obligation
hereunder, this shall not operate as a waiver of such
obligation in respect of any continuing subsequent
default, breach, or non-observance, and no such waiver
shall be implied but shall only be effective if
expressed in writing.
Sale, Demolition 17 (a) The term "Landlord" as used in this
And Renovation Lease, means only the owner for the time
being of the Property, so that in the event of any sale
or sales or transfer or transfers of the Property or
the making of any lease or leases thereof, or the sale
or sales or the transfer or transfers or the assignment
or assignments of any such lease or leases, previous
landlords shall be and hereby are relieved of all
covenants and obligations of Landlord hereunder. It
shall be deemed and construed without further agreement
between the parties, or their successors in interest,
.or between the parties and the transferee or acquiror,
at any such sale, transfer or assignment, or leasee on
the making of any such lease, that the transferee,
acquiror or lessee has assumed and agreed to carry out
any and all of the covenants and obligations of
Landlord hereunder to Landlord's exoneration, and
Tenant shall thereafter be bound to and shall attorn to
such transferee, acquiror or lessee, as the case may
be, as Landlord under this Lease;
(b) Notwithstanding anything contained in this Lease to
the contrary, in the event the Landlord intends to
demolish or to renovate substantially all the Building,
then the Landlord upon giving the Tenant one hundred
and eighty (180) days written notice, shall have the
right to terminate this Lease and this Lease shall
thereupon expire on the expiration of one hundred and
eighty (180) days from the date of the giving of such
notice without compensation of an kind to the Tenant.
Public Taking 18. The Landlord and Tenant shall co-operate,
each with the other, in respect of any Public Taking of
the Leased Premises or any part thereof so that the
Tenant may receive the maximum award to which it is
entitled in law for relocation costs and business
interruption and so that the Landlord may receive the
maximum award for all other compensation arising from
or relating to such Public Taking (including all
compensation for the value of the Tenant's leasehold
interest subject to the Public Taking) which shall be
the property of the Landlord, and the Tenant's rights
to such compensation are hereby assigned to the
Landlord. If the whole or in part of the Leased
Premises is Publicly Taken, as between the parties
hereto, the rights and obligations under this Lease
shall continue until the day on which the Public Taking
authority takes possession thereof. If the whole or any
part of the Leased Premises is Publicly Taken, the
Landlord shall have the option, to be exercised by
written notice to the Tenant, to terminate this Lease
and such termination shall be effective on the day the
Public Taking authority takes possession of the whole
or the portion of the Property Publicly Taken. Rent and
all other payments shall be adjusted as of the date of
such Public Taking, vacate the Leased Premises and
surrender the Landlord, with the Landlord having the
right to re-enter and repossess the Leased and all
other payments shall be adjusted as of the date of such
termination and discharged of this Lease and to remove
all persons therefrom. In this paragraph "Public
Taking" shall include expropriation and condemnation
and shall include a sale by the Landlord to an
authority with powers of expropriation, condemnation or
taking, in lieu of or under threat of expropriation or
taking and "Publicly Taken" shall have a corresponding
meaning.
Registration of Lease 19. The Tenant agrees with the
Landlord not to register this Lease in any recording
office and not to register notice of this Lease in any
form without the prior written consent of the Landlord.
If such consent is provided such notice of Lease or
caveat shall be in such form as the Landlord shall have
approved and upon payment of the Landlord's reasonable
fee for same and all applicable transfer or recording
taxes or charges. The Tenant shall remove and discharge
at Tenant's expense registration of such a notice or
caveat at the expiry or earlier termination of the
Term, and in and in the event of Tenant's failure to so
remove or discharge such notice or caveat after ten
(10) days written notice by Landlord to Tenant, the
Landlord may in the name and on behalf of the Tenant
execute a discharge of such a notice or caveat in order
to remove and discharge such notice of caveat and for
the purpose thereof the Tenant hereby irrevocably
constitutes and appoints any officer of the Landlord
the true and lawful attorney of the Tenant.
Lease Entire Agreement 20. The Tenant acknowledges that there
are no covenants, representations, warranties,
agreements or conditions express or implied, collateral
or otherwise forming part of or in any way affecting or
relating to this Lease save as expressly set out in
this Lease and Schedules attached hereto and that this
Lease and such Schedules constitute the entire
agreement between the Landlord and the Tenant and may
not be modified except as herein explicitly provided or
except by agreement in writing executed by the Landlord
and the Tenant.
Notices 21. Any notice, advice, document or writing required
or contemplated by any provision hereof shall be given
in writing and if to the Landlord, either delivered
personally to an officer of the Landlord or mailed by
prepaid mail addressed to the Landlord at the said
local office address of the Landlord shown above, and
if to the Tenant, either delivered personally to the
Tenant (or to an officer of the Tenant, if a
corporation) or mailed by prepaid mail addressed to the
Tenant at the Leased Premises, or if an address of the
Tenant is shown in the description of the Tenant above,
to such address. Every such notice, advice, document or
writing shall be deemed to have been given when
delivered personally, or if mailed as aforesaid, upon
the fifth day after being mailed. The Landlord may from
time to time by notice in writing to Tenant designate
another address as the address to which notices are to
be mailed to it, or specify with greater particularity
the address and persons to which such notices are to be
mailed and may require that copies of notices be sent
to an agent designated by it. The Tenant may, if an
address of the Tenant is shown in the description of
the Tenant above, from time to time by notice in
writing to the Landlord, designate another address as
the address to which notices are to be mailed to it, or
specify with greater particularity the address to which
such notices are to be mailed.
Interpretation 22. In this Agreement "herein," "hereof,"
"hereby," "hereunder," "hereto," "hereinafter" and
similar expressions refer to this Lease and not to any
particular paragraph, clause or other portion thereof,
unless there is something in the subject matter or
context inconsistent therewith; and the parties agree
that all of the provisions of this Lease are to be
construed as covenants and agreements as though words
importing such covenants and agreements were used in
each separate paragraph hereof, and that should any
provision or provisions of this Lease be illegal or not
enforceable it or they shall be considered separate and
severable from the Lease and its remaining provisions
shall remain in force and be binding upon parties
hereto as though the said provision or provisions had
never been included, and further that the captions
appearing for the provisions of this Lease have been
inserted as a matter of convenience and for reference
only and in no way define, limit or enlarge the scope
or meaning of this Lease or of any provision hereof.
Extent of Lease 23. This Agreement and everything herein contained
shall enure to the benefit of and be obligations
binding upon the respective heirs, executors,
administrators, successors, assigns and other legal
representatives, as the case may be, of each and every
of the parties hereto, subject to the granting of
consent by the Landlord to any assignment or sublease,
and every reference herein to any party hereto shall
include the heirs, executors, administrators,
successors, assigns and other legal representatives of
such party, and where there is more than one tenant or
there a male or female party the provisions hereof
shall be read with all grammatical changes thereby
rendered necessary and all covenants shall be deemed
joint and several.
Use and Occupancy 24. If the Tenant shall for any reason use or occupy
Prior to Term the Leased Premises in any prior to the
commencement of the Term without there being an
existing lease between the Landlord and Tenant under
which the Tenant has occupied the Leased Premises,
then during such prior use or occupancy the Tenants
shall be Tenant of the Landlord and shall be subject to
the same covenants and agreements in this Lease mutatis
mutandis.
Schedules 25. The provisions of the following Schedules attached
hereto shall form part of this Lease as if the same
were embodied herein:
Schedule "A" - Legal Description of Lands
Schedule "B" - Outline of Leased Premises
Schedule "C" - Taxes payable by Landlord and Tenant
Schedule "D" - Services and Costs
Schedule "E" - Rules and Regulations
Schedule "F" - Leasehold Improvements
Schedule "G" - Not Applicable
Schedule "H" - Not Applicable
Schedule "I" - Not Applicable
Schedule "J" - Not Applicable
Schedule "K" - Basic Rent Free Period
Schedule "L" - Additional Provisions
IN WITNESS WHEREOF the parties hereto have executed this Agreement
Landlord:
THE INTEGRITY FUND
Witness as to signing by Signature/s/
by Landlord Title: President
Tenant: Beta Capital Croup, Inc.
Witness as to signing by by Signature/s/Steve Antry
Tenant or officer(s) of Tenant
Title: President
by Signature ___________________________
Title
<PAGE>
SCHEDULE "A"
(Legal Description - 901 DOVE STREET)
THE LAND SITUATED IN THE STATE OF CALIFORNIA, COUNTY OF ORANGE, CITY OF NEWPORT
BEACH AND DESCRIBED AS FOLLOWS:
PARCEL 1 AS SHOWN ON A MAP THEREOF FILED IN BOOK 59, PAGE 2(pound) OF PARCEL
MAPS, RECORDS OF SAID ORANGE COUNTY, CALIFORNIA.
<PAGE>
SCHEDULE "B"
(Plan of Leased Premises Outlined in red)
[drawing of Leased Premises]
901 Dove Second Floor Plan
Building Name:
<PAGE>
SCHEDULE "C"
Taxes Payable by Landlord and Tenant
Tenant's Taxes 1. (a) The Tenant Covenants to pay all Tenant's
Taxes, as, and when the same becomes payable. Where any
Tenant's Taxes are payable by the Landlord to the
relevant taxing authorities, the Tenant covenants to
pay the amount thereof to the Landlord.
(b) The Tenant covenants to pay the Landlord the
Tenant's Proportionate Share of the excess of the
amount of the Landlord's Taxes in each Fiscal Period
over the Landlord's Taxes in the "Base Year" (as
hereinafter defined).
(c) The Tenant covenants to pay to the Landlord
the Tenant's Proportionate Share of the costs and
expenses (including legal and other professional fees
and interest and penalties on deferred payments)
incurred in good faith by the Landlord in contesting,
resisting or appealing any of the Taxes.
Landlord's Taxes (d) The Landlord covenants to pay all Landlord's
Taxes subject to the payments on account of Landlord's
Taxes required to be made by the Tenant elsewhere in
this lease. The Landlord may appeal any official
assessment or the amount of any Taxes or other taxes
based on such assessment and relating to the Property.
In connection with any such appeal, the Landlord may
defer payment of any Taxes other taxes, as the case may
be, payable by it to the extent permitted by law, and
the Tenant shall co-operate with the Landlord and
provide the Landlord with all relevant information
reasonably required by the Landlord in connection with
any such appeal.
Separate Allocation (e) In the event that the Landlord is unable
to obtain from the taxing authorities any separate
allocation of Landlord's Taxes, Tenant's Taxes or
assessment as required by the Landlord to make
calculations of Additional Rent under this Lease, such
allocation shall be made by the Landlord reasonably and
shall he conclusive.
Information (f) Whenever requested by the Landlord, the
Tenant shall deliver to it receipts for payment of all
the Tenant's Taxes and furnish such other information
in connection therewith as the Landlord may reasonably
require.
Tax Adjustment (g) If the Building has not been taxed as a
completed and fully occupied building for any Fiscal
Period, the Landlord's Taxes will be determined by the
Landlord as if the Building had been taxed as a
completed and fully occupied building for any such
Fiscal Period.
Definition 2. In this Lease:
(a) "Landlord Taxes" shall mean the aggregate of
all Taxes attributed to the Property, or the Landlord
in respect thereof and including, without limitation,
any amounts imposed, assessed or charged in
substitution for or in lieu of any such Taxes, but
excluding such taxes as capital gain taxes, corporate
income, profit or excess profit taxes to the extent
such taxes are not levied in lieu of any of the
foregoing against the Property or the Landlord in
respect thereof.
(b)"Taxes" shall mean all taxes, rates, duties,
levies, fees, charges, local improvement rates, capital
taxes, rental taxes and assessments whatsoever
including fees, rents, and levies for air rights and
encroachments on or over municipal property imposed,
assessed, levied or charged by any school, municipal,
regional, state, provincial, federal, parliamentary, or
other body, corporation, authority, agency or
commission provided that any such local improvement
rates, assessed and paid prior to or in the Base Year
shall be excluded from the Base Year and any year
during the Term, and provided further "Taxes" shall not
include any special utility, levies, fees or charges
imposed, assessed, levied or charged which are directly
associated with initial construction of the Property.
(c)"Tenant's Taxes" shall mean the aggregate of:
(i) all Taxes (whether imposed upon the
Landlord or the Tenant) attributable personal
property, trade fixtures, business, income,
occupancy, or sales of the Tenant or any other
occupant of the Leased Premises, and to any
Leasehold Improvement or fixtures installed by
or on behalf of the Tenant within the Leased
Premises, and to the use by the Tenant of any
of the Property, and
(ii) the amount by which Taxes (whether
imposed upon the Landlord or the are increased
above the Taxes which would have otherwise
been payable as a result of the Leased
Premises or the Tenant or any other occupant
of the Leased Premises being taxed or assessed
in support of separate schools.
(d)"Tenant's Proportionate Share" shall mean Seven
Point Twelve percent (7.12%) subject to adjustment
as determined solely by the Landlord and notified
to the Tenant in writing for physical increases or
decreases in the total rentable area of the
Property and the rentable area of the Leases
Premises shall exclude areas designated (whether or
not rented) for parking and for storage.
(e)"Base Year" as used is this schedule shall mean
calendar year 1994
<PAGE>
SCHEDULE "D"
Services and Costs
1. The Landlord covenants with the Tenant:
Interior Climate Control (a) To maintain in the Leased Premises
conditions of reasonable temperature and comfort in
accordance with good standards applicable to normal
occupancy of premises for office purposes subject to
governmental regulations during hours to be determined
by Landlord (but to be at least the hours from 8:00
a.m. to 6:00 p.m. from Monday to Friday inclusive with
the exception of holidays, Saturdays and Sundays), such
conditions to be maintained by means of a system for
heating and cooling, filtering and circulating air; the
Landlord shall have no responsibility for any
inadequacy of performance of said system if the
occupancy of the Leased Premises or the electrical
power or other energy consumed on the Leased Premises
for all purposes exceeds reasonable amounts as
determined by the Landlord or the Tenant installs
partitions or other installations in locations which
interfere with the proper operation of the system of
interior climate control or if the window covering on
exterior windows is not kept fully closed;
Janitor Service (b) To provide janitor and cleaning services to
the Leased Premises and to common areas of the Building
consisting of reasonable services in accordance with
the standards of similar office buildings;
Elevators, Lobbies, etc. (c) To keep available the following facilities for use
by the Tenant and its employees, invitees in common
with other persons entitled thereto:
(i)passenger and freight elevator service to each
floor upon which the Leased Premises are located
provided such service is installed in the
Building and provided that the Landlord may
prescribe the hours during which and the
procedures under freight elevator service shall
be available and may limit the number of
elevators. providing Service outside normal
business hours;
(ii) common entrances, lobbies, stairways and
corridors giving access to the Building and the
Leased Premises, including such other areas from
time to time which may be provided by the
Landlord for common use and enjoyment within the
Property;
(iii)the washrooms as the Landlord may assign from
time to time which are standard to the Building,
provided that the Landlord and the Tenant
acknowledge that where an entire floor is leased
to the Tenant or some other tenant the Tenant or
such other tenant, as the case may be, may
exclude others from the washrooms thereon.
Electricity 2. (a) The Landlord covenants with the Tenant to
furnish electricity to the Leased
Premises for normal office use for
lighting and for office equipment capable of
operating from the circuits available to the
Leased Premises and standard to the building
continuously;
(b) The amount of electricity consumed on the
Leased Premises in excess of
electricity required by the Tenant for normal
office use shall be as determined by the
Landlord acting reasonably or by a metering
device expense. The Tenant shall pay the
Landlord for any such excess electricity on
demand.
(c) (deleted)
(d) In calculating electricity costs for any
Fiscal Period, if less than one hundred
percent (100%) of Building is occupied by
tenants, then the amount of such electricity
costs shall be deemed for the purposes of this
Schedule to be increased to an amount equal to
like electricity costs which normally would be
expected by the Landlord to have incurred had
such occupancy been one hundred percent (100%)
during such entire period.
3 The Landlord shall maintain and keep in repair the
facilities required for the provision of interior
climate control, elevator (if installed in the
Building), and other services referred to sub paragraph
(a) and (c) of paragraph 1 and sub-paragraph (a) of
paragraph 2 of this Schedule in accordance with the
standards of office buildings similar to the Building
but reserves the right stop the use of any of these
facilities and the supply of the corresponding services
when necessary by reason of accident or breakdown or
during the making of repairs, alterations or
improvements, in the reasonable judgment of the
Landlord necessary or desirable to be made, until the
repairs, alterations or improvements shall have been
completed to the satisfaction of the Landlord.
Additional Services 4. (a)The Landlord may (but shall not be obliged)
on request of the Tenant supply services or
materials to the Leased Premises and the
Property which are not provided for under
this Lease and which are used by the Tenant
(the "Additional Services") including
without limitation,
(i) replacement of tubes and ballasts;
(ii) carpet shampooing;
(iii) drapery cleaning;
(iv) locksmithing;
(v) removal of bulk garbage;
(vi) picture hanging; and
(vii) special security arrangement.
<PAGE>
(b) When Additional Services arc supplied or
furnished by the Landlord, accounts
therefor shall be rendered by the
Landlord and shall be payable by the
Tenant to the Landlord on demand. In the
event the Landlord shall elect not to
supply or furnish Additional Services,
only persons with prior written approval
by the Landlord (which approval shall not
be unreasonably withheld) shall be
permitted by the Landlord or the Tenant
to supply or furnish Additional Services
to the Tenant and the supplying and
furnishing shall be subject to the
reasonable rules fixed by the Landlord
with which the Tenant undertakes to cause
compliance and to comply.
Operating Charges 5. (a) The Tenant covenants to pay to the Landlord the
Tenant's Proportionate Share of the excess
of the amount of the Operating Costs in each
Fiscal Period over the Operating Costs in the
"Base Year" (as hereinafter defined), the
increase in Operating Cost shall not exceed 7%
of the increase of the previous fiscal period,
and shall be subject to the original base year
defined in the Lease dated November 23, 1993.
(b) Lease Operating costs" shall mean all costs
incurred or which will he incurred by the
Landlord in the maintenance, operation,
administration and management of the Property
including without limitation:
(i) cost of heating, ventilating and
air-conditioning;
(ii) cost of water and sewer charges;
(iii)cost of insurance carried by the Landlord
pursuant to paragraph 9(a) of this Lease and cost
of any deductible amount paid by the Landlord in
connection with each claim made by the Landlord
under such insurance;
(iv) costs of building office expenses, including
telephone, rent, stationery and supplies,
(v) cost of fuel;
(vi)costs of all elevator and escalator (if
installed in the Building) maintenance and
operation;
(vii) costs of operating staff, management staff
and other administrative personnel, including
salaries, wages, and fringe benefits;
(viii)cost of providing security;
(ix) cost of providing janitorial services,
window cleaning, garbage and snow removal and
pest control and replacement of building standard
tubes and ballasts
(x) cost of supplies and materials;
(xi) cost of decoration of common areas;
(xii) cost of landscaping;
(xiii) cost of maintenance and operation of the
parking area;
(xiv)cost of consulting, and professional fees
including expenses;
(xv) cost of replacements, additions and
modifications unless otherwise included under
paragraph 6, and cost of repair.
(c) In this Lease there shall be excluded from
Operating Costs the following:
(i) interest on debt and capital retirement of
debt;
(ii)such of the Operating Costs as are
recovered from insurance proceeds; and
(iii) costs as determined by the Landlord of
acquiring tenants for the Property.
6. (Deleted)
7. In calculating Operating Costs for any Fiscal Period
including the Base Year, if less than one hundred
percent (100%) of Building is occupied by tenants, then
the amount of such Operating Costs shall be deemed for
the purposes of this Schedule to be increased to an
amount equal to the like Operating Costs which normally
would be expected by the Landlord to have been incurred
had such occupancy been one hundred percent (100%)
during such entire period.
8. In this Lease
(i) "Tenant's Proportionate Share" shall mean (7.12%)
subject to adjustment as determined solely
by the Landlord and notified to the Tenant in
writing for physical increases or decreases in the
total rentable area of the Property provided that
total rentable area of the Property and the
rentable area of the Leased Premises shall exclude
areas designated (whether or not rented)for parking
and for storage.
(ii) "Base Year' shall mean calendar year 1994 1993.
<PAGE>
SCHEDULE "E"
Rules and Regulations
1. The sidewalks, entry passages, elevators (if installed in
the Building) and common stairways shall not be obstructed by the
Tenant or used for any other purpose than for ingress and egress
to and from the Leased Premises. The Tenant will not place or
allow to be placed in the corridors or public stairways any waste
paper, dust, garbage, refuse or anything whatever.
2. The washroom plumbing fixtures and other water apparatus
shall not be used for any other than those for which they were
constructed, and no. sweepings, rubbish, rags, ashes substances
shall be thrown therein. The expense of any damage resulting by
misuse by the shall be borne by the Tenant.
3. The Tenant shall permit window cleaners to clean the
windows of the, Leased Premises during normal business hours.
4. No birds or animals shall be kept in or about the
Property nor shall the Tenant operate or permit to be operated
any musical or sound producing instruments or device or make or
any improper noise inside or outside the Leased Premises which
may be heard outside Leased Premises.
5. No one shall use the Leased Premises for residential
purposes, or for the storage of personal effects or articles
other than those required for business purposes.
6. All persons entering and leaving the Building at any time
other than during normal business hours shall register in the
books which may be kept by the Landlord at or near the night
entrance and the Landlord will hive the right to prevent any
person from entering or leaving the Building or the Property
unless provided with a key to the premises to which such person
seeks entrance and a pass in a form to be approved by the
Landlord. Any persons found in the Building at times without such
keys and passes will be subject to the surveillance of the
employees and agents of the Landlord.
7. No dangerous or explosive materials shall be kept or
permitted to be kept in the Leased Premises.
8. The Tenant shall not and shall not permit any cooking in
the Leased Premises. The Tenant shall not install or permit the
installation or use of any machine dispensing goods for sale in
Leased Premises without the prior written approval of the
Landlord. Only persons authorized by the Landlord shall be
permitted to deliver or to use the elevators (if installed in the
Building) for the purpose of delivering food or beverages to the
Leased Premises.
9. The Tenant shall not bring in or take out, position,
construct, install or move any business machine or other heavy
office equipment without first obtaining the prior written
consent of the Landlord. In giving such consent, the Landlord
shall hive the right in its sole discretion, to prescribe the
weight permitted and the position thereof, and the use and design
of planks, skids or platforms to distribute the weight thereof.
All damage done to the Building by moving or using any such heavy
equipment or other office equipment or furniture shall be
repaired at the expense of the Tenant. The moving of all heavy
equipment or other of equipment or furniture shall occur only at
times consented to by the Landlord and the person employed to
move the same in and out of the Building must be acceptable to
the Landlord. Safes and other heavy office equipment will be
moved through the halls and corridors only upon steel bearing
plates. No freight or bulky matter of any description will be
received into the Building carried in the elevators (if installed
in the Building) except during hours approved by the Landlord.
10. The Tenant shall give the Landlord prompt notice of any
accident to or any defect in the plumbing, heating,
air-conditioning, ventilating, mechanical or electrical apparatus
or any other part of the Building.
11. The parking of automobiles shall be subject to
reasonable regulations the Landlord. The Landlord shall not be
responsible for damage to or theft of any car, its accessories or
contents whether the same be the result of negligence or
otherwise.
12. The Tenant shall not mark, drill into or in any way
deface the walls, ceilings, partitions, floors or other parts of
the Leased Premises and the Building. except for reasonable wear
and tear.
13. Except with the prior written consent of the Landlord,
no tenant shall use or engage a person or persons other than the
janitor or janitorial contractor of the Landlord for the purpose
of any cleaning of the Leased Premises.
<PAGE>
14. If the Tenant desires any electrical or communications
wiring, the Landlord reserves the right to direct qualified
persons as to where and how the wires are to be introduced, and
without such directions no borings or cutting for wires shall
take place. No other wires or pipes shall be introduced without
the prior written consent of the Landlord.
15. The Tenant shall not place or cause to be placed any
additional locks upon any doors of the Leased Premises without
the approval of the Landlord and subject to any conditions
imposed by the Landlord. Additional keys may be obtained from the
Landlord at the cost of the Tenant.
16. The Tenant shall be entitled to have its name shown upon
the directory board of the Building and at one of the entrance
doors to the Leased Premises, all at the Tenant's expense, but
the Landlord shall in its sole discretion design the style of
such identification and allocate the space on the directory board
for the Tenant.
17. The Tenant shall keep the sun drapes (if any) in a
closed position at all times. The Tenant shall not interfere with
or obstruct any perimeter heating, air conditioning or
ventilating units.
18. The Tenant shall not conduct, and shall not permit any,
canvassing in the Building.
19. The Tenant shall take care of the rugs and drapes (if
any) in the Lease Premises and shall arrange for the carrying out
of regular spot cleaning and shampooing of carpets and dry
cleaning of drapes in a manner acceptable to the Landlord.
20. The Tenant shall permit the periodic closing of lanes,
driveways and passages for the purpose of preserving the
Landlord's rights over such lanes, driveways and passages.
21. The Tenant shall not place or permit to be placed any
sign, advertisement, notice display on any part of the exterior
of the Leased Premises or elsewhere if such sign, advertisement,
notice or other display is visible from outside the Leased
Premises without the prior consent of the Landlord which may be
arbitrarily withheld. The Tenant, upon request Landlord, shall
immediately remove any sign, advertisement, notice or other
display which the Tenant has placed or permitted to be placed
which, in the opinion of the Landlord, is objectionable, and if
the Tenant shall fail to do so, the Landlord may remove the same
expense of the Tenant.
22. The Landlord shall have the right to make such other and
further reasonable rule regulations and to alter the same as in
its judgment may from time to time be needful of safety, care,
cleanliness and appearance of the Leased Premises and the
Building and for the preservation of good order therein, and the
same shall be kept and observed by the tenants employees and
servants. The Landlord also has the right to suspend or cancel
any or rules and regulations herein set out.
<PAGE>
SCHEDULE "F"
Leasehold Improvements
Definitions of 1. For purposes of this Lease, the term "Leasehold ,
Leasehold Improvements" includeswithout limitation all fixtures,
Improvements improvements, installations, alterations and additions
from time to time made, erected or installedby or on
behalf of the Tenant, or any previous occupant
of the Leased Premises and by or on behalf of other
tenants in other premises in the Building (including
the Landlord if an occupant of the Building), including
all partitions, doors and hardware however affixed, and
whether or not movable, all mechanical, electrical and
utility installations and all carpeting and drapes with
the exception only of furniture and equipment not of
the nature of fixtures.
Installation of 2. The Landlord shall include in the Leased Premises
Improvements the "Landlord's Work" (as hereinafter defined). The
and Fixtures Tenant shall not make, erect, install or alter any
Leasehold Improvements in the Leased Premises without
having requested and obtained the Landlord's prior
written approval. The Landlord's approval shall not, if
given, under any circumstances be construed as a
consent to the Landlord having its estate charged with
the cost of work. The Landlord shall not unreasonably
withhold its approval to any such request, but failure
to comply with the Landlord's reasonable requirements
from time to time for the Building shall be considered
sufficient reason for refusal. In making, erecting,
installing or altering any Leasehold Improvements the
Tenant shall not, without the prior written approval of
the Landlord, alter or interfere with any installations
which been made by the Landlord or others and in no
even: shall alter or interfere with window coverings
(if any) or other light control devices (if any)
installed in the Building. The Tenant request for any
approval hereunder shall be in writing and accompanied
by an adequate description of the contemplated work
and, where appropriate, working drawings and
specifications thereof. If the Tenant requires from the
Landlord drawings or specifications of the Building in
connection with Leasehold Improvements, the Tenant
shall pay the cost thereof to the Landlord on demand.
Any reasonable costs and expenses incurred by the
Landlord in connection with the Tenant's Leasehold
Improvements shall be paid by the Tenant to the
Landlord on demand. All work to be performed in the
Leased Premises shall be performed by competent
contractors and sub-contractors of whom the Landlord
shall have approved in writing prior to commencement of
any work, such approval not to be unreasonably withheld
(except the Landlord may require that the Landlord's
contractors and sub-contractors be engaged for any
mechanical or electrical work) and by workmen who have
labour union affiliations that are compatible with
those affiliations (if any) of workmen employed by the
Landlord and its contractors and sub-contractors. All
such work including the delivery, storage and removal
of materials shall be subject to the reasonable
supervision of the Landlord, shall be performed in
accordance with any reasonable conditions or
regulations imposed by the Landlord including, without
limitation, payment on demand of a reasonable fee of
the Landlord for such supervision, and shall be
completed in goof and workmanlike manner in accordance
with the description of the work approved by the
Landlord and in accordance with all laws, regulations
and by-laws of all regulatory authorities. Copies of
required building permits or authorizations shall be
obtained by the Tenant at its expense and copies
thereof shall be provided to the Landlord. No locks
shall installed on the entrance doors or in any doors
in the Leased Premises that are not keyed to Building
master key system.
Liens and Encumbrances 3. In connection with the making, erection,
On Improvements and installation or alteration of Leasehold Improvements
Fixtures and all other work or installations made by or for the
Tenant in the Leased Premises the Tenant shall comply
with all the provisions of the mechanics lien and other
similar statutes from time to time applicable thereto
(including any proviso requiring or enabling the
retention by way of holdback of portions of any sums
payable) and, except as to any such holdback, shall
promptly pay all accounts relating thereto. The Tenant
will not create any mortgage, conditional sale
agreement or other encumbrance in respect of its
Leasehold Improvements or, without written consent of
the Landlord, with respect to its trade fixtures nor
shall the Tenant take any action as a consequence of
which any such mortgage, conditional sale agreement or
other encumbrance would attach to the Property or any
part thereof. If and whenever any mechanics or other
lien for work, labour, services or materials supplied
to or for the Tenant or for the cost of which the
Tenant may be in any liable or claims therefor shall
arise or be filed or any such mortgage, conditional
sale agreement or other encumbrance shall attach, the
Tenant shall within twenty (20) days after submission
by the Landlord of notice thereof procure the discharge
thereof, including any certificate of action registered
in respect of any lien, by payment or giving security
in such other manner as may be required or permitted by
law, and failing which the Landlord may avail itself of
any of its remedies hereunder for default of the Tenant
and may make any payment or take any steps or
proceedings required to procure the discharge of any
such liens or encumbrances, and shall be entitled to
be repaid by the Tenant on demand far any such payments
and to be paid on demand by the Tenant for all costs
and expense: in connection with steps or proceedings
taken by the Landlord and the Landlord's right to
reimbursement and to payment shall not be affected or
impaired if the Tenant shall then or subsequently
establish or claim tat any lien or encumbrances so
discharged was without merit or excessive or subject to
any abatement, set-off or defence. The Tenant agrees:
to indemnify the Landlord from all claims, costs and
expenses which may be incurred by the Landlord in any
proceeding: brought by any person against the Landlord
alone or with another or others for or in respect of
work, labour, services or materials supplied to or for
the Tenant.
Removal of 4. All Leasehold Improvements in or upon the Leased
Improvements and Premises shall immediately upon their placement be and
Fixtures become the Landlord's property without compensation
therefor to the Tenant. Except to the extent otherwise
expressly agreed by the Landlord in writing, no
Leasehold Improvements, furniture or equipment
shall be removed by the Tenant from the
Leased Premises either during or at the expiration or
sooner termination of the Term except that:
(a) the Tenant, shall, prior to the end of the
Term, remove such of the Leasehold
Improvements and trade fixtures in the Leased
Premises as the Landlord shall be require to
be removed and
(b) the Tenant may, at the times appointed by the
Landlord and :subject to availability of
elevators (if installed in the Building),
remove its furniture and equipment at the end
of the Term, and also during the Term in the
usual and normal course of its business where
such furniture or equipment has become excess
for the Tenant's purposes or the Tenant is
substituting therefor new furniture and
equipment.
The Tenant shall, in the case of every removal, mike
good at the expense of the Tenant any damage caused to
the Property by the installation and removal. In the
event of the Non-removal by the end of the Term, or
sooner termination of this Lease, of such trade
fixtures or Leasehold Improvements as required by the
Landlord of the Tenant to be removed, the Landlord
shall have the option, in addition to its other
remedies under this Lease to declare to the Tenant that
such trade fixtures are the property of the landlord
and the landlord upon such a declaration may dispose of
such trade fixtures and retain any proceeds of
disposition as security for the Debts, Liabilities and
Obligations and the Tenant shall be liable to the
Landlord far any expenses incurred by the Landlord.
5. For the purpose of this Lease,
(a) the term "Tenant's Work" shall mean all work
required to be done to complete the Leased
Premises for occupancy by the Tenant
excluding the "Landlord's Work" (as
hereinafter defined).
(b) the term "Landlord's Work" shall mean:
Suite #225
1) Add three new doors - painted black.
2) Paint suite to match existing.
3) Remove curtains and add new mini-blinds.
4) New carpet in suite.
5) Add eggcrate lens to existing fixtures.
6) Demo louvered doors and shelves / patch and
paint demo.
7) All must be cleaned. All improvements must
match existing suite #230, inclusive of paint,
carpets, shelves, doors and mini-blinds.
8) Clean exterior windows and sills.
The above "Landlord's Work" shall be completed at
Landlord's sole cost and expense.
<PAGE>
SCHEDULE "L"
ADDITIONAL PROVISIONS
1) Should landlord be grossly negligent in meeting its obligation to
provide a safe, clean, well-kept operating environment and provided
tenant notifies landlord in writing, and allows landlord 45 days to
satisfactorily address the failure, and provided tenant is not in
default of its own obligations under the lease, landlord warrants that
tenant will be allowed to move out of the lease premises 100 days after
the date of tenants initial notice of negligence and no further rent
payments will be required.
2) If at any time occupancy of 901 Dove falls below 50% for a period of 60
consecutive days landlord is obligated to immediately inform the tenant
in writing and tenant has the right to terminate the lease with a 90
day notice
3) Tenant has an option to renew the lease for two additional years at a
rate of $1.35 per foot.
4) Agreed upon improvements which have not yet been completed will be
completed as of the following dates:
a) Suite 225:
Inside white mini-blinds - October 14, 1994-done
Inside brown mini-blinds - October 14, 1994 -done
b) Suites 230 & 225:
Clean all exterior windows and sills - December 15,1994
In the event the above items are not completed by the listed dates,
tenant has the right to have the work completed for a reasonable
amount, and deduct that amount from the subsequent rent payment.
5) Tenant has the right to building signage on the exterior facia on Dove
Street, on the top floor in the event that the current signage rights
are not exercised within the terms of their existing lease or their
renewed lease within one year, and in the event the signage rights are
not exercised by a new tenant with 25% of total square footage within
one year. Any signage must be approved by landlord for aesthetic
purposes prior to being put on the building.
EXPLORATION AGREEMENT
BWC Project
Jackson County, Texas
This Exploration Agreement (the "Agreement") is entered into as of
April 1, 1998, by and between Parallel Petroleum Corporation ("Parallel"), TAC
Resources, Inc. ("TAC"), Beta Oil & Gas, Inc. ("Beta"), Meyer Financial
Services, Inc. ("Meyer"), FGL, Inc. ("FGL"), Mert L. Cooper ("Cooper"),
Mansefeldt Investment Corporation ("Mansefeldt"), Topaz Exploration Company
("Topaz"), Wes-Tex Drilling Corp. ("Wes-Tex") and CKC Investments, Inc. ("CKC")
all hereinafter collectively referred to as (the "Parties").
WITNESSETH:
WHEREAS, Parallel and TAC have acquired seismic and lease options, oil
and gas leases and seismic permits covering an area of approximately 40,000
acres located in Jackson County, Texas, as depicted on the plat attached hereto
as Exhibit "A".
WHEREAS, Beta, Meyer, FGL, Cooper, Mansefeldt, Topaz, Wes-Tex and CKC
propose to acquire undivided interests in and to the rights granted by such
agreements, and to participate in conducting a 3-D seismic program upon the
lands covered thereby.
NOW, THEREFORE, in consideration of the premises, the mutual agreements
and obligations set forth herein, and the mutual benefits to be received
hereunder, the Parties agree as follows:
ARTICLE 1. DEFINITIONS
For the purpose of this Agreement, the following terms shall have the
meanings designated below:
1.1 Area of Mutual Interest "AMI" means the lands outlined on the plat
attached hereto as Exhibit "A".
1.2 "AMI Interests" means any interest in the oil, gas or other
minerals in and under the AMI, including leasehold interests under oil
and gas leases, oil and gas lease options, interests of the farmee
under farmout agreement, and other such interests or rights similar or
dissimilar to those mentioned, including, but not limited to, seismic
permits. AMI Interest does not, however, include nonpossessory
interests in the oil, gas and other minerals in and under the AMI, such
as royalty interests, overriding royalty interests, net profits
interests, or other such interests whether similar or dissimilar to
those mentioned.
1.3 "Existing AMI Interests" means the Seismic and Lease Options, Oil
and Gas Leases and Seismic Permits which have been acquired as of
August 1, 1998.
1.4 "Subsequently Acquired AMI Interests" means all AMI Interests
acquired after August 1, 1998.
1.5 "Contract Lands" means lands located within the AMI which are
covered by AMI Interests.
1.6 "Initial Interest" means a Party's ownership in Existing AMI
Interests, and the amount of interest a party is entitled to acquire in
Subsequently Acquired AMI Interests, subject to the provisions hereof.
1.7 "Jointly Owned AMI Interest" means an AMI Interest in which the
Parties own an interest pursuant to the terms of this Agreement.
1.8 "Lease Burden" means any royalty, overriding royalty interest, net
profits interest, production payment, carried interest, reversionary
working interest or other charges upon a leasehold interest or the
production therefrom.
1.9 "Losses" means any and all losses, liabilities, claims, demands,
penalties, fines, settlements, damages, actions, or suits of whatsoever
kind and nature (but expressly excluding consequential damages),
whether or not subject to litigation, including without limitation (i)
claims or penalties arising from products liability, negligence,
statutory liability or violation of any applicable law or in tort
(strict, absolute or otherwise) and (ii) loss of or damage to any
property, and all reasonable out-of-pocket costs, disbursements and
expenses (including, without limitation, legal, accounting, consulting
and investigation expenses and litigation costs) imposed on, incurred
by or asserted against an indemnified Party in connection therewith.
1.10 "Operator" shall mean Parallel Petroleum Corporation.
1.11 "Party" or "Parties" means Parallel, TAC, Beta, Meyer, FGL,
Cooper, Mansefeldt, Topaz, Wes-Tex and CKC and any other person or
entity, singularly or as a group, which hereafter becomes a party
hereto or is otherwise subject to the terms hereof.
1.12 "Pre-Existing Data" means such data which includes, but is not
limited to: seismic records and related seismic data, electronic and
mud logs, cores and core analyses, field studies (less and except any
proprietary methodology or process used by any Party in such studies),
production tests, engineering, geological, geophysical, paleontological
data, interpretive data and maps prepared by any Party in existence as
of the date of this Agreement.
1.13 "Proportionate Share" except as otherwise provided for herein,
shall be calculated by dividing a Party's Initial Interest by the
aggregate of the Initial Interests of all Parties who are to share an
interest or an obligation pursuant to the terms hereof.
1.14 "Prospect" means an area within the AMI which is designated as a
Prospect pursuant to Article 7.3 hereof and within which there is
expected to occur, based on information developed as a result of 3-D
Seismic Operations, a commercial accumulation of oil and/or gas in a
specific structural or stratigraphic trap.
1.15 "Subsequently Created Burden" means a lease burden which is
created by a party subsequent to its acquisition of the interest which
is subject to the burden, except the overriding royalty interest
provided for in Article 2.5 hereof.
1.16 "Costs Prior to Leasehold Acquisition" means all costs of any
type whatsoever which pertain to this project, covering lands located
within or outside the AMI, including, but not limited to costs of
seismic permits, seismic and lease options, oil and gas leases, and
renewals and/or extensions thereof, land brokerage, legal costs,
surface damages, surveying, seismic acquisition, processing and
interpretation, etc., which are incurred prior to Leasehold
Acquisition conducted under the provisions of Article 4 hereof.
1.17 "Seismic Operations" means all operations which are necessary to
produce a three-dimensional seismic data grid over the portion of the
Contract Lands on which the Parties conduct such operations, including
the processing and interpretation of such data.
1.18 Other terms are defined elsewhere in this Agreement.
ARTICLE 2. INTERESTS AND SHARE OF COSTS OF THE PARTIES
2.1 Area of Mutual Interest. The Parties hereby establish an Area of
Mutual Interest "AMI", same to be comprised of the area outlined on the
attached Exhibit "A", and which shall cover AMI Interests located
therein. This AMI shall continue for a term of seven (7) years, or the
expiration of the last Jointly Owned AMI Interest, whichever is
earlier.
2.2 Interests and Share of Costs of the Parties. The Parties hereby
agree to own, as their Initial Interest, and agree to bear the costs
set out below, as follows:
<TABLE>
Party Initial Interest Share of Costs Share of Costs
Prior to Leasehold for Leasehold
Acquisition Acquisition and
Subsequent Operations
<S> <C> <C> <C>
Parallel .4825000 .5600000 .4825000
TAC .1875000 .0000000 .1875000
Beta .1250000 .1666667 .1250000
Meyer .0200000 .0266667 .0200000
CKC .0300000 .0400000 .0300000
Cooper .0300000 .0400000 .0300000
FGL .0750000 .1000000 .0750000
Mansefeldt .0360000 .0480000 .0360000
Topaz .0040000 .0053333 .0040000
Wes-Tex .0100000 .0133333 .0100000
</TABLE>
Parallel and TAC have acquired and presently own the Existing AMI
Interests. Beta, Meyer, FGL, Cooper, Mansefeldt, Topaz, Wes-Tex and CKC
agree that their respective costs in the Existing AMI Interests shall
be based on $100.00 per net mineral acre on seismic and lease options,
and cost plus 33.33333% on oil and gas leases and seismic permits. The
Existing AMI Interests are presently comprised of approximately
28,454.496 net mineral acres covered by seismic and lease option, 2,288
acres covered by seismic permit where cost was $36,895.00, and 279.3065
net mineral acres covered by oil and gas lease where cost was
$41,895.98. Based on the foregoing, the current total cost of Existing
AMI Interests is Two million nine hundred fifty thousand five hundred
four and 24/100 Dollars ($2,950,504.24). Beta, Meyer, FGL, Cooper,
Mansefeldt, Topaz, Wes-Tex and CKC agree to pay Parallel their share of
such cost, as referenced above, in the Existing AMI Interests upon
execution of this Agreement. Beta, Meyer, FGL, Cooper, Mansefeldt,
Topaz, Wes-Tex and CKC hereby agree that Parallel shall have the
exclusive right to acquire AMI Interests through August 1, 1998, and
that same shall be treated in all respects as Existing AMI Interests.
Beta, Meyer, FGL, Cooper, Mansefeldt, Topaz, Wes-Tex and CKC agree that
they shall be obligated to accept such interests in the same
percentages and pay Parallel for such interests at the same terms
stated herein. Payment for such interests shall be due within fifteen
(15) days after receipt of written notice as set out in Article 2.4.
Interests available to Parallel which costs exceed those stated above
shall be offered to the other Parties as per the procedure set forth in
Article 2.4 below.
2.3 Recording. Parallel agrees to file for record in the office of the
Jackson County Clerk, all Memorandums of Seismic and Lease Options
covering the Existing AMI Interests within fifteen (15) days of the
date this Agreement is executed by all Parties.
2.4 Subsequently Acquired AMI Interests. Any Party acquiring a
Subsequently Acquired AMI Interest, directly or indirectly, shall
notify the other Parties hereto. Such notice shall set forth (i) a
description of the interest acquired, (ii) the total cost of the
interest, including all land and legal costs associated with the
acquisition thereof, (iii) the Proportionate Share of the notified
Party and its cost therein, and (iv) any other pertinent terms of such
acquisition, including, but not limited to, copies of the instruments
of conveyance, copies of leases, assignments, subleases, farmout and
other contracts affecting the AMI Interests, copies of paid drafts or
checks, itemized invoices of actual costs incurred by the acquiring
Party. Parties shall have fifteen (15) days from the receipt of this
notice to acquire their Proportionate Share of the Subsequently
Acquired AMI Interest. A Party's election to acquire shall be given in
writing and accompanied by Party's payment of its total cost for such
interest. If a Party's election and payment are not received within
such fifteen (15) day period, it shall be conclusively presumed that
such Party has elected not to acquire its Proportionate Share of the
Subsequently Acquired AMI Interest and has forfeited its right thereto.
A Party's failure to exercise its option as to any particular notice
shall not constitute a waiver or release of its right to acquire any
interest described in any subsequent notice delivered hereunder.
Subsequently acquired AMI Interests shall not be construed to include
oil and gas leases acquired under Article 4 hereof.
2.5 Existing Burdens. Each Party's interest under this agreement in the
AMI Interests, and oil and gas leases which may be acquired thereunder,
shall be subject to and burdened by its proportionate share of all
existing operating agreements, existing and pending pooling and spacing
orders and all Lease Burdens other than Subsequently Created Burdens.
Parallel and TAC represent, except as hereinafter provided, that they
have not burdened the Existing AMI Interests acquired or to be acquired
with any liens or Subsequently Created Burdens. Each Party agrees to
perform its Proportionate Share of the obligations under the AMI
Interests acquired pursuant to this Agreement and the other obligations
described in this Article, but only to the extent that such obligations
arise after the acquisition of such AMI Interests by such Party.
Notwithstanding the foregoing, the Parties agree that they shall bear,
their Proportionate Share of an overriding royalty interest to be owned
by TAC on all oil and gas leases acquired pursuant to this Agreement
(including leases acquired by exercising lease options in which the
Parties own an interest, and in extensions and renewals thereof) equal
to the difference between Lease Burdens and twenty-five percent (25%)
on all such leases where Lease Burdens are less than twenty-five
percent (25%); and an overriding royalty interest equal to two percent
(2%) of eight-eighths (8/8th) in such leases where Lease Burdens are
twenty-five percent (25%) or greater. All such overriding royalty
interests shall be reduced in the proportion that the mineral interest
covered by any such lease or leases bears to the entire undivided fee
mineral estate.
2.6 Expiring Options. If any lease options covered hereby will expire
prior to completion of the Seismic Operations contemplated herein,
Operator shall use its best efforts to renew and/or extend such option
for a sufficient period of time to complete the proposed 3-D Seismic
Operations thereon and exercise the lease option thereunder. Payment
for extensions and/or renewals shall be due within fifteen (15) days
after receipt of an invoice therefore.
2.7 Assignments. Upon receipt of payment for AMI Interests, Parallel
shall assign to the Parties hereto their Initial Interest in such AMI
Interests. Such assignment shall be recordable in form, shall be
subject to this agreement, shall provide for warranty by, through and
under Parallel, but not otherwise, and shall be subject to the terms
and provisions of the AMI Interests assigned. Notwithstanding such
assignments, the Parties hereby grant Operator full right and authority
to conduct Leasehold Acquisition on their behalf under the provisions
of Article 4 hereof.
2.8 AMI Interests Located In and Outside of the Existing AMI. If an AMI
Interest is found to cover lands located both within and outside the
existing AMI, the entirety of such AMI Interest shall be offered to the
other Parties under the provisions of Article 2.4, and if the other
Parties elect to participate in the acquisition thereof, the
description of the lands comprising the AMI shall be deemed to be
amended to extend and cover all of the lands covered by such interest.
The option of the Parties to participate in the acquisition of such
interests shall be limited to the entirety of the interest acquired.
2.9 Option to Cash Call. Notwithstanding the provisions for the
payments required in Articles 2.2, 2.4, 2.6 and 4, Operator shall the
right to require the other Parties to pay their Proportionate Share of
the estimated costs as provided in such Articles in advance. Such
advanced payment shall be paid within fifteen (15) days of receipt of
an invoice therefor.
ARTICLE 3. SEISMIC OPERATIONS
3.1 Existing Seismic, Geologic and Other Subsurface Data. Except as
prohibited by law or by agreements with third parties, upon request,
each Party owning existing seismic data pertaining to lands located
within the AMI shall furnish copies of all such data to the other
Parties, together with any geologic or other subsurface data that could
be useful in the interpretation thereof. The Party receiving such data
shall bear the expense of copying it. The Party owning any seismic or
other data which may not be copied, due to legal prohibitions or by
agreements with third parties, shall, upon request, make such data
available to the Party requesting such data during normal business
hours.
3.2 Ownership of Pre-Existing Data. Ownership of the Pre-Existing Data
and all reprocessed Pre-Existing Data shall at all times remain vested
in the Party who contributes the Pre-Existing Data for use by the
Parties, and the Parties agree to acknowledge such ownership,
including, but not limited to, the filing with any appropriate
governmental authority of such acknowledgment. The Parties expressly
reserve the right to sell, license, or trade the Pre-Existing Data
which it contributes hereunder, to the extent that it has such right to
sell, license or trade the Pre-Existing Data, through its own efforts,
or through the efforts of others duly authorized by such Party and the
benefits and advantages, including monetary consideration, which such
Party receives as a result of such activities shall be the sole
property of such Party.
3.3 Management of the 3-D Seismic Operations. Operator shall
exclusively manage and conduct the 3-D Seismic Operations contemplated
hereunder and all operations incident thereto, including, but not
limited to, the acquisition of all geoscientific data, the performance
of all 3-D seismic surveys and other geoscientific work incident
thereto, and, subject to the Operating Agreements, the drilling of all
wells on the Prospects. Operator shall perform all such work through
employees, representatives, and contractors of its selection, and
Operator shall and does hereby agree to utilize reasonable prudence and
economic judgment in contracting with third party contractors or
subcontractors. As manager of 3-D Seismic Operations, Operator shall
devote such of its time, attention and efforts to the conduct thereof
as it shall in good faith determine reasonably necessary, but shall
otherwise be free to engage in and pursue all other current and future
business projects, programs, prospects, opportunities, investments and
activities without obligation of any kind to or right of participation
therein by the other Parties hereto. In performing its duties under
this Agreement, Operator shall serve as an independent contractor and
not as an agent or employee of the other Parties hereto. Operator shall
utilize reasonable prudence and economic judgment in incurring costs,
and shall further conduct the 3-D Seismic Operations and perform all of
its duties under this Agreement as a reasonable, prudent operator, in a
good and workmanlike manner with due diligence and dispatch, in
accordance with good oilfield and exploratory practice, and in
compliance with all applicable laws and regulations, BUT SHALL HAVE NO
LIABILITY TO THE OTHER PARTIES HERETO OR ANY OTHER OWNER OF RIGHTS OR
INTERESTS UNDER THIS AGREEMENT FOR ANY LOSSES SUSTAINED OR LIABILITIES
INCURRED IN CONNECTION WITH THE 3-D SEISMIC OPERATIONS AND/OR THE
CONDUCT OF ANY ACTIVITIES UNDER OR CONTEMPLATED BY THIS AGREEMENT, SAVE
AND EXCEPT AS MAY BE OCCASIONED BY THE GROSS NEGLIGENCE OR WILLFUL
MISCONDUCT OF OPERATOR. EACH OF THE OTHER PARTIES HERETO ACKNOWLEDGES
THAT (A) IT HAS READ AND AGREED TO THE FOREGOING EXCULPATION OF
OPERATOR AS A NEGOTIATED AND BARGAINED FOR ASPECT OF THIS TRANSACTION,
(B) THIS EXCULPATION PROVISION IS CONSPICUOUS.
3.4 Ongoing and Future Seismic Operations. The Parties agree to conduct
such operations on all or substantially all of the Contract Lands. The
Parties may, subject to their unanimous written consent, agree to
reduce or increase the acreage on which such operations will be
conducted when technical, legal or operational considerations indicate
that such reduction or increase is warranted. In any event, the Parties
agree to pay Operator their respective shares of the total costs of the
3-D Seismic Operations conducted on all land covered by AMI Interests
as set forth in Article 2.2 hereof. Payment for 3-D Seismic Operations
shall be due within fifteen (15) days after receipt of each invoice
therefore. Operator shall furnish the other Parties hereto with copies
of all applicable contracts and other information pertaining to all 3-D
Seismic Operations conducted hereunder. The Parties shall own their
Proportionate Share of the geophysical data obtained by and resulting
from the 3-D Seismic Operations conducted on the Contract Lands,
including, but not limited to all tapes, seismic sections and any and
all other data generated by such 3-D Seismic Operations. Each Party
shall have access to such data and shall receive copies thereof. The
Parties agree to work together in a spirit of cooperation and in good
faith in planning and causing the 3-D Seismic Operations to be
conducted as contemplated herein as well as in sharing the data
collected therefrom and the interpretations thereof. Such
interpretations, by any Party, shall in no way be deemed a
representation to any other Party that such interpretations are
accurate or correct. Such interpretations shall be given merely as a
means of sharing such Party's analysis and ideas regarding such data.
3.5 Confidentiality of Seismic Data. Except as provided below, each
Party agrees to keep all seismic data obtained pursuant to Article 3.3
confidential for a period of seven (7) years from the date hereof.
After the expiration of seven (7) years from the date hereof any Party
may sell the data it acquired pursuant to Article 3.3. Each Party
owning an interest in such data shall receive its Proportionate Share
of the proceeds of any such sale. Any data acquired from another Party
pursuant to Article 3.1 shall forever be kept confidential by the
Parties; provided, however, that the Party who originally contributed
such data may share, sell or otherwise dispose of such data that does
not pertain to a Prospect to a third party after the expiration of one
(1) year from the date hereof, and the other Parties shall have no
interest in the proceeds from such sale. Notwithstanding the foregoing,
a Party may disclose seismic data to (A) a prospective purchaser or
farmee of such Party's interest, provided (i) such disclosure is
limited to the Prospect under consideration for sale or farmout, (ii)
the prospective purchaser or farmee must review such data in the
affected Party's offices and may not copy such data until such time as
it has acquired or earned an interest in the Contract Lands, and (iii)
such prospective purchaser or farmee must execute a confidentiality
agreement to prevent further disclosure and unauthorized use of such
data; or (B) a third party who is entitled thereto pursuant to the
terms of a lease, lease option or seismic permit. Any Party may
disclose such data to its agents, staff, representatives and
consultants in the normal conduct of its business.
3.6 Review of Seismic Data. The Parties agree to cooperate in good
faith in reviewing the seismic data acquired hereunder. Such data
should be reviewed by the Parties as soon as practicable after the data
is available so that the Parties can make decisions regarding the
exercise of lease options.
ARTICLE 4. LEASEHOLD ACQUISITION
As soon as is practicable after the 3-D seismic data has been processed
and interpreted, Operator shall, in its sole discretion, acquire leases
within the AMI, and the Parties agree to pay their Proportionate Share
of cost therein, including all land and legal costs associated with the
acquisition thereof. Upon receipt of payment, which shall be due within
fifteen (15) days after receipt of each invoice therefore, Operator
shall promptly execute and deliver recordable assignments to the
Parties reflecting their respective interests in the leases acquired.
ARTICLE 5. FORFEITURE
Payments due hereunder, including Cash Calls provided for in Article
2.9, for Existing AMI Interests under Article 2.2, renewals and/or
extensions acquired under Article 2.6, Seismic Operations under
Article 3.4, and Lease Acquisition under Article 4 shall be mandatory.
A Party failing to timely make any such payment shall be in breach of
this Agreement; and, in the event such payment is not received by the
Party entitled thereto, within sixty (60) days after written demand
therefore has been received, such Party shall, without the necessity
of any further proceeding, forfeit all of its right, title and
interest under this Agreement (including, but not limited to all of the
interest that it acquired pursuant to the terms hereof in any AMI
Interests and seismic data) to the Party to whom such payment is owed.
Any Party so forfeiting its interest hereunder, hereby designates
and appoints the Party to whom such payment is owed as its Agent
and Attorney-in-Fact for the sole and limited purpose of executing
an instrument of conveyance vesting title to the forfeited interest in
the Party to whom such payment is owed. The Party receiving such
forfeited interest shall then offer the other Parties their
Proportionate Share of such forfeited interest as per the provisions of
Article 2.4 hereof.
ARTICLE 6. SALE, FARMOUT OR OTHER DISPOSITION OF AMI INTERESTS TO A THIRD PARTY
Any Party may sell, assign, farmout or otherwise dispose of all or any
portion of its interest acquired pursuant to or in connection with this
Agreement without consent of any other Party. Operator shall be
furnished with a copy of the assignment or other instrument disposing
of such interest within ten (10) days from the date thereof.
ARTICLE 7. SUBSEQUENT OPERATIONS
7.1 Operator. Operator shall have the right, subject to the terms and
provisions of the attached Operating Agreement, to be the Operator for
all operations conducted within the AMI, and the Parties hereby agree
to execute separate Operating Agreements designating Operator, as
Operator, as required.
7.2 Operating Agreement. Except as provided herein, all operations
conducted within the AMI shall be conducted in accordance with the
terms of an Operating Agreement substantially in the form attached
hereto as Exhibit "B". A separate Operating Agreement shall be executed
for each Prospect, with the first well drilled in such Prospect to be
designated as the "Initial Well". The share of costs which each Party
must bear and the interest of each Party in the production from each
well drilled under the Prospect Operating Agreement will be determined
on a well-by-well basis in accordance with the terms hereof as modified
by the terms of the Operating Agreement. In the event of conflict
between the terms and provisions hereof and those contained in the
Operating Agreement, the terms and provisions hereof shall prevail.
7.3 Designation of Prospects. As soon as practicable after the data has
been processed and interpreted, Operator shall furnish the other
Parties with maps which reflect designated Prospects, together with a
description of the seismic data, prospective feature and any
interpretative data or other maps upon which such Prospect is based.
7.4 Non-Consent Election on Initial Well. If a Party elects not to
participate in the drilling of the Initial Well in a Prospect, such
Party shall relinquish all of its rights and interests in that Prospect
to the Parties participating in the drilling of such well which elect
to acquire their Proportionate Share of the relinquished interest. A
condition precedent to such relinquishment shall be the reimbursement
of the relinquishing Party's leasehold cost in the relinquished
interest by the Parties electing to participate in such interest, which
cost shall be specifically limited to that incurred by such Party under
Article 4 hereof. A Party so relinquishing its interest shall promptly
execute a recordable assignment of its relinquished interest to the
Parties entitled thereto, which interest shall be free of any
Subsequently Created Burdens. Upon receipt of such assignment the
Parties receiving the relinquished interest shall reimburse the
relinquishing Party their respective Proportionate Share of the
relinquishing Party's cost in the interest so assigned.
7.5 Limitation on Number of Wells Drilling. Not more than three (3)
wells shall be drilling on the Contract Lands at any time unless it is
necessary to commence a well in order to perpetuate a lease or
otherwise satisfy the terms of a continuous drilling obligation.
ARTICLE 8. MISCELLANEOUS
8.1 Legal Relationship. This agreement is not intended to create, and
shall not be construed to create, a partnership or other relationship
whereby one party is liable for the actions or debts of another party;
it being understood and agreed that the rights and liabilities of all
parties are several and not joint or collective.
8.2 Entire Agreement. This agreement constitutes the entire agreement
among the parties hereto with respect to the subject matter hereof,
superseding any and all prior agreements, understandings, discussions,
negotiations and commitments of any kind.
8.3 Amendment. The provisions of this agreement may be amended,
supplemented, or waived only if in writing signed by all parties
hereto.
8.4 Construction. The parties to this agreement all acknowledge and
agree that this agreement was drafted jointly by them, and that in the
event of any ambiguity, this agreement shall not be construed against
any of them on the basis of the fact or presumption that one party had
a greater or lesser hand in the drafting of the agreement than another
party, but rather the terms shall be given a reasonable interpretation.
8.5 Governing Law. Except to the extent preempted by federal law, this
agreement is to be construed and interpreted in accordance with, and
governed by, the laws of the State of Texas.
8.6 Binding Agreement. This agreement shall bind and inure to the
benefit of the parties hereto and their respective heirs, successors,
legal representatives and assigns.
8.7 Section and Subsection Headings. The article, section and
subsection headings contained in this agreement are for the purpose of
convenience only and are not intended to define or limit the contents
hereof or otherwise be considered in construing and enforcing this
agreement.
8.8 Waivers. Any failure by any party hereto to comply with any of its
obligations, agreements or conditions herein contained may be waived in
writing, but not in any other manner, by the party to whom such
compliance is owed. No waiver of, or consent to a change in, any
provision of this agreement shall be deemed to be, or shall constitute,
a waiver of or consent to a change in the provisions hereof (whether or
not similar), nor shall such waiver constitute a continuing waiver
unless expressly provided.
8.9 Further Assurances. The parties hereto agree to deliver or cause to
be delivered to each other at all such times as shall be reasonably
required, all such additional instruments, agreements, and other
documents, and to perform all such actions, as any of them may
reasonably request for the purpose of performing any provision of this
agreement or evidencing the transactions contemplated by this
agreement.
8.10 Severability. If any term or provision of this agreement or any
application of this agreement is held invalid or unenforceable, the
remainder of this agreement and any other application of the terms and
provisions of this agreement shall not be affected by that holding, but
shall be valid and enforceable.
8.11 Exhibits. All exhibits attached hereto or referred to in this
agreement are incorporated herein and made a part of this agreement.
8.12 Term. The term of this agreement shall be seven (7) years from the
date hereof or until the last expiration of the last Jointly Owned AMI
Interest acquired hereunder, whichever is earlier, with the exception
of the confidentiality requirements of Article 3.5 which shall survive
and extend past that period.
8.13 Notices. All notices, consents and other communications under this
Agreement shall be in writing and shall be deemed to have been duly
given (a) when delivered by hand, (b) when sent by facsimile (with
receipt confirmed), provided that a copy is promptly mailed thereafter
by first class postage prepaid registered or certified mail, return
receipt requested, (c) when received by the addressee, if sent by
Express Mail, Federal Express, other express delivery service (receipt
requested) or by such other means as the Parties named below may agree
from time to time or (d) five (5) days after being mailed in the USA,
by first class postage prepaid registered or certified mail, return
receipt requested; in each case to the appropriate address and
telecopier number set forth below (or to such other address or
telecopier number as a Party may designate as to itself by notice to
the other Parties).
Parallel Petroleum Corporation
110 N. Marienfeld, Suite 465
Midland , TX 79701
Attn: Larry Oldham
Telephone Number: (915)684-3727
Telecopier Number: (915)684-3905
TAC Resources, Inc.
P. O. Box 206
Victoria, TX 77902
Attn: Bill Bishop
Telephone Number: (512)573-4969
Telecopier Number: (512)573-9840
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attn: Steve Antry
Telephone Number: (714)752-5212
Telecopier Number: (714)752-5757
Meyer Financial Services, Inc.
1005 Liberty Building
Buffalo, NY 14202
Attn: Paul Meyer
Telephone Number: (716)842-2215
Telecopier Number: (716)842-2220
Mert L. Cooper
P. O. Box 935
Canadian, TX 79014
Attn: Mert L. Cooper
Telephone Number: (806)323-9464
Telecopier Number: (806)323-9463
CKC Investments, Inc.
P. O. Box 935
Canadian, TX 79014
Attn: Mert L. Cooper
Telephone Number: (806)323-9464
Telecopier Number: (806)323-9463
FGL, Inc.
5646 Milton Street, Suite 900
Dallas, TX 75206
Attn: Guy Griffith
Telephone Number: (214)691-0711
Telecopier Number: (214)368-1502
Also Notify:
EG Operating, Inc.
1101 S. Capitol of Texas Highway, Building A, Suite 104
Austin, TX 78746
Attn: Ed Geoffroy
Telephone Number: (512)328-4355
Telecopier Number: (512)328-4383
Mansefeldt Investment Corporation
400 Pine Street, Suite 1000
Abilene, TX 79601
Attn: Tucker Bridwell
Telephone Number: (915)677-1367
Telecopier Number: (915)675-5017
Topaz Exploration Company
P. O. Box 1616
Abilene, TX 79604
Attn: Tucker Bridwell
Telephone Number: (915)677-1367
Telecopier Number: (915)675-5017
Wes-Tex Drilling Corp.
P. O. Box 3739
Abilene, TX 79604
Attn: Myrle Greathouse
Telephone Number: (915)677-9121
Telecopier Number: (915)675-5140
Each Party shall have the right upon giving thirty (30) days prior
written notice to the other Parties, in the manner herein provided, to
change its address and telecopier number for the purpose of notice.
8.14 Transfers Subject to this Agreement. Any sale, agreement, transfer
or other disposition of an interest in the Contract Lands, however
accomplished, either voluntarily or involuntarily, by operations of law
or otherwise, shall be subject to the terms of this Agreement. Any
instruments which convey any interest in the Contract Lands shall be
made expressly subject to the Agreement.
8.15 Counterparts. This agreement may be executed in multiple
counterparts, all of which when taken together shall constitute one
and the same agreement.
8.16 Public Announcements. Each Party hereto agrees that prior to
making any public announcement or statement with respect to the
transaction contemplated in this Agreement, the Party desiring
to make such public announcement or statement shall consult with
the other Parties hereto and exercise their best efforts to (i)
agree upon the text of a joint public announcement or statement to
be made by the Parties, (ii) obtain approval of the other Parties
hereto to the extent of a public announcement or statement to be made
solely by one of the Parties, as the case may be. Approval
shall be requested pursuant to Article 8.13 hereof, and any such
announcement or statement shall be deemed approved if no reply to
the contrary is received within twenty-four (24) hours (Saturdays,
Sundays and federal legal holidays excluded) after receipt of such
request by the other Parties. Nothing contained in this paragraph
shall be construed to require any Party to obtain approval of the other
Parties hereto to disclose information with respect to the transaction
contemplated by this Agreement to any governmental body to the extent
required by applicable law or by any applicable rules.
8.17 Expenses. Except as specified herein and as the Parties may
otherwise agree, each Party shall be solely responsible for all
expenses incurred by it in connection with any and all transactions
that are contemplated by this Agreement.
8.18 Force Majeure. Should any Party be prevented, wholly or in part,
from complying with any express or implied obligation of this
Agreement(other than the obligation to make money payments), from
conducting any operations provided for under this Agreement,
including by way of illustration but not limitation, the conducting
of the 3-D Seismic Operations by reason of scarcity of or inability to
obtain or to use labor, water, equipment or materials in the open
market or transportation thereof from any cause (other than
financial) beyond the control of such Party, or operation of "Force
Majeure, any State or Federal law or any order, ruling or regulation
of governmental authority, then while so prevented, such Party's
obligation to comply with such provision or obligation shall be
suspended, and such Party shall not be liable in damages or otherwise
to the other Parties for failure to comply therewith, provided that
the Party claiming suspension shall give written notice and full
particulars of the reason of such inability to perform its obligations
to the other Parties within thirty (30) days after the occurrence of
the cause relied on by the Party claiming suspension.
8.19 Arbitration. The Parties agree that any and all disputes arising
under or relating to this Agreement shall be referred to arbitration
pursuant to the commercial rules of arbitration of the American
Arbitration Association. Venue for such arbitration shall be Houston,
Texas USA.
IN WITNESS WHEREOF, this agreement is executed on the date first above written.
Parallel Petroleum Corporation
By:_________________________________
Larry C. Oldham, President
TAC Resources, Inc.
By:__________________________________
Bill Bishop, President
Beta Oil & Gas, Inc.
By:/s/_______________________________
Steve Antry, President
Meyer Financial Services, Inc.
By:___________________________________
Paul Meyer, President
CKC Investments, Inc.
By:___________________________________
Mert L. Cooper, President
-----------------------------------
Mert L. Cooper
FGL, Inc.
By:__________________________________
Guy Griffith, Vice President
Mansefeldt Investment Corporation
By:__________________________________
Tucker Bridwell, President
Topaz Exploration Company
By:_________________________________
Tucker Bridwell, President
Wes-Tex Drilling Corp.
By:__________________________________
Myrle Greathouse,
Chairman of the Board
<PAGE>
EXHIBIT A
to
BWC PROSPECT AGREEMENT, DATED APRIL 1, 1998
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
<PAGE>
EXHIBIT B
(ATTACHED TO AND MADE A PART OF THAT CERTAIN EXPLORATION AGREEMENT COVERING
THE BWC PROJECT DATED APRIL 1, 1998, BY AND BETWEEN PARALLEL
PETROLEUM CORPORATION ET AL)
[STAMP]
OPERATING AGREEMENT
DATED
, 19 ,
--------- --
OPERATOR Parallel Petroleum Corporation
-------------------------------------------------------
CONTRACT AREA
---------------------------------------------------
----------------------------------------------------------------
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COUNTY OR PARISH OF STATE OF
---------------------- ------------
COPYRIGHT 1982 - ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 2408 CONTINENTAL LIFE BUILDING.
FORT WORTH, TEXAS, 76102, APPROVED FORM.
A.A.P.L. NO. 610 - 1982 REVISED
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
- ------- ----- ----
<S> <C> <C>
I. DEFINITIONS.....................................................................1
II. EXHIBITS........................................................................1
III. INTERESTS OF PARTIES............................................................2
A. OIL AND GAS INTERESTS........................................................2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION.................................2
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS....................2
D. SUBSEQUENTLY CREATED INTERESTS...............................................2
IV. TITLES..........................................................................2
A. TITLE EXAMINATION............................................................2-3
B. LOSS OF TITLE................................................................3
1. Failure of Title..........................................................3
2. Loss by Non-Payment or Erroneous Payment of Amount Due....................3
3. Other Losses..............................................................3
V. OPERATOR........................................................................4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR.................................4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR................4
1. Resignation or Removal of Operator........................................4
2. Selection of Successor Operator...........................................4
C. EMPLOYEES....................................................................4
D. DRILLING CONTRACTS...........................................................4
VI. DRILLING AND DEVELOPMENT........................................................4
A. INITIAL WELL.................................................................4-5
B. SUBSEQUENT OPERATIONS........................................................5
1. Proposed Operations.......................................................5
2. Operations by Less than All Partners......................................5-6-7
3. Stand-By Time.............................................................7
4. Sidetracking..............................................................7
C. TAKING PRODUCTION IN KIND....................................................7
D. ACCESS TO CONTRACT AREA AND INFORMATION......................................8
E. ABANDONMENT OF WELLS.........................................................8
1. Abandonment of Dry Holes..................................................8
2. Abandonment of Wells that have Produced...................................8-9
3. Abandonment of Non-Consent Operations.....................................9
VII. EXPENDITURES AND LIABILITY OF PARTIES...........................................9
A. LIABILITY OF PARTIES.........................................................9
B. LIENS AND PAYMENT DEFAULTS...................................................9
C. PAYMENTS AND ACCOUNTING......................................................9
D. LIMITATION OF EXPENDITURES...................................................9-10
1. Drill or Deepen...........................................................9-10
2. Rework or Plug Back.......................................................10
3. Other Operations..........................................................10
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES.........................10
F. TAXES........................................................................10
G. INSURANCE....................................................................11
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST................................11
A. SURRENDER OF LEASES..........................................................11
B. RENEWAL OR EXTENSION OF LEASES...............................................11
C. ACREAGE OR CASH CONTRIBUTIONS................................................11-12
D. MAINTENANCE OF UNIFORM INTEREST..............................................12
E. WAIVER OF RIGHTS TO PARTITION................................................12
IX. INTERNAL REVENUE CODE ELECTION..................................................12
X. CLAIMS AND LAWSUITS.............................................................13
XI. FORCE MAJEURE...................................................................13
XII. NOTICES.........................................................................13
XIII. TERM OF AGREEMENT...............................................................13
XIV. COMPLIANCE WITH LAWS AND REGULATIONS............................................14
A. LAWS, REGULATIONS AND ORDERS.................................................14
B. GOVERNING LAW................................................................14
C. REGULATORY AGENCIES..........................................................14
XV. OTHER PROVISIONS................................................................14
XVI. MISCELLANEOUS...................................................................15
</TABLE>
II
<PAGE>
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between Parallel Petroleum
Corporation 110 N. Marienfield, Suite 465, Midland, TX 79701, hereinafter
designated and referred to as "Operator", and the signatory party or parties
other than Operator, sometimes hereinafter referred to individually herein as
"Non-Operator", and collectively as "Non-Operators"
WITNESSETH:
WHEREAS, the parties to this agreement are owners of oil and gas leases
and/or oil and gas interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these leases
and/or oil and gas interests for the production of oil and gas to the extent
and as hereinafter provided.
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas
condensate, and all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
B. The terms "oil and gas lease", "lease" and "leasehold" shall mean
the oil and gas leases covering tracts of land lying within the Contract Area
which are owned by the parties to this agreement.
C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.
D. The term "Contract Area" shall mean all of the lands, oil and gas
leasehold interests and oil and gas interests intended to be developed and
operated for oil and gas purposes under this agreement. Such lands, oil and
gas leasehold interests and oil and gas interests are described in Exhibit
"A".
E. The term "drilling unit" shall mean the area fixed for the drilling
of one well by order or rule of any state or federal body having authority.
If a drilling unit is not fixed by any such rule or order, a drilling unit
shall be the drilling unit as established by the pattern of drilling in the
Contract Area or as fixed by express agreement of the Drilling Parties.
F. The term "drillsite" shall mean the oil and gas lease or interest on
which a proposed well is to be located.
G. The terms "Drilling Party" and "Consenting Party" shall mean a party
who agrees to join in and pay its share of the cost of any operation conducted
under the provisions of this agreement.
H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean
a party who elects not to participate in a proposed operation.
Unless the context otherwise clearly indicates, words used in the
singular include the plural, the plural includes the singular, and the neuter
gender includes the masculine and the feminine.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
/X/ A. Exhibit "A", shall include the following information:
(1) Identification of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Percentages or fractional interests of parties to this agreement,
(4) Oil and gas leases and/or oil and gas interests subject to this
agreement,
(5) Addresses of parties for notice purposes.
/ / B. Exhibit "B", Form of Lease.
/X/ C. Exhibit "C", Accounting Procedure.
/X/ D. Exhibit "D", Insurance.
If any provision of any exhibit, except Exhibits "E" and "G", is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
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<PAGE>
ARTICLE III.
INTERESTS OF PARTIES
A. OIL AND GAS INTERESTS:
If any party owns an oil and gas interest in the Contract Area, that
interest shall be treated for all purposes of this agreement and during the
term hereof as if it were covered by the form of oil and gas lease attached
hereto as Exhibit "B", and the owner thereof shall be deemed to own both the
royalty interest reserved in such lease and the interest of the lessee
thereunder.
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be owned, by
the parties as their interests are set forth in Exhibit "A". In the same
manner, the parties shall also own all production of oil and gas from the
Contract Area subject to the payment of royalties to the extent of
the leasehold burdens provided for in the Exploration Agreement to which this
Agreement is subject which shall be borne as hereinafter set forth.
Regardless of which party has contributed the lease(s) and/or oil and
gas interest(s) hereto on which royalty is due and payable, each party
entitled to receive a share of production of oil and gas from the Contract
Area shall bear and shall pay or deliver, or cause to be paid or delivered,
to the extent of its interest in such production, the royalty amount
stipulated hereinabove and shall hold the other parties free from any
liability therefor. No party shall ever be responsible, however, on a price
basis higher than the price received by such party, to any other party's
lessor or royalty owner, and if any such other party's lessor or royalty
owner should demand and receive settlement on a higher price basis, the party
contributing the affected lease shall bear the additional royalty burden
attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment
or crossassignment of interests covered hereby.
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS:
Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty,
production payment or other burden on production in excess of the amount
stipulated in Article III.B., such party so burdened shall assume and alone
bear all such excess obligations and shall indemnify and hold the other
parties hereto harmless from any and all claims and demands for payment
asserted by owners of such excess burden.
D. SUBSEQUENTLY CREATED INTERESTS:
If any party should hereafter create an overriding royalty, production
payment or other burden payable out of production attributable to its working
interest hereunder, or if such a burden existed prior to this agreement and
is not set forth in Exhibit "A", or was not disclosed in writing to all other
parties prior to the execution of this agreement by all parties, or is not a
jointly acknowledged and accepted obligation of all parties (any such
interest being hereinafter referred to as "subsequently created interest"
irrespective of the timing of its creation and the party out of whose working
interest the subsequently created interest is derived being hereinafter
referred to as "burdened party"), and:
1. If the burdened party is required under this agreement to assign or
relinquish to any other party, or parties, all or a portion of its
working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or
production free and clear of said subsequently created interest and
the burdened party shall indemnify and save said other party, or
parties, harmless from any and all claims and demands for payment
asserted by owners of the subsequently created interest, and,
2. If the burdened party fails to pay, when due, its share of expenses
chargeable hereunder, all provisions of Article VII.B. shall be
enforceable against the subsequently created interest in the same
manner as they are enforceable against the working interest of the
burdened party.
ARTICLE IV.
TITLES
A. TITLE EXAMINATION:
Title examination shall be made on the drillsite of any proposed well
prior to commencement of drilling operations or, if the Drilling Parties so
request, title examination shall be made on the leases and/or oil and gas
interests included, or planned to be included, in the drilling unit around
such well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable leases. At the time a well is proposed, each party contributing
leases and/or oil and gas interests to the drillsite, or to be included in
such drilling unit, shall furnish to Operator all abstracts (including
federal lease status reports), title opinions, title papers and curative
material in its possession free of charge. All such information not in the
possession of or made available to Operator by the parties, but necessary for
the examination of the title, shall be obtained by Operator. Operator shall
cause title to be examined by attorneys on its staff or by outside attorneys.
Copies of all title opinions shall be furnished to each party hereto. The
cost incurred by Operator in this title program shall be borne as follows.
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<PAGE>
ARTICLE IV.
CONTINUED
/X/ OPTION NO. 2: Costs incurred by Operator in procuring abstracts curative
materials and fees paid outside attorneys for title examination (including
preliminary, supplemental, shut-in gas royalty opinions and division order
title opinions) shall be borne by the Drilling Parties in the proportion that
the interest of each Drilling Party bears to the total interest of all
Drilling Parties as such interests appear in Exhibit "A". Operator shall make
no charge for services rendered by its staff attorneys or other personnel in
the performance of the above functions.
Operator shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with leases or oil and gas
interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations as well as
the conduct of hearings before governmental agencies for the securing of
spacing or pooling orders. This shall not prevent any party from appearing on
its own behalf at any such hearing.
No well shall be drilled on the Contract Area until after (1) the title
to the drillsite or drilling unit has been examined as above provided, and
(2) the title has been approved by the examining attorney or title has been
accepted by all of the parties who are to participate in the drilling of the
well.
B. LOSS OF TITLE:
3. OTHER LOSSES: All losses incurred, shall be joint losses and shall
be borne by all parties in proportion to their interests. There shall be no
readjustment of interests in the remaining portion of the Contract Area.
-3-
<PAGE>
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
Parallel Petroleum Corporation shall be the Operator of the Contract Area,
and shall conduct and direct and have full control of all operations on the
Contract Area as permitted and required by, and within the limits of this
agreement. It shall conduct all such operations in a good and workmanlike
manner, but it shall have no liability as Operator to the other parties for
losses sustained or liabilities incurred, except such as may result from
gross negligence or willful misconduct.
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
1. RESIGNATION OR REMOVAL OF OPERATOR: Operator may resign at any time
by giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area,
or is no longer capable of serving as Operator, Operator shall be deemed to
have resigned without any action by Non-Operators, except the selection of a
successor. Operator may be removed if it fails or refuses to carry out its
duties hereunder, or becomes insolvent, bankrupt or is placed in
receivership by the affirmative vote of two (2) or more Non-Operators owning
a majority interest based on ownership as shown on Exhibit "A" remaining
after excluding the voting interest of Operator. Such resignation or removal
shall not become effective until 7:00 o'clock A.M. on the first day of the
calendar month following the expiration of ninety (90) days after the giving
of notice of resignation by Operator or action by the Non-Operators to remove
Operator, unless a successor Operator has been selected and assumes the
duties of Operator at an earlier date. Operator, after effective date of
resignation or removal, shall be bound by the terms hereof as a Non-Operator.
A change of a corporate name or structure of Operator or transfer of
Operator's interest to any single subsidiary, parent or successor corporation
shall not be the basis for removal of Operator.
2. SELECTION OF SUCCESSOR OPERATOR: Upon the resignation or removal of
Operator, a successor Operator shall be selected by the parties. The
successor Operator shall be selected from the parties owning an interest in
the Contract Area at the time such successor Operator is selected. The
successor Operator shall be selected by the affirmative vote of two (2) or
more parties owning a majority interest based on ownership as shown on
Exhibit "A"; provided, however, if an Operator which has been removed fails
to vote or votes only to succeed itself, the successor Operator shall be
selected by the affirmative vote of two (2) or more parties owning a majority
interest based on ownership as shown on Exhibit "A" remaining after excluding
the voting interest of the Operator that was removed.
C. EMPLOYEES:
The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees
shall be the employees of Operator.
D. DRILLING CONTRACTS:
All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing rates in the area and
the rate of such charges shall be agreed upon by the parties in writing
before drilling operations are commenced, and such work shall be performed by
Operator under the same terms and conditions as are customary and usual in
the area in contracts of independent contractors who are doing work of a
similar nature.
ARTICLE VI.
DRILLING AND DEVELOPMENT
Operator shall make reasonable tests of all formations encountered
during drilling which give indication of containing oil and gas in quantities
sufficient to test, unless this agreement shall be limited in its application
to a specific formation or formations in which event Operator shall be
required to test only the formation or formations to which this agreement may
apply.
[STAMP]
-4-
<PAGE>
ARTICLE VI
CONTINUED
If, in Operator's judgment, the well will not produce oil or gas in
paying quantities, and it wishes to plug and abandon the well as a dry hole,
the provisions of Article VI.E.1. shall thereafter apply.
B. SUBSEQUENT OPERATIONS:
1. PROPOSED OPERATIONS: Should any party hereto desire to drill any well
on the Contract Area other than the well provided for in Article VI.A., or to
rework, deepen or plug back a dry hole drilled at the joint expense of all
parties or a well jointly owned by all the parties and not then producing in
paying quantities, the party desiring to drill, rework, deepen or plug back
such a well shall give the other parties written notice of the proposed
operation, specifying the work to be performed, the location, proposed depth,
objective formation and the estimated cost of the operation. The parties
receiving such a notice shall have thirty (30) days after receipt of the
notice within which to notify the party wishing to do the work whether they
elect to participate in the cost of the proposed operation and to pay their
proportionate share of the estimated cost thereof. If a drilling rig is on
location, notice of a proposal to rework, plug back or drill deeper may be
given by telephone and the response period shall be limited to forty-eight
(48) hours, exclusive of Saturday, Sunday and legal holidays and to pay their
proportionate share of the estimated cost of such operations. Failure of a
party receiving such notice to reply within the period above fixed shall
constitute an election by that party not to participate in the cost of the
proposed operation. Any notice given by telephone shall be promptly confirmed
in writing.
If all parties elect to participate in such a proposed operation as
provided above Operator shall, within ninety (90) days after expiration of
the notice period of thirty (30) days (or as promptly as possible after the
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be), actually commence the proposed operation and
complete it with due diligence at the risk and expense of all parties hereto;
provided, however, said commencement date may be extended upon written notice
of same by Operator to the other parties, for a period of up to thirty (30)
additional days if, in the sole opinion of Operator, such additional time is
reasonably necessary to obtain permits from governmental authorities, surface
rights (including rights-of-way) or appropriate drilling equipment, or to
complete title examination or curative matter required for title approval or
acceptance. Notwithstanding the force majeure provisions of Article XI, if
the actual operation has not been commenced within the time provided
(including any extension thereof as specifically permitted herein) and if any
party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance with
the provisions hereof as if no prior proposal had been made.
2. OPERATIONS BY LESS THAN ALL PARTIES: If any party receiving such
notice as provided in Article VI.B.1. or VII.D.1. (Option No. 2) elects not
to participate in the proposed operation, then, in order to be entitled to
the benefits of this Article, the party or parties giving the notice and such
other parties as shall elect to participate in the operation shall, within
ninety (90) days after the expiration of the notice period of thirty (30)
days (or as promptly as possible after the expiration of the forty-eight (48)
hour period when a drilling rig is on location, as the case may be) actually
commence the proposed operation and complete it with due diligence. Operator
shall perform all work for the account of the Consenting Parties; provided,
however, if no drilling rig or other equipment is on location, and if
Operator is a Non-Consenting Party, the Consenting Parties shall either (a)
request Operator to perform the work required by such proposed operation for
the account of the Consenting Parties, or (b) designate one (1) of the
Consenting Parties as Operator to perform such work. Consenting Parties,
when conducting operations on the Contract Area pursuant to this Article
VI.B.2. shall comply with all terms and conditions of this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period,
shall advise the Consenting Parties of the total interest of the parties
approving such operation and its recommendation as to whether the Consenting
Parties should proceed with the operation as proposed. Each Consenting Party,
within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after receipt of such notice, shall advise the proposing party of
its desire to (a) limit participation to such party's interest as shown on
Exhibit "A" or (b) carry its proportionate part of Non-Consenting Parties'
interests, and failure to advise the proposing party shall be deemed an
election under (a). In the event a drilling rig is on location, the time
permitted for such a response shall not exceed a total of forty-eight (48)
hours (INCLUSIVE of Saturday, Sunday and legal holidays). The proposing
party, at its election, may withdraw such proposal if there is insufficient
participation and shall promptly notify all parties of such decision.
Notwithstanding the foregoing, an election by a Consenting Party under this
paragraph to acquire its proportionate share of such Non-Consenting Parties'
Interest requires the simultaneous tender to the Operator of its
proportionate share of the estimated cost attributable to such
Non-Consenting Parties' Interest.
The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same
under the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the
Consenting Parties shall plug and abandon the well and restore the surface
location at their sole cost, risk and expense. If any well drilled, reworked,
deepened or plugged back under the provisions of the Article results in a
producer of oil and/or gas in paying quantities, the Consenting Parties shall
complete and equip the well to produce at their sole cost and risk,
-5-
<PAGE>
ARTICLE VI
CONTINUED
and the well shall then be turned over to Operator and shall be operated by
it at the expense and for the account of the Consenting Parties. Upon
commencement of operations for the drilling, reworking, deepening or plugging
back of any such well by Consenting Parties in accordance with the
provisions of this Article, each Non-Consenting Party shall be deemed to have
relinquished to Consenting Parties, and the Consenting Parties shall own and
be entitled to receive, in proportion to their respective interests, all of
such Non-Consenting Party's interest in the well and its share of production
therefrom until the proceeds of the sale of such share, calculated at the
well, or market value thereof if such share is not sold, (after deducting
production taxes, excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.D. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts) shall equal the total of the following:
(a) 100% of each such Non-Consenting Party's share of the cost of any
newly acquired surface equipment beyond the wellhead connections (including,
but not limited to, stock tanks, separators, treaters, pumping equipment and
piping), plus 100% of each such Non-Consenting Party's share of the cost of
operation of the well commencing with first production and continuing until
each such Non-Consenting Party's relinquished interest shall revert to it
under other provisions of this Article, it being agreed that each
Non-Consenting Party's share of such costs and equipment will be that
interest which would have been chargeable to such Non-Consenting Party had it
participated in the well from the beginning of the operations and
(b) 300% of that portion of the costs and expenses of drilling,
reworking, deepening, plugging back, and testing after deducting any cash
contributions received under Article VIII.C., and 300% of that portion of the
cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Non-Consenting Party
if it had participated therein.
An election not to participate in the drilling or the deepening of a
well shall be deemed an election not to participate in any reworking or
plugging back operation proposed in such a well, or portion thereof, to which
the initial Non-Consent election applied that is conducted at any time prior
to full recovery by the Consenting Parties of the Non-Consenting Party's
recoupment account. Any such reworking or plugging back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the
Consenting Parties one hundred percent (100%) of that portion of the costs
of the reworking or plugging back operation which would have been chargeable
to such Non-Consenting Party had it participated therein. If such a reworking
or plugging back operation is proposed during such recoupment period, the
provisions of this Article VI.B. shall be applicable as between said
Consenting Parties in said well.
During the period of time Consenting Parties are entitled to receive
Non-Consenting Party's share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all production,
severance, excise, gathering and other taxes, and all royalty, overriding
royalty and other burdens applicable to Non-Consenting Party's share of
production not excepted by Article III.D.
In the case of any reworking, plugging back or deeper drilling
operation, the Consenting Parties shall be permitted to use, free of cost,
all casing, tubing and other equipment in the well, but the ownership of all
such equipment shall remain unchanged; and upon abandonment of a well after
such reworking, plugging back or deeper drilling, the Consenting Parties
shall account for all such equipment to the owners thereof, with each party
receiving its proportionate part in kind or in value, less cost of salvage.
Within sixty (60) days after the completion of any reworking, deepening
or plugging back operation under this Article, the party conducting such
operations for the Consenting Parties shall furnish each Non-Consenting Party
with an inventory of the equipment in and connected to the well, and an
itemized statement of the cost of deepening, plugging back, testing,
completing and equipping the well for production; or, at its option, the
operating party, in lieu of an itemized statement of such costs of operation
may submit a detailed statement of monthly billings. Each month thereafter,
during the time the Consenting Parties are being reimbursed as provided
above, the party conducting the operations for the Consenting Parties shall
furnish the Non-Consenting Parties with an itemized statement of all costs
and liabilities incurred in the operation of the well, together with a
statement of the quantity of oil and gas produced from it and the amount of
proceeds realized from the sale of the well's working interest production
during the preceding month. In determining the quantity of oil and gas
produced during any month, Consenting Parties shall use industry accepted
methods such as, but not limited to, metering or periodic well tests. Any
amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned by
a Non-Consenting Party had it participated therein shall be credited against
the total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it
as above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
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<PAGE>
ARTICLE VI
CONTINUED
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto,
and the production therefrom as such Non-Consenting Party would have been
entitled to had it participated in the drilling, reworking, deepening or
plugging back of said well. Thereafter, such Non-Consenting Party shall be
charged with and shall pay its proportionate part of the further costs of the
operation of said well in accordance with the terms of this agreement and the
Accounting Procedure attached hereto.
Notwithstanding the provisions of this Article VI.B.2., it is agreed
that without the mutual consent of all parties, no wells shall be completed
in or produced from a source of supply from which a well located elsewhere on
the Contract Area is producing, unless such well conforms to the then
existing well spacing pattern for such source of supply.
Notwithstanding anything contained herein to the contrary, the foregoing
provisions of this Article VI do not apply to the drilling or completion of a
well drilled hereunder.
The Non-Consenting Parties to the drilling of any well hereunder shall
relinquish all of their interest in the Contract Land (as defined in Article
I.D. hereof) except the land comprising the spacing or proration unit for any
well which such Non-Consenting Party has participated in the drilling and
completed as provided herein. To evidence such forfeiture, such
Non-Consenting Party shall execute and deliver to the Consenting Parties a
recordable assignment of the interest forfeited in accordance with
instructions furnished to the Non-Consenting Party by the Operator pertaining
to the interests of the Consenting Parties in the forfeited interest.
3. STAND-BY TIME: When a well which has been drilled or deepened has
reached its authorized depth and all tests have been completed, and the
results thereof furnished to the parties, stand-by costs incurred pending
response to a party's notice proposing a reworking, deepening, plugging back
or completing operation in such a well shall be charged and borne as part of
the drilling or deepening operation just completed. Stand-by costs subsequent
to all parties responding, or expiration of the response time permitted,
whichever first occurs, and prior to agreement as to the participating
interests of all Consenting Parties pursuant to the terms of the second
grammatical paragraph of Article VI.B.2. shall be charged to and borne as
part of the proposed operation, but if the proposal is subsequently withdrawn
because of insufficient participation, such stand-by costs shall be allocated
between the Consenting Parties in the proportion each Consenting Party's
interest as shown on Exhibit "A" bears to the total interest as shown on
Exhibit "A" of all Consenting Parties.
4. SIDETRACKING: Except as hereinafter provided, those provisions of
this agreement applicable to a "deepening" operation shall also be applicable
to any proposal to directionally control and intentionally deviate a well
from vertical so as to change the bottom hole location (herein called
"sidetracking"), unless done to straighten the hole or to drill around junk
in the hole or because of other mechanical difficulties. Any party having the
right to participate in a proposed sidetracking operation that does not own
an interest in the affected well bore at the time of the notice shall, upon
electing to participate, tender to the well bore owners its proportionate
share (equal to its interest in the sidetracking operation) of the value of
that portion of the existing well bore to be utilized as follows:
(a) If the proposal is for sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the
initial drilling of the well down to the depth at which the sidetracking
operation is initiated.
(b) If the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable
materials and equipment down to the depth at which the sidetracking operation
is initiated, determined in accordance with the provisions of Exhibit "C",
less the estimated cost of salvaging and the estimated costs of plugging and
abandoning.
In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be
limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal
holidays; provided, however, any party may request and receive up to eight
(8) additional days after expiration of the forty-eight (48) hours within
which to respond by paying for all stand-by time incurred during such
extended response period. If more than one party elects to take such
additional time to respond to the notice, stand-by costs shall be allocated
between the parties taking additional time to respond on a day-to-day basis
in the proportion each electing party's interest as shown on Exhibit "A"
bears to the total interest as shown on Exhibit "A" of all the electing
parties. In all other instances the response period to a proposal for
sidetracking shall be limited to thirty (30) days.
C. TAKING PRODUCTION IN KIND:
Each party shall take in kind or separately dispose of its proportionate
share of all oil and gas produced from the Contract Area, exclusive of
production which may be used in development and producing operations and in
preparing and treating oil and gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the risking in kind or
separate disposition by any party of its proportionate share of the
production shall be borne by such party. Any party risking its share of
production in kind shall be
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<PAGE>
ARTICLE VI
CONTINUED
required to pay for only its proportionate share of such part of Operator's
surface facilities which it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.D., shall be entitled to receive
payment directly from the purchaser thereof for its share of all production.
In the event any party shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the oil
produced from the Contract Area. Operator shall have the right, subject to
the revocation at will by the party owning it, but not the obligation, to
purchase such oil or sell it to others at any time and from time to time, for
the account of the non-taking party at the best price reasonably obtainable
under the circumstances in the area for such production. Any such purchase or
sale by Operator shall be subject always to the right of the owner of the
production to exercise at any time its right to take in kind, or separately
dispose of, its share of all oil not previously delivered to a purchaser. Any
purchase or sale by Operator of any other party's share of oil shall be only
for such reasonable periods of time as are consistent with the minimum needs
of the industry under the particular circumstances, but in no event for a
period in excess of one (1) year.
In the event one or more parties' separate disposition of its share of
the gas causes splitstream deliveries to separate pipelines and/or
deliveries which on a day-to-day basis for any reason are not exactly equal
to a party's respective proportionate share of total gas sales to be
allocated to it, the balancing or accounting between the respective accounts
of the parties shall be in accordance with any gas balancing agreement
between the parties hereto, whether such an agreement is attached as Exhibit
"E", or is a separate agreement.
D. ACCESS TO CONTRACT AREA AND INFORMATION:
Each party shall have access to the Contract Area at all reasonable
times, at its sole cost and risk to inspect or observe operations, and shall
have access at reasonable times to information pertaining to the development
or operation thereof, including Operator's books and records relating
thereto. Operator, upon request, shall furnish each of the other parties with
copies of all forms or reports filed with governmental agencies, daily
drilling reports, well logs, tank tables, daily gauge and run tickets and
reports of stock on hand at the first of each month, and shall make available
samples of any cores or cuttings taken from any well drilled on the Contract
Area. The cost of gathering and furnishing information to Non-Operator, other
than that specified above, shall be charged to the Non-Operator that requests
the information.
E. ABANDONMENT OF WELLS:
1. ABANDONMENT OF DRY HOLES. Any well which has been drilled or deepened
under the terms of this agreement and is proposed to be completed as a dry
hole shall not be plugged and abandoned without the consent of such
parties participating in the drilling of such well. Should Operator, after
diligent effort, be unable to contact any party, or should any party fail to
reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after receipt of notice of the proposal to plug and abandon such
well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening such well. Any party who
objects to plugging and abandoning such well shall have the right to take
over the well and conduct further operations in search of oil and/or gas
subject to the provisions of Article VIII.
2. ABANDONMENT OF WELLS THAT HAVE PRODUCED. Except for any well in
which, Non-Consent operation has been conducted hereunder for which the
Consenting Parties have not been fully reimbursed as herein provided, any
well which has been completed as a producer shall not be plugged and
abandoned without the consent of such parties. If such parties owning a
current interest in such well consent to such abandonment, the well shall be
plugged and abandoned in accordance with applicable regulations and at the
cost, risk and expense of such the parties hereto. If, within thirty (30)
days after receipt of notice of the purposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to
continue its operation from the interval(s) of the formation(s) then open to
production shall tender to each of the other parties owning an interest in
such well its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of
Exhibit "C", less the estimated cost of salvaging and the estimated cost of
plugging and abandoning. Each abandoning party shall assign the non-abandoning
parties, without warranty, express or implied, as to title or as to quantity,
or fitness for use of the equipment and material, all of its interest in the
well and related equipment, together with its interest in the leasehold
estate as to, but only as to, the interval or intervals of the formation or
formations then open to production. If the interest of the abandoning party
is or includes an oil and gas interest, such party shall execute and deliver
to the non-abandoning party or parties an oil and gas lease, limited to the
interval or intervals of the formation or formations then open to production,
for a term of one (1) year and so long thereafter as oil and/or gas is
produced from the interval or intervals of the formation or formations
covered thereby, such lease to be on the form attached as Exhibit
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<PAGE>
ARTICLE VI
CONTINUED
"B". The assignments or leases so limited shall encompass the "drilling unit"
upon which the well is located. The payments by, and the assignments or
leases to, the assignees shall be in a ratio based upon the relationship of
their respective percentage of participation in the Contract Area to the
aggregate of the percentages of participation in the Contract Area of all
assignees. There shall be no readjustment of interests in the remaining
portion of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in
the interval or intervals then open other than the royalties retained in any
lease made under the terms of this Article. Upon request, Operator shall
continue to operate the assigned well for the account of the non-abandoning
parties at the rates and charges contemplated by this agreement, plus any
additional cost and charges which may arise as the result of the separate
ownership of the assigned well. Upon proposed abandonment of the producing
interval(s) assigned or leased, the assignor or lessor shall then have the
opinion to repurchase its prior interest in the well (using the same
valuation formula) and participate in further operations therein subject to
the provisions hereof.
3. ABANDONMENT OF NON-CONSENT OPERATIONS: The provisions of Article
VI.E.1. or VI.E.2. above shall be applicable as between Consenting Parties in
the event of the proposed abandonment of any well excepted from said
Articles; provided, however, no well shall be permanently plugged and
abandoned unless and until all parties having the right to conduct further
operations therein have been notified of the proposed abandonment and
afforded the opportunity to elect to take over the well in accordance with
the provisions of this Article VI.E.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the
parties liable as partners.
B LIENS AND PAYMENT DEFAULTS:
Each Non-Operator grants to Operator a lien upon its oil and gas rights
in the Contract Area, and a security interest in its share of oil and/or gas
when extracted and its interest in all equipment, to secure payment of its
share of expense, together with interest thereon at the rate provided in
Exhibit "C". To the extent that Operator has a security interest under the
Uniform Commercial Code of the state, Operator shall be entitled to exercise
the rights and remedies of a secured party under the Code. The bringing of a
suit and the obtaining of judgment by Operator for the secured Indebtedness
shall not be deemed an election of remedies or otherwise affect the lien
rights or security interest as security for the payment thereof. In addition,
upon default by any Non-Operator in the payment of its share of expense,
Operator shall have the right, without prejudice to other rights or remedies,
to collect from the purchaser the proceeds from the sale of such
Non-Operator's share of oil and/or gas until the amount owed by such
Non-Operator, plus interest, has been paid. Each purchaser shall be entitled
to rely upon Operator's written statement concerning the amount of any
default. Operator grants a like lien and security interest to the
Non-Operators to secure payment of Operator's proportionate share of expense.
If any party fails or is unable to pay its share of expense within sixty
(60) days after rendition of a statement therefor by Operator, the
non-defaulting parties, including Operator, shall, upon request by Operator,
pay the unpaid amount in the proportion that the interest of each such
party bears to the interest of all such parties. Each party so paying its
share of the unpaid amount shall, to obtain reimbursement thereof, be
subrogated to the security rights described in the foregoing paragraph.
C. PAYMENTS AND ACCOUNTING:
Except as herein otherwise specifically provided, Operator shall
promptly pay and discharge expenses incurred in the development and operation
of the Contract Area pursuant to this agreement and shall charge each of the
parties hereto with their respective proportionate shares upon the expense
basis provided in Exhibit "C". Operator shall keep an accurate record of the
joint account hereunder, showing expenses incurred and charges and credits
made and received.
Operator, at its election, shall have the right from time to time to
demand and receive from the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of
such estimated expense, together with an invoice for its share thereof. Each
such statement and invoice for the payment in advance of estimated expense
shall be submitted on or before the 20th day of the next preceding month.
Each party shall pay to Operator its proportionate share of such estimate
within fifteen (15) days after such estimate and invoice is received. If any
party fails to pay its share of said estimate within said time, the amount
due shall bear interest as provided in Exhibit "C" until paid. Proper
adjustment shall be made monthly between advances and actual expense to the
end that each party shall bear and pay its proportionate share of actual
expenses incurred, and no more.
D. LIMITATION OF EXPENDITURES:
1. DRILL OR DEEPEN: Without the consent of all parties, no well shall be
drilled or deepened, except any well drilled or deepened pursuant to the
provisions of Article VI.B.2. of this agreement. Consent to the drilling or
deepening shall include:
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<PAGE>
ARTICLE VII
CONTINUED
/X/ OPTION NO. 1: All necessary expenditures for the drilling or deepening,
testing, completing and equipping of the well, including necessary tankage
and/or surface facilities.
2. REWORK OR PLUG BACK: Without the consent of all parties, no well
shall be reworked or plugged back except a well reworked or plugged back
pursuant to the provisions of Article VI.B.2. of this agreement. Consent to
the reworking or plugging back of a well shall include all necessary
expenditures in conducting such operations and completing and equipping of
said well, including necessary tankage and/or surface facilities.
3. OTHER OPERATIONS: Without the consent of all parties, Operator shall
not undertake any single project reasonably estimated to require an
expenditure in excess of Twenty-Five Thousand and No/100---Dollars ($25,000.00)
except in connection with a well, the drilling, reworking, deepening
completing, recompleting, or plugging back of which has been previously
authorized by or pursuant to this agreement; provided, however, that, in case
of explosion, fire, flood or other sudden emergency, whether of the same or
different nature, Operator may take such steps and incur such expenses as in
its opinion are required to deal with the emergency to safeguard life and
property but Operator, as promptly as possible, shall report the emergency to
the other parties. If Operator prepares an authority for expenditure (AFE)
for its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of
Twenty-Five Thousand and No/100---Dollars ($25,000.00) but less than
the amount first set forth above in this paragraph.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES.
Rentals, shut-in well payments and minimum royalties which may be
required under the terms of any lease shall be paid by the party or parties
who subjected such lease to this agreement at its or their expense. In the
event two or more parties own and have contributed interests in the same
lease to this agreement, such parties may designate one of such parties to
make said payments for and on behalf of all such parties. Any party may
request, and shall be entitled to receive, proper evidence of all such
payments. In the event of failure to make proper payment of any rental,
shut-in well payment or minimum royalty through mistake or oversight where
such payment is required to continue the lease in force, any loss which
results from such non-payment shall be borne in accordance with the
provisions of Article IV.B.2.
Operator shall notify Non-Operator of the anticipated completion of a
shut-in gas well, or the shutting in or return to production of a producing
gas well, at least five (5) days (excluding Saturday, Sunday and legal
holidays), or at the earliest opportunity permitted by circumstances, prior
to taking such action, but assumes no liability for failure to do so. In the
event of failure by Operator to so notify Non-Operator, the loss of any lease
contributed hereto by Non-Operator for failure to make timely payments of any
shut-in well payment shall be borne jointly by the parties hereto under the
provisions of Article IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay
all such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties or
production payments) on leases and oil and gas interests contributed by such
Non-Operator. If the assessed valuation of any leasehold estate is reduced by
reason of its being subject to outstanding excess royalties, over-riding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall insure to the benefit of the owner or owners of such
leasehold estate, and Operator shall adjust the charge to such owner or
owners so as to reflect the benefit of such reduction. 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.
Operator shall bill the other parties for their proportionate shares of all
tax payments in the manner provided in Exhibit "C".
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and
prosecute the protest to a final determination, unless all parties agree to
abandon the protest prior to final determination. During the pendency of
administrative or judicial proceedings. Operator may elect to pay, under
protest, all such taxes and any interest and penalty. When any such protested
assessment shall have been finally determined. Operator shall pay the tax for
the joint account, together with any interest and penalty accrued, and the
total cost shall then be assessed against the parties, and be paid by them,
as provided in Exhibit "C".
Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes* imposed upon or with respect to the
production or handling of such party's share of oil and/or gas produced under
the terms of this agreement.
* Including excise taxes
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<PAGE>
ARTICLE VII.
CONTINUED
G. INSURANCE:
At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations
are being conducted; PROVIDED, HOWEVER, that Operator may be a self-insurer
for liability under said compensation laws in which event the only charge
that shall be made to the joint account shall be as provided in Exhibit "C".
Operator shall also carry or provide insurance for the benefit of the joint
account of the parties as outlined in Exhibit "D", attached to and made a
part hereof. Operator shall require all contractors engaged in work on or for
the Contract Area to comply with the workmen's compensation law of the state
where the operations are being conducted and to maintain such other insurance
as Operator may require.
In the event automobile public liability insurance is specified in said
Exhibit "D", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automobile equipment.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. SURRENDER OF LEASES:
The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any lease
or in any portion thereof, and the other parties do not agree or consent
thereto, the party desiring to surrender shall assign, without express or
implied warranty of title, all of its interest in such lease, or portion
thereof, and any well material and equipment which may be located thereon and
any rights in production thereafter secured, to the parties not consenting
to such surrender. If the interest of the assigning party is or includes an
oil and gas interest, the assigning party shall execute and deliver to the
party or parties not consenting to such surrender an oil and gas lease
covering such oil and gas interest for a term of one (1) year and so long
thereafter as oil and/or gas is produced from the land covered thereby, such
lease to be on the form attached hereto as Exhibit "B". Upon such assignment
or lease, the assigning party shall be relieved from all obligations
thereafter accruing, but not theretofore accrued, with respect to the
interest assigned or leased and the operation of any well attributable
thereto, and the assigning party shall have no further interest in the
assigned or leased premises and its equipment and production other than the
royalties retained in any lease made under the terms of this Article. The
party assignee or lessee shall pay to the party assignor or lessor the
reasonable salvage value of the latter's interest in any wells and equipment
attributable to the assigned or leased acreage. The value of all material
shall be determined in accordance with the provisions of Exhibit "C", less
the estimated cost of salvaging and the estimated cost of plugging and
abandoning. If the assignment or lease is in favor of more than one party,
the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as
it was immediately before the assignment, lease or surrender in the balance
of the Contract Area; and the acreage assigned, leased or surrendered and
subsequent operations thereon, shall not thereafter be subject to the terms
and provisions of this agreement.
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal of any oil and gas lease subject to this
agreement, all other parties shall be notified promptly, and shall have the
right for a period of thirty (30) days following receipt of such notice in
which to elect to participate in the ownership of the renewal lease, insofar
as such lease affects lands within the Contract Area, by paying to the party
who acquired it their several proper proportionate shares of the acquisition
cost allocated to that part of such lease within the Contract Area, which
shall be in proportion to the interests held at that time by the parties in
the Contract Area.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate
of the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal lease. Any renewal lease in
which less than all parties elect to participate shall not be subject to this
agreement.
Each party who participates in the purchase of a renewal lease shall be
given an assignment of its proportionate interest therein by the acquiring
party.
The provisions of this Article shall apply to renewal leases whether
they are for the entire interest covered by the expiring lease or cover only
a portion of its area or an interest therein. Any renewal lease taken before
the expiration of its predecessor lease, or taken or contracted for within
six (6) months after the expiration of the existing lease shall be subject to
this provision; but any lease taken or contracted for more than six (6)
months after the expiration of an existing lease shall not be deemed a
renewal lease and shall not be subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
oil and gas leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost
of such drilling or other operation. If the contributions be in the form of
acreage, the party to whom the contribution is made shall promptly tender an
assignment of the acreage, without warranty of title, to the Drilling Parties
in the proportions
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<PAGE>
ARTICLE VIII
CONTINUED
said Drilling Parties shared the cost of drilling the well. Such acreage
shall become a separate Contract Area and, to the extent possible, be governed
by provisions identical to this agreement. Each party shall promptly notify
all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage
outside the Contract Area which are in support of a well drilled inside the
Contract Area.
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration
shall not be deemed a contribution as contemplated in this Article VIII C.
D. MAINTENANCE OF UNIFORM INTEREST:
For the purpose of maintaining uniformity of ownership in the oil and
gas leasehold interests covered by this agreement, no party shall sell,
encumber, transfer or make other disposition of its interests in the leases
embraced within the Contract Area and in wells, equipment and production
unless such disposition covers either:
1. the entire interest of the party in all leases and equipment and
production, or
2. an equal undivided interest in all leases and equipment and
production in the Contract Area.
Every such sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such
co-owners to appoint a single trustee or agent with full authority to receive
notices, approve expenditures, receive billings for and approve and pay such
party's share of the joint expenses, and to deal generally with, and with
power to bind, the co-owners of such party's interest within the scope of the
operations embraced in this agreement, however, all such co-owners shall have
the right to enter into and execute all contracts or agreements for the
disposition of their respective shares of the oil and gas produced from the
Contract Area and they shall have the right to receive, separately, payment of
the sale proceeds thereof.
E. WAIVER OF RIGHTS TO PARTITION:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in
the Contract Area waives any and all rights it may have to partition and have
set aside to it in severalty its undivided interest therein.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein thru the
rights and liabilities hereunder are several and not joint or collective, or
that this agreement and operations hereunder shall not constitute a
partnership, if, for federal income tax purposes, this agreement and the
operations hereunder are regarded as a partnership, each party hereby
affected elects to be excluded from the application of all of the provisions
of Subchapter "K", Chapter J, Subtitle "A", of the Internal Revenue Code of
1954, as permitted and authorized by Section 761 of the Code and the
regulations promulgated thereunder. Operator is authorized and directed to
execute on behalf of each party hereby affected such evidence of this
election as may be required by the Secretary of the Treasury of the United
States or the Federal Internal Revenue Service, including specifically, but
not by way of limitation, all of the returns, statements, and the data
required by Federal Regulations 1.761. Should there be any requirements that
each party hereby affected give further evidence of this election, each such
party shall execute such documents and furnish such other evidence as may be
required by the Federal Internal Revenue Service or as may be necessary to
evidence this election. No such party shall give any notices or take any
other action inconsistent with the election made hereby. If any present or
future income tax laws of the state or states in which the Contract Area is
located or any future income tax laws of the United States contain provisions
similar to those in Subchapter "K", Chapter J, Subtitle "A", of the Internal
Revenue Code of 1954, under which an election similar to that provided by
Section 761 of the Code is permitted, each party hereby affected shall make
such election as may be permitted or required by such laws. In making the
foregoing election, each such party states that the income derived by such
party from operations hereunder can be adequately determined without the
computation of partnership taxable income.
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<PAGE>
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
Twenty-Five thousand and 00/100 Dollars ($ 25,000.00) and if the payment is
in complete settlement of such claim or suit. If the amount required for
settlement exceeds the above amount, the parties hereto shall assume and take
over the further handling of the claim or suit, unless such authority is
delegated to Operator. All costs and expenses of handling, settling, or
otherwise discharging such claim or suit shall be at the joint expense of the
parties participating in the operation from which the claim or suit arises.
If a claim is made against any party or if any party is sued on account of
any matter arising from operations hereunder over which such individual has
no control because of the rights given Operator by this agreement, such party
shall immediately notify all other parties, and the claim or suit shall be
treated as any other claim or suit involving operations hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
make money payments, that party shall give to all other parties prompt
written notice of the force majeure with reasonably full particulars
concerning it, thereupon, the obligations of the party giving the notice, so
far as they are affected by the force majeure, shall be suspended during, but
no longer than, the continuance of the force majeure. The affected party
shall use all reasonable diligence to remove the force majeure situation as
quickly as practicable.
The requirement that any force majeure shall be remodeled with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the party involved, contrary to its wishes, how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.
The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy,
war, blockade, public riot, lightning, fire, storm, flood, explosion,
governmental action, governmental delay, restraint or inaction,
unavailability of equipment, and any other cause, whether of the kind
specifically enumerated above or otherwise, which is not reasonably within
the control of the party claiming suspension.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties and required by
any of the provisions of this agreement, unless otherwise specifically
provided, shall be given in writing by mail or telegram, postage or charges
prepaid, or by telex or telecopier and addressed to the parties to whom the
notice is given at the addresses listed in Exhibit "A". The originating
notice given under any provision hereof shall be deemed given only when
received by the party to whom such notice is directed, and the time for such
party to give any notice in response thereto shall run from the date the
originating notice is received. The second or any responsive notice shall be
deemed given when deposited in the mail or with the telegraph company, with
postage or charges prepaid, or sent by telex or telecopier. Each party shall
have the right to change its address at any time, and from time to time, by
giving written notice thereof to all other parties.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the oil and
gas leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas
interest contributed by any other party beyond the term of this agreement.
/ / OPTION NO. 1: So long as any of the oil and gas leases subject to this
agreement remain or are continued in force as to any part of the Contract
Area, whether by production, extension, renewal or otherwise.
/X/ OPTION NO. 2: In the event the well described in Article VI.A., or any
subsequent well drilled under any provision of this agreement, results in
production of oil and/or gas in paying quantities, this agreement shall
continue in force so long as any such well or wells produce, or are capable
of production, and for an additional period of 60 days from cessation of
all production; provided, however, if, prior to the expiration of such
additional period, one or more of the parties are engaged in drilling,
reworking, deepening, plugging back, testing or attempting to complete a well
or wells hereunder, this agreement shall continue in force until such
operations have been completed and if production results therefrom, this
agreement shall continue in force as provided herein. In the event the well
described in Article VI.A., or any subsequent well drilled hereunder, results
in a dry hole, and no other well is producing, or capable of producing oil
and/or gas from the Contract Area, this agreement shall terminate unless
drilling, deepening, plugging back or reworking operations are commenced
within 60 days from the date of abandonment of said well.
It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached
prior to the date of such termination.
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ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and
orders of any duly constituted regulatory body of said state; and to all
other applicable federal, state and local laws, ordinances, rules,
regulations and orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including, but not
limited to, matters of performance, non-performance, breach, remedies,
procedures, rights, duties and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state
of Texas shall govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production
of wells, on tracts offsetting or adjacent to the Contract Area.
With respect to operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of
action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or predecessor or successor agencies to
the extent such interpretation or application was made in good faith. Each
Non-Operator further agrees to reimburse Operator for any amounts applicable
to such Non-Operator's share of production that Operator may be required to
refund, rebate or pay as a result of such an incorrect interpretation or
application, together with interest and penalties thereon owing by Operator
as a result of such incorrect interpretation or application.
Non-Operators authorize Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold
hereunder or to any other person or entity pursuant to the requirements of
the "Crude Oil Windfall Profit Tax Act of 1980", as same may be amended from
time to time ("Act"), and any valid regulations or rules which may be issued
by the Treasury Department from time to time pursuant to said Act. Each
party hereto agrees to furnish any and all certifications or other
information which is required to be furnished by said Act in a timely manner
and in sufficient detail to permit compliance with said Act.
ARTICLE XV.
OTHER PROVISIONS
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ARTICLE XV
OTHER PROVISIONS
A. REWORKING OPERATIONS
Notwithstanding any language set out in Article VI (B) to the contrary,
each non-consenting party to a reworking operation on a well conducted
pursuant to Article VI (B) shall, upon commencement of such operations, be
deemed to have relinquished to consenting parties, and the consenting parties
shall own and be entitled to receive, in proportion to their respective
interests, all of such non-consenting party's interest in the well, its
leasehold operating rights and share of production therefrom, only insofar as
the interval or intervals of the formation or formations which are being
reworked and to which such non-consenting party does not desire to join in
the reworking thereof, until the proceeds or market value thereof (after
deducting production taxes, windfall profits taxes, royalty, overriding
royalty and other interests payable out of, or measured by the production
from such well, only insofar as the production secured from the interval or
intervals of the formation or formations which are subject to said reworking
operations accruing with respect to such interest until it reverts) shall
equal the total of those certain costs as further described in subparagraphs
(a) and (b) of the third grammatical paragraph under Article VI (B) 2, hereof.
B. NONDISCRIMINATION
In connection with the performance of work under this agreement, the
Operator agrees to comply with all of the provisions of Section 202 (1) to
(7) inclusive, of Executive Order 11246 (30 F.R. 12319), which are hereby
incorporated by reference in this agreement, and of all provisions of said
Executive Order 11246 and all rules, regulations and relevant orders of the
Secretary of Labor.
C. COVENANTS RUN WITH THE LAND
The terms, provisions, covenants and conditions of this agreement shall
be deemed to be covenants running with the lands, the lease or leases and
leasehold estates covered hereby, and all of the terms, provisions, covenants
and conditions of this agreement shall be binding upon and inure to the
benefit of the parties hereto, their respective heirs, executors,
administrators, personal representatives and assigns.
D. LAWS AND REGULATIONS
All of the provisions of this agreement are expressly subject to all
applicable laws, orders, rules and regulations of any governmental body or
agency having jurisdiction in the premises, and all operations contemplated
hereby shall be conducted in conformity therewith. Any provisions of this
agreement which is inconsistent with any such laws, orders, rules or
regulations is hereby modified so as to conform therewith, and this
agreement, as so modified, shall continue in full force and effect.
E. PRIORITY OF OPERATIONS
If at any time there is more than one operation proposed in connection
with any well subject to this agreement, then unless all participating
parties agree on the sequence of such operations, such proposals shall be
considered and disposed of in the following order or priority:
1. Proposals to do additional testing, coring or logging.
2. Proposals to attempt a completion in the objective zone.
3. Proposals to plug back and attempt completions in shallower
zones, in ascending order.
4. Proposals to side-track the well to reach any zone not below the
original authorized objective.
5. Proposals to deepen the well, in descending order.
F. REGULATORY PROVISIONS
1. LIQUID HYDROCARBONS.
Non-Operators hereby authorize Operator to file with the purchaser of
crude oil or other liquid hydrocarbons or with any other person required by
law, any statement or certification required by any
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rule, regulation or order issued thereunder or by any other law, rule,
regulation relating to the pricing of crude oil and other liquid hydrocarbons
or the taxation thereof. To the extent that Operator may by law be authorized
to do so, Non-Operators hereby authorized Operator to agree with any
purchaser to relieve Operator (in whole or in part as Operator may determine)
of any filing or certification requirements. In making any filing ore
certification with any purchaser or crude oil or other liquid hydrocarbons,
each Non-Operator shall be solely responsible for furnishing to Operator or
such purchaser or any other person required by law any exemption certificate,
independent producer certificate or any other evidence required by law to
entitle Non-Operator to higher price for the sale of his production or for a
lower rate of tax thereon, and upon a Non-Operator's failure to furnish same,
Operator shall certify to such purchaser for such Non-Operator's interest the
lower price and/or higher rate of tax. Operator shall have not duty to seek
any refunds on behalf of any Non-Operator of any overpayment of any tax to
which any Non-Operator may be entitled by law.
2. REFUNDS.
In the event any Non-Operator receives a greater sum for the sale of its
share of production than that to which such Non-Operator is entitled, such
Non-Operator shall promptly refund any excess sums so collected to the person
entitled thereto together with any interest thereon required by law. In the
event Operator is required for any reason to may any such refund on any
Non-Operator's behalf and such Non-Operator refuses upon Operator's request
to reimburse Operator for the amount so paid, then Operator, in addition to
any other rights or remedies which it may have as a result of making such
refund, (i) shall have the lien provided by Article VII.B to secure such
reimbursement AND (ii) shall be authorized to collect from Non-Operator's
purchaser of production all revenues attributable to Non-Operator's share of
production until the full amount required to be paid or refunded by
Non-Operator has been recovered.
3. OPERATOR'S LIABILITY.
Operator shall use its best judgement in making any of the filings and
certification referred to above and in prosecuting any filings and
applications. However, in no event shall Operator have any liability to any
Non-operator in making and prosecuting any such filing or in rendering any
statement or certification, absent bad faith, gross negligence or willful
misconduct. Any penalties incurred as a result of any incorrect
certification, statement or filing shall, in absence of bad faith, gross
negligence or willful misconduct, be charged to the parties owning the
production to which the penalty pertains. In no event shall any error by
Operator relieve any Non-Operator of the liability for any refund under
Paragraph 3 above.
G. OPERATOR PROTECTION
1. ASSIGNMENT.
No assignment or other transfer or disposition of an interest subject to
this Agreement shall be effective as to Operator or the other parties hereto
until the first day of the month following the month in which (i) Operator
received an authentic copy of the instrument evidencing such assignment,
transfer or disposition AND (ii) the person receiving such assignment,
transfer or disposition has become obligated by instrument satisfactory to
Operator to observe, perform and be bound by all of the covenants, terms and
conditions of this Agreement. Prior to such date, neither Operator nor any
other party shall be required to recognize such assignment, transfer, or
disposition for any purpose but may continue to deal exclusively with the
party making such assignment, transfer, or disposition in all matters under
this Agreement including billings. No assignment or other transfer or
disposition of an interest subject to this Agreement shall relieve a party of
its obligations accrued prior to the effective date aforesaid. Further, no
assignment, transfer or other disposition shall relieve any party of its
liability for its share of costs and expenses which may be incurred in any
operation to which such party has previously agreed or consented prior to the
effective date aforesaid for the drilling, testing, completing and equipping,
re-working, recompleting, side-tracking, deepening, plugging-back, or
plugging and abandoning of a well even though such operation is performed
after said effective date, subject to such party's right to elect not to
participate in completion operations under Article VI.B and Article VII.D,
Option No. 2, not previously consented to.
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2. ATTORNEYS FEES.
In the event any party hereto shall ever be required to bring legal
proceedings in order to collect any sums due from any party under this
Agreement, then party or parties shall also be entitled to recover all court
costs, costs of collection and a reasonable attorney's fee, which the lien
provided for herein shall also secure.
H. PERPETUITIES
It is not the intent of the parties that any provision herein violate any
applicable law regarding the rule against perpetuities, the suspension of the
absolute power of alienation or other rule regarding the vesting or duration
of estates, and this agreement shall be construed as not violating such rule
to the extent the same can be so construed consistent with the intent of the
parties. In the event, however, any provision hereof is determined to
violate such rule, then such provision shall nevertheless be effective for
the maximum period (but not longer than the maximum period) permitted by
such rule which will result in no violation.
I. NO THIRD PARTY BENEFICIARY CONTRACT
This Agreement is made solely for the benefit of those persons who are
parties hereto (including those persons succeeding to all or part of the
interest of an original party, if such succession is recognized under the
other provisions hereof), and no other person shall have or claim or be
entitled to enforce any rights, benefits or obligations under this Agreement.
J. OPERATOR'S REORGANIZATION AND STATUS CHANGE
1. Notwithstanding, the second sentence of Article V.B.1., in the event
of a transfer of all Operator's interest to a corporation which controls, is
controlled by or is under common control with Operator, such transferee shall
automatically become the successor Operator without the approval of
Non-Operators.
2. For the purpose of Article V.B., Operator shall be considered to own
an interest in the Contract Area if it is a general partner of a limited
partnership which owns an interest in the Contract Area or if its owns a
carried or reversionary working interest in the Contract Area.
K. BANKRUPTCY
If, following the granting of relief under the Bankruptcy Code to any
party hereto as debtor thereunder, this Agreement should be held to be an
executory contract within the meaning of 11 U.S.C. Section 365 the Operator,
or (if the Operator is the debtor in bankruptcy) any other party, shall be
entitled to a determination by debtor or any trustee for debtor within thirty
(30) days from the date an order for relief in entered under the Bankruptcy
Code as to the rejection or assumption of this Operating Agreement. In the
event of an assumption, Operator or said other party shall be entitled to
adequate assurances as to future performance of debtor's obligation
hereunder and the protection of the interest of all other parties.
L. OBLIGATIONS WELLS
Notwithstanding any provisions contained in this Operating Agreement to
the contrary, if a party hereto elects not to participate in the drilling or
completion of a well which must be drilled in order to perpetuate a lease or
a farmout agreement which is subject hereto, upon such election, such party
shall promptly assign all of its interest in such lease or farmout agreement
to the parties who elected to participate in the drilling and completing of
such well in the proportions of their interests in such well.
M. SUBJECT TO EXPLORATION AGREEMENT
This Operating Agreement is executed in connection with and pursuant to
that certain Exploration Agreement dated August 1, 1997, between the
parties hereto. In the event of a conflict between any of the terms of this
Operating Agreement and said Agreement, the terms of said Exploration
Agreement shall apply.
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N. PAYMENT OF LEASE BURDENS
Notwithstanding any provision of this Operating Agreement to the
contrary, unless the purchaser of production or other third party pays such
burdens directly, Operator shall pay all royalties, overriding royalties and
other burdens on or payable out of the interest of any Non-Operator electing
by written notice to Operator to have Operator make such payments, provided
(i) such Non-Operator make adequate arrangements for the receipt by Operator
of the revenues necessary to make such payments, and (ii) the owners of such
interests execute Operator's division order or otherwise satisfy Operator
with respect to entitlement to such payments.
P. MARKETING OF NON-OPERATOR PRODUCTION
Notwithstanding anything to the contrary contained herein, Operator
hereby covenants and agrees that should any Non-Operator request, Operator
will market Non-Operators share of any production from operations upon the
Contract Area under the same terms that Operator is marketing its share of
said production.
Q. COUNTERPART EXECUTION
This agreement may be executed in counterparts, each of which so executed
shall be given the effect of execution of the original agreement. Failure of
any party hereto to execute this agreement shall not render it ineffective as
to any party hereto who does execute same. If this agreement is executed in
counterparts, the signature pages of the parties to the various counterparts
may be combined by Operator in one or more copies of this agreement and
treated and given effect for all purposes, including recording, as separate
and complete instructions.
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ARTICLE XVI.
MISCELLANEOUS
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and to their respective heirs, devisees, legal
representatives, successors and assigns.
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
IN WITNESS WHEREOF, this agreement shall be effective as of _________ day
of _____________, 19__.
OPERATOR
- --------------------------------- ---------------------------------
NON-OPERATORS
- --------------------------------- ---------------------------------
- --------------------------------- ---------------------------------
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EXHIBIT "A"
OPERATOR INTEREST
NON-OPERATOR INTEREST
(with address, phone, fax #)
to be completed at the time the Operating Agreement is executed
<PAGE>
EXHIBIT "B"
There is not an Exhibit "B" to this agreement
<PAGE>
EXHIBIT
Attached to and made a part of ______________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
_____________________________________________________________________________
ACCOUNTING PROCEDURES
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-Operator" 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
and/or contract labor directly employed on the Joint Property in a 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 Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of 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 NationsBank on the first day of the month in which delinquency
occurs plus 1% or 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 within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical
inventory of Controllable Material as provided for in Section V.
COPYRIGHT-C- 1985 by the Council of Petroleum Accountants Societies.
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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 within 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 I. 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
more than once each year without prior approval of Operator, except
upon the registration or removal of the Operator, and shall be made at
the expense of those Non-Operators approving 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 this Accounting Procedure and
if the agreement to which this Accounting Procedure is attached contains
no contrary provisions in 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 or consultants
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 or consultants directly
employed on the Joint Property if such charges are excluded from
the overhead rates.
(4) Salaries and wages of Technical Employees or consultants either
temporarily or permanently assigned to and directly employed in the
operation of 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 imposed 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 or consultants whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II.
4. EMPLOYEE BENEFITS
Operator's current costs of 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.
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.
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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
receiving 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 available 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 ten percent (10%) 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 in paragraph 8A above, Operator may elect to use
average commercial rates prevailing 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
Association.
9. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or 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, examination of title, payment of judgements 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.
12. INSURANCE
Net premiums paid for insurance required to be carried 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 expenditures 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.
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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 charges 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:
( ) shall be covered by the overhead rates, or
(X) shall not be covered by the overhead rates
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services 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. OVERHEAD - FIXED RATE BASIS
(1) Operator shall charge the Joint Account at the following rates
per well per month.
Drilling Well Rate $5,000.00
(Prorated for less than a full month)
Producing Well Rate $500.00
(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 is
later, except that no charge shall be made during
suspension 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 a period of five (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 a multi-completed well in
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 on 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
-4-
<PAGE>
2. OVERHEAD--MAJOR CONSTRUCTION
3. CATASTROPHE OVERHEAD
4. AMENDMENT OF RATES
The overhead rates provided for in this Section III may be amended from
time to time only by mutual arrangement 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
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or 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:
-5-
<PAGE>
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 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.
(d) Macaroni tubing (size less than 2 1/4 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 1/4 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, or point of manufacture, plus transportation costs,
if applicable, to the railway receiving point nearest the Joint
Property. Unused new tabulars will be priced as provided above in
Paragraph 2 A(1) and (2).
B. GOOD USED MATERIAL (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 which 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 as 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.
-6-
<PAGE>
(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 completion 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 (25CENTS) per hundred weight on
all tubular 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 Material 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 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 the the Joint Account.
-7-
<PAGE>
EXHIBIT "D"
INSURANCE AND INDEMNITY
Without in any way limiting the Operator's and Non-Operator's liability
pursuant to this agreement, Operator shall, at all times while operations are
conducted under this agreement, maintain for the benefit of all parties
hereto, insurance at the types an in the maximum amounts as follows. Premiums
for such insurance shall be charged to the joint account.
All such insurance shall be maintained in full force and effect during
the terms of this agreement; however, such insurance may be canceled, altered
or amended as deemed necessary by Operator. If so required, Operator agrees
to have its insurance carrier furnish certificates of insurance evidencing
such insurance coverage.
Operator and non-operating working interest owners agree to mutually
waive subrogation in favor of each other on all insurance carried by each
party and/or to obtain such waiver from the insurance carrier if so required
by the insurance contract.
Non-operating working interest owners agree that the limits and coverage
carried by Operator are adequate and shall hold Operator harmless if any
claim exceeds such limit or is not covered by such policy.
<TABLE>
<CAPTION>
MINIMUM LIMITS
KIND POLICY FORM OF LIABILITY
- ---- ----------- ------------
<S> <C> <C>
Workman's Compensation Statutory Statutory
Comprehensive General Liability Comprehensive $500,000
(including coverage under all sections Combined Single Limit
of policy)
Motor Vehicle Comprehensive B.I. ($1,000,000)
(including non-ownership liability P.D. ($1,000,000)
and hired automobile coverage) Combined Single Limits
Umbrella Liability $2,000,000
Operator's Extra Expense * Control of well seepage, pollution & $1,000,000
containment replacement cost redrill
evacuation
</TABLE>
* On an individual election basis.
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is entered into as of
_____________________, 1997 (the "Effective Date"), by and between BETA OIL &
GAS, INC., a Nevada corporation (the "Company"), and DAHLIA FINANCIAL LIMITED, a
corporation ("Consultant").
RECITALS
WHEREAS, the Company desires to retain the Consultant to provide the
services set forth in Exhibit A hereto for the benefit of the Company (the
"Consulting Services");
WHEREAS, Consultant is engaged in the business of providing the
Consulting Services and desires to provide the Consulting Services to the
Company in accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties hereto hereby agree as follows:
A G R E E M E N T
1. Appointment and Duties. The Company hereby engages Consultant to
perform the Consulting Services commencing upon the date of this Agreement and
terminating in accordance with the terms set forth in Exhibit A. Consultant
agrees to accept such engagement upon the terms and conditions set forth herein.
Consultant shall faithfully and diligently perform the Consulting Services.
2. Compensation. Subject to the termination of this Agreement as
provided herein, the Company shall compensate Consultant for the performance of
the Consulting Services hereunder upon the terms and conditions set forth
in attached Exhibit B hereto
3. Non-Exclusive; Non-Disclosure.
3.1 Consultant agrees to perform Consultant's Consulting
Services efficiently and to the best of Consultant's ability. It is anticipated
that the Consultant shall spend as much time as deemed necessary by the
Consultant in order to perform the obligations of Consultant hereunder.
Notwithstanding the foregoing, the Company acknowledges and agrees that
Consultant's engagement with the Company is not exclusive and that Consultant is
engaged in other business endeavors and reserves the right to continue to do so
throughout the terms of this Agreement.
<PAGE>
3.2 Consultant acknowledges that Consultant may have access to
proprietary information regarding the business operations of the Company and
agrees to keep all such information secret and confidential and not to use or
disclose any such information to any individual or organization without the
Company's prior written consent.
4. Independent Contractor. Both the Company and the Consultant agree
that the Consultant will act as an independent contractor in the performance of
its duties under this Agreement. Nothing contained in this Agreement shall be
construed to imply that Consultant, or any employee, agent or other authorized
representative of Consultant, is a partner, joint venturer, agent, officer or
employee of the Company.
5. Term; Termination.
(a) Consultant may terminate this Agreement immediately for
cause at any time without notice. For purposes of this subsection (b), "cause"
for termination by Consultant shall be (i) a breach by The Company of any
material covenant or obligation hereunder; or (ii) the voluntary or involuntary
dissolution of the Company.
(b) The Company may terminate this Agreement for cause at any
time without notice. For purposes of this subsection (c), "cause" for
termination shall be: (i) any felonious conduct or material fraud by Consultant
in connection with The Company; (ii) any embezzlement or misappropriation of
funds or property of The Company by Consultant; (iii) any material breach of or
material failure to perform any covenant or obligation of Consultant under this
Agreement; or (iv) gross negligence by Consultant in the performance of his
duties under this Agreement.
6. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto their respective devisees, legatees, heirs,
legal representatives, successors, and permitted assigns. The preceding sentence
shall not affect any restriction on assignment set forth elsewhere in this
Agreement.
7. Notices. Any notice, request, demand, or other communication given
pursuant to the terms of this Agreement shall be deemed given upon delivery, if
hand delivered, or forty-eight (48) hours after deposit in the United States
mail, postage prepaid, and sent certified or registered mail, return receipt
requested, correctly addressed to the addresses of the parties indicated below
or at such other address as such party shall in writing have advised the other
party.
If to the Company: Beta Oil & Gas, Inc.
901 Dove Street Suite 230
Newport Beach, CA 92660
<PAGE>
If to Consultant: Dahlia Financial Limited
Road Town, Tortola, BVI
c/o Privatim Finance
Waldmanstrasse 6, Postpach 269
CH-8024 Zurich, Switzerland
8. Entire Agreement. Except as provided herein, this Agreement contains
the entire agreement of the parties, and supersedes all existing negotiations,
representations, or agreements and all other oral, written, or other
communications between them concerning the subject matter of this Agreement.
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same instrument.
10. Modification. No change, modification, addition, or amendment to
this Agreement shall be valid unless in writing and signed by all parties
hereto.
11. Attorneys' Fees. Except as otherwise provided herein, if a dispute
should arise between the parties including, but not limited to arbitration, the
prevailing party shall be reimbursed by the non-prevailing party for all
reasonable expenses incurred in resolving such dispute, including reasonable
attorneys' fees exclusive of such amount of attorneys' fees as shall be a
premium for result or for risk of loss under a contingency fee arrangement. In
the event of such a dispute, it shall be resolved at the Orange County,
California office of the American Arbitration Association.
12. Assignment. Neither party shall assign its rights or obligations
under this Agreement without the express prior written consent of the other
party.
13. Arbitration. If a dispute or claim shall arise with respect to any
of the terms or provisions of this Agreement, or with respect to the performance
by either of the parties under this Agreement, then either party may, with
notice as herein provided, require that the dispute be submitted under the
Commercial Arbitration Rules of the American Arbitration Association.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the Effective Date.
"The Company"
BETA OIL & GAS, INC.
BY: /s/Steve Antry
ITS: President
"The Consultant"
DAHLIA FINANCIAL LIMITED
BY:/s/Paul Caland
ITS:Director
<PAGE>
EXHIBIT "A"
Description of Consulting Services
During the pendency of this Agreement, the Consultant shall serve
perform international public relations services for the Company.
<PAGE>
EXHIBIT "B"
Compensation
The Consultant shall receive the following Compensation for the
provision of the Consulting Services:
400,000 warrants to purchase common stock of the Company at an exercise
price of $5.00 for a term of five years (the "Warrants"). 133,333 of the total
of 400,000 Warrants shall be callable at the option of the Company, on and after
the date that its Common Stock is traded on any exchange, including the NASD
Bulletin Board, at a Market Price, as defined below, equal to or exceeding $7.00
per share for 10 consecutive trading days. The remaining 266,667 of the total of
400,000 Warrants shall not be callable by the Company in any event. Further
provisions and representations regarding the Warrants are set forth in full in
those certain Warrant Agreements executed between the Company and the Consultant
on even date herewith.
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT (this "Agreement") is entered into as of
March 12, 1998 (the "Effective Date"), by and between BETA OIL & GAS, INC., a
Nevada corporation (the "Company"), and ST. CLOUD INVESTMENTS LTD., a
corporation ("Consultant").
RECITALS
WHEREAS, the Company desires to retain the Consultant to provide the
services set forth in Exhibit A hereto for the benefit of the Company (the
"Consulting Services");
WHEREAS, Consultant is engaged in the business of providing the
Consulting Services and desires to provide the Consulting Services to the
Company in accordance with the terms of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions
contained herein, the parties hereto hereby agree as follows:
A G R E E M E N T
1. Appointment and Duties. The Company hereby engages Consultant to
perform the Consulting Services commencing upon the date of this Agreement and
terminating in accordance with the terms set forth in Exhibit A. Consultant
agrees to accept such engagement upon the terms and conditions set forth herein.
Consultant shall faithfully and diligently perform the Consulting Services.
2. Compensation. Subject to the termination of this Agreement as
provided herein, the Company shall compensate Consultant for the
performance of the Consulting Services hereunder upon the terms and
conditions set forth in attached Exhibit B hereto
3. Non-Exclusive; Non-Disclosure.
3.1 Consultant agrees to perform Consultant's Consulting
Services efficiently and to the best of Consultant's ability. It is anticipated
that the Consultant shall spend as much time as deemed necessary by the
Consultant in order to perform the obligations of Consultant hereunder.
Notwithstanding the foregoing, the Company acknowledges and agrees that
Consultant's engagement with the Company is not exclusive and that Consultant is
engaged in other business endeavors and reserves the right to continue to do so
throughout the terms of this Agreement.
<PAGE>
3.2 Consultant acknowledges that Consultant may have access to
proprietary information regarding the business operations of the Company and
agrees to keep all such information secret and confidential and not to use or
disclose any such information to any individual or organization without the
Company's prior written consent.
4. Independent Contractor. Both the Company and the Consultant agree
that the Consultant will act as an independent contractor in the performance of
its duties under this Agreement. Nothing contained in this Agreement shall be
construed to imply that Consultant, or any employee, agent or other authorized
representative of Consultant, is a partner, joint venturer, agent, officer or
employee of the Company.
5. Term; Termination.
(a) Consultant may terminate this Agreement immediately for
cause at any time without notice. For purposes of this subsection (b), "cause"
for termination by Consultant shall be (i) a breach by The Company of any
material covenant or obligation hereunder; or (ii) the voluntary or involuntary
dissolution of the Company.
(b) The Company may terminate this Agreement for cause at any
time without notice. For purposes of this subsection (c), "cause" for
termination shall be: (i) any felonious conduct or material fraud by Consultant
in connection with The Company; (ii) any embezzlement or misappropriation of
funds or property of The Company by Consultant; (iii) any material breach of or
material failure to perform any covenant or obligation of Consultant under this
Agreement; or (iv) gross negligence by Consultant in the performance of his
duties under this Agreement.
6. Binding Effect. This Agreement shall be binding upon and inure to
the benefit of the parties hereto their respective devisees, legatees, heirs,
legal representatives, successors, and permitted assigns. The preceding sentence
shall not affect any restriction on assignment set forth elsewhere in this
Agreement.
7. Notices. Any notice, request, demand, or other communication given
pursuant to the terms of this Agreement shall be deemed given upon delivery, if
hand delivered, or forty-eight (48) hours after deposit in the United States
mail, postage prepaid, and sent certified or registered mail, return receipt
requested, correctly addressed to the addresses of the parties indicated below
or at such other address as such party shall in writing have advised the other
party.
If to the Company: Beta Oil & Gas, Inc.
901 Dove Street Suite 230
Newport Beach, CA 92660
<PAGE>
If to Consultant: St. Cloud Investments Ltd.
c/o Dominique Lang
Waldmanstrasse 8
P.O. Box 319
CH-8024 Zurich, Switzerland
8. Entire Agreement. Except as provided herein, this Agreement contains
the entire agreement of the parties, and supersedes all existing negotiations,
representations, or agreements and all other oral, written, or other
communications between them concerning the subject matter of this Agreement.
9. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same instrument.
10. Modification. No change, modification, addition, or amendment to
this Agreement shall be valid unless in writing and signed by all parties
hereto.
11. Attorneys' Fees. Except as otherwise provided herein, if a dispute
should arise between the parties including, but not limited to arbitration, the
prevailing party shall be reimbursed by the non-prevailing party for all
reasonable expenses incurred in resolving such dispute, including reasonable
attorneys' fees exclusive of such amount of attorneys' fees as shall be a
premium for result or for risk of loss under a contingency fee arrangement. In
the event of such a dispute, it shall be resolved at the Orange County,
California office of the American Arbitration Association.
12. Assignment. Neither party shall assign its rights or obligations
under this Agreement without the express prior written consent of the other
party.
13. Arbitration. If a dispute or claim shall arise with respect to any
of the terms or provisions of this Agreement, or with respect to the performance
by either of the parties under this Agreement, then either party may, with
notice as herein provided, require that the dispute be submitted under the
Commercial Arbitration Rules of the American Arbitration Association.
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the Effective Date.
"The Company"
BETA OIL & GAS, INC.
BY:/s/ Steve Antry
ITS: President
"The Consultant"
ST. CLOUD INVESTMENTS LTD.
BY:/s/ Robert T. Tucker
ITS:Director
<PAGE>
EXHIBIT "A"
Description of Consulting Services
During the pendency of this Agreement, the Consultant shall serve
perform international public relations services for the Company.
<PAGE>
EXHIBIT "B"
Compensation
The Consultant shall receive the following Compensation for the
provision of the Consulting Services:
150,000 warrants to purchase common stock of the Company at an exercise
price of $7.50 for a term of five years (the "Warrants"). Fifty thousand of the
total of 150,000 Warrants shall be callable at the option of the Company, on and
after the date that its Common Stock is traded on any exchange, including the
Over-the-Counter Bulletin Board, at a Market Price, as defined below, equal to
or exceeding $10.00 per share for 10 consecutive trading days. The remaining
100,000 of the total of 150,000 Warrants shall not be callable by the Company in
any event. Further provisions and representations regarding the Warrants are set
forth in full in those certain Warrant Agreements executed between the Company
and the Consultant on even date herewith.
Law Offices of
HORWITZ & BEAM
Two Venture Plaza
Suite 350
Irvine, California 92618
(714) 453-0300
(310) 842-8574
FAX: (714) 453-9416
Gregory B. Beam, Esq. Thomas B. Griffen, Esq.
Lawrence W. Horwitz, Esq. Malea M. Farsai, Esq.
Lawrence R. Bujold, Esq. Ralph R. Loyd, Esq.
Lawrence M. Cron, Esq.
Lynne Bolduc, Esq. George L Rogers, Esq.
Of Counsel
June 23, 1997
Beta Oil & Gas, Inc.
901 Dove Street
Suite 230
Newport Beach, CA 92660
Re: Legal Representation
Gentlemen:
This is to confirm our understanding whereby you have engaged Horwitz &
Beam (the "Firm") to represent your company with respect to general counsel
representation in connection with the operations of Beta Oil & Gas, Inc. during
the period of time commencing upon the date of this Agreement and terminating
the earlier to occur of either: (i) two years or (ii) the Company's common stock
commencing trading in the public securities markets (hereinafter referred to as
the "Matter"). California law requires lawyers to have written fee contracts
with their clients. This letter, when signed by you, will constitute the written
fee contract required by California law. In connection therewith, our
understanding and agreement are as follows:
1. We will undertake to advise you in connection with the Matter and
any other matters you ask us to undertake. We will undertake to prepare such
documents as may be required to affect the foregoing.
2. There can be no assurances, and we make no guarantees,
representations or warranties as to the particular results from our services and
the response and timeliness of action by any governmental official or
department.
<PAGE>
Horwitz & Beam
Beta Oil & Gas, Inc.
June 23, 1997
Page 3
51368.1
3. You understand that the accuracy and completeness of any document
prepared by us is dependent upon your alertness to assure that it contains all
material facts which might be important and that such documents must not contain
any misrepresentation of a material fact nor omit information necessary to make
the statements therein not misleading. To that end, you agree to review, and
confirm to us in writing that you have reviewed, all materials for their
accuracy and completeness prior to any use thereof. You also acknowledge that
this responsibility continues in the event that the materials become deficient
in this regard.
4. It is understood that the Company shall reimburse the firm for all
non-labor out-of-pocket expenses incurred by the firm on behalf of the Company,
including, but not limited to copying charges, long distance telephone charges,
out sourced messenger charges, filing fees, court costs and facsimile charges,
arising from this agreement. It is understood that the Company's obligation to
pay such expenses shall only be at the actual costs incurred by the firm. You
agree to pay any and all expenses advanced by the firm.
5. The firm reserves the right to immediately withdraw its
representation in the event that (i) we discover any misrepresentation of
information provided to us, or (ii) you and any of your affiliates engage in any
conduct or activities contrary to our advice which in our opinion would
constitute a violation of applicable law. In the event legal action is required
to collect any amounts due hereunder, you agree to pay legal fees and expenses
required to collect such amounts.
6. We will consult with you on all major decisions and will attempt to
keep you fully informed of the status of the preparation of documents and
responses to filings, if any, as well as our recommended strategies. You should
feel free to call at any time if you have any questions or wish to discuss any
aspect of these matters.
7. You are advised that the Firm maintains errors and omissions
insurance coverage applicable to the services to be rendered.
<PAGE>
8. This Agreement shall be governed by the laws of the State of
California and venue for any action hereunder shall be in Orange County,
California.
If this letter correctly sets forth your understanding and agreement
with respect to the matters mentioned above, please execute and return one copy
of this letter.
Very truly yours,
HORWITZ & BEAM
/s/
Lawrence W. Horwitz
The undersigned hereby confirms and agrees that this letter, executed
and effective this _____ day of ____________, 1997, sets forth my understanding
and agreement.
BETA OIL & GAS, INC.
By: /s/
Steve Antry, President
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
January 6, 1999
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: Mr. Steve Antry, President
Re: Prospect "Cobra" (Formerly "Pelican")
Offshore - West Cameron Area, Louisiana
Gentlemen:
When accepted by you in the manner provided below, this letter shall
evidence the agreement between you (sometimes hereinafter referred to as "Beta")
and Cheniere Energy, Inc., (hereinafter referred to as "Cheniere") with respect
to (1) your acquiring from Cheniere a certain undivided interest in and to the
Oil, Gas and Mineral Leases described on Exhibit "A" attached hereto and made a
part hereof (the "Leases"), which Leases cover lands comprising the prospect
known to Cheniere as the Cobra Prospect, and (2) your participation in the
drilling of a test well on the Cobra Prospect in the manner hereinafter
described. The geographical area covered by the Cobra Prospect is shown on
Exhibit "A," on which it is depicted as the yellow shaded "Lease Block"
(hereinafter referred to as the "Cobra Lease Block").
1.
Cheniere represents that it owns a 50% interest in and to the Leases.
In consideration of the sum of $312,000, which Beta agrees to pay and deliver to
Cheniere simultaneously with Beta's execution of this Letter Agreement, and
Beta's undertakings as hereinafter set forth, Cheniere has agreed and does
hereby agree to assign to Beta, an undivided 15.0% of 8/8ths interest in and to
the Leases. The assignment to you of interests pursuant to this Paragraph shall
be made immediately after Cheniere's receipt of (i) your payment to Cheniere of
the amount set forth above, (ii) an original counterpart of this Letter
Agreement duly executed by you, (iii) an Operating Agreement, in the form
attached as Exhibit "C" (the "Operating Agreement"), duly executed by you; and
(iv) the authority for expenditure for the Test Well set forth in Exhibit A duly
executed by you. Except as to claims by, through, or under Assignor, but not
otherwise, the assignments herein provided for shall be without warranty, either
express or implied, and shall be made expressly subject to the terms and
provisions of this Letter Agreement and the Operating Agreement. The form of the
assignment shall be the same or substantially similar to the form of assignment
attached hereto as Exhibit "B."
2.
All operations on the Cobra Lease Block or the area of mutual interest
("AMI") created in the Operating Agreement, including the drilling of a test
well as provided in Section 3 below (the "Test Well"), will be governed by the
Operating Agreement; provided, however, if on any matter there is a conflict
between the Operating Agreement and this Letter Agreement, the Letter Agreement
shall prevail. Initially, Zydeco Exploration, Inc. ("Zydeco") shall be
designated as operator under the Operating Agreement. Zydeco may resign or be
replaced as operator in accordance with the provisions of the Operating
Agreement; provided, however, that if Zydeco resigns or is replaced as operator
prior to completion or abandonment of the Test Well and the successor operator
selected under the Operating Agreement is not acceptable to Beta, then, for a
period of thirty (30) days after appointment of such successor operator, Beta
may elect to reassign to Cheniere its interests in the Leases, and any other
interests acquired within the Cobra Lease Block or AMI, and Cheniere shall,
contemporaneously with receipt of such reassignment, return to Beta the purchase
price therefor. If such reassignment right is not timely exercised, it shall be
deemed waived.
3.
Beta has agreed, and does hereby agree to participate in the manner set
forth below in the drilling of a Test Well for the Cobra Prospect at the
location and to the Contract Depth described in Exhibit "A." Prior to the
spudding of the Test Well, Cheniere may change the location or Contract Depth
for the Test Well, provided that if Beta does not approve such change it may,
within fourteen (14) days of receipt of notice thereof, reassign to Cheniere its
interests in the Leases, and any other interests acquired within the Cobra Lease
Block or AMI, and Cheniere shall, contemporaneously with receipt of such
reassignment, return to Beta the purchase price therefor. If such reassignment
right is not timely exercised, it shall be deemed waived.
Beta has agreed and does hereby agree to pay and bear 20.0% of all
risks, costs and expenses incurred in connection with the drilling of the Test
Well to Contract Depth; in logging and testing the Test Well; and, in plugging
and abandoning the Test Well if a completion attempt is not made. The costs and
expenses of drilling the Test Well shall include, but without limitation by
enumeration, the costs incurred in obtaining a drill site surface lease,
examining and clearing title on the surface location (and, if the Test Well is
directionally drilled, the lease covering the bottom hole location), staking the
location, preparing the location and drilling to Contract Depth and evaluating
the well. A detailed estimate of costs of drilling the Test Well to Contract
Depth is included in Exhibit "A", but such information is merely an estimate and
shall not be deemed a limitation or cap on such costs or on either party's
responsibility therefor. An estimate of completion cost will be provided prior
to spudding the Test Well.
If after reaching Contract Depth in the Test Well, Beta elects to
participate in a completion attempt of the Test Well, 15% of all risks, costs
and expenses incurred in connection with such completion, together with the
risks, costs and expenses of plugging and abandoning such well in the event
completion is unsuccessful, shall be borne by Beta.
If the Test Well is not commenced within 120 days after the date
hereof, then, for a period of thirty (30) days thereafter, Beta may reassign to
Cheniere its interest in the Leases, and any other interests acquired within the
Cobra Lease Block and AMI, and Cheniere shall, contemporaneously with receipt of
such reassignment, return to Beta the purchase price therefor. If such
reassignment right is not timely exercised, it shall be deemed waived.
4.
If, after commencing a Test Well, but before reaching Contract Depth,
there should be encountered conditions or formations, whether natural or
mechanical, which render further drilling of the Test Well either impossible or
impractical, so that operations on the Test Well are abandoned, a Substitute
Well may be commenced not later than 90 days following the abandonment of Test
Well. Such Substitute Well shall be considered and deemed for all purposes
(including, without limitation, the apportionment between the parties of the
costs and expenses incurred in connection therewith) a continuation of the
drilling of the Test Well and as though it were the well for which it is the
substitute.
5.
If Beta elects not to participate in the Substitute Well, then Beta
shall be deemed to have forfeited all rights and interest in and to the Leases
and any other leases, fee mineral interests or other oil and gas interests or
contractual rights covering or appurtenant to lands in the Cobra Lease Block and
the AMI, and shall, within ten (10) days after (i) receipt of notice of the
commencement of the Substitute Well or (ii) the expiration of the 90 day period
for commencement of a Substitute Well, as the case may be, assign to Cheniere
all of such rights and interests.
6.
It is recognized that (i) although title will be examined on the drill
site surface and bottom hole location tracts for the Test Well prior to
commencement of drilling thereof, title will not be examined as to other lands
lying within the Cobra Lease Block or the AMI until such time as wells are
proposed to be drilled thereon, and (ii) there possibly may be unleased
interests in other tracts of land within the Cobra Lease Block. You acknowledge
that Cheniere has advised you of any currently unleased interests known to
Cheniere which may exist within the Cobra Lease Block, but Cheniere makes no
representation or warranty, express or implied, as to the completeness or
accuracy of such information, and your reliance thereon is at your sole risk. If
any such unleased interests are now known or become known to Cheniere to exist
prior to completion or abandonment of the Test Well, Cheniere agrees to make a
good faith effort to acquire Oil, Gas and Mineral Leases covering such unleased
interests under such terms and conditions as are reasonably acceptable to
Cheniere. Undivided interests in such leases acquired by Cheniere shall be
offered to Beta pursuant to the AMI provision of the Operating Agreement.
7.
The notices provided for in this agreement shall be in writing and
delivered by certified U.S. mail, return receipt requested, telecopy, or
overnight courier or messenger with receipt confirmation, to the addresses
below:
CHENIERE ENERGY, INC.
Two Allen Center
1200 Smith Street, Suite 1740
Houston, TX 77002
Attn: Walter L. Williams
phone (713) 659-1361
fax (713) 659-5459
BETA OIL & GAS, INC.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attn: Steve Antry
phone (949) 752-5212
fax (949) 752-5757
Notices hereunder shall be deemed made upon receipt.
8.
Beta shall have the right to review in Cheniere's office all Fairfield
spec data pertaining to the Cobra Prospect under the terms and conditions set
out in the Master and Supplemental Licensing Agreement covering such data by and
between Fairfield Industries and Cheniere Energy, Inc. dated January 28, 1998,
and Beta agrees to comply with all such terms and conditions. At Beta's request
and at Beta's cost Cheniere will endeavor to secure a Partners License to such
data for Beta. Subject to Beta's continued compliance with the previously
executed Confidentiality Agreement, dated September 14, 1998, Beta shall have
access to proprietary seismic data acquired by Cheniere covering the Cobra
Prospect in Cheniere's offices during Cheniere's normal business hours;
provided, however, that if Beta reassigns interests to Cheniere rights pursuant
to this Agreement, Beta shall return all interpretations, maps, seismic sections
or other data, information, reports, analyses or opinions generated by Beta or
its consultants, contractors or agents using, based upon or derived from such
data, and Beta shall cause all such materials to be removed from Beta's
workstations and computer systems.
9.
This agreement is made subject to all valid, applicable laws, rules,
orders and regulations, of any duly constituted Federal, State or local
regulatory body or authority having jurisdiction thereof, and all development
and operations hereunder shall be in conformity therewith.
10.
The provisions hereof shall inure to the benefit and are binding upon
the parties hereto, and to their respective successors and assigns.
11.
Prior to the date hereof, Beta acquired an interest in State Leases No.
16187 and 16188, Sabine Pass Block 3, Offshore Louisiana. Beta and Cheniere
expressly agree that, notwithstanding anything herein or in the Operating
Agreement to the contrary, such State Leases are hereby excluded from the AMI.
12.
The parties agree that this Agreement shall be deemed confidential and
shall not be revealed to any third party except (i) to the extent disclosure may
be required by law, including, without limitation, disclosures in registration
statements or other filings with the Securities and Exchange Commission; (ii)
disclosures in any judicial or alternative dispute resolution proceeding
concerning the terms hereof; (iii) disclosures to bona fide prospective
investors, lenders, successors or assigns of a party, upon such third parties'
execution of a confidentiality agreement in form and substance reasonably
acceptable to the parties hereto; and (iv) disclosures with the written consent
of the other party, which consent shall not be unreasonably withheld.
13.
All assignments of interests by Beta to Cheniere pursuant to this
Agreement shall be made by assignment reasonably acceptable to Cheniere and free
of all claims, burdens or encumbrances by through, or under Beta, other than
royalties, overriding royalties, back-ins or like interests reserved by third
parties in farmout agreements, assignments or grants of such interests to Beta.
If Beta reassigns interests to Cheniere pursuant to this Agreement, then Beta
agrees (i) to maintain the confidentiality of all information in Beta's
possession concerning the Cobra Prospect; and (ii) for a period of three (3)
years after the date hereof, not to acquire oil and gas interests (including,
without limitation, leasehold interests, fee mineral interests, net profits
interests, royalty or overriding royalty interests, farmouts or other interests)
covering lands within the Cobra Lease Block or the AMI. If, notwithstanding the
foregoing, Beta acquires such interests, then within fourteen (14) days after
receipt of assignments or conveyances of such interests, Beta shall in writing
offer to assign such interests to Cheniere upon Cheniere's payment to Beta of
Beta's acquisition costs therefor, documentation of which shall be furnished by
Beta to Cheniere. Cheniere shall have thirty (30) days after receipt of such
notice in which to elect whether to acquire such interest. If Cheniere does not
tender the purchase price for such interests within such period, Cheniere shall
be deemed to have elected not to acquire such interest. Beta shall deliver
executed and acknowledged assignments of such interests to Cheniere
contemporaneously with Cheniere's payment of the purchase price therefor.
14.
Time is of the essence in the performance of this Agreement.
If the foregoing is your understanding of our agreement, please
evidence your acceptance of this agreement by executing in the space provided
below for your signature.
Sincerely,
CHENIERE ENERGY, INC.
/s/Walter L. Williams
President & CEO
AGREED TO AND ACCEPTED THIS _____ DAY OF _______________, 1999.
BETA OIL AND GAS, INC.
/s/Steve Antry
President & CEO
<PAGE>
EXHIBIT A
to
COBRA PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
Exhibit B
Cobra Prospect
EXHIBIT "B"
(Attached to and made a part of that certain Letter Agreement dated January 6,
1998 by and between Cheniere Energy, Inc., as Operator, and Beta Oil & Gas,
Inc., as Non-Operator.)
ASSIGNMENT OF UNDIVIDED INTEREST
IN OIL, GAS AND MINERAL LEASES
THE STATE OF LOUISIANA )
) KNOW ALL MEN BY THESE PRESENTS, THAT:
PARISH OF CAMERON )
WHEREAS, Cheniere Energy, Inc. is the owner of record of an interest in
the Oil, Gas and Mineral Leases and the Lease Option described in Exhibit "A"
and made a part hereof, which leases may be referred to in this assignment as
"Subject Leases"; and
WHEREAS, pursuant to the terms and provisions of that certain
unrecorded Letter Agreement by and between Cheniere Energy, Inc. ("Cheniere")
and Beta Oil & Gas, Inc. ("Beta") dated January 6, 1999, and pertaining to the
leases described in Exhibit "A," Cheniere has agreed to assign and convey to
Beta and Beta has agreed to acquire from Cheniere, subject to the terms and
provisions hereinafter set forth, an undivided 15% interest in and to Subject
Leases.
NOW THEREFORE, in consideration of $1,000.00 and other good and
valuable considerations, paid by Assignee to Assignor, the receipt, seriousness
and sufficiency of which is hereby acknowledged by Assignor, Cheniere, as
Assignor, does hereby assign, transfer and convey unto Beta, as Assignee, an
undivided 15% interest in and to Subject Leases.
This assignment is made by Assignor and is accepted by Assignee subject
to and the parties hereto agree to be bound by the terms and provisions of the
above described unrecorded Letter Agreement and the Joint Operating Agreement,
which is attached thereto as Exhibit "C."
This assignment is made subject to and Assignee agrees to bear its
pro-rata part of the royalties and leasehold obligations provided for in Subject
Leases and of the overriding royalties, if any, that are described in Exhibit
"A" hereof, following the description of each of Subject Leases. Assignor
represents and warrants to Assignee that each of Subject Lease is burdened only
with the royalty and overriding royalty, if any, set forth following the
description of each lease in Exhibit "A."
This assignment is made without warranty, either express or implied,
not even for the return of purchase price paid by Assignee to Assignor, but with
full substitution and subrogation, to the extent of the interest herein
assigned, to the rights and actions of warranty granted Assignor under the terms
of Subject Leases or by Assignor's predecessors-in-title.
IN TESTIMONY WHEREOF, this instrument is executed this ________ day of
_____________________________, 19 ______, in the presence of the undersigned
competent witnesses.
WITNESSES:
- -----------------------------------
--------------------------------
- ------------------------------------
- ------------------------------------
---------------------------------
- ------------------------------------
<PAGE>
<PAGE>
EXHIBIT C
(ATTACHED TO AND MADE A PART OF THAT CERTAIN EXPLORATION AGREEMENT COVERING
THE FORMOSA GRANDE PROJECT DATED AUGUST 1, 1997, BY AND BETWEEN PARALLEL
PETROLEUM CORPORATION ET AL)
[STAMP]
OPERATING AGREEMENT
DATED
, 19
--------- --
OPERATOR ZYDECO EXPLORATION, INC.
-------------------------------------------------------
CONTRACT AREA
---------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
COUNTY OR PARISH OF STATE OF
---------------------- ------------
COPYRIGHT 1982 - ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 2408 CONTINENTAL LIFE BUILDING,
FORT WORTH, TEXAS, 76102, APPROVED FORM.
A.A.P.L. NO. 610 - 1982 REVISED
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Article Title Page
- ------- ------ ----
<S> <C> <C>
I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
II. EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
III. INTERESTS OF PARTIES. . . . . . . . . . . . . . . . . . . . . . . . . 2
A. OIL AND GAS INTERESTS . . . . . . . . . . . . . . . . . . . . . . 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION. . . . . . . . . . . 2
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS . . . . 2
D. SUBSEQUENTLY CREATED INTERESTS. . . . . . . . . . . . . . . . . . 2
IV. TITLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A. TITLE EXAMINATION . . . . . . . . . . . . . . . . . . . . . . . . 2-3
B. LOSS OF TITLE . . . . . . . . . . . . . . . . . . . . . . . . . . 3
1. Failure of Title . . . . . . . . . . . . . . . . . . . . . . . 3
2. Loss by Non-Payment or Erroneous Payment of Amount Due . . . . 3
3. Other Losses . . . . . . . . . . . . . . . . . . . . . . . . . 3
V. OPERATOR. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR. . . . . . . . . . . 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR . . 4
1. Resignation or Removal of Operator . . . . . . . . . . . . . . 4
2. Selection of Successor Operator. . . . . . . . . . . . . . . . 4
C. EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
D. DRILLING CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . 4
VI. DRILLING AND DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . . . 4
A. INITIAL WELL. . . . . . . . . . . . . . . . . . . . . . . . . . . 4-5
B. SUBSEQUENT OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 5
1. Proposed Operations. . . . . . . . . . . . . . . . . . . . . . 5
2. Operations by Less than All Parties. . . . . . . . . . . . . . 5-6-7
3. Stand-By Time. . . . . . . . . . . . . . . . . . . . . . . . . 7
4. Sidetracking . . . . . . . . . . . . . . . . . . . . . . . . . 7
C. TAKING PRODUCTION IN KIND . . . . . . . . . . . . . . . . . . . . 7
D. ACCESS TO CONTRACT AREA AND INFORMATION . . . . . . . . . . . . . 8
E. ABANDONMENT OF WELLS. . . . . . . . . . . . . . . . . . . . . . . 8
1. Abandonment of Dry Holes . . . . . . . . . . . . . . . . . . . 8
2. Abandonment of Wells that have Produced. . . . . . . . . . . . 8-9
3. Abandonment of Non-Consent Operations. . . . . . . . . . . . . 9
VII. EXPENDITURES AND LIABILITY OF PARTIES . . . . . . . . . . . . . . . . 9
A. LIABILITY OF PARTIES. . . . . . . . . . . . . . . . . . . . . . . 9
B. LIENS AND PAYMENT DEFAULTS. . . . . . . . . . . . . . . . . . . . 9
C. PAYMENTS AND ACCOUNTING . . . . . . . . . . . . . . . . . . . . . 9
D. LIMITATION OF EXPENDITURES. . . . . . . . . . . . . . . . . . . . 9-10
1. Drill or Deepen. . . . . . . . . . . . . . . . . . . . . . . . 9-10
2. Rework or Plug Back. . . . . . . . . . . . . . . . . . . . . . 10
3. Other Operations . . . . . . . . . . . . . . . . . . . . . . . 10
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES. . . . . . . 10
F. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
G. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST. . . . . . . . . . . 11
A. SURRENDER OF LEASES . . . . . . . . . . . . . . . . . . . . . . . 11
B. RENEWAL OR EXTENSION OF LEASES. . . . . . . . . . . . . . . . . . 11
C. ACREAGE OR CASH CONTRIBUTIONS . . . . . . . . . . . . . . . . . . 11-12
D. MAINTENANCE OF UNIFORM INTEREST . . . . . . . . . . . . . . . . . 12
E. WAIVER OF RIGHTS TO PARTITION . . . . . . . . . . . . . . . . . . 12
F. PREFERENTIAL RIGHT TO PURCHASE. . . . . . . . . . . . . . . . . . 12
IX. INTERNAL REVENUE CODE ELECTION. . . . . . . . . . . . . . . . . . . . 12
X. CLAIMS AND LAWSUITS . . . . . . . . . . . . . . . . . . . . . . . . . 13
XI. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
XII. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
XIII. TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 13
XIV. COMPLIANCE WITH LAWS AND REGULATIONS. . . . . . . . . . . . . . . . . 14
A. LAWS, REGULATIONS AND ORDERS. . . . . . . . . . . . . . . . . . . 14
B. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . 14
C. REGULATORY AGENCIES . . . . . . . . . . . . . . . . . . . . . . . 14
XV. OTHER PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
XVI. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
</TABLE>
<PAGE>
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between ZYDECO EXPLORATION, INC.,
hereinafter designated and referred to as "Operator", and the signatory party
or parties other than Operator, sometimes hereinafter referred to
individually herein as "Non-Operator", and collectively as "Non-Operators".
WITNESSETH:
WHEREAS, the parties to this agreement are owners of oil and gas leases
and/or oil and gas interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these leases
and/or oil and gas interests for the production of oil and gas to the extent and
as hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas
condensate, and all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
B. The terms "oil and gas lease", "lease" and "leasehold" shall mean the
oil and gas leases covering tracts of land lying within the Contract Area which
are owned by the parties to this agreement.
C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.
D. The term "Contract Area" shall mean all of the lands, oil and gas
leasehold interests and oil and gas interests intended to be developed and
operated for oil and gas purposes under this agreement. Such lands, oil and gas
leasehold interests and oil and gas interests are described in Exhibit "A".
E. The term "drilling unit" shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority. If a
drilling unit is not fixed by any such rule or order, a drilling unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
or as fixed by express agreement of the Drilling Parties.
F. The term "drillsite" shall mean the oil and gas lease or interest on
which a proposed well is to be located.
G. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.
H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a
party who elects not to participate in a proposed operation.
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the plural includes the singular, and the neuter gender
includes the masculine and the feminine.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
/ / A. Exhibit "A", shall include the following information:
(1) Identification of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Percentages or fractional interests of parties to this agreement,
(4) Oil and gas leases and/or oil and gas interests subject to this
agreement,
(5) Addresses of parties for notice purposes.
/ / B. Exhibit "B", Form of Lease.
/ / C. Exhibit "C", Accounting Procedure.
/ / D. Exhibit "D", Insurance.
/ / E. Exhibit "E", Gas Balancing Agreement.
/ / F. Exhibit "F", Non-Discrimination and Certification of
Non-Segregated Facilities.
/ / G. Exhibit "G", Tax Partnership.
< H. EXHIBIT "H", NOTICE OF JOINT OPERATING AGREEMENT.
If any provision of any exhibit, except Exhibits "E" and "G", is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
- 1 -
<PAGE>
ARTICLE III.
INTERESTS OF PARTIES
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:
Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A". In the same manner,
the parties shall also own all production of oil and gas from the Contract Area
subject to the payment of royalties OR OTHER LANDOWNER OBLIGATIONS AS SET FORTH
IN THE LEASES which shall be borne as hereinafter set forth.
SEE ARTICLE XV.B.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby.
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS:
Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty, production
payment or other burden on production in excess of the amount stipulated in
Article III.B., such party so burdened shall assume and alone bear all such
excess obligations and shall indemnify and hold the other parties hereto
harmless from any and all claims and demands for payment asserted by owners of
such excess burden.
D. SUBSEQUENTLY CREATED INTERESTS:
If any party should hereafter create an overriding royalty, production
payment or other burden payable out of production attributable to its working
interest hereunder, or if such a burden existed prior to this agreement and is
not set forth in Exhibit "A", or was not disclosed in writing to all other
parties prior to the execution of this agreement by all parties, or is not a
jointly acknowledged and accepted obligation of all parties (any such interest
being hereinafter referred to as "subsequently created interest" irrespective of
the timing of its creation and the party out of whose working interest the
subsequently created interest is derived being hereinafter referred to as
"burdened party"), and:
1. If the burdened party is required under this agreement to assign or
relinquish to any other party, or parties, all or a portion of its
working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or
production free and clear of said subsequently created interest and
the burdened party shall indemnify and save said other party, or
parties, harmless from any and all claims and demands for payment
asserted by owners of the subsequently created interest; and,
2. If the burdened party fails to pay, when due, its share of expenses
chargeable hereunder, all provisions of Article VII.B. shall be
enforceable against the subsequently created interest in the same
manner as they are enforceable against the working interest of the
burdened party.
ARTICLE IV.
TITLES
A. TITLE EXAMINATION:
Title examination shall be made on the drillsite of any proposed well prior
to commencement of drilling operations or, if the Drilling Parties so request,
title examination shall be made on the leases and/or oil and gas interests
included, or planned to be included, in the drilling unit around such well. The
opinion will include the ownership of the working interest, minerals, royalty,
overriding royalty and production payments under the applicable leases. At the
time a well is proposed, each party contributing leases and/or oil and gas
interests to the drillsite, or to be included in such drilling unit, shall
furnish to Operator all abstracts (including federal lease status reports),
title opinions, title papers and curative material in its possession free of
charge. All such information not in the possession of or made available to
Operator by the parties, but necessary for the examination of the title, shall
be obtained by Operator. Operator shall cause title to be examined by attorneys
on its staff or by outside attorneys. Copies of all title opinions shall be
furnished to each party hereto. The cost incurred by Operator in this title
program shall be borne as follows:
/ / OPTION NO. 1: Costs incurred by Operator in procuring abstracts and
title examination (including preliminary, supplemental, shut-in gas royalty
opinions and division order title opinions) shall be a part of the
administrative overhead as provided in Exhibit "C", and shall not be a direct
charge, whether performed by Operator's staff attorneys or by outside attorneys.
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<PAGE>
ARTICLE IV
CONTINUED
/ / OPTION NO. 2: Costs incurred by Operator in procuring abstracts and fees
paid outside attorneys for title examination (including preliminary,
supplemental, shut-in gas royalty opinions and division order title opinions)
shall be borne by the Drilling Parties in the proportion that the interest of
each Drilling Party bears to the total interest of all Drilling Parties as such
interests appear in Exhibit "A". Operator shall make no charge for services
rendered by its staff attorneys or other personnel in the performance of the
above functions.
Operator shall use its best efforts to secure curative matter and
pooling amendments or agreements required in connection with leases or oil
and gas interests contributed by each party. Operator shall be responsible
for the preparation and recording of pooling designations or declarations as
well as the conduct of hearings before governmental agencies for the securing
of spacing or pooling orders. This shall not prevent any party from appearing
on its own behalf at any such hearing.
No well shall be drilled on the Contract Area until after (1) the title to
the drillsite or drilling unit has been examined as above provided, and (2) the
title has been approved by the examining attorney or title has been accepted by
all of the parties who are to participate in the drilling of the well.
3. LOSSES: All losses incurred, shall be joint losses and shall be borne
by all parties in proportion to their interests. There shall be no readjustment
of interests in the remaining portion of the Contract Area.
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<PAGE>
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
ZYDECO EXPLORATION, INC. shall be the Operator of the Contract Area, and
shall conduct and direct and have full control of all operations on the
Contract Area as permitted and required by, and within the limits of this
agreement. It shall conduct all such operations in a good and workmanlike
manner, but it shall have no liability as Operator to the other parties for
losses sustained or liabilities incurred, except such as may result from
gross negligence or willful misconduct. SEE ARTICLE XV.A. FOR ADDITIONAL
PROVISIONS.
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:
1. RESIGNATION OR REMOVAL OF OPERATOR: Operator may resign at any time by
giving written notice thereof to Non-Operators. If Operator terminates its legal
existence, no longer owns an interest hereunder in the Contract Area, or is no
longer capable of serving as Operator, Operator shall be deemed to have resigned
without any action by Non-Operators, except the selection of a successor.
Operator may be removed if it fails or refuses to carry out its duties
hereunder, or becomes insolvent, bankrupt or is placed in receivership, by the
affirmative vote of ONE or more Non-Operators owning a majority interest based
on ownership as shown on Exhibit "A" remaining after excluding the voting
interest of Operator. Such resignation or removal shall not become effective
until 7:00 o'clock A.M. on the first day of the calendar month following the
expiration of ninety (90) days after the giving of notice of resignation by
Operator or action by the Non-Operators to remove Operator, unless a successor
Operator has been selected and assumes the duties of Operator at an earlier
date. Operator, after effective date of resignation or removal, shall be bound
by the terms hereof as a Non-Operator. A change of a corporate name or
structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator. ALSO SEE ARTICLE XV.A.
2. SELECTION OF SUCCESSOR OPERATOR: Upon the resignation or removal of
Operator, a successor Operator shall be selected by the parties. The successor
Operator shall be selected from the parties owning an interest in the Contract
Area at the time such successor Operator is selected. The successor Operator
shall be selected by the affirmative vote of ONE or more parties owning a
majority interest based on ownership as shown on Exhibit "A"; provided, however,
if an Operator which has been removed fails to vote or votes only to succeed
itself, the successor Operator shall be selected by the affirmative vote of ONE
or more parties owning a majority interest based on ownership as shown on
Exhibit "A" remaining after excluding the voting interest of the Operator that
was removed. THE NEWLY APPOINTED OPERATOR SHALL ASSUME THE DUTIES AND
RESPONSIBILITIES OF THE OPERATOR HEREUNDER, EFFECTIVE AS OF THE LAST DAY OF THE
MONTH OF SUCH ELECTION.
C. EMPLOYEES:
The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees shall
be the employees of Operator.
D. DRILLING CONTRACTS:
All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing rates in the area and the
rate of such charges shall be agreed upon by the parties in writing before
drilling operations are commenced, and such work shall be performed by Operator
under the same terms and conditions as are customary and usual in the area in
contracts of independent contractors who are doing work of a similar nature.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. INITIAL WELL:
On or before the 15TH day of FEBRUARY, 1999, Operator shall commence
the drilling of a well for oil and gas at the following location: Section
23, T15S, R14W, Cameron Parish, Louisiana
and shall thereafter continue the drilling of the well with due diligence to
contract depth as set forth in the model turnkey contract between Zydeco
Exploration, Inc., and Grey Wolf Drilling Company L.P.
unless granite or other practically impenetrable substance or condition in the
hole, which renders further drilling impractical, is encountered at a lesser
depth, or unless all parties agree to complete or abandon the well at a lesser
depth.
Operator shall make reasonable tests of all formations encountered during
drilling which give indication of containing oil and gas in quantities
sufficient to test, unless this agreement shall be limited in its application to
a specific formation or formations, in which event Operator shall be required to
test only the formation or formations to which this agreement may apply.
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<PAGE>
ARTICLE VI
CONTINUED
If, in Operator's judgment, the well will not produce oil or gas in paying
quantities, and it wishes to plug and abandon the well as a dry hole, the
provisions of Article VI.E.1. shall thereafter apply.
SEE ARTICLE XV.V. FOR ADDITIONAL PROVISIONS.
B. SUBSEQUENT OPERATIONS:
1. PROPOSED OPERATIONS: Should any party hereto desire to drill any well
on the Contract Area other than the well provided for in Article VI.A., or to
rework, deepen or plug back a dry hole drilled at the joint expense of all
parties or a well jointly owned by all the parties and not then producing in
paying quantities, the party desiring to drill, rework, deepen or plug back such
a well shall give the other parties written notice of the proposed operation,
specifying the work to be performed, the location, proposed depth, objective
formation and the estimated cost of the operation. The parties receiving such a
notice shall have thirty (30) days after receipt of the notice within which to
notify the party wishing to do the work whether they elect to participate in the
cost of the proposed operation. If a drilling rig is on location, notice of a
proposal to rework, plug back or drill deeper may be given by telephone and the
response period shall be limited to forty-eight (48) hours, inclusive of
Saturday, Sunday, and legal holidays. Failure of a party receiving such notice
to reply within the period above fixed shall constitute an election by that
party not to participate in the cost of the proposed operation. Any notice or
response given by telephone shall be promptly confirmed in writing.
If all parties elect to participate in such a proposed operation, Operator
shall, within ninety (90) days after expiration of the notice period of thirty
(30) days (or as promptly as possible after the expiration of the forty-eight
(48) hour period when a drilling rig is on location, as the case may be),
actually commence the proposed operation and complete it with due diligence at
the risk and expense of all parties hereto; provided, however, said commencement
date may be extended upon written notice of same by Operator to the other
parties, for a period of up to thirty (30) additional days if, in the sole
opinion of Operator, such additional time is reasonably necessary to obtain
permits from governmental authorities, surface rights (including rights-of-way)
or appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance. Notwithstanding the force
majeure provisions of Article XI, if the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein) and if any party hereto still desires to conduct said
operation, written notice proposing same must be resubmitted to the other
parties in accordance with the provisions hereof as if no prior proposal had
been made.
2. OPERATIONS BY LESS THAN ALL PARTIES: If any party receiving such notice
as provided in Article VI.B.1. or VII.D.1. (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, within ninety (90)
days after the expiration of the notice period of thirty (30) days (or as
promptly as possible after the expiration of the forty-eight (48) hour period
when a drilling rig is on location, as the case may be) actually commence the
proposed operation and complete it with due diligence. Operator shall perform
all work for the account of the Consenting Parties; provided, however, if no
drilling rig or other equipment is on location, and if Operator is a
Non-Consenting Party, the Consenting Parties shall either: (a) request Operator
to perform the work required by such proposed operation for the account of the
Consenting Parties, or (b) designate one (1) of the Consenting Parties as
Operator to perform such work. Consenting Parties, when conducting operations
on the Contract Area pursuant to this Article VI.B.2., shall comply with all
terms and conditions of this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise the Consenting Parties of the total interest of the parties approving
such operation and its recommendation as to whether the Consenting Parties
should proceed with the operation as proposed. Each Consenting Party, within
forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after
receipt of such notice, shall advise the proposing party of its desire to (a)
limit par ticipation to such party's interest as shown on Exhibit "A" or (b)
carry its proportionate part of Non-Consenting Parties' interests, and failure
to advise the proposing party shall be deemed an election under (a). In the
event a drilling rig is on location, the time permitted for such a response
shall not exceed a total of forty-eight (48) hours (INCLUSIVE of Saturday,
Sunday and legal holidays). The proposing party, at its election, may withdraw
such proposal if there is insufficient participation and shall promptly notify
all parties of such decision.
The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same under
the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the Consenting
Parties shall plug and abandon the well and restore the surface location at
their sole cost, risk and expense. If any well drilled, reworked, deepened or
plugged back under the provisions of this Article results in a pro ducer of oil
and/or gas in paying quantities, the Consenting Parties shall complete and equip
the well to produce at their sole cost and risk,
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<PAGE>
ARTICLE VI
CONTINUED
and the well shall then be turned over to Operator and shall be operated by it
at the expense and for the account of the Consenting Parties. Upon
commencement of operations for the drilling, reworking, deepening or plugging
back of any such well by Consenting Parties in accordance with the provisions of
this Article, each Non-Consenting Party shall be deemed to have relinquished to
Consenting Parties, and the Consenting Parties shall own and be entitled to
receive, in proportion to their respective interests, all of such Non-Consenting
Party's interest in the well and share of production therefrom until the
proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold, (after deducting production taxes, excise
taxes, royalty, overriding royalty and other in terests not excepted by Article
III.D. payable out of or measured by the production from such well accruing with
respect to such interest until it reverts) shall equal the total of the
following:
(a) 100% of each such Non-Consenting Party's share of the cost of any
newly acquired surface equipment beyond the wellhead connections (including, but
not limited to, stock tanks, separators, treaters, pumping equipment and
piping), plus 100% of each such Non-Consenting Party's share of the cost of
operation of the well commencing with first production and continuing until each
such Non- Consenting Party's relinquished interest shall revert to it under
other provisions of this Article, it being agreed that each Non- Consenting
Party's share of such costs and equipment will be that interest which would have
been chargeable to such Non-Consenting Party had it participated in the well
from the beginning of the operations; and
(b) ____% of that portion of the costs and expenses of drilling,
reworking, deepening, plugging back, testing and completing, after deducting any
cash contributions received under Article VIII.C., and _______% of that portion
of the cost of newly acquired equip ment in the well (to and including the
wellhead connections), which would have been chargeable to such Non-Consenting
Party if it had participated therein.
An election not to participate in the drilling or the deepening of a well
shall be deemed an election not to participate in any re- working or plugging
back operation proposed in such a well, or portion thereof, to which the initial
Non-Consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
account. Any such reworking or plugging back operation conducted during the
recoupment period shall be deemed part of the cost of operation of said well and
there shall be added to the sums to be recouped by the Consenting Parties one
hundred percent (100%) of that portion of the costs of the reworking or plugging
back operation which would have been chargeable to such Non-Consenting Party had
it participated therein. If such a reworking or plugging back operation is
proposed during such recoupment period, the provisions of this Article VI.B.
shall be ap plicable as between said Consenting Parties in said well.
During the period of time Consenting Parties are entitled to receive
Non-Consenting Party's share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all production,
severance, excise, gathering and other taxes, and all royalty, overriding
royalty and other burdens applicable to Non-Consenting Party's share of
production not excepted by Article III.D.
In the case of any reworking, plugging back or deeper drilling operation,
the Consenting Parties shall be permitted to use, free of cost, all casing,
tubing and other equipment in the well, but the ownership of all such equipment
shall remain unchanged; and upon abandonment of a well after such reworking,
plugging back or deeper drilling, the Consenting Parties shall account for all
such equipment to the owners thereof, with each party receiving its
proportionate part in kind or in value, less cost of salvage.
Within sixty (60) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
deepening, plugging back, testing, completing, and equipping the well for
production; or, at its option, the operating party, in lieu of an itemized
statement of such costs of operation, may submit a detailed statement of monthly
billings. Each month thereafter, during the time the Consenting Parties are
being reimbursed as provided above, the party conducting the operations for the
Consenting Parties shall furnish the Non-Consenting Parties with an itemized
statement of all costs and liabilities incurred in the operation of the well,
together with a statement of the quantity of oil and gas produced from it and
the amount of proceeds realized from the sale of the well's working interest
production during the preceding month. In determining the quantity of oil and
gas produced during any month, Consenting Parties shall use industry accepted
methods such as, but not limited to, metering or periodic well tests. Any
amount realized from the sale or other disposition of equipment newly acquired
in connection with any such operation which would have been owned by a
Non-Consenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
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<PAGE>
ARTICLE VI
CONTINUED
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it, and, from and
after such reversion, such Non-Consenting Party shall own the same interest in
such well, the material and equipment in or pertaining thereto, and the
production therefrom as such Non-Consenting Party would have been entitled to
had it participated in the drilling, reworking, deepening or plugging back of
said well. Thereafter, such Non-Consenting Party shall be charged with and
shall pay its proportionate part of the further costs of the operation of said
well in accordance with the terms of this agreement and the Accounting Procedure
attached hereto.
Notwithstanding the provisions of this Article VI.B.2., it is agreed that
without the mutual consent of all parties, no wells shall be completed in or
produced from a source of supply from which a well located elsewhere on the
Contract Area is producing, unless such well conforms to the then-existing well
spacing pattern for such source of supply.
The provisions of this Article shall have no application whatsoever to the
drilling of the initial well described in Article VI.A. except (a) as to Article
VII.D.1. (Option No. 2), if selected, or (b) as to the reworking, deepening and
plugging back of such initial well after if has been drilled to the depth
specified in Article VI.A. if it shall thereafter prove to be a dry hole or, if
initially completed for production, ceases to produce in paying quantities.
3. STAND-BY TIME: When a well which has been drilled or deepened has
reached its authorized depth and all tests have been completed, and the results
thereof furnished to the parties, stand-by costs incurred pending response to a
party's notice proposing a reworking, deepening, plugging back or completing
operation in such a well shall be charged and borne as part of the drilling or
deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2., shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.
4. SIDETRACKING: Except as hereinafter provided, those provisions of this
agreement applicable to a "deepening" operation shall also be applicable to any
proposal to directionally control and intentionally deviate a well from vertical
so as to change the bottom hole location (herein call "sidetracking"), unless
done to straighten the hole or to drill around junk in the hole or because of
other mechanical difficulties. Any party having the right to participate in a
proposed sidetracking operation that does not own an interest in the affected
well bore at the time of the notice shall, upon electing to participate, tender
to the well bore owners its proportionate share (equal to its interest in the
sidetracking operation) of the value of that portion of the existing well bore
to be utilized as follows:
(a) If the proposal is for sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the initial
drilling of the well down to the depth at which the sidetracking operation is
initiated.
(b) If the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable materials
and equipment down to the depth at which the sidetracking operation is
initiated, determined in accordance with the provisions of Exhibit "C", less the
estimated cost of salvaging and the estimated cost of plugging and abandoning.
In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be limited
to twenty-four (24) hours, inclusive of Saturday, Sunday and legal holidays;
provided, however, any party may request and receive up to eight (8) additional
days after expiration of the twenty-four (24) hours within which to respond by
paying for all stand-by time incurred during such extended response period. If
more than one party elects to take such additional time to respond to the
notice, stand by costs shall be allocated between the parties taking additional
time to respond on a day-to-day basis in the proportion each electing party's
interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit
"A" of all the electing parties. In all other instances the response period to
a proposal for sidetracking shall be limited to thirty (30) days.
C. TAKING PRODUCTION IN KIND:
Each party shall have the right to take in kind or separately dispose of
its proportionate share of all oil and gas produced from the Contract Area,
exclusive of production which may be used in development and producing
operations and in preparing the treating oil and gas for marketing purposes and
production unavoidably lost. Any extra expenditure incurred in the taking in
kind or separate disposition by any party of its proportionate share of the
production shall be borne by such party. Any party taking its share of
production in kind shall be
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<PAGE>
ARTICLE VI
CONTINUED
required to pay for only its proportionate share of such part of Operator's
surface facilities which it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.B., shall be entitled to receive payment
directly from the purchaser thereof for its share of all production.
In the event any party shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the oil
produced from the Contract Area, Operator shall have the right, subject to the
revocation at will by the party owning it, but not the obligation, to purchase
such oil or sell it to others at any time and from time to time, for the account
of the non-taking party at the best price obtainable in the area for such
production. Any such purchase or sale by Operator shall be subject always to
the right of the owner of the production to exercise at any time its right to
take in kind, or separately dispose of, its share of all oil not previously
delivered to a purchaser. Any purchase or sale by Operator of any other party's
share of oil shall be only for such reasonable periods of time as are consistent
with the minimum needs of the industry under the particular circumstances, but
in no event for a period in excess of one (1) year.
In the event one or more parties' separate disposition of its share of the
gas causes split-stream deliveries to separate pipelines and/or deliveries which
on a day-to-day basis for any reason are not exactly equal to a party's
respective proportionate share of total gas sales to be allocated to it, the
balancing or accounting between the respective accounts of the parties shall be
in accordance with any gas balancing agreement between the parties hereto,
whether such an agreement is attached as Exhibit "E", or is a separate
agreement.
D. ACCESS TO CONTRACT AREA AND INFORMATION:
Each party shall have access to the Contract Area at all reasonable times,
at its sole cost and risk to inspect or observe operations, and shall have
access at reasonable times to information pertaining to the development or
operation thereof, including Operator's books and records relating thereto.
Operator, upon request, shall furnish each of the other parties with copies of
all forms or reports filed with governmental agencies, daily drilling reports,
well logs, tank tables, daily gauge and run tickets and reports of stock on hand
at the first of each month, and shall make available samples of any cores or
cuttings taken from any well drilled on the Contract Area. The cost of
gathering and furnishing information to Non-Operator, other than that specified
above, shall be charged to the Non-Operator that requests the Information.
E. ABANDONMENT OF WELLS:
1. ABANDONMENT OF DRY HOLES: Except for any well drilled or deepened
pursuant to Article VI.B.2., any well which has been drilled or deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be plugged and abandoned without the consent of all parties. Should
Operator, after diligent effort, be unable to contact any party, or should any
party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday
and legal holidays) after receipt of notice of the proposal to plug and abandon
such well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening such well. Any party who
objects to plugging and abandoning such well shall have the right to take over
the well and conduct further operations in search of oil and/or gas subject to
the provisions of Article VI.B.
2. ABANDONMENT OF WELLS THAT HAVE PRODUCED: Except for any well in which
a Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto. If, within thirty (30)
days after receipt of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to continue
its operation from the interval(s) of the formation(s) then open to production
shall tender to each of the other parties its proportionate share of the value
of the well's salvable material and equipment, determined in accordance with the
provisions of Exhibit "C", less the estimated cost of salvaging and the
estimated cost of plugging and abandoning. Each abandoning party shall assign
the non-abandoning parties, without warranty, express or implied, as to title or
as to quantity, or fitness for use of the equipment and material, all of its
interest in the well and related equipment, together with its interest in the
leasehold estate as to, but only as to, the interval or intervals of the
formation or formations then open to production. If the interest of the
abandoning party is or includes an oil and gas interest, such party shall
execute and deliver to the non-abandoning party or parties an oil and gas lease,
limited to the interval or intervals of the formation or formations then open to
production, for a term of one (1) year and so long thereafter as oil and/or gas
is produced from the interval or intervals of the formation or formations
covered thereby, such lease to be on the form attached as Exhibit
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<PAGE>
ARTICLE VI
CONTINUED
required to pay for only its proportionate share of such part of Operator's
surface facilities which it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.B., shall be entitled to receive payment
directly from the purchaser thereof for its share of all production.
In the event any party shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the oil and gas
produced from the Contract Area, Operator shall have the right, subject to the
revocation at will by the party owning it, but not the obligation, to purchase
such oil and gas or sell it to others at any time and from time to time, for the
account of the non taking party at the best price obtainable in the area for
such production. Any such purchase or sale by Operator shall be subject always
to the right of the owner of the production to exercise at any time its right to
take in kind, or separately dispose of, its share of all oil and gas not
previously delivered to a purchaser. Any purchase or sale by Operator of any
other party's share of oil and gas shall be only for such reasonable periods of
time as are consistent with the minimum needs of the industry under the
particular circumstances, but in no event for a period in excess of one (1)
year. Notwithstanding the foregoing, Operator shall not make a sale, including
one into interstate commerce, of any other party's share of gas production
without first giving such other party thirty (30) days notice of such intended
sale.
D. ACCESS TO CONTRACT AREA AND INFORMATION:
Each party shall have access to the Contract Area at all reasonable times,
at its sole cost and risk to inspect or observe operations, and shall have
access at reasonable times to information pertaining to the development or
operation thereof, including Operator's books and records relating thereto.
Operator, upon request, shall furnish each of the other parties with copies of
all forms or reports filed with governmental agencies, daily drilling reports,
well logs, tank tables, daily gauge and run tickets and reports of stock on hand
at the first of each month, and shall make available samples of any cores or
cuttings taken from any well drilled on the Contract Area. The cost of
gathering and furnishing information to Non-Operator, other than that specified
above, shall be charged to the Non-Operator that requests the Information.
E. ABANDONMENT OF WELLS:
1. ABANDONMENT OF DRY HOLES: Except for any well drilled or deepened
pursuant to Article VI.B.2., any well which has been drilled or deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be plugged and abandoned without the consent of all parties. Should
Operator, after diligent effort, be unable to contact any party, or should any
party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday
and legal holidays) after receipt of notice of the proposal to plug and abandon
such well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening such well. Any party who
objects to plugging and abandoning such well shall have the right to take over
the well and conduct further operations in search of oil and/or gas subject to
the provisions of Article VI.B.
2. ABANDONMENT OF WELLS THAT HAVE PRODUCED: Except for any well in which
a Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto. If, within thirty (30)
days after receipt of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to continue
its operation from the interval(s) of the formation(s) then open to production
shall tender to each of the other parties its proportionate share of the value
of the well's salvable material and equipment, determined in accordance with the
provisions of Exhibit "C", less the estimated cost of salvaging and the
estimated cost of plugging and abandoning. Each abandoning party shall assign
the non-abandoning parties, without warranty, express or implied, as to title or
as to quantity, or fitness for use of the equipment and material, all of its
interest in the well and related equipment, together with its interest in the
leasehold estate as to, but only as to, the interval or intervals of the
formation or formations then open to production. If the interest of the
abandoning party is or includes an oil and gas interest, such party shall
execute and deliver to the non-abandoning party or parties an oil and gas lease,
limited to the interval or intervals of the formation or formations then open to
production, for a term of one (1) year and so long thereafter as oil and/or gas
is produced from the interval or intervals of the formation or formations
covered thereby, such lease to be on the form attached as Exhibit
- 8 alternate -
<PAGE>
ARTICLE VI
CONTINUED
/ / OPTION NO. 1: All necessary expenditures for the drilling or deepening,
testing, completing and equipping of the well, including necessary tankage
and/or surface facilities.
/x/ OPTION NO. 2: All necessary expenditures for the drilling or deepening and
testing of the well. When such well has reached its authorized depth, and all
tests have been completed, and the results thereof furnished to the parties,
Operator shall give immediate notice to the Non-Operators who have the right to
participate in the completion costs. The parties receiving such notice shall
have twenty-four (24) hours (inclusive of Saturday, Sunday and legal holidays)
in which to elect to participate in the setting of casing and the completion
attempt. Such election, when made, shall include consent to all necessary
expenditures for the completing and equipping of such well, including necessary
tankage and/or surface facilities. Failure of any party receiving such notice
to reply within the period above fixed shall constitute an election by that
party not to participate in the cost of the completion attempt. If one or more,
but less than all of the parties, elect to set pipe and to attempt a completion,
the provisions of Article VI.B.2. hereof (the phrase "reworking, deepening or
plugging back" as contained in Article VI.B.2. shall be deemed to include
"completing") shall apply to the operations thereafter conducted by less than
all parties.
2. REWORK OR PLUG BACK: Without the consent of all parties, no well shall
be reworked or plugged back except a well reworked or plugged back pursuant to
the provisions of Article VI.B.2. of this agreement. Consent to the reworking
or plugging back of a well shall include all necessary expenditures in
conducting such operations and completing and equipping of said well, including
necessary tankage and/or surface facilities.
3. OTHER OPERATIONS: Without the consent of all parties, Operator shall
not undertake any single project reasonably estimated to require an expenditure
in excess of TWENTY FIVE THOUSAND Dollars ($25,000.00) except in connection with
a well, the drilling, reworking, deepening, completing, recompleting, or
plugging back of which has been previously authorized by or pursuant to this
agreement; provided, however, that, in case of explosion, fire, flood or other
sudden emergency, whether of the same or different nature, Operator may take
such steps and incur such expenses as in its opinion are required to deal with
the emergency to safeguard life and property but Operator, as promptly as
possible, shall report the emergency to the other parties.
F. TAXES:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on leases and oil and gas interests contributed by such
NonOperator. If the assessed valuation of any leasehold estate is reduced by
reason of its being subject to outstanding excess royalties, overriding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or owners of such leasehold
estate, and Operator shall adjust the charge to such owner or owners so as to
reflect the benefit of such reduction. 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. Operator shall bill the other
parties for their proportionate shares of all tax payments in the manner
provided in Exhibit "C".
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have
been finally determined, Operator shall pay the tax for the joint account,
together with any interest and penalty accrued, and the total cost shall then be
assessed against the parties, and be paid by them, as provided in Exhibit "C".
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of oil and/or gas produced under the terms of
this agreement.
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<PAGE>
ARTICLE VI
CONTINUED
The assignments so limited shall encompass ONLY the "drilling or
proration unit" upon which the well is located. The payments by, and the
assignments or leases to, the assignees shall be in a ratio based upon the
relationship of their respective percentage of participation in the Contract
Area to the aggregate of the percentages of participation in the Contract
Area of all assignees. There shall be no readjustment of interests in the
remaining portion of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
interval or intervals then open. Upon request, Operator shall continue to
operate the assigned well for the account of the non-abandoning parties at the
rates and charges contemplated by this agreement, plus any additional cost and
charges which may arise as the result of the separate ownership of the assigned
well. Upon proposed abandonment of the producing interval(s) assigned the
assignor shall then have the option to repurchase its prior interest in the well
(using the same valuation formula) and participate in further operations therein
subject to the provisions hereof.
3. ABANDONMENT OF NON-CONSENT OPERATIONS: The provisions of Article
VI.E.1. or VI.E.2 above shall be applicable as between Consenting Parties in the
event of the proposed abandonment of any well excepted from said Articles;
provided, however, no well shall be permanently plugged and abandoned unless and
until all parties having the right to conduct further operations therein have
been notified of the proposed abandonment and afforded the opportunity to elect
to take over the well in accordance with the provisions of this Article VI.E.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. LIABILITY OF PARTIES:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the parties
liable as partners.
B. LIENS AND PAYMENT DEFAULTS:
Each Non-Operator HAS GRANTED to Operator IN ARTICLE XV.I. HEREOF a lien
upon AND A SECURITY INTEREST IN its oil and gas rights inthe Contract Area, and
a security interest in its share of oil and/or gas when extracted and its
interest in all equipment, to secure payment of its share of expense, together
with interest thereon at the rate provided in Exhibit "C". To the extent that
Operator has a security interest under the Uniform Commercial Code of the state,
Operator shall be entitled to exercise the rights and remedies of a secured
party under the Code. The bringing of a suit and the obtaining of judgment by
Operator for the secured indebtedness shall not be deemed an election of
remedies or otherwise affect the lien rights or security interest as security
for the payment thereof. In addition, upon default by any Non-Operator in the
payment of its share of expense, Operator shall have the right, without
prejudice to other rights or remedies, to collect from the purchaser the
proceeds from the sale of such Non-Operator's share of oil and/or gas until the
amount owed by such Non-Operator, plus interest, has been paid. Each purchaser
shall be entitled to rely upon Operator's written statement concerning the
amount of any default. Operator HAS GRANTED IN ARTICLE XV.I. HEREOF a like lien
and security interest to the Non-Operators to secure payment of Operator's
proportionate share of expense.
SEE PARAGRAPHS XV.I. AND XV.M. FOR ADDITIONAL PROVISIONS
If any party fails or is unable to pay its share of expense within THIRTY
(30) days after rendition of a statement therefor by Operator, the
non-defaulting parties, including Operator, shall, upon request by Operator, pay
the unpaid amount in the proportion that the interest of each such party bears
to the interest of all such parties. Each party so paying its share of the
unpaid amount shall, to obtain reimbursement thereof, be subrogated to the
security rights described in the foregoing paragraph.
C. PAYMENTS AND ACCOUNTING:
Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Contract Area pursuant to this agreement and shall charge each of the parties
hereto with their respective proportionate shares upon the expense basis
provided in Exhibit "C". Operator shall keep an accurate record of the joint
account hereunder, showing expenses incurred and charges and credits made and
received. IN ADDITION, SEE ARTICLE XV.M.
Operator, at its election, shall have the right from time to time to demand
and receive from the other parties payment in advance of their respective shares
of the estimated amount of the expense to be incurred in operations hereunder
during the next succeeding month, which right may be exercised only by
submission to each such party of an itemized statement of such estimated
expense, together with an invoice for its share thereof. Each such statement
and invoice for the payment in advance of estimated expense shall be submitted
on or before the 20th day of the next preceding month. Each party shall pay to
Operator its proportionate share of such estimate within fifteen (15) days after
such estimate and invoice is received. If any party fails to pay its share of
said estimate in accordance with the provisions of Article XV.K proper
adjustment shall be made monthly between advances and actual expense to the end
that each party shall bear and pay its proportionate share of actual expenses
incurred, and no more.
SEE PARAGRAPH XV.J. FOR ADDITIONAL PROVISIONS
D. LIMITATION OF EXPENDITURES:
1. DRILL OR DEEPEN: Without the consent of all parties, no well shall be
drilled or deepened, except any well drilled or deepened pursuant to the
provisions of Article VI.B.2. of this agreement. Consent to the drilling or
deepening shall include:
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<PAGE>
ARTICLE VII
CONTINUED
G. INSURANCE:
At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations are
being conducted; provided, however, that Operator may be a self-insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit "C". Operator
shall also carry or provide insurance for the benefit of the joint account of
the parties as outlined in Exhibit "D", attached to and made a part hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workmen's compensation law of the state where the
operations are being conducted and to maintain such other insurance as Operator
may require.
In the event automobile public liability insurance is specified in said
Exhibit "D", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automotive equipment.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. SURRENDER OF LEASES:
The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any lease or
in any portion thereof, and the other parties do not agree or consent thereto,
the party desiring to surrender shall assign, without express or implied
warranty of title, all of its interest in such lease, or portion thereof, and
any well, material and equipment which may be located thereon and any rights in
production thereafter secured, to the parties not consenting to such surrender.
If the interest of the assigning party is or includes an oil and gas interest,
the assigning party shall execute and deliver to the party or parties not
consenting to such surrender an oil and gas lease covering such oil and gas
interest for a term of one (1) year and so long thereafter as oil and/or gas is
produced from the land covered thereby, such lease to be on the form attached
hereto as Exhibit "B". Upon such assignment or lease, the assigning party shall
be relieved from all obligations thereafter accruing, but not theretofore
accrued, with respect to the interest assigned or leased and the operation of
any well attributable thereto, and the assigning party shall have no further
interest in the assigned or leased premises and its equipment and production
other than the royalties retained in any lease made under the terms of this
Article. The party assignee or lessee shall pay to the party assignor or lessor
the reasonable salvage value of the latter's interest in any wells and equipment
attributable to the assigned or leased acreage. The value of all material shall
be determined in accordance with the provisions of Exhibit "C", less the
estimated cost of salvaging and the estimated cost of plugging and abandoning.
If the assignment or lease is in favor of more than one party, the interest
shall be shared by such parties in the proportions that the interest of each
bears to the total interest of all such parties.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement.
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal of any oil and gas lease subject to this
agreement, all other parties shall be notified promptly, and shall have the
right for a period of thirty (30) days following receipt of such notice
provided, however, the response period shall be limited to 48 hours in the event
a well is drilling on the Contract Area or on lands adjacent thereto in which to
elect to participate in the ownership of the renewal lease, insofar as such
lease affects lands within the Contract Area, by paying to the party who
acquired it their several proper proportionate shares of the acquisition cost
allocated to that part of such lease within the Contract Area, which shall be in
proportion to the interests held at that time by the parties in the Contract
Area.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal lease. Any renewal lease in which less than all
parties elect to participate shall not be subject to this agreement.
Each party who participates in the purchase of a renewal lease shall be
given an assignment of its proportionate interest therein by the acquiring party
within 7 days from its payment of costs.
The provisions of this Article shall apply to renewal leases whether they
are for the entire interest covered by the expiring lease or cover only a
portion of its area or an interest therein. Any renewal lease taken before the
expiration of its predecessor lease, or taken or contracted for within six (6)
months after the expiration of the existing lease shall be subject to this
provision; but any lease taken or contracted for more than six (6) months after
the expiration of an existing lease shall not be deemed a renewal lease and
shall not be subject to the provisions of this agreement, but shall be deemed to
be subject to an Operating Agreement identical to this, modified only to reflect
the ownership of the acquiring parties and their respective percentage
interests.
The provisions in this Article shall also be applicable to extensions of
oil and gas leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party to
whom the contribution is made shall promptly tender an assignment of the
acreage, without warranty of title, to the Drilling Parties in the proportions
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<PAGE>
ARTICLE VII
CONTINUED
said Drilling Parties shared the cost of drilling the well. Such acreage shall
become a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions
shall also be applicable to optional rights to earn acreage outside the Contract
Area which are in support of a well drilled inside the Contract Area.
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.
D. MAINTENANCE OF UNIFORM INTERESTS:
For the purpose of maintaining uniformity of ownership in the oil and gas
leasehold interests covered by this agreement, no party shall sell, encumber,
transfer or make other disposition of its interest in the leases embraced within
the Contract Area and in wells, equipment and production unless such disposition
covers either:
1. the entire interest of the party in all leases and equipment and
production; or
2. an equal undivided interest in all leases and equipment and production
in the Contract Area.
Every such sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the oil and gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.
E. WAIVER OF RIGHTS TO PARTITION:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the rights
and liabilities hereunder are several and not joint or collective, or that this
agreement and operations hereunder shall not constitute a partnership, if, for
federal income tax purposes, this agreement and the operations hereunder are
regarded as a partnership, each party hereby affected elects to be excluded from
the application of all of the provisions of Subchapter "K", Chapter 1, Subtitle
"A", of the Internal Revenue Code of 1986, as permitted and authorized by
Section 761 of the Code and the regulations promulgated thereunder. Operator is
authorized and directed to execute on behalf of each party hereby affected such
evidence of this election as may be required by the Secretary of the Treasury of
the United States or the Federal Internal Revenue Service, including
specifically, but not by way of limitation, all of the returns, statements, and
the data required by Federal Regulations 1.761. Should there be any requirement
that each party hereby affected give further evidence of this election, each
such party shall execute such documents and furnish such other evidence as may
be required by the Federal Internal Revenue Service or as may be necessary to
evidence this election. No such party shall give any notices or take any other
action inconsistent with the election made hereby. If any present or future
income tax laws of the state or states in which the Contract Area is located or
any future income tax laws of the United States contain provisions similar to
those in Subchapter "K", Chapter 1, Subtitle "A", of the Internal Revenue Code
of 1986, under which an election similar to that provided by Section 761 of the
Code is permitted, each party hereby affected shall make such election as may be
permitted or required by such laws. In making the foregoing election, each such
party states that the income derived by such party from operations hereunder can
be adequately determined without the computation of partnership taxable income.
- 12 -
<PAGE>
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed TWENTY-FIVE
THOUSAND Dollars ($25,000.00) and if the payment is in complete settlement of
such claim or suit. If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs
and expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises. If a claim is made against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given Operator by
this agreement, such party shall immediately notify all other parties, and the
claim or suit shall be treated as any other claim or suit involving operations
hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
make money payments, that party shall give to all other parties prompt written
notice of the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of the party giving the notice, so far as they are
affected by the force majeure, shall be suspending during, but no longer than,
the continuance of the force majeure. The affected party shall use all
reasonable diligence to remove the force majeure situation as quickly as
practicable.
The requirement that any force majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the party involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.
The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy, war,
blockade, public riot, lightning, fire, storm, flood, explosion, governmental
action, governmental delay, restraint or inaction, unavailability of equipment,
and any other cause, whether of the kind specifically enumerated above or
otherwise, which is not reasonably within the control of the party claiming
suspension.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties and required by any
of the provisions of this agreement, unless otherwise specifically provided,
shall be given in writing by mail or telegram, postage or charges prepaid, or by
telex or telecopier and addressed to the parties to whom the notice is given at
the addresses listed on Exhibit "A". The originating notice given under any
provision hereof shall be deemed given only when received by the party to whom
such notice is directed, and the time for such party to give any notice in
response thereto shall run from the date the originating notice is received.
The second or any responsive notice shall be deemed given when deposited in the
mail or with the telegraph company, with postage or charges prepaid, or sent by
telex or telecopier. Each party shall have the right to change its address at
any time, and from time to time, by giving written notice thereof to all other
parties. Provided, however, notices requiring an election within twenty-four
(24) or forty-eight (48) hours over weekends or legal holidays will not be
deemed given until acknowledged, either verbally or in writing, by the receiving
party.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the oil and gas
leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas interest
contributed by any other party beyond the term of this agreement.
/ / OPTION NO. 1: So long as any of the oil and gas leases subject to this
agreement remain or are continued in force as to any part of the Contract Area,
whether by production, extension, renewal, or otherwise.
/ / OPTION NO. 2: In the event the well described in Article VI.A., or any
subsequent well drilled under any provision of this agreement, results in
production of oil and/or gas in paying quantities, this agreement shall continue
in force so long as any such well or wells produce, or are capable of
production, and for an additional period of ________ days from cessation of all
production; provided, however, if, prior to the expiration of such additional
period, one or more of the parties hereto are engaged in drilling, reworking,
deepening, plugging back, testing or attempting to complete a well or wells
hereunder, this agreement shall continue in force until such operations have
been completed and if production results therefrom, this agreement shall
continue in force as provided herein. In the event the well described in
Article VI.A., or any subsequent well drilled hereunder, results in a dry hole,
and no other well is producing, or capable of producing oil and/or gas from the
Contract Area, this agreement shall terminate unless drilling, deepening,
plugging back or reworking operations are commenced within _______ days from the
date of abandonment of said well.
It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached prior
to the date of such termination.
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ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations, and
orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including, but not
limited to, matters of performance, non-performance, breach, remedies,
procedures, rights, duties, and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state of
LOUISIANA shall govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production of
wells, on tracts offsetting or adjacent to the Contract Area.
With respect to operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or predecessor or successor agencies to the extent such
interpretation or application was made in good faith. Each Non-Operator further
agrees to reimburse Operator for any amounts applicable to such NonOperator's
share of production that Operator may be required to refund, rebate or pay as a
result of such an incorrect interpretation or application, together with
interest and penalties thereon owing by Operator as a result of such incorrect
interpretation or application.
Non-Operators authorize Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold hereunder
or to any other person or entity pursuant to the requirements of the "Crude Oil
Windfall Profit Tax Act of 1980", as same may be amended from time to time
("Act"), and any valid regulations or rules which may be issued by the Treasury
Department from time to time pursuant to said Act. Each party hereto agrees to
furnish any and all certifications or other information which is required to be
furnished by said Act in a timely manner and in sufficient detail to permit
compliance with said Act.
ARTICLE XV.
OTHER PROVISIONS
SEE ARTICLE XV. BEGINNING ON PAGE 15 HEREOF.
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<PAGE>
15
ARTICLE XV
OTHER PROVISIONS
A. REMOVAL OF OPERATOR:
Notwithstanding Article V.B.1. hereinabove, after any Operator has acted in
that capacity for a period of not less than ONE (1) year, any Non-Operator
may call a meeting of the working interest owners to discuss complaints
against the Operator; provided, however, such meetings shall not be called
more than once each SIX (6) months. The Non-Operator(s) may require
justification of charges deemed by Non-Operator(s) to be excessive and may
question Operator's efficiency of operations, or any other practice
employed by Operator, if it is felt that such practice is not in accord
with accepted industry practices and procedures. By a vote of a total of
at least a 50% interest at any such meeting, Non-Operator(s) may give
notice to Operator, in writing, in accordance with the provisions hereof
respecting notices, of the terms and conditions on which any one of the
Non-Operators is willing to operate the Contract Area if permitted to
become the Operator under this agreement. Unless within ten (10) days
after the receipt by Operator of such notice, Operator agrees in writing to
act as Operator according to the terms set out in such notice, then the
Non-Operator(s) may elect a successor who shall become Operator after a
further thirty (30) day period following the initial ten (10) day period.
The successor Operator shall be required to perform the duties of Operator
in accordance with the terms set out in the notice given the former
Operator, and shall be elected by a total of at least 50% interest of the
parties hereto and its appointment shall become effective at 7:00 a.m. on
the first day after the expiration of the thirty (30) day period, as above
provided. Notice in writing of the appointment of a successor Operator
shall be given to all parties to this agreement by the Non-Operator
selected to be the successor Operator. Operator shall give the successor
Operator access at all reasonable times to all information pertaining to
the operation, exploration and development of the Contract Area, including
Operator's books, records and files and Operator shall cooperate with
successor Operator so as to facilitate an orderly and timely transference
of the duties of Operator.
B. PAYMENT OF ROYALTIES, OVERRIDING ROYALTIES AND OTHER BURDENS:
Operator shall pay, or cause to be paid, all royalties, overriding
royalties, and other burdens upon or payable out of production from the
Contract Area that are in existence as of the date of this agreement to the
extent provided for in Article III.B. AND/OR AS DESCRIBED IN EXHIBIT "A"
HERETO (the "Existing Burdens"). The amounts of such payments shall be
charged by Operator to the joint account of the parties and shall be
subject to Article III. hereof and shall be treated in all respects the
same as costs incurred in the development and operation of the Contract
Area. Operator shall diligently attempt to make proper payment, but
Operator shall have no liability to Non-Operator if, through mistake or
oversight, such payments are not paid or are erroneously paid OTHER THAN
THE RESPONSIBILITY TO CORRECT SUCH ERRORS AND OMISSIONS. In the event that
any Non-Operator elects to take in kind or separately dispose of its
proportionate share of production from the Contract Area, such Non-Operator
shall assume and alone bear the Existing Burdens attributable to its share
of production and shall account for, or cause to be accounted for, such
share of the Existing Burdens to the owners thereof. In addition, if the
interest of any party in any lease covered by this agreement is subject to
any royalty, overriding royalty, production payment, or other charge over
and above the Existing Burdens, such party shall assume and alone bear all
such obligations and shall account for, or cause to be accounted for, such
burdens to the owners thereof.
C. PAYMENT OF DELAY RENTAL, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTY
PAYMENTS:
Operator shall pay all delay rentals, shut-in well payments and minimum
royalty payments which may be required under the terms of all leases
covered by this agreement and submit evidence of each payment to the other
parties. Each party shall notify the others, in writing, at least thirty
(30) days prior to the date any rental payment is due in the event that
such party elects not to participate in the payment thereof. In the event
any party elects not to participate in a rental payment, and the other
parties elect to participate therein, then the party desiring not to
participate shall promptly execute and deliver to the parties desiring to
participate in such rental payment an assignment of such non-participating
party's right, title and interest in and to such lease or leases, and if
the assignment is in favor of more than one party the assigned interest
shall be owned by the Consenting Parties in the proportions that the
interest of each bears to the interest of all Consenting Parties unless
otherwise agreed to in writing. Thereafter, such acreage covered by said
assignment shall no longer be subject to this agreement, but shall be
deemed to be subject to an agreement identical to this agreement, changed
only to reflect the proper owners, lands covered and ownership percentages.
The amount of such payments, when made for the account of the participating
parties, shall be charged by Operator to the joint account of the
participating parties. Operator shall not be liable to the other party in
damages for the loss of any lease or interests therein if, through mistake
or oversight, any of said payment(s) is not paid, or is erroneously paid.
There shall be no adjustment of interests of the parties in the remaining
portion of the Contract Area in the event of a failure to pay, or erroneous
payment of said payments. If any party secures a new lease covering the
terminated interest, such acquisition shall be subject to the provisions of
Article VIII.B. and XV.Q. of this agreement.
Operator shall promptly notify each party hereto of the date on which any
gas well located on the Contract Area is shut-in and the reasons therefor.
D. PRODUCTION TAXES:
Operator shall pay or cause to be paid for the joint account all taxes,
either State or Federal, owing or which may be payable on production from
the Contract Area, whether in the form of a severance or production tax;
provided, however, if at any time any party is taking its share of
production in kind, such party shall pay or cause to be paid said taxes as
to such production unless Operator agrees otherwise in writing.
E. PRIORITY OF OPERATIONS:
If, after operations are proposed by one party pursuant to Article VI.B.1.
of this agreement and prior to the expiration of the applicable response
period pursuant to said Article VI.B.1., conflicting operations are
proposed by one or more of the parties, the order of priority of operations
on the subject well shall be as follows:
(a) additional testing, coring or logging;
(b) attempt completions, in ascending order;
(c) deepen the well, in descending order;
(d) sidetrack the well;
(e) conduct other operations;
(f) plug and abandon.
F. REWORKING:
"Reworked" or "Reworking" as used in this agreement shall mean perforating,
cleaning out, acidizing, fracturing, recompleting, plugging back or any
other operation for the purpose of restoring or increasing production which
does not involve the drilling of an additional hole.
G. MULTIPLE WELL PROPOSAL:
It is specifically provided that no notice shall be given under Article VI.
hereof which proposes the drilling of more than one well. Further, the
provisions of said Article VI., insofar as same pertains to notification by
a party of its desire to drill a well, shall be suspended for so long as
(1) a prior notice has been given which is still in force and effect and
the period of time during which the well regarding same may be commenced
has not expired, or (2) a well is presently drilling hereunder. This
paragraph shall not apply under those circumstances where the well to which
notice is directed is a well which is required under the terms of a lease
or contract or one required to maintain a lease or a portion thereof in
force.
<PAGE>
16
H. REWORKING OF PRODUCING WELLS:
It is agreed that without the mutual consent of all parties no reworking or
other operations shall be conducted under the provisions of Article VI.
hereof so long as any completion is producing in paying quantities in the
well with respect to which such proposal is made.
I. LIENS AND SECURITY INTERESTS:
1. Liens and Security Interests of Operator: To secure payment to
Operator of all indebtedness due by each Non-Operator to Operator
pursuant to this Operating Agreement, each Non-Operator hereby
specially mortgages and hypothecates unto and in favor of Operator,
and its successors and assigns, all right, title and interest of each
Non-Operator in and to (i) the oil, gas, or other minerals in, on, and
under the Contract Area, (ii) any oil, gas, and mineral leases
covering the Contract Area or any portion thereof.
In addition, Non-Operator grants to Operator a security interest in
and to all of such Non-Operator's rights, titles, interests, claims,
general intangibles, proceeds, and products thereof, whether now
existing or hereafter acquired, in and to (i) all oil, gas and other
minerals produced from the Contract Area when produced; (ii) all
accounts receivable accruing or arising as a result of the sale of
such oil, gas and other minerals; (iii) all cash or other proceeds
from the sale of such oil, gas, and other minerals once produced; and
(iv) all surface and sub-surface equipment and facilities of any kind
or character located on the Contract Area and the cash or other
proceeds realized from the sale thereof (collectively, the "Personal
Property Collateral"). Some of the Personal Property Collateral is or
will become fixtures on the Contract Area, and the interest of
Non-Operator in and to the oil, gas and other minerals when extracted
from the Contract Area and the accounts receivable accruing or
arising as the result of the sale thereof shall be financed at the
wellhead of the well or wells located on the Contract Area. This
Operating Agreement (including a carbon, photographic, or other
reproduction hereof) shall constitute a non-standard form financing
statement under the terms of the Uniform Commercial Code, as adopted
in the State of Louisiana, and, as such, may be filed for record in
the office of the Clerk of Court of any parish in Louisiana (or the
Recorder of Mortgages of Orleans Parish).
2. Lien and Security Interest of Non-Operator: Operator hereby grants a
like lien and security interest, as provided, in XV.I..1. above to
each Non-Operator (in proportions to any indebtedness owed by Operator
to each Non-Operator at any time and from time to time under the terms
of this Operating Agreement) to secure payment by Operator of
Operator's proportionate share of all costs and expenses incurred
under the terms of this Operating Agreement and all sums owed by
Operator to Non-Operator in connection with operations on and
production of oil, gas and other minerals from the Contract Area,
including, without limitation, any proceeds realized from the sale of
oil, gas, and other minerals produced from the Contract Area received
by Operator from the purchaser thereof and attributable to the
interests therein of Non-Operator. All of the provisions of Article
XV.I.1. and XV.I.3. relating to the grant of a lien and security
interest to Operator by Non-Operator are hereby repeated mutatis
mutandis, substituting the word "Operator" for "Non-Operator" and vice
versa when appropriate.
3. Maximum Amount: The maximum amount for which the mortgage herein
granted shall be deemed to secure the obligations of Non-Operator as
stipulated herein is hereby fixed in an amount equal to
$100,000,000.00 (the "Limit of the Mortgage"). Notwithstanding the
foregoing Limit of the Mortgage, the individual liability of
Non-Operator and Operator under the Operating Agreement and the
mortgage and security interest granted hereby shall be limited to, and
neither Operator nor Non-Operator, individually or collectively, shall
be entitled to enforce the same against any Non-Operator or Operator
for, an amount exceeding the actual indebtedness (including all
interest charges, costs, attorney's fees, and other charges provided
for in this Operating Agreement) outstanding and unpaid and that is
attributable to or charged against the interest of such Non-Operator
or Operator.
J. ADVANCE BILLING FOR CERTAIN OPERATIONS:
In addition to the rights granted to Operator pursuant to Article VII.C.,
Operator, at its election, shall have the right from time to time to demand
and receive in advance from Non-Operators payment of their respective
proportionate shares of the estimated cost to be incurred in connection
with any drilling, reworking, deepening, sidetracking, plugging-back, or
completion operation proposed hereunder or any other operation undertaken
pursuant hereto that is reasonably estimated to require an expenditure in
excess of Twenty-five Thousand Dollars ($25,000.00), as reflected in the
authority for expenditure provided by Operator to Non-Operators in
connection with the relevant operation. In the case of a proposal for the
drilling of a well, any such advance invoice shall cover only the estimated
cost to drill the relevant well to its total depth, to conduct open-hole
tests therein prior to a completion attempt, and to plug and abandon the
same as a dry hole, maximum advance for abandonment and cleanup of
location shall be $100,000. Each Non-Operator shall pay to Operator its
proportionate share of such estimated costs in accordance with the
provisions of Article XV.K. Proper adjustment between such advances and
the actual expenses incurred shall be made upon the completion of the
relevant operations to the end that each party shall bear and pay its
proportionate share of the actual expenses incurred, and no more.
K. REMEDIES OF OPERATOR UPON DEFAULT IN PAYMENT BY NON-OPERATOR:
Notwithstanding any other provision of this Operating Agreement to the
contrary, the proportionate share of all costs, expenses (including,
without limitation, delay rentals, shut-in royalty payments, minimum
royalties, and other lease maintenance expenses), and/or advance estimates
due by any Non-Operator to Operator pursuant to any provision of this
Operating Agreement shall be due and payable within 15 days of the receipt
by Non-Operator of Operator's invoice therefor (and, in the case of an
advance for estimated costs, a statement thereof that conforms with the
provisions of Article XV.J.), or, in the case of an invoice for the
estimated cost to be incurred in connection with a completion attempt in
a well located on the Contract Area, forty eight (48) hours after the
delivery thereof. In the event that Operator does not receive
Non-Operator's payment of the relevant invoice or statement amount within
fifteen (15) days after the delivery by Operator of such invoice or
statement, or, in the case of an invoice for the estimated cost to be
incurred in connection with a completion attempt in a well located on the
Contract Area, forty eight (48) hours after the delivery thereof, such
invoice or statement shall bear interest as provided in Exhibit "C"
attached hereto until paid. In the event that such invoice or statement
remains unpaid fifteen (15) days after delivery thereof by Operator, or, in
the case of an invoice for the estimated cost to be incurred in connection
with a completion attempt in a well located on the Contract Area, forty
eight (48) hours after the delivery thereof, Operator shall, by certified
mail, return receipt requested, deliver to Non-Operator a second invoice or
statement and notify Non-Operator that it is in default and that Operator
intends to invoke the provisions of this Article XV.K. Should the second
invoice or statement remain unpaid for forty eight (48) hours after the
delivery thereof by Non-Operator, the relevant Non-Operator shall be deemed
to be in default under the terms hereof, and Operator may select from the
following remedies with respect to such default:
(i) Operator may treat the amount of the unpaid invoice as a valid
obligation, and collect the same (subject to final adjustment in the
case of invoices for estimates) in any legal manner.
(ii) Operator may elect to treat such failure to pay such costs and
expenses in a timely manner as a non-consent under the provisions of
Article VI.B.2 with respect to the wells or leases as to which the
default has occurred, with the result that the non-consent penalties
established in such provision or in Article XV.N. hereof, as
applicable, shall be in effect with respect to the interest of the
defaulting Non-Operator in such well, provided, however, that this
remedy may not be selected with respect to defaults in payment of well
operating expenses after first production (other than expenses of
Subsequent Operations pursuant to Article VI.B.).
<PAGE>
17
Except as expressly otherwise provided hereinafter, Operator shall
evidence its election in this regard by notice in writing to the
relevant Non-Operator. For purposes of this Operating Agreement,
however, Operator shall not be deemed to have elected the remedy
provided in subsection (i) of this Article XV.K. until Operator shall
have obtained from a court of competent jurisdiction a final and
non-appealable judgment against the defaulting Non-Operator for the
full amount of the unpaid invoice. The election by Operator of the
remedy provided in subsection (i) of this Article XV.K. shall preclude
Operator's pursuit of the remedies provided in subsection (ii) of this
Article XV.K., but otherwise shall not restrict, limit, or prejudice
Operator's recourse against the defaulting Non-Operator under any
other provision of this Operating Agreement or otherwise for the
defaulting Non-Operator's breach of its obligations hereunder and any
resulting damage to Operator. Operator's election under subsection
(ii) of this Article XV.K. above shall be deemed to constitute an
election of remedies by Operator under the terms of this Operating
Agreement, at law, or in equity with respect to such breach and any
resulting damage to Operator; provided that if a court of competent
jurisdiction holds such election to be ineffective or refuses to
enforce such election, then Operator shall be deemed to have available
all other remedies provided in this Operating Agreement, at law, or in
equity against the relevant Non-Operator with respect to such breach
and any resulting damage to Operator. No Non-Operator shall be
entitled to rely upon Operator to enforce strictly Operator's rights
under any provision of this Article XV.K. or any similar rights
provided in agreements similar hereto between Operator and any other
Non-Operators, with respect to any similar default by any Non-Operator
in the payment of amounts invoiced by Operator. Any defaulting
Non-Operator shall, upon notice by Operator, execute such assignments,
conveyances, documents, and other instruments as Operator deems are
necessary or appropriate to effectuate the intent and purposes of this
Article K.
Notwithstanding anything to the contrary contained in this Article
XV.K., in the event any party hereto disputes in good faith an invoice
or statement that is the subject of a default and notice has been
given pursuant to the provisions hereof, such party may avoid the
imposition of the remedies for such default contained in this
Operating Agreement by paying the undisputed amount to Operator and
paying the disputed amount into an account at a bank requiring the
signatures of both such party and the Operator (or, if the Operator is
the party in default, a Non-Operator designated by the Non-Operators)
in order to release such funds. Such funds, or portions thereof,
shall be released to the party(ies) entitled thereto upon the
resolution of the issue raised by the objecting party.
L. PARAGRAPH L. HAS BEEN INTENTIONALLY OMITTED.
M. OPERATOR AS DISBURSING AGENT FOR NON-OPERATORS:
Subject to the right of each party to take in kind its share of production
from the Contract Area, each Non-Operator, by such party's execution of
this Operating Agreement, designates Operator as the agent of any such
party to receive and disburse the proceeds received from the sale of any
oil, gas, or other minerals produced from the Contract Area pursuant
hereto. Subject to the provisions of Article VII.B. of this Operating
Agreement, Operator shall remit to each Non-Operator its proportionate
share of such proceeds within thirty (30) days after the receipt by
Operator of such proceeds. All costs incurred by Operator in making such
disbursements (including, without limitation, all costs incurred by
Operator in the preparation and circulation of division orders) shall be
charged by Operator to the joint account of the parties and shall be
treated in all respects the same as costs incurred in the development and
operations of the Contract Area. Operator shall use its best efforts to
make such disbursements correctly, but will be liable for incorrect
disbursement only in the event of gross negligence or willful misconduct.
Any Non-Operator may terminate the authority of Operator to act in such
capacity on behalf of such Non-Operator by providing Operator and the
relevant purchaser of production from the Contract Area with written notice
of such termination of authority.
N. OPERATIONS NECESSARY TO MAINTAIN A LEASE:
In addition to the provisions of Article VI.B.2. of this Agreement, if any
proposed operations are necessary to maintain a lease or leases covered by
this agreement in force or an agreement to earn lease(s) or interests which
would otherwise expire unless such operations are conducted, then each
Non-Consenting Party shall assign to Consenting Parties all of such
Non-Consenting Party's right, title and interest in and to the lease(s) or
portion thereof or such agreement which would be lost or not earned if such
operations were not conducted. Such assignment shall be promptly due upon
commencement of said proposed operations by Consenting Parties and if the
assignment is in favor of more than one party the assigned interest shall
be owned by the Consenting Parties in the proportions that the interest of
each bears to the interest of all Consenting Parties unless otherwise
agreed to in writing. Thereafter such acreage covered by said assignment
shall not be subject to the terms of this agreement, but shall be deemed to
be subject to an agreement identical to this agreement changed only to
reflect the proper owners, lands covered and ownership percentages. For
purposes of defining necessary operations to maintain a lease in force
which would otherwise expire, such operations will be deemed necessary if
proposed within the last six (6) months of the primary term of such lease.
O. DISPOSITION OF INTERESTS:
Notwithstanding the provisions of this agreement and of the accounting
procedure attached hereto as Exhibit "C", the parties to this agreement
specifically agree subject to the provisions of this Article XV.O., that in
no event during the terms of this contract shall Operator be required to
make more than one billing for the entire interest credited to each party
on Exhibit "A". It is further agreed that if any party to this agreement
(hereafter referred to as "Selling Party") disposes of part or all of the
interest credited to it on Exhibit "A", the Selling Party will be solely
responsible for billing its assignee or assignees, and shall remain
primarily liable to the other parties for the interest or interests
assigned and shall make prompt payment to Operator for the entire amount of
statements and billings rendered to it until such time as Selling Party has
furnished Operator the following:
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18
(a) Written notice of the conveyance and photostatic or certified copies
of the assignments by which the transfer was made.
(b) The name of the assignee to be billed and a written statement signed
by the assignee to be billed in which it consents to receive
statements and billings for the interest acquired.
Notwithstanding any provision of this agreement to the contrary, where,
under the terms of this agreement, a party hereto is required to assign to
one or more of the other parties its interest in one or more leases or
portion or part thereof, such assignment shall be made free and clear of
all overriding royalties, production payments, net profits interests,
mortgages, liens or other burdens placed thereon by the assigning party or
resulting from its ownership and operation of such lease or interest on and
after the date of this instrument, except such burdens as set forth in
Exhibit "A" or with which the lease or interest was burdened when acquired
by the party, but otherwise without warranty of title, either express or
implied, except against those parties claiming by, through and under but
not otherwise, and assignee shall have the right of subrogation as to any
warranties to which it may be entitled.
P. NON-DISCRIMINATION:
Operator agrees to comply with non-discrimination provisions of Paragraphs
(1) through (7) Section 202 of Executive Order No. 11246, as amended (30
Fed. Reg. 12319), unless exempted by order of the Secretary of Labor issued
pursuant to Section 204 of said Executive Order No. 11246.
Q. AREA OF MUTUAL INTEREST:
The parties hereto designate, as an Area of Mutual Interest, all lands
lying within the geographical area shown on the plat attached hereto as
Exhibit "A-1".
(a) The terms and conditions of this Area of Mutual Interest shall be
effective from the effective date of this Operating Agreement until
(i) three years after such effective date; or (ii) the termination or
expiration of this Agreement, whichever occurs sooner.
(b) During the period of this Area of Mutual Interest, should any party
hereto ("Acquiring Party") acquire or obtain the right to acquire any
leasehold interest or mineral interest, including a farmout or other
similar agreement, covering any lands within the Area of Mutual
Interest, from a party not subject to this Operating Agreement, then
the Acquiring Party shall give notice of such acquisition to the other
parties ("Offerees") within 15 days after the acquisition together
with a detailed statement of the actual costs incurred for such
acquisition. In addition, such notice shall include a copy of the
lease or contract, paid draft and any other pertinent and available
data. The Offerees shall have the option to acquire their
proportionate share of said interest, said option to be exercised
within fifteen (15) days after the Offerees receive written notice of
the acquisition.
If however, a well is then being drilled either within the Area of
Mutual Interest or within 2,000' thereof, the Acquiring Party shall so
advise the Offerees, in which event the election must be made within
forty-eight (48) hours, exclusive of Saturdays, Sundays and legal
holidays, after receipt of notice. The election to exercise the
foregoing option shall be made by tendering to the Acquiring Party
within the aforesaid fifteen (15) day or forty-eight (48) hour period,
whichever is applicable, the Offeree's proportionate share of the
actual cost of acquisition of such interest, which shall be in
proportion to the interests held at that time by the parties in the
Contract Area. Failure of any Offeree to exercise the option within
the period provided above shall be deemed an election not to acquire
its share of such interest.
(c) If the interest to be acquired is the consequence of a farmout
agreement or similar agreement requiring the drilling of a well or the
performance of other obligations, the election to acquire shall also
constitute an election by the Offerees to join with the Acquiring
Party in all operations and obligations required to earn under such an
agreement and to bear its proportionate part of the cost thereof.
However, nothing in this Article shall be construed to prevent any
party hereto from electing not to join in a completion attempt of an
earning or obligation well drilled under the terms of such farmout
agreement or similar agreement. In any such event, the non-consenting
party shall forfeit all rights in and to such farmout agreement or
similar agreement not theretofore earned by the non-consenting party.
Thereupon, the participating party or parties shall bear the cost and
risk of such operation in the proportions they have elected to bear
same under the terms of the second grammatical paragraph of Article
VI.B.2.
(d) If the acquired interest covers lands both within and without the Area
of Mutual Interest, the Acquiring Party shall offer the entire
interest and should each Offeree hereto acquire its proportionate
interest therein, the lands lying outside the Area of Mutual Interest
shall become part of the Contract Area and the Area of Mutual Interest
shall thereby be enlarged.
(e) If some, but less than all, of the Offerees elect to participate in
the acquisition of an interest, the Acquiring Party shall advise the
other parties of the total interest of the Offerees participating in
the acquisition of an interest. Each Offeree within forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays) after receipt
of such notice, shall advise the Acquiring Party of its desire to (a)
limit participation to such Offeree's interest as shown on Exhibit "A"
or (b) acquire its proportionate part of the interest of those
Offerees electing not to participate in the acquisition of an
interest, and failure to advise the Acquiring Party shall be deemed an
election under (a). Any interest in which less than all the Offerees
elect to participate shall not be subject to this Operating Agreement
but shall be deemed to be subject to an agreement identical to this
agreement except that the lands described and the interest of the
parties shall conform to the actual interest acquired and as owned.
(f) Each Offeree who participates in the acquisition of an interest shall
promptly be given an assignment of its proportionate interest therein
by the Acquiring Party, free and clear of any burdens placed thereon
by the Acquiring Party (other than overriding royalties, back-ins or
other burdens reserved by the grantor, farmor, assignor or lessor, as
the case may be, of such interest) and with warranty as to those
claiming by, through or under Acquiring Party, but not otherwise.
(g) The provisions of this Article shall not be applicable to acquisitions
by any party hereto of an interest either through mergers, corporate
reorganizations or through consolidation with a subsidiary or
affiliated company, partnership, or individual.
R. CONFIDENTIALITY:
Except as provided herein below, no Party shall release any geological,
geophysical, or reservoir information or any logs or other information
pertaining to the progress, tests, or results of any well drilled on the
Contract Area unless such information is already available to the general
public, or unless agreed to by the participating parties owning interests
in said well or wells.
A party may make confidential information available to:
(1) Governmental agencies as required or reasonably necessitated by law or
regulation;
(2) Third parties with whom a party is engaged in a bona fide effort to
sell or farmout its interest in the Contract Area;
(3) Reputable engineering firms for hydrocarbon reserve and other
technical evaluations;
(4) Gas purchasers and gas transmission companies for technical
evaluations;
(5) Reputable financial institutions for evaluation prior to commitment of
funds.
Any third party permitted access to data pursuant to this Article XV.R.
shall first agree not to release the data to anyone for any purpose. Each
third party permitted access under Article XV.R. (2) shall also first agree
in writing that, in the event of a failure to complete such transaction, it
shall make no use of the confidential information.
<PAGE>
19
No party hereto shall distribute any information or photographs to the
press or other media without approval of all other parties. The only
exception to the foregoing shall be (i) disclosures required by law and
(ii) in the event of an emergency involving the loss of human life or other
clear emergency, a participating party is authorized to furnish such
minimum strictly factual information as shall be necessary to satisfy the
legitimate public interest on the part of the press and duly constituted
authorities if time does not permit the obtaining of prior approval by all
participating parties such party shall thereupon promptly advise Operator
of the information the party so furnished. Any news releases made by any
of the parties hereto concerning operations conducted hereunder shall
contain the names of all of the parties hereto.
ACCESS AND INFORMATION:
Notwithstanding the provisions of this agreement to the contrary should any
party be a Non-Consenting Party under Article VI.B.2. or Article XV.N., or
be in default under Articles VII., XV.K. or any other provision hereunder,
then such non-consenting or defaulting party shall be denied access to and
information (including but not limited to daily drilling reports and well
logs) pertaining to the well or wells for which such party is in default or
has elected not to participate. The provisions of this Article XV.S. are
not intended to supersede the requirements contained in Article VI.B.2., in
lines 53 through 65, page 6 of this agreement.
T. NON-CONSENTING PARTY GAS SALES:
Gas production attributable to any Non-Consenting Party's relinquished
interest upon such Party's election shall be sold to its purchaser, if
available, under the terms of its existing gas sales contract. Such
Non-Consenting Party shall direct its purchaser to remit the proceeds
receivable from such sale direct to the Consenting Parties until the
amounts provided for in Article VI.B.2. are recovered from the
Non-Consenting Party's relinquished interest. If such Non-Consenting Party
has not contracted for sale of its gas at the time such gas is available
for delivery, or has not made the election as provided above, the
Consenting Parties shall own and be entitled to receive and sell such
Non-Consenting Party's share of gas as hereinabove provided during the
recoupment period.
U. ARBITRATION
Subject to any restriction imposed by law on agreements for compulsory
arbitration, the parties agree that any controversy or dispute arising out
of, in connection with, or related to this Agreement, any provision or
breach thereof, or any transaction contemplated hereby shall be submitted
to and settled by binding and conclusive arbitartion before a panel of
three (3) arbitrators in Houston, Texas in accordance with the applicable
rules of the American Arbitration Association (or any other form of
arbitration agreed to by the parties) then in effect; provided, however,
that only actual damages and attorney fees of the prevailing party
reasonably incurred in connection with the arbitration proceeding shall be
awarded in connection therewith. Judgment on any award rendered pursuant
to any such arbitration proceeding may be entered in any court, Federal or
state, having jurisdiction thereof, and the parties shall be deemed to have
waived their right to any form of appeal of such award to the extent
permitted by law.
V. NON CONSENT OF INITIAL TEST WELL
Notwithstanding any provision of Article VI.A. or VI.B.2. to the contrary,
should any party to this Agreement elect not to participate in the initial
test well drilled on the Contract Area; then such party or parties shall be
deemed to have forfeited its interest in and to the well and all lands and
leases within the Contract Area. Such Non-Participating party shall
immediately assign all of its right, title and interest within the Contract
Area to the Participating Parties in the proportions that the interest of
each Participating Party bears to the interest of all Participating Parties
unless otherwise agreed to in writing.
W. CONFLICT OF PROVISIONS
In the event that a conflict exists between any provision of this Article
XV. and any other Articles or provision of this Operating Agreement, this
Article XV. shall control.
X. EXPLORATION AGREEMENT
As of the Effective Date hereof, this Joint Operating Agreement shall with
respect to the Contract Area supercede and be in lieu of the Exploration
Agreement dated April 4, 1996, by and between Zydeco Exploration, Inc., and
FX Energy, Inc. (now Cheniere Energy Operating Company, Inc.) and the
Default Operating Agreement attached thereto.
<PAGE>
ARTICLE XVI.
MISCELLANEOUS
This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and to their respective heirs, devisees, legal representatives,
successors and assigns.
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
IN WITNESS WHEREOF, this agreement shall be effective as of ___________
day of ________, 19__.
_________________, who has prepared and circulated this form for execution,
represents and warrants that the form was printed from and with the exception
listed below, is identical to the AAPL Form 610-1982 Model Form Operating
Agreement, as published in diskette form by Forms On-A-Disk, Inc. No changes,
alternations, or modifications, other than those in Articles_______________
_________________________________________________, have been made to the form.
O P E R A T O R
WITNESSES: ZYDECO EXPLORATION, INC.
- ------------------------------ -------------------------------------
BY:
N O N O P E R A T O R S
CHENIERE ENERGY, INC.
- ------------------------------ -------------------------------------
BY:
BETA OIL & GAS, INC.
- ------------------------------ -------------------------------------
BY:
EXCEL ENERGY, L. P.
EPSILON ENERGY INC.
- 15 -
<PAGE>
EXHIBIT "C"
Attached to and made a part of that certain Operating Agreement dated
effective February 2, 1999, by and between ZYDECO EXPLORATION, INC., as
Operator and CHENIERE ENERGY, INC., ET AL, as Non-Operator.
ACCOUNTING PROCEDURES
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-Operator" 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
and/or contract labor directly employed on the Joint Property in a 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 Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of 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 Citibank on the first day of the month in which delinquency occurs
plus 1% or 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 within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical
inventory of Controllable Material as provided for in Section V.
COPYRIGHT-C- 1985 by the Council of Petroleum Accountants Societies.
- 1 -
<PAGE>
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 within 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 I. 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
more than once each year without prior approval of Operator, except
upon the registration or removal of the Operator, and shall be made at
the expense of those Non-Operators approving such audit.
B. The Operator shall reply in writing to an audit report within 30 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 this Accounting Procedure and
if the agreement to which this Accounting Procedure is attached contains
no contrary provisions in 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 or consultants
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 or consultants directly
employed on the Joint Property if such charges are excluded from the
overhead rates.
(4) Salaries and wages of Technical Employees or consultants either
temporarily or permanently assigned to and directly employed in the
operation of 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 imposed 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 or consultants whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II.
4. EMPLOYEE BENEFITS
Operator's current costs of 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.
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<PAGE>
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
receiving 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 available 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 in paragraph 8A above, Operator may elect to use
average commercial rates prevailing 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
Association.
9. DAMAGES AND LOSSES TO JOINT PROPERTY
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or 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, examination of title, payment of judgements 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 shall be made unless previously agreed to by the Parties.
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 -
<PAGE>
12. INSURANCE
Net premiums paid for insurance required to be carried 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 expenditures 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 charges shall be in
lieu of costs and expenses of the home 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 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:
( ) shall be covered by the overhead rates, or
(X) shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services 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. OVERHEAD - FIXED RATE BASIS
(1) Operator shall charge the Joint Account at the following rates
per well per month:
Drilling Well Rate $ 9,700.00
(Prorated for less than a full month)
Producing Well Rate $ 970.00
(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 is
later, except that no charge shall be made during
suspension of drilling or completion operations for
fifteen (15) or more consecutive calendar days.
- 4 -
<PAGE>
(2) Charges for wells undergoing any type of workover or
recompletion for a period of five (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 a multi-completed well in
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 on 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.
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 as a 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-
<PAGE>
Account for overhead based on the following rates for any Major
Construction project in excess of $25,000.00:
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 are 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 arrangement 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
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or 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 pound Oil Field Haulers Association interstate truck
rate shall be used.
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<PAGE>
(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.
(d) Macaroni tubing (size less than 2 1/4 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 1/4 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, or point of manufacture, plus transportation costs,
if applicable, to the railway receiving point nearest the Joint
Property. Unused new tabulars will be priced as provided above in
Paragraph 2 A(1) and (2).
B. GOOD USED MATERIAL (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 market price.
(2) MATERIAL USED ON AND MOVED FROM THE JOINT PROPERTY
(a) At seventy-five percent (75%) of current new market price, if
Material was originally charged to the Joint Account as new
Material or
(b) At sixty-five percent (65%) of current new market price, 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 which 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 market price. 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 -
<PAGE>
(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 completion 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-cents-) per hundred weight on
all tubular 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 Material 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 -
<PAGE>
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 the the Joint Account.
- 9 -
<PAGE>
EXHIBIT "D"
Attached to and made a part of that certain Operating Agreement dated
___________ between Zydeco Exploration, Inc. and
___________________________.
Operator shall, at all times while operations are conducted by it for the
Joint Account, carry, pay for and charge to the Joint Account the following
minimum insurance:
1. Workman's Compensation
Covering the employees of Operator engaged in operations hereunder in
compliance with all applicable State and Federal laws.
2. Employers Liability
A minimum of $500,000 Combined Single Limit and a maximum of $1,000,000.
Such limit will be set at the discretion of the Operator.
3. Comprehensive General Liability
Notwithstanding any provisions of this agreement to the contrary to
insurance, all parties hereto shall be required to maintain insurance
coverages as set forth below. Any Non-operator may request to be covered
under the Operator's policy and if such can be arranged by Operator, such
Non-operator shall pay its proportionate share of the cost of such
coverage. Any Non-operator not covered under Operator's policy shall cause
a certificate evidencing its required coverage to be promptly furnished to
Operator. No drilling operation on any well subject to this agreement
shall be commenced prior to the requirements of this insurance provision
being fulfilled. The insurance coverages are:
a) $1,000,000 for Comprehensive General and Automobile Liability
Coverage.
b) A minimum of $5,000,000 and a maximum of $10,000,000 for Umbrella
Liability coverage. Such limit will be set at the discretion of the
Operator.
c) A minimum of $10,000,000 combined single limit for Operator's Extra
Expense coverage. Such limit will be set at the discretion of
Operator.
4. Non-Consent Operations
If non-consent operations are conducted under the terms of this Agreement,
the cost of insurance requirement hereunder in regard to such operations,
as well as all losses, liabilities and expenses incurred as a result of
such operations, shall be the burden of the Parties participating therein.
5. Other Insurance
It is specifically understood that Operator shall have no obligation to
carry any other insurance for the benefit of the Joint Account unless
agreed to in writing by the Operator and the Non-Operator.
6. Other
<PAGE>
All insurance maintained by the Operator and Non-Operators shall include
Waivers of Subrogation on behalf of all parties to the contract. Operator
shall inform Non-Operators within a reasonable amount of time of injury or
death of persons, property damage or pollution of environment. Operator
shall use reasonable efforts to require contractors working or performing
services hereunder to comply with the Workers' Compensation and Employer's
Liability laws, both State and Federal, and provide reasonable levels of
General Liability Insurance naming the Operator and, if applicable,
Non-Operators as additional insureds and providing Waivers of Subrogation
against same. If any of the above described insurance is not available (or
becomes unavailable) at reasonable premium rates, then Operator shall
promptly give notice in writing thereof to the other parties and Operator
thereafter shall not be required to obtain or continue such insurance in
force.
7. Nothing herein contained shall preclude non-operators from providing and
paying for their own Operator's Extra Expense coverage provided such
coverage is acceptable to operator and evidence of such coverage is
furnished to operator prior to the spudding or workover of a well.
<PAGE>
EXHIBIT "E"
Attached to and made a part of that certain Operating Agreement dated
___________________ , 199__ by and among __________________________________
as Operator and ____________________________as Non-Operators, covering
__________________________________________________________________________.
GAS BALANCING AGREEMENT
This Gas Balancing Agreement is entered into by and between the Working
Interest Owners who are parties to the attached Operating Agreement
("Operating Agreement") dated effective ____________________ covering ______
________________________, described therein, said leases being hereinafter
referred to as the "Contract Area" and such Owners hereinafter called "Party
or Parties". The term "share" or "pro rata share" shall hereinafter mean an
interest equal to a Party's percentage of participation in the working
interest of a well or wells in the Contract Area. Each Party hereto has made
or will make arrangements to either sell or utilize, which alternative is
hereafter sometimes referred to as "market" or "marketing", its share of the
gas produced from said Contract Area, but the Parties may market such gas at
different times or prices. Therefore, in consideration of each Party's right
to market its share of gas from the Contract Area in accordance with their
individual needs and in consideration of each Party's right to share
proportionately in the cumulative gas production from said Contract Area and
of the covenants and agreements herein contained to be kept and performed by
each of the Parties hereto, said Parties agree as follows:
1.
In accordance with the terms of said Operating Agreement, each Party
hereto has the right to take its share of gas produced from the Contract Area
and market same. If at any time a Party hereto is not taking or marketing its
full share of gas or has contracted to sell its share of gas to a purchaser
and that purchaser does not take the full share of gas attributable to the
interest of such Party, the terms of this Agreement shall automatically
become effective.
2.
During the period or periods when any Party hereto or any such Party's
purchaser is not taking or marketing its full share of gas produced from the
Contract Area, the other Parties ready and able to market their share of gas
shall be entitled, but not required to produce, take, and deliver each month
in proportion to their right of participation in the production and reserves
of the Contract Area, all of the portion of the allowable gas production
attributable to the underproducing Party(s) that is not being marketed;
provided, however, unless otherwise agreed to by a majority interest of the
Parties, no Party shall in any month be entitled to take more than two
hundred percent (200%) of its monthly share of gas production unless such
Party is an underproduced party. All Parties hereto shall share in and own
the liquid hydrocarbons recovered from such gas by lease equipment in
accordance with their respective interests and subject to the above
referenced Operating Agreement, but the Party or Parties taking gas shall own
all of the gas delivered to its or their purchaser. Each Party not marketing
its full share of the gas produced shall be credited with deferred gas
production in reservoirs equal to such share of the gas produced therefrom
under this Agreement that was not marketed less its share of gas used in
lease operations, vented or lost. The Operator will maintain a current
account of the gas balance between the Parties and will furnish all Parties
hereto monthly statements showing the quantity of deferred gas production
credited to each Party identified by pricing category in the reservoirs under
the terms hereof.
3.
Each party's right to defer production notwithstanding, if Operator, in
its sole judgment, determines that any or all of the wells in the Contract
Area must be produced to maintain the leases, to protect against offset
drainage, to prevent the ultimate loss of reserves or for other valid reason,
then each party will be obligated to market its proration share of
production. If any party does not market its share of production, then
Operator may either (a) purchase gas at the price prevailing in the area, or
(b) sell such gas to others at the best price obtainable by Operator. All
contracts of sale by Operator of any Party's share of gas shall be only for
such reasonable periods of time as are consistent with the minimum lease
requirements. Proceeds of all shares made by Operator pursuant to this
Paragraph, net of all marketing costs incurred by Operator, shall be paid to
the Parties entitled thereto.
4.
At all times while gas is produced from a well or wells in the Contract
Area, settlement for the lessor's royalties and all other jointly-shared
leasehold burdens will be made or caused to be made by the Parties selling
gas in proportion to each Party's gas sales to the total gas sales. All other
leasehold burdens which are not jointly shared under the terms of the
Operating Agreement, shall be paid by the Party creating the same at the time
which they are due. Each Party hereto agrees to hold each other Party
harmless from any and all claims for royalty payments burdening its interest
asserted by royalty owners to whom each Party is accountable. Each Party
producing and/or delivering gas to its purchaser shall pay or cause to be
paid any and all production taxes due on such gas.
5.
For purposes of reporting taxable income and certain deductions and
credits, the Parties to this Agreement agree to adopt the cumulative gas
balancing method as described in I.R.S. Regs. Section 1.761-2(d). The
Parties further agree to abide by all applicable changes to the Internal
Revenue Code of 1986 (the "Code") as well as any temporary or final Internal
Revenue Service Regulations ("Regulations")
Exhibit "E"
<PAGE>
as of their effective date. The appropriate Code and/or Regulatory language
will become a part of this Agreement as though fully set forth in the
Agreement as of such effective date. The Parties will be considered to have
agreed to abide by any default requirements provided in the applicable Code
and/or Regulations unless the Parties satisfy elective requirements specified
in the applicable Code and/or Regulations. In the event of a conflict between
the other provisions of this Agreement and this Paragraph 5., the
provisions of this Paragraph 5. shall control.
6.
Commencing on the first day of the month after ten (10) days written
notice to Operator, any Party at any time and from time to time may begin
taking or delivering to a purchaser its share of the gas produced from a well
or wells in the Contract Area. In addition to its share, each underproduced
Party, including the Operator, if applicable, until it has recovered its
deferred gas in storage and balanced the gas account as to its interest,
shall be entitled to take or deliver to a purchaser a make-up volume of gas
up to an amount equal to fifty percent (50%) of the overproduced Party's or
Parties' share of gas produced. If two or more Parties are entitled to the
make-up volumes, they shall divide such make-up volumes in accordance with
the ratio of their respective percentage of participation in the working
interest in the well or wells. Such additional takes by the underproduced
Party or Parties shall offset any underproduction in the order of accrual.
Nothing shall prevent any Party from taking its full share of production in
order to make deliverability tests required by its purchaser. The Operator
shall endeavor to determine the point in time when any overproduced Party has
taken a volume of gas equal to one hundred percent (100%) of the volume of
the ultimate recoverable gas reserves creditable to that producer from the
well or wells in the Contract Area. Upon notice by Operator that it believes
that such a point in time has been reached, notwithstanding anything herein
to the contrary, the underproduced Parties shall be entitled to take one
hundred percent (100%) of production of such gas until recovery of their
deferred volumes of gas in storage and balancing of the gas account as to
their respective interests, and from the time of such notice until such
recovery, the overproduced Parties shall have no rights to any gas from such
well or wells in the Contract Area. However, the Parties indemnify Operator,
its successors and assigns, and save Operator harmless from all suits,
actions, debts, accounts, damages, costs, losses and expenses arising from or
out of adverse claims of all parties applicable to any determination of
reserves or lack thereof.
7.
The provisions of this Agreement shall be applicable to all wells in the
Contract Area to the end that production from one gas well may be utilized
for the purpose of balancing deferred gas production from other wells in the
Contract Area; provided, however that there shall be no balancing between gas
reservoirs not qualifying for and being paid the same NGPA maximum lawful
price. It is understood that gas imbalances incurred hereunder shall be
computed by use of Btu equivalences.
8.
It is recognized that the purpose of this Agreement is to permit any
Party not marketing or taking its full share of current gas production to
defer its production from the reservoir and permit the marketing Party or
Parties to pass clear title to all gas which is marketed or taken on a
current basis. Therefore, when production of a given category of gas from the
Contract Area permanently ceases, Operator shall be responsible for promptly
determining the final accounting of underproduction and overproduction of
such gas and shall notify all Parties to this Agreement and each overproduced
Party shall account to and pay to Operator for distribution to each
underproduced Party within sixty (60) days of said notice a sum of money
equal to the amount actually received by such overproduced Party at the time
of overproduction, less applicable taxes and royalties paid, from the sale
of that part of the overproduced Party or Parties' total sales that is
overproduction and equal to the deferred production of the underproduced
Party or Parties. Should any overproduced Party fail to pay the full amount
due Operator when the same is due, as herein provided, interest thereupon
shall accrue at a rate equal to the sum of the prime rate in effect at such
time at the Chase Manhattan Bank, N.A., New York, New York, for commercial
loans, plus two percent (2%) per annum, not to exceed the maximum lawful rate
payable for the period from the date when such amount is due until the same
is paid. Monies to be paid an underproduced Party shall not exceed those which
such underproduced Party could legally have received under the terms of its
own gas sales agreement(s) in effect at the time of overproduction, or, in
the event an underproduced party did not have its own gas sales agreement(s)
at the time such underproduction accrued, monies to be paid shall not exceed
"Market Value" as defined below. For gas sold the price basis shall be the
price received for the sale of the gas, except that should any portion of the
price received be subject to refund as provided by applicable laws or
regulations pursuant thereto, or other governmental authority, then the price
basis of gas sold shall be the price received less the aforesaid refundable
portion until such time as final determination is made with respect thereto
and such additional collected amount is no longer subject to refund or until
such time as the overproduced Party or Parties are agreeable to accept and do
accept from the underproduced Party or Parties a corporate undertaking
whereby such underproducer(s) agree to hold the overproducer(s) harmless
from financial loss with respect to the refundable portion of the price
received. In the event the marketing Party or Parties were taking gas in kind
for their own use and had no gas sales contract, the price basis shall be
Market Value (as defined below) but in no event less than the appropriate
area, national or statutory rate applicable to such well(s) which a party
would be authorized to collect and did in fact collect under applicable laws
or regulations at the time the gas is produced for like quality and
quantities. "Market Value" is defined as the price being paid for the sale of
similar production from the general area.
9.
If, at any time, an overproduced Party elects to sell or assign its
working interest in any well or well(s) covered by this Agreement, each
underproduced Party in such well(s) shall have the individual right, but not
the obligation, to request the overproduced Party electing to sell or assign
its working interest to cash settle their pro rata share of such
overproduction. The overproduced Party shall give each underproduced Party at
least thirty (30) days written notice prior to the closing date of such sale
or assignment advising of its intention to sell or assign its working
interest. Such notice shall provide the name and location of the prospective
purchaser. Upon receipt of the overproduced Party's notice, the underproduced
Party(ies) shall have fifteen calendar days in which to advise the
overproduced Party in writing of its election to cash settle. Should the
underproduced Party elect to cash settle, payment shall be made as provided
in Paragraph 8. with payment due within sixty (60) days from the date of the
underproduced Party's notice. In the event the underproduced Party either
(i) waives its right to cash settle, or (ii) fails to respond timely, the
underproduced Party(ies) shall not be entitled to cash settle with the
selling overproduced Party and shall look to the new owner for any future
settlement hereunder.
Exhibit "E"
<PAGE>
10.
Notwithstanding anything herein or in the Operating Agreement to the
contrary, if any Party sells or assigns an interest in the working interest
in the land owned by it when such Party is an underproduced or overproduced
Party, the sale or assignment shall, insofar as the Parties hereto are
concerned, include all interest of the selling or assigning Party in the gas,
all right to receive or the obligation to provide make up gas and all right
to receive or the obligation to make any money payment which may ultimately
be due hereunder, as applicable. Operator and each of the other Parties
hereto may treat the sale or assignment accordingly and the selling or
assigning Party shall look solely to its purchaser or assignee for any
interest in the gas or money payment that such Party may have or to which it
may be entitled or shall cause its purchaser or assignee to assume any
obligation it may have to provide make-up gas or make any payments hereunder,
as applicable; provided, however, that the overproduced assignor shall, to
the extent such sums cannot be recovered from its assignee, remain ultimately
liable to the Parties hereto for any money payment relating to its
overproduction incurred prior to the sale or assignment of its interest.
11.
In lieu of cash settlement as provided in Paragraph 8. and 9., an
overproduced Party may deliver to the underproduced Party an offer to settle
its overproduction in-kind and at such rates, quantities, times and sources as
may be agreed upon by the underproduced Party. If the Parties are unable to
agree upon the manner in which such in-kind settlement gas will be furnished
within sixty (60) after the overproduced Party's offer to settle in-kind,
which period may be extended by agreement of said Parties, the overproduced
Party shall make a cash settlement as provided in Paragraph 8. and 9.. The
making of an in-kind settlement offer under this Paragraph 11. will not
delay the accrual of interest on the cash settlement should the Parties fail
to reach agreement on an in-kind settlement.
12.
For purposes of this Agreement, all references hereinabove to production
from a gas well shall include all gas reservoirs produced from such well(s)
qualifying for the same maximum lawful price under the terms of applicable
laws or regulations.
13.
Nothing in this Agreement shall change or affect each Parties
obligations to pay its proportionate share, as set forth in the Operating
Agreement of all cost and liabilities incurred in operations of the Contract
Area.
14.
This Agreement may be executed in counterparts but will not be binding
on any Party unless and until all working interest Parties in the Contract
Area have accepted this Gas Balancing Agreement without exception
15.
This Agreement shall become effective in accordance with its terms and
shall remain in force and effect for a term concurrent with said Operating
Agreement or until final cash settlement is made to the underproduced Parties
from all reservoirs, and shall inure to the benefit of and be binding upon
the Parties hereto, their successors, legal representatives and assigns.
Nothwithstanding any provision to the contrary in this or any other
Agreement, any underproduced Party shall have the right for a period of two
(2) years after date that gas accounts are settled, to audit an overproduced
Party's records as to volumes and prices received for gas produced from the
Contract Area, and any overproduced Party shall have the right for a period
of two (2) years after the gas accounts are settled, to audit any
underproduced Party's records as to volumes.
16.
This Agreement shall be governed and construed in accordance with the
laws of the State of Texas, without giving effect to the conflicts of laws
rules of the State of Texas. Venue for any claims brought by the Parties under
this Agreement shall be in Harris County, Texas.
17.
Participating Parties in each Non-Consent Well agree that the provisions
of this Agreement shall apply to the balancing of gas production from each
Non-Consent Well. Operator shall maintain separate accounting by Pricing
Category for each Non-Consent Well.
Exhibit "E"
<PAGE>
A.A.P.L. FORM 610 - MODEL FROM OPERATING AGREEMENT - 1982
THERE IS NO EXHIBIT "G" TO THIS AGREEMENT
-15-
<PAGE>
A.A.P.L. FORM 610 - MODEL FROM OPERATING AGREEMENT - 1982
THERE IS NO EXHIBIT "F" TO THIS AGREEMENT
-15-
<PAGE>
EXHIBIT "H"
Attached to and made a part of Operating Agreement dated
____________________, 19___, between ZYDECO EXPLORATION, INC. and
______________________________________.
NOTICE OF JOINT OPERATING AGREEMENT BETWEEN
ZYDECO EXPLORATION, INC.
AND
--------------------------------------------------------------------
THE STATE OF ?
KNOW ALL MEN BY THESE PRESENTS:
PARISH OF ?
THAT, ZYDECO EXPLORATION, INC., a Texas corporation, with offices at 1200
Smith Street, Suite 1710, Houston, Texas 77002, ("Operator") and
______________________________________ whose address is
_____________________________________ ("Non-Operator") hereby give
notice as follows:
WHEREAS, by that certain Operating Agreement dated _______________, 199__
(the "Operating Agreement"), which Agreement is available for review in
the offices of Operator at the address above, by and between Operator and
Non-Operator, concerning the participation by Non-Operator with Operator
in the exploration and development for oil and gas within that certain
"Contract Area", and that term is defined therein, and the acquisition
by such Non-Operator interests therein, Operator was granted the
following described liens and security interests under the terms of
Article VII.B. and XV.I. of the Operating Agreement (the "Operator's
Liens"):
ARTICLE VII.B.
LIENS AND PAYMENT DEFAULTS:
Each Non-Operator grants to Operator a lien upon, and a security
interest in, its oil and gas rights in the Contract Area in accordance
with the provisions of Article XV.I. hereof to secure payment of its
share of expense, together with
<PAGE>
interest thereon at the rate provided in Exhibit "C". To the extent that
Operator has a security interest under the Uniform Commercial Code of
the state, Operator shall be entitled to exercise the rights and
remedies of a secured party under the Code. The bringing of a suit
and the obtaining of judgment by Operator for the secured indebtedness
shall not be deemed an election of remedies or otherwise affect the lien
rights or security interest as security for payment thereof. In
addition, upon default by any Non-Operator in the payment of its share
of expense, Operator shall have the right, without prejudice to other
rights or remedies, to collect from the purchaser the proceeds from the
sale of such Non-Operator's share of oil and/or gas until the amount
owed by such Non-Operator, plus interest, has been paid. Each purchaser
shall be entitled to rely upon Operator's written statement concerning
the amount of any default. Operator grants a like lien and security
interest to the Non-Operators to secure payment of Operator's
proportionate share of expense.
If any party fails or is unable to pay its share of expense within thirty
(30) days after rendition of a statement therefor by Operator, the
non-defaulting parties, including Operator, shall, upon request by
Operator, pay the unpaid amount in the proportion that the interest of
each party bears to the interest of all such parties. Each party so
paying its share of the unpaid amount shall, to obtain reimbursement
thereof, be subrogated to the security rights described in the
foregoing paragraph.
ARTICLE XV.I.
LIENS AND SECURITY INTERESTS:
1. Liens and Security Interests of Operator: Subject to the provisions of
Article VII.B. of this Operating Agreement, to secure payment to
Operator of all indebtedness due by each Non-Operator to Operator
pursuant to this Operating Agreement, each Non-Operator hereby specially
mortgages and hypothecates unto and in favor of Operator, and its
successors and assigns, all right, title and interest of each
Non-Operator in and to (i) the oil, gas, or other minerals in, on, and
under the Contract Area, (ii) any oil, gas, and mineral leases covering
the Contract Area or any portion thereof.
In addition, Non-Operator grants to Operator a security interest in and
to all of such Non-Operator's rights, titles, interests, claims, general
intangibles, proceeds, and products thereof, whether now existing or
hereafter acquired, in and to (i) all oil, gas and other minerals
produced from the Contract Area when produced; (ii) all accounts
receivable accruing or arising as a result of the sale of such oil, gas
and other minerals;
(iii) all cash or other proceeds from the sale of such oil, gas, and
other minerals once produced; and (iv) all surface and sub-surface
equipment and facilities of any kind or character located on the
Contract Area and the cash or other proceeds realized from the sale
thereof (collectively, the "Personal Property Collateral"). Some of
the Personal Property Collateral is or will become
<PAGE>
fixtures on the Contract Area, and the interest of Non-Operator in and
to the oil, gas and other minerals when extracted from the Contract Area
and the accounts receivable accruing or arising as the result of the sale
thereof shall be financed at the wellhead of the well or wells located
on the Contract Area. This Operating Agreement (including a carbon,
photographic, or other reproduction hereof) shall constitute a non-
standard form financing statement under the terms of the Uniform
Commercial Code, as adopted in the State of Louisiana, and, as such, may
be filed for record in the office of the Clerk of Court of any parish in
Louisiana (or the Recorder of Mortgages of Orleans Parish).
2. Lien and Security Interest of Non-Operator: Subject to the provisions of
Articles VII.B. and XV.I.1. of this Operating Agreement, Operator hereby
grants a like lien and security interest to each Non-Operator (in
proportions to any indebtedness owed by Operator to each Non-Operator at
any time and from time to time under the terms of this Operating
Agreement) to secure payment by Operator of Operator's proportionate
share of all costs and expenses incurred under the terms of this
Operating Agreement and all sums owed by Operator to Non-Operator in
connection with operations on and production of oil, gas and other
minerals from the Contract Area, including, without limitation, any
proceeds realized from the sale of oil, gas, and other minerals produced
from the Contract Area received by Operator from the purchaser thereof
and attributable to the interests therein of Non-Operator.
All of the foregoing provisions of Article VII.B. and Article XV.I.1.
relating to the grant of a lien and security interest to Operator by
Non-Operator are hereby repeated mutatis mutandis, substituting the word
"Operator" for "Non-Operator" and vice versa when appropriate.
3. Maximum Amount: The maximum amount for which the mortgage herein granted
shall be deemed to secure the obligations of Non-Operator as stipulated
herein is hereby fixed in an amount equal to $100,000,000.00 (the "Limit
of the Mortgage"). Notwithstanding the foregoing Limit of the Mortgage,
the individual liability of Non-Operator and Operator under the Operating
Agreement and the mortgage and security interest granted hereby shall be
limited to, and neither Operator nor Non-Operator, individually or
collectively, shall be entitled to enforce the same against any
Non-Operator or Operator for, an amount exceeding the actual indebtedness
(including all interest charges, costs, attorney's fees, and other
charges provided for in this Operating Agreement) outstanding and unpaid
and that is attributable to or charged against the interest of such
Non-Operator or Operator.
EXECUTED this ______ day of ___________________, 199___.
WITNESSES: OPERATOR:
ZYDECO EXPLORATION, INC.
- ----------------------------
BY:
- ------------------------- ------------------------------
<PAGE>
NON-OPERATOR:
CHENIERE ENERGY, INC.
- ----------------------------
BY:
- ------------------------- ------------------------------
BETA OIL & GAS, INC.
- ----------------------------
BY:
- ------------------------- ------------------------------
EXCEL ENERGY, L. P.
- ----------------------------------------------------------------------
BY:
- ------------------------- ------------------------------
THE STATE OF TEXAS X
COUNTY OF HARRIS X
On this ______ day of ________________, 199____, before me appeared
____________________, to me personally known, who, being by me duly
sworn, did say that he is the ___________________________ of ZYDECO
EXPLORATION, INC., and that said instrument was signed in behalf of
said corporation by authority of its Board of Directors, and said
________________ acknowledged said instrument to be the free act and
deed of said corporation.
- -------------------------------------------------------------------------------
My Commission Expires: Notary Public - State of Texas
- -------------------------------------------------------------------------------
<PAGE>
THE STATE OF __________________ X
COUNTY/PARISH OF ____________ X
On this ______ day of _________________, 199____, before me appeared
_____________________, to me personally known, who, being by me duly
sworn, did say that he is the ___________________________ of
____________________________, and that said instrument was signed in
behalf of said corporation by authority of its Board of Directors,
and said ________________________ acknowledged said instrument to
be the free act and deed of said corporation.
- -------------------------------------------------------------------------------
My Commission Expires: Notary Public - State of
_____________
- -------------------------------------------------------------------------------
State of ____________ ?
County of __________ ?
On this ______day of _______________, 1999, before me appeared
__________, to me personally known, who, being by me duly sworn, did
say that he is the _____________, of Beta Oil & Gas, Inc., a ______
corporation, and that said instrument was signed and sealed on
behalf of said corporation by authority of its Board of Directors,
and said appearer acknowledged that he executed the same as the
free act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my official hand and seal
on the date hereinabove written.
- -------------------------------------------------------------------------------
Notary Public in and for
(SEAL) the State of ____________
My Commision Expires:_______________
State of ____________ ?
County of __________ ?
<PAGE>
On this ______day of _______________, 1999, before me appeared
__________, to me personally known, who, being by me duly sworn, did
say that he is the _____________, of Excel Energy, L. P., a _______
corporation, and that said instrument was signed and sealed on
behalf of said corporation by authority of its Board of Directors,
and said appearer acknowledged that he executed the same as the
free act and deed of said corporation.
IN WITNESS WHEREOF, I have hereunto set my official hand and seal
on the date hereinabove written.
- -------------------------------------------------------------------------------
Notary Public in and for
(SEAL) the State of ____________
My Commision Expires:_______________
<PAGE>
EXHIBIT A-1
of
EXHIBIT C
to
COBRA PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
January 6, 1999
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: Mr. Steve Antry, President
Re: Prospect "Redfish" (IP's "Four Corners")
Offshore - West Cameron Area, Louisiana
Gentlemen:
When accepted by you in the manner provided below, this letter shall
evidence the agreement between you (sometimes hereinafter referred to as "Beta")
and Cheniere Energy, Inc., (hereinafter referred to as "Cheniere") with respect
to (1) your acquiring from Cheniere a certain undivided interest in and to the
Oil, Gas and Mineral Leases described on Exhibit "A" attached hereto and made a
part hereof (the "Leases"), which Leases cover lands comprising the prospect
known to Cheniere as the Redfish Prospect, and (2) your participation in the
drilling of a test well on the Redfish Prospect in the manner hereinafter
described. The geographical area covered by the Redfish Prospect is shown on
Exhibit "A," on which it is depicted as the yellow shaded "Lease Block"
(hereinafter referred to as the "Redfish Lease Block").
1.
Cheniere represents that it owns a 50% interest in and to the Leases.
In consideration of the sum of $242,000, which Beta agrees to pay and deliver to
Cheniere simultaneously with Beta's execution of this Letter Agreement, and
Beta's undertakings as hereinafter set forth, Cheniere has agreed and does
hereby agree to assign to Beta, an undivided 15.0% of 8/8ths interest in and to
the Leases. The assignment to you of interests pursuant to this Paragraph shall
be made immediately after Cheniere's receipt of (i) your payment to Cheniere of
the amount set forth above, (ii) an original counterpart of this Letter
Agreement duly executed by you, (iii) an Operating Agreement, in the form
attached as Exhibit "C" (the "Operating Agreement"), duly executed by you; and
(iv) the authority for expenditure for the Test Well set forth in Exhibit A duly
executed by you. Except as to claims by, through, or under Assignor, but not
otherwise, the assignments herein provided for shall be without warranty, either
express or implied, and shall be made expressly subject to the terms and
provisions of this Letter Agreement and the Operating Agreement. The form of the
assignment shall be the same or substantially similar to the form of assignment
attached hereto as Exhibit "B."
2.
All operations on the Redfish Lease Block or the area of mutual
interest ("AMI") created in the Operating Agreement, including the drilling of a
test well as provided in Section 3 below (the "Test Well"), will be governed by
the Operating Agreement; provided, however, if on any matter there is a conflict
between the Operating Agreement and this Letter Agreement, the Letter Agreement
shall prevail. Initially, IP petroleum Company, Inc. (IP) shall be designated as
operator under the Operating Agreement. IP may resign or be replaced as operator
in accordance with the provisions of the Operating Agreement; provided, however,
that if IP resigns or is replaced as operator prior to completion or abandonment
of the Test Well and the successor operator selected under the Operating
Agreement is not acceptable to Beta, then, for a period of thirty (30) days
after appointment of such successor operator, Beta may elect to reassign to
Cheniere its interests in the Leases, and any other interests acquired within
the Redfish Lease Block or AMI, and Cheniere shall, contemporaneously with
receipt of such reassignment, return to Beta the purchase price therefor. If
such reassignment right is not timely exercised, it shall be deemed waived.
3.
Beta has agreed, and does hereby agree to participate in the manner set
forth below in the drilling of a Test Well for the Redfish Prospect at the
location and to the Contract Depth described in Exhibit "A." Prior to the
spudding of the Test Well, Cheniere may change the location or Contract Depth
for the Test Well, provided that if Beta does not approve such change it may,
within fourteen (14) days of receipt of notice thereof, reassign to Cheniere its
interests in the Leases, and any other interests acquired within the Redfish
Lease Block or AMI, and Cheniere shall, contemporaneously with receipt of such
reassignment, return to Beta the purchase price therefor. If such reassignment
right is not timely exercised, it shall be deemed waived.
Beta has agreed and does hereby agree to pay and bear 20.0% of all
risks, costs and expenses incurred in connection with the drilling of the Test
Well to Contract Depth; in logging and testing the Test Well; and, in plugging
and abandoning the Test Well if a completion attempt is not made. The costs and
expenses of drilling the Test Well shall include, but without limitation by
enumeration, the costs incurred in obtaining a drill site surface lease,
examining and clearing title on the surface location (and, if the Test Well is
directionally drilled, the lease covering the bottom hole location), staking the
location, preparing the location and drilling to Contract Depth and evaluating
the well. A detailed estimate of costs of drilling the Test Well to Contract
Depth is included in Exhibit "A", but such information is merely an estimate and
shall not be deemed a limitation or cap on such costs or on either party's
responsibility therefor. An estimate of completion cost will be provided prior
to spudding the Test Well.
If after reaching Contract Depth in the Test Well, Beta elects to
participate in a completion attempt of the Test Well, 15% of all risks, costs
and expenses incurred in connection with such completion, together with the
risks, costs and expenses of plugging and abandoning such well in the event
completion is unsuccessful, shall be borne by Beta.
If the Test Well is not commenced within 120 days after the date
hereof, then, for a period of thirty (30) days thereafter, Beta may reassign to
Cheniere its interest in the Leases, and any other interests acquired within the
Redfish Lease Block and AMI, and Cheniere shall, contemporaneously with receipt
of such reassignment, return to Beta the purchase price therefor. If such
reassignment right is not timely exercised, it shall be deemed waived.
4.
If, after commencing a Test Well, but before reaching Contract Depth,
there should be encountered conditions or formations, whether natural or
mechanical, which render further drilling of the Test Well either impossible or
impractical, so that operations on the Test Well are abandoned, a Substitute
Well may be commenced not later than 90 days following the abandonment of Test
Well. Such Substitute Well shall be considered and deemed for all purposes
(including, without limitation, the apportionment between the parties of the
costs and expenses incurred in connection therewith) a continuation of the
drilling of the Test Well and as though it were the well for which it is the
substitute.
5.
If Beta elects not to participate in the Substitute Well, then Beta
shall be deemed to have forfeited all rights and interest in and to the Leases
and any other leases, fee mineral interests or other oil and gas interests or
contractual rights covering or appurtenant to lands in the Redfish Lease Block
and the AMI, and shall, within ten (10) days after (i) receipt of notice of the
commencement of the Substitute Well or (ii) the expiration of the 90 day period
for commencement of a Substitute Well, as the case may be, assign to Cheniere
all of such rights and interests.
6.
It is recognized that (i) although title will be examined on the drill
site surface and bottom hole location tracts for the Test Well prior to
commencement of drilling thereof, title will not be examined as to other lands
lying within the Redfish Lease Block or the AMI until such time as wells are
proposed to be drilled thereon, and (ii) there possibly may be unleased
interests in other tracts of land within the Redfish Lease Block. You
acknowledge that Cheniere has advised you of any currently unleased interests
known to Cheniere which may exist within the Redfish Lease Block, but Cheniere
makes no representation or warranty, express or implied, as to the completeness
or accuracy of such information, and your reliance thereon is at your sole risk.
If any such unleased interests are now known or become known to Cheniere to
exist prior to completion or abandonment of the Test Well, Cheniere agrees to
make a good faith effort to acquire Oil, Gas and Mineral Leases covering such
unleased interests under such terms and conditions as are reasonably acceptable
to Cheniere. Undivided interests in such leases acquired by Cheniere shall be
offered to Beta pursuant to the AMI provision of the Operating Agreement.
7.
The notices provided for in this agreement shall be in writing and
delivered by certified U.S. mail, return receipt requested, telecopy, or
overnight courier or messenger with receipt confirmation, to the addresses
below:
CHENIERE ENERGY, INC.
Two Allen Center
1200 Smith Street, Suite 1740
Houston, TX 77002
Attn: Walter L. Williams
phone (713) 659-1361
fax (713) 659-5459
BETA OIL & GAS, INC.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attn: Steve Antry
phone (949) 752-5212
fax (949) 752-5757
Notices hereunder shall be deemed made upon receipt.
8.
Beta shall have the right to review in Cheniere's office all Fairfield
spec data pertaining to the Redfish Prospect under the terms and conditions set
out in the Master and Supplemental Licensing Agreement covering such data by and
between Fairfield Industries and Cheniere Energy, Inc. dated January 28, 1998,
and Beta agrees to comply with all such terms and conditions. At Beta's request
and at Beta's cost Cheniere will endeavor to secure a Partners License to such
data for Beta. Subject to Beta's continued compliance with the previously
executed Confidentiality Agreement, dated September 14, 1998, Beta shall have
access to proprietary seismic data acquired by Cheniere covering the Redfish
Prospect in Cheniere's offices during Cheniere's normal business hours;
provided, however, that if Beta reassigns interests to Cheniere rights pursuant
to this Agreement, Beta shall return all interpretations, maps, seismic sections
or other data, information, reports, analyses or opinions generated by Beta or
its consultants, contractors or agents using, based upon or derived from such
data, and Beta shall cause all such materials to be removed from Beta's
workstations and computer systems.
9.
This agreement is made subject to all valid, applicable laws, rules,
orders and regulations, of any duly constituted Federal, State or local
regulatory body or authority having jurisdiction thereof, and all development
and operations hereunder shall be in conformity therewith.
10.
The provisions hereof shall inure to the benefit and are binding upon
the parties hereto, and to their respective successors and assigns.
11.
Prior to the date hereof, Beta acquired an interest in State Leases No.
16187 and 16188, Sabine Pass Block 3, Offshore Louisiana. Beta and Cheniere
expressly agree that, notwithstanding anything herein or in the Operating
Agreement to the contrary, such State Leases are hereby excluded from the AMI.
12.
The parties agree that this Agreement shall be deemed confidential and
shall not be revealed to any third party except (i) to the extent disclosure may
be required by law, including, without limitation, disclosures in registration
statements or other filings with the Securities and Exchange Commission; (ii)
disclosures in any judicial or alternative dispute resolution proceeding
concerning the terms hereof; (iii) disclosures to bona fide prospective
investors, lenders, successors or assigns of a party, upon such third parties'
execution of a confidentiality agreement in form and substance reasonably
acceptable to the parties hereto; and (iv) disclosures with the written consent
of the other party, which consent shall not be unreasonably withheld.
13.
All assignments of interests by Beta to Cheniere pursuant to this
Agreement shall be made by assignment reasonably acceptable to Cheniere and free
of all claims, burdens or encumbrances by through, or under Beta, other than
royalties, overriding royalties, back-ins or like interests reserved by third
parties in farmout agreements, assignments or grants of such interests to Beta.
If Beta reassigns interests to Cheniere pursuant to this Agreement, then Beta
agrees (i) to maintain the confidentiality of all information in Beta's
possession concerning the Redfish Prospect; and (ii) for a period of three (3)
years after the date hereof, not to acquire oil and gas interests (including,
without limitation, leasehold interests, fee mineral interests, net profits
interests, royalty or overriding royalty interests, farmouts or other interests)
covering lands within the Redfish Lease Block or the AMI. If, notwithstanding
the foregoing, Beta acquires such interests, then within fourteen (14) days
after receipt of assignments or conveyances of such interests, Beta shall in
writing offer to assign such interests to Cheniere upon Cheniere's payment to
Beta of Beta's acquisition costs therefor, documentation of which shall be
furnished by Beta to Cheniere. Cheniere shall have thirty (30) days after
receipt of such notice in which to elect whether to acquire such interest. If
Cheniere does not tender the purchase price for such interests within such
period, Cheniere shall be deemed to have elected not to acquire such interest.
Beta shall deliver executed and acknowledged assignments of such interests to
Cheniere contemporaneously with Cheniere's payment of the purchase price
therefor.
14.
Time is of the essence in the performance of this Agreement.
If the foregoing is your understanding of our agreement, please
evidence your acceptance of this agreement by executing in the space provided
below for your signature.
Sincerely,
CHENIERE ENERGY, INC.
/s/Walter L. Williams
President & CEO
AGREED TO AND ACCEPTED THIS _____ DAY OF _______________, 1999.
BETA OIL AND GAS, INC.
/s/Steve Antry
President & CEO
<PAGE>
EXHIBIT A
to
REDFISH PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
Exhibit B
Redfish Prospect
EXHIBIT "B"
(Attached to and made a part of that certain Letter Agreement dated January 6,
1999 by and between Cheniere Energy, Inc., and Beta Oil & Gas, Inc.)
ASSIGNMENT OF UNDIVIDED INTEREST
IN OIL, GAS AND MINERAL LEASES
THE STATE OF LOUISIANA )
) KNOW ALL MEN BY THESE PRESENTS, THAT:
PARISH OF CAMERON )
WHEREAS, Cheniere Energy, Inc. is the owner of record of a 50 percent
interest in the Oil, Gas and Mineral Leases and the Lease Option described in
Exhibit "A" and made a part hereof, which leases may be referred to in this
assignment as "Subject Leases"; and
WHEREAS, pursuant to the terms and provisions of that certain
unrecorded Letter Agreement by and between Cheniere Energy, Inc. ("Cheniere")
and Beta Oil & Gas, Inc. ("Beta") dated January 6, 1999, and pertaining to the
leases described in Exhibit "A," Cheniere has agreed to assign and convey to
Beta and Beta has agreed to acquire from Cheniere, subject to the terms and
provisions hereinafter set forth, an undivided 15% interest in and to Subject
Leases.
NOW THEREFORE, in consideration of $1,000.00 and other good and
valuable considerations, paid by Assignee to Assignor, the receipt, seriousness
and sufficiency of which is hereby acknowledged by Assignor, Cheniere, as
Assignor, does hereby assign, transfer and convey unto Beta, as Assignee, an
undivided 15% interest in and to Subject Leases.
This assignment is made by Assignor and is accepted by Assignee subject
to and the parties hereto agree to be bound by the terms and provisions of the
above described unrecorded Letter Agreement and the Joint Operating Agreement,
which is attached thereto as Exhibit "C."
This assignment is made subject to and Assignee agrees to bear its
pro-rata part of the royalties and leasehold obligations provided for in Subject
Leases and of the overriding royalties, if any, that are described in Exhibit
"A" hereof, following the description of each of Subject Leases. Assignor
represents and warrants to Assignee that each of Subject Lease is burdened only
with the royalty and overriding royalty, if any, set forth following the
description of each lease in Exhibit "A."
This assignment is made without warranty, either express or implied,
not even for the return of purchase price paid by Assignee to Assignor, but with
full substitution and subrogation, to the extent of the interest herein
assigned, to the rights and actions of warranty granted Assignor under the terms
of Subject Leases or by Assignor's predecessors-in-title.
IN TESTIMONY WHEREOF, this instrument is executed this ________ day of
_____________________________, 19 ______, in the presence of the undersigned
competent witnesses.
WITNESSES:
- -----------------------------------
--------------------------------
- ------------------------------------
- ------------------------------------
---------------------------------
- ------------------------------------
<PAGE>
COVER PAGE
of
EXHIBIT C
to
REDFISH PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
T A B L E O F C O N T E N T S
SECTION
<TABLE>
<CAPTION>
Page
<S> <C>
Preliminary Recitals . . . . . . . . . . . . . . . . . . . . . . . . . . . ii.
ARTICLE I
APPLICATION
1.1 Application . . . . . . . . . . . . . . . . . . . . . . . . . . .1.
ARTICLE II
DEFINITIONS
2.1 Casing Point . . . . . . . . . . . . . . . . . . . . . . . . . . .1.
2.2 Development Operations . . . . . . . . . . . . . . . . . . . . . .1.
2.3 Development Well . . . . . . . . . . . . . . . . . . . . . . . .1.
2.4 Exploratory Operations . . . . . . . . . . . . . . . . . . . . . .1.
2.5 Exploratory Well . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.6 Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.7 Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.8 Non-Consent Operations . . . . . . . . . . . . . . . . . . . . . .2.
2.9 Non-Consent Platform . . . . . . . . . . . . . . . . . . . . . . .2.
2.10 Non-Consent Well . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.11 Non-Operator . . . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.12 Non-Participating Party. . . . . . . . . . . . . . . . . . . . . .2.
2.13 Non-Participating Party's Share. . . . . . . . . . . . . . . . . .2.
2.14 Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.15 Participating Interest . . . . . . . . . . . . . . . . . . . . . .2.
2.16 Participating Party. . . . . . . . . . . . . . . . . . . . . . . .2.
2.17 Producible Well. . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.18 Working Interest . . . . . . . . . . . . . . . . . . . . . . . . .3.
ARTICLE III
EXHIBITS
3.1 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.
3.1.1 Exhibit A: Description of Lease
and Working Interest. . . . . . . . . . . . . . . .3.
3.1.2. Exhibit A-1 Area of Mutual Interest . . . . . . . . .3.
3.1.3 Exhibit B: Insurance Provision . . . . . . . . . . .3.
3.1.4 Exhibit C: Accounting Procedure. . . . . . . . . . .3.
3.1.5 Exhibit D: Non-Discrimination Provision. . . . . . .3.
3.1.6 Exhibit E: Gas Balancing Agreement . . . . . . . . .3.
ARTICLE IV
OPERATOR
4.1 Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.
4.2 Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . .3.
4.3 Removal of Operator. . . . . . . . . . . . . . . . . . . . . . . .3.
4.4 Selection of Successor . . . . . . . . . . . . . . . . . . . . . .4.
4.5 Delivery of Property . . . . . . . . . . . . . . . . . . . . . . .4.
2
<PAGE>
ARTICLE V
AUTHORITY AND DUTIES OF OPERATOR
5.1 Exclusive Right to Operate . . . . . . . . . . . . . . . . . . . .4.
5.2 Workmanlike Conduct. . . . . . . . . . . . . . . . . . . . . . . .4.
5.3 Liens and Encumbrances . . . . . . . . . . . . . . . . . . . . . .4.
5.4 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.
5.5 Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.
5.6 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.
5.7 Drilling . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.
5.8 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.
5.9 Information to Participating Parties . . . . . . . . . . . . . . .5.
ARTICLE VI
VOTING AND VOTING PROCEDURES
6.1 Designation of Representatives . . . . . . . . . . . . . . . . . .6.
6.2 Voting Procedures. . . . . . . . . . . . . . . . . . . . . . . . .6.
6.2.1 Voting Interest. . . . . . . . . . . . . . . . . . . . .6.
6.2.2 Vote Required. . . . . . . . . . . . . . . . . . . . . .6.
6.2.3 Votes. . . . . . . . . . . . . . . . . . . . . . . . . .6.
6.2.4 Meetings . . . . . . . . . . . . . . . . . . . . . . . .6.
ARTICLE VII
ACCESS
7.1 Access to Lease. . . . . . . . . . . . . . . . . . . . . . . . . .7.
7.2 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.
7.3 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . .7.
7.4 Limited Disclosure . . . . . . . . . . . . . . . . . . . . . . . .7.
ARTICLE VIII
EXPENDITURES
8.1 Basis of Charge to the Parties . . . . . . . . . . . . . . . . . .7.
8.2 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . .8.
8.3 Advance Billings . . . . . . . . . . . . . . . . . . . . . . . . .8.
8.4 Commingling of Funds . . . . . . . . . . . . . . . . . . . . . . .8.
8.5 Security Rights. . . . . . . . . . . . . . . . . . . . . . . . . .8.
8.6 Unpaid Charges . . . . . . . . . . . . . . . . . . . . . . . . . .9.
8.7 Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.
8.8 Carved-out Interests . . . . . . . . . . . . . . . . . . . . . . 10.
ARTICLE IX
NOTICES
9.1 Giving and Receiving Notices . . . . . . . . . . . . . . . . . . 10.
9.2 Content of Notice. . . . . . . . . . . . . . . . . . . . . . . . 10.
9.3 Response to Notices. . . . . . . . . . . . . . . . . . . . . . . 10.
9.3.1 Platform Construction. . . . . . . . . . . . . . . . . 11.
9.3.2 Proposal Without Platform. . . . . . . . . . . . . . . 11.
9.3.3 Other Matters. . . . . . . . . . . . . . . . . . . . . 11.
9.4 Failure to Respond . . . . . . . . . . . . . . . . . . . . . . . 11.
9.5 Restrictions on Multiple Well Proposals. . . . . . . . . . . . . 11.
ARTICLE X
3
<PAGE>
EXPLORATORY WELLS
10.1 Operations by All Parties. . . . . . . . . . . . . . . . . . . . 11.
10.2 Second Opportunity to Participate. . . . . . . . . . . . . . . . 12.
10.3 Operations by Fewer Than All Parties . . . . . . . . . . . . . . 12.
10.4 Course of Action After Drilling to Initial Objective
Depth . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.
10.4.1 Casing Point Election. . . . . . . . . . . . . . . . . . . . . . 13.
ARTICLE XI
DEVELOPMENT WELL OPERATIONS
11.1 Operations by All Parties. . . . . . . . . . . . . . . . . . . . 14.
11.2 Second Opportunity to Participate. . . . . . . . . . . . . . . . 15.
11.3 Operations by Fewer Than All Parties . . . . . . . . . . . . . . 15.
11.4 Timely Operations. . . . . . . . . . . . . . . . . . . . . . . . 15.
11.5 Course of Action After Drilling to Initial Objective
Depth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.
11.6 Deeper Drilling. . . . . . . . . . . . . . . . . . . . . . . . . 15.
ARTICLE XII
NON-CONSENT OPERATIONS
12.1 Non-Consent Operations . . . . . . . . . . . . . . . . . . . . . 16.
12.1.1 Non-Interference . . . . . . . . . . . . . . . . . . . 16.
12.1.2 Multiple Completion Limitation . . . . . . . . . . . . 16.
12.1.3 Metering . . . . . . . . . . . . . . . . . . . . . . . 16.
12.1.4 Liens. . . . . . . . . . . . . . . . . . . . . . . . . 16.
12.1.5 Non-Consent Well . . . . . . . . . . . . . . . . . . . 16.
12.1.6 Cost-Information . . . . . . . . . . . . . . . . . . . 17.
12.1.7 Completions. . . . . . . . . . . . . . . . . . . . . . 17.
12.2 Relinquishment of Interest . . . . . . . . . . . . . . . . . . . 17.
12.2.1 Production Reversion Penalties . . . . . . . . . . . . 17.
12.2.2 Non-Production Reversion . . . . . . . . . . . . . . . 18.
12.3 Deepening of Non-Consent Well. . . . . . . . . . . . . . . . . . 18.
12.4 Operations from Non-Consent Platforms. . . . . . . . . . . . . . 18.
12.5 Discovery or Extension from Mobile Drilling Operations . . . . . 19.
12.6 Allocation of Platform Costs to Non-Consent Operations . . . . . 19.
12.6.1 Charges. . . . . . . . . . . . . . . . . . . . . . . . 19.
12.6.2 Operating and Maintenance Charges. . . . . . . . . . . 20.
12.6.3 Payments . . . . . . . . . . . . . . . . . . . . . . . 20.
12.7 Non-Consent Drilling to Maintain Lease . . . . . . . . . . . . . 21.
12.7.1 Retention of Lease by Non-Consent Well . . . . . . . . 22.
12.8 Allocation of Costs (Single Completion). . . . . . . . . . . . . 22.
12.9 Allocation of Costs (Multiple Completions) . . . . . . . . . . . 22.
12.10 Allocation of Costs (Dry Hole) . . . . . . . . . . . . . . . . . 24.
12.11 Intangible Drilling and Completion Allocations . . . . . . . . . 24.
12.12 Operated Wells . . . . . . . . . . . . . . . . . . . . . . . . . 24.
ARTICLE XII
FACILITIES
13.1 Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.
ARTICLE XIV
ABANDONMENT AND SALVAGE
14.1 Platform Salvage and Removal Costs . . . . . . . . . . . . . . . 25.
14.2 Purchase of Salvage Materials. . . . . . . . . . . . . . . . . . 26.
14.3 Abandonment of Producing Well. . . . . . . . . . . . . . . . . . 27.
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14.4 Assignment of Interest . . . . . . . . . . . . . . . . . . . . . 27.
14.5 Abandonment Operations Required by Governmental Authority. . . . 27.
ARTICLE XV
WITHDRAWAL
15.1 Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.
15.2 Limitations on Withdrawal. . . . . . . . . . . . . . . . . . . . 28.
ARTICLE XVI
RENTALS, ROYALTIES AND OTHER PAYMENTS
16.1 Creation of Overriding Royalty . . . . . . . . . . . . . . . . . 29.
16.2 Payment of Rentals and Minimum Royalties . . . . . . . . . . . . 29.
16.3 Non-Concurrence in Payments. . . . . . . . . . . . . . . . . . . 30.
16.4 Royalty Payments . . . . . . . . . . . . . . . . . . . . . . . . 30.
16.5 Federal Offshore Oil Pollution Compensation Fund Fee . . . . . . 31.
ARTICLE XVII
TAXES
17.1 Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 31.
17.2 Contest of Property Tax Valuation. . . . . . . . . . . . . . . . 31.
17.3 Production and Severance Taxes . . . . . . . . . . . . . . . . . 31.
17.4 Other Taxes and Assessments. . . . . . . . . . . . . . . . . . . 31.
ARTICLE XVIII
INSURANCE
18.1 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.
ARTICLE XIX
LIABILITY, CLAIMS AND LAWSUITS
19.1 Individual Obligations . . . . . . . . . . . . . . . . . . . . . 32.
19.2 Notice of Claim or Lawsuit . . . . . . . . . . . . . . . . . . . 32.
19.3 Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . 32.
19.4 Legal Expense. . . . . . . . . . . . . . . . . . . . . . . . . . 32.
19.5 Liability for Losses, Damages, Injury or Death . . . . . . . . . 32.
19.6 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 32.
ARTICLE XX
INTERNAL REVENUE PROVISION
20.1 Internal Revenue Provision . . . . . . . . . . . . . . . . . . . 33.
ARTICLE XXI
CONTRIBUTIONS
21.1 Notice of Contributions Other Than Advances for Sale
of Production . . . . . . . . . . . . . . . . . . . . . . . 34.
21.2 Cash Contributions . . . . . . . . . . . . . . . . . . . . . . . 34.
21.3 Acreage Contributions. . . . . . . . . . . . . . . . . . . . . . 34.
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ARTICLE XXII
DISPOSITION OF PRODUCTION
22.1 Facilities to Take in Kind . . . . . . . . . . . . . . . . . . . 34.
22.2 Duty to Take in Kind . . . . . . . . . . . . . . . . . . . . . . 34.
22.3 Failure to Take in Kind. . . . . . . . . . . . . . . . . . . . . 34.
22.4 Expenses of Delivery in Kind.. . . . . . . . . . . . . . . . . . 35.
22.5 Gas Balancing Provisions . . . . . . . . . . . . . . . . . . . . 35.
ARTICLE XXIII
APPLICABLE LAW
23.1 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . 35.
ARTICLE XXIV
LAWS, REGULATIONS AND NONDISCRIMINATION
24.1 Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . 35.
24.2 Nondiscrimination. . . . . . . . . . . . . . . . . . . . . . . . 35.
ARTICLE XXV
FORCE MAJEURE
25.1 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.
25.2 Strikes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.
25.3 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . 36.
ARTICLE XXVI
SUCCESSORS, ASSIGNS, AND
PREFERENTIAL RIGHT TO PURCHASE
26.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 36.
26.2 Preferential Right of Purchase . . . . . . . . . . . . . . . . . 36.
26.2.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.
26.2.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.
26.3 Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . 38.
ARTICLE XXVII
AREA OF MUTUAL INTEREST
27. Area of Mutual Interest. . . . . . . . . . . . . . . . . . . . . 39.
ARTICLE XXVIII
TERM
28.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.
ARTICLE XXIX
HEADINGS AND EXECUTION
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29.1 Topical Headings . . . . . . . . . . . . . . . . . . . . . . . . 40.
29.2 Counterpart Execution. . . . . . . . . . . . . . . . . . . . . . 41.
</TABLE>
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JOINT OPERATING AGREEMENT
THIS AGREEMENT is made effective as of November 6, 1998 herein by the
signers hereof, herein referred to collectively as "PARTIES" and individually as
"PARTY".
WITNESSETH:
WHEREAS the PARTIES are owners of or have contracted for the right to
earn an interest in the oil and gas lease(s) identified in Exhibit "A", and the
PARTIES desire to explore, develop, produce and operate said lease(s).
NOW THEREFORE, in consideration of the premises and of the mutual
agreement herein, it is agreed as follows:
ARTICLE I
APPLICATION
1.1 APPLICATION . The leases and lands identified in Exhibit "A" shall be
treated as one oil and gas lease for the purposes of this Agreement.
ARTICLE II
DEFINITIONS
2.1 CASING POINT. That point at which a well drilled hereunder, has
reached the proposed objective depth or zone, logged and logs distributed to the
PARTICIPATING PARTIES.
2.2 DEVELOPMENT OPERATIONS. Operations on the LEASE other than
EXPLORATORY OPERATIONS as defined in Section 2.4 below.
2.3 DEVELOPMENT WELL. Any well proposed as a DEVELOPMENT OPERATION.
2.4 EXPLORATORY OPERATIONS. Operations on the LEASE which are scheduled
for an objective zone, horizon or formation:
(1) which has not been established as producible on the LEASE under
2.16 below; or,
(2) which is already established as producible on the LEASE under
2.16 below, but such objective zone, horizon or formation will be
penetrated at a location more than 2,000 feet from the nearest bottom hole
location on the LEASE at which such objective has been proved producible,
or such objective is mutually agreed to be in a separate fault block.
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2.5 EXPLORATORY WELL. Any well proposed as an EXPLORATORY OPERATION.
2.6 FACILITIES. All lease equipment beyond the wellhead connections
acquired pursuant to this Agreement including any platform(s) necessary to carry
out the operation.
2.7 LEASE. The oil and gas leases identified in Exhibit "A" and the lands
affected thereby.
2.8 NON-CONSENT OPERATIONS. DEVELOPMENT or EXPLORATORY OPERATIONS
conducted by fewer than all PARTIES.
2.9 NON-CONSENT PLATFORM. A drilling or production platform owned by
fewer than all PARTIES.
2.10 NON-CONSENT WELL. A DEVELOPMENT or EXPLORATORY WELL owned by fewer
than all PARTIES.
2.11 NON-OPERATOR. Any PARTY to the Agreement other than the OPERATOR.
2.12 NON-PARTICIPATING PARTY. Any PARTY other than a PARTICIPATING PARTY.
2.13 NON-PARTICIPATING PARTY'S SHARE. The PARTICIPATING INTEREST a
NON-PARTICIPATING PARTY would have had if all PARTIES had participated in the
operation.
2.14 OPERATOR. The PARTY designated under this Agreement to conduct all
operations.
2.15 PARTICIPATING INTEREST. A PARTICIPATING PARTY'S percentage of
participation in an operation conducted pursuant to the Agreement.
2.16 PARTICIPATING PARTY. A PARTY who joins in an operation conducted
pursuant to this agreement.
2.17 PRODUCIBLE WELL. A well producing oil or gas, or if not producing oil
or gas, a well declared capable of producing in accordance with any applicable
government authority or by agreement of all of the PARTIES.
2.18 WORKING INTEREST. The ownership of each PARTY in and to the LEASE as
set forth in Exhibit "A".
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ARTICLE III
EXHIBITS
3.1 EXHIBITS. Attached hereto are the following exhibits which are
incorporated herein by reference:
3.1.1 Exhibit A. Description of Lease and Working Interest
3.1.2 Exhibit A-1. Area of Mutual Interest
3.1.3 Exhibit B. Insurance Provision
3.1.4 Exhibit C. Accounting Procedure
3.1.5 Exhibit D. Nondiscrimination Provision
3.1.6 Exhibit E. Gas Balancing Agreement
ARTICLE IV
OPERATOR
4.1 OPERATOR. Cheniere Energy, Inc. is hereby designated as OPERATOR.
OPERATOR shall not have the right to assign or transfer any rights, duties or
obligations of OPERATOR to another PARTY.
4.2 RESIGNATION. OPERATOR may resign at any time by giving notice to the
PARTIES. Such resignation shall become effective at 7:00 a.m. on the first day
of the month following a period of ninety (90) days after said notice, unless a
successor OPERATOR has assumed the duties of OPERATOR prior to that date.
4.3 REMOVAL OF OPERATOR. OPERATOR may be removed if (1) OPERATOR becomes
insolvent or unable to pay its debts as they mature or makes an assignment for
the benefit of creditors or commits any act of bankruptcy or seeks relief under
laws providing for the relief of debtors; or (2) a receiver is appointed for
OPERATOR or for substantially all of its property and/or affairs; or (3)
OPERATOR or its designee no longer owns an interest in the property or divest
itself of fifty percent (50%) or more of the interest owned by it in the Lease
at the time it was designated OPERATOR; or (4) OPERATOR has committed a material
breach of any substantive provision hereof or fails to perform its duties
hereunder in a reasonable and prudent manner, or failed to rectify such default
within sixty (60) days after notice from another PARTY to do so. The PARTY
giving notice to the OPERATOR or a default shall also furnish a copy of such
notice to the other PARTIES. In such event, the OPERATOR may be removed by an
affirmative vote of two (2) or more PARTIES having a combined WORKING INTEREST
of fifty percent (50%) in the LEASE.
4.4 SELECTION OF SUCCESSOR. Upon resignation or removal of OPERATOR, a
successor OPERATOR shall be selected by an affirmative vote of two
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(2) or more PARTIES having a combined WORKING INTEREST of fifty-one percent
(51%) or more; however, if the removed or resigned OPERATOR fails to vote or
votes only to succeed itself, the successor OPERATOR shall be selected by an
affirmative vote of the PARTIES having a combined WORKING INTEREST of
fifty-one percent (51%) or more of the remaining WORKING INTEREST after
excluding the WORKING INTEREST of the removed or resigned OPERATOR.
4.5 DELIVERY OF PROPERTY. Prior to the effective date of resignation or
removal, OPERATOR shall deliver promptly to successor OPERATOR the possession of
everything owned by the PARTIES pursuant to this Agreement.
ARTICLE V
AUTHORITY AND DUTIES OF OPERATOR
5.1 EXCLUSIVE RIGHT TO OPERATE. Unless provided, OPERATOR shall have the
exclusive right and duty to conduct all operations pursuant to the Agreement.
5.2 WORKMANLIKE CONDUCT. OPERATOR shall conduct all operations in a good
and workmanlike manner, as would a prudent OPERATOR under the same or similar
circumstances. OPERATOR shall not be liable to the PARTIES for losses sustained
or liabilities incurred except such as may result from its gross negligence or
willful misconduct. Unless otherwise provided, OPERATOR shall consult with the
PARTIES and keep them informed of all important matters.
5.3 LIENS AND ENCUMBRANCES. OPERATOR shall endeavor to keep the LEASE and
equipment free from all liens and encumbrances occasioned by operations
hereunder, except those provided for in Section 8.5.
5.4 EMPLOYEES. OPERATOR shall select employees and determine their
number, hours of labor and compensation. Such employees shall be employees of
OPERATOR.
5.5 RECORDS. OPERATOR shall keep accurate books, accounts and records of
operations hereunder which, unless otherwise provided for in this Agreement,
shall be available to NON-OPERATOR pursuant to the provisions contained in
Exhibit "C".
5.6 COMPLIANCE. OPERATOR shall comply with and require all agents and
contractors to comply with all applicable laws, rules, regulations and orders of
any governmental agency having jurisdiction.
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5.7 DRILLING. OPERATOR shall have all drilling operations conducted by
qualified and responsible independent contractors under competitive contracts.
However, OPERATOR may employ its equipment and personnel in the conduct of such
operations, but its charges therefor shall not exceed the then prevailing rates
in the area and such work shall be performed pursuant to a written agreement
among the PARTICIPATING PARTIES.
5.8 REPORTS. OPERATOR shall make reports to governmental authorities that
it has a duty to make as OPERATOR and shall furnish copies of such reports to
the PARTIES. OPERATOR shall give timely written notice to the PARTIES of all
litigation and hearings affecting the LEASE or operations hereunder.
5.9 INFORMATION TO PARTICIPATING PARTIES. OPERATOR shall furnish all
PARTICIPATING PARTIES hereto the following information pertaining to each well
being drilled:
(a) copy of application for permit to drill and all amendments
thereto;
(b) daily drilling reports by telephone followed by written reports
(or by TWX or TELEX);
(c) complete report of all core analyses;
(d) two (2) copies of any logs or surveys as run;
(e) two (2) copies of any well test results, bottom-hole pressure
surveys, gas and condensate analyses or similar information;
(f) one (1) copy of reports made to regulatory agencies; and
(g) twenty-four (24) hour notice of logging, coring and testing
operations;
(h) upon request prior to resumption of drilling operations, samples
of cuttings and cores marked as to depth, to be packaged and shipped to the
requesting PARTY at their expense.
(i) all other reasonable information, available to OPERATOR,
pertaining to any well drilled pursuant to this Agreement.
ARTICLE VI
VOTING AND VOTING PROCEDURES
6.1 DESIGNATION OF REPRESENTATIVE. The name and address of the
representative and alternate authorized to represent and bind each PARTY for
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operations provided in Article IX, shall be as shown on Exhibit "A". The
designated representative or alternate may be changed by written notice to the
other PARTIES.
6.2 VOTING PROCEDURES. Unless otherwise provided, any matter requiring
approval of the PARTIES shall be determined as follows:
6.2.1 VOTING INTEREST. Each PARTY shall have a voting interest
equal to its WORKING INTEREST or its PARTICIPATING INTEREST as applicable.
6.2.2 VOTE REQUIRED. Except as may be specifically provided
elsewhere herein, any proposal requiring approval of the PARTIES shall be
decided by an affirmative vote to two (2) or more PARTIES having a combined
voting interest of fifty-one percent (51%) or more.
6.2.3 VOTES. The PARTIES may vote at meetings, by telephone,
confirmed in writing to OPERATOR; or by letter, telegram, telex or telecopies.
However, any PARTY not attending a meeting must vote prior to the meeting in
order to be counted. Provided, however, no vote shall be taken in a meeting in
which all Parties are not present unless such vote was specifically set out in
the formal agenda. OPERATOR shall give prompt notice of the results of such
voting to each PARTY.
6.2.4 MEETINGS. Meetings of the PARTIES may be called by OPERATOR
upon its own motion or at the request of one (1) or more PARTIES having a
combined voting interest of not less than ten percent (10%). Except in the case
of emergency or except when agreed by unanimous consent, no meeting shall be
called on less than five (5) days advance written notice, (including the agenda
for such meeting). The OPERATOR shall be chairman of each meeting.
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ARTICLE VII
ACCESS
7.1 ACCESS TO LEASE. Each PARTY shall have access to the LEASE as its
sole risk and expense at all reasonable times to inspect operations and records
and data pertaining thereto.
7.2 REPORTS. OPERATOR shall furnish to a requesting PARTY any information
to which such PARTY is entitled hereunder. The costs of gathering and
furnishing information not otherwise furnished under Article V shall be charged
to the requesting PARTY.
7.3 CONFIDENTIALITY. Except as provided in Section 7.4 and except for
necessary disclosures to governmental agencies, no PARTY shall release any
geological, geophysical or reservoir information or any logs, surveys or other
information pertaining to the progress, tests or results of any well or status
of the LEASE unless agreed to by the PARTICIPATING PARTIES. At such time as the
PARTIES mutually agree such information is non-confidential, it may be publicly
released. Unless otherwise provided, OPERATOR shall initially release the same
subsequent to approval of its content by the PARTIES. OPERATOR shall have the
exclusive right to designate certain wells as "tight" for the competitive
protection of the PARTIES.
7.4 LIMITED DISCLOSURE. Any PARTY may make confidential data available to
affiliates, to reputable engineering firms and gas transmission companies for
hydrocarbon reserve and other technical evaluations, to reputable financial
institutions for study prior to commitment of funds and to bonafide purchasers
of all of a PARTY'S interest in the LEASE. Any third party permitted such
access shall first agree in writing neither to disclose such data to others nor
to use such data except for the purpose for which it is disclosed. Each PARTY
shall be furnished with copies of third parties execution of the same.
ARTICLE VIII
EXPENDITURES
8.1 BASIS OF CHARGE TO THE PARTIES. OPERATOR shall pay all costs and each
PARTY shall reimburse OPERATOR in proportion to the PARTICIPATING INTEREST. All
charges, credits and accounting for expenditures shall be pursuant to
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the Accounting Procedure attached hereto as Exhibit "C". The provisions of
this Agreement shall prevail in the event of conflict with Exhibit "C".
8.2 AUTHORIZATION. OPERATOR shall neither make any single expenditure nor
undertake any project costing in excess of Seventy-five Thousand Dollars
($75,000.00) without prior approval of the PARTIES. OPERATOR shall furnish a
written AFE, for information purposes only, to the PARTIES on any expenditures
in excess of Twenty-five Thousand Dollars ($25,000.00) or if costs of an
operation exceed 120% of a previously approved AFE. Subject to any election
provided in Article X and XI, approval of a well operation shall include
approval of a all necessary expenditures through installation of the wellhead.
In the event of an emergency, OPERATOR may immediately make such expenditures as
in its opinion are required to deal with the emergency. OPERATOR shall report
to the PARTIES, as promptly as possible, the nature of the emergency and action
taken.
8.3 ADVANCE BILLINGS. OPERATOR shall have the right to require each
PARTY to advance its respective share of estimated expenditures pursuant to
Exhibit "C", provided, however, that in the event a statement and invoice for
advance payment is submitted for costs attributable to a well proposal,
OPERATOR shall advance bill for the entire amount of such billing costs even
though such costs may not actually be incurred during the next thirty (30) day
period and as to any party who fails to pay its share of said advance payment
within fifteen (15) days after receipt of such statement and invoice, OPERATOR
will notify such affected party of its default by certified mail, return receipt
requested and if such party fails to cure the default within ten (10) days from
the date of receipt of OPERATOR'S Notice, by payment in full of the outstanding
invoices for advance payment, at OPERATOR'S election, the affected party shall
be deemed non-consent as to the proposed well attributable thereto.
8.4 COMMINGLING OF FUNDS. Funds received by OPERATOR under this Agreement
may be commingled with its own funds.
8.5 SECURITY RIGHTS. In addition to any other security rights and
remedies provided by law with respect to services rendered or materials and
equipment furnished under this Agreement, OPERATOR shall have a first lien upon
each PARTY'S PARTICIPATING and/or WORKING INTEREST, including the production and
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equipment credited thereto, in order to secure payment of charges against such
PARTY, together with interest thereon at the rate set forth in Exhibit "C" or
the maximum rate allowed by law, whichever is less, plus attorneys' fees, court
costs and other related collection costs. If any PARTY does not pay such
charges when due, OPERATOR shall have the additional right to collect from the
purchaser the proceeds from the sale of such PARTY'S share of production until
the amount owed has been paid. Each purchaser shall be entitled to rely on
OPERATOR'S statement concerning the amount owed. Each NON-OPERATOR shall have
comparable security rights on OPERATOR'S PARTICIPATING and/or WORKING INTEREST.
8.6 UNPAID CHARGES. If any PARTY fails to pay the charges due hereunder,
including billings under Section 8.3, within thirty (30) days after payment is
due, the PARTICIPATING PARTIES shall have the obligation, upon OPERATOR'S
request, to pay the unpaid amount in proportion to their interest. Each PARTY
so paying its share of the unpaid amount shall be subrogated to OPERATOR'S
security rights to the extent of such payment.
8.7 DEFAULT. If any PARTY does not pay its share of the charges when due,
or prior to commencement of the approved operation for which it is billed,
whichever is the earlier, OPERATOR may give such PARTY notice that unless
payment is made within fifteen (15) DAYS, such PARTY shall be in default. Any
PARTY in default shall have no further access to the maps, cores, logs, surveys,
records, data, interpretations or other information obtained in connection with
said operation. A defaulting PARTY shall not be entitled to vote on any matter
until such time as PARTY'S payments are current. The voting interest of each
non-defaulting PARTY shall be in the proportion its PARTICIPATING INTEREST bears
to the total non-defaulting PARTICIPATING INTEREST. As to any operation
approved or commenced during the time a PARTY is in default, such PARTY shall be
deemed to be a NON-PARTICIPATING PARTY.
8.8 CARVED-OUT INTERESTS. Any overriding royalty, production payment, net
proceeds interest, carried interest or any other interest carved-out of the
WORKING INTEREST in the LEASE after the effective date of this Agreement shall
be subject to the rights of the PARTIES to this Agreement, and any PARTY whose
WORKING
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INTEREST is so encumbered shall be responsible therefor. If a PARTY does not
pay its share of expenses and the proceeds from the sale of production under
Section 8.5 are insufficient for that purpose, the security rights provided
for therein may be applied against the carved-out interests with which such
WORKING INTEREST is burdened. In such event, the rights of the owner of such
carved-out interest shall be subordinated to the security rights granted by
Section 8.5.
ARTICLE IX
NOTICES
9.1 GIVING AND RECEIVING NOTICES. All notices shall be in writing and
delivered in person or by mail, telex, telegraph, TWX, telecopier or cable;
however, if a drilling rig is on location at time of proposal and standby
charges are accumulating, such notices shall be given by telephone and
immediately confirmed in writing. Notice shall be deemed given only when
received by the PARTY to whom such notice is directed, except that any notice by
certified mail or equivalent, telegraph or cable properly addressed, pursuant to
Section 6.1, and with all postage and charges prepaid shall be deemed given
seventy-two (72) hours after such notice is deposited in the mail or twenty-four
(24) hours after such notice is sent by facsimile (receipt confirmed), or when
filed with an operating, telegraph or cable company for immediate transmission.
9.2 CONTENT OF NOTICE. Any notice which requires a response shall
indicate the maximum response time specified in Section 9.3 If a proposal
involves a platform or facility, the notice shall contain a description of same,
including location and the estimated costs of fabrication, transportation and
installation. If a proposal involves a well operation, the notice shall include
the proposed depth, the objective zone or zones to be tested, the surface and
bottom-hole locations and the estimated costs of the operation including all
necessary expenditures through installation of the wellhead.
9.3 RESPONSE TO NOTICES. Each PARTY'S response to a proposal shall be in
writing to OPERATOR, with copies to the other PARTIES. Except for
those notices in Articles X, XI, XV and XVI, the maximum response time
shall be as follows:
9.3.1 PLATFORM CONSTRUCTION. When any proposal for operations
involves the construction of a platform, the maximum response time
shall be forty-five (45) days.
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9.3.2 PROPOSAL WITHOUT PLATFORM. When any proposal for operations
does not require construction of a platform, maximum response time
shall be thirty (30) days; however, if a drilling rig is on location
and standby charges are accumulating, the maximum response time shall
be forty-eight (48) hours.
9.3.3 OTHER MATTERS. For all other matters requiring notice, the
maximum response time shall be thirty (30) days.
9.4 FAILURE TO RESPOND. Failure of any PARTY to respond to a notice
within the required period shall be deemed to be a negative response.
9.5 RESTRICTIONS ON MULTIPLE WELL PROPOSALS. Unless otherwise agreed by
the PARTIES, no more than one well shall be drilling or completing at the same
time. Well proposals made under the terms hereof shall be limited to one well
each and except as provided below, no PARTY shall be required to make an
election under more than one well proposal at the same time or while a well is
drilling or completing. This paragraph shall not limit the right of a PARTY to
propose a well while another is drilling or completing, however, the time to
elect under such a proposal shall be deferred until (a) thirty (30) days after
the previous well has been completed or plugged and abandoned or (b) twenty-four
(24) hours from receipt of notification that the drilling rig has been moved to
the new location and standby charges are being accumulated, whichever is
earlier.
ARTICLE X
EXPLORATORY WELLS
10.1 OPERATIONS BY ALL PARTIES. Any PARTY may propose an EXPLORATORY WELL
by notifying the other PARTIES. If all the PARTIES agree to participate in
drilling the proposed well, OPERATOR shall drill same for the benefit of all
PARTIES.
10.2 SECOND OPPORTUNITY TO PARTICIPATE. If fewer than all PARTIES elect
to participate, the proposing PARTY shall inform the OPERATOR of the elections
made. OPERATOR shall inform the PARTIES of the elections, whereupon any PARTY
originally electing not to participate may then elect to participate by
notifying the OPERATOR within forty-eight (48) hours after receipt of such
information.
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10.3 OPERATIONS BY FEWER THAN ALL PARTIES. If fewer than all but two (2)
or more PARTIES owning not less than fifty percent (50%) WORKING INTEREST elect
to participate in and agree to bear the cost and risk of drilling the proposed
well, OPERATOR, even if OPERATOR is a NON-PARTICIPATING PARTY, shall drill such
well under this Agreement. OPERATOR, immediately after expiration of the
applicable notice period, shall advise the PARTICIPATING PARTIES of (a) the
total interest of the PARTIES approving such operation, and (b) its
recommendation as to whether the PARTICIPATING PARTIES should proceed with the
operation as proposed. Each PARTICIPATING PARTY, within forty-eight (48) hours
(inclusive of Saturday, Sunday or legal holidays) after receipt of such notice,
shall advise the proposing PARTY of its desire to (a) limit participation to
such PARTY'S interest as shown on Exhibit "A", or (b) carry its proportionate
part of NON-PARTICIPATING PARTIES' interest, or (c) participate with a lesser
percentage than its proportionate part of the NON-PARTICIPATING PARTIES'
interest. The proposing PARTY, at its election, may withdraw such proposal if
there is insufficient participation and shall promptly notify all PARTIES of
such decision. If the well is commenced within ONE HUNDRED FIFTY (150) days
after the date of the last applicable election date and is drilled as proposed
in accordance with this Agreement, any PARTY electing not to participate shall
be deemed to have relinquished its operating rights in such well as if it were a
NON-CONSENT WELL. However, in the situation in which a rig is on location and
standby charges are accumulating, thus precipitating a forty-eight (48) hour
response period, the well must be commenced within fifteen (15) days. If no
operations are begun within such time period, the effect shall be as if the
proposal had not been made. Operations shall be deemed to have commenced (a) on
the date the contract for a new platform is let, if the notice indicated the
need for such platform; or (b) the date rigging-up operations are commenced.
Recoupment of costs shall be determined by Sections 12.2 and 12.5, if
applicable, and the drilling of such well shall be governed by Article XII as
applicable; however, percentages under Section 12.2 shall be as follows:
12.2.1a) Eight hundred percent (800%)
12.2.1b) Three hundred percent (300%)
12.2.1c) One hundred percent (100%)
12.2.1d) One hundred percent (100%)
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PROVIDED HOWEVER, if the proposed EXPLORATORY WELL is the initial well drilled
by the PARTIES on the LEASE, then any NON-PARTICIPATING PARTY shall permanently
assign its entire interest in the LEASE to the PARTICIPATING PARTIES and the
recoupment of cost provision of this Article and Article XII shall not apply,
but the NON-PARTICIPATING PARTY shall not be relieved of any obligation accruing
prior to such assignment.
10.4 COURSE OF ACTION AFTER DRILLING TO INITIAL OBJECTIVE
DEPTH
10.4.1 CASING POINT ELECTION. After an EXPLORATORY WELL has been
drilled for all PARTIES to CASING POINT, and all authorized logging and testing
has been completed, OPERATOR shall immediately notify the other PARTICIPATING
PARTIES in writing of OPERATOR'S proposal for further operations thereon. Each
PARTICIPATING PARTY, within forty-eight (48) hours after receipt of such notice,
shall advise the OPERATOR and the other PARTICIPATING PARTIES in writing whether
it accepts OPERATOR'S recommendation or makes additional recommendations as to
further operations with respect to such well. If additional recommendations are
made, the PARTICIPATING PARTIES shall have an additional twenty-four (24) hours
to respond. If all PARTICIPATING PARTIES elect to abandon the well at that
point, it shall be plugged and abandoned at their joint cost and expense.
If less than all, but one (1) or more PARTICIPATING PARTIES owning at least
twenty-five percent (25%) in interest in the well elect to conduct a specific
operation, other than plugging and abandoning the well, the PARTIES so electing
shall conduct such operation as a NON-CONSENT OPERATION under the provisions of
Article 12. In the sole opinion of OPERATOR, if the well is in such a condition
that a reasonably prudent Operator would not conduct the contemplated operations
due to concern for jeopardizing or losing the same prior to completing the well
in the objective depth or objective formation, such election shall not be given
the priority herein above set forth. If at any time there is more than one
operation proposed in connection with any well subject to this Agreement, and in
the event no one proposed operation receives the approval of one or more
PARTICIPATING PARTIES owning fifty-one percent (51%) in interest in the well,
such operations shall be conducted in the following order of priority:
(a) further log or test the well,
(b) complete the well as originally planned,
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(c) plug-back the well and attempt to complete it in a shallower zone
in ascending order,
(d) sidetrack the well to another bottom hole location,
(e) deepen the well in the order made,
(f) other operations in the well,
(g) temporarily plug and abandon the well,
(h) permanently plug and abandon the well.
If all PARTIES approve a proposal or counter-proposal, OPERATOR shall conduct
the operation at the PARTICIPATING PARTIES cost and risk. A proposal to
complete, rework or recomplete a well at a particular depth will take precedence
over a proposal to complete, rework or recomplete the well above such depth,
with a deeper proposal for such operations always taking precedence over a
shallower proposal. Proposals for such operations at any depth will take
precedence over proposals to deepen the well below its originally proposed total
depth or to sidetrack the well once it has reached such depth with a proposal to
sidetrack taking precedence over a proposal to deepen. Proposals of the same
type shall be given precedence in the order in which they are made. No action
shall be required on a proposal while there is pending a proposal, with
precedence being on the same well on which the PARTIES have not acted or on
which work has not been completed.
ARTICLE XI
DEVELOPMENT WELL OPERATIONS
11.1 OPERATIONS BY ALL PARTIES. Any PARTY may propose a DEVELOPMENT
OPERATION, including any platform required by such operations, by notifying the
other PARTIES. If all PARTIES elect to participate in the proposed operation,
OPERATOR shall conduct such operation for the benefit of the PARTIES at their
cost and risk.
11.2 SECOND OPPORTUNITY TO PARTICIPATE. If fewer than all PARTIES elect
to participate, the OPERATOR shall inform the PARTIES of the elections made,
whereupon any PARTY originally electing not to participate may then elect to
participate by notifying the OPERATOR within forty-eight (48) hours after
receipt of such information. Thereafter, if fewer than all PARTIES elect to
participate, the PARTICIPATING PARTIES shall be afforded the alternatives as set
out under Article 10.3.
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11.3 OPERATIONS BY FEWER THAN ALL PARTIES. Except for a DEVELOPMENT
WELL(S) under Section 12.7, if fewer than all PARTIES, but one (1) or more
PARTIES having a combined WORKING INTEREST of fifty percent (50%) or more
approve a DEVELOPMENT OPERATION, OPERATOR shall conduct such operation pursuant
to Article XII. If such operations are to be conducted from an existing
platform, the operations participated in by all of the PARTIES shall have
preference, unless otherwise agreed to by the PARTIES hereto.
11.4 TIMELY OPERATIONS. Operations shall be commenced within ONE HUNDRED
FIFTY (150) days following the date upon which the last applicable election may
be made. If no operations are begun within such time period, the effect shall
be as if the proposal had not been made. Operations shall be deemed to have
commenced (a) on the date the contract for a new platform is let, if the notice
indicated the need for such platform; or (b) on the date rigging-up operations
are commenced on an existing platform.
11.5 COURSE OF ACTION AFTER DRILLING TO INITIAL OBJECTIVE DEPTH. After
any DEVELOPMENT WELL has reached its objective depth, the identical procedures
and alternatives provided under Article 10.4 shall apply.
11.6 DEEPER DRILLING. If a well is proposed to be drilled below the
deepest producible zone penetrated by a PRODUCIBLE WELL on the LEASE any PARTY
may elect to participate either in the well as proposed or to the base of the
deepest producible zone. A PARTY electing to participate in such well to the
base of said zone shall bear its proportionate part of the cost and risk of
drilling to said zone including completion or abandonment. All operations below
the depth to which such PARTY agreed to participate shall be governed by Article
X.
ARTICLE XII
NON-CONSENT OPERATIONS
12.1 NON-CONSENT OPERATIONS. OPERATOR shall conduct NON-CONSENT
OPERATIONS at the sole risk and expense of the PARTICIPATING PARTIES, in
accordance with the following provisions;
12.1.1 NON-INTERFERENCE. NON-CONSENT OPERATIONS shall not
interfere unreasonably with operations being conducted by all PARTIES.
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12.1.2 MULTIPLE COMPLETION LIMITATION. NON-CONSENT OPERATIONS
shall not be conducted in a well having multiple completions unless: (a) each
completion is owned by the same PARTIES in the same proportions; (b) the well
is incapable of producing from any of its current completions; or (c) all
PARTICIPATING PARTIES in the well consent to such operations.
12.1.3 METERING. In NON-CONSENT OPERATIONS, production need not be
separately metered but may be determined on the basis of well test.
12.1.4 LIENS. In the conduct of NON-CONSENT OPERATIONS, the
PARTICIPATING PARTIES shall keep the LEASE free and clear of liens and
encumbrances.
12.1.5 NON-CONSENT WELL. Operations on a NON-CONSENT WELL shall
not be conducted in any producible zone penetrated by a PRODUCIBLE WELL
without approval of each NON-PARTICIPATING PARTY unless; (a) such zone shall
have been designated in the notice as a completion zone; (b) completion of
such well in said zone will not increase the well density governmentally
prescribed or approved for such zone; and (c) the horizontal distance between
the vertical projections of the midpoint of the zone in such well and any
existing well in the same zone will be a least one thousand (1,000) feet if
an oil-well completion or two thousand (2,000) feet if a gas-well completion
Subject to the foregoing provisions of this Article, until the PARTICIPATING
PARTIES in a NON-CONSENT WELL have recouped the amount to which they are
entitled hereunder, they may conduct any reworking operation on such well
which they may desire, including plugging back to a shallower zone but only
if such shallower zone is subject to NON-CONSENT elections in the original
proposal. In this event, the cost of such reworking operation shall be
subject to the penalty provisions of Section 12.2.1.
12.1.6 COST-INFORMATION. OPERATOR shall, within one hundred twenty
(120) days after completion of a NON-CONSENT WELL, furnish the PARTIES an
inventory and an itemized statement of the cost of such well and equipment
pertaining thereto. OPERATOR shall furnish to the PARTIES a monthly statement
showing operating expenses and the proceeds from the sale of production from the
well for the preceding month.
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12.1.7 COMPLETIONS. For the purposes of determinations hereunder,
each completion shall be considered a separate well.
12.2. RELINQUISHMENT OF INTEREST. Upon commencement of NON-CONSENT
OPERATIONS, each NON-PARTICIPATING PARTY'S interest and leasehold operating
rights in the NON-CONSENT OPERATION and title to production therefrom shall be
owned by and vested in each PARTICIPATING PARTY in proportion to its
PARTICIPATING INTEREST for as long as the operations originally proposed are
being conducted or production is obtained, subject to Sections 12.2.1 and
12.2.2.
12.2.1 PRODUCTION REVERSION PENALTIES. Except as to such
operations conducted pursuant to Section 12.7 or for the initial EXPLORATORY
WELL referred to in Section 10.3, such interest, rights and title shall revert
to each NON-PARTICIPATING PARTY when the PARTICIPATING PARTIES have recouped out
of the proceeds of production from such NON-CONSENT OPERATIONS an amount equal
to the sum of the following:
(a) Six hundred percent (600%) of the cost of drilling,
completing, recompleting, sidetracking, deepening, deviating or
plugging back each NON-CONSENT WELL and equipping it through the
wellhead connections, reduced by any contribution received under
Section 21.1; plus,
(b) Three hundred percent (300%) of the cost of FACILITIES
necessary to carry out the operation; plus,
(c) One hundred percent (100%) of the cost of using any
FACILITIES already installed determined pursuant to Section 12.6
below; plus,
(d) One hundred percent (100%) of the cost of operating
expenses, royalties and severance, gathering, production and windfall
profit taxes.
Recoupment of costs shall be in the order listed above. Upon the recoupment of
such costs, a NON-PARTICIPATING PARTY shall become a PARTICIPATING PARTY in such
operations.
12.2.2 NON-PRODUCTION REVERSION. If such NON-CONSENT OPERATIONS
fail to obtain production or such operations result in production which ceases
prior to recoupment by the PARTICIPATING PARTIES of the penalties provided for
above, such operating rights shall revert to each NON-PARTICIPATING PARTY except
that all NON-CONSENT wells, platforms and FACILITIES shall remain vested in
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the PARTICIPATING PARTIES; however, any salvage in excess of the sum
remaining under Section 12.2.1 shall be credited to all PARTIES.
12.3 DEEPENING OR SIDETRACKING OF NON-CONSENT WELL. If any PARTICIPATING
PARTY proposes to deepen or sidetrack a NON-CONSENT WELL, a NON-PARTICIPATING
PARTY may participate by notifying the OPERATOR within fifteen (15) days after
receiving the proposal (48 hours if a rig is on location) that it will join in
the (deepening or sidetracking) operations, and by paying to the PARTICIPATING
PARTIES an amount equal to such NON-PARTICIPATING PARTY'S share of the actual
costs of drilling and casing such well to the point at which such deepening or
sidetracking operation is commenced. The PARTICIPATING PARTIES shall continue
to be entitled to recoup the full sum specified in Section 12.2.1 applicable to
the NON-CONSENT WELL, less the amount paid under this section, out of the
proceeds of production from the NON-CONSENT portion of the well.
12.4 OPERATIONS FROM NON-CONSENT PLATFORMS. Subject to the following,
a PARTY which did not originally participate in a platform shall be a
NON-PARTICIPATING PARTY as to ownership therein and all operations thereon
until the PARTICIPATING PARTIES as to such platform have recouped the full
sum specified in Section 12.2.1 applicable to such NON-CONSENT PLATFORM and
the NON-CONSENT OPERATIONS which resulted in the setting of such PLATFORM and
other NON-CONSENT OPERATIONS thereon or therefrom. However, an original
NON-PARTICIPATING PARTY may participate in additional operations from such
PLATFORM by notifying the OPERATOR within thirty (30) days after receiving a
proposal for operations from such PLATFORM (48 hours if a rig is on location
and standby rig charges are being incurred) that it will join in such
proposed operations by paying to the PARTICIPATING PARTIES in such PLATFORM
an amount equal to 300% of such NON-PARTICIPATING PARTY'S share of the actual
cost of such PLATFORM, less any recoupment therefor previously obtained.
Thereafter, such original NON-PARTICIPATING PARTY in the PLATFORM shall own
its proportionate share thereof. The PARTICIPATING PARTIES in such
NON-CONSENT PLATFORM shall continue to be entitled to recoup the full sum
specified in Section 12.2.1 applicable to any other NON-CONSENT OPERATIONS
thereon or therefrom.
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12.5 DISCOVERY OR EXTENSION FROM MOBILE DRILLING OPERATIONS. If a
NON-CONSENT WELL drilled from a mobile drilling rig or floating drilling
vessel results in the discovery or extension of productive formations and, if
within one (1) year from the date the drilling equipment is released, a
platform or other fixed structure is ordered and if its location is within
one thousand (1,000) feet from an oil well or three thousand (3,000) feet if
gas, from the vertical projection of the bottom-hole location of any such
well (unless limited by surface restrictions), the recoupment of amounts
applicable to such well under Section 12.2.1 shall be out of such original
NON-PARTICIPATING PARTY'S SHARE of all production from such NON-CONSENT WELL
and one-half of its share of production from all other wells on the platform
or other fixed structure drilled to develop reserves resulting from the
discovery or extension of productive formations in said NON-CONSENT WELL in
which the NON-PARTICIPATING PARTY in such NON-CONSENT WELL has a
PARTICIPATING INTEREST.
12.6 ALLOCATION OF PLATFORM COSTS TO NON-CONSENT OPERATIONS.
NON-CONSENT OPERATIONS shall be subject to further conditions as follows:
12.6.1 CHARGES. If a NON-CONSENT WELL is drilled from a platform
(and is producible or the slot is otherwise rendered unusable), the
PARTICIPATING PARTIES in such well shall pay to the OPERATOR for credit to the
owners of such platform a charge (due upon completion of operations for such
NON-CONSENT WELL) for the right to use the platform and its FACILITIES as
follows:
(a) Such PARTICIPATING PARTIES shall pay a sum equal to that
portion of the total cost of the platform (including, but not by way
of limitation, costs of design, materials, fabrication,
transportation, installation and other costs associated therewith,
plus any repairs and maintenance expense resulting from the drilling
of such well not provided in Section 12.6.2), which one platform slot
bears to the total number of slots on the platform. If the
NON-CONSENT WELL is abandoned, the right of the PARTICIPATING PARTIES
to use that platform slot shall terminate
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unless such PARTIES commence drilling a substitute well from the same
slot within ninety (90) days after abandonment.
(b) If the NON-CONSENT WELL production is handled through
existing FACILITIES, the PARTICIPATING PARTIES shall pay the owners
of the facilities a sum equal to that portion of the total cost of
such FACILITIES which the number of completions in said NON-CONSENT
WELL bears to the total number of completions utilizing the
FACILITIES.
12.6.2 OPERATING AND MAINTENANCE CHARGES. The PARTICIPATING PARTIES
shall pay all costs necessary to connect a NON-CONSENT WELL to the FACILITIES
and that proportionate part of the expense of operating and maintaining the
platform and other FACILITIES applicable to the NON-CONSENT WELL, including the
cost of insurance thereon or in connection therewith, whether by insurance
policy of self-insurance by each PARTY for its interest or by OPERATOR for the
joint account. Platform operating and maintenance expenses shall be allocated
equally to all completions served and operating and maintenance expenses for the
other FACILITIES shall be allocated equally to producing completions.
12.6.3 PAYMENTS. Payments of sums pursuant to Section 12.6.1 is
not a purchase of an additional interest in the platform or other FACILITIES.
Such payments shall be included in the total amount which the PARTICIPATING
PARTIES are entitled to recoup out of production from the NON-CONSENT WELL.
12.7 NON-CONSENT DRILLING TO MAINTAIN LEASE. A lease maintenance
operation is defined for the purposes of this paragraph as one required to
maintain the joint LEASE or a portion thereof, at its expiration date or
otherwise. This shall include, but not be limited to, a well proposed to be and
actually commenced and drilled during the last year of the primary term of the
LEASE, or subsequent thereto, when: (a) the LEASE, or affected portion
thereof, is not otherwise being held by operations or production; (b) a
PRODUCIBLE WELL(S) thereon has not established sufficient reserves, as
determined by one (1) or more PARTICIPATING PARTIES owning fifty percent (50%)
working interest in the well, to justify a platform; or (c) any governmental
agency having jurisdiction requires the same to avoid loss or forfeiture of
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all or any portion of the LEASE. Any PARTY may propose and carry out (no
percentage vote required) a lease maintenance operation and any PARTY(S)
electing not to participate in such an operation will assign to the
PARTICIPATING PARTIES in the proportions in which they participate therein,
all of its rights, titles and interest in such LEASE block, or the affected
portion thereof, free and clear of any burdens thereon occurring since the
effective date of this Agreement as provided herein, retaining, however, its
interest in previously completed wells which are producing, shut-in or
temporarily abandoned. Such assignment, effective upon commencement of lease
maintenance operations, will be promptly signed before witnesses,
acknowledged and delivered to the PARTICIPATING PARTIES. If only a portion
of the LEASE is involved, the PARTICIPATING PARTIES at their election may
require an assignment of operating rights in lieu of the assignment of all
interest. Upon acceptance by assignees, the assigning PARTY will thereupon
cease to be a PARTY hereto as to the assigned interest, subject to final
accounting between the PARTIES. If such assignment is not accepted by the
Assignees, they shall promptly prepare a release of such affected LEASE or
portion thereof which shall be executed by all PARTIES. However, nothing
herein contained will be construed to permit any PARTY to refuse to pay in
cash its share of the cost and expense of any operation required on the joint
LEASE block by final order of any governmental authority or court having
jurisdiction.
12.7.1 RETENTION OF LEASE BY NON-CONSENT WELL. If a NON-CONSENT
WELL is the only well on the LEASE(S) and is serving to perpetuate the
LEASE(S), within thirty (30) days after expiration of the LEASE(S) primary
term, each NON-PARTICIPATING PARTY shall elect one of the following;
(a) Immediately assign its entire interest in the LEASE(S) to
the PARTICIPATING PARTIES in the proportions in which the NON-CONSENT
OPERATION was conducted; or
(b) Immediately pay to the PARTICIPATING PARTIES its share of
all costs associated with such well, less any recoupment therefor
previously obtained, such payment to be credited against the total
amount to be recovered out of its share of production by
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the PARTICIPATING PARTIES pursuant to Article X or XII, whichever is
applicable.
12.8 ALLOCATION OF COSTS (SINGLE COMPLETION). For the purpose of
allocating costs on any well in which the ownership is not the same for the
entire depth, the cost of drilling, completing or equipping such well shall be
allocated on the following basis:
(a) Intangible drilling, completion and material costs
(including casing and tubing costs) from the surface to a depth one
hundred (100) feet below the base of the completed zone shall be
charged to the owners or the PARTIES participating in that zone.
(b) Intangible drilling, completion, casing string and material
costs, other than tubing costs, from a depth one hundred (100) feet
below the base of the completed zone to total depth shall be charged
to the owners or the PARTIES participating in the costs to total
depth.
12.9 ALLOCATION OF COSTS (MULTIPLE COMPLETIONS). For the purpose of
allocating costs on any well completed in dual or multiple zones in which the
ownership is not the same for the entire depth or the completions thereof, the
cost of drilling, completing and equipping such well shall be allocated on the
following basis:
(a) Intangible drilling, completion (including wellhead
equipment), casing string and material costs, other than tubing costs,
from the surface to a depth one hundred (100) feet below the base of
the upper completed zone shall be divided equally between the
completed zones and charged to the owners thereof or the PARTIES
participating in such zone.
(b) Intangible drilling, completion, casing string and material
costs, other than tubing costs, from a depth one hundred (100) feet
below the base of the upper completed zone to a depth one hundred
(100) feet below the base of the second completed zone shall be
divided equally between the second and any other zone completed below
such depth and charged to the owners
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thereof or to the PARTIES participating in each zone. If the well is
completed in additional zones, the costs applicable to each such zone
shall be determined and charged to the owners thereof in the same
manner as prescribed by the dual zones completion.
(c) Intangible drilling, completion, casing string and material
costs, other than tubing costs, from a depth one hundred (100) feet
below the base of the lower completed zone to total depth shall be
charged to the owners or the PARTIES participating in the costs to
total depth.
(d) Costs of tubing strings serving each separate zone shall be
charged to the owners or the PARTIES participating in each zone.
(e) For the purposes of allocating tangible and intangible costs
between zones that occur at less than one hundred (100) foot
intervals, the costs for the distance between the base of the upper
zone to the top of the next lower zone shall be allocated equally
between zones.
12.10 ALLOCATION OF COSTS (DRY HOLE). For the purpose of allocating
costs on any well determined to be a dry hole, in which the ownership is not the
same for the entire depth or the completion thereof, the cost of drilling,
plugging and abandoning such well shall be allocated on the following basis:
(a) Costs to drill, plug and abandon a well proposed for
completion in single, dual, or multiple zones shall be charged to the
PARTICIPATING PARTIES in the same manner as if the well were completed
as a producing well in all zones as proposed.
(b) Plugging and abandoning of any well following any deepening,
completion attempt or other operation shall be at the sole risk and
expense of the PARTICIPATING PARTIES in such operation, subject
however to the provisions of Section 10.4.
12.11 INTANGIBLE DRILLING AND COMPLETION ALLOCATIONS. For the purpose of
calculations hereunder, intangible drilling and completion costs, including
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non-controllable material costs, shall be allocated between zones, including
the interval from the lower completed zones to total depth, on a drilling day
ratio basis beginning on the day the rig arrives on location and terminating
when the rig is released.
12.12 OPERATED WELLS. The designated OPERATOR hereunder shall operate
all wells drilled pursuant to the NON-CONSENT provision of this Agreement.
However, if the NON-CONSENT WELL is drilled from a mobile drilling rig and if
the designated OPERATOR is a NON-PARTICIPATING PARTY therein, the PARTICIPATING
PARTY owning the largest PARTICIPATING INTEREST shall serve as OPERATOR for the
drilling and completion of such well, unless the PARTICIPATING PARTIES agree
otherwise. Upon completion of any such well as a productive well (completion
through the wellhead), the well shall be turned over to the designated OPERATOR
for further operations.
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ARTICLE XIII
FACILITIES
13.1 APPROVAL. Any PARTY may propose the installation of FACILITIES by
notice to the other PARTIES with information adequate to describe the proposed
FACILITIES and the estimated costs. The affirmative vote of one (1) or more
PARTIES having a combined PARTICIPATING INTEREST of fifty percent (50%) or more
in the wells to be served shall be required before such FACILITIES may be
installed. If such required approval is obtained, the PARTICIPATING PARTIES
therein shall proceed with the installation of such FACILITIES at their sole
cost, risk and expense and the NON-PARTICIPATING PARTIES in such FACILITIES
shall have no rights with respect thereto, subject to recoupment of amounts set
forth under Article 12.2.1 from the completions served thereby. Each PARTIES'
share shall be calculated by multiplying the total cost of the FACILITIES by a
fraction, the numerator of which is that PARTY'S number of PRODUCIBLE WELL
completions served by the FACILITIES and the denominator of which is the total
number of PRODUCIBLE WELL completions served by the FACILITIES. Nothing
hereunder shall limit a PARTY'S rights under Section 22.1, however, a PARTY
acting thereunder shall not be required to pay for joint account FACILITIES that
duplicate its FACILITIES constructed pursuant to Section 22.1
ARTICLE XIV
ABANDONMENT AND SALVAGE
14.1 PLATFORM SALVAGE AND REMOVAL COSTS. When the PARTIES owning
FACILITIES consisting of a platform, mutually agree to dispose of such platform
it shall be disposed of by the OPERATOR as approved by such PARTIES. The costs,
risks and net proceeds, if any, resulting from such disposition shall be shared
by such PARTIES in proportion to their PARTICIPATING INTEREST. To secure the
availability and sufficiency of funds for the dismantling, abandonment and
removal of such platform, the PARTICIPATING PARTIES, prior to the construction
shall assign to a trustee of a bank (the "Assignee") an overriding royalty
interest equal to one-half percent (1/2%) of the whole of the oil, gas and other
minerals produced, saved and marketed from the LEASE. The assignee shall be
selected by an affirmative vote of two or more parties having a combined
PARTICIPATING INTEREST of fifty percent
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(50%) or more. The assigned overriding royalty interest shall burden the
interest of the parties in proportion to their participation in the platform.
The assignee, who shall have no interest in the overriding royalty
interest, shall receive the proceeds and place same in an interest bearing
account or in insured certificates of deposit (the "Abandonment Fund"). If a
platform is not constructed within one year of the date of overriding royalty
interest is assigned, the overriding royalty shall terminate and the assignee
shall reassign the interest and disburse the Abandonment Fund.
Any proposal to construct a platform shall provide estimated cost of
dismantling, abandonment and removal of same. At such time as the Abandonment
Fund equals these estimated costs, the overriding royalty shall be assigned to
the PARTICIPATING PARTIES by the assignee. Similarly, any excess Abandonment
Funds after complete dismantling, abandonment and removal costs are paid shall
be disbursed to the PARTICIPATING PARTIES in proportion to their interest.
A PARTICIPATING PARTY's interest in the Abandonment Fund may only be
assigned or transferred in conjunction with an assignment or transfer of the
subject leases.
In lieu of an assignment of overriding royalty interest, any PARTICIPATING
PARTY may elect to furnish an irrevocable letter of credit in favor of the
assignee, or proof of coverage under adequate plugging and abandonment bonds,
subrogated in favor of the OPERATOR, to provide for that PARTY's estimated
proportionate share of platform dismantling, removal and abandonment costs. The
letter of credit or plugging and abandonment bonds shall provide that either
instrument shall remain in force in the event of a transfer or assignment of the
PARTY's interest until such time as the transferee or assignee provides a
similar irrevocable letter of credit or plugging and abandonment bonds.
14.2 PURCHASE OF SALVAGE MATERIALS. OPERATOR shall give all PARTIES
written notice when it is determined under Section 14.1 that FACILITIES or other
materials are not needed for further operations and may be moved from the LEASE.
Within fifteen (15) days after receipt of such notice any PARTY desiring to
acquire such materials shall give OPERATOR written notice of such fact. If more
than
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one PARTY desires to acquire such materials, OPERATOR shall designate a time
and place at which each PARTY may submit written bids for such materials. If
only one PARTY desires to acquire such materials, it may do so on the basis
of the value thereof as determined in accordance with the provisions of
Exhibit "C", with prefabricated materials being valued on the basis of cost
including but not limited to cost of fabrication. All materials removed from
the LEASE shall be removed at the expense of the PARTIES unless purchased
hereunder, then at the expense of the acquiring PARTY. In the event no PARTY
desires to purchase said materials, the materials shall be disposed of in
accordance with the provisions of Exhibit "C".
14.3 ABANDONMENT OF PRODUCING WELL. Any PARTY may propose the
abandonment of a well by notifying the other PARTIES, who shall have the time
period set forth in Section 9.3.2 from receipt thereof within which to
respond. No well shall be abandoned without the mutual consent of the
PARTICIPATING PARTIES. The PARTICIPATING PARTIES not consenting to the
abandonment shall pay to each PARTICIPATING PARTY desiring to abandon its
share of the current value of the well's salvageable material and equipment
as determined pursuant to Exhibit "C", less the estimated current costs of
salvaging same and of plugging and abandoning the well as determined by the
PARTICIPATING PARTIES. Provided, however, if such salvage value is less than
such estimated current costs, then each PARTICIPATING PARTY desiring to
abandon shall pay to OPERATOR for the benefit of the PARTICIPATING PARTIES
not consenting to abandonment a sum equal to its share of such deficiency.
14.4 ASSIGNMENT OF INTEREST. Each PARTICIPATING PARTY desiring to
abandon a well pursuant to Section 14.3 shall assign effective as of the last
applicable election date, to the non-abandoning PARTIES, in proportion to
their PARTICIPATING INTERESTS, its interest in such well and the equipment
therein and its ownership in the production of such well. Any PARTY so
assigning shall be relieved from any further liability with respect to said
well except as to any accrued liability.
14.5 ABANDONMENT OPERATIONS REQUIRED BY GOVERNMENTAL AUTHORITY. Any well
abandonment or platform removal required by a governmental authority shall be
accomplished by OPERATOR with the costs, risks and net proceeds,
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if any, to be shared by the PARTIES owning such well or platform in
proportion to their PARTICIPATING INTEREST.
ARTICLE XV
WITHDRAWAL
15.1 WITHDRAWAL. Any PARTY may withdraw from this Agreement and thereby
be relieved of all responsibilities with respect to the LEASE by giving notice
to the other PARTIES of such desire together with an offer to convey at no cost
by a recordable instrument, without warranty, express or implied, except for its
own acts, all of its interest in and to the LEASE, the oil and gas, and the
property and equipment owned hereunder. Any such conveyance or assignment shall
be free and clear of any overriding royalties, production payments or other
burdens on production created after the effective date of this Agreement and
shall be subject to the LEASE provisions and to the rules and regulations of the
lessor. If any PARTY(S) desires to acquire such interest and to assume the
obligations of the assigning PARTY under this Agreement and the LEASE, the
withdrawing PARTY shall deliver such conveyance or assignment ratably to the
acquiring PARTIES, unless the acquiring PARTIES agree otherwise. If no PARTY
desires to acquire such interest, the PARTY desiring to withdraw may do so only
by paying to those PARTIES not desiring to withdraw its pro-rata share of the
estimated costs of plugging and abandoning all wells and removal of all
platforms, structures and other equipment on the LEASE, less any salvage value
approved under the voting procedure hereof, and such withdrawing PARTY shall
remain liable for any costs, expenses or damages theretofore accrued or arising
out of any event occurring prior to such PARTY'S withdrawal. Thereafter, the
withdrawing PARTY shall assign its entire interest ratably to the remaining
PARTIES. If the remaining PARTIES do not wish to continue operations on the
LEASE, all PARTIES shall proceed with abandoning and surrendering the same.
15.2 LIMITATIONS ON WITHDRAWAL. No PARTY shall be relieved of its
obligations hereunder during a well or platform fire, blowout or other emergency
thereon, buy may withdraw from this Agreement and be relieved of such
obligations after termination of such emergency, provided such PARTY shall be
and remain liable for its full share of all costs arising out of said emergency,
including without limitation,
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the drilling of a relief well, containment and cleanup of oil spill and
pollution and all costs of platform debris removal made necessary by the
emergency.
ARTICLE XVI
RENTALS, ROYALTIES AND OTHER PAYMENTS
16.1 CREATION OF OVERRIDING ROYALTY. If after the effective date of this
Agreement, any PARTY creates any overriding royalty, production payment or other
burden payable out of production attributable to such PARTY'S WORKING INTEREST
in the LEASE owned and if any other PARTY(S) becomes entitled to an assignment
pursuant to the provisions of this Agreement (except for Paragraph 26.2) or as a
result of NON-CONSENT OPERATIONS hereunder becomes entitled to receive the
WORKING INTEREST otherwise belonging to a NON-PARTICIPATING PARTY in such
operations, the PARTY entitled to receive the assignment from or the WORKING
INTEREST production of such NON-PARTICIPATING PARTY shall receive same free and
clear of such burdens, and the NON-PARTICIPATING PARTY creating such burdens
shall save the PARTICIPATING PARTIES harmless with respect to the receipt of
such assigned interest or such WORKING INTEREST production.
16.2 PAYMENT OF RENTALS AND MINIMUM ROYALTIES. OPERATOR shall pay all
rentals, minimum royalties, or similar payments accruing under the terms of the
LEASE and submit evidence of such payment to the PARTIES. As to any production
delivered in kind by OPERATOR to any NON-OPERATOR or to another for the account
of such NON-OPERATOR, said NON-OPERATOR shall provide OPERATOR with information
as to the proceeds or value of such production in order that the OPERATOR may
make payment of any minimum royalty due. The amount of such payment for which
each PARTY is responsible shall be charged by the OPERATOR to such PARTIES.
OPERATOR shall diligently attempt to make proper payment, but shall not be held
liable to the PARTIES in damages for the loss of any LEASE or interest therein
of through mistake or oversight any rental or minimum royalty payment is not
paid for or is erroneously paid. The loss of any LEASE or interest therein
which results from a failure to pay or an erroneous payment of rental or minimum
royalty shall be a joint loss and there shall be no readjustment of interest.
16.3 NON-CONCURRENCE IN PAYMENTS. Should any PARTY(S) not concur in the
payment of any rental, minimum royalty or similar payment, such
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PARTY(S) shall notify OPERATOR and all other owners in writing at least sixty
(60) days prior to the date on which such payment is due or accrues; and, in
this event OPERATOR shall make such payment for the benefit of all concurring
PARTIES. In such event the non-concurring PARTY(s) shall, upon request of
any concurring PARTIES, assign to the concurring PARTIES in the ratio that
each concurring PARTY'S interest at the time bears to the total interest of
all concurring PARTIES, without warranty, except for its own acts, such
portions of its interest in and to the LEASE or portion thereof involved as
would be maintained by such payment. That assignment shall be free and clear
of any overriding royalties, production payments or other burdens on
production created after the effective date hereof. Thereafter, the LEASE, or
portion thereof, involved shall no longer be subject to this Agreement. The
PARTIES then owning such LEASE or portion thereof agree to operate said LEASE
or portion thereof under a separate agreement in the same form as this
Agreement.
16.4 ROYALTY PAYMENTS. Each PARTY shall pay, deliver or cause to be paid
or delivered its pro-rata share of LEASE royalties, overriding royalties,
payments out of production or other amounts or charges which may be or become
payable out of its share of production and shall hold the other PARTIES free
from any liability therefor. During any time in which PARTICIPATING PARTIES in
a NON-CONSENT OPERATION are entitled to receive a NON-PARTICIPATING PARTY'S
share of production, the PARTICIPATING PARTIES shall bear the LEASE royalty due
with respect to such share of production and shall hold the NON-PARTICIPATING
PARTIES harmless from liability in connection therewith. Any PARTY acting under
the provisions of the Article shall never be liable for a standard of
performance in making such payments or deliveries in excess of a good faith
effort to pay or deliver same prior to the due date and no liability (other than
the liability to correct such payment) shall be incurred for failure through
error or omissions of the employees of any such PARTY to make payment or
delivery within the time, in the manner and for the amounts due.
16.5 FEDERAL OFFSHORE OIL POLLUTION COMPENSATION FUND FEE. Each PARTY
agrees to pay and bear the Federal Offshore Oil Pollution Compensation Fund Fee
payable on its share of oil produced, such fee being required by Section 302 of
the Outer Continental Shelf Lands Act Amendment of 1978 and any regulation
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lawfully promulgated pursuant thereto; provided, however, should the oil owned
by a PARTY be reported by another PARTY, it shall be the obligation of such
reporting PARTY and such reporting PARTY is specifically authorized to an agrees
to pay the Federal Offshore Oil Pollution Compensation Fund Fee on those volumes
which it reports for the benefit of the non-reporting PARTY, and such reporting
PARTY may charge such non-reporting PARTY for the payments so made.
ARTICLE XVII
TAXES
17.1 PROPERTY TAXES. OPERATOR shall render property covered by this
Agreement as may be subject to ad valorem taxation and shall pay such property
taxes for the benefit of each PARTY. OPERATOR shall charge each PARTY its share
of such tax payments. If the OPERATOR is required hereunder to pay ad valorem
taxes based in whole or in part upon separate valuation 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 percentage of tax value generated by each PARTY'S WORKING INTEREST.
17.2 CONTEST OF PROPERTY TAX VALUATION. OPERATOR shall timely and
diligently protest to a final determination any valuation it deems unreasonable.
Pending such determination, OPERATOR may elect to pay under protest. Upon final
determination, OPERATOR shall pay the taxes and any interest, penalty or cost
accrued as a result of such protest. In either event, OPERATOR shall charge
each PARTY its share.
17.3 PRODUCTION AND SEVERANCE TAXES. Each PARTY shall pay, or cause to be
paid, all production, severance and windfall profits taxes due on any production
which it received pursuant to the terms of this Agreement.
17.4 OTHER TAXES AND ASSESSMENTS. OPERATOR shall pay other applicable
taxes or assessments and charge each PARTY its share.
ARTICLE XVIII
INSURANCE
18.1 INSURANCE. OPERATOR shall obtain the insurance provided in Exhibit
"B" and charge each PARTICIPATING PARTY its proportionate share of the cost of
such coverage.
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ARTICLE XIX
LIABILITY, CLAIMS AND LAWSUITS
19.1 INDIVIDUAL OBLIGATIONS. The obligations, duties and liabilities of
the PARTIES shall be several and not joint or collective; and nothing contained
herein shall ever be construed as creating a partnership of any kind, joint
venture, association or other character of business entity recognizable in law
for any purpose. Each PARTY shall hold all the other PARTIES harmless from
liens and encumbrances on the LEASE arising as a result of its acts.
19.2 NOTICE OF CLAIM OR LAWSUIT. If a claim is made against any PARTY or
if any PARTY is sued on account of any matter arising from operations hereunder,
such PARTY shall give prompt written notice to the other PARTIES.
19.3 SETTLEMENTS. OPERATOR may settle any single damage claim or suit
involving operations hereunder if the expenditure does not exceed Ten Thousand
Dollars ($10,000.00), if the claim is not covered by Exhibit "B" and if the
payment is in complete settlement of such claim or suit.
19.4 LEGAL EXPENSE. Legal Expenses shall be handled pursuant to Exhibit
"C".
19.5 LIABILITY FOR LOSSES, DAMAGES, INJURY OR DEATH. Liability for
losses, damages, injury or death arising from operations under this Agreement
shall be borne by the PARTIES in proportion to their PARTICIPATING INTERESTS in
the operations out of which such liability arises, except when such liability
results from the gross negligence or willful misconduct of any party, in which
case such PARTY shall be liable.
19.6 INDEMNIFICATION. The PARTICIPATING PARTIES agree to hold the
NON-PARTICIPATING PARTIES harmless and to indemnify and protect them against
all claims, demands, liabilities and liens for property damage or personal
injury, including death, caused by or otherwise arising out of NON-CONSENT
OPERATIONS, and any loss and costs suffered by any NON-PARTICIPATING PARTY as
an incident thereof.
ARTICLE XX
INTERNAL REVENUE PROVISION
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20.1 INTERNAL REVENUE PROVISION. Notwithstanding any provisions herein
that the rights and liabilities hereunder are several and not joint or
collective or that this Agreement and the operations hereunder shall not
constitute a partnership, if for Federal Income Tax purposes this Agreement and
the operations hereunder are regarded as a partnership, then for Federal Income
Tax purposes each PARTY elects to be excluded from the application of all the
provisions of Subchapter K, Chapter 1, Subtitle A, Internal Revenue Code of
1988, as permitted and authorized by Section 761 of said Code and the
regulations promulgated thereunder. OPERATOR is hereby authorized and directed
to execute on behalf of each PARTY such evidence of this election as may be
required by the Federal Internal Revenue Service including specifically, but not
by way of limitation, all of the returns, statements and data required by
Federal Regulations 1.761.2. Should there be any requirement that each PARTY
further evidence this election, each PARTY agrees to execute such documents and
furnish such other evidence as may be required by the Federal Internal Revenue
Service. Each PARTY further agrees not to give any notices or take any other
action inconsistent with the election made hereby. If any present or future
income tax law of the United States of America or any state contains provisions
similar to those contained in Subchapter K, Chapter 1, Subtitle A of the
Internal Revenue Code of 1986, under which an election similar to that provided
by Section 761 of said Subchapter K is permitted, each PARTY makes such election
or agrees to make such election as may be permitted by such laws. In making
this election, each PARTY states that the income derived by it from the
operations under this Agreement can be adequately determined without the
computation of partnership taxable income.
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ARTICLE XXI
CONTRIBUTIONS
21.1 NOTICE OF CONTRIBUTIONS OTHER THAN ADVANCES FOR SALE OF PRODUCTION.
Each PARTY shall promptly notify the other PARTIES of all contributions which it
may obtain, or is attempting to obtain, concerning the drilling of any well on
the LEASE. Payments received as consideration for entering into a contract for
sale of production from the LEASE, loans and other financing arrangements shall
not be considered contributions for the purposes of the Article. No PARTY shall
release or obligate itself or release information in return for a contribution
from an outside party toward the drilling of a well without prior written
consent of the other PARTICIPATING PARTIES therein.
21.2 CASH CONTRIBUTIONS. In the event a PARTY receives a cash
contribution toward the drilling of a well, said cash contribution shall be paid
to OPERATOR and OPERATOR shall credit the amount thereof to the PARTIES in
proportion to their PARTICIPATING INTEREST.
21.3 ACREAGE CONTRIBUTIONS. In the event a PARTY receives an acreage
contribution toward the drilling of a well, said acreage contribution shall be
shared by each PARTICIPATING PARTY who accepts in proportion to its
PARTICIPATING INTEREST in the well.
ARTICLE XXII
DISPOSITION OF PRODUCTION
22.1 FACILITIES TO TAKE IN KIND. Any PARTY shall have the right, at its
sole risk and expense, to construct FACILITIES for taking its share of
production in kind, provided that such FACILITIES at the time of installation do
not interfere with continuing operations on the LEASE and adequate space is
available therefor.
22.2 DUTY TO TAKE IN KIND. Each PARTY shall have the right and duty to
take in kind or separately dispose of its share of the oil and gas produced and
saved from the LEASE.
22.3 FAILURE TO TAKE IN KIND. If any PARTY fails to take in kind or
dispose of its share of the oil and condensate, OPERATOR may either (a) purchase
oil or condensate at OPERATOR'S posted price or, in the absence of a posted
price, in no event less than the price prevailing in the area for oil of the
same kind, gravity and
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quality, or (b) sell such oil or condensate to others at the best price
obtainable by OPERATOR, subject to revocation by the non-taking PARTY upon
thirty (30) days advance notice. All contracts of sale by OPERATOR of any
PARTY'S share of oil or condensate shall be only for such reasonable periods
of time as are consistent with the minimum needs of the industry under the
circumstances, but in no event shall any contract be for a period in excess
of one (1) year. Proceeds of all sales made by OPERATOR pursuant to this
Section shall be paid to the PARTIES entitled thereto. Unless required by
governmental authority or judicial process, no PARTY shall be forced to share
an available market with any non-taking PARTY.
22.4 EXPENSES OF DELIVERY IN KIND. Any cost incurred by OPERATOR in
making delivery of any PARTY'S share of oil and condensate, or disposing of same
pursuant to Section 22.3, shall be borne by such PARTY.
22.5 GAS BALANCING PROVISIONS. Attached hereto is Exhibit "E" entitled
"Gas Balancing Agreement", containing an agreement of the PARTIES which is
incorporated into this Agreement as if copied at length herein.
ARTICLE XXIII
APPLICABLE LAW
23.1 APPLICABLE LAW. THIS AGREEMENT SHALL BE INTERPRETED ACCORDING TO THE
LAWS OF THE STATE OF TEXAS.
ARTICLE XXIV
LAWS, REGULATIONS AND NON-DISCRIMINATION
24.1 LAWS AND REGULATIONS. This Agreement and operations hereunder are
subject to all applicable laws, rules, regulations and orders, and any provision
of the Agreement found to be contrary to or inconsistent with any such law,
rule, regulation or order shall be deemed modified accordingly.
24.2 NON-DISCRIMINATION. In the performance of work under the Agreement,
the PARTIES agree to comply, and OPERATOR shall require each independent
contractor to comply, with the governmental requirements set forth in Exhibit
"D" and with all of the provisions of Section 202(1) to (7), inclusive, of
Executive Order No. 11246, as amended.
ARTICLE XXV
FORCE MAJEURE
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25.1 NOTICE. If any PARTY is rendered unable, wholly or in part, by force
majeure to carry out its obligations under this Agreement, other than the
obligation to make money payments, that PARTY shall give to all other PARTIES
prompt written notice of the force majeure with reasonably full particulars
concerning it; thereupon, the obligations of the PARTY giving the notice, so far
as they are affected by the force majeure, shall be suspended during, but no
longer than, the continuance of the force majeure. The affected PARTY shall use
reasonable diligence to remove the force majeure as quickly as possible.
25.2 STRIKES. The requirement that any force majeure shall be remedied
with all reasonable dispatch shall not require the settlement of strikes.
25.3 FORCE MAJEURE. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout, or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, governmental restraint, unavailability of equipment and any other
cause, whether of the kind specifically enumerated above or otherwise, which is
not reasonably within the control of the PARTY claiming suspension.
ARTICLE XXVI
SUCCESSORS, ASSIGNS AND PREFERENTIAL
RIGHT TO PURCHASE
26.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the PARTIES and their respective heirs, successors,
representatives and assigns and shall constitute a covenant running with the
LEASE. Each PARTY shall incorporate in any assignment of an interest in the
LEASE a provision that such assignment is subject to this Agreement.
26.2 PREFERENTIAL RIGHT OF PURCHASE. Should any PARTY desire to sell,
farmout or otherwise dispose of all or any part of its Working Interest in the
Lease, it shall promptly give written notice to the other PARTIES giving
complete information relative to the proposed disposition, including the price
or value fixed for the interest and the name and address of the prospective
transferee, who must be ready, willing and able to accept such sale, farmout or
other disposition. The other PARTIES shall have the right for a period of
twenty (20) days after receipt of the notice to purchase the interest which the
PARTY proposes to sell, farmout or otherwise dispose of on the
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same terms and conditions; if this right is exercised, the purchasing PARTIES
shall share the purchased interest in proportion to their Working Interest.
A transfer of interest hereunder shall not become effective as to the PARTIES
until the first day of the month following delivery to OPERATOR of an
original (or copies thereof) instrument of transfer approved by the proper
governmental authority and conforming to the requirements of this Section.
No such transfer shall relieve the transferring PARTY of any obligations or
liabilities accrued hereunder prior to such effective date. This Section
shall not apply when a PARTY wishes to mortgage its interest or to dispose of
its interest by merger, reorganization, consolidation, assignment of
production payment, sale of all or substantially all of its assets, or sale
or transfer of its interest to an affiliate.
26.2.1 A PARTY may sell, transfer or assign all or any part of its
interest in the property or this Agreement without the consent of any other
PARTY hereto, provided that:
(a) Any such sale, transfer or assignment shall be made only to
a financially responsible PARTY or PARTIES.
(b) Such PARTY shall give the other PARTIES written notice of
such sale, transfer or assignment at least thirty (30) days prior to
executing any instrument(s) evidencing the sale, transfer or
assignment (such notice to include the name of each proposed
transferee and the interest(s) to be transferred).
(c) Such PARTY shall incorporate in each instrument evidencing
the sale, transfer or assignment a provision making the same expressly
subject to the Operating Agreement and shall obtain (and furnish to
the other PARTIES) such transferee's written consent to be bound by
all the provisions of the Operating Agreement.
(d) If the original interest of any PARTY is at any time
transferred to two (2) or more transferees, OPERATOR may, at its
discretion, require such transferees to appoint a single trustee with
full authority to receive notices and payments, approve
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expenditures and pay the share of costs which are chargeable against
such transferees.
26.2.2 The Provisions of this Article shall not, however, apply to
and it shall not be necessary to obtain the consent of any PARTY in connection
with;
(a) Any mortgage or other pledge, including without limitation
the granting of any lien or security interest and any assignment of
production executed as further security for the debt secured by any
such mortgage or pledge, by a PARTY hereto of its interest or any
portion thereof in the joint leases, or the Agreement, or any
judicial, trustee's or other sales to foreclose the same;
(b) Any transfer or disposition of the interest of a PARTY
hereto by corporate merger or consolidation or by any sale or sales of
substantially all of its oil and gas properties; or
(c) Any sale, merger, consolidation or other transfer by a PARTY
hereto of any part of its interest to or with any "affiliate" (as such
term is defined in Regulation C, issued under the Securities Act of
1933).
(d) Any mortgage, pledge, transfer, sale, merger or any other
disposition enumerated in subparagraphs (a), (b) or (c) of this
Paragraph shall be made expressly subject to this Agreement. Any
assignment under this provision shall be effective upon approval of
the lessor or at such earlier date as agreed to by the lessor.
26.3 ASSIGNMENTS. Any assignment, vesting or relinquishment of interest
between the PARTIES shall be without warranty of title, except as to overrides,
production payments, liens, encumbrances or similar burdens on the interest
assigned.
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ARTICLE XXVII
AREA OF MUTUAL INTEREST
27.1 AREA OF MUTUAL INTEREST. The PARTIES hereby create an Area of Mutual
Interest ("AMI") described and identified on Exhibit "A-1" attached hereto and
made a part hereof. This AMI shall remain in force and effect as long as any
leases lying within the AMI are being maintained by the parties hereto. Any
acquisition of any right, title or interest acquired in, to and under any oil or
gas lease or any other interest in oil or gas, including, without limitation,
contractual rights, which confer on the holder thereof the right to share, or
acquire the right to share, in the production or the proceeds of production of
oil and gas within the AMI (the "Acquisition") by a PARTY herein shall be for
the mutual benefit of the PARTIES; provided, however, that any such Acquisition
shall not be subject to the provisions of this AMI if such Acquisition is the
consequence of (i) a merger, consolidation or reorganization, or (ii) the
acquisition of all or substantially all of the assets of any person, firm or
entity. Each PARTY shall have the right to participate in any such Acquisition
in the same proportion as such PARTY's WORKING INTEREST in and to the LEASE as
set forth in Exhibit "A". The PARTY making the Acquisition (the "Acquiring
Party") shall notify each of the other PARTIES in writing within thirty (30)
days of such Acquisition and shall furnish a copy of all executed agreements
pertaining thereto and such title information as the Acquiring PARTY has,
stating the cost of such acquisition or the obligations that must be assumed in
connection therewith. Each of the other PARTIES shall have a period of fifteen
(15) working days (48 hours exclusive of Saturdays, Sundays and legal holidays
in the event that a well is being drilled within the AMI) after receipt of such
notice within which to elect and notify the Acquiring PARTY whether or not it
desires to participate in such Acquisition. Failure to timely respond to the
Acquiring PARTY's notice or reimburse the Acquiring PARTY for the proportionate
share of the acquired interest shall be deemed an election not to acquire such
interest. Upon election and payment to the Acquiring PARTY of a non-acquiring
PARTY's share of the cost of such acquisition, such non-acquiring PARTY shall be
entitled to an assignment of its proportionate share in such Acquisition.
If fewer than all PARTIES elect to participate in the Acquisition
within the AMI, the Acquiring PARTY shall inform all PARTIES who have elected to
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participate in the Acquisition, in writing, of the elections made. Each
PARTY receiving notice, within forty-eight (48) hours (inclusive of Saturday,
Sunday or legal holidays) after receipt of such notice, shall advise the
Acquiring PARTY of its desire to (a) limit participation to its WORKING
INTEREST, or (b) acquire its proportionate share of the interest of the
non-participating PARTY(IES), or (c) participate for a percentage of the
interest of the non-participating PARTY(IES).
The proportionate interest of any PARTY who elects to participate
in any acquisition within the AMI shall be subject to and be burdened by the
identical obligations that the Acquiring PARTY owes to Houston Energy &
Development, Inc. on the LEASE.
ARTICLE XXVIII
TERM
28.1 TERM. This Agreement may be amended only in writing and only by
mutual consent of all PARTIES. This Agreement shall remain in effect so long as
the LEASE shall remain in effect and thereafter until all claims, liabilities
and obligations incurred in operations hereunder have been settled; however, all
property belonging to the PARTIES shall be disposed of and final settlement
shall be made under this Agreement.
ARTICLE XXIX
HEADINGS AND EXECUTION
29.1 TOPICAL HEADINGS. The topical headings used herein are for
convenience only and shall not be construed as having any substantive
significance or as indicating that all of the provisions of this Agreement
relating to any topic are to be found in any particular Section.
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29.2 COUNTERPART EXECUTIONS. This Agreement may be signed in
counterparts, and shall be binding upon the PARTIES and upon their successors,
representatives and assigns.
CHENIERE ENERGY, INC.
WITNESSES:
- ---------------------------- BY:
-------------------------------------
PRINTED NAME: Walter L. Williams
- ---------------------------- TITLE: President & CEO
BETA OIL & GAS, INC.
- ---------------------------- BY:
-------------------------------------
PRINTED NAME: Steve Antry
- ---------------------------- TITLE: President
SIGNATURE PAGE OF JOINT OPERATING AGREEMENT DATED NOVEMBER 6, 1998 COVERING S.L.
16017, S.L. 16185, S.L. 16186
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EXHIBIT A
of
EXHIBIT C
to
REDFISH PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED)
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EXHIBIT A-1
of
EXHIBIT C
to
REDFISH PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED)
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EXHIBIT "B"
INSURANCE
(Attached and made a part of that particular Joint Operating Agreement dated
effective November 6, 1998, by and between Cheniere Energy, Inc., as Operator,
and Beta Oil & Gas, Inc. as Non-Operator, covering S.L. 16019, 16017 and 16186
as more fully set out on Exhibit "A" of the Joint Operating Agreement.)
Operator shall, at all times while conducting operations on the Contract Area
and/or Assigned Premises, carry or cause to be carried insurance for the
following coverages and in at least the minimum amounts noted.
1. Workers' Compensation and Occupational Disease insurance in accordance
with the statutory requirements of the state in which work is to be
performed, the state in which the Operator, herein "Contractor", or
any of Operator's contractor(s) or sub-contractor(s), employees reside
and the state in which the Contractor is domiciled; Employer's
Liability insurance with limits of not less than $1,000,000. These
coverages shall include:
a. Protection for liabilities under the Federal Longshoremen's and
Harbor Worker's Compensation Act and the Outer Continental Shelf
Lands Act.
b. Coverage for liability under the Merchant Marine Act of 1920,
commonly known as the Jones Act; the Admiralty Act; and the Death
on the High Seas Act with limits of not less than $1,000,000 per
accident.
c. Protection against liability of employer to provide
transportation, wages, maintenance and cure to maritime employees
and a Voluntary Compensation Endorsement.
d. Coverage amended to provide that a claim IN REM shall be treated
as a claim against the employer.
e. Territorial extension shall cover all work areas.
2. Comprehensive General Liability insurance, written on any occurrence
reported basis with limits of $1,000,000 per occurrence Bodily Injury
and Property Damage, combined single limits, an annual aggregate of no
less than $2,000,000 (if applicable), including the following
coverages:
a. Premises and Operations coverages.
b. Independent Contractor's Contingent coverage.
c. Contractual Liability covering liabilities assumed under this
Contract.
d. Products and Completed Operations coverage.
e. Coverage for explosion, collapse and underground resources and
property damage under both Premises/Operations and Contractual
Liability coverage parts, where applicable.
f. Broad Form Property Damage Liability endorsement.
g. Personal Injury Liability.
h. IN REM endorsement.
i. Territorial extension shall cover all work areas.
j. Where applicable, coverage for liability resulting from the
consumption of food prepared or served by contractor or
subcontractor.
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k. Watercraft exclusion deleted or Protection & Indemnity provided
as per 4.B.
l. Coverage is provided for "Action Over" suits.
m. Coverage is silent as respects Punitive Damages.
3. Automobile Liability insurance covering owned, hired and non-owned
vehicles with limits of $1,000,000 per occurrence Bodily Injury and
Property Damage combined single limits.
4. Where the work described by this Contract involves the use of marine
equipment. Operator will require the contractor to provide the
following insurance:
a. Full Form Hull and Machinery insurance, with coverage equal to
that provided by the American Institute Hull Clauses including
collision liability, with the sister ship clause unamended, with
limits of liability at least equal to the full value of the
vessel and with navigational limitations adequate for Contractor
to perform the contracted work. Where the vessels engage in
towing operations, said insurance shall include full tower's
liability with the sister ship clause unamended.
b. Protection and indemnity insurance coverage in an amount at least
equal to the full value of each vessel employed under the
Contract. Protection and indemnity insurance shall include full
coverage for all crew liabilities if coverage for maritime
employees is not provided under Coverage B, Employers Liability
for Admiralty Jurisdiction.
c. Excess Protection and Indemnity insurance, including Collision
and Tower's (where applicable) Liability in an amount at least
equal to the value of each vessel covered or the difference
between the full value of each vessel and $1,000,000 per
occurrence.
d. Voluntary Removal of Wreck and/or Debris insurance covering
Contractor's operations in an amount of not less than $1,000,000
per occurrence.
All of the marine coverages cited above shall name Operator and all its
subsidiary and affiliated companies as additional insureds as their interests
may appear, to the extent of contractor's obligations to defend and indemnify
the Parties.
5. Aircraft Liability insurance (for contracts involving use of aircraft
or helicopters) with combined single limit coverage for public
liability, passenger liability and property damage liability of not
less than $5,000,000 covering all owned and non-owned aircraft used by
Contractor in connection with work to be performed.
6. Umbrella Liability insurance written on an occurrence basis with no
claims made features with a minimum combined single limit of
$5,000,000 each occurrence/aggregate where applicable, to be excess of
the coverages and limits required in 1, 2, 3, 4 and 5 above.
7. Excess Umbrella Liability with a minimum combined single limit of
$10,000,000.
8. OPERATOR shall carry or cause to be carried the following coverages
for the benefit of and at the expense of the Joint Account, however,
proportionate coverage may be carried individually by each
NON-OPERATOR, subject to proper evidence of such proportionate
coverage being provided to Operator at least fifteen (15) days prior
to commencement of operations for the drilling of the initial
EXPLORATORY WELL.
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a. Operator's Extra Expense Insurance, including control of well and
redrilling of the well (full restoration redrill), including, but
not limited to, Seepage and Pollution and Containment and
Evacuation Expense with a limit of liability of $20,000,000.
b. Physical Damage and Removal of Wreck Coverage for facilities
hereunder, with limits not less than the replacement value
thereof. Notwithstanding the foregoing, this coverage to be
provided fifteen(15)days prior to placement of such facilities.
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EXHIBIT "C"
(Attached and made a part of that particular Joint Operating Agreement dated
effective November 6, 1998, by and between Cheniere Energy, Inc., as Operator,
and Beta Oil & Gas, Inc. as Non-Operator, covering S.L. 16019, 16017 and 16186
as more fully set out on Exhibit "A" of the Joint Operating Agreement.)
INSERT EXHIBIT "C" THIS PAGE
ACCOUNTING PROCEDURE
OFFSHORE JOINT OPERATIONS
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INSERT PAGE 2 OF EXHIBIT C
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INSERT PAGE 3 OF EXHIBIT C
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INSERT PAGE 4 OF EXHIBIT C
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INSERT PAGE 5 OF EXHIBIT C
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INSERT PAGE 6 OF EXHIBIT C
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INSERT PAGE 7 OF EXHIBIT C
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EXHIBIT "D"
(Attached and made a part of that particular Joint Operating Agreement dated
effective November 6, 1998, by and between Cheniere Energy, Inc., as
Operator, and Beta Oil & Gas, Inc. as Non-Operator, covering S.L. 16017,
16185 and 16186 as more fully set out on Exhibit "A" of the Joint Operating
Agreement.)
CERTIFICATION OF NONSEGREGATED FACILITIES
Contractor certifies that it does not maintain or provide for its employees
any segregated facilities at any of its establishments and that it does not
permit its employees to perform their services at any location, under its
control, where segregated facilities are maintained. Contractor certifies
further that it will not maintain or provide for its employees any segregated
facilities at any of its establishments and that it will not permit its
employees to perform their services at any location, under its control, where
segregated facilities are maintained. Contractor agrees that a breach of
this certification is a violation of the Equal Opportunity Clause in any
Government contract between Contractor and Corporation. As used in this
certification, the term "segregated facilities" means any waiting rooms, work
areas, rest rooms and wash rooms, restaurants and other eating areas, time
clocks, locker rooms and other storage or dressing areas, parking lots,
drinking fountains, recreation or entertainment areas, transportation, and
housing facilities provided for employees which are segregated by explicit
directive or are in fact segregated on the basis of race, color, religion, or
natinal origin, because of habit, local customs or otherwise. Contractor
further agrees that (except where it has obtain identical certifications from
proposed subcontractors for specific time periods) it will obtain identical
certifications from proposed subcontractors prior to the award of
subcontracts exceeding $10,000 which are not exempt from the provisions of
the Equal Oportunity Clause; that it will retain such certifications in its
files; and that it will forward the following notice to such proposed
subcontractors (except where the proposed subcontractors have submitted
identical certifications for specific time periods):
NOTICE TO PROSPECTIVE SUBCONTRACTORS OF REQUIREMENT FOR CERTIFICATIONS OF
NONSEGREGATED FACILITIES. A Certification of Non-segregated Facilities, as
required by the May 9, 1967, order on Elimination of Segregated Facilites, by
the Secretary of Labor (32 Fed. Reg. 7439, May 19, 1967), must be submitted
prior to the award of a subcontract exceeding $10,000 which is not exempt
from the provisions of the Equal Opportunity Clause. The certi-fication may
be submitted either for each subcontract or for all subcontracts during a
period (i.e., quarterly, semi-annually or annually). (1968 MAR.) (Note: The
penalty for making false statements in offers is prescribed in 18 U.S.C.
1001.)
Whenever used in the foregoing Section, the term "contractor" refers to each
party to this agreement.
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EXHIBIT E
GAS BALANCING AGREEMENT
(Attached and made a part of that particular Joint Operating Agreement dated
effective November 6, 1998, by and between Cheniere Energy, Inc., as Operator,
and Beta Oil & Gas, Inc. as Non-Operator, covering S.L. 16017, 16185 and 16186
as more fully set out on Exhibit "A" of the Joint Operating Agreement.)
I. DEFINITIONS
A. "Agreement" shall mean this Gas Balancing Agreement.
B. "Balanced" is that condition which occurs when a party hereto has
taken the same percentage of the cumulative volume of Gas production it is
entitled to take pursuant to the terms of the Operating Agreement.
C. "Gas" includes natural gas produced from a Well that produces Gas Well
Gas, including all constituent parts of such natural gas except liquid
hydrocarbons and condensate recovered by primary separation equipment.
D. "Gas Well Gas" is gas produced from a Well classified as a gas well by
the regulatory body having jurisdiction.
E. "Overproduced" is the status of a party when the percentage of the
cumulative volume of Gas taken by that party exceeds that party's percentage
interest of the volume of cumulative Gas production of all parties to the
Operating Agreement under and pursuant to the terms of the Operating Agreement.
F. "Underproduced" is the status of a party when the percentage of
cumulative volume of Gas taken by that party is less than that party's
percentage interest of the volume of cumulative Gas production of all parties to
the Operating Agreement under and pursuant to the terms of said Operating
Agreement.
G. "Well" is defined as each well subject to the Operating Agreement that
produces Gas Well Gas. If a single Well is completed in two or more reservoirs,
such Well shall be considered a separate Well with respect to, but only with
respect to, each reservoir from which the Gas produced is not commingled in the
well bore.
II. APPLICATION OF THIS AGREEMENT
The parties to the Operating Agreement own the working or operating
interests in the Gas underlying the Contract Area covered by the Operating
Agreement and are entitled to share in the percentages therein stated in the
Operating Agreement.
In accordance with the terms of the Operating Agreement, each party shall
take its share of Gas produced from the Contract Area and market or otherwise
dispose of same. In the event a party hereto does not take in kind or market
its share of Gas or has contracted to sell its share of Gas produced from the
Contract Area to a purchaser which, at any time while this Agreement is in
effect, fails to take the share of Gas attributable to the interest of such
party, the terms of this Agreement shall automatically become effective.
The Operator has [THE DUTY TO CONTROL GAS PRODUCTION AND] the
responsibility of administering the provisions of this GAS BALANCING AGREEMENT.
[THE OPERATOR SHALL CAUSE DELIVERIES TO BE MADE TO THE GAS PURCHASERS AT SUCH
RATES AS MAY BE REQUIRED TO GIVE EFFECT TO THE EXTENT PRACTICABLE, TO BE OR
BECOME BALANCED.]
The provisions of this agreement shall be applied to each well separately
as if each Well was covered by separate but identical agreements.
III. STORING AND MAKING UP GAS PRODUCTION
A. RIGHT TO TAKE AND MARKET GAS
During any periods or periods when any party hereto does not take, has
no market for, or the market of a party is not sufficient to take, that party's
full share of the Gas produced from any Well located on the Contract Area, or
such party's purchaser otherwise fails to take such party's share of Gas
produced from any such Well located on the Contract Area, resulting in such
party becoming Underproduced (such party being herein referred to as an
"Underproduced Party"), the other party or parties shall be entitled, but not
required, to produce from said Well on the Contract Area (and take or deliver to
their respective purchaser(s)), each month all or a part of that portion of the
allowable Gas production assigned to such Well by the regulatory body having
jurisdiction. Any party so taking or delivering Gas which results in such party
becoming Overproduced is herein referred to as an "Overproduced Party".
Those parties which are capable of taking and/or marketing quantities
of Gas allocable to an Underproduced Party, in the absence of any other
agreement between them, shall each take a share of the Gas attributed to the
Underproduced Party or Parties in the direct proportion that their respective
interests bear to the total interest of all parties taking Gas which are also
considered Overproduced.
All parties hereto shall share in and own the liquid hydrocarbons
recovered from such Gas by primary separation equipment in accordance with their
respective interests and subject to the terms of the above described Operating
Agreement, whether or not such parties are actually taking and/or marketing Gas
at such time.
B. MAKING UP UNDERPRODUCTION
Any Underproduced Party shall endeavor to bring its taking of Gas into
a Balanced condition. Upon written notice to the Operator, any Underproduced
Party may thereafter begin taking or delivering to its purchaser its full share
of the Gas produced from a Well (less any used in operations, vented or lost).
To allow for the recovery of Gas in storage and to balance the Gas account of
the parties in accordance with their respective interests, Underproduced Party
shall be entitled to take or deliver to a purchaser its full share of Gas
produced from such Well (less any used in operations, vented or lost) plus,(i)
for the months of March, April, May, June, July, August, September and October
only of any calendar year during which this agreement may be in place, an amount
up to an additional fifty percent (50%) of the monthly quantity of Gas
attributable to the Overproduced Party or Parties, or (ii) for the months of
November, December, January and February only of any calendar year or years
during which this agreement may be in place, an amount up to an additional
twenty-five percent (25%) of the monthly quantity of Gas attributable to the
Overproduced Party or Parties. If more than one Underproduced Party is entitled
to take additional Gas, they shall divide the additional Gas in proportion to
their respective Underproduced accounts. The first Gas made up shall be assumed
to be the first Gas Underproduced.
C. GAS BALANCE REPORTING
Each party taking Gas shall furnish or cause to be furnished to the
Operator a monthly written statement of Gas volumes taken and the identity of
its Gas purchaser, if any, no later than [THIRTY (30)] days after the production
month. Operator shall not be required to adjust its Gas accounting statements
reflecting a different Gas purchaser until the first day of the month following
the month in which such notice is received by the Operator. The Operator will
maintain appropriate accounting on a monthly and cumulative basis of the
quantities of Gas each party is entitled to take and/or market and the
quantities of Gas taken and/or marketed by each of the parties to their
respective Gas purchasers. With respect to gas purchased from or transported
for more than one party by or through one pipeline connected to the Well, each
party selling to or transporting through such one pipeline shall furnish to
Operator or cause the pipeline owner to furnish to Operator monthly volume
statements showing the split of ownership through such pipeline's sales or
pipeline inlet meter during the preceding calendar month. Within [NINETY (90)]
days after the end of each producing calendar month, the Operator shall furnish
each party a statement showing the status of the Overproduced and Underproduced
accounts of all parties.
To determine respective volumes of Gas taken by separate gas pipelines
connected to the Well, measurement of Gas for overproduction and underproduction
shall be accomplished by use of sales meters and lease measurement equipment
which shall be in accordance with AGA requirements.
Each party to this Agreement agrees that it will not utilize any
information obtained hereunder for any purpose other than implementing or
administering the terms of this Agreement.
D. ROYALTY AND PRODUCTION TAX
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At all times while Gas is produced from the Contract Area, unless
otherwise required by any State or Federal law or regulations, each party shall
pay or cause to be paid all royalty due and payable on its share of Gas
production as if each party were taking or delivering to a Gas purchaser its
share of Gas production. Each party agrees to hold each other party harmless
from any and all claims for royalty payments asserted by its royalty owners.
The term "royalty owner" shall include owners of royalty, overriding royalties,
production payments and similar interests payable out of production.
Each party producing or taking or delivering Gas to its Gas purchaser
shall pay, or cause to be paid, all production and severance taxes due on all
volumes of Gas actually taken or sold by such party.
IV. CASH SETTLEMENT
A. VOLUME/VALUE
If, at the permanent termination of production of Gas from a Well
located on the Contract Area, an imbalance exists between the parties, a cash
settlement of the imbalance between the parties relative to such Well shall be
made. The amount of the cash settlement will be limited to the proceeds
actually received by the Overproduced Party or Parties at the time of
overproduction, less transportation and applicable treating charges and
production and severance taxes paid on such overproduction. Royalty shall only
be deducted from such proceeds attributable to the overproduction if actually
paid to royalty owners by the Overproduced Party or Parties. [NO INTEREST SHALL
BE ADDED TO ANY CASH SETTLEMENT HEREUNDER.] If there is more than one
Overproduced Party, the cash settlement shall be based on a weighted average of
the proceeds actually received as above described by all Overproduced Parties.
If the Overproduced Party or Parties did not sell its Gas, such Gas will be
valued in the same manner used for royalty calculation purposes when produced.
That portion of the monies collected by the Overproduced Party or Parties which
is subject to refund by others of the Federal Energy Regulatory Commission
("FERC") may be withheld by the Overproduced Party or Parties until such parties
are fully approved by FERC, unless the Underproduced Party or Parties furnish a
corporate undertaking acceptable to the Overproduced Party or Parties agreeing
to hold the Overproduced Party or Parties harmless from financial loss due to
refund orders by FERC.
B. COLLECTION AND DISTRIBUTION
Operator shall provide within [SIXTY (60)] days of permanent
determination of Gas production a final accounting of the Gas balance to all
parties hereto. Overproduced Parties, within thirty (30) days of receipt of the
final accounting of the Gas balance, shall pay their respective shares of the
above described cash settlement to the Underproduced Parties in that proportion
that each such Underproduced Party's volume of gas in storage bears to the total
of all Underproduced Parties' volumes of gas in storage.
V. MISCELLANEOUS
A. TERM
This Agreement shall remain in force and effect as long as the
Operating Agreement to which it is attached remains in force and effect, and
thereafter until the Gas balance accounts between the parties are settled in
full, and shall inure to the benefit of and be binding upon the parties hereto,
their heirs, successors, legal representatives and assigns.
B. EXPENSES
Nothing herein shall change or affect each party's obligations to pay
its proportionate share of all costs and liabilities incurred in operations on
the Contract Area as its share thereof is set forth in the Operating Agreement
to which this Agreement is attached.
C. WELL TESTS
Nothing herein shall be construed to deny any party the right, from
time to time, to produce and take or deliver to its Gas purchaser up to one
hundred percent (100%) of the entire Well stream to meet the deliverability test
required by its Gas purchaser, provided that such tests are reasonable in light
of overall industry standards.
D. MONITORING OF TAKES OF PRODUCTION
Each party shall, at all times, use its best efforts to regulate its
takes and deliveries from each Well on said Contract Area so that no Well will
be shut-in for overproducing the allowable assigned thereto by the regulatory
body having jurisdiction. Additionally, each party shall communicate, as
necessary, the contents of this agreement to its respective Gas purchaser(s) or
transporter(s) and shall monitor its deliveries to its respective Gas
purchaser(s) or transporter(s) so as to ensure to the greatest extent
practicable that its Gas purchaser(s) or transporter(s) does not take Gas in
excess of the quantities provided for herein.
E. LIQUEFIABLE HYDROCARBONS NOT COVERED UNDER AGREEMENT
The parties shall share proportionately in and own all liquid
hydrocarbons recovered with the gas by lease equipment in accordance with their
respective interests.
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CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
January 6, 1999
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: Mr. Steve Antry, President
Re: Prospect "Shark"
Offshore - West Cameron Area, Louisiana
Gentlemen:
When accepted by you in the manner provided below, this letter shall
evidence the agreement between you (sometimes hereinafter referred to as "Beta")
and Cheniere Energy, Inc., (hereinafter referred to as "Cheniere") with respect
to (1) your acquiring from Cheniere a certain undivided interest in and to the
Oil, Gas and Mineral Leases described on Exhibit "A" attached hereto and made a
part hereof (the "Leases"), which Leases cover lands comprising the prospect
known to Cheniere as the Shark Prospect, and (2) your participation in the
drilling of a test well on the Shark Prospect in the manner hereinafter
described. The geographical area covered by the Shark Prospect is shown on
Exhibit "A," on which it is depicted as the yellow shaded "Lease Block"
(hereinafter referred to as the "Shark Lease Block").
1.
Cheniere represents that it owns a 100% interest in and to the Leases.
In consideration of the sum of $104,000, which Beta agrees to pay and deliver to
Cheniere simultaneously with Beta's execution of this Letter Agreement, and
Beta's undertakings as hereinafter set forth, Cheniere has agreed and does
hereby agree to assign to Beta, an undivided 15.0% of 8/8ths interest in and to
the Leases. The assignment to you of interests pursuant to this Paragraph shall
be made immediately after Cheniere's receipt of (i) your payment to Cheniere of
the amount set forth above, (ii) an original counterpart of this Letter
Agreement duly executed by you, (iii) an Operating Agreement, in the form
attached as Exhibit "C" (the "Operating Agreement"), duly executed by you; and
(iv) the authority for expenditure for the Test Well set forth in Exhibit A duly
executed by you. Except as to claims by, through, or under Assignor, but not
otherwise, the assignments herein provided for shall be without warranty, either
express or implied, and shall be made expressly subject to the terms and
provisions of this Letter Agreement and the Operating Agreement. The form of the
assignment shall be the same or substantially similar to the form of assignment
attached hereto as Exhibit "B."
2.
All operations on the Shark Lease Block or the area of mutual interest
("AMI") created in the Operating Agreement, including the drilling of a test
well as provided in Section 3 below (the "Test Well"), will be governed by the
Operating Agreement; provided, however, if on any matter there is a conflict
between the Operating Agreement and this Letter Agreement, the Letter Agreement
shall prevail. Initially, Cheniere shall be designated as operator under the
Operating Agreement. Cheniere may resign or be replaced as operator in
accordance with the provisions of the Operating Agreement; provided, however,
that if Cheniere resigns or is replaced as operator prior to completion or
abandonment of the Test Well and the successor operator selected under the
Operating Agreement is not acceptable to Beta, then, for a period of thirty (30)
days after appointment of such successor operator, Beta may elect to reassign to
Cheniere its interests in the Leases, and any other interests acquired within
the Shark Lease Block or AMI, and Cheniere shall, contemporaneously with receipt
of such reassignment, return to Beta the purchase price therefor. If such
reassignment right is not timely exercised, it shall be deemed waived.
3.
Beta has agreed, and does hereby agree to participate in the manner set
forth below in the drilling of a Test Well for the Shark Prospect at the
location and to the Contract Depth described in Exhibit "A." Prior to the
spudding of the Test Well, Cheniere may change the location or Contract Depth
for the Test Well, provided that if Beta does not approve such change it may,
within fourteen (14) days of receipt of notice thereof, reassign to Cheniere its
interests in the Leases, and any other interests acquired within the Shark Lease
Block or AMI, and Cheniere shall, contemporaneously with receipt of such
reassignment, return to Beta the purchase price therefor. If such reassignment
right is not timely exercised, it shall be deemed waived.
Beta has agreed and does hereby agree to pay and bear 20.0% of all
risks, costs and expenses incurred in connection with the drilling of the Test
Well to Contract Depth; in logging and testing the Test Well; and, in plugging
and abandoning the Test Well if a completion attempt is not made. The costs and
expenses of drilling the Test Well shall include, but without limitation by
enumeration, the costs incurred in obtaining a drill site surface lease,
examining and clearing title on the surface location (and, if the Test Well is
directionally drilled, the lease covering the bottom hole location), staking the
location, preparing the location and drilling to Contract Depth and evaluating
the well. A detailed estimate of costs of drilling the Test Well to Contract
Depth is included in Exhibit "A", but such information is merely an estimate and
shall not be deemed a limitation or cap on such costs or on either party's
responsibility therefor. An estimate of completion cost will be provided prior
to spudding the Test Well.
If after reaching Contract Depth in the Test Well, Beta elects to
participate in a completion attempt of the Test Well, 15% of all risks, costs
and expenses incurred in connection with such completion, together with the
risks, costs and expenses of plugging and abandoning such well in the event
completion is unsuccessful, shall be borne by Beta.
If the Test Well is not commenced within 120 days after the date
hereof, then, for a period of thirty (30) days thereafter, Beta may reassign to
Cheniere its interest in the Leases, and any other interests acquired within the
Shark Lease Block and AMI, and Cheniere shall, contemporaneously with receipt of
such reassignment, return to Beta the purchase price therefor. If such
reassignment right is not timely exercised, it shall be deemed waived.
4.
If, after commencing a Test Well, but before reaching Contract Depth,
there should be encountered conditions or formations, whether natural or
mechanical, which render further drilling of the Test Well either impossible or
impractical, so that operations on the Test Well are abandoned, a Substitute
Well may be commenced not later than 90 days following the abandonment of Test
Well. Such Substitute Well shall be considered and deemed for all purposes
(including, without limitation, the apportionment between the parties of the
costs and expenses incurred in connection therewith) a continuation of the
drilling of the Test Well and as though it were the well for which it is the
substitute.
5.
If Beta elects not to participate in the Substitute Well, then Beta
shall be deemed to have forfeited all rights and interest in and to the Leases
and any other leases, fee mineral interests or other oil and gas interests or
contractual rights covering or appurtenant to lands in the Shark Lease Block and
the AMI, and shall, within ten (10) days after (i) receipt of notice of the
commencement of the Substitute Well or (ii) the expiration of the 90 day period
for commencement of a Substitute Well, as the case may be, assign to Cheniere
all of such rights and interests.
6.
It is recognized that (i) although title will be examined on the drill
site surface and bottom hole location tracts for the Test Well prior to
commencement of drilling thereof, title will not be examined as to other lands
lying within the Shark Lease Block or the AMI until such time as wells are
proposed to be drilled thereon, and (ii) there possibly may be unleased
interests in other tracts of land within the Shark Lease Block. You acknowledge
that Cheniere has advised you of any currently unleased interests known to
Cheniere which may exist within the Shark Lease Block, but Cheniere makes no
representation or warranty, express or implied, as to the completeness or
accuracy of such information, and your reliance thereon is at your sole risk. If
any such unleased interests are now known or become known to Cheniere to exist
prior to completion or abandonment of the Test Well, Cheniere agrees to make a
good faith effort to acquire Oil, Gas and Mineral Leases covering such unleased
interests under such terms and conditions as are reasonably acceptable to
Cheniere. Undivided interests in such leases acquired by Cheniere shall be
offered to Beta pursuant to the AMI provision of the Operating Agreement.
7.
The notices provided for in this agreement shall be in writing and
delivered by certified U.S. mail, return receipt requested, telecopy, or
overnight courier or messenger with receipt confirmation, to the addresses
below:
CHENIERE ENERGY, INC.
Two Allen Center
1200 Smith Street, Suite 1740
Houston, TX 77002
Attn: Walter L. Williams
phone (713) 659-1361
fax (713) 659-5459
BETA OIL & GAS, INC.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attn: Steve Antry
phone (949) 752-5212
fax (949) 752-5757
Notices hereunder shall be deemed made upon receipt.
8.
Beta shall have the right to review in Cheniere's office all Fairfield
spec data pertaining to the Shark Prospect under the terms and conditions set
out in the Master and Supplemental Licensing Agreement covering such data by and
between Fairfield Industries and Cheniere Energy, Inc. dated January 28, 1998,
and Beta agrees to comply with all such terms and conditions. At Beta's request
and at Beta's cost Cheniere will endeavor to secure a Partners License to such
data for Beta. Subject to Beta's continued compliance with the previously
executed Confidentiality Agreement, dated September 14, 1998, Beta shall have
access to proprietary seismic data acquired by Cheniere covering the Shark
Prospect in Cheniere's offices during Cheniere's normal business hours;
provided, however, that if Beta reassigns interests to Cheniere rights pursuant
to this Agreement, Beta shall return all interpretations, maps, seismic sections
or other data, information, reports, analyses or opinions generated by Beta or
its consultants, contractors or agents using, based upon or derived from such
data, and Beta shall cause all such materials to be removed from Beta's
workstations and computer systems.
9.
This agreement is made subject to all valid, applicable laws, rules,
orders and regulations, of any duly constituted Federal, State or local
regulatory body or authority having jurisdiction thereof, and all development
and operations hereunder shall be in conformity therewith.
10.
The provisions hereof shall inure to the benefit and are binding upon
the parties hereto, and to their respective successors and assigns.
11.
Prior to the date hereof, Beta acquired an interest in State Leases No.
16187 and 16188, Sabine Pass Block 3, Offshore Louisiana. Beta and Cheniere
expressly agree that, notwithstanding anything herein or in the Operating
Agreement to the contrary, such State Leases are hereby excluded from the AMI.
12.
The parties agree that this Agreement shall be deemed confidential and
shall not be revealed to any third party except (i) to the extent disclosure may
be required by law, including, without limitation, disclosures in registration
statements or other filings with the Securities and Exchange Commission; (ii)
disclosures in any judicial or alternative dispute resolution proceeding
concerning the terms hereof; (iii) disclosures to bona fide prospective
investors, lenders, successors or assigns of a party, upon such third parties'
execution of a confidentiality agreement in form and substance reasonably
acceptable to the parties hereto; and (iv) disclosures with the written consent
of the other party, which consent shall not be unreasonably withheld.
13.
All assignments of interests by Beta to Cheniere pursuant to this
Agreement shall be made by assignment reasonably acceptable to Cheniere and free
of all claims, burdens or encumbrances by through, or under Beta, other than
royalties, overriding royalties, back-ins or like interests reserved by third
parties in farmout agreements, assignments or grants of such interests to Beta.
If Beta reassigns interests to Cheniere pursuant to this Agreement, then Beta
agrees (i) to maintain the confidentiality of all information in Beta's
possession concerning the Shark Prospect; and (ii) for a period of three (3)
years after the date hereof, not to acquire oil and gas interests (including,
without limitation, leasehold interests, fee mineral interests, net profits
interests, royalty or overriding royalty interests, farmouts or other interests)
covering lands within the Shark Lease Block or the AMI. If, notwithstanding the
foregoing, Beta acquires such interests, then within fourteen (14) days after
receipt of assignments or conveyances of such interests, Beta shall in writing
offer to assign such interests to Cheniere upon Cheniere's payment to Beta of
Beta's acquisition costs therefor, documentation of which shall be furnished by
Beta to Cheniere. Cheniere shall have thirty (30) days after receipt of such
notice in which to elect whether to acquire such interest. If Cheniere does not
tender the purchase price for such interests within such period, Cheniere shall
be deemed to have elected not to acquire such interest. Beta shall deliver
executed and acknowledged assignments of such interests to Cheniere
contemporaneously with Cheniere's payment of the purchase price therefor.
14.
Time is of the essence in the performance of this Agreement.
If the foregoing is your understanding of our agreement, please
evidence your acceptance of this agreement by executing in the space provided
below for your signature.
Sincerely,
CHENIERE ENERGY, INC.
/s/Walter L. Williams
President & CEO
AGREED TO AND ACCEPTED THIS _____ DAY OF _______________, 1999.
BETA OIL AND GAS, INC.
/s/Steve Antry
President & CEO
<PAGE>
EXHIBIT A
to
SHARK PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
Exhibit B
Shark Prospect
EXHIBIT "B"
(Attached to and made a part of that certain Letter Agreement dated January 6,
1998 by and between Cheniere Energy, Inc., as Operator, and Beta Oil & Gas,
Inc., as Non-Operator.)
ASSIGNMENT OF UNDIVIDED INTEREST
IN OIL, GAS AND MINERAL LEASES
THE STATE OF LOUISIANA )
) KNOW ALL MEN BY THESE PRESENTS, THAT:
PARISH OF CAMERON )
WHEREAS, Cheniere Energy, Inc. is the owner of record of an interest in
the Oil, Gas and Mineral Leases and the Lease Option described in Exhibit "A"
and made a part hereof, which leases may be referred to in this assignment as
"Subject Leases"; and
WHEREAS, pursuant to the terms and provisions of that certain
unrecorded Letter Agreement by and between Cheniere Energy, Inc. ("Cheniere")
and Beta Oil & Gas, Inc. ("Beta") dated January 6, 1999, and pertaining to the
leases described in Exhibit "A," Cheniere has agreed to assign and convey to
Beta and Beta has agreed to acquire from Cheniere, subject to the terms and
provisions hereinafter set forth, an undivided 15% interest in and to Subject
Leases.
NOW THEREFORE, in consideration of $1,000.00 and other good and
valuable considerations, paid by Assignee to Assignor, the receipt, seriousness
and sufficiency of which is hereby acknowledged by Assignor, Cheniere, as
Assignor, does hereby assign, transfer and convey unto Beta, as Assignee, an
undivided 15% interest in and to Subject Leases.
This assignment is made by Assignor and is accepted by Assignee subject
to and the parties hereto agree to be bound by the terms and provisions of the
above described unrecorded Letter Agreement and the Joint Operating Agreement,
which is attached thereto as Exhibit "C."
This assignment is made subject to and Assignee agrees to bear its
pro-rata part of the royalties and leasehold obligations provided for in Subject
Leases and of the overriding royalties, if any, that are described in Exhibit
"A" hereof, following the description of each of Subject Leases. Assignor
represents and warrants to Assignee that each of Subject Lease is burdened only
with the royalty and overriding royalty, if any, set forth following the
description of each lease in Exhibit "A."
This assignment is made without warranty, either express or implied,
not even for the return of purchase price paid by Assignee to Assignor, but with
full substitution and subrogation, to the extent of the interest herein
assigned, to the rights and actions of warranty granted Assignor under the terms
of Subject Leases or by Assignor's predecessors-in-title.
IN TESTIMONY WHEREOF, this instrument is executed this ________ day of
_____________________________, 19 ______, in the presence of the undersigned
competent witnesses.
WITNESSES:
- -----------------------------------
--------------------------------
- ------------------------------------
- ------------------------------------
---------------------------------
- ------------------------------------
<PAGE>
<PAGE>
COVER PAGE
of
EXHIBIT C
to
SHARK PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED)
1
<PAGE>
T A B L E O F C O N T E N T S
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
Preliminary Recitals . . . . . . . . . . . . . . . . . . . . . . . . . . . ii.
ARTICLE I
APPLICATION
1.1 Application . . . . . . . . . . . . . . . . . . . . . . . . . . .1.
ARTICLE II
DEFINITIONS
2.1 Casing Point . . . . . . . . . . . . . . . . . . . . . . . . . . .1.
2.2 Development Operations . . . . . . . . . . . . . . . . . . . . . .1.
2.3 Development Well . . . . . . . . . . . . . . . . . . . . . . . .1.
2.4 Exploratory Operations . . . . . . . . . . . . . . . . . . . . . .1.
2.5 Exploratory Well . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.6 Facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.7 Lease. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.8 Non-Consent Operations . . . . . . . . . . . . . . . . . . . . . .2.
2.9 Non-Consent Platform . . . . . . . . . . . . . . . . . . . . . . .2.
2.10 Non-Consent Well . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.11 Non-Operator . . . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.12 Non-Participating Party. . . . . . . . . . . . . . . . . . . . . .2.
2.13 Non-Participating Party's Share. . . . . . . . . . . . . . . . . .2.
2.14 Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.15 Participating Interest . . . . . . . . . . . . . . . . . . . . . .2.
2.16 Participating Party. . . . . . . . . . . . . . . . . . . . . . . .2.
2.17 Producible Well. . . . . . . . . . . . . . . . . . . . . . . . . .2.
2.18 Working Interest . . . . . . . . . . . . . . . . . . . . . . . . .3.
ARTICLE III
EXHIBITS
3.1 Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.
3.1.1 Exhibit A: Description of Lease
and Working Interest. . . . . . . . . . . . . . . . . . . . .3.
3.1.2. Exhibit A-1 Area of Mutual Interest . . . . . . . . .3.
3.1.3 Exhibit B: Insurance Provision . . . . . . . . . . .3.
3.1.4 Exhibit C: Accounting Procedure. . . . . . . . . . .3.
3.1.5 Exhibit D: Non-Discrimination Provision. . . . . . .3.
3.1.6 Exhibit E: Gas Balancing Agreement . . . . . . . . .3.
ARTICLE IV
OPERATOR
4.1 Operator . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3.
4.2 Resignation. . . . . . . . . . . . . . . . . . . . . . . . . . . .3.
4.3 Removal of Operator. . . . . . . . . . . . . . . . . . . . . . . .3.
4.4 Selection of Successor . . . . . . . . . . . . . . . . . . . . . .4.
4.5 Delivery of Property . . . . . . . . . . . . . . . . . . . . . . .4.
2
<PAGE>
ARTICLE V
AUTHORITY AND DUTIES OF OPERATOR
5.1 Exclusive Right to Operate . . . . . . . . . . . . . . . . . . . .4.
5.2 Workmanlike Conduct. . . . . . . . . . . . . . . . . . . . . . . .4.
5.3 Liens and Encumbrances . . . . . . . . . . . . . . . . . . . . . .4.
5.4 Employees. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.
5.5 Records. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4.
5.6 Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.
5.7 Drilling . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.
5.8 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5.
5.9 Information to Participating Parties . . . . . . . . . . . . . . .5.
ARTICLE VI
VOTING AND VOTING PROCEDURES
6.1 Designation of Representatives . . . . . . . . . . . . . . . . . .6.
6.2 Voting Procedures. . . . . . . . . . . . . . . . . . . . . . . . .6.
6.2.1 Voting Interest. . . . . . . . . . . . . . . . . . . . .6.
6.2.2 Vote Required. . . . . . . . . . . . . . . . . . . . . .6.
6.2.3 Votes. . . . . . . . . . . . . . . . . . . . . . . . . .6.
6.2.4 Meetings . . . . . . . . . . . . . . . . . . . . . . . .6.
ARTICLE VII
ACCESS
7.1 Access to Lease. . . . . . . . . . . . . . . . . . . . . . . . . .7.
7.2 Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7.
7.3 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . .7.
7.4 Limited Disclosure . . . . . . . . . . . . . . . . . . . . . . . .7.
ARTICLE VIII
EXPENDITURES
8.1 Basis of Charge to the Parties . . . . . . . . . . . . . . . . . .7.
8.2 Authorization. . . . . . . . . . . . . . . . . . . . . . . . . . .8.
8.3 Advance Billings . . . . . . . . . . . . . . . . . . . . . . . . .8.
8.4 Commingling of Funds . . . . . . . . . . . . . . . . . . . . . . .8.
8.5 Security Rights. . . . . . . . . . . . . . . . . . . . . . . . . .8.
8.6 Unpaid Charges . . . . . . . . . . . . . . . . . . . . . . . . . .9.
8.7 Default. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9.
8.8 Carved-out Interests . . . . . . . . . . . . . . . . . . . . . . 10.
ARTICLE IX
NOTICES
9.1 Giving and Receiving Notices . . . . . . . . . . . . . . . . . . 10.
9.2 Content of Notice. . . . . . . . . . . . . . . . . . . . . . . . 10.
9.3 Response to Notices. . . . . . . . . . . . . . . . . . . . . . . 10.
9.3.1 Platform Construction. . . . . . . . . . . . . . . . . 11.
9.3.2 Proposal Without Platform. . . . . . . . . . . . . . . 11.
9.3.3 Other Matters. . . . . . . . . . . . . . . . . . . . . 11.
9.4 Failure to Respond . . . . . . . . . . . . . . . . . . . . . . . 11.
9.5 Restrictions on Multiple Well Proposals. . . . . . . . . . . . . 11.
ARTICLE X
3
<PAGE>
EXPLORATORY WELLS
10.1 Operations by All Parties. . . . . . . . . . . . . . . . . . . . 11.
10.2 Second Opportunity to Participate. . . . . . . . . . . . . . . . 12.
10.3 Operations by Fewer Than All Parties . . . . . . . . . . . . . . 12.
10.4 Course of Action After Drilling to Initial Objective
Depth . . . . . . . . . . . . . . . . . . . . . . . . . . . 13.
10.4.1 Casing Point Election. . . . . . . . . . . . . . . . . . . . . . 13.
ARTICLE XI
DEVELOPMENT WELL OPERATIONS
11.1 Operations by All Parties. . . . . . . . . . . . . . . . . . . . 14.
11.2 Second Opportunity to Participate. . . . . . . . . . . . . . . . 15.
11.3 Operations by Fewer Than All Parties . . . . . . . . . . . . . . 15.
11.4 Timely Operations. . . . . . . . . . . . . . . . . . . . . . . . 15.
11.5 Course of Action After Drilling to Initial Objective
Depth. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15.
11.6 Deeper Drilling. . . . . . . . . . . . . . . . . . . . . . . . . 15.
ARTICLE XII
NON-CONSENT OPERATIONS
12.1 Non-Consent Operations . . . . . . . . . . . . . . . . . . . . . 16.
12.1.1 Non-Interference . . . . . . . . . . . . . . . . . . . 16.
12.1.2 Multiple Completion Limitation . . . . . . . . . . . . 16.
12.1.3 Metering . . . . . . . . . . . . . . . . . . . . . . . 16.
12.1.4 Liens. . . . . . . . . . . . . . . . . . . . . . . . . 16.
12.1.5 Non-Consent Well . . . . . . . . . . . . . . . . . . . 16.
12.1.6 Cost-Information . . . . . . . . . . . . . . . . . . . 17.
12.1.7 Completions. . . . . . . . . . . . . . . . . . . . . . 17.
12.2 Relinquishment of Interest . . . . . . . . . . . . . . . . . . . 17.
12.2.1 Production Reversion Penalties . . . . . . . . . . . . 17.
12.2.2 Non-Production Reversion . . . . . . . . . . . . . . . 18.
12.3 Deepening of Non-Consent Well. . . . . . . . . . . . . . . . . . 18.
12.4 Operations from Non-Consent Platforms. . . . . . . . . . . . . . 18.
12.5 Discovery or Extension from Mobile Drilling Operations . . . . . 19.
12.6 Allocation of Platform Costs to Non-Consent Operations . . . . . 19.
12.6.1 Charges. . . . . . . . . . . . . . . . . . . . . . . . 19.
12.6.2 Operating and Maintenance Charges. . . . . . . . . . . 20.
12.6.3 Payments . . . . . . . . . . . . . . . . . . . . . . . 20.
12.7 Non-Consent Drilling to Maintain Lease . . . . . . . . . . . . . 21.
12.7.1 Retention of Lease by Non-Consent Well . . . . . . . . 22.
12.8 Allocation of Costs (Single Completion). . . . . . . . . . . . . 22.
12.9 Allocation of Costs (Multiple Completions) . . . . . . . . . . . 22.
12.10 Allocation of Costs (Dry Hole) . . . . . . . . . . . . . . . . . 24.
12.11 Intangible Drilling and Completion Allocations . . . . . . . . . 24.
12.12 Operated Wells . . . . . . . . . . . . . . . . . . . . . . . . . 24.
ARTICLE XII
FACILITIES
13.1 Approval . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.
ARTICLE XIV
ABANDONMENT AND SALVAGE
14.1 Platform Salvage and Removal Costs . . . . . . . . . . . . . . . 25.
14.2 Purchase of Salvage Materials. . . . . . . . . . . . . . . . . . 26.
14.3 Abandonment of Producing Well. . . . . . . . . . . . . . . . . . 27.
4
<PAGE>
14.4 Assignment of Interest . . . . . . . . . . . . . . . . . . . . . 27.
14.5 Abandonment Operations Required by Governmental Authority. . . . 27.
ARTICLE XV
WITHDRAWAL
15.1 Withdrawal . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.
15.2 Limitations on Withdrawal. . . . . . . . . . . . . . . . . . . . 28.
ARTICLE XVI
RENTALS, ROYALTIES AND OTHER PAYMENTS
16.1 Creation of Overriding Royalty . . . . . . . . . . . . . . . . . 29.
16.2 Payment of Rentals and Minimum Royalties . . . . . . . . . . . . 29.
16.3 Non-Concurrence in Payments. . . . . . . . . . . . . . . . . . . 30.
16.4 Royalty Payments . . . . . . . . . . . . . . . . . . . . . . . . 30.
16.5 Federal Offshore Oil Pollution Compensation Fund Fee . . . . . . 31.
ARTICLE XVII
TAXES
17.1 Property Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 31.
17.2 Contest of Property Tax Valuation. . . . . . . . . . . . . . . . 31.
17.3 Production and Severance Taxes . . . . . . . . . . . . . . . . . 31.
17.4 Other Taxes and Assessments. . . . . . . . . . . . . . . . . . . 31.
ARTICLE XVIII
INSURANCE
18.1 Insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32.
ARTICLE XIX
LIABILITY, CLAIMS AND LAWSUITS
19.1 Individual Obligations . . . . . . . . . . . . . . . . . . . . . 32.
19.2 Notice of Claim or Lawsuit . . . . . . . . . . . . . . . . . . . 32.
19.3 Settlements. . . . . . . . . . . . . . . . . . . . . . . . . . . 32.
19.4 Legal Expense. . . . . . . . . . . . . . . . . . . . . . . . . . 32.
19.5 Liability for Losses, Damages, Injury or Death . . . . . . . . . 32.
19.6 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . 32.
ARTICLE XX
INTERNAL REVENUE PROVISION
20.1 Internal Revenue Provision . . . . . . . . . . . . . . . . . . . 33.
ARTICLE XXI
CONTRIBUTIONS
21.1 Notice of Contributions Other Than Advances for Sale
of Production. . . . . . . . . . . . . . . . . . . . . . . . . . 34.
21.2 Cash Contributions . . . . . . . . . . . . . . . . . . . . . . . 34.
21.3 Acreage Contributions. . . . . . . . . . . . . . . . . . . . . . 34.
5
<PAGE>
ARTICLE XXII
DISPOSITION OF PRODUCTION
22.1 Facilities to Take in Kind . . . . . . . . . . . . . . . . . . . 34.
22.2 Duty to Take in Kind . . . . . . . . . . . . . . . . . . . . . . 34.
22.3 Failure to Take in Kind. . . . . . . . . . . . . . . . . . . . . 34.
22.4 Expenses of Delivery in Kind.. . . . . . . . . . . . . . . . . . 35.
22.5 Gas Balancing Provisions . . . . . . . . . . . . . . . . . . . . 35.
ARTICLE XXIII
APPLICABLE LAW
23.1 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . 35.
ARTICLE XXIV
LAWS, REGULATIONS AND NONDISCRIMINATION
24.1 Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . 35.
24.2 Nondiscrimination. . . . . . . . . . . . . . . . . . . . . . . . 35.
ARTICLE XXV
FORCE MAJEURE
25.1 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.
25.2 Strikes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.
25.3 Force Majeure. . . . . . . . . . . . . . . . . . . . . . . . . . 36.
ARTICLE XXVI
SUCCESSORS, ASSIGNS, AND
PREFERENTIAL RIGHT TO PURCHASE
26.1 Successors and Assigns . . . . . . . . . . . . . . . . . . . . . 36.
26.2 Preferential Right of Purchase . . . . . . . . . . . . . . . . . 36.
26.2.1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37.
26.2.2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38.
26.3 Assignments. . . . . . . . . . . . . . . . . . . . . . . . . . . 38.
ARTICLE XXVII
AREA OF MUTUAL INTEREST
27. Area of Mutual Interest. . . . . . . . . . . . . . . . . . . . . 39.
ARTICLE XXVIII
TERM
28.1 Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40.
ARTICLE XXIX
HEADINGS AND EXECUTION
6
<PAGE>
29.1 Topical Headings . . . . . . . . . . . . . . . . . . . . . . . . 40.
29.2 Counterpart Execution. . . . . . . . . . . . . . . . . . . . . . 41.
</TABLE>
7
<PAGE>
JOINT OPERATING AGREEMENT
THIS AGREEMENT is made effective as of November 6, 1998 herein by the
signers hereof, herein referred to collectively as "PARTIES" and individually as
"PARTY".
WITNESSETH:
WHEREAS the PARTIES are owners of or have contracted for the right to
earn an interest in the oil and gas lease(s) identified in Exhibit "A", and the
PARTIES desire to explore, develop, produce and operate said lease(s).
NOW THEREFORE, in consideration of the premises and of the mutual
agreement herein, it is agreed as follows:
ARTICLE I
APPLICATION
1.1 APPLICATION . The leases and lands identified in Exhibit "A" shall be
treated as one oil and gas lease for the purposes of this Agreement.
ARTICLE II
DEFINITIONS
2.1 CASING POINT. That point at which a well drilled hereunder, has
reached the proposed objective depth or zone, logged and logs distributed to the
PARTICIPATING PARTIES.
2.2 DEVELOPMENT OPERATIONS. Operations on the LEASE other than
EXPLORATORY OPERATIONS as defined in Section 2.4 below.
2.3 DEVELOPMENT WELL. Any well proposed as a DEVELOPMENT OPERATION.
2.4 EXPLORATORY OPERATIONS. Operations on the LEASE which are scheduled
for an objective zone, horizon or formation:
(1) which has not been established as producible on the LEASE
under 2.16 below; or,
(2) which is already established as producible on the LEASE
under 2.16 below, but such objective zone, horizon or formation will
be penetrated at a location more than 2,000 feet from the nearest
bottom hole location on the LEASE at which such objective has been
proved producible, or such objective is mutually agreed to be in a
separate fault block.
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2.5 EXPLORATORY WELL. Any well proposed as an EXPLORATORY OPERATION.
2.6 FACILITIES. All lease equipment beyond the wellhead connections
acquired pursuant to this Agreement including any platform(s) necessary to carry
out the operation.
2.7 LEASE. The oil and gas leases identified in Exhibit "A" and the lands
affected thereby.
2.8 NON-CONSENT OPERATIONS. DEVELOPMENT or EXPLORATORY OPERATIONS
conducted by fewer than all PARTIES.
2.9 NON-CONSENT PLATFORM. A drilling or production platform owned by
fewer than all PARTIES.
2.10 NON-CONSENT WELL. A DEVELOPMENT or EXPLORATORY WELL owned by fewer
than all PARTIES.
2.11 NON-OPERATOR. Any PARTY to the Agreement other than the OPERATOR.
2.12 NON-PARTICIPATING PARTY. Any PARTY other than a PARTICIPATING PARTY.
2.13 NON-PARTICIPATING PARTY'S SHARE. The PARTICIPATING INTEREST a
NON-PARTICIPATING PARTY would have had if all PARTIES had participated in the
operation.
2.14 OPERATOR. The PARTY designated under this Agreement to conduct all
operations.
2.15 PARTICIPATING INTEREST. A PARTICIPATING PARTY'S percentage of
participation in an operation conducted pursuant to the Agreement.
2.16 PARTICIPATING PARTY. A PARTY who joins in an operation conducted
pursuant to this agreement.
2.17 PRODUCIBLE WELL. A well producing oil or gas, or if not producing oil
or gas, a well declared capable of producing in accordance with any applicable
government authority or by agreement of all of the PARTIES.
2.18 WORKING INTEREST. The ownership of each PARTY in and to the LEASE as
set forth in Exhibit "A".
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ARTICLE III
EXHIBITS
3.1 EXHIBITS. Attached hereto are the following exhibits which are
incorporated herein by reference:
3.1.1 Exhibit A. Description of Lease and Working Interest
3.1.2 Exhibit A-1. Area of Mutual Interest
3.1.3 Exhibit B. Insurance Provision
3.1.4 Exhibit C. Accounting Procedure
3.1.5 Exhibit D. Nondiscrimination Provision
3.1.6 Exhibit E. Gas Balancing Agreement
ARTICLE IV
OPERATOR
4.1 OPERATOR. Cheniere Energy, Inc. is hereby designated as OPERATOR.
OPERATOR shall not have the right to assign or transfer any rights, duties or
obligations of OPERATOR to another PARTY.
4.2 RESIGNATION. OPERATOR may resign at any time by giving notice to the
PARTIES. Such resignation shall become effective at 7:00 a.m. on the first day
of the month following a period of ninety (90) days after said notice, unless a
successor OPERATOR has assumed the duties of OPERATOR prior to that date.
4.3 REMOVAL OF OPERATOR. OPERATOR may be removed if (1) OPERATOR becomes
insolvent or unable to pay its debts as they mature or makes an assignment for
the benefit of creditors or commits any act of bankruptcy or seeks relief under
laws providing for the relief of debtors; or (2) a receiver is appointed for
OPERATOR or for substantially all of its property and/or affairs; or (3)
OPERATOR or its designee no longer owns an interest in the property or divest
itself of fifty percent (50%) or more of the interest owned by it in the Lease
at the time it was designated OPERATOR; or (4) OPERATOR has committed a material
breach of any substantive provision hereof or fails to perform its duties
hereunder in a reasonable and prudent manner, or failed to rectify such default
within sixty (60) days after notice from another PARTY to do so. The PARTY
giving notice to the OPERATOR or a default shall also furnish a copy of such
notice to the other PARTIES. In such event, the OPERATOR may be removed by an
affirmative vote of two (2) or more PARTIES having a combined WORKING INTEREST
of fifty percent (50%) in the LEASE.
4.4 SELECTION OF SUCCESSOR. Upon resignation or removal of OPERATOR, a
successor OPERATOR shall be selected by an affirmative vote of two
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(2) or more PARTIES having a combined WORKING INTEREST of fifty-one percent
(51%) or more; however, if the removed or resigned OPERATOR fails to vote or
votes only to succeed itself, the successor OPERATOR shall be selected by an
affirmative vote of the PARTIES having a combined WORKING INTEREST of
fifty-one percent (51%) or more of the remaining WORKING INTEREST after
excluding the WORKING INTEREST of the removed or resigned OPERATOR.
4.5 DELIVERY OF PROPERTY. Prior to the effective date of resignation or
removal, OPERATOR shall deliver promptly to successor OPERATOR the possession of
everything owned by the PARTIES pursuant to this Agreement.
ARTICLE V
AUTHORITY AND DUTIES OF OPERATOR
5.1 EXCLUSIVE RIGHT TO OPERATE. Unless provided, OPERATOR shall have the
exclusive right and duty to conduct all operations pursuant to the Agreement.
5.2 WORKMANLIKE CONDUCT. OPERATOR shall conduct all operations in a good
and workmanlike manner, as would a prudent OPERATOR under the same or similar
circumstances. OPERATOR shall not be liable to the PARTIES for losses sustained
or liabilities incurred except such as may result from its gross negligence or
willful misconduct. Unless otherwise provided, OPERATOR shall consult with the
PARTIES and keep them informed of all important matters.
5.3 LIENS AND ENCUMBRANCES. OPERATOR shall endeavor to keep the LEASE and
equipment free from all liens and encumbrances occasioned by operations
hereunder, except those provided for in Section 8.5.
5.4 EMPLOYEES. OPERATOR shall select employees and determine their
number, hours of labor and compensation. Such employees shall be employees of
OPERATOR.
5.5 RECORDS. OPERATOR shall keep accurate books, accounts and records of
operations hereunder which, unless otherwise provided for in this Agreement,
shall be available to NON-OPERATOR pursuant to the provisions contained in
Exhibit "C".
5.6 COMPLIANCE. OPERATOR shall comply with and require all agents and
contractors to comply with all applicable laws, rules, regulations and orders of
any governmental agency having jurisdiction.
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5.7 DRILLING. OPERATOR shall have all drilling operations conducted by
qualified and responsible independent contractors under competitive contracts.
However, OPERATOR may employ its equipment and personnel in the conduct of such
operations, but its charges therefor shall not exceed the then prevailing rates
in the area and such work shall be performed pursuant to a written agreement
among the PARTICIPATING PARTIES.
5.8 REPORTS. OPERATOR shall make reports to governmental authorities that
it has a duty to make as OPERATOR and shall furnish copies of such reports to
the PARTIES. OPERATOR shall give timely written notice to the PARTIES of all
litigation and hearings affecting the LEASE or operations hereunder.
5.9 INFORMATION TO PARTICIPATING PARTIES. OPERATOR shall furnish all
PARTICIPATING PARTIES hereto the following information pertaining to each well
being drilled:
(a) copy of application for permit to drill and all amendments
thereto;
(b) daily drilling reports by telephone followed by written
reports (or by TWX or TELEX);
(c) complete report of all core analyses;
(d) two (2) copies of any logs or surveys as run;
(e) two (2) copies of any well test results, bottom-hole
pressure surveys, gas and condensate analyses or similar information;
(f) one (1) copy of reports made to regulatory agencies; and
(g) twenty-four (24) hour notice of logging, coring and testing
operations;
(h) upon request prior to resumption of drilling operations,
samples of cuttings and cores marked as to depth, to be packaged and
shipped to the requesting PARTY at their expense.
(i) all other reasonable information, available to OPERATOR,
pertaining to any well drilled pursuant to this Agreement.
ARTICLE VI
VOTING AND VOTING PROCEDURES
6.1 DESIGNATION OF REPRESENTATIVE. The name and address of the
representative and alternate authorized to represent and bind each PARTY for
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operations provided in Article IX, shall be as shown on Exhibit "A". The
designated representative or alternate may be changed by written notice to the
other PARTIES.
6.2 VOTING PROCEDURES. Unless otherwise provided, any matter requiring
approval of the PARTIES shall be determined as follows:
6.2.1 VOTING INTEREST. Each PARTY shall have a voting interest
equal to its WORKING INTEREST or its PARTICIPATING INTEREST as applicable.
6.2.2 VOTE REQUIRED. Except as may be specifically provided
elsewhere herein, any proposal requiring approval of the PARTIES shall be
decided by an affirmative vote to two (2) or more PARTIES having a combined
voting interest of fifty-one percent (51%) or more.
6.2.3 VOTES. The PARTIES may vote at meetings, by telephone,
confirmed in writing to OPERATOR; or by letter, telegram, telex or telecopies.
However, any PARTY not attending a meeting must vote prior to the meeting in
order to be counted. Provided, however, no vote shall be taken in a meeting in
which all Parties are not present unless such vote was specifically set out in
the formal agenda. OPERATOR shall give prompt notice of the results of such
voting to each PARTY.
6.2.4 MEETINGS. Meetings of the PARTIES may be called by OPERATOR
upon its own motion or at the request of one (1) or more PARTIES having a
combined voting interest of not less than ten percent (10%). Except in the case
of emergency or except when agreed by unanimous consent, no meeting shall be
called on less than five (5) days advance written notice, (including the agenda
for such meeting). The OPERATOR shall be chairman of each meeting.
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ARTICLE VII
ACCESS
7.1 ACCESS TO LEASE. Each PARTY shall have access to the LEASE as its
sole risk and expense at all reasonable times to inspect operations and records
and data pertaining thereto.
7.2 REPORTS. OPERATOR shall furnish to a requesting PARTY any information
to which such PARTY is entitled hereunder. The costs of gathering and
furnishing information not otherwise furnished under Article V shall be charged
to the requesting PARTY.
7.3 CONFIDENTIALITY. Except as provided in Section 7.4 and except for
necessary disclosures to governmental agencies, no PARTY shall release any
geological, geophysical or reservoir information or any logs, surveys or other
information pertaining to the progress, tests or results of any well or status
of the LEASE unless agreed to by the PARTICIPATING PARTIES. At such time as the
PARTIES mutually agree such information is non-confidential, it may be publicly
released. Unless otherwise provided, OPERATOR shall initially release the same
subsequent to approval of its content by the PARTIES. OPERATOR shall have the
exclusive right to designate certain wells as "tight" for the competitive
protection of the PARTIES.
7.4 LIMITED DISCLOSURE. Any PARTY may make confidential data available to
affiliates, to reputable engineering firms and gas transmission companies for
hydrocarbon reserve and other technical evaluations, to reputable financial
institutions for study prior to commitment of funds and to bonafide purchasers
of all of a PARTY'S interest in the LEASE. Any third party permitted such
access shall first agree in writing neither to disclose such data to others nor
to use such data except for the purpose for which it is disclosed. Each PARTY
shall be furnished with copies of third parties execution of the same.
ARTICLE VIII
EXPENDITURES
8.1 BASIS OF CHARGE TO THE PARTIES. OPERATOR shall pay all costs and each
PARTY shall reimburse OPERATOR in proportion to the PARTICIPATING INTEREST. All
charges, credits and accounting for expenditures shall be pursuant to
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the Accounting Procedure attached hereto as Exhibit "C". The provisions of
this Agreement shall prevail in the event of conflict with Exhibit "C".
8.2 AUTHORIZATION. OPERATOR shall neither make any single expenditure nor
undertake any project costing in excess of Seventy-five Thousand Dollars
($75,000.00) without prior approval of the PARTIES. OPERATOR shall furnish a
written AFE, for information purposes only, to the PARTIES on any expenditures
in excess of Twenty-five Thousand Dollars ($25,000.00) or if costs of an
operation exceed 120% of a previously approved AFE. Subject to any election
provided in Article X and XI, approval of a well operation shall include
approval of a all necessary expenditures through installation of the wellhead.
In the event of an emergency, OPERATOR may immediately make such expenditures as
in its opinion are required to deal with the emergency. OPERATOR shall report
to the PARTIES, as promptly as possible, the nature of the emergency and action
taken.
8.3 ADVANCE BILLINGS. OPERATOR shall have the right to require each
PARTY to advance its respective share of estimated expenditures pursuant to
Exhibit "C", provided, however, that in the event a statement and invoice for
advance payment is submitted for costs attributable to a well proposal,
OPERATOR shall advance bill for the entire amount of such billing costs even
though such costs may not actually be incurred during the next thirty (30) day
period and as to any party who fails to pay its share of said advance payment
within fifteen (15) days after receipt of such statement and invoice, OPERATOR
will notify such affected party of its default by certified mail, return receipt
requested and if such party fails to cure the default within ten (10) days from
the date of receipt of OPERATOR'S Notice, by payment in full of the outstanding
invoices for advance payment, at OPERATOR'S election, the affected party shall
be deemed non-consent as to the proposed well attributable thereto.
8.4 COMMINGLING OF FUNDS. Funds received by OPERATOR under this Agreement
may be commingled with its own funds.
8.5 SECURITY RIGHTS. In addition to any other security rights and
remedies provided by law with respect to services rendered or materials and
equipment furnished under this Agreement, OPERATOR shall have a first lien upon
each PARTY'S PARTICIPATING and/or WORKING INTEREST, including the production and
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equipment credited thereto, in order to secure payment of charges against such
PARTY, together with interest thereon at the rate set forth in Exhibit "C" or
the maximum rate allowed by law, whichever is less, plus attorneys' fees, court
costs and other related collection costs. If any PARTY does not pay such
charges when due, OPERATOR shall have the additional right to collect from the
purchaser the proceeds from the sale of such PARTY'S share of production until
the amount owed has been paid. Each purchaser shall be entitled to rely on
OPERATOR'S statement concerning the amount owed. Each NON-OPERATOR shall have
comparable security rights on OPERATOR'S PARTICIPATING and/or WORKING INTEREST.
8.6 UNPAID CHARGES. If any PARTY fails to pay the charges due hereunder,
including billings under Section 8.3, within thirty (30) days after payment is
due, the PARTICIPATING PARTIES shall have the obligation, upon OPERATOR'S
request, to pay the unpaid amount in proportion to their interest. Each PARTY
so paying its share of the unpaid amount shall be subrogated to OPERATOR'S
security rights to the extent of such payment.
8.7 DEFAULT. If any PARTY does not pay its share of the charges when due,
or prior to commencement of the approved operation for which it is billed,
whichever is the earlier, OPERATOR may give such PARTY notice that unless
payment is made within fifteen (15) DAYS, such PARTY shall be in default. Any
PARTY in default shall have no further access to the maps, cores, logs, surveys,
records, data, interpretations or other information obtained in connection with
said operation. A defaulting PARTY shall not be entitled to vote on any matter
until such time as PARTY'S payments are current. The voting interest of each
non-defaulting PARTY shall be in the proportion its PARTICIPATING INTEREST bears
to the total non-defaulting PARTICIPATING INTEREST. As to any operation
approved or commenced during the time a PARTY is in default, such PARTY shall be
deemed to be a NON-PARTICIPATING PARTY.
8.8 CARVED-OUT INTERESTS. Any overriding royalty, production payment, net
proceeds interest, carried interest or any other interest carved-out of the
WORKING INTEREST in the LEASE after the effective date of this Agreement shall
be subject to the rights of the PARTIES to this Agreement, and any PARTY whose
WORKING
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INTEREST is so encumbered shall be responsible therefor. If a PARTY does not
pay its share of expenses and the proceeds from the sale of production under
Section 8.5 are insufficient for that purpose, the security rights provided
for therein may be applied against the carved-out interests with which such
WORKING INTEREST is burdened. In such event, the rights of the owner of such
carved-out interest shall be subordinated to the security rights granted by
Section 8.5.
ARTICLE IX
NOTICES
9.1 GIVING AND RECEIVING NOTICES. All notices shall be in writing and
delivered in person or by mail, telex, telegraph, TWX, telecopier or cable;
however, if a drilling rig is on location at time of proposal and standby
charges are accumulating, such notices shall be given by telephone and
immediately confirmed in writing. Notice shall be deemed given only when
received by the PARTY to whom such notice is directed, except that any notice by
certified mail or equivalent, telegraph or cable properly addressed, pursuant to
Section 6.1, and with all postage and charges prepaid shall be deemed given
seventy-two (72) hours after such notice is deposited in the mail or twenty-four
(24) hours after such notice is sent by facsimile (receipt confirmed), or when
filed with an operating, telegraph or cable company for immediate transmission.
9.2 CONTENT OF NOTICE. Any notice which requires a response shall
indicate the maximum response time specified in Section 9.3 If a proposal
involves a platform or facility, the notice shall contain a description of same,
including location and the estimated costs of fabrication, transportation and
installation. If a proposal involves a well operation, the notice shall include
the proposed depth, the objective zone or zones to be tested, the surface and
bottom-hole locations and the estimated costs of the operation including all
necessary expenditures through installation of the wellhead.
9.3 RESPONSE TO NOTICES. Each PARTY'S response to a proposal shall be in
writing to OPERATOR, with copies to the other PARTIES. Except for
those notices in Articles X, XI, XV and XVI, the maximum response time
shall be as follows:
9.3.1 PLATFORM CONSTRUCTION. When any proposal for operations
involves the construction of a platform, the maximum response time
shall be forty-five (45) days.
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9.3.2 PROPOSAL WITHOUT PLATFORM. When any proposal for operations
does not require construction of a platform, maximum response time
shall be thirty (30) days; however, if a drilling rig is on location
and standby charges are accumulating, the maximum response time shall
be forty-eight (48) hours.
9.3.3 OTHER MATTERS. For all other matters requiring notice, the
maximum response time shall be thirty (30) days.
9.4 FAILURE TO RESPOND. Failure of any PARTY to respond to a notice
within the required period shall be deemed to be a negative response.
9.5 RESTRICTIONS ON MULTIPLE WELL PROPOSALS. Unless otherwise agreed by
the PARTIES, no more than one well shall be drilling or completing at the same
time. Well proposals made under the terms hereof shall be limited to one well
each and except as provided below, no PARTY shall be required to make an
election under more than one well proposal at the same time or while a well is
drilling or completing. This paragraph shall not limit the right of a PARTY to
propose a well while another is drilling or completing, however, the time to
elect under such a proposal shall be deferred until (a) thirty (30) days after
the previous well has been completed or plugged and abandoned or (b) twenty-four
(24) hours from receipt of notification that the drilling rig has been moved to
the new location and standby charges are being accumulated, whichever is
earlier.
ARTICLE X
EXPLORATORY WELLS
10.1 OPERATIONS BY ALL PARTIES. Any PARTY may propose an EXPLORATORY WELL
by notifying the other PARTIES. If all the PARTIES agree to participate in
drilling the proposed well, OPERATOR shall drill same for the benefit of all
PARTIES.
10.2 SECOND OPPORTUNITY TO PARTICIPATE. If fewer than all PARTIES elect
to participate, the proposing PARTY shall inform the OPERATOR of the elections
made. OPERATOR shall inform the PARTIES of the elections, whereupon any PARTY
originally electing not to participate may then elect to participate by
notifying the OPERATOR within forty-eight (48) hours after receipt of such
information.
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10.3 OPERATIONS BY FEWER THAN ALL PARTIES. If fewer than all but two (2)
or more PARTIES owning not less than fifty percent (50%) WORKING INTEREST elect
to participate in and agree to bear the cost and risk of drilling the proposed
well, OPERATOR, even if OPERATOR is a NON-PARTICIPATING PARTY, shall drill such
well under this Agreement. OPERATOR, immediately after expiration of the
applicable notice period, shall advise the PARTICIPATING PARTIES of (a) the
total interest of the PARTIES approving such operation, and (b) its
recommendation as to whether the PARTICIPATING PARTIES should proceed with the
operation as proposed. Each PARTICIPATING PARTY, within forty-eight (48) hours
(inclusive of Saturday, Sunday or legal holidays) after receipt of such notice,
shall advise the proposing PARTY of its desire to (a) limit participation to
such PARTY'S interest as shown on Exhibit "A", or (b) carry its proportionate
part of NON-PARTICIPATING PARTIES' interest, or (c) participate with a lesser
percentage than its proportionate part of the NON-PARTICIPATING PARTIES'
interest. The proposing PARTY, at its election, may withdraw such proposal if
there is insufficient participation and shall promptly notify all PARTIES of
such decision. If the well is commenced within ONE HUNDRED FIFTY (150) days
after the date of the last applicable election date and is drilled as proposed
in accordance with this Agreement, any PARTY electing not to participate shall
be deemed to have relinquished its operating rights in such well as if it were a
NON-CONSENT WELL. However, in the situation in which a rig is on location and
standby charges are accumulating, thus precipitating a forty-eight (48) hour
response period, the well must be commenced within fifteen (15) days. If no
operations are begun within such time period, the effect shall be as if the
proposal had not been made. Operations shall be deemed to have commenced (a) on
the date the contract for a new platform is let, if the notice indicated the
need for such platform; or (b) the date rigging-up operations are commenced.
Recoupment of costs shall be determined by Sections 12.2 and 12.5, if
applicable, and the drilling of such well shall be governed by Article XII as
applicable; however, percentages under Section 12.2 shall be as follows:
12.2.1a) Eight hundred percent (800%)
12.2.1b) Three hundred percent (300%)
12.2.1c) One hundred percent (100%)
12.2.1d) One hundred percent (100%)
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PROVIDED HOWEVER, if the proposed EXPLORATORY WELL is the initial well drilled
by the PARTIES on the LEASE, then any NON-PARTICIPATING PARTY shall permanently
assign its entire interest in the LEASE to the PARTICIPATING PARTIES and the
recoupment of cost provision of this Article and Article XII shall not apply,
but the NON-PARTICIPATING PARTY shall not be relieved of any obligation accruing
prior to such assignment.
10.4 COURSE OF ACTION AFTER DRILLING TO INITIAL OBJECTIVE DEPTH
10.4.1 CASING POINT ELECTION. After an EXPLORATORY WELL has been
drilled for all PARTIES to CASING POINT, and all authorized logging and testing
has been completed, OPERATOR shall immediately notify the other PARTICIPATING
PARTIES in writing of OPERATOR'S proposal for further operations thereon. Each
PARTICIPATING PARTY, within forty-eight (48) hours after receipt of such notice,
shall advise the OPERATOR and the other PARTICIPATING PARTIES in writing whether
it accepts OPERATOR'S recommendation or makes additional recommendations as to
further operations with respect to such well. If additional recommendations are
made, the PARTICIPATING PARTIES shall have an additional twenty-four (24) hours
to respond. If all PARTICIPATING PARTIES elect to abandon the well at that
point, it shall be plugged and abandoned at their joint cost and expense.
If less than all, but one (1) or more PARTICIPATING PARTIES owning at least
twenty-five percent (25%) in interest in the well elect to conduct a specific
operation, other than plugging and abandoning the well, the PARTIES so electing
shall conduct such operation as a NON-CONSENT OPERATION under the provisions of
Article 12. In the sole opinion of OPERATOR, if the well is in such a condition
that a reasonably prudent Operator would not conduct the contemplated operations
due to concern for jeopardizing or losing the same prior to completing the well
in the objective depth or objective formation, such election shall not be given
the priority herein above set forth. If at any time there is more than one
operation proposed in connection with any well subject to this Agreement, and in
the event no one proposed operation receives the approval of one or more
PARTICIPATING PARTIES owning fifty-one percent (51%) in interest in the well,
such operations shall be conducted in the following order of priority:
(a) further log or test the well,
(b) complete the well as originally planned,
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(c) plug-back the well and attempt to complete it in a shallower zone
in ascending order,
(d) sidetrack the well to another bottom hole location,
(e) deepen the well in the order made,
(f) other operations in the well,
(g) temporarily plug and abandon the well,
(h) permanently plug and abandon the well.
If all PARTIES approve a proposal or counter-proposal, OPERATOR shall conduct
the operation at the PARTICIPATING PARTIES cost and risk. A proposal to
complete, rework or recomplete a well at a particular depth will take precedence
over a proposal to complete, rework or recomplete the well above such depth,
with a deeper proposal for such operations always taking precedence over a
shallower proposal. Proposals for such operations at any depth will take
precedence over proposals to deepen the well below its originally proposed total
depth or to sidetrack the well once it has reached such depth with a proposal to
sidetrack taking precedence over a proposal to deepen. Proposals of the same
type shall be given precedence in the order in which they are made. No action
shall be required on a proposal while there is pending a proposal, with
precedence being on the same well on which the PARTIES have not acted or on
which work has not been completed.
ARTICLE XI
DEVELOPMENT WELL OPERATIONS
11.1 OPERATIONS BY ALL PARTIES. Any PARTY may propose a DEVELOPMENT
OPERATION, including any platform required by such operations, by notifying the
other PARTIES. If all PARTIES elect to participate in the proposed operation,
OPERATOR shall conduct such operation for the benefit of the PARTIES at their
cost and risk.
11.2 SECOND OPPORTUNITY TO PARTICIPATE. If fewer than all PARTIES elect
to participate, the OPERATOR shall inform the PARTIES of the elections made,
whereupon any PARTY originally electing not to participate may then elect to
participate by notifying the OPERATOR within forty-eight (48) hours after
receipt of such information. Thereafter, if fewer than all PARTIES elect to
participate, the PARTICIPATING PARTIES shall be afforded the alternatives as set
out under Article 10.3.
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11.3 OPERATIONS BY FEWER THAN ALL PARTIES. Except for a DEVELOPMENT
WELL(S) under Section 12.7, if fewer than all PARTIES, but one (1) or more
PARTIES having a combined WORKING INTEREST of fifty percent (50%) or more
approve a DEVELOPMENT OPERATION, OPERATOR shall conduct such operation pursuant
to Article XII. If such operations are to be conducted from an existing
platform, the operations participated in by all of the PARTIES shall have
preference, unless otherwise agreed to by the PARTIES hereto.
11.4 TIMELY OPERATIONS. Operations shall be commenced within ONE HUNDRED
FIFTY (150) days following the date upon which the last applicable election may
be made. If no operations are begun within such time period, the effect shall
be as if the proposal had not been made. Operations shall be deemed to have
commenced (a) on the date the contract for a new platform is let, if the notice
indicated the need for such platform; or (b) on the date rigging-up operations
are commenced on an existing platform.
11.5 COURSE OF ACTION AFTER DRILLING TO INITIAL OBJECTIVE DEPTH. After
any DEVELOPMENT WELL has reached its objective depth, the identical procedures
and alternatives provided under Article 10.4 shall apply.
11.6 DEEPER DRILLING. If a well is proposed to be drilled below the
deepest producible zone penetrated by a PRODUCIBLE WELL on the LEASE any PARTY
may elect to participate either in the well as proposed or to the base of the
deepest producible zone. A PARTY electing to participate in such well to the
base of said zone shall bear its proportionate part of the cost and risk of
drilling to said zone including completion or abandonment. All operations below
the depth to which such PARTY agreed to participate shall be governed by Article
X.
ARTICLE XII
NON-CONSENT OPERATIONS
12.1 NON-CONSENT OPERATIONS. OPERATOR shall conduct NON-CONSENT
OPERATIONS at the sole risk and expense of the PARTICIPATING PARTIES, in
accordance with the following provisions;
12.1.1 NON-INTERFERENCE. NON-CONSENT OPERATIONS shall not
interfere unreasonably with operations being conducted by all PARTIES.
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12.1.2 MULTIPLE COMPLETION LIMITATION. NON-CONSENT OPERATIONS
shall not be conducted in a well having multiple completions unless: (a) each
completion is owned by the same PARTIES in the same proportions; (b) the well
is incapable of producing from any of its current completions; or (c) all
PARTICIPATING PARTIES in the well consent to such operations.
12.1.3 METERING. In NON-CONSENT OPERATIONS, production need not be
separately metered but may be determined on the basis of well test.
12.1.4 LIENS. In the conduct of NON-CONSENT OPERATIONS, the
PARTICIPATING PARTIES shall keep the LEASE free and clear of liens and
encumbrances.
12.1.5 NON-CONSENT WELL. Operations on a NON-CONSENT WELL shall
not be conducted in any producible zone penetrated by a PRODUCIBLE WELL
without approval of each NON-PARTICIPATING PARTY unless; (a) such zone shall
have been designated in the notice as a completion zone; (b) completion of
such well in said zone will not increase the well density governmentally
prescribed or approved for such zone; and (c) the horizontal distance between
the vertical projections of the midpoint of the zone in such well and any
existing well in the same zone will be a least one thousand (1,000) feet if
an oil-well completion or two thousand (2,000) feet if a gas-well completion
Subject to the foregoing provisions of this Article, until the PARTICIPATING
PARTIES in a NON-CONSENT WELL have recouped the amount to which they are
entitled hereunder, they may conduct any reworking operation on such well
which they may desire, including plugging back to a shallower zone but only
if such shallower zone is subject to NON-CONSENT elections in the original
proposal. In this event, the cost of such reworking operation shall be
subject to the penalty provisions of Section 12.2.1.
12.1.6 COST-INFORMATION. OPERATOR shall, within one hundred twenty
(120) days after completion of a NON-CONSENT WELL, furnish the PARTIES an
inventory and an itemized statement of the cost of such well and equipment
pertaining thereto. OPERATOR shall furnish to the PARTIES a monthly statement
showing operating expenses and the proceeds from the sale of production from the
well for the preceding month.
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12.1.7 COMPLETIONS. For the purposes of determinations hereunder,
each completion shall be considered a separate well.
12.2. RELINQUISHMENT OF INTEREST. Upon commencement of NON-CONSENT
OPERATIONS, each NON-PARTICIPATING PARTY'S interest and leasehold operating
rights in the NON-CONSENT OPERATION and title to production therefrom shall be
owned by and vested in each PARTICIPATING PARTY in proportion to its
PARTICIPATING INTEREST for as long as the operations originally proposed are
being conducted or production is obtained, subject to Sections 12.2.1 and
12.2.2.
12.2.1 PRODUCTION REVERSION PENALTIES. Except as to such
operations conducted pursuant to Section 12.7 or for the initial EXPLORATORY
WELL referred to in Section 10.3, such interest, rights and title shall revert
to each NON-PARTICIPATING PARTY when the PARTICIPATING PARTIES have recouped out
of the proceeds of production from such NON-CONSENT OPERATIONS an amount equal
to the sum of the following:
(a) Six hundred percent (600%) of the cost of drilling,
completing, recompleting, sidetracking, deepening, deviating or
plugging back each NON-CONSENT WELL and equipping it through the
wellhead connections, reduced by any contribution received under
Section 21.1; plus,
(b) Three hundred percent (300%) of the cost of FACILITIES
necessary to carry out the operation; plus,
(c) One hundred percent (100%) of the cost of using any
FACILITIES already installed determined pursuant to Section 12.6
below; plus,
(d) One hundred percent (100%) of the cost of operating
expenses, royalties and severance, gathering, production and windfall
profit taxes.
Recoupment of costs shall be in the order listed above. Upon the recoupment of
such costs, a NON-PARTICIPATING PARTY shall become a PARTICIPATING PARTY in such
operations.
12.2.2 NON-PRODUCTION REVERSION. If such NON-CONSENT OPERATIONS
fail to obtain production or such operations result in production which ceases
prior to recoupment by the PARTICIPATING PARTIES of the penalties provided for
above, such operating rights shall revert to each NON-PARTICIPATING PARTY except
that all NON-CONSENT wells, platforms and FACILITIES shall remain vested in
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the PARTICIPATING PARTIES; however, any salvage in excess of the sum
remaining under Section 12.2.1 shall be credited to all PARTIES.
12.3 DEEPENING OR SIDETRACKING OF NON-CONSENT WELL. If any PARTICIPATING
PARTY proposes to deepen or sidetrack a NON-CONSENT WELL, a NON-PARTICIPATING
PARTY may participate by notifying the OPERATOR within fifteen (15) days after
receiving the proposal (48 hours if a rig is on location) that it will join in
the (deepening or sidetracking) operations, and by paying to the PARTICIPATING
PARTIES an amount equal to such NON-PARTICIPATING PARTY'S share of the actual
costs of drilling and casing such well to the point at which such deepening or
sidetracking operation is commenced. The PARTICIPATING PARTIES shall continue
to be entitled to recoup the full sum specified in Section 12.2.1 applicable to
the NON-CONSENT WELL, less the amount paid under this section, out of the
proceeds of production from the NON-CONSENT portion of the well.
12.4 OPERATIONS FROM NON-CONSENT PLATFORMS. Subject to the following,
a PARTY which did not originally participate in a platform shall be a
NON-PARTICIPATING PARTY as to ownership therein and all operations thereon
until the PARTICIPATING PARTIES as to such platform have recouped the full
sum specified in Section 12.2.1 applicable to such NON-CONSENT PLATFORM and
the NON-CONSENT OPERATIONS which resulted in the setting of such PLATFORM and
other NON-CONSENT OPERATIONS thereon or therefrom. However, an original
NON-PARTICIPATING PARTY may participate in additional operations from such
PLATFORM by notifying the OPERATOR within thirty (30) days after receiving a
proposal for operations from such PLATFORM (48 hours if a rig is on location
and standby rig charges are being incurred) that it will join in such
proposed operations by paying to the PARTICIPATING PARTIES in such PLATFORM
an amount equal to 300% of such NON-PARTICIPATING PARTY'S share of the actual
cost of such PLATFORM, less any recoupment therefor previously obtained.
Thereafter, such original NON-PARTICIPATING PARTY in the PLATFORM shall own
its proportionate share thereof. The PARTICIPATING PARTIES in such
NON-CONSENT PLATFORM shall continue to be entitled to recoup the full sum
specified in Section 12.2.1 applicable to any other NON-CONSENT OPERATIONS
thereon or therefrom.
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12.5 DISCOVERY OR EXTENSION FROM MOBILE DRILLING OPERATIONS. If a
NON-CONSENT WELL drilled from a mobile drilling rig or floating drilling
vessel results in the discovery or extension of productive formations and, if
within one (1) year from the date the drilling equipment is released, a
platform or other fixed structure is ordered and if its location is within
one thousand (1,000) feet from an oil well or three thousand (3,000) feet if
gas, from the vertical projection of the bottom-hole location of any such
well (unless limited by surface restrictions), the recoupment of amounts
applicable to such well under Section 12.2.1 shall be out of such original
NON-PARTICIPATING PARTY'S SHARE of all production from such NON-CONSENT WELL
and one-half of its share of production from all other wells on the platform
or other fixed structure drilled to develop reserves resulting from the
discovery or extension of productive formations in said NON-CONSENT WELL in
which the NON-PARTICIPATING PARTY in such NON-CONSENT WELL has a
PARTICIPATING INTEREST.
12.6 ALLOCATION OF PLATFORM COSTS TO NON-CONSENT OPERATIONS. NON-CONSENT
OPERATIONS shall be subject to further conditions as follows:
12.6.1 CHARGES. If a NON-CONSENT WELL is drilled from a platform
(and is producible or the slot is otherwise rendered unusable), the
PARTICIPATING PARTIES in such well shall pay to the OPERATOR for credit to the
owners of such platform a charge (due upon completion of operations for such
NON-CONSENT WELL) for the right to use the platform and its FACILITIES as
follows:
(a) Such PARTICIPATING PARTIES shall pay a sum equal to that
portion of the total cost of the platform (including, but not by way
of limitation, costs of design, materials, fabrication,
transportation, installation and other costs associated therewith,
plus any repairs and maintenance expense resulting from the drilling
of such well not provided in Section 12.6.2), which one platform slot
bears to the total number of slots on the platform. If the
NON-CONSENT WELL is abandoned, the right of the PARTICIPATING PARTIES
to use that platform slot shall terminate
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unless such PARTIES commence drilling a substitute well from the same
slot within ninety (90) days after abandonment.
(b) If the NON-CONSENT WELL production is handled through
existing FACILITIES, the PARTICIPATING PARTIES shall pay the owners
of the facilities a sum equal to that portion of the total cost of
such FACILITIES which the number of completions in said NON-CONSENT
WELL bears to the total number of completions utilizing the
FACILITIES.
12.6.2 OPERATING AND MAINTENANCE CHARGES. The PARTICIPATING PARTIES
shall pay all costs necessary to connect a NON-CONSENT WELL to the FACILITIES
and that proportionate part of the expense of operating and maintaining the
platform and other FACILITIES applicable to the NON-CONSENT WELL, including the
cost of insurance thereon or in connection therewith, whether by insurance
policy of self-insurance by each PARTY for its interest or by OPERATOR for the
joint account. Platform operating and maintenance expenses shall be allocated
equally to all completions served and operating and maintenance expenses for the
other FACILITIES shall be allocated equally to producing completions.
12.6.3 PAYMENTS. Payments of sums pursuant to Section 12.6.1 is
not a purchase of an additional interest in the platform or other FACILITIES.
Such payments shall be included in the total amount which the PARTICIPATING
PARTIES are entitled to recoup out of production from the NON-CONSENT WELL.
12.7 NON-CONSENT DRILLING TO MAINTAIN LEASE. A lease maintenance
operation is defined for the purposes of this paragraph as one required to
maintain the joint LEASE or a portion thereof, at its expiration date or
otherwise. This shall include, but not be limited to, a well proposed to be and
actually commenced and drilled during the last year of the primary term of the
LEASE, or subsequent thereto, when: (a) the LEASE, or affected portion
thereof, is not otherwise being held by operations or production; (b) a
PRODUCIBLE WELL(S) thereon has not established sufficient reserves, as
determined by one (1) or more PARTICIPATING PARTIES owning fifty percent (50%)
working interest in the well, to justify a platform; or (c) any governmental
agency having jurisdiction requires the same to avoid loss or forfeiture of
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all or any portion of the LEASE. Any PARTY may propose and carry out (no
percentage vote required) a lease maintenance operation and any PARTY(S)
electing not to participate in such an operation will assign to the
PARTICIPATING PARTIES in the proportions in which they participate therein,
all of its rights, titles and interest in such LEASE block, or the affected
portion thereof, free and clear of any burdens thereon occurring since the
effective date of this Agreement as provided herein, retaining, however, its
interest in previously completed wells which are producing, shut-in or
temporarily abandoned. Such assignment, effective upon commencement of lease
maintenance operations, will be promptly signed before witnesses,
acknowledged and delivered to the PARTICIPATING PARTIES. If only a portion
of the LEASE is involved, the PARTICIPATING PARTIES at their election may
require an assignment of operating rights in lieu of the assignment of all
interest. Upon acceptance by assignees, the assigning PARTY will thereupon
cease to be a PARTY hereto as to the assigned interest, subject to final
accounting between the PARTIES. If such assignment is not accepted by the
Assignees, they shall promptly prepare a release of such affected LEASE or
portion thereof which shall be executed by all PARTIES. However, nothing
herein contained will be construed to permit any PARTY to refuse to pay in
cash its share of the cost and expense of any operation required on the joint
LEASE block by final order of any governmental authority or court having
jurisdiction.
12.7.1 RETENTION OF LEASE BY NON-CONSENT WELL. If a NON-CONSENT
WELL is the only well on the LEASE(S) and is serving to perpetuate the
LEASE(S), within thirty (30) days after expiration of the LEASE(S) primary
term, each NON-PARTICIPATING PARTY shall elect one of the following;
(a) Immediately assign its entire interest in the LEASE(S) to
the PARTICIPATING PARTIES in the proportions in which the NON-CONSENT
OPERATION was conducted; or
(b) Immediately pay to the PARTICIPATING PARTIES its share of
all costs associated with such well, less any recoupment therefor
previously obtained, such payment to be credited against the total
amount to be recovered out of its share of production by
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the PARTICIPATING PARTIES pursuant to Article X or XII, whichever is
applicable.
12.8 ALLOCATION OF COSTS (SINGLE COMPLETION). For the purpose of
allocating costs on any well in which the ownership is not the same for the
entire depth, the cost of drilling, completing or equipping such well shall be
allocated on the following basis:
(a) Intangible drilling, completion and material costs
(including casing and tubing costs) from the surface to a depth one
hundred (100) feet below the base of the completed zone shall be
charged to the owners or the PARTIES participating in that zone.
(b) Intangible drilling, completion, casing string and material
costs, other than tubing costs, from a depth one hundred (100) feet
below the base of the completed zone to total depth shall be charged
to the owners or the PARTIES participating in the costs to total
depth.
12.9 ALLOCATION OF COSTS (MULTIPLE COMPLETIONS). For the purpose of
allocating costs on any well completed in dual or multiple zones in which the
ownership is not the same for the entire depth or the completions thereof, the
cost of drilling, completing and equipping such well shall be allocated on the
following basis:
(a) Intangible drilling, completion (including wellhead
equipment), casing string and material costs, other than tubing costs,
from the surface to a depth one hundred (100) feet below the base of
the upper completed zone shall be divided equally between the
completed zones and charged to the owners thereof or the PARTIES
participating in such zone.
(b) Intangible drilling, completion, casing string and material
costs, other than tubing costs, from a depth one hundred (100) feet
below the base of the upper completed zone to a depth one hundred
(100) feet below the base of the second completed zone shall be
divided equally between the second and any other zone completed below
such depth and charged to the owners
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thereof or to the PARTIES participating in each zone. If the well is
completed in additional zones, the costs applicable to each such zone
shall be determined and charged to the owners thereof in the same
manner as prescribed by the dual zones completion.
(c) Intangible drilling, completion, casing string and material
costs, other than tubing costs, from a depth one hundred (100) feet
below the base of the lower completed zone to total depth shall be
charged to the owners or the PARTIES participating in the costs to
total depth.
(d) Costs of tubing strings serving each separate zone shall be
charged to the owners or the PARTIES participating in each zone.
(e) For the purposes of allocating tangible and intangible costs
between zones that occur at less than one hundred (100) foot
intervals, the costs for the distance between the base of the upper
zone to the top of the next lower zone shall be allocated equally
between zones.
12.10 ALLOCATION OF COSTS (DRY HOLE). For the purpose of allocating
costs on any well determined to be a dry hole, in which the ownership is not the
same for the entire depth or the completion thereof, the cost of drilling,
plugging and abandoning such well shall be allocated on the following basis:
(a) Costs to drill, plug and abandon a well proposed for
completion in single, dual, or multiple zones shall be charged to the
PARTICIPATING PARTIES in the same manner as if the well were completed
as a producing well in all zones as proposed.
(b) Plugging and abandoning of any well following any deepening,
completion attempt or other operation shall be at the sole risk and
expense of the PARTICIPATING PARTIES in such operation, subject
however to the provisions of Section 10.4.
12.11 INTANGIBLE DRILLING AND COMPLETION ALLOCATIONS. For the purpose of
calculations hereunder, intangible drilling and completion costs, including
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non-controllable material costs, shall be allocated between zones, including
the interval from the lower completed zones to total depth, on a drilling day
ratio basis beginning on the day the rig arrives on location and terminating
when the rig is released.
12.12 OPERATED WELLS. The designated OPERATOR hereunder shall operate
all wells drilled pursuant to the NON-CONSENT provision of this Agreement.
However, if the NON-CONSENT WELL is drilled from a mobile drilling rig and if
the designated OPERATOR is a NON-PARTICIPATING PARTY therein, the PARTICIPATING
PARTY owning the largest PARTICIPATING INTEREST shall serve as OPERATOR for the
drilling and completion of such well, unless the PARTICIPATING PARTIES agree
otherwise. Upon completion of any such well as a productive well (completion
through the wellhead), the well shall be turned over to the designated OPERATOR
for further operations.
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ARTICLE XIII
FACILITIES
13.1 APPROVAL. Any PARTY may propose the installation of FACILITIES by
notice to the other PARTIES with information adequate to describe the proposed
FACILITIES and the estimated costs. The affirmative vote of one (1) or more
PARTIES having a combined PARTICIPATING INTEREST of fifty percent (50%) or more
in the wells to be served shall be required before such FACILITIES may be
installed. If such required approval is obtained, the PARTICIPATING PARTIES
therein shall proceed with the installation of such FACILITIES at their sole
cost, risk and expense and the NON-PARTICIPATING PARTIES in such FACILITIES
shall have no rights with respect thereto, subject to recoupment of amounts set
forth under Article 12.2.1 from the completions served thereby. Each PARTIES'
share shall be calculated by multiplying the total cost of the FACILITIES by a
fraction, the numerator of which is that PARTY'S number of PRODUCIBLE WELL
completions served by the FACILITIES and the denominator of which is the total
number of PRODUCIBLE WELL completions served by the FACILITIES. Nothing
hereunder shall limit a PARTY'S rights under Section 22.1, however, a PARTY
acting thereunder shall not be required to pay for joint account FACILITIES that
duplicate its FACILITIES constructed pursuant to Section 22.1
ARTICLE XIV
ABANDONMENT AND SALVAGE
14.1 PLATFORM SALVAGE AND REMOVAL COSTS. When the PARTIES owning
FACILITIES consisting of a platform, mutually agree to dispose of such platform
it shall be disposed of by the OPERATOR as approved by such PARTIES. The costs,
risks and net proceeds, if any, resulting from such disposition shall be shared
by such PARTIES in proportion to their PARTICIPATING INTEREST. To secure the
availability and sufficiency of funds for the dismantling, abandonment and
removal of such platform, the PARTICIPATING PARTIES, prior to the construction
shall assign to a trustee of a bank (the "Assignee") an overriding royalty
interest equal to one-half percent (1/2%) of the whole of the oil, gas and other
minerals produced, saved and marketed from the LEASE. The assignee shall be
selected by an affirmative vote of two or more parties having a combined
PARTICIPATING INTEREST of fifty percent
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(50%) or more. The assigned overriding royalty interest shall burden the
interest of the parties in proportion to their participation in the platform.
The assignee, who shall have no interest in the overriding royalty
interest, shall receive the proceeds and place same in an interest bearing
account or in insured certificates of deposit (the "Abandonment Fund"). If a
platform is not constructed within one year of the date of overriding royalty
interest is assigned, the overriding royalty shall terminate and the assignee
shall reassign the interest and disburse the Abandonment Fund.
Any proposal to construct a platform shall provide estimated cost of
dismantling, abandonment and removal of same. At such time as the Abandonment
Fund equals these estimated costs, the overriding royalty shall be assigned to
the PARTICIPATING PARTIES by the assignee. Similarly, any excess Abandonment
Funds after complete dismantling, abandonment and removal costs are paid shall
be disbursed to the PARTICIPATING PARTIES in proportion to their interest.
A PARTICIPATING PARTY's interest in the Abandonment Fund may only be
assigned or transferred in conjunction with an assignment or transfer of the
subject leases.
In lieu of an assignment of overriding royalty interest, any PARTICIPATING
PARTY may elect to furnish an irrevocable letter of credit in favor of the
assignee, or proof of coverage under adequate plugging and abandonment bonds,
subrogated in favor of the OPERATOR, to provide for that PARTY's estimated
proportionate share of platform dismantling, removal and abandonment costs. The
letter of credit or plugging and abandonment bonds shall provide that either
instrument shall remain in force in the event of a transfer or assignment of the
PARTY's interest until such time as the transferee or assignee provides a
similar irrevocable letter of credit or plugging and abandonment bonds.
14.2 PURCHASE OF SALVAGE MATERIALS. OPERATOR shall give all PARTIES
written notice when it is determined under Section 14.1 that FACILITIES or other
materials are not needed for further operations and may be moved from the LEASE.
Within fifteen (15) days after receipt of such notice any PARTY desiring to
acquire such materials shall give OPERATOR written notice of such fact. If more
than
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one PARTY desires to acquire such materials, OPERATOR shall designate a time
and place at which each PARTY may submit written bids for such materials. If
only one PARTY desires to acquire such materials, it may do so on the basis
of the value thereof as determined in accordance with the provisions of
Exhibit "C", with prefabricated materials being valued on the basis of cost
including but not limited to cost of fabrication. All materials removed from
the LEASE shall be removed at the expense of the PARTIES unless purchased
hereunder, then at the expense of the acquiring PARTY. In the event no PARTY
desires to purchase said materials, the materials shall be disposed of in
accordance with the provisions of Exhibit "C".
14.3 ABANDONMENT OF PRODUCING WELL. Any PARTY may propose the abandonment
of a well by notifying the other PARTIES, who shall have the time period set
forth in Section 9.3.2 from receipt thereof within which to respond. No well
shall be abandoned without the mutual consent of the PARTICIPATING PARTIES. The
PARTICIPATING PARTIES not consenting to the abandonment shall pay to each
PARTICIPATING PARTY desiring to abandon its share of the current value of the
well's salvageable material and equipment as determined pursuant to Exhibit "C",
less the estimated current costs of salvaging same and of plugging and
abandoning the well as determined by the PARTICIPATING PARTIES. Provided,
however, if such salvage value is less than such estimated current costs, then
each PARTICIPATING PARTY desiring to abandon shall pay to OPERATOR for the
benefit of the PARTICIPATING PARTIES not consenting to abandonment a sum equal
to its share of such deficiency.
14.4 ASSIGNMENT OF INTEREST. Each PARTICIPATING PARTY desiring to abandon
a well pursuant to Section 14.3 shall assign effective as of the last applicable
election date, to the non-abandoning PARTIES, in proportion to their
PARTICIPATING INTERESTS, its interest in such well and the equipment therein and
its ownership in the production of such well. Any PARTY so assigning shall be
relieved from any further liability with respect to said well except as to any
accrued liability.
14.5 ABANDONMENT OPERATIONS REQUIRED BY GOVERNMENTAL AUTHORITY. Any well
abandonment or platform removal required by a governmental authority shall be
accomplished by OPERATOR with the costs, risks and net proceeds,
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if any, to be shared by the PARTIES owning such well or platform in
proportion to their PARTICIPATING INTEREST.
ARTICLE XV
WITHDRAWAL
15.1 WITHDRAWAL. Any PARTY may withdraw from this Agreement and thereby
be relieved of all responsibilities with respect to the LEASE by giving notice
to the other PARTIES of such desire together with an offer to convey at no cost
by a recordable instrument, without warranty, express or implied, except for its
own acts, all of its interest in and to the LEASE, the oil and gas, and the
property and equipment owned hereunder. Any such conveyance or assignment shall
be free and clear of any overriding royalties, production payments or other
burdens on production created after the effective date of this Agreement and
shall be subject to the LEASE provisions and to the rules and regulations of the
lessor. If any PARTY(S) desires to acquire such interest and to assume the
obligations of the assigning PARTY under this Agreement and the LEASE, the
withdrawing PARTY shall deliver such conveyance or assignment ratably to the
acquiring PARTIES, unless the acquiring PARTIES agree otherwise. If no PARTY
desires to acquire such interest, the PARTY desiring to withdraw may do so only
by paying to those PARTIES not desiring to withdraw its pro-rata share of the
estimated costs of plugging and abandoning all wells and removal of all
platforms, structures and other equipment on the LEASE, less any salvage value
approved under the voting procedure hereof, and such withdrawing PARTY shall
remain liable for any costs, expenses or damages theretofore accrued or arising
out of any event occurring prior to such PARTY'S withdrawal. Thereafter, the
withdrawing PARTY shall assign its entire interest ratably to the remaining
PARTIES. If the remaining PARTIES do not wish to continue operations on the
LEASE, all PARTIES shall proceed with abandoning and surrendering the same.
15.2 LIMITATIONS ON WITHDRAWAL. No PARTY shall be relieved of its
obligations hereunder during a well or platform fire, blowout or other emergency
thereon, buy may withdraw from this Agreement and be relieved of such
obligations after termination of such emergency, provided such PARTY shall be
and remain liable for its full share of all costs arising out of said emergency,
including without limitation,
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the drilling of a relief well, containment and cleanup of oil spill and
pollution and all costs of platform debris removal made necessary by the
emergency.
ARTICLE XVI
RENTALS, ROYALTIES AND OTHER PAYMENTS
16.1 CREATION OF OVERRIDING ROYALTY. If after the effective date of this
Agreement, any PARTY creates any overriding royalty, production payment or other
burden payable out of production attributable to such PARTY'S WORKING INTEREST
in the LEASE owned and if any other PARTY(S) becomes entitled to an assignment
pursuant to the provisions of this Agreement (except for Paragraph 26.2) or as a
result of NON-CONSENT OPERATIONS hereunder becomes entitled to receive the
WORKING INTEREST otherwise belonging to a NON-PARTICIPATING PARTY in such
operations, the PARTY entitled to receive the assignment from or the WORKING
INTEREST production of such NON-PARTICIPATING PARTY shall receive same free and
clear of such burdens, and the NON-PARTICIPATING PARTY creating such burdens
shall save the PARTICIPATING PARTIES harmless with respect to the receipt of
such assigned interest or such WORKING INTEREST production.
16.2 PAYMENT OF RENTALS AND MINIMUM ROYALTIES. OPERATOR shall pay all
rentals, minimum royalties, or similar payments accruing under the terms of the
LEASE and submit evidence of such payment to the PARTIES. As to any production
delivered in kind by OPERATOR to any NON-OPERATOR or to another for the account
of such NON-OPERATOR, said NON-OPERATOR shall provide OPERATOR with information
as to the proceeds or value of such production in order that the OPERATOR may
make payment of any minimum royalty due. The amount of such payment for which
each PARTY is responsible shall be charged by the OPERATOR to such PARTIES.
OPERATOR shall diligently attempt to make proper payment, but shall not be held
liable to the PARTIES in damages for the loss of any LEASE or interest therein
of through mistake or oversight any rental or minimum royalty payment is not
paid for or is erroneously paid. The loss of any LEASE or interest therein
which results from a failure to pay or an erroneous payment of rental or minimum
royalty shall be a joint loss and there shall be no readjustment of interest.
16.3 NON-CONCURRENCE IN PAYMENTS. Should any PARTY(S) not concur in the
payment of any rental, minimum royalty or similar payment, such
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PARTY(S) shall notify OPERATOR and all other owners in writing at least sixty
(60) days prior to the date on which such payment is due or accrues; and, in
this event OPERATOR shall make such payment for the benefit of all concurring
PARTIES. In such event the non-concurring PARTY(s) shall, upon request of
any concurring PARTIES, assign to the concurring PARTIES in the ratio that
each concurring PARTY'S interest at the time bears to the total interest of
all concurring PARTIES, without warranty, except for its own acts, such
portions of its interest in and to the LEASE or portion thereof involved as
would be maintained by such payment. That assignment shall be free and clear
of any overriding royalties, production payments or other burdens on
production created after the effective date hereof. Thereafter, the LEASE, or
portion thereof, involved shall no longer be subject to this Agreement. The
PARTIES then owning such LEASE or portion thereof agree to operate said LEASE
or portion thereof under a separate agreement in the same form as this
Agreement.
16.4 ROYALTY PAYMENTS. Each PARTY shall pay, deliver or cause to be paid
or delivered its pro-rata share of LEASE royalties, overriding royalties,
payments out of production or other amounts or charges which may be or become
payable out of its share of production and shall hold the other PARTIES free
from any liability therefor. During any time in which PARTICIPATING PARTIES in
a NON-CONSENT OPERATION are entitled to receive a NON-PARTICIPATING PARTY'S
share of production, the PARTICIPATING PARTIES shall bear the LEASE royalty due
with respect to such share of production and shall hold the NON-PARTICIPATING
PARTIES harmless from liability in connection therewith. Any PARTY acting under
the provisions of the Article shall never be liable for a standard of
performance in making such payments or deliveries in excess of a good faith
effort to pay or deliver same prior to the due date and no liability (other than
the liability to correct such payment) shall be incurred for failure through
error or omissions of the employees of any such PARTY to make payment or
delivery within the time, in the manner and for the amounts due.
16.5 FEDERAL OFFSHORE OIL POLLUTION COMPENSATION FUND FEE. Each PARTY
agrees to pay and bear the Federal Offshore Oil Pollution Compensation Fund Fee
payable on its share of oil produced, such fee being required by Section 302 of
the Outer Continental Shelf Lands Act Amendment of 1978 and any regulation
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lawfully promulgated pursuant thereto; provided, however, should the oil owned
by a PARTY be reported by another PARTY, it shall be the obligation of such
reporting PARTY and such reporting PARTY is specifically authorized to an agrees
to pay the Federal Offshore Oil Pollution Compensation Fund Fee on those volumes
which it reports for the benefit of the non-reporting PARTY, and such reporting
PARTY may charge such non-reporting PARTY for the payments so made.
ARTICLE XVII
TAXES
17.1 PROPERTY TAXES. OPERATOR shall render property covered by this
Agreement as may be subject to ad valorem taxation and shall pay such property
taxes for the benefit of each PARTY. OPERATOR shall charge each PARTY its share
of such tax payments. If the OPERATOR is required hereunder to pay ad valorem
taxes based in whole or in part upon separate valuation 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 percentage of tax value generated by each PARTY'S WORKING INTEREST.
17.2 CONTEST OF PROPERTY TAX VALUATION. OPERATOR shall timely and
diligently protest to a final determination any valuation it deems unreasonable.
Pending such determination, OPERATOR may elect to pay under protest. Upon final
determination, OPERATOR shall pay the taxes and any interest, penalty or cost
accrued as a result of such protest. In either event, OPERATOR shall charge
each PARTY its share.
17.3 PRODUCTION AND SEVERANCE TAXES. Each PARTY shall pay, or cause to be
paid, all production, severance and windfall profits taxes due on any production
which it received pursuant to the terms of this Agreement.
17.4 OTHER TAXES AND ASSESSMENTS. OPERATOR shall pay other applicable
taxes or assessments and charge each PARTY its share.
ARTICLE XVIII
INSURANCE
18.1 INSURANCE. OPERATOR shall obtain the insurance provided in Exhibit
"B" and charge each PARTICIPATING PARTY its proportionate share of the cost of
such coverage.
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ARTICLE XIX
LIABILITY, CLAIMS AND LAWSUITS
19.1 INDIVIDUAL OBLIGATIONS. The obligations, duties and liabilities of
the PARTIES shall be several and not joint or collective; and nothing contained
herein shall ever be construed as creating a partnership of any kind, joint
venture, association or other character of business entity recognizable in law
for any purpose. Each PARTY shall hold all the other PARTIES harmless from
liens and encumbrances on the LEASE arising as a result of its acts.
19.2 NOTICE OF CLAIM OR LAWSUIT. If a claim is made against any PARTY or
if any PARTY is sued on account of any matter arising from operations hereunder,
such PARTY shall give prompt written notice to the other PARTIES.
19.3 SETTLEMENTS. OPERATOR may settle any single damage claim or suit
involving operations hereunder if the expenditure does not exceed Ten Thousand
Dollars ($10,000.00), if the claim is not covered by Exhibit "B" and if the
payment is in complete settlement of such claim or suit.
19.4 LEGAL EXPENSE. Legal Expenses shall be handled pursuant to Exhibit
"C".
19.5 LIABILITY FOR LOSSES, DAMAGES, INJURY OR DEATH. Liability for
losses, damages, injury or death arising from operations under this Agreement
shall be borne by the PARTIES in proportion to their PARTICIPATING INTERESTS in
the operations out of which such liability arises, except when such liability
results from the gross negligence or willful misconduct of any party, in which
case such PARTY shall be liable.
19.6 INDEMNIFICATION. The PARTICIPATING PARTIES agree to hold the
NON-PARTICIPATING PARTIES harmless and to indemnify and protect them against all
claims, demands, liabilities and liens for property damage or personal injury,
including death, caused by or otherwise arising out of NON-CONSENT OPERATIONS,
and any loss and costs suffered by any NON-PARTICIPATING PARTY as an incident
thereof.
ARTICLE XX
INTERNAL REVENUE PROVISION
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20.1 INTERNAL REVENUE PROVISION. Notwithstanding any provisions herein
that the rights and liabilities hereunder are several and not joint or
collective or that this Agreement and the operations hereunder shall not
constitute a partnership, if for Federal Income Tax purposes this Agreement and
the operations hereunder are regarded as a partnership, then for Federal Income
Tax purposes each PARTY elects to be excluded from the application of all the
provisions of Subchapter K, Chapter 1, Subtitle A, Internal Revenue Code of
1988, as permitted and authorized by Section 761 of said Code and the
regulations promulgated thereunder. OPERATOR is hereby authorized and directed
to execute on behalf of each PARTY such evidence of this election as may be
required by the Federal Internal Revenue Service including specifically, but not
by way of limitation, all of the returns, statements and data required by
Federal Regulations 1.761.2. Should there be any requirement that each PARTY
further evidence this election, each PARTY agrees to execute such documents and
furnish such other evidence as may be required by the Federal Internal Revenue
Service. Each PARTY further agrees not to give any notices or take any other
action inconsistent with the election made hereby. If any present or future
income tax law of the United States of America or any state contains provisions
similar to those contained in Subchapter K, Chapter 1, Subtitle A of the
Internal Revenue Code of 1986, under which an election similar to that provided
by Section 761 of said Subchapter K is permitted, each PARTY makes such election
or agrees to make such election as may be permitted by such laws. In making
this election, each PARTY states that the income derived by it from the
operations under this Agreement can be adequately determined without the
computation of partnership taxable income.
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ARTICLE XXI
CONTRIBUTIONS
21.1 NOTICE OF CONTRIBUTIONS OTHER THAN ADVANCES FOR SALE OF PRODUCTION.
Each PARTY shall promptly notify the other PARTIES of all contributions which it
may obtain, or is attempting to obtain, concerning the drilling of any well on
the LEASE. Payments received as consideration for entering into a contract for
sale of production from the LEASE, loans and other financing arrangements shall
not be considered contributions for the purposes of the Article. No PARTY shall
release or obligate itself or release information in return for a contribution
from an outside party toward the drilling of a well without prior written
consent of the other PARTICIPATING PARTIES therein.
21.2 CASH CONTRIBUTIONS. In the event a PARTY receives a cash
contribution toward the drilling of a well, said cash contribution shall be paid
to OPERATOR and OPERATOR shall credit the amount thereof to the PARTIES in
proportion to their PARTICIPATING INTEREST.
21.3 ACREAGE CONTRIBUTIONS. In the event a PARTY receives an acreage
contribution toward the drilling of a well, said acreage contribution shall be
shared by each PARTICIPATING PARTY who accepts in proportion to its
PARTICIPATING INTEREST in the well.
ARTICLE XXII
DISPOSITION OF PRODUCTION
22.1 FACILITIES TO TAKE IN KIND. Any PARTY shall have the right, at its
sole risk and expense, to construct FACILITIES for taking its share of
production in kind, provided that such FACILITIES at the time of installation do
not interfere with continuing operations on the LEASE and adequate space is
available therefor.
22.2 DUTY TO TAKE IN KIND. Each PARTY shall have the right and duty to
take in kind or separately dispose of its share of the oil and gas produced and
saved from the LEASE.
22.3 FAILURE TO TAKE IN KIND. If any PARTY fails to take in kind or
dispose of its share of the oil and condensate, OPERATOR may either (a) purchase
oil or condensate at OPERATOR'S posted price or, in the absence of a posted
price, in no event less than the price prevailing in the area for oil of the
same kind, gravity and
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quality, or (b) sell such oil or condensate to others at the best price
obtainable by OPERATOR, subject to revocation by the non-taking PARTY upon
thirty (30) days advance notice. All contracts of sale by OPERATOR of any
PARTY'S share of oil or condensate shall be only for such reasonable periods
of time as are consistent with the minimum needs of the industry under the
circumstances, but in no event shall any contract be for a period in excess
of one (1) year. Proceeds of all sales made by OPERATOR pursuant to this
Section shall be paid to the PARTIES entitled thereto. Unless required by
governmental authority or judicial process, no PARTY shall be forced to share
an available market with any non-taking PARTY.
22.4 EXPENSES OF DELIVERY IN KIND. Any cost incurred by OPERATOR in
making delivery of any PARTY'S share of oil and condensate, or disposing of same
pursuant to Section 22.3, shall be borne by such PARTY.
22.5 GAS BALANCING PROVISIONS. Attached hereto is Exhibit "E" entitled
"Gas Balancing Agreement", containing an agreement of the PARTIES which is
incorporated into this Agreement as if copied at length herein.
ARTICLE XXIII
APPLICABLE LAW
23.1 APPLICABLE LAW. THIS AGREEMENT SHALL BE INTERPRETED ACCORDING TO THE
LAWS OF THE STATE OF TEXAS.
ARTICLE XXIV
LAWS, REGULATIONS AND NON-DISCRIMINATION
24.1 LAWS AND REGULATIONS. This Agreement and operations hereunder are
subject to all applicable laws, rules, regulations and orders, and any provision
of the Agreement found to be contrary to or inconsistent with any such law,
rule, regulation or order shall be deemed modified accordingly.
24.2 NON-DISCRIMINATION. In the performance of work under the Agreement,
the PARTIES agree to comply, and OPERATOR shall require each independent
contractor to comply, with the governmental requirements set forth in Exhibit
"D" and with all of the provisions of Section 202(1) to (7), inclusive, of
Executive Order No. 11246, as amended.
ARTICLE XXV
FORCE MAJEURE
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25.1 NOTICE. If any PARTY is rendered unable, wholly or in part, by force
majeure to carry out its obligations under this Agreement, other than the
obligation to make money payments, that PARTY shall give to all other PARTIES
prompt written notice of the force majeure with reasonably full particulars
concerning it; thereupon, the obligations of the PARTY giving the notice, so far
as they are affected by the force majeure, shall be suspended during, but no
longer than, the continuance of the force majeure. The affected PARTY shall use
reasonable diligence to remove the force majeure as quickly as possible.
25.2 STRIKES. The requirement that any force majeure shall be remedied
with all reasonable dispatch shall not require the settlement of strikes.
25.3 FORCE MAJEURE. The term "force majeure" as herein employed shall
mean an act of God, strike, lockout, or other industrial disturbance, act of the
public enemy, war, blockade, public riot, lightning, fire, storm, flood,
explosion, governmental restraint, unavailability of equipment and any other
cause, whether of the kind specifically enumerated above or otherwise, which is
not reasonably within the control of the PARTY claiming suspension.
ARTICLE XXVI
SUCCESSORS, ASSIGNS AND PREFERENTIAL
RIGHT TO PURCHASE
26.1 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
inure to the benefit of the PARTIES and their respective heirs, successors,
representatives and assigns and shall constitute a covenant running with the
LEASE. Each PARTY shall incorporate in any assignment of an interest in the
LEASE a provision that such assignment is subject to this Agreement.
26.2 PREFERENTIAL RIGHT OF PURCHASE. Should any PARTY desire to sell,
farmout or otherwise dispose of all or any part of its Working Interest in the
Lease, it shall promptly give written notice to the other PARTIES giving
complete information relative to the proposed disposition, including the price
or value fixed for the interest and the name and address of the prospective
transferee, who must be ready, willing and able to accept such sale, farmout or
other disposition. The other PARTIES shall have the right for a period of
twenty (20) days after receipt of the notice to purchase the interest which the
PARTY proposes to sell, farmout or otherwise dispose of on the
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same terms and conditions; if this right is exercised, the purchasing PARTIES
shall share the purchased interest in proportion to their Working Interest.
A transfer of interest hereunder shall not become effective as to the PARTIES
until the first day of the month following delivery to OPERATOR of an
original (or copies thereof) instrument of transfer approved by the proper
governmental authority and conforming to the requirements of this Section.
No such transfer shall relieve the transferring PARTY of any obligations or
liabilities accrued hereunder prior to such effective date. This Section
shall not apply when a PARTY wishes to mortgage its interest or to dispose of
its interest by merger, reorganization, consolidation, assignment of
production payment, sale of all or substantially all of its assets, or sale
or transfer of its interest to an affiliate.
26.2.1 A PARTY may sell, transfer or assign all or any part of its
interest in the property or this Agreement without the consent of any other
PARTY hereto, provided that:
(a) Any such sale, transfer or assignment shall be made only to
a financially responsible PARTY or PARTIES.
(b) Such PARTY shall give the other PARTIES written notice of
such sale, transfer or assignment at least thirty (30) days prior to
executing any instrument(s) evidencing the sale, transfer or
assignment (such notice to include the name of each proposed
transferee and the interest(s) to be transferred).
(c) Such PARTY shall incorporate in each instrument evidencing
the sale, transfer or assignment a provision making the same expressly
subject to the Operating Agreement and shall obtain (and furnish to
the other PARTIES) such transferee's written consent to be bound by
all the provisions of the Operating Agreement.
(d) If the original interest of any PARTY is at any time
transferred to two (2) or more transferees, OPERATOR may, at its
discretion, require such transferees to appoint a single trustee with
full authority to receive notices and payments, approve
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expenditures and pay the share of costs which are chargeable against
such transferees.
26.2.2 The Provisions of this Article shall not, however, apply to
and it shall not be necessary to obtain the consent of any PARTY in connection
with;
(a) Any mortgage or other pledge, including without limitation
the granting of any lien or security interest and any assignment of
production executed as further security for the debt secured by any
such mortgage or pledge, by a PARTY hereto of its interest or any
portion thereof in the joint leases, or the Agreement, or any
judicial, trustee's or other sales to foreclose the same;
(b) Any transfer or disposition of the interest of a PARTY
hereto by corporate merger or consolidation or by any sale or sales of
substantially all of its oil and gas properties; or
(c) Any sale, merger, consolidation or other transfer by a PARTY
hereto of any part of its interest to or with any "affiliate" (as such
term is defined in Regulation C, issued under the Securities Act of
1933).
(d) Any mortgage, pledge, transfer, sale, merger or any other
disposition enumerated in subparagraphs (a), (b) or (c) of this
Paragraph shall be made expressly subject to this Agreement. Any
assignment under this provision shall be effective upon approval of
the lessor or at such earlier date as agreed to by the lessor.
26.3 ASSIGNMENTS. Any assignment, vesting or relinquishment of interest
between the PARTIES shall be without warranty of title, except as to overrides,
production payments, liens, encumbrances or similar burdens on the interest
assigned.
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ARTICLE XXVII
AREA OF MUTUAL INTEREST
27.1 AREA OF MUTUAL INTEREST. The PARTIES hereby create an Area of Mutual
Interest ("AMI") described and identified on Exhibit "A-1" attached hereto and
made a part hereof. This AMI shall remain in force and effect as long as any
leases lying within the AMI are being maintained by the parties hereto. Any
acquisition of any right, title or interest acquired in, to and under any oil or
gas lease or any other interest in oil or gas, including, without limitation,
contractual rights, which confer on the holder thereof the right to share, or
acquire the right to share, in the production or the proceeds of production of
oil and gas within the AMI (the "Acquisition") by a PARTY herein shall be for
the mutual benefit of the PARTIES; provided, however, that any such Acquisition
shall not be subject to the provisions of this AMI if such Acquisition is the
consequence of (i) a merger, consolidation or reorganization, or (ii) the
acquisition of all or substantially all of the assets of any person, firm or
entity. Each PARTY shall have the right to participate in any such Acquisition
in the same proportion as such PARTY's WORKING INTEREST in and to the LEASE as
set forth in Exhibit "A". The PARTY making the Acquisition (the "Acquiring
Party") shall notify each of the other PARTIES in writing within thirty (30)
days of such Acquisition and shall furnish a copy of all executed agreements
pertaining thereto and such title information as the Acquiring PARTY has,
stating the cost of such acquisition or the obligations that must be assumed in
connection therewith. Each of the other PARTIES shall have a period of fifteen
(15) working days (48 hours exclusive of Saturdays, Sundays and legal holidays
in the event that a well is being drilled within the AMI) after receipt of such
notice within which to elect and notify the Acquiring PARTY whether or not it
desires to participate in such Acquisition. Failure to timely respond to the
Acquiring PARTY's notice or reimburse the Acquiring PARTY for the proportionate
share of the acquired interest shall be deemed an election not to acquire such
interest. Upon election and payment to the Acquiring PARTY of a non-acquiring
PARTY's share of the cost of such acquisition, such non-acquiring PARTY shall be
entitled to an assignment of its proportionate share in such Acquisition.
If fewer than all PARTIES elect to participate in the Acquisition
within the AMI, the Acquiring PARTY shall inform all PARTIES who have elected to
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participate in the Acquisition, in writing, of the elections made. Each
PARTY receiving notice, within forty-eight (48) hours (inclusive of Saturday,
Sunday or legal holidays) after receipt of such notice, shall advise the
Acquiring PARTY of its desire to (a) limit participation to its WORKING
INTEREST, or (b) acquire its proportionate share of the interest of the
non-participating PARTY(IES), or (c) participate for a percentage of the
interest of the non-participating PARTY(IES).
The proportionate interest of any PARTY who elects to participate
in any acquisition within the AMI shall be subject to and be burdened by the
identical obligations that the Acquiring PARTY owes to Houston Energy &
Development, Inc. on the LEASE.
ARTICLE XXVIII
TERM
28.1 TERM. This Agreement may be amended only in writing and only by
mutual consent of all PARTIES. This Agreement shall remain in effect so long as
the LEASE shall remain in effect and thereafter until all claims, liabilities
and obligations incurred in operations hereunder have been settled; however, all
property belonging to the PARTIES shall be disposed of and final settlement
shall be made under this Agreement.
ARTICLE XXIX
HEADINGS AND EXECUTION
29.1 TOPICAL HEADINGS. The topical headings used herein are for
convenience only and shall not be construed as having any substantive
significance or as indicating that all of the provisions of this Agreement
relating to any topic are to be found in any particular Section.
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29.2 COUNTERPART EXECUTIONS. This Agreement may be signed in
counterparts, and shall be binding upon the PARTIES and upon their successors,
representatives and assigns.
CHENIERE ENERGY, INC.
WITNESSES:
- ---------------------------- BY:
----------------------------------------
PRINTED NAME: Walter L. Williams
- ---------------------------- TITLE: President & CEO
BETA OIL & GAS, INC.
- ---------------------------- BY:
----------------------------------------
PRINTED NAME: Steve Antry
- ---------------------------- TITLE: President
SIGNATURE PAGE OF JOINT OPERATING AGREEMENT DATED NOVEMBER 6, 1998 COVERING S.L.
16019, S.L. 16017, S.L. 16186
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EXHIBIT A
of
EXHIBIT C
to
SHARK PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED
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EXHIBIT A-1
of
EXHIBIT C
to
SHARK PROSPECT AGREEMENT, DATED JANUARY 6, 1999
(CONFIDENTIAL TREATMENT REQUESTED
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EXHIBIT "B"
INSURANCE
(Attached and made a part of that particular Joint Operating Agreement dated
effective November 6, 1998, by and between Cheniere Energy, Inc., as Operator,
and Beta Oil & Gas, Inc. as Non-Operator, covering S.L. 16019, 16017 and 16186
as more fully set out on Exhibit "A" of the Joint Operating Agreement.)
Operator shall, at all times while conducting operations on the Contract Area
and/or Assigned Premises, carry or cause to be carried insurance for the
following coverages and in at least the minimum amounts noted.
1. Workers' Compensation and Occupational Disease insurance in accordance
with the statutory requirements of the state in which work is to be
performed, the state in which the Operator, herein "Contractor", or
any of Operator's contractor(s) or sub-contractor(s), employees reside
and the state in which the Contractor is domiciled; Employer's
Liability insurance with limits of not less than $1,000,000. These
coverages shall include:
a. Protection for liabilities under the Federal Longshoremen's and
Harbor Worker's Compensation Act and the Outer Continental Shelf
Lands Act.
b. Coverage for liability under the Merchant Marine Act of 1920,
commonly known as the Jones Act; the Admiralty Act; and the Death
on the High Seas Act with limits of not less than $1,000,000 per
accident.
c. Protection against liability of employer to provide
transportation, wages, maintenance and cure to maritime employees
and a Voluntary Compensation Endorsement.
d. Coverage amended to provide that a claim IN REM shall be treated
as a claim against the employer.
e. Territorial extension shall cover all work areas.
2. Comprehensive General Liability insurance, written on any occurrence
reported basis with limits of $1,000,000 per occurrence Bodily Injury
and Property Damage, combined single limits, an annual aggregate of no
less than $2,000,000 (if applicable), including the following
coverages:
a. Premises and Operations coverages.
b. Independent Contractor's Contingent coverage.
c. Contractual Liability covering liabilities assumed under this
Contract.
d. Products and Completed Operations coverage.
e. Coverage for explosion, collapse and underground resources and
property damage under both Premises/Operations and Contractual
Liability coverage parts, where applicable.
f. Broad Form Property Damage Liability endorsement.
g. Personal Injury Liability.
h. IN REM endorsement.
i. Territorial extension shall cover all work areas.
j. Where applicable, coverage for liability resulting from the
consumption of food prepared or served by contractor or
subcontractor.
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k. Watercraft exclusion deleted or Protection & Indemnity provided
as per 4.B.
l. Coverage is provided for "Action Over" suits.
m. Coverage is silent as respects Punitive Damages.
3. Automobile Liability insurance covering owned, hired and non-owned
vehicles with limits of $1,000,000 per occurrence Bodily Injury and
Property Damage combined single limits.
4. Where the work described by this Contract involves the use of marine
equipment. Operator will require the contractor to provide the
following insurance:
a. Full Form Hull and Machinery insurance, with coverage equal to
that provided by the American Institute Hull Clauses including
collision liability, with the sister ship clause unamended, with
limits of liability at least equal to the full value of the
vessel and with navigational limitations adequate for Contractor
to perform the contracted work. Where the vessels engage in
towing operations, said insurance shall include full tower's
liability with the sister ship clause unamended.
b. Protection and indemnity insurance coverage in an amount at least
equal to the full value of each vessel employed under the
Contract. Protection and indemnity insurance shall include full
coverage for all crew liabilities if coverage for maritime
employees is not provided under Coverage B, Employers Liability
for Admiralty Jurisdiction.
c. Excess Protection and Indemnity insurance, including Collision
and Tower's (where applicable) Liability in an amount at least
equal to the value of each vessel covered or the difference
between the full value of each vessel and $1,000,000 per
occurrence.
d. Voluntary Removal of Wreck and/or Debris insurance covering
Contractor's operations in an amount of not less than $1,000,000
per occurrence.
All of the marine coverages cited above shall name Operator and all its
subsidiary and affiliated companies as additional insureds as their interests
may appear, to the extent of contractor's obligations to defend and indemnify
the Parties.
5. Aircraft Liability insurance (for contracts involving use of aircraft
or helicopters) with combined single limit coverage for public
liability, passenger liability and property damage liability of not
less than $5,000,000 covering all owned and non-owned aircraft used by
Contractor in connection with work to be performed.
6. Umbrella Liability insurance written on an occurrence basis with no
claims made features with a minimum combined single limit of
$5,000,000 each occurrence/aggregate where applicable, to be excess of
the coverages and limits required in 1, 2, 3, 4 and 5 above.
7. Excess Umbrella Liability with a minimum combined single limit of
$10,000,000.
8. OPERATOR shall carry or cause to be carried the following coverages
for the benefit of and at the expense of the Joint Account, however,
proportionate coverage may be carried individually by each
NON-OPERATOR, subject to proper evidence of such proportionate
coverage being provided to Operator at least fifteen (15) days prior
to commencement of operations for the drilling of the initial
EXPLORATORY WELL.
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a. Operator's Extra Expense Insurance, including control of well and
redrilling of the well (full restoration redrill), including, but
not limited to, Seepage and Pollution and Containment and
Evacuation Expense with a limit of liability of $20,000,000.
b. Physical Damage and Removal of Wreck Coverage for facilities
hereunder, with limits not less than the replacement value
thereof. Notwithstanding the foregoing, this coverage to be
provided fifteen(15)days prior to placement of such facilities.
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EXHIBIT "C"
(Attached and made a part of that particular Joint Operating Agreement dated
effective November 6, 1998, by and between Cheniere Energy, Inc., as Operator,
and Beta Oil & Gas, Inc. as Non-Operator, covering S.L. 16019, 16017 and 16186
as more fully set out on Exhibit "A" of the Joint Operating Agreement.)
INSERT EXHIBIT "C" THIS PAGE
ACCOUNTING PROCEDURE
OFFSHORE JOINT OPERATIONS
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INSERT PAGE 2 OF EXHIBIT C
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INSERT PAGE 3 OF EXHIBIT C
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INSERT PAGE 4 OF EXHIBIT C
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INSERT PAGE 5 OF EXHIBIT C
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INSERT PAGE 6 OF EXHIBIT C
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INSERT PAGE 7 OF EXHIBIT C
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EXHIBIT "D"
(Attached and made a part of that particular Joint Operating Agreement dated
effective November 6, 1998, by and between Cheniere Energy, Inc., as Operator,
and Beta Oil & Gas, Inc. as Non-Operator, covering S.L. 16019, 16017 and 16186
as more fully set out on Exhibit "A" of the Joint Operating Agreement.)
CERTIFICATION OF NONSEGREGATED FACILITIES
Contractor certifies that it does not maintain or provide for its employees
any segregated facilities at any of its establishments and that it does not
permit its employees to perform their services at any location, under its
control, where segregated facilities are maintained. Contractor certifies
further that it will not maintain or provide for its employees any segregated
facilities at any of its establishments and that it will not permit its
employees to perform their services at any location, under its control, where
segregated facilities are maintained. Contractor agrees that a breach of
this certification is a violation of the Equal Opportunity Clause in any
Government contract between Contractor and Corporation. As used in this
certification, the term "segregated facilities" means any waiting rooms, work
areas, rest rooms and wash rooms, restaurants and other eating areas, time
clocks, locker rooms and other storage or dressing areas, parking lots,
drinking fountains, recreation or entertainment areas, transportation, and
housing facilities provided for employees which are segregated by explicit
directive or are in fact segregated on the basis of race, color, religion, or
natinal origin, because of habit, local customs or otherwise. Contractor
further agrees that (except where it has obtain identical certifications from
proposed subcontractors for specific time periods) it will obtain identical
certifications from proposed subcontractors prior to the award of
subcontracts exceeding $10,000 which are not exempt from the provisions of
the Equal Oportunity Clause; that it will retain such certifications in its
files; and that it will forward the following notice to such proposed
subcontractors (except where the proposed subcontractors have submitted
identical certifications for specific time periods):
NOTICE TO PROSPECTIVE SUBCONTRACTORS OF REQUIREMENT FOR CERTIFICATIONS OF
NONSEGREGATED FACILITIES. A Certification of Non-segregated Facilities, as
required by the May 9, 1967, order on Elimination of Segregated Facilites,
by the Secretary of Labor (32 Fed. Reg. 7439, May 19, 1967), must be
submitted prior to the award of a subcontract exceeding $10,000 which is not
exempt from the provisions of the Equal Opportunity Clause. The certi-
fication may be submitted either for each subcontract or for all subcontracts
during a period (i.e., quarterly, semi-annually or annually). (1968 MAR.)
(Note: The penalty for making false statements in offers is prescribed in 18
U.S.C. 1001.)
Whenever used in the foregoing Section, the term "contractor" refers to each
party to this agreement.
-54-
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EXHIBIT E
GAS BALANCING AGREEMENT
(Attached and made a part of that particular Joint Operating Agreement dated
effective November 6, 1998, by and between Cheniere Energy, Inc., as Operator,
and Beta Oil & Gas, Inc. as Non-Operator, covering S.L. 16019, 16017 and 16186
as more fully set out on Exhibit "A" of the Joint Operating Agreement.)
I. DEFINITIONS
A. "Agreement" shall mean this Gas Balancing Agreement.
B. "Balanced" is that condition which occurs when a party hereto has
taken the same percentage of the cumulative volume of Gas production it is
entitled to take pursuant to the terms of the Operating Agreement.
C. "Gas" includes natural gas produced from a Well that produces Gas Well
Gas, including all constituent parts of such natural gas except liquid
hydrocarbons and condensate recovered by primary separation equipment.
D. "Gas Well Gas" is gas produced from a Well classified as a gas well by
the regulatory body having jurisdiction.
E. "Overproduced" is the status of a party when the percentage of the
cumulative volume of Gas taken by that party exceeds that party's percentage
interest of the volume of cumulative Gas production of all parties to the
Operating Agreement under and pursuant to the terms of the Operating Agreement.
F. "Underproduced" is the status of a party when the percentage of
cumulative volume of Gas taken by that party is less than that party's
percentage interest of the volume of cumulative Gas production of all parties to
the Operating Agreement under and pursuant to the terms of said Operating
Agreement.
G. "Well" is defined as each well subject to the Operating Agreement that
produces Gas Well Gas. If a single Well is completed in two or more reservoirs,
such Well shall be considered a separate Well with respect to, but only with
respect to, each reservoir from which the Gas produced is not commingled in the
well bore.
II. APPLICATION OF THIS AGREEMENT
The parties to the Operating Agreement own the working or operating
interests in the Gas underlying the Contract Area covered by the Operating
Agreement and are entitled to share in the percentages therein stated in the
Operating Agreement.
In accordance with the terms of the Operating Agreement, each party shall
take its share of Gas produced from the Contract Area and market or otherwise
dispose of same. In the event a party hereto does not take in kind or market
its share of Gas or has contracted to sell its share of Gas produced from the
Contract Area to a purchaser which, at any time while this Agreement is in
effect, fails to take the share of Gas attributable to the interest of such
party, the terms of this Agreement shall automatically become effective.
The Operator has [THE DUTY TO CONTROL GAS PRODUCTION AND] the
responsibility of administering the provisions of this GAS BALANCING AGREEMENT.
[THE OPERATOR SHALL CAUSE DELIVERIES TO BE MADE TO THE GAS PURCHASERS AT SUCH
RATES AS MAY BE REQUIRED TO GIVE EFFECT TO THE EXTENT PRACTICABLE, TO BE OR
BECOME BALANCED.]
The provisions of this agreement shall be applied to each well separately
as if each Well was covered by separate but identical agreements.
III. STORING AND MAKING UP GAS PRODUCTION
A. RIGHT TO TAKE AND MARKET GAS
During any periods or periods when any party hereto does not take, has
no market for, or the market of a party is not sufficient to take, that party's
full share of the Gas produced from any Well located on the Contract Area, or
such party's purchaser otherwise fails to take such party's share of Gas
produced from any such Well located on the Contract Area, resulting in such
party becoming Underproduced (such party being herein referred to as an
"Underproduced Party"), the other party or parties shall be entitled, but not
required, to produce from said Well on the Contract Area (and take or deliver to
their respective purchaser(s)), each month all or a part of that portion of the
allowable Gas production assigned to such Well by the regulatory body having
jurisdiction. Any party so taking or delivering Gas which results in such party
becoming Overproduced is herein referred to as an "Overproduced Party".
Those parties which are capable of taking and/or marketing quantities
of Gas allocable to an Underproduced Party, in the absence of any other
agreement between them, shall each take a share of the Gas attributed to the
Underproduced Party or Parties in the direct proportion that their respective
interests bear to the total interest of all parties taking Gas which are also
considered Overproduced.
All parties hereto shall share in and own the liquid hydrocarbons
recovered from such Gas by primary separation equipment in accordance with their
respective interests and subject to the terms of the above described Operating
Agreement, whether or not such parties are actually taking and/or marketing Gas
at such time.
B. MAKING UP UNDERPRODUCTION
Any Underproduced Party shall endeavor to bring its taking of Gas into
a Balanced condition. Upon written notice to the Operator, any Underproduced
Party may thereafter begin taking or delivering to its purchaser its full share
of the Gas produced from a Well (less any used in operations, vented or lost).
To allow for the recovery of Gas in storage and to balance the Gas account of
the parties in accordance with their respective interests, Underproduced Party
shall be entitled to take or deliver to a purchaser its full share of Gas
produced from such Well (less any used in operations, vented or lost) plus,(i)
for the months of March, April, May, June, July, August, September and October
only of any calendar year during which this agreement may be in place, an amount
up to an additional fifty percent (50%) of the monthly quantity of Gas
attributable to the Overproduced Party or Parties, or (ii) for the months of
November, December, January and February only of any calendar year or years
during which this agreement may be in place, an amount up to an additional
twenty-five percent (25%) of the monthly quantity of Gas attributable to the
Overproduced Party or Parties. If more than one Underproduced Party is entitled
to take additional Gas, they shall divide the additional Gas in proportion to
their respective Underproduced accounts. The first Gas made up shall be assumed
to be the first Gas Underproduced.
C. GAS BALANCE REPORTING
Each party taking Gas shall furnish or cause to be furnished to the
Operator a monthly written statement of Gas volumes taken and the identity of
its Gas purchaser, if any, no later than [THIRTY (30)] days after the production
month. Operator shall not be required to adjust its Gas accounting statements
reflecting a different Gas purchaser until the first day of the month following
the month in which such notice is received by the Operator. The Operator will
maintain appropriate accounting on a monthly and cumulative basis of the
quantities of Gas each party is entitled to take and/or market and the
quantities of Gas taken and/or marketed by each of the parties to their
respective Gas purchasers. With respect to gas purchased from or transported
for more than one party by or through one pipeline connected to the Well, each
party selling to or transporting through such one pipeline shall furnish to
Operator or cause the pipeline owner to furnish to Operator monthly volume
statements showing the split of ownership through such pipeline's sales or
pipeline inlet meter during the preceding calendar month. Within [NINETY (90)]
days after the end of each producing calendar month, the Operator shall furnish
each party a statement showing the status of the Overproduced and Underproduced
accounts of all parties.
To determine respective volumes of Gas taken by separate gas pipelines
connected to the Well, measurement of Gas for overproduction and underproduction
shall be accomplished by use of sales meters and lease measurement equipment
which shall be in accordance with AGA requirements.
Each party to this Agreement agrees that it will not utilize any
information obtained hereunder for any purpose other than implementing or
administering the terms of this Agreement.
D. ROYALTY AND PRODUCTION TAX
-55-
<PAGE>
At all times while Gas is produced from the Contract Area, unless
otherwise required by any State or Federal law or regulations, each party shall
pay or cause to be paid all royalty due and payable on its share of Gas
production as if each party were taking or delivering to a Gas purchaser its
share of Gas production. Each party agrees to hold each other party harmless
from any and all claims for royalty payments asserted by its royalty owners.
The term "royalty owner" shall include owners of royalty, overriding royalties,
production payments and similar interests payable out of production.
Each party producing or taking or delivering Gas to its Gas purchaser
shall pay, or cause to be paid, all production and severance taxes due on all
volumes of Gas actually taken or sold by such party.
IV. CASH SETTLEMENT
A. VOLUME/VALUE
If, at the permanent termination of production of Gas from a Well
located on the Contract Area, an imbalance exists between the parties, a cash
settlement of the imbalance between the parties relative to such Well shall be
made. The amount of the cash settlement will be limited to the proceeds
actually received by the Overproduced Party or Parties at the time of
overproduction, less transportation and applicable treating charges and
production and severance taxes paid on such overproduction. Royalty shall only
be deducted from such proceeds attributable to the overproduction if actually
paid to royalty owners by the Overproduced Party or Parties. [NO INTEREST SHALL
BE ADDED TO ANY CASH SETTLEMENT HEREUNDER.] If there is more than one
Overproduced Party, the cash settlement shall be based on a weighted average of
the proceeds actually received as above described by all Overproduced Parties.
If the Overproduced Party or Parties did not sell its Gas, such Gas will be
valued in the same manner used for royalty calculation purposes when produced.
That portion of the monies collected by the Overproduced Party or Parties which
is subject to refund by others of the Federal Energy Regulatory Commission
("FERC") may be withheld by the Overproduced Party or Parties until such parties
are fully approved by FERC, unless the Underproduced Party or Parties furnish a
corporate undertaking acceptable to the Overproduced Party or Parties agreeing
to hold the Overproduced Party or Parties harmless from financial loss due to
refund orders by FERC.
B. COLLECTION AND DISTRIBUTION
Operator shall provide within [SIXTY (60)] days of permanent
determination of Gas production a final accounting of the Gas balance to all
parties hereto. Overproduced Parties, within thirty (30) days of receipt of the
final accounting of the Gas balance, shall pay their respective shares of the
above described cash settlement to the Underproduced Parties in that proportion
that each such Underproduced Party's volume of gas in storage bears to the total
of all Underproduced Parties' volumes of gas in storage.
V. MISCELLANEOUS
A. TERM
This Agreement shall remain in force and effect as long as the
Operating Agreement to which it is attached remains in force and effect, and
thereafter until the Gas balance accounts between the parties are settled in
full, and shall inure to the benefit of and be binding upon the parties hereto,
their heirs, successors, legal representatives and assigns.
B. EXPENSES
Nothing herein shall change or affect each party's obligations to pay
its proportionate share of all costs and liabilities incurred in operations on
the Contract Area as its share thereof is set forth in the Operating Agreement
to which this Agreement is attached.
C. WELL TESTS
Nothing herein shall be construed to deny any party the right, from
time to time, to produce and take or deliver to its Gas purchaser up to one
hundred percent (100%) of the entire Well stream to meet the deliverability test
required by its Gas purchaser, provided that such tests are reasonable in light
of overall industry standards.
D. MONITORING OF TAKES OF PRODUCTION
Each party shall, at all times, use its best efforts to regulate its
takes and deliveries from each Well on said Contract Area so that no Well will
be shut in for overproducing the allowable assigned thereto by the regulatory
body having jurisdiction. Additionally, each party shall communicate, as
necessary, the contents of this agreement to its respective Gas purchaser(s) or
transporter(s) and shall monitor its deliveries to its respective Gas
purchaser(s) or transporter(s) so as to ensure to the greatest extent
practicable that its Gas purchaser(s) or transporter(s) does not take Gas in
excess of the quantities provided for herein.
E. LIQUEFIABLE HYDROCARBONS NOT COVERED UNDER AGREEMENT
The parties shall share proportionately in and own all liquid
hydrocarbons recovered with the gas by lease equipment in accordance with their
respective interests.
-56-
CHENIERE ENERGY, INC.
TWO ALLEN CENTER
1200 SMITH STREET, SUITE 1740
HOUSTON, TEXAS 77002-4312
(713) 659-1361
FAX: (713) 659-5459
January 6, 1999
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: Mr. Steve Antry, President
Re: Option Agreement
Heron, Stingray, and King Creole Prospects
West Cameron Area, Louisiana
Gentlemen:
Cheniere is the owner of interests in:
(i) the Oil, Gas and Mineral Leases described in Exhibit A-1
attached hereto (the "Heron Leases"), which cover lands
comprising the prospect known to Cheniere as the "Heron
Prospect." The lands covered by the Heron Prospect are
depicted on Exhibit A-2 as the yellow shaded "Lease Block"
(the "Heron Lease Block").
(ii) the Oil, Gas and Mineral Leases described in Exhibit B-1
attached hereto (the "Stingray Leases"), which cover lands
comprising the prospect known to Cheniere as the "Stingray
Prospect." The lands covered by the Stingray Prospect are
depicted on Exhibit B-2 as the yellow shaded "Lease Block"
(the "Stingray Lease Block").
(iii) the Oil, Gas and Mineral Leases described in Exhibit C-1
attached hereto (the "King Creole Leases"), which cover lands
comprising the prospect known to Cheniere as the "King Creole
Prospect." The lands covered by the King Creole Prospect are
depicted on Exhibit C-2 as the yellow shaded "Lease Block"
(the "King Creole Lease Block").
For and in consideration of ONE HUNDRED DOLLARS ($100) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, Cheniere hereby grants to Beta Oil & Gas, Inc. ("Beta") the option
for a period of sixty (60) days after the date hereof to purchase from Cheniere
an undivided fifteen percent (15%) of 8/8ths interest in the Heron Leases,
Stingray Leases and/or King Creole Leases. The purchase prices for the undivided
fifteen percent interest in the Heron Leases, Stingray Leases, and King Creole
Leases, respectively, are:
Heron Leases $255,000
Stingray Leases $100
King Creole $230,000
(the aggregate of such purchase prices being equal to a portion of seismic costs
incurred by Cheniere in connection with such prospects plus 20% of the aggregate
of leasehold acquisition costs incurred Cheniere for the Heron, Stingray and
King Creole Leases). If additional leasehold acquisition costs (including,
without limitation, delay rentals) for the Heron Leases, Stingray Leases or King
Creole Leases are incurred by or billed after the date hereof, then Cheniere
will notify Beta of such additional costs, with supporting documentation, and
the purchase price for the affected Leases shall be adjusted upward by an amount
equal to fifteen percent (15%) of such additional costs.
The option granted herein may be separately exercised by Beta as to the
Heron Leases, Stingray Leases and King Creole Leases, by (i) Beta's payment to
Cheniere of the purchase price(s), as provided above, for the Leases covering
the respective prospect(s) which Beta elects to acquire; and (ii) Beta's
execution and delivery to Cheniere of a prospect agreement, substantially in the
form of Exhibit D attached hereto, for each such prospect Beta elects to
acquire. This option shall terminate if within sixty (60) days after the date
hereof Cheniere has not received from Beta the purchase price and executed
prospect agreement provided above.
If Beta does not exercise its option to acquire an interest in
the Heron, Stingray, or King Creole Leases, then Beta agrees (i) to maintain the
confidentiality of all information in the possession of Beta concerning such
Leases and prospects; and (ii) for a period of three (3) years after the date
hereof, not to acquire oil and gas interests (including, without limitation,
leasehold interests, fee mineral interests, net profits interests, royalty or
overriding royalty interests, farmouts or other interests) covering lands within
the respective Lease Block or the Area of Mutual Interest for the rejected
prospect, as shown in the exhibits hereto. If, notwithstanding the foregoing,
Beta acquires such interests, then within fourteen (14) days after receipt of
assignments or conveyances of such interests, Beta shall by written notice offer
to assign such interests to Cheniere upon Cheniere's payment to Beta of Beta's
acquisition costs therefor, documentation of which shall be furnished by Beta to
Cheniere. Cheniere shall have thirty (30) days after receipt of such notice in
which to elect whether to acquire such interest. If Cheniere does not tender the
purchase price for such interests within such period, Cheniere shall be deemed
to have elected not to acquire such interest. Contemporaneously with Cheniere's
payment of the purchase price therefor, Beta shall deliver executed and
acknowledged assignments of such interests to Cheniere in form and substance
reasonably acceptable to Cheniere, free of all claims or encumbrances by,
through or under Beta.
This Option Agreement may not be assigned by Beta without the prior
written consent of Cheniere, which consent may be withheld by Cheniere at its
sole discretion; provided, however, that this provision shall not apply to
assignments by Beta of leasehold interests acquired upon exercise of its options
hereunder.
The notices provided for in this agreement shall be in writing and
delivered by certified U.S. mail, return receipt requested, telecopy, or
overnight courier or messenger with receipt confirmation, to the addresses
below:
CHENIERE ENERGY, INC.
Two Allen Center
1200 Smith Street, Suite 1740
Houston, TX 77002
Attn: Walter L. Williams
phone (713) 659-1361
fax (713) 659-5459
BETA OIL & GAS, INC.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attn: Steve Antry
phone (949) 752-5212
fax (949) 752-5757
Notices hereunder shall be deemed made upon receipt.
Time is of the essence in the performance or exercise of this Option
Agreement.
Please indicate your acceptance of the foregoing by signing an original
counterpart of this letter in the space provided below and returning it to me.
Sincerely,
CHENIERE ENERGY, INC.
/s/Walter L. Williams
President & CEO
<PAGE>
AGREED TO AND ACCEPTED THIS _____ DAY OF _______________, 1999.
BETA OIL AND GAS, INC.
/s/Steve Antry
President & CEO
January 25, 1999
BETAustralia, LLC
901 Dove Street, Suite 230
Newport Beach, Ca. 92660
Attention: Chris Steinhauser
Re: ATP 554 P
Queensland, Australia
Gentlemen:
This letter when fully executed, including the terms and provisions provided for
herein, shall constitute an agreement between Dyad - Australia, Inc. (Dyad) and
BETAustralia LLC (Beta).
Dyad - Australia, Inc. is the holder of an exploration permit described as
Authority to Prospect 554P in Queensland, Australia. The permit covers an area
of 35 blocks as described in Exhibit A attached hereto.
Dyad has entered into an agreement with Duke Energy International of Brisbane,
Queensland for the funding of additional seismic data acquisition and the
drilling of an exploration well. Under the terms of the agreement with Duke
Energy, a copy of which is attached and made a part of this agreement, Dyad -
Australia will have the opportunity to buy into the exploratory well on a cost
only basis and after the well has been drilled and evaluated. Dyad also has the
option of postponing its buy-in until later stages in the development program.
The exact terms are more fully described in the agreement between Duke and Dyad.
Subject to the terms of this agreement Dyad agrees to assign to Beta 20% of
Dyad's rights under the first and subsequent Dyad Buy-In Options set out on page
2 and 3 of the Duke agreement specifically reserving to Dyad the existing 8%
royalty interests covered in the Duke agreement under "Existing Royalties." For
example, assuming Dyad and its group of investors elects to buy in at Stage 1 of
the program, thereby acquiring a 50% interest, the net working interest to Beta
shall be 10% (20% x 50%).
Should the Dyad group elect to acquire an economic interest under Stage 2 of the
Duke agreement, Beta's interest shall be 20% of that acquired interest.
(i.e.:20% x Interest.)
Assignment of the above described interest is subject to the following terms and
conditions:
1. Beta agrees to pay Dyad - Australia, Inc. a sum of US
$100,000 at the time this letter agreement is
executed and delivered to Dyad.
2. An Operating Agreement between Dyad-Australia, Inc.,
as Operator, or a third party acceptable to Dyad and
Duke, as Operator, and Duke, as Non-Operator, the
terms and conditions of which Operating Agreement are
to be negotiated by and mutually acceptable to Dyad
and Duke, at their sole discretion.
<PAGE>
1. The election to either buy into the exploratory well and prospect at
Stage 1 of the Duke agreement or at some point in Stage 2, shall be by
a vote of the majority of the interest owners based on their
percentage of ownership in the Duke agreement. The parties to this
agreement and their percentage of ownership are set out in Exhibit
"A." Each party shall have 10 days after receipt of written notice by
Dyad of the election to or not to Buy-In pursuant to the Duke
agreement. Failure of a party to forward its ballot within the 10-day
period shall be deemed a vote not to Buy-In.
3. In the event the majority percentage of ownership elects to
participate in a Buy-In under the Duke agreement, Dyad will give each
party voting against said Buy-In the chance to participate in the
decision of the majority by giving Dyad written notice of its election
to participate in the Buy-In within 5 days of notice from Dyad of the
election results. In the event said party still does not wish to
participate in the majority decision or fails to respond to the
election notice within said 5-day period, the non-participating party
shall forfeit all of his, her and/or its interest in all rights in the
Duke agreement and agrees to execute any documents reflecting said
forfeiture. Thereafter, each participating party, after receipt of
written notice from Dyad, shall advise Dyad, within 5 days of written
notice from Dyad, of its desire to (a) limit its ownership in the
agreement to the interest reflected on Exhibit "A" or (b) assume its
proportionate part of the non-participating parties' interest. Failure
to advise Dyad shall be deemed an election to limit the participating
party to its original interest. Following the election to purchase an
economic interest under the Duke agreement and subsequent election to
or not to bear more interest, Dyad will invoice each participating
party for his, her and or its proportionate share of all costs,
including any additional share assumed from the forfeited interest.
Thereafter, each party shall have 30 days after receipt of said
invoice within which to pay the invoice amount either by wire transfer
and/or cashier's check. In the event any party fails to make the
required payment within 5 days after written notification of said
party's failure to make the payment within the 30-day period, said
party shall forfeit all of his, her and/or its interest in all rights
in the Duke agreement and agrees to execute any documents reflecting
said forfeiture.
4. The interest herein conveyed is subject to a 10% royalty to the State
of Queensland, Australia and a total of 8% overriding royalty which is
further described in the Duke agreement under "Existing Royalties".
6. A preferential right to purchase is retained by Dyad - Australia, Inc.
with respect to the sale or transfer of the interest here-in conveyed.
A party desiring to sell any or all of its interest created under this
agreement shall notify Dyad - Australia in writing of the name of
purchaser and the terms of the proposed sale. Dyad shall have a period
of 30 days in which to purchase the interest under the same terms and
price or elect not to acquire the interest. Specifically excluded from
the preferential right to purchase is the transfer of interest to a
subsidiary or affiliate of Beta.
7. Any expenses incurred by Dyad in the management and administration of
the subject venture including a $250 per month overhead fee shall be
reimbursed proportionally to Dyad by the parties to this agreement.
8. This agreement shall be construed, governed and enforced by the laws
of the County of Midland, State of Texas, and all payments are payable
in Midland County, Texas unless otherwise instructed by Dyad.
<PAGE>
If the foregoing terms are acceptable please indicate Beta's acceptance by
returning an executed notarized copy of this agreement to Dyad's office's within
15 days of the above date.
Sincerely yours,
DYAD - AUSTRALIA, INC.
/s/Tom D. Dyches
President
- -------------------------------
BETA OIL & GAS, INC.
By:/s/Steve Antry Title: President
STATE OF _________________________ ss.
ss.
COUNTY OF________________________ ss.
BEFORE Me, the undersigned authority, on this day personally appeared
__________________________________, known to me to be the person whose name is
subscribed to the foregoing instrument, as_____________________________
of_______________________________ and acknowledged to me that He executed the
same for the purposes and consideration therein expressed, in the capacity
stated, and as the act and deed of said corporation. Given under my hand and
seal of office this the _____ day of_______________, 19_____.
- -------------------------------
Notary
Public
<PAGE>
EXHIBIT A
to
DYAD AUSTRALIA INC. AGREEMENT, DATED JANUARY 25, 1999
(ONFIDENTIAL TREATMENT REQUESTED)
<PAGE>
NOTE AND COMMON STOCK PURCHASE AGREEMENT
This NOTE AND COMMON STOCK PURCHASE AGREEMENT
("Agreement") is entered into as of January 20, 1999, by and between
BETA OIL & GAS, INC., a Nevada corporation (the "Company"), with
headquarters located at 901 Dove Street, Suite 230, Newport Beach,
California 92660 and the purchasers (the "Purchasers") set forth on the
execution pages hereof, with regard to the following:
RECITALS
A. The Company and Purchasers are executing and
delivering this Agreement in reliance upon the exemption from
securities registration afforded by the provisions of Regulation D
("Regulation D"), as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933 as
amended (the "Securities Act").
B. Purchasers desire to purchase, upon the terms and
conditions stated in this Agreement, Secured Promissory Notes ("Notes")
and shares of the Company's Common Stock, $.001 par value (the "Common
Stock"). The shares of Common Stock issuable hereunder are referred to
herein as the Common Shares. The Notes and Common Shares are sometimes
referred to herein jointly as the "Securities."
C. Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a
Registration Rights Agreement in the form attached hereto as Exhibit A
(the "Registration Rights Agreement"), pursuant to which the Company
has agreed to provide certain registration rights under the Securities
Act, the rules and regulations promulgated thereunder and applicable
state securities laws and a Security Agreement in the form attached
hereto as Exhibit B (the "Security Agreement") pursuant to which the
Company has agreed to grant the Purchasers a security interest in its
assets.
AGREEMENTS
NOW, THEREFORE, in consideration of their respective promises
contained herein and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company and
Purchasers hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF NOTES AND COMMON STOCK
1.1 Purchase of Notes and Common Shares. Subject to the terms and
conditions of this Agreement, the issuance, sale and purchase of the
Notes and Common Shares shall be consummated in a "Closing". On the
date of the Closing ("Closing Date"), subject to the satisfaction or
waiver of the conditions set forth in Articles V and VII, the Company
shall issue and sell to each Purchaser, and each Purchaser severally
agrees to purchase from the Company, Notes of the Company in the amount
set forth on the signature page executed by such Purchaser. The Notes
shall be in the form of Exhibit C hereto. Each Purchaser's obligation
to purchase Notes hereunder is distinct and separate from each other
Purchasers obligation to purchase, and no Purchaser shall be required
to purchase hereunder more than the amount of Notes set forth on such
Purchaser's signature page. The obligations of the Company with respect
to each Purchaser shall be separate from the obligations of each other
Purchaser and shall not be conditioned as to any Purchaser upon the
performance of obligations of any other Purchaser.
1.2 Security Agreement. Concurrently with the sale of the Notes, the
Company and the Investors shall execute the Security Agreement. In
addition, the Company shall take any action reasonably requested by
Purchaser in connection with Purchaser's preparation and filing of UCC
Form 1 Financing Statements and similar documents.
1.3 Issuance of Common Shares. Concurrently with the sale of the Notes, the
Company shall issue to each Purchaser Common Shares. The Common Shares
issuable shall be determined as provided herein.
A. Closing Date Common Shares. On the Closing Date, the
Company shall issue to each Purchaser that number of Common Shares
determined by multiplying the amount of the Notes issued to such
Purchaser by 15% (the "Coverage Percentage"). By way of example if a
Purchaser invested $ 2,000,000 in Notes, such Purchaser would be issued
300,000 Common Shares ($2,000,000 x 15% = 300,000).
B. Additional Common Shares. If any portion of the principal
of the Note remains unpaid on the 180th, 210th, 240th, 270th, 300th,
and/or the 330th day following the Closing Date, then on the day
following any of such dates, the Company shall issue to each holder of
Notes, that number of Common Shares determined by the above formula and
a Coverage Percentage, in each instance, of 2.5%. For example, if
$1,000,000 of principal remains unpaid on the 180th day following the
Closing Date, then on the following day the Purchasers would be issued
an additional 25,000 Common Shares ($1,000,000 x 2.5%=25,000).
C. INTENTIONALLY LEFT BLANK.
1.4 Form of Payment. Each Purchaser shall pay the aggregate
Purchase Price for the Notes and Common Shares being purchased by such
Purchaser by wire transfer to the account designated by the Company.
1.5 Closing Date. Subject to the satisfaction (or waiver) of
the conditions set forth in Articles VI and VII below, the date and
time of the issuance, sale and purchase of the Notes and Common Shares
pursuant to this Agreement shall be at 10:00 a.m. California time, on
January 20, 1999 when usable funds have been received by the Company.
ARTICLE II
PURCHASERS REPRESENTATIONS AND
WARRANTIES
Each Purchaser represents and warrants as of the date hereof
and as of the Closing, severally and solely with respect to itself and
its purchase hereunder and not with respect to any other Purchaser or
the purchase hereunder by any other Purchaser (and no Purchaser shall
be deemed to make or have any liability for any representation or
warranty made by any other Purchaser) to the Company as set forth in
this Article II. No Purchaser makes any other representations or
warranties, express or implied, to the Company in connection with the
transactions contemplated hereby and any and all prior representations
and warranties, if any, which may have been made by a Purchaser to the
Company in connection with the transactions contemplated hereby shall
be deemed to have been merged in this Agreement and any such prior
representations and warranties, if any, shall not survive the execution
and delivery of this Agreement.
2.1 Investment Purpose. Purchaser is purchasing the Securities
for Purchaser's own account for investment only and not with a view
toward or in connection with the public sale or distribution thereof.
Purchaser will not, directly or indirectly. offer, sell, pledge
(subject to Section 4.11) or otherwise transfer its Securities or any
interest therein except pursuant to transactions that are exempt from
the registration requirements of the Securities Act and/or sales
registered under the Securities Act. Purchaser understands that
Purchaser must bear the economic risk of this investment indefinitely,
unless the Securities are registered pursuant to the Securities Act and
any applicable state securities laws or an exemption from such
registration is available, and that the Company has no present
intention of registering any such Securities other than contemplated by
the Registration Rights Agreement. By making the representations in
this Section 2.1, Purchaser does not agree to hold the Securities for
any minimum or other specific term (except as otherwise provided
herein) and reserves the right to dispose of the Securities at any time
in accordance with or pursuant to a registration statement or an
exemption from registration under the Securities Act and any applicable
state securities laws.
2.2 Qualified Institutional Buyer. Purchaser is a "Qualified
Institutional Buyer" as that term is defined in Rule 144(a) of the
Securities Act of 1933 and Purchaser has indicated on the Confidential
Prospective Investor Questionnaire attached hereto as Exhibit E in
which capacity that it so qualifies as a "Qualified Institutional
Buyer".
2.3 Reliance on Exemptions. Purchaser understands that the
Securities are being offered and sold to Purchaser in reliance upon
specific exemptions from the registration requirements of United States
federal and state securities laws and that the Company is relying upon
the truth and accuracy of, and Purchaser's compliance with, the
representations, warranties. agreements, acknowledgments and
understandings of Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of Purchaser to
acquire the Securities
2.4 Information. Purchaser or its counsel have been furnished
all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities
which have been specifically requested by Purchaser, including without
limitation the Company's Form S-1 Registration Statement Dated November
16, 1998 filed with the Securities and Exchange Commission ("SEC") on
December 4, 1998. Purchaser has been afforded the opportunity to ask
questions of the Company and has received what Purchaser believes to be
complete and satisfactory answers to any such inquiries. Purchaser
understands that Purchaser's investment in the Securities involves a
high degree of risk, including without limitation the risks and
uncertainties disclosed in the SEC Document.
2.5 Governmental Review. Purchaser understands that no United
States federal or state agency or any other government or governmental
agency has passed upon or made any recommendation or endorsement of the
Securities.
2.6 Transfer or Resale. Purchaser understands that (i)
except as provided in the Registration Rights Agreement, the Securities
have not been and are not being registered under the Securities
and/or any state securities laws, and may not be offered, sold,
pledged (subject to Section 4.11 of this Agreement) or otherwise
transferred unless subsequently registered thereunder or an
exemption from such registration is available (which exemption the
Company expressly agrees may be established as contemplated in clauses
(b) and (c) of Section 5.1 hereof); (ii) any sale of such Securities
made in reliance on Rule 144 under the Securities Act (or a successor
rule) ("Rule 144") may be made only in accordance with the terms of
Rule 144 and further, if Rule 144 is not applicable, any resale
of such Securities without registration under the Securities Act
under circumstances in which the seller may be deemed to be an
underwriter (as that term is defined in the Securities Act) may require
compliance with some other exemption under the Securities Act or
the rules and regulations of the SEC thereunder in order for such
resale to be allowed, and (iii) neither the Company nor any other
person is under any obligation to register such Securities under the
Securities Act or any state securities laws or to comply with the
terms and conditions of any exemption thereunder (in each case,
other than pursuant to this Agreement or the Registration Rights
Agreement).
2.7 Legends. Purchaser understands that, subject to Article V
hereof, until such time as the Securities have been registered under
the Securities Act as contemplated by the Registration Rights Agreement
or otherwise may be sold by Purchaser pursuant to Rule 144 (subject to
and in accordance with the procedures specified in Article V hereof)
the certificates for the Securities will bear a restrictive legend (the
"Legend") in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE
SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE
SECURITIES LAWS OR UNLESS OFFERED, SOLD OR TRANSFERRED
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS. THESE SECURITIES ARE ALSO SUBJECT
TO THE TERMS OF A SECURITIES PURCHASE AGREEMENT DATED JANUARY
20, 1999 A
COPY OF WHICH IS AVAILABLE FROM BETA OIL & GAS, INC.
2.8 Authorization: Enforcement. This Agreement, the Registration
Rights Agreement and the Security Agreement have been duly and validly
authorized, executed and delivered on behalf of Purchaser and are valid and
binding agreements of Purchaser enforceable in accordance with their
respective terms, except to the extent that such validity or enforceability
may be subject to or affected by any bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of creditors' rights or remedies of
creditors generally or by other equitable principles of general
application.
2.9 Residency. Purchaser is a resident of the jurisdiction set forth
under Purchaser's name on the signature page hereto executed by Purchaser.
2.10 No Brokers. Except for an Agreement between the Company and
Hagerty, Stewart & Associates, Inc. ("Hagerty Stewart") and the issuance of
25,000 shares of Common Stock to Scorpion Energy Partners, the Purchasers
have taken no action which would give rise to any claim by any person for
brokerage commission, finder fees or similar payments relating to this
Agreement or the transaction contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to each Purchaser as of the date hereof and
as of the Closing that:
3.1 Organization and Qualification. Except as set forth on Schedule 3.1.
each of the Company and its subsidiaries is a corporation duly organized and
existing in good standing under the laws of the jurisdiction in which it is
incorporated, and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company and each of its
subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction where the failure so to qualify or be in
good standing would have a Material Adverse Effect. "Material Adverse Effect"
means any effect which, individually or in the aggregate with all other effects,
reasonably would be expected to be materially adverse to the business,
operations, properties, financial condition, operating results or prospects of
the Company and its subsidiaries, taken as a whole on a consolidated basis or on
the transactions contemplated hereby.
3.2 Authorization: Enforcement. (a) The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Registration Rights Agreement and the Security Agreement, and to issue, sell and
perform its obligations with respect to the Securities in accordance with the
terms hereof and thereof; (b) the execution, delivery and performance of this
Agreement, the Registration Rights Agreement and the Security Agreement by the
Company and the consummation by it of the transactions contemplated hereby and
thereby (including, without limitation, the issuance of the Securities) have
been duly authorized by all necessary corporate action and, no further consent
or authorization of the Company, its board of directors, or its shareholders or
any other person, body or agency is required with respect to any of the
transactions contemplated hereby or thereby (whether under rules of the Nasdaq
National Market, the Nasdaq Small Cap Market, the National Association of
Securities Dealers, Inc. ("NASD") or otherwise); (c) this Agreement, the
Registration Rights Agreement, the Security Agreement and certificates for the
Notes and Common Shares have been duly executed and delivered by the Company;
and (d) this Agreement, the Registration Rights Agreement, and the Secured
Promissory Notes and Common Shares constitute legal, valid and binding
obligations of the Company enforceable against the Company in accordance with
their respective terms, except (i) to the extent that such validity or
enforceability may be subject to or affected by any bankruptcy, insolvency.
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditor's rights or remedies of
creditors generally, or by other equitable principles of general application,
and (ii) as rights to indemnity and contribution under the Registration Rights
Agreement may be limited by Federal or state securities laws. The Company has
duly reserved all Common Shares from time to time issuable under the terms of
this agreement.
3.3 Capitalization. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares reserved for issuance pursuant to the
Company's stock option plans, the number of shares reserved for issuance
pursuant to securities exercisable for, or convertible into or exchangeable for
any shares of Common Stock is set forth on Schedule 3.3. All of such outstanding
shares of capital stock have been, or upon issuance following full payment
therefor will be, validly issued, fully paid and nonassessable. No shares of
capital stock of the Company are subject to preemptive rights or any other
similar rights of the shareholders of the Company or any liens or encumbrances.
Except as disclosed in Schedule 3.3, as of the date of this Agreement, (i) there
are no outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its subsidiaries, and (ii) issuance of the Common shares will
not trigger antidilution rights for any other outstanding or authorized
securities of the Company, and (iii) there are no agreements or arrangements
under which the Company or any of its subsidiaries is obligated to register the
sale of any of its or their securities under the Securities Act (except the
Registration Rights Agreement and what is set forth on Schedule 3.3). The
Company has furnished to Purchaser true and correct copies of the Company's
Articles of Incorporation as in effect on the date hereof ("Articles of
Incorporation"), and the Company's By-laws as in effect on the date hereof (the
"By-laws"). The Company has set forth on Schedule 3.3 all instruments and
agreements (other than the Certificate of Incorporation and By-laws) governing
securities convertible into or exercisable or exchangeable for Common Stock of
the Company (and the Company shall provide to Purchaser copies thereof upon the
request of Purchaser).
3.4 Issuance of Shares. The Common Shares are duly authorized and
reserved for issuance, and following full payment therefor, will be validly
issued, fully paid and non-assessable, and free from all taxes, liens, claims
and encumbrances imposed or suffered by the Company and will not be subject to
preemptive rights or other similar rights of shareholders of the Company.
3.5 No Conflicts. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement and the Security Agreement by the
Company, and the consummation by the Company of transactions contemplated hereby
and thereby (including, without limitation, the issuance of the Securities) do
not and will not (a) result in a violation of the Articles of lncorporation or
By-laws or (b) conflict with, or constitute a default (or an event which, with
notice or lapse of time or both, would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of any
agreement indenture or instrument to which the Company or any of its
subsidiaries is a party, or to the best knowledge of the Company, result in a
violation of any law, rule, regulation, order, judgment or decree (including
U.S. federal and state securities laws and regulations and the rules and
regulations of NASDAQ) applicable to the Company or any of its subsidiaries, or
by which any property or asset of the Company or any of its subsidiaries, is
bound or affected (except for such possible conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect). Except as set
forth in Schedule 3.5, neither the Company nor any of its subsidiaries is in
violation of its Articles of Incorporation or other organizational documents,
and neither the Company nor any of its subsidiaries, is in default (and no event
has occurred which has not been waived which, with notice or lapse of time or
both, would put the Company or any of its subsidiaries in default) under, nor
has there occurred any event giving others (with notice or lapse of time or
both) any rights of termination, amendment, acceleration or cancellation of, any
agreements indenture or instrument to which the Company or any of its
subsidiaries is a party, except for possible violations, defaults or rights as
would not, individually or in the aggregate, have a Material Adverse Effect. The
businesses of the Company and its subsidiaries are not being conducted. and
shall not be conducted so long as purchaser owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental entity, except
for possible violations the sanctions for which either individually or in the
aggregate would not have a Material Adverse Effect. Except as set forth on
Schedule 3.5, or except (A) such may be required under the Securities Act in
connection with the performance of the Company's obligations under the
Registration Rights Agreement, (B) filing of a Form D with the SEC, (C)
compliance with the state securities or Blue Sky laws of applicable
jurisdictions, and (D) as required by Nasdaq, the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency or any regulatory or
self-regulatory agency in order for it to execute deliver or perform any of its
obligations under this Agreement or the Registration Rights Agreement or to
perform its obligations in accordance with the terms hereof or thereof.
3.6 SEC Documents. The Company is not presently subject to the
reporting requirements of the Securities Exchange Act of 1934 (the
"Exchange Act"). The Company has filed with the principal office of the
Securities and Exchange Commission (the "Commission") in Washington, DC,
and a Registration Statement on Form S-1 (thethe Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"). For
purposes hereof, the term "Registration Statement" means the original
Registration Statement and any and all amendments thereto. At such time
that this Registration Statement becomes effective, the Company intends to
register under the Exchange Act. Upon effectiveness, the Company will
furnish its stockholders with annual reports containing financial
statements audited by independent certified public accountants and will
file with the Commission quarterly reports containing unaudited financial
information for each of the first three quarters of each fiscal year within
45 days following the end of each such quarter.As of its date, the
Registration Statement complied in all material respects with the
requirements of the Securities Act and the rules and regulations of the SEC
promulgated thereunder applicable to the Registration Statement, and the
Registration Statement, at the time it was filed with the SEC, did not
contain any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which they were
made, not misleading. None of the statements made in the Registration
Statement which is required to be updated or amended under applicable law
has not been so updated or amended except for the disclosures which will be
required as a result of this Agreement, the Company's joint exploration
agreements with Cheniere Energy, Inc., "Plain English" Disclosures required
by the SEC and any SEC legal and accounting comments and resultant changes
which will be required by the SEC upon their review of the Registration
Statement. The financial statements of the Company included in the
Registration Statement have been prepared in accordance with U.S. generally
accepted accounting principles, consistently applied, and the rules and
regulations of the SEC during the periods involved except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or
(ii) in the case of unaudited interim statements, to the extent they do not
include footnotes or are condensed or summary statements) and present
accurately and completely the consolidated financial position of the
Company and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). Except as set forth in a manner clearly
evident to a sophisticated institutional investor in the financial
statements or the notes thereto of the Company included in the Registration
Statement, the Company has no liabilities, contingent or otherwise, other
than (i) liabilities incurred in the ordinary course of business consistent
with past practice subsequent to the date of such financial statements and
(ii) obligations under contracts and commitments incurred in the ordinary
course of business consistent with past practice and not required under
generally accepted accounting principles to be reflected in such financial
statements, in each case of clause (i) and (ii) next above which,
individually or in the aggregate, are not material to the financial
condition, business, operations, properties, operating results or prospects
of the Company and its subsidiaries. To the extent required by the rules of
the SEC applicable thereto, the Registration Statement contains a complete
and accurate list of all material undischarged written or oral contracts,
agreements, leases or other instruments to which the Company or any
subsidiary is a party or by which the Company or any subsidiary is bound or
to which any of the properties or assets of the Company or any subsidiary
is subject (each a "Contract"). Except as set forth in Schedule 3.6, none
of the Company, its subsidiaries or, to the best knowledge of the Company,
any of the other parties thereto, is in breach or violation of any Contract
which breach or violation would have a Material Adverse Effect. No event,
occurrence or condition exists which, with the lapse of time, the giving of
notice, or both, would become a default by the Company or its subsidiaries
thereunder which would have a Material Adverse Effect. The Company has not
provided to any Purchaser any material non-public information or any other
information which, according to applicable law, rule or regulation, should
have been disclosed publicly by the Company but which has not been so
disclosed.
3.7 Absence of Certain Changes. Since September 30, 1998, there has
been no material adverse change and no material adverse development in the
business, properties, operations, financial condition, results of operations or
prospects of the Company, except as disclosed in Schedule 3.7 or clearly evident
to a sophisticated institutional investor from the Registration Statement.
3.8 Absence of Litigation. Except as disclosed in Schedule 3.8 or as
clearly evident to a sophisticated institutional investor from the Registration
Statement, there is no action, suit, proceeding, inquiry or investigation before
or by any court, public board, government agency, or self-regulatory
organization or body pending or, to the knowledge of the Company or any of its
subsidiaries, threatened against or affecting the Company, any of its
subsidiaries or any of their respective directors or officers in their
capacities as such, which could reasonably be expected to result in an
unfavorable decision, ruling or finding which would have a Material Adverse
Effect or would adversely affect the transactions contemplated by this Agreement
or any of the documents contemplated hereby or which would adversely affect the
validity or Enforceability of, or the authority or ability of the Company to
perform its obligations under, this Agreement or any of such other documents.
There are no facts known to the Company which, if known by a potential claimant
or governmental authority, could reasonably be expected to give rise to a claim
or proceeding which, if asserted or conducted with results unfavorable to the
Company or any of its subsidiaries, could reasonably be expected to have a
Material Adverse Effect.
3.9 Disclosure. No information relating to or concerning the Company set
forth in this Agreement contains an untrue statement of a material fact. No
information relating to or concerning the Company set forth in the Registration
Statement contains a statement of material fact that was untrue as of the date
the Registration Statement was filed with the SEC. The Company has not omitted
to state a material fact necessary in order to make the statements made herein
or herein, in light of the circumstances under which they were made, not
misleading. Except for the execution and performance of this Agreement and the
Company's joint exploration agreements with Cheniere Energy, Inc., no material
fact (within the meaning of the federal securities laws of the United States and
of applicable state securities laws) exists with respect to the Company which
has not been publicly disclosed which requires such disclosure.
3.10 Acknowledgment Regarding Purchaser's Purchase of the Securities.
The Company acknowledges and agrees that Purchaser is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
this Agreement or the transactions contemplated hereby, that this Agreement and
the transaction contemplated hereby, and the relationship between each Purchaser
and the Company, are "arms-length", and that any statement made by Purchaser
(except as set forth in Article II), or any of its representatives or agents, in
connection with this Agreement and the transactions contemplated hereby is not
advice or a recommendation, is merely incidental to Purchaser's purchase of the
Securities and has not been relied upon as such in any way by the Company, its
officers or directors, The Company further represents to Purchaser that the
Company's decision to enter into this Agreement and the transactions
contemplated hereby have been based solely on an independent evaluation by the
Company and its representatives.
3.11 S-3 Registration. The Company is currently not eligible to
register the Common Shares on a registration statement on Form S-3 under the
Securities Act.
3.12 No General Solicitation. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as described in Rule 502(c) under
Regulation D, with respect to any of the Securities being offered hereby.
3.13 No Integrated Offerings. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would prevent the parties hereto from
consummating the transactions contemplated hereby pursuant to an exemption from
the registration under the Securities Act pursuant to the provisions of
Regulation D. The transactions contemplated hereby are exempt from the
registration requirements of the Securities Act, assuming the accuracy of the
representations and warranties herein contained of each Purchaser.
3.14 No Brokers. The Company and the Purchasers acknowledge that the
Company has entered into an Agreement with Hagerty Stewart pursuant to which the
Company will pay Hagerty Stewart a fee in connection with the transactions
contemplated hereby. In addition, the Company has agreed to issue 25,000 shares
of its Common Stock to Scorpion Holdings, Inc. in connection with this
transaction. Except for the aforementioned agreements with Hagerty Stewart and
Scorpion Holdings, Inc., the Company has taken no action which would give rise
to any claim by any person for brokerage commissions, finder's fees or similar
payments relating to this Agreement or the transactions contemplated hereby.
3.15 INTENTIONALLY LEFT BLANK.
3.16 Key Employees. Each Key Employee as listed on Schedule 3.16 is
currently serving the Company in the capacity disclosed in Schedule 3.16. No Key
Employee, to the best of the knowledge of the Company and its subsidiaries, is,
or is now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best of the knowledge of the
Company and its subsidiaries, any intention to terminate his employment with; or
services to, the Company or any of its subsidiaries.
3.17 Rights Plan. The Company does not have in effect a shareholders
rights plan or similar plan in the nature of a "poison pill" except what is
disclosed in the Registration Statement.
ARTICLE IV
COVENANTS
4.1 Best Efforts. The parties shall use their best efforts to timely
satisfy each of the conditions described in Articles VI and VII of this
Agreement.
4.2 Securities Laws. The Company agrees to file a Form D with respect to
the Securities with the SEC as required under Regulation D and to provide a copy
thereof to each Purchaser within fifteen (15) days after the date of closing.
The Company shall, on or prior to the date of Closing, take such action as is
necessary to sell the Securities to each Purchaser under applicable securities
laws of the states of the United States, and shall provide evidence of any such
action so taken to each Purchaser on or prior to the date of the Closing.
4.3 Reporting Status. The Company is not presently subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Company has filed with the principal office of the Securities and Exchange
Commission (the "Commission") in Washington, DC, a Registration Statement on
Form S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"). At such time that the Registration Statement
becomes effective, the Company intends to file for registration under the 1934
Exchange Act and will become subject to the reporting requirements of the
Exchange Act. For the period ending two (2) years from the Closing, (a) the
Company shall then timely file all reports required to be filed with the SEC
pursuant to the Exchange Act, and the Company shall not terminate its status as
an issuer required to file reports under the Exchange Act even if the Exchange
Act or the rules and regulations thereunder would permit such termination, and
(b) the Company will maintain its ability to register its Common Stock on Form
S-3 if, and at such time, the Company becomes eligible to use Form S-3.
4.4 INTENTIONALLY LEFT BLANK
4.5 INTENTIONALLY LEFT BLANK
4.6 Information. For the period ending two (2) years from the Closing, the
Company agrees to send the following reports to each Purchaser until such
Purchaser transfers, assigns or sells all of its Securities in transactions in
which the transferee is (unless such transferee is an affiliate of the Company)
not subject to securities law resale restrictions: (a) within ten (10) business
days after the filing with the SEC, a copy of its Annual Report on Form 10-K,
its Quarterly Reports on Form 10-Q, any proxy statements and any Current Reports
on Form 8-K; and (b) within one (1) business day after release, copies of all
press releases issued by the Company or any of its subsidiaries. The Company
further agrees to promptly provide to any Purchaser any information with respect
to the Company, its properties, or its business or Purchasers investment as such
Purchaser may reasonably request; provided, however. that the Company shall not
be required to give any Purchaser any material nonpublic information. If any
information requested by a Purchaser from the Company contains material
nonpublic information, the Company shall inform the Purchaser in writing that
the information requested contains material nonpublic information and shall in
no event provide such information to Purchaser without the express written
consent of such Purchaser after being so informed.
4.7 Listing. For the period ending two (2) years from the Closing, the
Company shall use its reasonable best efforts to obtain and then continue the
uninterrupted quotation and trading of its Common Stock on the Nasdaq SmallCap
Market or the Nasdaq NMS; and, if so quoted and traded, comply in all respects
with the Company's reporting, filing and other obligations under the By-laws or
rules of the Nasdaq Small Cap Market or the Nasdaq NMS, as applicable.
4.8 Prospectus Delivery Requirement. Each Purchaser understands that the
Securities Act may require delivery of a prospectus relating to the Common Stock
in connection with any sale thereof pursuant to a registration statement under
the Securities Act covering the resale by such Purchaser of the Common Stock
being sold, and each Purchaser shall comply with the applicable prospectus
delivery requirements of the Securities Act in connection with any such sale.
4.9 Corporate Existence. For the period ending two (2) years from the
Closing, the Company shall maintain its corporate existence, except in the event
of a merger, consolidation or sale of all or substantially all of the Company's
assets, as long as the surviving or successor entity in such transaction (i)
assumes the Company's obligations hereunder and under the agreements and
instruments entered into in connection herewith and (ii) is a publicly traded
corporation whose common stock is listed for trading on the NASDAQ, the New York
Stock Exchange, the Pacific Stock Exchange or the American Stock Exchange.
4.10 INTENTIONALLY LEFT BLANK.
4.11 Pledging and Margining. Notwithstanding anything in this Agreement to
the contrary and assuming such Common Shares are eligible to be margined under
applicable regulations, Purchaser may pledge, margin or otherwise encumber the
Common Shares unless the result of any such activity would be that such Common
Shares would be available for lending and/or borrowing in connection with short
sales of the Common Stock by any third party.
4.12 INTENTIONALLY LEFT BLANK.
4.13 Use of Proceeds. The Company will use the proceeds of the sale of the
Securities for working capital or such other purposes as management of the
Company's Board of Directors shall determine.
4.14 INTENTIONALLY LEFT BLANK.
ARTICLE V
LEGEND REMOVAL, TRANSFER, AND CERTAIN SALES
5.1 Removal of Legend. The Legend shall be removed and the Company shall
issue a certificate without such Legend to the holder of any Security upon which
it is stamped, and a certificate for a security shall be originally issued
without the Legend, if. (a) the sale of such Security is registered under the
Securities Act, (b) such holder provides the Company with an opinion of counsel,
in form, substance and scope customary for opinions of counsel in comparable
transactions and reasonably satisfactory to the Company and its counsel (the
reasonable cost of which shall be borne by the Company if neither an effective
registration statement under the Securities Act nor Rule 144 is available in
connection with such sale) to the effect that a public sale or transfer of such
Security may be made without registration under the Securities Act pursuant to
an exemption from such registration requirements, (c) such Security can be sold
pursuant to Rule 144 and the holder provides the Company with reasonable
assurances that the Security can be so sold without restriction or (d) such
Security can be sold pursuant to Rule 144(k). Each Purchaser agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement, in accordance with the manner
of distribution described in such registration statement and to deliver a
prospectus in connection with such sale, or in compliance with an exemption from
the registration requirements of the Securities Act. In the event the Legend is
removed from any Security or any Security is issued without the Legend and the
Security is to be disposed of other than pursuant to the registration statement
or pursuant to Rule 144, then prior to, and as a condition to, such disposition
such Security shall be relegended as provided herein in connection with any
disposition if the subsequent transfer thereof would be restricted under the
Securities Act, Also, in the event the Legend is removed from any Security or
any Security is issued without the Legend and thereafter the effectiveness of a
registration statement covering the resale of such Security is suspended or the
Company determines that a supplement or amendment thereto is required by
applicable securities laws, then upon reasonable advance notice to Purchaser
holding such Security, the Company may require that the Legend be placed on any
such Security that cannot then be sold pursuant to an effective registration
statement or Rule 144 or with respect to which the opinion referred to in clause
(b) next above has not been rendered, which Legend shall be removed when such
Security may be sold pursuant to an effective registration statement or Rule 144
or such holder provides the opinion with respect thereto described in clause (b)
next above.
5.2 Transfer Agent Instructions. The Company shall or shall instruct its
transfer agent to issue certificates, registered in the name of each Purchaser
or its nominee, for the Securities. Such certificates shall bear the Legend only
to the extent provided by Section 5.1 above. The Company covenants that no
instruction other than such instructions referred to in the Article V, and stop
transfer instructions to give effect to Section 2.6 hereof in the case of the
Securities prior to registration of the Securities under the Securities Act,
will be given by the Company to its transfer agent and that the securities shall
otherwise be freely transferable on the books and records of the Company.
Nothing in this section shall affect in any way each Purchaser's obligations and
agreement et forth in Section 5.1 hereof to resell the Securities pursuant to an
effective registration statement and to deliver a prospectus in connection with
such sale or in compliance with an exemption from the registration requirements
of applicable securities laws. If (a) a Purchaser provides the Company with an
opinion of counsel in comparable transactions and reasonably satisfactory to the
Company and its counsel (the reasonable cost of which shall be borne by the
Company if neither an effective registration statement under the Securities Act
nor Rule 144 is available in connection with such sale), to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption form registration or (b) a Purchaser transfers Securities to an
affiliate which is an accredited investor (within the meaning of Regulation D
under the Securities Act) and which delivers to the Company in written form the
same representations, warranties and covenants made by Purchaser hereunder or
pursuant to Rule 144, the Company shall permit the transfer, and, in the case of
the Securities, issue or promptly instruct its transfer agent to issue one or
more certificates in such name and in such denomination as specified by such
Purchaser. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to a Purchaser by vitiating the intent and
purposes of the transaction contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Article V will be inadequate and agrees in the event of a breach or threatened
breach by the Company of the provisions of this Article V, that a Purchaser
shall be entitled in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
5.3 INTENTIONALLY LEFT BLANK
ARTICLE VI
CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL
6.1 Conditions to the Company's Obligation to Sell. The obligation of the
Company hereunder to issue and sell the Securities to a Purchaser at the Closing
is subject to the satisfaction, as of the Closing Date and with respect to such
Purchaser, of each of the following conditions thereto, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion:
(i) Such Purchaser shall have executed and delivered the signature page
to this Agreement, the Registration Rights Agreement and the Security
Agreement;
(ii) Such Purchaser shall have wired the Purchase Price to the account
designated by the Company;
(iii) The representations and warranties of such Purchaser shall be
true and correct in all material respects as of the date when made and
as of the Closing as though made at that time (except for
representations and warranties that speak as of a specific date), and
such Purchaser shall have performed, satisfied and complied in all
material respects with the covenants, agreements and conditions
required by this Agreement to be performed. satisfied or complied with
by the applicable Purchaser at or prior to the Closing;
(iv) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters
contemplated hereby which restricts or prohibits the consummation of
any of the transactions contemplated by this Agreement.
ARTICLE VII
CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE
7.1 The obligation of each Purchaser hereunder to purchase the Securities
to be purchased by it on the Closing date is subject to the satisfaction of each
of the following conditions, provided that these conditions are for each
Purchaser's sole benefit and may be waived by such Purchaser at any time in such
Purchaser's sole discretion:
(i) The Company shall have executed and delivered the signature page to
this Agreement, the Registration Rights Agreement and the Security
Agreement.
(ii) The Company shall have delivered to the Purchasers counsel duly
issued certificates for the Secured Promissory Notes and Warrants being
so purchased by Purchaser at the Closing.
(iii) INTENTIONALLY LEFT BLANK
(iv) The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of
the Closing as though made at that time and the Company shall have
performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the
Closing.
(v) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement
(vi) Purchaser shall have received an opinion of Horwitz & Beam,
counsel to the Company, dated as of the Closing, in the form attached
hereto as Exhibit F.
ARTICLE VIII
GOVERNING LAW; MISCELLANEOUS
8.1 Governing Law: Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of California which would
apply if both parties were residents of California and this Agreement was made
and performed in California. In any legal action involving this Agreement or the
parties' relationship, the Parties agree that the exclusive venue for any
lawsuit shall be in the state or federal court located within the County of
Orange, California. The parties agree to submit to the personal jurisdiction of
the state and federal courts located within Orange County, California.
8.2 Counterparts. This Agreement may be executed in two or more
counterparts, including, without limitation, by facsimile transmission, all of
which counterparts shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each party and delivered
to the other party. In the event any signature page is delivered by facsimile
transmission, the party using such means of delivery shall cause additional
original executed signature pages to be delivered to the other parties as soon
as practicable thereafter.
8.3Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
8.4Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction
8.5Entire Agreement: Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor any Purchaser makes any
representation, warranty, covenant or undertaking with respect to such manners.
No provision of this Agreement may be waived other than by an instrument in
writing signed by the party to be charged with enforcement and no provision of
this Agreement may be amended other than by an instrument in writing signed by
the Company and each Purchaser.
8.6 Notice. Any notice herein required or permitted to be given shall be
in writing and may be personally served or delivered by nationally-recognizable
overnight courier or by facsimile machine confirmed telecopy, and shall be
deemed delivered at the time and date of receipt (which shall include telephone
line facsimile transmission). The addresses for such communications shall be:
If to the Company:
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: Steve Antry
Phone: (949) 752-5212 Facsimile: (949) 752- 5757
With a copy to:
Horwitz & Beam
Two Venture Plaza, Suite 350
Irvine, CA 92618
Attention: Lynne Bolduc, Esq.
Phone: (949) 453-0300 Fax: (949) 453-9416
If to the Purchasers:
St. Cloud Investments, Ltd.
Dandelion Investments, Ltd.
Scorpion Holdings, Inc.
505 Park Avenue, 12th Floor
New York, NY 10022
Phone: (212) 207 - 9020 Fax; (212) 207-9050
With a copy to:
Robert T. Tucker, Esq.
61 Purchase Street, Suite 2
Rye, NY 10580
Phone: (914) 967 - 8105 Facsimile: (914) 967 - 8161
8.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and assigns. Each Purchaser
may assign its rights and obligations hereunder to any of its "affiliates," as
that term is defined under the Securities Act, without the consent of the
Company so long as such affiliate is an accredited investor (within the meaning
of Regulation D under the Securities Act) and agrees in writing to be bound by
this Agreement. This provision shall not limit each Purchaser's right to
transfer the Securities pursuant to the terms of this Agreement or to assign
such Purchaser's rights hereunder to any such transferee. In that regard, if
Purchaser sells all or part of its Securities to someone that acquires the
Securities subject to restrictions on transferability (other than restrictions,
if any, arising out of the transferee's status as an affiliate of the Company),
Purchaser shall be permitted to assign its rights hereunder, in whole or in
part, to such transferee.
8.8 Third Party Beneficiaries. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
8.9 Survival. The representations and warranties of the Company and the
agreements and covenants shall survive the closing hereunder notwithstanding any
due diligence investigation conducted by or on behalf of Purchaser. The Company
agrees to indemnify and hold harmless each Purchaser and each of each
Purchaser's officers, directors, employees, partners, agents and affiliates for
loss or damage arising as a result of or related to any breach or alleged breach
by the Company of any of its representations or covenants set forth herein. The
representations and warranties of the Purchasers shall survive the Closing
hereunder and each Purchaser shall indemnify and hold harmless the Company and
each of its officers, director. employees, partners, agents and affiliates for
any loss or damage arising as a result of the breach of such Purchaser's
representations and warranties.
8.10 INTENTIONALLY LEFT BLANK.
8.11 Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
8.12 Remedies. No provision of this Agreement providing for any remedy to
a Purchaser shall limit any remedy which would otherwise be available to such
Purchaser at law or in equity Nothing in this Agreement shall limit any rights a
Purchaser may have with any applicable federal or state securities laws with
respect to the investment contemplated hereby. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to a
Purchaser. Accordingly, the Company acknowledges that the remedy at law for a
material breach of its obligations under this Agreement will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Agreement, that a Purchaser shall be entitled, in addition to
all other available remedies, to an injunction restraining any breach and
requiring immediate compliance, without the necessity of showing economic loss
and without any bond or other security being required.
8.13 Final Agreement. This Agreement, the Registration Rights Agreement
and the Security Agreement, when executed by the parties hereof, shall
constitute the final agreement between the parties and upon such execution
Purchasers and the Company accept the terms hereof and have no cause of action
against each other for prior negotiations preceding the execution of this
Agreement.
8.14 Expenses. Each of the Company and the Purchasers shall be
responsibly for its own expenses in connection with this Agreement;
provided, however, that on the date hereof, the Company shall pay to
Scorpion Holdings, Inc., a sum not to exceed $15,000 in connection with
legal fees and expenses incurred by the Purchasers. Such amount shall be
paid to:
Scorpion Holdings, Inc.
505 Park Avenue, 12th Floor
New York, NY 10022
IN WITNESS WHEREOF, the undersigned Purchasers and the Company have caused this
Agreement to be duly executed as of the date first above written.
"COMPANY":
Beta Oil & Gas, Inc.
by ______________________
/s/J. Chris Steinhauser
Its: Chief Financial Officer and Director
"PURCHASERS":
St. Cloud Investments, Ltd. Dandelion Investments, Ltd.
a corporation a corporation
By: ______________________ By. __________________
Its: Its:
<PAGE>
SCHEDULES
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
JANUARY 20, 1999
Schedule 3.1 - None.
Schedule 3.3 - Attached.
Schedule 3.5 - None.
Schedule 3.6 - None.
Schedule 3.7 - None.
Schedule 3.8 - None.
Schedule 3.16 - Attached.
<PAGE>
SCHEDULE 3.3
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
JANUARY 20, 1999
CAPITALIZATION OF BETA OIL & GAS, INC.
The following table sets forth as of September 30, 1998 (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
that gives effect to the sale and issuance of shares of Common Stock in a
private placement completed subsequent to September 30, 1998; and (ii) the
capitalization of the Company on a pro forma basis as adjusted to give effect to
the proposed sale by the Company of a minimum of 600,000 shares and a maximum of
880,000 shares of Common Stock being offered in the initial public offering.
As of September 30, 1998
<TABLE>
-------------------------------------------------------------------------
Adjusted for Adjusted for
the Sale of the Sale of
Actual Pro Forma Minimum Offering Maximum
Offering
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Shareholders' Equity
Common shares, $.001 par value;
50,000,000 shares authorized;
6,725,192 shares issued and outstanding actual;
7,029,492 shares pro forma;
7,629,492 shares (Minimum Offering) and
7,909,492 (Maximum Offering) pro forma as
adjusted at September 30, 1998(1) $ 6,725 $ 7,029 $ 7,629 $ 7,909
Additional paid-in capital 14,540,548 15,909,594 18,950,994 20,412,314
Common Stock subscribed 1,261,350 - - -
Accumulated deficit (2,344,599) (2,344,599) (2,344,599) (2,344,599)
============== ============== ================= =================
Total shareholders' equity $ 13,464,024 $ 13,572,024 $ 16,614,024 $ 18,075,624
============== ============== ================= =================
<FN>
(1) Does not include 2,585,663 shares reserved for issuance on exercise of
outstanding Warrants to purchase Common Stock of the Company. All of the
presently outstanding shares of the Company and shares issuable upon
exercise of the 2,585,663 warrants have registration rights which will be
satisfied upon effectiveness of the current Registration Statement. There
will be an additional number of shares reserved for issuance underlying
warrants equal to 10% of the number of shares sold in the initial public
offering ("underwriter's warrants"). In addition, the minimum and the
maximum number of shares sold in the initial public offering may be changed
at the discretion of Company's management and the Underwriters.
Note: In addition, there may be an additional number of shares issuable pursuant
to common stock options in the event of termination without cause of Steve
Antry, President of the Company. This is pursuant to Mr. Antry's employment
contract with the Company.
</FN>
</TABLE>
<PAGE>
SCHEDULE 3.16
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
JANUARY 20, 1999
Key Employee
Mr. Steve Antry is serving the Company in the capacity of President and Chairman
of the Board. Neither the Company, nor any of its subsidiaries, is aware that
Mr. Antry is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of Mr. Antry does not subject
the Company or any of its subsidiaries to any liability with respect to any of
the foregoing matters. Mr. Antry, to the best of the knowledge of the Company
and its subsidiaries, does not have any intention to terminate his employment
with the Company or any of its subsidiaries.
<PAGE>
EXHIBIT A
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
JANUARY 20, 1999
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT dated as of January 20,
1999 (the "Agreement") is made by and between Beta Oil & Gas, Inc., a
Nevada Corporation, 901 Dove Street, Suite 230, Newport Beach, CA 92660
(the Company"), and the undersigned investors (the "Initial
Investors").
WITNESSETH:
WHEREAS, in connection with the Note and Common Stock Purchase
agreement dated January 20, 1999 among the Initial Investors and the
Company the "Purchase Agreement"), the Company has agreed, upon the
terms and subject to the conditions of said Purchase Agreement, to
issue and sell to the Initial Investors shares of Common Stock, $.001
par value, of the Company (the "Common Stock"). The shares of Common
Stock are referred to herein as the "Registrable Shares." In connection
with the sale of the Common Stock to the Initial Investors (the
"Offering"), each of such investors will be entitled to registration
rights as set forth in this Agreement.
WHEREAS, to induce the Initial Investors to execute and
deliver the Purchase Agreement, the Company has agreed to provide
certain registration rights under the Securities Act of 1933, as
amended, and the rules and regulations thereunder, or any similar
successor statute (collectively, the 'Securities Act"), and applicable
state securities laws with respect to the Registrable Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
Covenants contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged1 the
Company and the Initial Investors hereby agree as follows:
1. Definitions. Capitalized terms used herein and not
otherwise defined herein shall have the respective meanings set forth
in the Purchase Agreement as used in this Agreement. The following
terms shall have the following meanings:
(a) "Holders" are shareholders of the Company who, by virtue
of agreements with the Company, are entitled to include
certain of their securities in certain Registration Statements
filed by the Company.
(b) "Investors" means the initial Investors and any permitted
transferee or assignee of the initial investors who agrees to
become bound by the provisions of this Agreement in accordance
with Section 9 hereof.
(c) "Registrable Securities" means the Registrable Shares,
together with any shares of Common Stock or other securities
which may be issued as a dividend or other distribution or in
exchange for Registrable Shares or common shares issued or
which may be issued pursuant to paragraph 1.3B of the Purchase
Agreement which are required to be included in a Registration
Statement pursuant to Section 2(a) below.
(d) "Registration Period" means the period between the date of
this Agreement and the earlier of (i) the date on which all of
the Registrable Securities have been sold in transactions
where the transferee is not subject to securities law resale
restrictions (or is subject to securities law resale
restrictions solely because it is an "affiliate" of the
Company under the Securities Act and the Rules and Regulations
promulgated thereunder), or (ii) the date on which the
Registrable Securities (in the opinion of Investors' counsel)
may be immediately sold without registration and free of
restrictions on transfer.
(e) "Registration Statement" means a registration statement of
the Company filed with the Securities and Exchange Commission
(the "SEC") under the Securities Act.
(f) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a
Registration Statement in compliance with the Securities Act
and applicable rules and regulations thereunder and pursuant
to Rule 415 under the Securities Act, and the declaration or
ordering of effectiveness of such Registration Statement by
the SEC.
2. Registration.
(a) Mandatory Registration. Subject to Section 4, the Company will prepare
and file a Registration Statement with the SEC, registering all of the
Registrable Shares for resale promptly following 180 days after the closing
date of the Company's initial public offering (the "Closing Date").
Notwithstanding the foregoing right of registration, the Investors shall
have the right to include the Registrable Securities in any Registration
Statement filed by the Company subsequent to the Closing Date. However,
this does not include the registration statement filed by the Company on
December 4, 1998 or any amendments or supplements thereto. To the extent
allowable under the Securities Act and the Rules promulgated thereunder,
the Registration Statement shall include the Registrable Shares. The
Registration Statement (and each amendment or supplement thereto) shall be
provided to and subject to the reasonable approval of, the Initial
Investors and their counsel. The Company shall use its best efforts to
cause such Registration Statement to be declared effective by the SEC as
soon as practicable after filing. Such best efforts shall include, but not
be limited to, promptly responding to all comments received from the staff
of the SEC. Should the Company receive notification from the SEC that the
Registration Statement will receive no action or no review from the SEC,
the Company shall cause such Registration Statement to become effective
within fifteen (15) business days of such SEC notification. Once declared
effective by the SEC. the Company shall cause such Registration Statement
to remain effective throughout the Registration Period.
(b) INTENTIONALLY LEFT BLANK
(c) INTENTIONALLY LEFT BLANK
3. Additional Obligations of the Company. In connection with
the registration of the Registrable Securities, the Company shall
have the following additional obligations:
(a) The Company shall keep the Registration Statement
required by Section 2(a) hereof effective pursuant to
Rule 415 under the Securities Act at all times during
the Registration Period as defined
in Section 1(d) above.
(b) The Registration Statement (including any
amendments or supplements thereto and prospectuses
contained therein) filed by the Company shall not
contain any untrue statement of a material fact or
omit to state a material fact required to be stated
therein1 or necessary to make the statements therein,
in light of the circumstances in which they were
made, not misleading. The Company shall prepare and
file with the SEC such amendments (including
post-effective amendments) and supplements to the
Registration Statement and the prospectus used in
connection with the Registration Statement as may be
necessary to keep the Registration Statement
effective at all times during the Registration
Period1 and, during such period, shall comply with
the provisions of the Securities Act with respect to
the disposition of all Registrable Securities of the
Company covered by the Registration Statement until
such time as all of such Registrable Securities have
been disposed of in accordance with the intended
methods of disposition by the sellers thereof as set
forth in the Registration Statement in the event the
number of shares of Common Stock included in a
Registration Statement filed pursuant to this
Agreement is insufficient to cover all of the
Registrable Securities, the Company shall amend, if
permissible, the Registration Statement and/or file a
new Registration Statement so as to cover all of the
Registrable Securities as soon as practicable, but in
no event more than twenty (20) business days after
the Company first determines (or reasonably should
have determined) the need therefor, the Company shall
use its best efforts to cause such amendment and/or
new Registration Statement to become effective as
soon as practicable following the filing thereof.
(c) The Company shall furnish to each Investor whose
Registrable Securities are included in the
Registration Statement (i) promptly after the same is
prepared and publicly distributed, filed with the SEC
or received by the Company, one copy of the
Registration Statement and any amendment thereto;
each preliminary prospectus and final prospectus and
each amendment or supplement thereto; and, in the
case of the Registration Statement required under
Section 2(a) above, each letter written by or on
behalf of the Company to the SEC and each item of
correspondence from the SEC, in each case relating to
such Registration Statement (other than any portion
of any item thereof which contains information for
which the Company has sought confidential treatment);
and (ii) such number of copies of a prospectus,
including a preliminary prospectus, and all
amendments and supplements thereto, and such other
documents as such Investor may reasonably request in
order to facilitate the disposition of the
Registrable Securities owned by such Investor.
(d) The Company shall use its best efforts to (i)
register and qualify the Registrable Securities
covered by the Registration Statement under such
other securities or blue sky laws of such
jurisdictions as the Investors reasonably request,
(ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and
supplements to such registrations as may be necessary
to maintain the effectiveness thereof during the
Registration Period, (iii) take such other actions as
may be necessary to maintain such registrations and
qualifications in effect at all times during the
Registration Period, and (iv) take all other actions
reasonably necessary or advisable to qualify the
Registrable Securities for sale in such
jurisdictions. Notwithstanding the foregoing
provision, the Company shall not be required in
connection therewith or as a condition thereto to (i)
qualify to do business in any jurisdiction where it
would not otherwise be required to qualify but for
this Section 3(d), (ii) subject itself to general
taxation in any such jurisdiction, (iii) file a
general consent to service of process in any such
jurisdiction, (iv) provide any undertakings that
cause more than nominal expense or burden to the
Company, or (v) make any change in its charter or
bylaws, which in each case the Board of Directors of
the Company determines to be contrary to the best
interests of the Company and its shareholders.
(e) INTENTIONALLY LEFT BLANK
(f) The Company shall notify each Investor who holds
Registrable Securities being sold pursuant to a
Registration Statement of the happening of any event
of which the Company has knowledge as a result of
which the prospectus included in the Registration
Statement as then in effect includes an untrue
statement of a material fact or omits to state a
material fact required to be stated therein or
necessary to make the statements therein, in light of
the circumstances under which they were made not
misleading (a "Suspension Event") The Company shall
make such notification as promptly as practicable
after the Company becomes aware of such Suspension
Event, shall promptly, but in all events within five
(5) business days after becoming aware of such
Suspension Event1 use its best efforts to prepare a
supplement or amendment to the Registration Statement
to correct such untrue statement or omission and
shall deliver a number of copies of such supplement
or amendment to each Investor as such Investor may
reasonably request. Notwithstanding the foregoing
provision, the Company shall not be required to
maintain the effectiveness of the Registration
Statement or to amend or supplement the Registration
Statement for a period (a "Delay Period") expiring
upon the earlier to occur of (i) the date on which
such material information is disclosed to the public
or ceases to be material, (ii) the date on which the
Company is able to comply with its disclosure
obligations and SEC requirements related thereto, or
(iii) thirty (30) days after the occurrence of the
Suspension Event.
(g) The Company shall use its best efforts to prevent
the issuance of any stop order or other suspension of
effectiveness of a Registration Statement and, if
such an order is issued, shall use its best efforts
to obtain the withdrawal of such order at the
earliest possible time and to notify each Investor
who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing
underwriters) of the issuance of such order and the
resolution thereof.
(h) The Company shall permit a single firm of counsel
designated by the Investors who hold a majority in
interest of the Registrable Securities being sold
pursuant to such registration to review the
Registration Statement and all amendments and
supplements thereto (as well as all requests for
acceleration or effectiveness thereof) a reasonable
period of time prior to their filing with the SEC,
and shall not file any document in a form to which
such counsel reasonably objects. The Company shall
make generally available to its security holders as
soon as practical, but not later than ninety (90)
days after the close of the period covered thereby,
an earnings statement (in a form complying with the
provisions of Rule 155 under the Securities Act)
covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter
following the effective date of the Registration
Statement.
(i) At the request of any Investor who holds
Registrable Securities being sold pursuant to such
registration, the Company shall furnish on the date
that Registrable Securities are delivered to an
underwriter for sale in connection with the
Registration Statement (i) a letter, dated such date,
from the Company's independent certified public
accountants in form and substance as is customarily
given by independent certified public accountants to
underwriters in an underwritten public offering,
addressed to the investors; and (ii) an opinion,
dated such date, from counsel representing the
Company for purposes of such Registration Statement
in form and substance as is customarily given in an
underwritten public offering, addressed to the
underwriters and Investors.
(k) The Company shall make available for inspection by
any Investor whose Registrable Securities are being
sold pursuant to such registration, any underwriter
participating in any disposition pursuant to the
Registration Statement, and any attorney, accountant
or other agent retained by any such Investor or
underwriter (collectively, the "Inspectors"), all
pertinent financial and other records, pertinent
corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably
necessary to enable each Inspector to exercise its due
diligence responsibility. and use its best efforts to
cause the Company's officers, directors and employees
to supply all information which any Inspector may
reasonably request for purposes of such due diligence;
provided, however, that each Inspector shall hold in
confidence and shall not make any disclosure (except
to an Investor) of any Record or other information
which the Company determines in good faith to be
confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure
of such Records is necessary to avoid or correct a
material misstatement or material omission in any
Registration Statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other
order from a court or government body of competent
jurisdiction. or such release is reasonably necessary
in connection with litigation or other legal process
or (iii) the information in such Records has been made
generally available to the public other than by
disclosure in violation of this or any other
agreement. The Company shall not be required to
disclose any confidential information in such Records
to any Inspector until and unless such Inspector shall
have entered into confidentiality agreements (in form
and substance satisfactory to the Company) with the
Company with respect thereto1 substantially in the
form of this Section 3(k). Each Investor agrees that
it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental
body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the
Company, at the Company's expense. to undertake
appropriate action to prevent disclosure of, or to
obtain a protective order for, the Records deemed
confidential. Nothing herein shall be deemed to limit
the Investor's ability to sell Registrable Securities
in a manner which is otherwise consistent with
applicable laws and regulations.
(l) The Company shall hold in confidence and shall
not make any disclosure of information concerning an
Investor provided to the Company pursuant hereto
unless (i) disclosure of such information is
necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is
necessary to avoid or correct a misstatement or
omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a
subpoena or other order from a court or governmental
body of competent jurisdiction, or such release is
reasonably necessary in connection with litigation or
other legal process or (iv) such information has been
made generally available to the public other than by
disclosure in violation of this or any other
agreement. The Company agrees that it shall, upon
learning that disclosure of such information
concerning an Investor is sought in or by a court or
Governmental body of competent jurisdiction or
through other means, give prompt notice to such
Investor and allow such Investor, at its expense, to
undertake appropriate action to prevent disclosure
of, or to obtain a protective order for, such
information.
(m) The Company shall use its best efforts to cause
all the Registrable Securities covered by the
Registration Statement to be listed on each national
securities exchange on which similar securities
issued by the Company are then listed, if any, if the
listing of such Registrable Securities is then
permitted under the rules of such exchange.
(n) The Company shall provide a transfer agent and
registrar, which may be a single entity, for the
Registrable Securities not later than the effective
date of the Registration Statement.
(o) The Company shall cooperate with the Investors who hold Registrable
Securities being sold and the managing underwriter or underwriters, if any,
to facilitate the timely preparation and delivery of certificates (not
bearing any restrictive legends) representing Registrable Securities to be
sold pursuant to the Registration Statement and enable such certificates to
be in such denominations or amounts as the case may be, and registered in
such names as the managing underwriter or underwriters if any. or the
Investors may reasonably request, and within three (3) business days after
a Registration Statement which includes Registrable Securities is ordered
effective by the SEC, the Company shall deliver, and shall cause legal
counsel selected by the Company to deliver, to the transfer agent for the
Registrable Securities (with copies to the Investors whose Registrable
Securities are included in such Registration Statement) instructions to the
transfer agent to issue new stock certificates without a legend and an
opinion of such counsel that the Registrable Shares have been registered.
(p) The Company shall take all other reasonable
actions necessary to expedite and facilitate
disposition by the Investor of the Registrable
Securities pursuant to the Registration Statement.
(q) At the request of any Investor, the Company shall
promptly prepare and file with the SEC such
amendments (including post effective amendments) and
supplements to a Registration Statement and the
prospectus used in connection with the Registration
Statement as may be necessary in order to change the
plan of distribution set forth in such Registration
Statement to conforming to written information
supplied to the Company by such investor for such
purpose.
(r)The Company shall comply with all applicable laws
related to a Registration Statement and offering and
sale of securities and all applicable rules and
regulations of governmental authorities in connection
therewith.
(s)INTENTIONALLY LEFT BLANK.
(t) INTENTIONALLY LEFT BLANK
4. Obligations of the Investors. In connection with
the registration of the Registrable Securities, the Investors
shall have the following obligations:
(a) it shall be a condition precedent to the obligations of the Company to
take any action pursuant to this Agreement with respect to each Investor
that such Investor shall furnish to the Company such information regarding
itself the number of Registrable Securities held by it and the intended
method of disposition of the Registrable Securities held by it as shall be
reasonably required by rules of the SEC to effect the registration of the
Registrable Securities. The information so provided by the Investor shall
be included without material alteration in the Registration Statement and
shall not be materially modified without such investors written consent. At
least ten (10) business days prior to the first anticipated filing date of
the Registration Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor (the "Requested
Information") if such Investor elects to have any of such investor's
Registrable Securities included in the Registration Statement. If within
five (5) business days of such notice the Company has not received the
Requested Information from an Investor (a "Non-Responsive Investor"), then
the Company may file the Registration Statement without including
Registrable Securities of such Non-Responsive Investor. The Non-Responsive
Investor shall then have no continuing right to demand registration of
their unregistered Common Stock, but shall continue to have the right to
include the Registrable Securities in any subsequent Registration Statement
filed by the Company.
(b) Each Investor, by such Investors acceptance of
the Registrable Securities agrees to cooperate with
the Company as reasonably requested by the Company in
connection with the preparation and filing of the
Registration Statement hereunder, unless such
Investor has notified the Company in writing of such
Investors election to exclude all of such investor's
Registrable Securities from the Registration
Statement.
(c) In the event Investors holding a majority in
interest of the Registrable Securities being
registered determine to engage the services of an
underwriter, each Investor agrees to enter into and
perform such Investor's obligations under an
underwriting agreement in usual and customary form,
including, without limitation, customary
indemnification and contribution obligations, with
the managing underwriter of such offering and take
such other actions as are reasonably required in
order to expedite or facilitate the disposition of
the Registrable Securities, unless such Investor has
notified the Company in writing of such Investor's
election to exclude all of such Investor's
Registrable Securities from the applicable
Registration Statement. No Investor shall be
obligated to participate in any such underwriting.
(d) Each Investor agrees that upon receipt of any
notice from the Company of the happening of any event
of the kind described in Section 3(f) or 3(g), such
Investor will immediately discontinue disposition of
Registrable Securities pursuant to the Registration
Statement covering such Registrable Securities until
such Investor's receipt of the copies of the
supplemented or amended prospectus contemplated by
Section 3(f) or 3(y) and, if so directed by the
Company, such Investor shall deliver to the Company
(at the expense of the Company) or destroy (and
deliver to the Company a certificate of destruction)
all copies, other than file copies, in such
Investor's possession, of the prospectus covering
such Registrable Securities current at the time of
receipt of such notice.
(e) No Investor may participate in any underwritten
registration hereunder unless such Investor (i)
agrees to sell such Investors Registrable Securities
on the basis provided in any underwriting
arrangements approved by the Investors entitled
hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms
of such underwriting arrangements, and (iii) agrees
to pay its pro rata share of all underwriting
discounts and commissions and other fees and expenses
of investment bankers and any manager or managers of
such underwriting and legal expenses of the
underwriter applicable with respect to its
Registrable Securities, in each case to the extent
not payable by the Company pursuant to the terms of
this Agreement.
5. Expenses of Registration. All expenses, other than
underwriting discounts and commissions and the fees and
disbursements of one counsel selected by the Initial Investors
pursuant to Section 3(e) hereof, incurred in connection with
registrations, filings or qualifications pursuant to Sections
2 and 3, including, without limitation, all registration,
listing and qualifications fees, printers and accounting fees,
and the fees and disbursements of counsel for the Company,
shall be borne by the Company.
6. Indemnification. In the event any Registrable Securities
are included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Investor who holds
such Registrable Securities, the directors, if any,
of such Investor, the officers, if any, of such
Investor, each person, if any, who controls any
Investor within the meaning of the Securities Act or
the Exchange Act any underwriter (as defined in the
Securities Act) for the Investors, the directors, if
any. of such underwriter and the officers, if any, of
such underwriter, and each person, if any, who
controls any such underwriter within the meaning of
the Securities Act or the Exchange Act (each, an
"Indemnified Person"), against any losses, claims,
damages, expenses (including legal fees in compliance
with Section 6 (c)) or liabilities joint or several
(collectively "Claims") to which any of them become
subject under the Securities Act, the Exchange Act or
otherwise, insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any
of the following statements, omissions or violations
in the Registration Statement, or any post-effective
amendment thereof, or any prospectus included
therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the
Registration Statement or any post-effective
amendment thereof or the omission or alleged omission
to state therein a material fact required to be
stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or
alleged untrue statement of a material fact contained
in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or
contained in the final prospectus (as amended or
supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the
omission or alleged omission to state therein any
material fact necessary to make the statements made
therein, in light of the circumstances under which
the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the
Company of the Securities Act, the exchange Act or
any state securities law or any rule or regulation
(the matters in the foregoing clauses (i) through
(iii) being, collectively, 'Violations"). Subject to
the restrictions Set forth in Section 6(c) with
respect to the number of legal counsel, the Company
shall reimburse the Investors and each such
underwriter or controlling person for any legal fees
or other reasonable expenses incurred by them in
connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary
contained herein1 the indemnification agreement
contained in this Section 6(a): (A) shall not apply
to a Claim arising out of or based upon a Violation
which occurs in reliance upon and in conformity with
information furnished in writing to the Company by
any Indemnified Person or underwriter for such
Indemnified Person expressly for use in connection
with the preparation of the Registration Statement or
any such amendment thereof or supplement thereto1 if
the prospectus contained in such Registration
Statement was timely made available by the Company
pursuant to Section 3(c) hereof, (B) with respect to
any preliminary prospectus shall not inure to the
benefit of any such person from whom the person
asserting any such Claim purchased the Registrable
Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the
untrue statement or omission of material fact
contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented.
if a prospectus was timely made available by the
Company pursuant to Section 3(c) hereof, and (C)
shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the
prior written consent of the Company, which consent
shall not be unreasonably withheld. Such indemnity
shall remain in full force and effect regardless of
any investigation made by or on behalf of the
Indemnified Persons and shall survive the transfer of
the Registrable Securities by the Investors pursuant
to Section 9.
(b) In connection with any Registration Statement in
which an Investor is participating, each such
investor, severally and not jointly, agrees to
indemnify and hold harmless, to the same extent and
in the same manner set forth in Section 6(a), the
Company, each of its directors, each of its officers
who signs the Registration Statement, each person, if
any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, its
attorneys, any underwriter and any other stockholder
selling securities pursuant to the Registration
Statement or any of its directors or officers or any
person who controls such stockholder or underwriter
within the meaning of the Securities Act or the
Exchange Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against
any Claim to which any of them may become subject,
under the Securities Act, the Exchange Act or
otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent
(and only to the extent) that such Violation occurs
in reliance upon and in conformity with written
information furnished to the Company by such Investor
expressly for use in connection with such
Registration Statement and such Investor will
promptly reimburse any legal or other expenses
reasonably incurred by them in connection with
investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in
this Section 6(b) shall not apply to amounts paid in
settlement of any Claim if such settlement is
effected without the prior written consent of such
Investor which consent shall not be unreasonably
withheld. Such indemnity shall remain in full force
and effect regardless of any investigation made by or
on behalf of such indemnified Party and shall survive
the transfer of the Registrable Securities by the
Investors pursuant to Section 9 Notwithstanding
anything to the contrary contained herein4 the
indemnification agreement contained in this Section
6(b) with respect to any preliminary prospectus shall
not inure to the benefit of any Indemnified Party if
the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected
on a timely basis in the prospectus; as then amended
or supplemented.
(c) Promptly after receipt by an Indemnified Person
or Indemnified Party under this Section 6 of notice
of the commencement of any action (including any
governmental action)1 such Indemnified Person or
Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party
under this Section 6, deliver to the indemnifying
party a written notice of the Commencement thereof
and this indemnifying party shall have the right to
panicipate in) and, to the extent the indemnifying
party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to
the indemnifying parties; provided. however, that an
Indemnified Person or Indemnified Party shall have
the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by
the indemnifying party, the representation by such
counsel of the Indemnified Person or Indemnified
Party and the indemnifying party would be
inappropriate due to actual or potential differing
interests between such Indemnified Person or
Indemnified Party and other party represented by such
counsel in such proceeding. The Company shall pay for
only one separate legal counsel for the Investors;
such legal counsel shall be selected by the Investors
holding a majority in interest of the Registrable
Securities. The failure to deliver written notice to
the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve
such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this
Section 6, except to the extent that the indemnifying
party is prejudiced in its ability to defend such
action.
7. Contribution. If the indemnification provided for in
Section 6 herein is unavailable to the Indemnified Parties in respect
of any losses, claims, damages or liabilities referred to herein (other
than by reason of the exceptions provided therein), then each such
Indemnifying Party, in lieu of indemnifying such Indemnified Party,
shall contribute to the amount paid or payable by such Indemnified
Party as a result of such losses, claims, damages or liabilities as
between the Company on the one hand and any Investor on the other, in
such proportion as is appropriate to reflect the relative fault of the
Company and of such Investor in connection with the statements or
Omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations,
The relative fault of the Company on the one hand and of any Investor
on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material tact or
omission or alleged omission to state a material fact relates to
information supplied by the Company or by such Investor,
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 7 exceed the amount that such
Indemnifying Party would have been obligated to pay by way of
indemnification if the indemnification provided for under Section 6(a)
or 6(b) hereof had been available under the circumstances.
The Company and the Investors agree that it would not be just
and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Investors or the
underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraphs. The
amount paid or payable by an Indemnified Party as a result of the
losses, claims, damages and liabilities referred to in the immediately
preceding paragraphs shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such Indemnified Party in connection with investigating or
defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
8. Public Information. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act
or any other similar rule or regulation of the SEC that may at any time
permit the Investors to sell securities of the Company to the public
without registration ("Rule 144"), the Company agrees to:
(a) File with the SEC in a timely manner and make and keep
available all reports and other documents required of the
Company under the Exchange Act at such time that the Company
becomes subject to and so long as the Company remains subject
to, such requirements and the filing and availability of such
reports and other documents is required for the applicable
provisions of Rule 144; and
(b) Furnish to each Investor so long as such Investor holds
Registrable Securities promptly upon request, (i) a written
statement by the Company that it has complied with the
reporting requirements of Rule 144 and the Exchange Act (if
and when applicable), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and
documents so filed by the Company and (iii) such other
information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without
registration.
9. Assignment of Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement
shall be automatically assigned by the Investors to transferees or
assignees of all or any portion of such securities only if:
(i) the Investor agrees in writing with the
transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company
within a reasonable time after such assignment, (ii)
the Company is, within a reasonable time after such
transfer or assignment furnished with written notice
of the name and address of such transferee or
assignee and the securities with respect to which
such registration rights are being transferred or
assigned, (iii) following such transfer or assignment
the further disposition of such securities by the
transferee or assignee is restricted under the
Securities Act and applicable state securities laws,
(iv) at or before the time the Company received the
written notice contemplated by clause (ii) of this
sentence, the transferee or assignee agrees in
writing with the Company to be bound by all of the
provisions contained herein, (v) such transfer shall
have been made in accordance with the applicable
requirements of the Purchase Agreement and (vi) such
transferee shall be an "accredited investor" as that
term is defined in Rule 501 of Regulation D
promulgated under the Securities Act.
10. Amendment of Registration Rights Provisions of this
Agreement may be amended and the observance thereof may be waived
(either generally or in a particular instance and either retroactively
or prospectively) only with the written consent of the Company and
Investor's holding sixtyfive percent of the Registerable Securities.
Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.
11. Miscellaneous.
(a) Conflicting Instructions. A person or entity is deemed to
be a holder of Registrable Securities whenever such person or
entity owns of record such Registrable Securities. If the
Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to
the same Registrable Securities, the Company shall act upon
the basis of instructions, notice or election received from
the registered owner of such Registrable Securities.
(b) Notices. Any notices required or permitted to be given
under the terms of this Agreement shall be sent by certified
or registered mail (with return receipt requested) or
delivered personally or by courier (including a nationally
recognized overnight delivery service) or by facsimile
transmission. Any notice so given shall be deemed effective
upon receipt if delivered personally, by U.S. Mail or by
courier or facsimile transmission, in each case addressed to a
party at the following address or such other address as each
such party furnishes to the other in accordance with this
Section 11(b). and;
If to the Company:
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: J. Chris Steinhauser
Phone: (949) 752 -5212
Fax: (949) 752 -5757
With copy to:
Horwitz & Beam
Two Venture Plaza, Suite 350
Irvine1 CA 92618
Attention: Lynne Buldoc, Esq.
Phone: (949) 453-0300
Fax: (949) 453 - 9416
if to the Investors:
St. Cloud Investments, Ltd.
Dandelion Investments, Ltd.
C/O Scorpion Holdings, Inc.
505 Park Avenue1 12th Floor
New York, NY 10022
Phone: (212) 207-9020
Fax: (212) 207 - 9050
With a copy to:
Robert T. Tucker, Esq.
61 Purchase Street, Suite 2
Rye, NY 10580
Phone: (914) 967 - 5105
Facsimile: (914) 967 - 8161
(c) Waiver. Failure of any party to exercise any right or
remedy under this Agreement or otherwise, or delay by a party
in exercising such right or remedy, shall not operate as a
waiver thereof
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of
California which would apply if both parties were residents of
California and this Agreement was made and performed in
California. In any legal action involving this Agreement or
the parties' relationship, the parties agree that the
exclusive venue for any lawsuit shall be in the state or
federal court located within the County of Orange, California.
The parties agree to submit to the personal jurisdiction of
the state and federal courts located within Orange County,
California.
(e) Severability. In the event that any provision of this
Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule
of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or
enforceability of any other provision hereof.
(f) Entire Agreement. This Agreement and the Purchase
Agreement (including all schedules and exhibits thereto)
constitute the entire agreement among the parties hereto with
respect to the subject matter hereof. There are no
restrictions1 promises, warranties or undertakings, other than
those set forth or referred to herein or therein. This
Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter
hereof.
(g) Successors and Assigns. Subject to the requirements of
Section 9 hereof, this Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the
parties hereto.
(h) Use of Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or
plural, as the context may require.
(i) Headings. The headings and subheadings in the Agreement
are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof.
(j) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original
but all of which shall constitute one and the same agreement.
This Agreement once executed by a party, may be delivered to
the other party hereto by facsimile transmission, and
facsimile signatures shall be binding on the parties hereto.
(k) Further Acts. Each party shall do and perform1 or cause to
be done and performed, all such further acts and things1 and
shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party
may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation
of the transactions contemplated hereby.
(l) Remedies. No provision of this Agreement providing for any
remedy to a Investor shall limit any remedy which would
otherwise be available to such Investor at law or in equity.
Nothing in this Agreement shall limit any rights a Investor
nay have with any applicable federal or state securities laws
with respect to the investment contemplated hereby. The
Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to a Investor.
Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Agreement will be
inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Agreement,
that a Investor shall be entitled, in addition to all other
available remedies to an injunction restraining any breach and
requiring immediate compliance, without the necessity of
showing economic loss and without any bond or other security
being required.
(m) Consents. All consents and other determinations to be made
by the Investors pursuant to this Agreement shall be made by
investors holding sixty-five percent of the Registrable
Securities.
IN WITNESS WHEREOF, the parties have caused this
Registration Rights Agreement to be duly executed as of the date
first above written.
COMPANY:
Beta Oil & Gas, Inc.
By ______________________
/s/J. Chris Steinhauser
Its: Chief Financial Officer and Director
INVESTORS:
St. Cloud Investments, Ltd. Dandelion Investments, Ltd..
a corporation a corporation
By: ______________________ By. __________________
Its: Its:
<PAGE>
EXHIBIT B
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
JANUARY 20, 1999
SECURITY AGREEMENT
This SECURITY AGREEMENT (this "Agreement') is made and entered into as of this
20th day of January, 1999, by and between Beta Oil & Gas, Inc., a Nevada
corporation ("Debtor") and St. Cloud Investments, Ltd., a _______ corporation
("St. Cloud"), and Dandelion Investments, Ltd., a ________ corporation
("Dandelion"). St. Cloud and Dandelion are referred to herein as the "Secured
Parties".
RECITALS
A. Debtor and the Secured Parties are parties to that certain Note and Common
Stock Purchase Agreement dated of even date herewith (the "Purchase Agreement").
B. As security for Debtor's obligations to the Secured Parties under Those
certain Secured Promissory Notes dated of even date herewith issued to the
Secured Parties pursuant to the Purchase Agreement (the "Secured Promissory
Notes"), Debtor has agreed to execute this Agreement granting to Secured Parties
a security interest in all of the assets of Debtor.
AGREEMENT
In consideration of the foregoing recitals and the mutual covenants and
conditions contained herein, the parties, intending to be legally bound, agree
as follows:
1. Grant of Security Interest Debtor hereby grants to Secured Parties, along
with additional secured parties to be defined at a later date in a second
tranche of like financing not to exceed $1,000,000, to secure all of Debtors
obligations under the Secured Promissory Notes, a security interest in all of
the assets of Debtor, including, without limitation, all of Debtor's presently
existing or hereafter acquired right, title and interest in and to all of
Debtor's assets, tangible and intangible, including without limitation, the
following: All equipment, inventory, accounts, instruments, documents, oil and
gas leases, productive wells, seismic data, chattel paper, general intangibles,
contracts, money and proceeds and products of the foregoing (collectively, the
"Collateral").
2. Use of Collateral in Absence of Default. Until a Default (as defined in
Section 3 below), Debtor may use the Collateral in any lawful manner not
inconsistent with this Agreement and may sell its inventory in the ordinary
course of business. Debtor will maintain the Collateral in good working order
and condition, normal wear and tear excepted, and will not cause or permit any
waste or unusual or unreasonable depreciation thereof.
3. Default by Debtor. A "Default" shall mean an Event of Default as defined in
the Secured Promissory Notes.
4. Remedies of Secured Party. Upon and after a Default, each Secured Party and
its respective assigns, shall have all of the rights and remedies of a secured
party under the Uniform Commercial Code or other applicable law in all relevant
jurisdictions, all of which rights and remedies shall be cumulative and
nonexclusive to the extent permitted by law.
5. Relationship of the Secured Parties The rights of the Secured Parties
hereunder shall rank pari passu and any action taken by any Secured Party
hereunder shall inure to the benefit of each other Secured Party, pro rata in
accordance with the aggregate amounts due and owing to such Secured Party under
the Secured Promissory Note held by such Secured Party.
6. Notice. Any notice required to be given by any Secured Party on a sale,
lease, other disposition of the Collateral or any other intended action and such
Secured Party, if given ten (10) business days prior to such proposed action,
shall constitute commercially reasonably fair notice thereof to Debtor.
7. Financing Statements. Debtor agrees to execute from time to time such
financing statements and such additional instruments as may be reasonably
required by the Secured Parties to preserve and perfect the security interests
created hereby.
8. Termination of Lien. Upon Debtor's payment in full of all amount:; due and
owing under the Secured Promissory Notes, the Secured Parties shall cause an
appropriate UCC termination statement or other instruments as required to be
filed with the appropriate government offices in all of the states, counties, or
otherwise in which financing statements or such other instruments were filed
pursuant to Section 7.
9. General Provisions
9.1 Choice of Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California, which would apply if both
parties were residents of California and this Agreement was made and performed
in California. In any legal action involving this Agreement or the parties'
relationship, the parties agree that the exclusive venue for any lawsuit shall
be in the state or federal court located within the County of Orange,
California. The parties agree to submit to the personal jurisdiction of the
state and federal courts located within Orange County, California.
9.2 Severability. Each provision of this Agreement is intended to be severable.
Should any provision of this Agreement or the application thereof be judicially
declared to be or becomes unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the party hereto. The parties further agree to replace such
unenforceable provision of this Agreement with an enforceable provision that
will achieve, to the extent possible, the economic, business and other purposes
of such unenforceable provision
9.3 Assignability. Except in connection with a change in control or sale of
substantially all of the assets of a party, neither this Agreement nor any
interest herein shall be assignable (voluntarily. involuntarily, by judicial
process or otherwise), in whole or in part, by any party to any other entity
without the prior written consent of the other party. Any attempt at such an
assignment without such consent shall be void.
9.4 Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Security Agreement, or to seek damages for a breach of any
provision hereof is validly asserted as a defense, the successful party shall be
entitled to recover reasonable attorneys' feesin addition to any other available
remedy.
9.5 Successors and Assigns. Each of the terms, provisions and obligations of
this Agreement shall be binding upon, shall inure to the benefit of, and shall
be enforceable by the parties and their respective legal representatives,
successors and permitted assigns.
9.6 Notices. All notices, demands or other communications which are required or
are permitted to be given hereunder shall be in writing and shall be deemed to
have been sufficiently given in the manner set forth in the Purchase Agreement.
IN WITNESS WHEREOF, each of the parties has executed this Agreement as of the
date first set forth above.
"DEBTOR":
Beta Oil & Gas, Inc.
a Nevada corporation
By: ____________________
/s/ J. Chris Steinhauser
Its: Chief Financial Officer and Director
"SECURED PARTIES":
St. Cloud Investments, Ltd. Dandelion Investments, Ltd..
a corporation a corporation
By: ______________________ By. __________________
Its: Its:
<PAGE>
EXHIBIT C-1
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT
DATED JANUARY 20, 1999
<PAGE>
THIS SECURED PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT AND ALL APPLICABLE STATE
SECURITIES LAWS.
SECURED PROMISSORY NOTE
$ 1,200,000 Due January 20, 2000
FOR VALUE RECEIVED, the undersigned, Beta Oil & Gas, Inc., a Nevada corporation
("Maker"), promises to pay to St. Cloud Investments, Ltd., a __________
Corporation ("Payee"), the principal sum of one million two hundred thousand
Dollars ($1,200,000) (the "Principal Amount") at maturity, together with
Interest accruing on the unpaid portion of the Principal Amount from the date
hereof until maturity at the annual rate of ten percent (10%) payable monthly in
arrears.
This Secured Promissory Note (this '"Note") is one of two secured promissory
notes of like tenor issued by the Company (each, a "Note" and collectively, the
"Notes") being issued and delivered pursuant to that certain Note and Common
Stock Purchase Agreement dated of even date herewith (the "Purchase Agreement")
by and between Maker, Payee and others and is made subject to the terms and
Conditions of the Purchase Agreement. Unless otherwise set forth herein, all
capitalized terms used herein without definition shall have the meanings given
to such terms in the Purchase Agreement.
The Principal Amount and all accrued and unpaid interest thereon shall be due
and payable on the sooner to occur of January 20, 2000 or the occurrence of an
Event of Default as hereafter defined (the "Maturity Date"). Maker may prepay.
at any time or from time to time prior to the Maturity Date, any portion or all
of the amount due hereunder without penalty; provided, however, that any such
prepayment shall be applied first to the Principal Amount and the balance to
accrued but unpaid interest, in which case, interest shall cease to accrue on
the amount of the Principal Amount so paid; and provided further that, unless
the holders of all of the Notes otherwise consent in writing, unless the full
principal amount of and all accrued and unpaid interest on all of the
outstanding Notes are prepaid in full at such time, any amount paid by Maker in
prepayment of any Note shall be allocated among all outstanding Notes prorated
in accordance with the respective principal amount of and accrued and unpaid
Interest on such Notes. The Maker agrees that one-half of the original principal
amount of the Note will be due and payable prior to or at such time that Maker
receives the proceeds of its initial public offering for which Maker has filed
an S-1 Registration Statement.
It shall constitute an event of default ("Event of Default") if any one or more
of the following shall occur for any reason:
(a) A failure by Maker to pay the principal of or interest on this Note
or any portion thereof when due; or
(b) A failure by Maker to perform or observe any term, covenant or
Agreement contained in the Note and Common Stock Purchase Agreement or
the Security Agreement on its part to be performed or observed and such
failure shall continue for more than fourteen (14) days after notice of
such failure is given by Payee to Maker; or
(c) Any representation or warranty in the Note and Common Stock
Purchase Agreement or in any certificate, agreement instrument or other
document made or delivered by Maker to Payee pursuant to the Note and
Common Stock Purchase Agreement proves to have been incorrect when
made; or
(d) Maker shall fall to pay when due (or within any stated grace
period), whether at the stated maturity, upon acceleration, by reason
of required prepayment or otherwise, the principal or any principal
installment of, or any interest on, any present or future indebtedness
of Maker; or
(e) Maker Is the subject of an order for relief by a bankruptcy court,
or is unable or admits in writing its inability to pay its debts as
they mature or makes an assignment for the benefit of creditors, or
applies for or consents to the appointment of any receiver, trustee,
custodian, conservator, liquidator, rehabilitator or similar officer
for it or for all or any part of its business or Property; or any
receiver, trustee., custodian, conservator, liquidator, rehabilitator
or similar officer is appointed without the application or consent of
Maker and the appointment continues a undischarged or unstayed for
sixty (60) calendar days; or institutes or consents to any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt,
dissolution, custodianship, conservatorship, liquidation,
rehabilitation or similar proceeding relating to it or to all or any
part of its business or property under the laws of any jurisdiction; or
any similar proceeding is instituted without the consent of Maker
(including but not limited to any action taken by any Governmental
Agency that has a material adverse effect on the business, operations
or property of Maker) and continues undismissed or unstayed for sixty
(60) calendar days; or
(f) Any judgment, writ, warrant of attachment or execution or similar
process is issued or levied against all or any part of the property of
Maker end is not released, vacated or fully bonded within sixty (60)
calendar days after its issue or levy.
Maker will reimburse Payee on demand for all costs of collection before and
after judgement and the costs of preservation and/or liquidation of any
collateral (including all fees and expenses of counsel to the Payee).
All payments hereunder shall be made in lawful currency of the United States of
America at such place as Holder shall designate in writing and shall be payable
by Maker by check or wire transfer.
Maker's obligations under this Note are secured pursuant to the terms of that
certain Security Agreement of even date herewith between Maker, Payee and
others, securing all of the assets of Maker, tangible and intangible, in favor
of Payee and others.
The validity. construction and performance of this Note, and any action or claim
arising out of or relating to this Note, shall be governed by the laws, without
regard to the laws as to choice or conflict of laws, of the State of California.
The forum for disputes is Orange County, California.
Each of the terms, provisions and obligations of this Note shall be binding
upon. shall inure to the benefit of, and shall be enforceable by the parties and
their respective legal representatives, successors and permitted assigns.
IN WITNESS WHEREOF, Maker has executed this Note in favor of Payee is of the
date first set forth above.
MAKER:
Beta Oil & Gas, Inc.
a Nevada corporation
By:__________________
/s/J. Chris Steinhauser
Its: Chief Financial Officer and Director
PAYEE:
St. Cloud Investments, Ltd.
a _______ corporation
By:__________________
Its: __________________
<PAGE>
EXHIBIT C-2
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT
DATED JANUARY 20, 1999
<PAGE>
THIS SECURED PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT AND ALL APPLICABLE STATE
SECURITIES LAWS.
SECURED PROMISSORY NOTE
$ 800,000 Due January 20, 2000
FOR VALUE RECEIVED, the undersigned, Beta Oil & Gas, Inc., a Nevada corporation
("Maker"), promises to pay to Dandelion Investments, Ltd., a __________
Corporation ("Payee"), the principal sum of eight hundred thousand Dollars
($800,000) (the "Principal Amount") at maturity, together with Interest accruing
on the unpaid portion of the Principal Amount from the date hereof until
maturity at the annual rate of ten percent (10%) payable monthly in arrears.
This Secured Promissory Note (this '"Note") is one of two secured promissory
notes of like tenor issued by the Company (each, a "Note" and collectively, the
"Notes") being issued and delivered pursuant to that certain Note and Common
Stock Purchase Agreement dated of even date herewith (the "Purchase Agreement")
by and between Maker, Payee and others and is made subject to the terms and
Conditions of the Purchase Agreement. Unless otherwise set forth herein, all
capitalized terms used herein without definition shall have the meanings given
to such terms in the Purchase Agreement.
The Principal Amount and all accrued and unpaid interest thereon shall be due
and payable on the sooner to occur of January 20, 2000 or the occurrence of an
Event of Default as hereafter defined (the "Maturity Date"). Maker may prepay.
at any time or from time to time prior to the Maturity Date, any portion or all
of the amount due hereunder without penalty; provided, however, that any such
prepayment shall be applied first to the Principal Amount and the balance to
accrued but unpaid interest, in which case, interest shall cease to accrue on
the amount of the Principal Amount so paid; and provided further that, unless
the holders of all of the Notes otherwise consent in writing, unless the full
principal amount of and all accrued and unpaid interest on all of the
outstanding Notes are prepaid in full at such time, any amount paid by Maker in
prepayment of any Note shall be allocated among all outstanding Notes prorated
in accordance with the respective principal amount of and accrued and unpaid
Interest on such Notes. The Maker agrees that one-half of the original principal
amount of the Note will be due and payable prior to or at such time that Maker
receives the proceeds of its initial public offering for which Maker has filed
an S-1 Registration Statement.
It shall constitute an event of default ("Event of Default") if any one or more
of the following shall occur for any reason:
(a) A failure by Maker to pay the principal of or interest on this Note
or any portion thereof when due; or
(b) A failure by Maker to perform or observe any term, covenant or
Agreement contained in the Note and Common Stock Purchase Agreement or
the Security Agreement on its part to be performed or observed and such
failure shall continue for more than fourteen (14) days after notice of
such failure is given by Payee to Maker; or
(c) Any representation or warranty in the Note and Common Stock
Purchase Agreement or in any certificate, agreement instrument or other
document made or delivered by Maker to Payee pursuant to the Note and
Common Stock Purchase Agreement proves to have been incorrect when
made; or
(d) Maker shall fall to pay when due (or within any stated grace
period), whether at the stated maturity, upon acceleration, by reason
of required prepayment or otherwise, the principal or any principal
installment of, or any interest on, any present or future indebtedness
of Maker; or
(e) Maker Is the subject of an order for relief by a bankruptcy court,
or is unable or admits in writing its inability to pay its debts as
they mature or makes an assignment for the benefit of creditors, or
applies for or consents to the appointment of any receiver, trustee,
custodian, conservator, liquidator, rehabilitator or similar officer
for it or for all or any part of its business or Property; or any
receiver, trustee., custodian, conservator, liquidator, rehabilitator
or similar officer is appointed without the application or consent of
Maker and the appointment continues a undischarged or unstayed for
sixty (60) calendar days; or institutes or consents to any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt,
dissolution, custodianship, conservatorship, liquidation,
rehabilitation or similar proceeding relating to it or to all or any
part of its business or property under the laws of any jurisdiction; or
any similar proceeding is instituted without the consent of Maker
(including but not limited to any action taken by any Governmental
Agency that has a material adverse effect on the business, operations
or property of Maker) and continues undismissed or unstayed for sixty
(60) calendar days; or
(f) Any judgment, writ, warrant of attachment or execution or similar
process is issued or levied against all or any part of the property of
Maker end is not released, vacated or fully bonded within sixty (60)
calendar days after its issue or levy.
Maker will reimburse Payee on demand for all costs of collection before and
after judgement and the costs of preservation and/or liquidation of any
collateral (including all fees and expenses of counsel to the Payee).
All payments hereunder shall be made in lawful currency of the United States of
America at such place as Holder shall designate in writing and shall be payable
by Maker by check or wire transfer.
Maker's obligations under this Note are secured pursuant to the terms of that
certain Security Agreement of even date herewith between Maker, Payee and
others, securing all of the assets of Maker, tangible and intangible, in favor
of Payee and others.
The validity. construction and performance of this Note, and any action or claim
arising out of or relating to this Note, shall be governed by the laws, without
regard to the laws as to choice or conflict of laws, of the State of California.
The forum for disputes is Orange County, California.
Each of the terms, provisions and obligations of this Note shall be binding
upon. shall inure to the benefit of, and shall be enforceable by the parties and
their respective legal representatives, successors and permitted assigns.
IN WITNESS WHEREOF, Maker has executed this Note in favor of Payee is of the
date first set forth above.
MAKER:
Beta Oil & Gas, Inc.
a Nevada corporation
By:__________________
/s/J. Chris Steinhauser
Its: Chief Financial Officer and Director
PAYEE:
Dandelion Investments, Ltd.
a _______ corporation
By:__________________
Its: __________________
<PAGE>
EXHIBIT D
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
JANUARY 20, 1999
There is no Exhibit D.
<PAGE>
EXHIBIT E
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
JANUARY 20, 1999
BETA OIL & GAS, INC.
QUALIFIED INSTITUTIONAL BUYER CERTIFICATE
Dear Sir or Madame:
The undersigned hereby certifies thatt it is: (Please check one)
[ ] Any of the following entities, acting for its own account or the
accounts of other qualified institutional buyers, that in the
aggregate owns and invests on a discretionary basis at least $100
million in securities of issuers that are not affiliated with the
entity: (If selecting this qualification, one of the following
qualifications must also be checked).
[ ] Any insurance company as defined in section 2(13) of the Act;
[ ]Any investment company registered under the Investment Company Act or
any business development company 119 defined in section 2(a)(48) of
that Act;
[ ] Any Small Business Investment Company licensed by the U.S. Small
Business Administration under Section 301(c) or (d) of the Small
Business Investment Act of 1958;
[ ] Any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its
political subdivisions, for the benefit of its employees;
[ ] Any employee benefit plan within the meaning of title I of the
Employee Retirement Income Security Act of 1974;
[ ] Any trust fund whose trustee is a bank or trust company and whose
participants are exclusively plans of the types identified in
paragraph (a)(l)(i) (D) or (E) of this section, except trust funds
that include as participants individual retirement accounts or H.R. 10
plans;
[ ] Any business development company as defined in section 202(a)(22) of
the Investment Advisers Act of 1940;
[ ]Any organization described in section 301(c)(3) of the Internal
Revenue Code, corporation (other than a bank as defined in section
3(a)(2) of the Act or a savings and loan association or other
institution referenced in section 3(a)(5)(A) of the Act or a foreign
bank or savings and loan association or equivalent institution),
partnership, or Massachusetts or similar business trust; or
[ ] Any investment advisor registered under the Investment Advisors Act.
OR
[ ] Any dealer registered pursuant to section 15 of the Exchange Act,
acting for its own account or the accounts of other qualified
institutional buyers, that in the aggregate owns and invests on a
discretionary basis at least $10 million of securities of issuers that
are not affiliated with the dealer, provided, that securities
constituting the whole or a part of an unsold allotment to or
subscription by a dealer as a participant in a public offering shall
not be deemed to be owned by such dealer.
OR
[ ] Any dealer registered pursuant to section 15 of the Exchange Act
acting in a riskless principal transaction on behalf of a qualified
institutional buyer;
OR
[ ] Any investment company registered under the investment Company Act,
acting for its own account or for the accounts of other qualified
institutional buyers, that is part of a family of investment companies
which own in the aggregate at least $100 million in Securities of
issuers, other than issuers that are affiliated with the investment
company or are part of such family of investment companies. Family of
investment companies means any two or more investment companies
registered under the Investment Company Act, except for a unit
investment trust whose assets consist solely of shares of one or more
registered investment companies, that have the same investment adviser
(or, in the case of unit investment trusts, the same depositor),
provided that, for purposes of this section: (A) Each series of a
series company (as defined in Rule 18f-2 under the Investment Company
Act [17 CFR 270.1 8f-2]) shall be deemed to be a separate investment
company; and (B) Investment companies shall be deemed to have the same
adviser (or depositor) if their advisers (or depositors) are
majority-owned subsidiaries of the same parent, or if one investment
company's advisor (or depositor) is a majority-owned subsidiary of the
other investment company's advisor (or depositor).
OR
[ ] Any entity, all of the equity owners of which are qualified
institutional buyers acting for its own account or the accounts of
other qualified institutional buyers; and
OR
[ ] Any bank as defined in section 3(a)(2) of the Act, any savings and
loan association or other institution as referenced in section
3(a)(5)(A) of the Act, or any foreign bank or savings and loan
association or equivalent institution, acting for its own account or
the accounts of other qualified institutional buyers, that in the
aggregate owns and invests on a discretionary basis at least $100
million in securities of issuers that are not affiliated with it and
that has an audited net worth of at least $25 million as demonstrated
in its latest annual financial statements, as of a date not more than
16 months preceding the date of sale under the Rule in the case of a
U.S. bank or savings and loan association, and not more than 18 months
preceding such date of sale for a foreign bank or savings and loan
association or equivalent institution.
Dated:________________________ ________________________________
Signature
- --------------------------------
Print or type name
- --------------------------------
Print or type name of entity
- --------------------------------
Print or type title or position of signatory
Note: "The person signing this Ceniticate warrants, by his or her
signature above, that he or she is fully authorized and empowered
by any entity named above to make the representations contained
herein with respect to such entity.
THE SECURITIES MAY NOT BE SOLD UNLESS THE PURCHASER CERTIFIES THAT AT LEAST
ONE OF THE CRITERIA SET FORTH ABOVE IS MET BY COMPLETING AND EXECUTING THIS
CERTIFICATE
<PAGE>
EXHIBIT F
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
JANUARY 20, 1999
Attorney Letterhead (Horwitz & Beam)
January 20, 1999
____________, a ________ corporation
c/o Robert Tucker, Esq.
61 Purchase Street, #2
Rye, New York 10580
Re: Beta Oil & Gas, Inc.
Ladies and Gentlemen:
We have acted as counsel to Beta Oil & Gas, Inc., a Nevada
corporation (the "Cornpany"), in connection with (i) the execution
and delivery by the Company of the Note and Common Stock Purchase
Agreement, the Secured Promissory Notes, the Security Agreement, the
Registration Rights Agreement, all dated as of January 20,1999
(collectively, the "Transaction Documents'), to which ____, a
corporation, (collectively, the "Purchasers") and the Company are
signatories and (ii) the transactions contemplated to be consummated
by the Company under the Transaction Documents on the date hereof. We
are rendering this Opinion pursuant to Section 7.l (vii) of the Note
and Common Stock Purchase Agreement. Capitalized terms used and not
otherwise defined herein shall have the same meanings as are ascribed
thereto in the various Transaction Documents.
As counsel in this capacity, we have examined the following:
(i) each of the Transaction Documents, (ii) a copy of the Articles of
Incorporation and By-laws of the Company, including any amendments
thereto to date, (iii) records of the proceedings and actions of the
Company's board of directors, (iv) certificates of the Nevada
Secretary of State (dated October 23, 1998), (v) a certificate of an
executive officer of the Company (of even date herewith), and (vi)
such other documents, records, and items as we have deemed necessary
or relevant for purposes of the opinions hereinafter expressed.
For purposes of this opinion, we have also made the following
assumptions and have not made any factual, legal, or other inquiry or
investigation with respect thereto:
(i) that the Transaction Documents have been
duly authorized, executed, and delivered by
each of the Purchasers and each other party
thereto (other than the Company);
(ii) that all persons signing the Transaction
Documents on behalf of each of the Purchasers
and each other party thereto (other than the
Company) have the legal existence, power,
authority, and right so to sign;
(iii) that each of the agreements made by
each of the parties in each Transaction
Document executed by each of the Purchasers
is authorized by all appropriate corporate or
other actions of the respective Purchasers
and each other party thereto (other than the
Company) arid is in compliance with all
applicable laws and regulations affecting the
relevant Purchasers;
(iv) the genuineness of all signatures on
documents not signed in our presence (other
than those of the officers of the Company),
and the authenticity of all documents
submitted to us as originals and the
conformity with original documents of all
documents submitted to us as copies,
(v) that (x) each Transaction Document is
enforceable against each Purchaser and each
other party thereto (other than the Company);
(y) all actions required to be taken and all
conditions and requirements required to be
fulfilled under the Transaction Documents in
order to allow each Purchaser (other than
conditions and requirements to be fulfilled
by the Company) to enforce its rights
thereunder have been fully and effectively
taken and fulfilled; and (r) each Purchaser
has complied with all laws that may be
applicable to it with respect to the
execution and delivery of the Transaction
Documents, and purchasing the Notes and the
Common Shares, and other actions taken or
that may be taken by it thereunder;
(vi) that the representations and warranties
made by each Purchaser within the Transaction
Documents are true and complete in all
material in respects. and do not fail to
state any fact or information, the statement
of which is necessary to make than not
misleading in any material respect; and
(vii) that there are no documents other than
the Transaction Documents and no agreements
other than as contained in the Transaction
Documents between the Purchasers and the
Company or others that expand or otherwise
modify the obligations of the Company with
respect to the transactions contemplated by
the Transaction Documents and would have an
affect on the Opinions Set forth below.
For purposes of this opinion we have relied upon the accuracy
of: (i) the representations and warranties of each of the parties set
forth in the Transaction Documents, but only as to questions of fact,
(ii) the representations of an executive officer of the Company in a
certificate to us, and (iii) the certificates of public officials. In
addition to the assumptions set forth above, this opinion is subject
to the following qualifications and exceptions:
(a) enforcement may be limited by (i) applicable
bankruptcy, insolvency, fraudulent conveyance,
preference, reorganization, moratorium, or other
similar laws of general application affecting
creditors' rights (including equitable
subordination) and (ii) the application of the
rules of equity, including those respecting
availability of specific performance and general
principles of public policy (regardless of
whether enforcement is sought in equity or at
law);
(b) we express no opinion as to (i) the
enforceability of the choice of California law by
a federal court or by a state court outside the
State of California, (ii) conflicts of law
principles generally, (iii) the validity, binding
effect, or enforceability of any provision of the
Transaction Documents purporting to (A) prohibit
oral amendment or waiver of such documents or
limit the effect of a course of dealing between
the parties or (B) indemnify any pawn for its own
negligence, gross negligence, or willful
misconduct or release such person from the
consequences thereof, (iv) the enforceability of
any provision in the Transaction Documents
purporting to relate to delay by any party to the
Transaction Documents to exercise any right,
remedy, or option under the provisions thereof
not operating as a waiver, (v) the enforceability
of any provisions in the Transaction Documents,
as a whole, and in the Notes specifically, in
respect of interest to be charged to, or accrued
or paid by, the Company and whether any
provisions of any of the Transaction Documents,
individually or taken as a whole, if enforced,
would constitute a violation of any
Constitutional, statutory, administrative, or
case law regarding effective interest rates
(usury), and (vi) the priority of any liens or
security interests created by any or all of the
Transaction Documents in any of the Company's
property and whether, if applicable, the
Purchasers have possession of the collateral
described in any or all of the Transaction
Documents sufficient to perfect a security
interest therein;
(c) with respect to our opinions as to the good
standing and foreign qualification of the
Company, we have relied solely on the good
standing certificates referenced above and
delivered to us by public officials from the
State of Nevada; and
(d) the qualification that any right to
indemnification and contribution contained in the
Transaction Documents may be limited by United
States federal or state securities laws or the
policies underlying such laws.
We express no opinion as to the laws of any jurisdiction other
than (i) the laws of the State of California and (ii) the federal
laws of the United States of America to the extent specifically
referred to herein. We express no opinion as to any ordinances,
administrative decisions, or the rules and regulations of counties,
towns, municipalities, and special political subdivisions
As used herein, the term "knowledge" refers only to the actual
knowledge of our attorneys who participated in our representation of
the Company in connection with the negotiation, execution, and
delivery of the Transaction Documents. Unless otherwise expressly
indicated, the phrase "to our knowledge" does not imply any
investigation or inquiry on the part of our firm or any partner or
employee thereof. As used herein, the word "including" means
"including, without limitation."
Based upon and subject to the foregoing, we are of the opinion
that:
1. The Company is a corporation validly existing and
in good standing under the laws of the State of
Nevada, and is qualified as a foreign corporation in
California to own and operate its properties and
assets and to carry on its business as presently
conducted. The Company is not qualified as a foreign
corporation to do business in any other
jurisdictions.
2. The offer and sale of the Notes and Common Shares
in conformity with the terms of the Transaction
Documents will constitute transactions exempt from
the registration requirements of Section 5 of the
Securities Act.
3. No consent, approval, or authorization of or
designation, declaration, or filing with any court,
governmental authority, regulatory agency,
self-regulatory organization. stock exchange, or
market on the part of the Company is required in
connection with (i) the valid execution and delivery
of the Transaction Documents. (ii) the offer, sale,
or issuance of the Notes or the Common Shares, (iii)
the consummation of any other transaction
contemplated by the Transaction Documents, with the
exception of (A) the filing of one or more Notices
of Sale of Securities Pursuant to Regulation D (Form
D) with the SEC, (B) the filing of appropriate
notices with state securities commjssioners (blue
sky authorities), and (C) the filing of a
Registration Statement pursuant to the Registration
Rights Agreement.
4. The Company has all requisite corporate power
and authority to execute and deliver the
Transaction Documents to carry out all of its
obligations thereunder, including the sale and
issuance of the Notes and the Common Shares, in
accordance with the terms of the Transaction
Documents.
5. Each of the Transaction Documents has been duly and
validly authorized by all necessary corporate
action, and has been executed and delivered by, and
constitutes a valid and binding agreement of, the
Company and is enforceable against the Company in
accordance with its terms
6. The authorized capital stock of the Company is as
stated in the Articles of incorporation of the
Company and in Schedule 3.3 of the Note and Common
Stock Purchase Agreement. To our knowledge, there
have not been any shares of the capital stock of
the Company issued that are not validly issued,
fully paid, and non-assessable. All issued and
outstanding shares of Common Stock of the Company
are free of any preemptive or similar rights
contained in the Articles of Incorporation or
Bylaws of the Company or, to our knowledge, in any
agreement by which the Company is bound.
7. Upon payment therefor, the Common Shares will be
validly issued, fully paid, and non-assessable, and
free of any preemptive or similar rights contained
in the Articles of incorporation or the By-laws of
the Company or, to our knowledge, of any agreement
by which the Company is bound.
8. The execution and delivery of, and compliance
with the terms of: the Transaction Documents,
including the issuance of the Common Shares, as
contemplated thereby, do not and will not conflict
with or result in a breach or default by the
Company of any of the terms or provisions of: (i)
the Articles of Incorporation or the By-laws of the
Company, (ii) to our knowledge, any existing
applicable decree, judgment, or order of any court,
federal or state regulatory body, administrative
agency, or other governmental body having
jurisdiction over the Company or any of its
properties or assets, (iii) to our knowledge,
conflict with, or constitute a default (or an event
which with notice or lapse of time or both would
become a default) under, or give to others any
rights of terminations, amendments, accelerations,
or cancellation of, any agreement, indenture, or
instrument to which the Company is a party (except
for such conflicts, defaults, termination,
amendments, accelerations, cancellations, arid
violations as would not, individually or in the
aggregate, have a Material Adverse Effect), or (iv)
federal or California State law. However, we
express no opinion on usury laws and encourage
purchaser to undertake its own investigation into
such laws.
9. To our knowledge, there is no litigation,
pending or threatened, that could or that would
impair the ability of the Company to issue and
deliver the Common Shares, or to comply with the
provisions of the Transaction Documents or
otherwise have a Material Adverse Effect.
This opinion is furnished to the Purchasers solely for their
benefit in connection with the sale and issuance of the Notes and the
Common Shares, as contemplated by the Transaction Documents, and may
not be relied upon by any other person (other than the Company) or
for any other purpose without our prior written consent. This opinion
is limited to matters expressly set forth herein and no opinion may
be inferred or implied beyond the matters expressly stated in this
opinion on the date hereof. We shall have no obligation to update any
of the matters set forth in this opinion.
We bring to your attention the fact that our legal opinions
are an expression of professional judgment and are not a guarantee of
a result.
Very truly yours,
HORWITZ & BEAM
NOTE AND COMMON STOCK PURCHASE AGREEMENT
This NOTE AND COMMON STOCK PURCHASE AGREEMENT
("Agreement") is entered into as of March 19, 1999, by and between BETA
OIL & GAS, INC., a Nevada corporation (the "Company"), with
headquarters located at 901 Dove Street, Suite 230, Newport Beach,
California 92660 and Aztore Holdings, Inc. (the "Purchaser") an Arizona
Corporation with principal offices at 3170 E. Kent Drive, Phoenix, AZ
85004 set forth on the execution pages hereof, with regard to the
following:
RECITALS
A. The Company and Purchaser are executing and
delivering this Agreement in reliance upon the exemption from
securities registration afforded by the provisions of Regulation D
("Regulation D"), as promulgated by the United States Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933 as
amended (the "Securities Act").
B. Purchaser desires to purchase, upon the terms and
conditions stated in this Agreement, Secured Promissory Notes ("Notes")
and shares of the Company's Common Stock, $.001 par value (the "Common
Stock"). The shares of Common Stock issuable hereunder are referred to
herein as the Common Shares. The Notes and Common Shares are sometimes
referred to herein jointly as the "Securities."
C. Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a
Registration Rights Agreement in the form attached hereto as Exhibit A
(the "Registration Rights Agreement"), pursuant to which the Company
has agreed to provide certain registration rights under the Securities
Act, the rules and regulations promulgated thereunder and applicable
state securities laws and a Security Agreement in the form attached
hereto as Exhibit B (the "Security Agreement") and a Mortgage, Security
Agreement and Financing Statement ("Mortgage") pursuant to which the
Company has agreed and will agree to grant the Purchaser a security
interest in its assets (the "Collateral").
AGREEMENTS
NOW, THEREFORE, in consideration of their respective promises
contained herein and other good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, the Company and
Purchaser hereby agree as follows:
ARTICLE I
PURCHASE AND SALE OF NOTES AND COMMON STOCK
1.1 Purchase of Notes and Common Shares. Subject to the terms and
conditions of this Agreement, the issuance, sale and purchase of the
Notes and Common Shares shall be consummated in a "Closing". On the
date of the Closing ("Closing Date"), subject to the satisfaction or
waiver of the conditions set forth in Articles V and VII, the Company
shall issue and sell to Purchaser, and Purchaser agrees to purchase
from the Company, a Note of the Company in the amount set forth on the
signature page executed by Purchaser. The Note shall be in the form of
Exhibit C hereto.
1.2 Security Agreement. Concurrently with the sale of the Note, the
Company and the Purchaser shall execute the Security Agreement. In
addition, the Company shall take all action reasonably necessary to
cause a UCC Form 1 Financing Statement and similar documents to be
filed in all jurisdictions as necessary to cause Purchaser to have a
perfected security interest in the Collateral.
1.3 Mortgage, Security Agreement and Financing Statement. On
or before July 1, 1999 the Company shall deliver and cause to be
recorded a Mortgage, in form as approved by Purchaser, in such
jurisdiction as necessary to cause Purchaser to have a perfected
security interest in the producing oil and gas wells and related
leasehold interests in the producing oil and gas wells comprising the
Collateral and identified in Exhibit G hereto (the "Oil & Gas
Properties").
1.4 Issuance of Common Shares. Concurrently with the sale of the
Notes, the Company shall issue to each Purchaser Common Shares.
The Common Shares issuable shall be determined as provided herein.
A. Closing Date Common Shares. On the Closing Date, the
Company shall issue to Purchaser that number of Common Shares
determined by multiplying the amount of the Notes issued to Purchaser
by 10% (the "Coverage Percentage"). By way of example if Purchaser
invested $1,000,000 in Notes, Purchaser would be issued 100,000 Common
Shares ($1,000,000 x 10% = 100,000); if a Purchaser invested 250,000 in
Notes, such Purchaser would be issued 25,000 Common Shares
($250,000x10% = 25,000).
B. Additional Common Shares. If any portion of the principal
of the Note remains unpaid on the 30th, 60th, 90th, 120th, 160th,
180th, 210th, 240th, 270th, 300th, 330th and/or the 360th day following
the Closing Date, then on the day following any of such dates, the
Company shall issue to Purchaser, that number of Common Shares
determined by the above formula and a Coverage Percentage, in each
instance, of 1%. For examples, if $1,000,000 of principal remains
unpaid on the 30th day following the Closing Date, then on the
following day the Purchaser would be issued an additional 10,000 Common
Shares ($1,000,000 x 1%=10,000); if $250,000 of principal remains
unpaid on the 30th day following the Closing Date, then on the
following day the Purchaser would be issued an additional 2,500 Common
Shares ($250,000 x 1% = 2,500).
C. INTENTIONALLY LEFT BLANK.
1.4 Form of Payment. Each Purchaser shall pay the aggregate
Purchase Price for the Notes and Common Shares being purchased by such
Purchaser by wire transfer to the account designated by the Company.
1.5 Closing Date. Subject to the satisfaction (or waiver) of
the conditions set forth in Articles VI and VII below, the date and
time of the issuance, sale and purchase of the Notes and Common Shares
pursuant to this Agreement shall be at 10:00 a.m. California time, on
March 19, 1999 or when usable funds have been received by the Company,
whichever is later.
ARTICLE II
PURCHASER REPRESENTATIONS AND
WARRANTIES
Purchaser represents and warrants as of the date hereof and as
of the Closing to the Company as set forth in this Article II.
Purchaser makes bo other representations or warranties, express or
implied, to the Company in connection with the transactions
contemplated hereby and any and all prior representations and
warranties, if any, which may have been made by a Purchaser to the
Company in connection with the transactions contemplated hereby shall
be deemed to have been merged in this Agreement and any such prior
representations and warranties, if any, shall not survive the execution
and delivery of this Agreement.
2.1 Investment Purpose. Purchaser is purchasing the Securities for
Purchaser's own account for investment only and not with a view toward or
in connection with the public sale or distribution thereof. Purchaser will
not, directly or indirectly offer, sell, pledge (subject to Section 4.11)
or otherwise transfer its Securities or any interest therein except
pursuant to transactions that are exempt from the registration requirements
of the Securities Act and/or sales registered under the Securities Act.
Purchaser understands that Purchaser must bear the economic risk of this
investment indefinitely, unless the Securities are registered pursuant to
the Securities Act and any applicable state securities laws or an exemption
from such registration is available, and that the Company has no present
intention of registering any such Securities other than contemplated by the
Registration Rights Agreement. By making the representations in this
Section 2.1, Purchaser does not agree to hold the Securities for any
minimum or other specific term (except as otherwise provided herein) and
reserves the right to dispose of the Securities at any time in accordance
with or pursuant to a registration statement or an exemption from
registration under the Securities Act and any applicable state securities
laws.
2.2 Accredited Investor. Purchaser is an "Accredited Investor"
as that term is defined in Rule 501 (a) (3) of the Securities Act of
1933. Purchaser is a corporation with assets in excess of $5,000,000.
2.3 Reliance on Exemptions. Purchaser understands that the
Securities are being offered and sold to Purchaser in reliance upon
specific exemptions from the registration requirements of United States
federal and state securities laws and that the Company is relying upon
the truth and accuracy of, and Purchaser's compliance with, the
representations, warranties, agreements, acknowledgments and
understandings of Purchaser set forth herein in order to determine the
availability of such exemptions and the eligibility of Purchaser to
acquire the Securities
2.4 Information. Purchaser or its counsel have been furnished
all materials relating to the business, finances and operations of the
Company and materials relating to the offer and sale of the Securities
which have been specifically requested by Purchaser, including without
limitation the Company's Form S-1 Registration Statement Dated November
16, 1998 filed with the Securities and Exchange Commission ("SEC") on
December 4, 1998. Purchaser has been afforded the opportunity to ask
questions of the Company and has received what Purchaser believes to be
complete and satisfactory answers to any such inquiries. Purchaser
understands that Purchaser's investment in the Securities involves a
high degree of risk, including without limitation the risks and
uncertainties disclosed in the SEC Document.
2.5 Governmental Review. Purchaser understands that no United
States federal or state agency or any other government or governmental
agency has passed upon or made any recommendation or endorsement of the
Securities.
2.6 Transfer or Resale. Purchaser understands that (i) except as provided
in the Registration Rights Agreement, the Securities have not been and
are not being registered under the Securities and/or any state
securities laws, and may not be offered, sold, pledged (subject to
Section 4.11 of this Agreement) or otherwise transferred unless
subsequently registered thereunder or an exemption from such
registration is available (which exemption the Company expressly agrees
may be established as contemplated in clauses (b) and (c) of Section
5.1 hereof); (ii) any sale of such Securities made in reliance on Rule
144 under the Securities Act (or a successor rule) ("Rule 144") may be
made only in accordance with the terms of Rule 144 and further, if Rule
144 is not applicable, any resale of such Securities without
registration under the Securities Act under circumstances in which the
seller may be deemed to be an underwriter (as that term is defined in
the Securities Act) may require compliance with some other exemption
under the Securities Act or the rules and regulations of the SEC
thereunder in order for such resale to be allowed, and (iii) neither
the Company nor any other person is under any obligation to register
such Securities under the Securities Act or any state securities laws
or to comply with the terms and conditions of any exemption thereunder
(in each case, other than pursuant to this Agreement or the
Registration Rights Agreement).
2.7 Legends. Purchaser understands that, subject to Article V
hereof, until such time as the Securities have been registered under
the Securities Act as contemplated by the Registration Rights Agreement
or otherwise may be sold by Purchaser pursuant to Rule 144 (subject to
and in accordance with the procedures specified in Article V hereof)
the certificates for the Securities will bear a restrictive legend (the
"Legend") in the following form:
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES. THE
SECURITIES REPRESENTED HEREBY MAY NOT BE OFFERED OR SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT FOR THE SECURITIES UNDER APPLICABLE
SECURITIES LAWS OR UNLESS OFFERED, SOLD OR TRANSFERRED
PURSUANT TO AN AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THOSE LAWS. THESE SECURITIES ARE ALSO SUBJECT
TO THE TERMS OF A NOTE AND COMMON STOCK PURCHASE AGREEMENT
DATED MARCH 19, 1999 A COPY OF WHICH IS AVAILABLE FROM BETA
OIL & GAS, INC.
2.8 Authorization: Enforcement. This Agreement, the Registration Rights
Agreement and the Security Agreement have been duly and validly authorized,
executed and delivered on behalf of Purchaser and are valid and binding
agreements of Purchaser enforceable in accordance with their respective terms,
except to the extent that such validity or enforceability may be subject to or
affected by any bankruptcy, insolvency, reorganization, moratorium, liquidation
or similar laws relating to, or affecting generally the enforcement of
creditors' rights or remedies of creditors generally or by other equitable
principles of general application.
2.9 Residency. Purchaser is a resident of the jurisdiction set forth under
Purchaser's name on the signature page hereto executed by Purchaser.
2.10 No Brokers. The Purchaser has taken no action which would give rise to any
claim by any person for brokerage commission, finder fees or similar payments
relating to this Agreement or the transaction contemplated hereby.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Purchaser as of the date hereof and as of
the Closing that:
3.1 Organization and Qualification. Except as set forth on Schedule 3.1,
each of the Company and its subsidiaries is a corporation duly organized and
existing in good standing under the laws of the jurisdiction in which it is
incorporated, and has the requisite corporate power to own its properties and to
carry on its business as now being conducted. The Company and each of its
subsidiaries is duly qualified as a foreign corporation to do business and is in
good standing in every jurisdiction where the failure so to qualify or be in
good standing would have a Material Adverse Effect. "Material Adverse Effect"
means any effect which, individually or in the aggregate with all other effects,
reasonably would be expected to be materially adverse to the business,
operations, properties, financial condition, operating results or prospects of
the Company and its subsidiaries, taken as a whole on a consolidated basis or on
the transactions contemplated hereby.
3.2 Authorization; Enforcement. (a) The Company has the requisite
corporate power and authority to enter into and perform this Agreement, the
Note, the Registration Rights Agreement and the Security Agreement and the
Mortgage (collectively the "Loan Documents"), and to issue, sell and perform its
obligations with respect to the Securities in accordance with the terms hereof
and thereof; (b) the execution, delivery and performance of by the Company and
the consummation by it of the transactions contemplated hereby and thereby
(including, without limitation, the issuance of the Securities) have been duly
authorized by all necessary corporate action and, no further consent or
authorization of the Company, its board of directors, or its shareholders or any
other person, body or agency is required with respect to any of the transactions
contemplated hereby or thereby (whether under rules of the Nasdaq National
Market, the Nasdaq Small Cap Market, the National Association of Securities
Dealers, Inc. ("NASD") or otherwise); (c) the Loan Documents and certificates
for the Common Shares have been duly executed and delivered by the Company; and
(d) this Agreement, the Registration Rights Agreement, and the Secured
Promissory Notes and Common Shares constitute legal, valid and binding
obligations of the Company enforceable against the Company in accordance with
their respective terms, except (i) to the extent that such validity or
enforceability may be subject to or affected by any bankruptcy, insolvency.
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally the enforcement of, creditor's rights or remedies of
creditors generally, or by other equitable principles of general application,
and (ii) as rights to indemnity and contribution under the Registration Rights
Agreement may be limited by Federal or state securities laws. The Company has
duly reserved all Common Shares from time to time issuable under the terms of
this agreement.
3.3 Capitalization. The capitalization of the Company as of the date
hereof, including the authorized capital stock, the number of shares issued and
outstanding, the number of shares reserved for issuance pursuant to the
Company's stock option plans, the number of shares reserved for issuance
pursuant to securities exercisable for, or convertible into or exchangeable for
any shares of Common Stock is set forth on Schedule 3.3. All of such outstanding
shares of capital stock have been, or upon issuance following full payment
therefor will be, validly issued, fully paid and nonassessable. No shares of
capital stock of the Company are subject to preemptive rights or any other
similar rights of the shareholders of the Company or any liens or encumbrances.
Except as disclosed in Schedule 3.3, as of the date of this Agreement, (i) there
are no outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into or exercisable or exchangeable for, any shares of capital stock
of the Company or any of its subsidiaries, or contracts, commitments,
understandings or arrangements by which the Company or any of its subsidiaries
is or may become bound to issue additional shares of capital stock of the
Company or any of its subsidiaries, and (ii) issuance of the Common shares will
not trigger antidilution rights for any other outstanding or authorized
securities of the Company, and (iii) there are no agreements or arrangements
under which the Company or any of its subsidiaries is obligated to register the
sale of any of its or their securities under the Securities Act (except the
Registration Rights Agreement and what is set forth on Schedule 3.3). The
Company has furnished to Purchaser true and correct copies of the Company's
Articles of Incorporation as in effect on the date hereof ("Articles of
Incorporation"), and the Company's By-laws as in effect on the date hereof (the
"By-laws"). The Company has set forth on Schedule 3.3 all instruments and
agreements (other than the Certificate of Incorporation and By-laws) governing
securities convertible into or exercisable or exchangeable for Common Stock of
the Company (and the Company shall provide to Purchaser copies thereof upon the
request of Purchaser).
3.4 Issuance of Shares. The Common Shares to be issued to Purchaser
under the terms of this Agreement are duly authorized and reserved for issuance,
and following full payment therefor, will be validly issued, fully paid and
non-assessable, and free from all taxes, liens, claims and encumbrances imposed
or suffered by the Company and will not be subject to preemptive rights or other
similar rights of shareholders of the Company.
3.5 No Conflicts. The execution, delivery and performance of this
Agreement, the Registration Rights Agreement and the Security Agreement by the
Company, and the consummation by the Company of transactions contemplated hereby
and thereby (including, without limitation, the issuance of the Securities) do
not and will not (a) result in a violation of the Articles of Incorporation or
By-laws or (b) conflict with, or constitute a default (or an event which, with
notice or lapse of time or both, would become a default) under, or give to
others any rights of termination, amendment, acceleration or cancellation of any
agreement indenture or instrument to which the Company or any of its
subsidiaries is a party, or to the best knowledge of the Company, result in a
violation of any law, rule, regulation, order, judgment or decree (including
U.S. federal and state securities laws and regulations and the rules and
regulations of NASDAQ) applicable to the Company or any of its subsidiaries, or
by which any property or asset of the Company or any of its subsidiaries, is
bound or affected (except for such possible conflicts, defaults, terminations,
amendments, accelerations, cancellations and violations as would not,
individually or in the aggregate, have a Material Adverse Effect). Except as set
forth in Schedule 3.5, neither the Company nor any of its subsidiaries is in
violation of its Articles of Incorporation or other organizational documents,
and neither the Company nor any of its subsidiaries, is in default (and no event
has occurred which has not been waived which, with notice or lapse of time or
both, would put the Company or any of its subsidiaries in default) under, nor
has there occurred any event giving others (with notice or lapse of time or
both) any rights of termination, amendment, acceleration or cancellation of, any
agreements indenture or instrument to which the Company or any of its
subsidiaries is a party, except for possible violations, defaults or rights as
would not, individually or in the aggregate, have a Material Adverse Effect. The
businesses of the Company and its subsidiaries are not being conducted. and
shall not be conducted so long as purchaser owns any of the Securities, in
violation of any law, ordinance or regulation of any governmental entity, except
for possible violations the sanctions for which either individually or in the
aggregate would not have a Material Adverse Effect. Except as set forth on
Schedule 3.5, or except (A) such may be required under the Securities Act in
connection with the performance of the Company's obligations under the
Registration Rights Agreement, (B) filing of a Form D with the SEC, (C)
compliance with the state securities or Blue Sky laws of applicable
jurisdictions, and (D) as required by Nasdaq, the Company is not required to
obtain any consent, authorization or order of, or make any filing or
registration with, any court or governmental agency or any regulatory or
self-regulatory agency in order for it to execute deliver or perform any of its
obligations under this Agreement or the Registration Rights Agreement or to
perform its obligations in accordance with the terms hereof or thereof.
3.6 SEC Documents. The Company is not presently subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Company has filed with the principal office of the Securities and Exchange
Commission (the "Commission") in Washington, DC, and a Registration Statement on
Form S-1 (the Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"). For purposes hereof, the term "Registration
Statement" means the original Registration Statement and any and all amendments
thereto. At such time that this Registration Statement becomes effective, the
Company intends to register under the Exchange Act. Upon effectiveness, the
Company will furnish its stockholders with annual reports containing financial
statements audited by independent certified public accountants and will file
with the Commission quarterly reports containing unaudited financial information
for each of the first three quarters of each fiscal year within 45 days
following the end of each such quarter. As of its date, the Registration
Statement complied in all material respects with the requirements of the
Securities Act and the rules and regulations of the SEC promulgated thereunder
applicable to the Registration Statement, and the Registration Statement, at the
time it was filed with the SEC, did not contain any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading. None of the statements
made in the Registration Statement which is required to be updated or amended
under applicable law has not been so updated or amended except for the
disclosures which will be required as a result of this Agreement, the Company's
joint exploration agreements with Cheniere Energy, Inc., "Plain English"
Disclosures required by the SEC and any SEC legal and accounting comments and
resultant changes which will be required by the SEC upon their review of the
Registration Statement. The financial statements of the Company included in the
Registration Statement have been prepared in accordance with U.S. generally
accepted accounting principles, consistently applied, and the rules and
regulations of the SEC during the periods involved except (i) as may be
otherwise indicated in such financial statements or the notes thereto, or (ii)
in the case of unaudited interim statements, to the extent they do not include
footnotes or are condensed or summary statements) and present accurately and
completely the consolidated financial position of the Company and its
consolidated subsidiaries as of the dates thereof and the consolidated results
of their operations and cash flows for the periods then ended (subject, in the
case of unaudited statements, to normal year-end audit adjustments). Except as
set forth in a manner clearly evident to a sophisticated investor in the
financial statements or the notes thereto of the Company included in the
Registration Statement, the Company has no liabilities, contingent or otherwise,
other than (i) liabilities incurred in the ordinary course of business
consistent with past practice subsequent to the date of such financial
statements and (ii) obligations under contracts and commitments incurred in the
ordinary course of business consistent with past practice and not required under
generally accepted accounting principles to be reflected in such financial
statements, in each case of clause (i) and (ii) next above which, individually
or in the aggregate, are not material to the financial condition, business,
operations, properties, operating results or prospects of the Company and its
subsidiaries. To the extent required by the rules of the SEC applicable thereto,
the Registration Statement contains a complete and accurate list of all material
undischarged written or oral contracts, agreements, leases or other instruments
to which the Company or any subsidiary is a party or by which the Company or any
subsidiary is bound or to which any of the properties or assets of the Company
or any subsidiary is subject (each a "Contract"). Except as set forth in
Schedule 3.6, none of the Company, its subsidiaries or, to the best knowledge of
the Company, any of the other parties thereto, is in breach or violation of any
Contract which breach or violation would have a Material Adverse Effect. No
event, occurrence or condition exists which, with the lapse of time, the giving
of notice, or both, would become a default by the Company or its subsidiaries
thereunder which would have a Material Adverse Effect. The Company has not
provided to any Purchaser any material non-public information or any other
information which, according to applicable law,
rule or regulation, should have been disclosed publicly by the Company but
which has not been so disclosed.
3.7 Absence of Certain Changes. Since September 30, 1998, there has
been no material adverse change and no material adverse development in the
business, properties, operations, financial condition, results of operations or
prospects of the Company, except as disclosed in Schedule 3.7 or clearly evident
to a sophisticated institutional investor from the Registration Statement.
3.8 Absence of Litigation. Except as disclosed in Schedule 3.8 or as
clearly evident to a sophisticated investor from the Registration Statement,
there is no action, suit, proceeding, inquiry or investigation before or by any
court, public board, government agency, or self-regulatory organization or body
pending or, to the knowledge of the Company or any of its subsidiaries,
threatened against or affecting the Company, any of its subsidiaries or any of
their respective directors or officers in their capacities as such, which could
reasonably be expected to result in an unfavorable decision, ruling or finding
which would have a Material Adverse Effect or would adversely affect the
transactions contemplated by this Agreement or any of the documents contemplated
hereby or which would adversely affect the validity or Enforceability of, or the
authority or ability of the Company to perform its obligations under, this
Agreement or any of such other documents. There are no facts known to the
Company which, if known by a potential claimant or governmental authority, could
reasonably be expected to give rise to a claim or proceeding which, if asserted
or conducted with results unfavorable to the Company or any of its subsidiaries,
could reasonably be expected to have a Material Adverse Effect.
3.9 Disclosure. No information relating to or concerning the Company set
forth in this Agreement contains an untrue statement of a material fact. No
information relating to or concerning the Company set forth in the Registration
Statement contains a statement of material fact that was untrue as of the date
the Registration Statement was filed with the SEC. The Company has not omitted
to state a material fact necessary in order to make the statements made herein
or herein, in light of the circumstances under which they were made, not
misleading. Except for the execution and performance of this Agreement and the
Company's joint exploration agreements with Cheniere Energy, Inc., no material
fact (within the meaning of the federal securities laws of the United States and
of applicable state securities laws) exists with respect to the Company which
has not been publicly disclosed which requires such disclosure.
3.10 Acknowledgment Regarding Purchaser's Purchase of the Securities.
The Company acknowledges and agrees that Purchaser is not acting as a financial
advisor or fiduciary of the Company (or in any similar capacity) with respect to
this Agreement or the transactions contemplated hereby, that this Agreement and
the transaction contemplated hereby, and the relationship between each Purchaser
and the Company, are "arms-length", and that any statement made by Purchaser
(except as set forth in Article II), or any of its representatives or agents, in
connection with this Agreement and the transactions contemplated hereby is not
advice or a recommendation, is merely incidental to Purchaser's purchase of the
Securities and has not been relied upon as such in any way by the Company, its
officers or directors, The Company further represents to Purchaser that the
Company's decision to enter into this Agreement and the transactions
contemplated hereby have been based solely on an independent evaluation by the
Company and its representatives.
3.11 S-3 Registration. The Company is currently not eligible to
register the Common Shares on a registration statement on Form S-3 under the
Securities Act.
3.12 No General Solicitation. Neither the Company nor any distributor
participating on the Company's behalf in the transactions contemplated hereby
(if any) nor any person acting for the Company, or any such distributor, has
conducted any "general solicitation," as described in Rule 502(c) under
Regulation D, with respect to any of the Securities being offered hereby.
3.13 No Integrated Offerings. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any security or solicited any offers to
buy any security under circumstances that would prevent the parties hereto from
consummating the transactions contemplated hereby pursuant to an exemption from
the registration under the Securities Act pursuant to the provisions of
Regulation D. The transactions contemplated hereby are exempt from the
registration requirements of the Securities Act, assuming the accuracy of the
representations and warranties herein contained of each Purchaser.
3.14 No Brokers. The Company and the Purchaser acknowledge that the
Company has taken no action which would give rise to any claim by any person for
brokerage commissions, finder's fees or similar payments relating to this
Agreement or the transactions contemplated hereby.
3.15 Ownership of Assets. The Company has good title to the assets comprising
the Collateral and the assets comprising the Collateral are free and clear of
liens, except for operator liens as provided for in operating agreements in the
normal course of business as disclosed in Exhibit G hereto or as clearly evident
to a sophisticated investor from the Registration Statement.
3.16 Key Employees. Each Key Employee as listed on Schedule 3.16 is
currently serving the Company in the capacity disclosed in Schedule 3.16. No Key
Employee, to the best of the knowledge of the Company and its subsidiaries, is,
or is now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement,
non-competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best of the knowledge of the
Company and its subsidiaries, any intention to terminate his employment with; or
services to, the Company or any of its subsidiaries.
3.17 Rights Plan. The Company does not have in effect a shareholders
rights plan or similar plan in the nature of a "poison pill" except what is
disclosed in the Registration Statement.
ARTICLE IV
COVENANTS
4.1 Best Efforts. The parties shall use their best efforts to timely
satisfy each of the conditions described in Articles VI and VII of this
Agreement.
4.2 Securities Laws. The Company agrees to file a Form D with respect to
the Securities with the SEC as required under Regulation D and to provide a copy
thereof to each Purchaser within fifteen (15) days after the date of Closing.
The Company shall, on or prior to the date of Closing, take such action as is
necessary to sell the Securities to Purchaser under applicable securities laws
of the states of the United States, and shall provide evidence of any such
action so taken to Purchaser on or prior to the date of the Closing.
4.3 Reporting Status. The Company is not presently subject to the reporting
requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). The
Company has filed with the principal office of the Securities and Exchange
Commission (the "Commission") in Washington, DC, a Registration Statement on
Form S-1 (the "Registration Statement") under the Securities Act of 1933, as
amended (the "Securities Act"). At such time that the Registration Statement
becomes effective, the Company intends to file for registration under the 1934
Exchange Act and will become subject to the reporting requirements of the
Exchange Act. For the period ending two (2) years from the Closing, (a) the
Company shall then timely file all reports required to be filed with the SEC
pursuant to the Exchange Act, and the Company shall not terminate its status as
an issuer required to file reports under the Exchange Act even if the Exchange
Act or the rules and regulations thereunder would permit such termination, and
(b) the Company will maintain its ability to register its Common Stock on Form
S-3 if, and at such time, the Company becomes eligible to use Form S-3.
4.4 INTENTIONALLY LEFT BLANK
4.5 INTENTIONALLY LEFT BLANK
4.6 Information. For the period ending two (2) years from the Closing, the
Company agrees to send the following reports to Purchaser until Purchaser
transfers, assigns or sells all of its Securities in transactions in which the
transferee is (unless such transferee is an affiliate of the Company) not
subject to securities law resale restrictions: (a) within ten (10) business days
after the filing with the SEC, a copy of its Annual Report on Form 10-K, its
Quarterly Reports on Form 10-Q, any proxy statements and any Current Reports on
Form 8-K; and (b) within one (1) business day after release, copies of all press
releases issued by the Company or any of its subsidiaries. The Company further
agrees to promptly provide to any Purchaser any information with respect to the
Company, its properties, or its business or Purchaser's investment as such
Purchaser may reasonably request; provided, however that the Company shall not
be required to give Purchaser any material nonpublic information. If any
information requested by Purchaser from the Company contains material nonpublic
information, the Company shall inform the Purchaser in writing that the
information requested contains material nonpublic information and shall in no
event provide such information to Purchaser without the express written consent
of Purchaser after being so informed.
4.7 Listing. For the period ending two (2) years from the Closing, the
Company shall use its reasonable best efforts to obtain and then continue the
uninterrupted quotation and trading of its Common Stock, including the shares to
be issued to Purchaser, on the Nasdaq SmallCap Market or the Nasdaq NMS; and, if
so quoted and traded, comply in all respects with the Company's reporting,
filing and other obligations under the By-laws or rules of the Nasdaq Small Cap
Market or the Nasdaq NMS, as applicable.
4.8 Prospectus Delivery Requirement. Each Purchaser understands that the
Securities Act may require delivery of a prospectus relating to the Common Stock
in connection with any sale thereof pursuant to a registration statement under
the Securities Act covering the resale by such Purchaser of the Common Stock
being sold, and each Purchaser shall comply with the applicable prospectus
delivery requirements of the Securities Act in connection with any such sale.
4.9 Corporate Existence. For the period ending two (2) years from the
Closing, the Company shall maintain its corporate existence, except in the event
of a merger, consolidation or sale of all or substantially all of the Company's
assets, as long as the surviving or successor entity in such transaction (i)
assumes the Company's obligations hereunder and under the agreements and
instruments entered into in connection herewith and (ii) is a publicly traded
corporation whose common stock is listed for trading on the NASDAQ, the New York
Stock Exchange, the Pacific Stock Exchange or the American Stock Exchange.
4.10 INTENTIONALLY LEFT BLANK.
4.11 Pledging and Margining. Notwithstanding anything in this Agreement to
the contrary and assuming such Common Shares are eligible to be margined under
applicable regulations, Purchaser may pledge, margin or otherwise encumber the
Common Shares unless the result of any such activity would be that such Common
Shares would be available for lending and/or borrowing in connection with short
sales of the Common Stock by any third party.
4.12 INTENTIONALLY LEFT BLANK.
4.13 Use of Proceeds. The Company will use the proceeds of the sale of the
Securities for working capital or such other purposes as management of the
Company's Board of Directors shall determine.
4.14 INTENTIONALLY LEFT BLANK.
ARTICLE V
LEGEND REMOVAL, TRANSFER AND CERTAIN SALES
5.1 Removal of Legend. The Legend shall be removed and the Company shall
issue a certificate without such Legend to the holder of any Security upon which
it is stamped, and a certificate for a security shall be originally issued
without the Legend, if (a) the sale of such Security is registered under the
Securities Act, (b) such holder provides the Company with an opinion of counsel,
in form, substance and scope customary for opinions of counsel in comparable
transactions and reasonably satisfactory to the Company and its counsel (the
reasonable cost of which shall be borne by the Company if neither an effective
registration statement under the Securities Act nor Rule 144 is available in
connection with such sale) to the effect that a public sale or transfer of such
Security may be made without registration under the Securities Act pursuant to
an exemption from such registration requirements, (c) such Security can be sold
pursuant to Rule 144 and the holder provides the Company with reasonable
assurances that the Security can be so sold without restriction or (d) such
Security can be sold pursuant to Rule 144(k). Each Purchaser agrees to sell all
Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement, in accordance with the manner
of distribution described in such registration statement and to deliver a
prospectus in connection with such sale, or in compliance with an exemption from
the registration requirements of the Securities Act. In the event the Legend is
removed from any Security or any Security is issued without the Legend and the
Security is to be disposed of other than pursuant to the registration statement
or pursuant to Rule 144, then prior to, and as a condition to, such disposition
such Security shall be relegended as provided herein in connection with any
disposition if the subsequent transfer thereof would be restricted under the
Securities Act. Also, in the event the Legend is removed from any Security or
any Security is issued without the Legend and thereafter the effectiveness of a
registration statement covering the resale of such Security is suspended or the
Company determines that a supplement or amendment thereto is required by
applicable securities laws, then upon reasonable advance notice to Purchaser
holding such Security, the Company may require that the Legend be placed on any
such Security that cannot then be sold pursuant to an effective registration
statement or Rule 144 or with respect to which the opinion referred to in clause
(b) next above has not been rendered, which Legend shall be removed when such
Security may be sold pursuant to an effective registration statement or Rule 144
or such holder provides the opinion with respect thereto described in clause (b)
next above.
5.2 Transfer Agent Instructions. The Company shall or shall instruct its
transfer agent to issue certificates, registered in the name of Purchaser or its
nominee, for the Securities. Such certificates shall bear the Legend only to the
extent provided by Section 5.1 above. The Company covenants that no instruction
other than such instructions referred to in the Article V, and stop transfer
instructions to give effect to Section 2.6 hereof in the case of the Securities
prior to registration of the Securities under the Securities Act, will be given
by the Company to its transfer agent and that the securities shall otherwise be
freely transferable on the books and records of the Company. Nothing in this
section shall affect in any way each Purchaser's obligations and agreement set
forth in Section 5.1 hereof to resell the Securities pursuant to an effective
registration statement and to deliver a prospectus in connection with such sale
or in compliance with an exemption from the registration requirements of
applicable securities laws. If (a) a Purchaser provides the Company with an
opinion of counsel in comparable transactions and reasonably satisfactory to the
Company and its counsel (the reasonable cost of which shall be borne by the
Company if neither an effective registration statement under the Securities Act
nor Rule 144 is available in connection with such sale), to the effect that the
Securities to be sold or transferred may be sold or transferred pursuant to an
exemption form registration or (b) a Purchaser transfers Securities to an
affiliate which is an accredited investor (within the meaning of Regulation D
under the Securities Act) and which delivers to the Company in written form the
same representations, warranties and covenants made by Purchaser hereunder or
pursuant to Rule 144, the Company shall permit the transfer, and, in the case of
the Securities, issue or promptly instruct its transfer agent to issue one or
more certificates in such name and in such denomination as specified by such
Purchaser. The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to a Purchaser by vitiating the intent and
purposes of the transaction contemplated hereby. Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Article V will be inadequate and agrees in the event of a breach or threatened
breach by the Company of the provisions of this Article V, that a Purchaser
shall be entitled in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
5.3 INTENTIONALLY LEFT BLANK
ARTICLE VI
CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL
6.1 Conditions to the Company's Obligation to Sell. The obligation of the
Company hereunder to issue and sell the Securities to Purchaser at the Closing
is subject to the satisfaction, as of the Closing Date and with respect to
Purchaser, of each of the following conditions thereto, provided that these
conditions are for the Company's sole benefit and may be waived by the Company
at any time in its sole discretion:
(i) Purchaser shall have executed and delivered the signature page to
this Agreement, the Registration Rights Agreement and the Security
Agreement;
(ii) Purchaser shall have wired or otherwise delivered the Purchase
Price to the account designated by the Company;
(iii) The representations and warranties of Purchaser shall be true and
correct in all material respects as of the date when made and as of the
Closing as though made at that time (except for representations and
warranties that speak as of a specific date), and Purchaser shall have
performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be
performed. satisfied or complied with by the Purchaser at or prior to
the Closing;
(iv) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters
contemplated hereby which restricts or prohibits the consummation of
any of the transactions contemplated by this Agreement.
ARTICLE VII
CONDITIONS TO EACH PURCHASER'S OBLIGATION TO PURCHASE
7.1 The obligation of Purchaser hereunder to purchase the Securities to be
purchased by it on the Closing date is subject to the satisfaction of each of
the following conditions, provided that these conditions are for Purchaser's
sole benefit and may be waived by such Purchaser at any time in Purchaser's sole
discretion:
(i) The Company shall have executed and delivered the signature page to
this Agreement, the Registration Rights Agreement and the Security
Agreement.
(ii) The Company shall have immediately delivered to the Purchaser or
their counsel duly issued certificates for the Secured Promissory
Notes, and within 10 days delivered a copy of the instructions to the
Transfer Agent to issue Shares being so purchased by Purchaser at the
Closing.
(iii) INTENTIONALLY LEFT BLANK
(iv) The representations and warranties of the Company shall be true
and correct in all material respects as of the date when made and as of
the Closing as though made at that time and the Company shall have
performed, satisfied and complied in all material respects with the
covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the
Closing.
(v) No statute, rule, regulation, executive order, decree, ruling or
injunction shall have been enacted, entered, promulgated or endorsed by
any court or governmental authority of competent jurisdiction or any
self-regulatory organization having authority over the matters
contemplated hereby which prohibits the consummation of any of the
transactions contemplated by this Agreement
(vi) Purchaser shall have received an opinion of Horwitz & Beam,
counsel to the Company, dated as of the Closing, in the form attached
hereto as Exhibit F.
ARTICLE VIII
GOVERNING LAW; MISCELLANEOUS
8.1 Governing Law: Jurisdiction. This Agreement shall be governed by and
construed in accordance with the laws of the State of Arizona which would apply
if both parties were residents of California and this Agreement was made and
performed in Arizona. In any legal action involving this Agreement or the
parties' relationship, the Parties agree that the exclusive venue for any
lawsuit shall be in the state or federal court located within the County of
Orange, California. The parties agree to submit to the personal jurisdiction of
the state and federal courts located within Maricopa County, Arizona.
8.2 Counterparts. This Agreement may be executed in two or more
counterparts, including, without limitation, by facsimile transmission, all of
which counterparts shall be considered one and the same agreement and shall
become effective when counterparts have been signed by each party and delivered
to the other party. In the event any signature page is delivered by facsimile
transmission, the party using such means of delivery shall cause additional
original executed signature pages to be delivered to the other parties as soon
as practicable thereafter.
8.3Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
8.4Severability. If any provision of this Agreement shall be invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall not
affect the validity or enforceability of the remainder of this Agreement or the
validity or enforceability of this Agreement in any other jurisdiction
8.5Entire Agreement; Amendments. This Agreement and the instruments
referenced herein contain the entire understanding of the parties with respect
to the matters covered herein and therein and, except as specifically set forth
herein or therein, neither the Company nor Purchaser makes any representation,
warranty, covenant or undertaking with respect to such matters. No provision of
this Agreement may be waived other than by an instrument in writing signed by
the party to be charged with enforcement and no provision of this Agreement may
be amended other than by an instrument in writing signed by the Company and
Purchaser.
8.6 Notice. Any notice herein required or permitted to be given shall be
in writing and may be personally served or delivered by nationally-recognizable
overnight courier or by facsimile machine confirmed telecopy, and shall be
deemed delivered at the time and date of receipt (which shall include telephone
line facsimile transmission). The addresses for such communications shall be:
If to the Company:
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: Steve Antry
Phone: (949) 752-5212 Facsimile: (949) 752- 5757
With a copy to:
Horwitz & Beam
Two Venture Plaza, Suite 350
Irvine, CA 92618
Attention: Lynne Bolduc, Esq.
Phone: (949) 453-0300 Fax: (949) 453-9416
If to the Purchaser:
Attn: Aztore Holdings, Inc.
2117 So. 48th St.
Suite 105
Tempe, AZ 85282
Phone: 602-438-7333
Fax: 602-438-7392
With a copy to:
Thomas J. Morgan, Esq.
Gallager & Kennedy
2600 N. Central
20th Floor
Phoenix, AZ 85004
Phone: 602-530-8490
Fax: 602-357-9459
8.7 Successors and Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties and their successors and assigns. Each Purchaser
may assign its rights and obligations hereunder to any of its "affiliates," as
that term is defined under the Securities Act, without the consent of the
Company so long as such affiliate is an accredited investor (within the meaning
of Regulation D under the Securities Act) and agrees in writing to be bound by
this Agreement. This provision shall not limit Purchaser's right to transfer the
Securities pursuant to the terms of this Agreement or to assign Purchaser's
rights hereunder to any such transferee. In that regard, if Purchaser sells all
or part of its Securities to someone that acquires the Securities subject to
restrictions on transferability (other than restrictions, if any, arising out of
the transferee's status as an affiliate of the Company), Purchaser shall be
permitted to assign its rights hereunder, in whole or in part, to such
transferee.
8.8 Third Party Beneficiaries. This Agreement is intended for the benefit
of the parties hereto and their respective permitted successors and assigns and
is not for the benefit of, nor may any provision hereof be enforced by, any
other person.
8.9 Survival. The representations and warranties of the Company and the
agreements and covenants shall survive the Closing hereunder notwithstanding any
due diligence investigation conducted by or on behalf of Purchaser. The Company
agrees to indemnify and hold harmless Purchaser and each of Purchaser's
officers, directors, employees, partners, agents and affiliates for loss or
damage arising as a result of or related to any breach or alleged breach by the
Company of any of its representations or covenants set forth herein. The
representations and warranties of Purchaser shall survive the Closing hereunder
and Purchaser shall indemnify and hold harmless the Company and each of its
officers, director, employees, partners, agents and affiliates for any loss or
damage arising as a result of the breach of such Purchaser's representations and
warranties.
8.10 INTENTIONALLY LEFT BLANK.
8.11 Further Assurances. Each party shall do and perform, or cause to be
done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
8.12 Remedies. No provision of this Agreement providing for any remedy to
a Purchaser shall limit any remedy which would otherwise be available to such
Purchaser at law or in equity. Nothing in this Agreement shall limit any rights
a Purchaser may have with any applicable federal or state securities laws with
respect to the investment contemplated hereby. The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to
Purchaser. Accordingly, the Company acknowledges that the remedy at law for a
material breach of its obligations under this Agreement will be inadequate and
agrees, in the event of a breach or threatened breach by the Company of the
provisions of this Agreement, that Purchaser shall be entitled, in addition to
all other available remedies, to an injunction restraining any breach and
requiring immediate compliance, without the necessity of showing economic loss
and without any bond or other security being required.
8.13 Final Agreement. This Agreement, the Note, the Registration Rights
Agreement, the Security Agreement and the Mortgage, when executed by the parties
hereof, shall constitute the final agreement between the parties and upon such
execution Purchaser and the Company accept the terms hereof and have no cause of
action against each other for prior negotiations preceding the execution of this
Agreement.
8.14 Expenses. Each of the Company and Purchaser shall be responsible for
its own expenses in connection with this Agreement; provided, however, that if
requested, the Company shall reimburse Purchaser, a sum not to exceed $5,000 in
connection with legal fees and expenses incurred by the Purchaser.
IN WITNESS WHEREOF, the undersigned Purchaser and the Company have caused this
Agreement to be duly executed as of the date first above written.
"COMPANY":
Beta Oil & Gas, Inc.
by ______________________
/s/Steve Antry
Its: President and Director
"PURCHASER":
Aztore Holdings, Inc.
By: ______________________
Its:
<PAGE>
SCHEDULES
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
Schedule 3.1 - None.
Schedule 3.3 - Attached.
Schedule 3.5 - None.
Schedule 3.6 - None.
Schedule 3.7 - None.
Schedule 3.8 - None.
Schedule 3.16 - Attached.
<PAGE>
SCHEDULE 3.3
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
CAPITALIZATION OF BETA OIL & GAS, INC.
The following table sets forth as of September 30, 1998 (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
that gives effect to the sale and issuance of 429,000 shares of Common Stock in
private placements completed subsequent to December 31, 1998; and (ii) the
capitalization of the Company on a pro forma basis as adjusted to give effect,
net of estimated offering costs, to the proposed sale by the Company of a
minimum of 600,000 shares and a maximum of 1,500,000 shares of Common Stock
being offered in the initial public offering.
<TABLE>
As of December 31, 1998
-------------------------------------------------------------------------
Adjusted for Adjusted for
the Sale of the Sale of
Actual Pro Forma Minimum Offering Maximum
Offering
-------------- -------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Shareholders' Equity
Common shares, $.001 par value;
50,000,000 shares authorized;
6,725,192 shares issued and outstanding actual;
7,358,492 shares pro forma;
8,058,492 shares (Minimum Offering) and
8,958,492 (Maximum Offering) pro forma as
adjusted at December 31, 1998(1) $ 6,725 $ 7,458 $ 8,058 $ 8,958
Additional paid-in capital 15,878,386 17,872,957 21,022,357 25,881,457
Accumulated deficit (2,586,073) (2,586,073) (2,586,073) (2,586,073)
============== ============== ================= =================
Total shareholders' equity $ 13,299,342 $ 15,294,342 $ 18,444,342 $ 23,304,342
============== ============== ================= =================
<FN>
(1) Does not include 2,497,663 shares reserved for issuance on exercise of
outstanding Warrants to purchase Common Stock of the Company. All of the
presently outstanding shares of the Company and shares issuable upon
exercise of the 2,497,663 warrants have registration rights which will be
satisfied upon effectiveness of the current Registration Statement. This
does not include an additional number of shares reserved for issuance
underlying warrants equal to 10% of the number of shares sold in the
initial public offering ("underwriter's or selected dealer warrants"). In
addition, the minimum and the maximum number of shares sold in the initial
public offering may be changed at the discretion of Company's management.
Note: In addition, there may be an additional number of shares issuable pursuant
to common stock options in the event of termination without cause of Steve
Antry, President of the Company. This is pursuant to Mr. Antry's employment
contract with the Company.
</FN>
</TABLE>
<PAGE>
SCHEDULE 3.16
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
Key Employee
Mr. Steve Antry is serving the Company in the capacity of President and Chairman
of the Board. Neither the Company, nor any of its subsidiaries, is aware that
Mr. Antry is, or is now expected to be, in violation of any material term of any
employment contract, confidentiality, disclosure or proprietary information
agreement, non-competition agreement, or any other contract or agreement or any
restrictive covenant, and the continued employment of Mr. Antry does not subject
the Company or any of its subsidiaries to any liability with respect to any of
the foregoing matters. Mr. Antry, to the best of the knowledge of the Company
and its subsidiaries, does not have any intention to terminate his employment
with the Company or any of its subsidiaries.
<PAGE>
EXHIBIT A
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT dated as of March 19, 1999
(the "Agreement") is made by and between Beta Oil & Gas, Inc., a Nevada
Corporation, 901 Dove Street, Suite 230, Newport Beach, CA 92660 (the
Company"), and the undersigned investor (the "Initial Investor").
WITNESSETH:
WHEREAS, in connection with the Note and Common Stock Purchase
agreement dated March 19, 1999 among the Initial investor and the
Company the "Purchase Agreement"), the Company has agreed, upon the
terms and subject to the conditions of said Purchase Agreement, to
issue and sell to the Initial investor shares of Common Stock, $.001
par value, of the Company (the "Common Stock"). The shares of Common
Stock are referred to herein as the "Registrable Shares." In connection
with the sale of the Common Stock to the Initial investor (the
"Offering"), each of such investors will be entitled to registration
rights as set forth in this Agreement.
WHEREAS, to induce the Initial investor to execute and deliver
the Purchase Agreement, the Company has agreed to provide certain
registration rights under the Securities Act of 1933, as amended, and
the rules and regulations thereunder, or any similar successor statute
(collectively, the 'Securities Act"), and applicable state securities
laws with respect to the Registrable Shares;
NOW, THEREFORE, in consideration of the premises and the mutual
Covenants contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged1 the
Company and the Initial investor hereby agree as follows:
1. Definitions. Capitalized terms used herein and not
otherwise defined herein shall have the respective meanings set forth
in the Purchase Agreement as used in this Agreement. The following
terms shall have the following meanings:
(a) "Holders" are shareholders of the Company who, by virtue
of agreements with the Company, are entitled to include
certain of their securities in certain Registration Statements
filed by the Company.
(b) "Investors" means the initial investor and any permitted
transferee or assignee of the initial investor who agrees to
become bound by the provisions of this Agreement in accordance
with Section 9 hereof.
(c) "Registrable Securities" means the Registrable Shares,
together with any shares of Common Stock or other securities
which may be issued as a dividend or other distribution or in
exchange for Registrable Shares or common shares issued or
which may be issued pursuant to paragraph 1.3B of the Purchase
Agreement which are required to be included in a Registration
Statement pursuant to Section 2(a) below.
(d) "Registration Period" means the period between the date of
this Agreement and the earlier of (i) the date on which all of
the Registrable Securities have been sold in transactions
where the transferee is not subject to securities law resale
restrictions (or is subject to securities law resale
restrictions solely because it is an "affiliate" of the
Company under the Securities Act and the Rules and Regulations
promulgated thereunder), or (ii) the date on which the
Registrable Securities (in the opinion of Investors' counsel)
may be immediately sold without registration and free of
restrictions on transfer.
(e) "Registration Statement" means a registration statement of
the Company filed with the Securities and Exchange Commission
(the "SEC") under the Securities Act.
(f) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a
Registration Statement in compliance with the Securities Act
and applicable rules and regulations thereunder and pursuant
to Rule 415 under the Securities Act, and the declaration or
ordering of effectiveness of such Registration Statement by
the SEC.
2. Registration.
(a) Mandatory Registration. Subject to Section 4, the Company will
prepare and file a Registration Statement with the SEC,
registering all of the Registrable Shares for resale promptly
following 180 days after the closing date of the Company's
initial public offering (the "Closing Date"). Notwithstanding the
foregoing right of registration, the Investors shall have the
right to include the Registrable Securities in any Registration
Statement filed by the Company subsequent to the Closing Date.
However, this does not include the registration statement filed
by the Company on December 4, 1998 or any amendments or
supplements thereto. To the extent allowable under the Securities
Act and the Rules promulgated thereunder, the Registration
Statement shall include the Registrable Shares. The Registration
Statement (and each amendment or supplement thereto) shall be
provided to and subject to the reasonable approval of, the
Initial investor and their counsel. The Company shall use its
best efforts to cause such Registration Statement to be declared
effective by the SEC as soon as practicable after filing. Such
best efforts shall include, but not be limited to, promptly
responding to all comments received from the staff of the SEC.
Should the Company receive notification from the SEC that the
Registration Statement will receive no action or no review from
the SEC, the Company shall cause such Registration Statement to
become effective within fifteen (15) business days of such SEC
notification. Once declared effective by the SEC. the Company
shall cause such Registration Statement to remain effective
throughout the Registration Period.
(b) INTENTIONALLY LEFT BLANK
(c) INTENTIONALLY LEFT BLANK
3. Additional Obligations of the Company. In connection with
the registration of the Registrable Securities, the Company shall
have the following additional obligations:
(a) The Company shall keep the Registration Statement
required by Section 2(a) hereof effective pursuant to
Rule 415 under the Securities Act at all times during
the Registration Period as defined
in Section 1(d) above.
(b) The Registration Statement (including any
amendments or supplements thereto and prospectuses
contained therein) filed by the Company shall not
contain any untrue statement of a material fact or
omit to state a material fact required to be stated
therein1 or necessary to make the statements therein,
in light of the circumstances in which they were
made, not misleading. The Company shall prepare and
file with the SEC such amendments (including
post-effective amendments) and supplements to the
Registration Statement and the prospectus used in
connection with the Registration Statement as may be
necessary to keep the Registration Statement
effective at all times during the Registration
Period1 and, during such period, shall comply with
the provisions of the Securities Act with respect to
the disposition of all Registrable Securities of the
Company covered by the Registration Statement until
such time as all of such Registrable Securities have
been disposed of in accordance with the intended
methods of disposition by the sellers thereof as set
forth in the Registration Statement in the event the
number of shares of Common Stock included in a
Registration Statement filed pursuant to this
Agreement is insufficient to cover all of the
Registrable Securities, the Company shall amend, if
permissible, the Registration Statement and/or file a
new Registration Statement so as to cover all of the
Registrable Securities as soon as practicable, but in
no event more than twenty (20) business days after
the Company first determines (or reasonably should
have determined) the need therefor, the Company shall
use its best efforts to cause such amendment and/or
new Registration Statement to become effective as
soon as practicable following the filing thereof.
(c) The Company shall furnish to each Investor whose
Registrable Securities are included in the
Registration Statement (i) promptly after the same is
prepared and publicly distributed, filed with the SEC
or received by the Company, one copy of the
Registration Statement and any amendment thereto;
each preliminary prospectus and final prospectus and
each amendment or supplement thereto; and, in the
case of the Registration Statement required under
Section 2(a) above, each letter written by or on
behalf of the Company to the SEC and each item of
correspondence from the SEC, in each case relating to
such Registration Statement (other than any portion
of any item thereof which contains information for
which the Company has sought confidential treatment);
and (ii) such number of copies of a prospectus,
including a preliminary prospectus, and all
amendments and supplements thereto, and such other
documents as such Investor may reasonably request in
order to facilitate the disposition of the
Registrable Securities owned by such Investor.
(d) The Company shall use its best efforts to (i)
register and qualify the Registrable Securities
covered by the Registration Statement under such
other securities or blue sky laws of such
jurisdictions as the Investors reasonably request,
(ii) prepare and file in those jurisdictions such
amendments (including post-effective amendments) and
supplements to such registrations as may be necessary
to maintain the effectiveness thereof during the
Registration Period, (iii) take such other actions as
may be necessary to maintain such registrations and
qualifications in effect at all times during the
Registration Period, and (iv) take all other actions
reasonably necessary or advisable to qualify the
Registrable Securities for sale in such
jurisdictions. Notwithstanding the foregoing
provision, the Company shall not be required in
connection therewith or as a condition thereto to (i)
qualify to do business in any jurisdiction where it
would not otherwise be required to qualify but for
this Section 3(d), (ii) subject itself to general
taxation in any such jurisdiction, (iii) file a
general consent to service of process in any such
jurisdiction, (iv) provide any undertakings that
cause more than nominal expense or burden to the
Company, or (v) make any change in its charter or
bylaws, which in each case the Board of Directors of
the Company determines to be contrary to the best
interests of the Company and its shareholders.
(e) INTENTIONALLY LEFT BLANK
(f) The Company shall notify each Investor who holds
Registrable Securities being sold pursuant to a
Registration Statement of the happening of any event
of which the Company has knowledge as a result of
which the prospectus included in the Registration
Statement as then in effect includes an untrue
statement of a material fact or omits to state a
material fact required to be stated therein or
necessary to make the statements therein, in light of
the circumstances under which they were made not
misleading (a "Suspension Event") The Company shall
make such notification as promptly as practicable
after the Company becomes aware of such Suspension
Event, shall promptly, but in all events within five
(5) business days after becoming aware of such
Suspension Event1 use its best efforts to prepare a
supplement or amendment to the Registration Statement
to correct such untrue statement or omission and
shall deliver a number of copies of such supplement
or amendment to each Investor as such Investor may
reasonably request. Notwithstanding the foregoing
provision, the Company shall not be required to
maintain the effectiveness of the Registration
Statement or to amend or supplement the Registration
Statement for a period (a "Delay Period") expiring
upon the earlier to occur of (i) the date on which
such material information is disclosed to the public
or ceases to be material, (ii) the date on which the
Company is able to comply with its disclosure
obligations and SEC requirements related thereto, or
(iii) thirty (30) days after the occurrence of the
Suspension Event.
(g) The Company shall use its best efforts to prevent
the issuance of any stop order or other suspension of
effectiveness of a Registration Statement and, if
such an order is issued, shall use its best efforts
to obtain the withdrawal of such order at the
earliest possible time and to notify each Investor
who holds Registrable Securities being sold (or, in
the event of an underwritten offering, the managing
underwriters) of the issuance of such order and the
resolution thereof.
(h) The Company shall permit a single firm of counsel
designated by the Investors who hold a majority in
interest of the Registrable Securities being sold
pursuant to such registration to review the
Registration Statement and all amendments and
supplements thereto (as well as all requests for
acceleration or effectiveness thereof) a reasonable
period of time prior to their filing with the SEC,
and shall not file any document in a form to which
such counsel reasonably objects. The Company shall
make generally available to its security holders as
soon as practical, but not later than ninety (90)
days after the close of the period covered thereby,
an earnings statement (in a form complying with the
provisions of Rule 155 under the Securities Act)
covering a twelve-month period beginning not later
than the first day of the Company's fiscal quarter
following the effective date of the Registration
Statement.
(i) At the request of any Investor who holds
Registrable Securities being sold pursuant to such
registration, the Company shall furnish on the date
that Registrable Securities are delivered to an
underwriter for sale in connection with the
Registration Statement (i) a letter, dated such date,
from the Company's independent certified public
accountants in form and substance as is customarily
given by independent certified public accountants to
underwriters in an underwritten public offering,
addressed to the investors; and (ii) an opinion,
dated such date, from counsel representing the
Company for purposes of such Registration Statement
in form and substance as is customarily given in an
underwritten public offering, addressed to the
underwriters and Investors.
(k) The Company shall make available for inspection by
any Investor whose Registrable Securities are being
sold pursuant to such registration, any underwriter
participating in any disposition pursuant to the
Registration Statement, and any attorney, accountant
or other agent retained by any such Investor or
underwriter (collectively, the "Inspectors"), all
pertinent financial and other records, pertinent
corporate documents and properties of the Company
(collectively, the "Records"), as shall be reasonably
necessary to enable each Inspector to exercise its due
diligence responsibility. and use its best efforts to
cause the Company's officers, directors and employees
to supply all information which any Inspector may
reasonably request for purposes of such due diligence;
provided, however, that each Inspector shall hold in
confidence and shall not make any disclosure (except
to an Investor) of any Record or other information
which the Company determines in good faith to be
confidential, and of which determination the
Inspectors are so notified, unless (i) the disclosure
of such Records is necessary to avoid or correct a
material misstatement or material omission in any
Registration Statement, (ii) the release of such
Records is ordered pursuant to a subpoena or other
order from a court or government body of competent
jurisdiction. or such release is reasonably necessary
in connection with litigation or other legal process
or (iii) the information in such Records has been made
generally available to the public other than by
disclosure in violation of this or any other
agreement. The Company shall not be required to
disclose any confidential information in such Records
to any Inspector until and unless such Inspector shall
have entered into confidentiality agreements (in form
and substance satisfactory to the Company) with the
Company with respect thereto1 substantially in the
form of this Section 3(k). Each Investor agrees that
it shall, upon learning that disclosure of such
Records is sought in or by a court or governmental
body of competent jurisdiction or through other means,
give prompt notice to the Company and allow the
Company, at the Company's expense. to undertake
appropriate action to prevent disclosure of, or to
obtain a protective order for, the Records deemed
confidential. Nothing herein shall be deemed to limit
the Investor's ability to sell Registrable Securities
in a manner which is otherwise consistent with
applicable laws and regulations.
(l) The Company shall hold in confidence and shall
not make any disclosure of information concerning an
Investor provided to the Company pursuant hereto
unless (i) disclosure of such information is
necessary to comply with federal or state securities
laws, (ii) the disclosure of such information is
necessary to avoid or correct a misstatement or
omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a
subpoena or other order from a court or governmental
body of competent jurisdiction, or such release is
reasonably necessary in connection with litigation or
other legal process or (iv) such information has been
made generally available to the public other than by
disclosure in violation of this or any other
agreement. The Company agrees that it shall, upon
learning that disclosure of such information
concerning an Investor is sought in or by a court or
Governmental body of competent jurisdiction or
through other means, give prompt notice to such
Investor and allow such Investor, at its expense, to
undertake appropriate action to prevent disclosure
of, or to obtain a protective order for, such
information.
(m) The Company shall use its best efforts to cause
all the Registrable Securities covered by the
Registration Statement to be listed on each national
securities exchange on which similar securities
issued by the Company are then listed, if any, if the
listing of such Registrable Securities is then
permitted under the rules of such exchange.
(n) The Company shall provide a transfer agent and
registrar, which may be a single entity, for the
Registrable Securities not later than the effective
date of the Registration Statement.
(o) The Company shall cooperate with the Investors who hold
Registrable Securities being sold and the managing
underwriter or underwriters, if any, to facilitate the
timely preparation and delivery of certificates (not bearing
any restrictive legends) representing Registrable Securities
to be sold pursuant to the Registration Statement and enable
such certificates to be in such denominations or amounts as
the case may be, and registered in such names as the
managing underwriter or underwriters if any. or the
Investors may reasonably request, and within three (3)
business days after a Registration Statement which includes
Registrable Securities is ordered effective by the SEC, the
Company shall deliver, and shall cause legal counsel
selected by the Company to deliver, to the transfer agent
for the Registrable Securities (with copies to the Investors
whose Registrable Securities are included in such
Registration Statement) instructions to the transfer agent
to issue new stock certificates without a legend and an
opinion of such counsel that the Registrable Shares have
been registered.
(p) The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the
Investor of the Registrable Securities pursuant to the
Registration Statement.
(q) At the request of any Investor, the Company shall promptly
prepare and file with the SEC such amendments (including
post effective amendments) and supplements to a Registration
Statement and the prospectus used in connection with the
Registration Statement as may be necessary in order to
change the plan of distribution set forth in such
Registration Statement to conforming to written information
supplied to the Company by such investor for such purpose.
(r) The Company shall comply with all applicable laws related to
a Registration Statement and offering and sale of securities
and all applicable rules and regulations of governmental
authorities in connection therewith.
(s) INTENTIONALLY LEFT BLANK.
(t) INTENTIONALLY LEFT BLANK
4. Obligations of the Investors. In connection with
the registration of the Registrable Securities, the Investors
shall have the following obligations:
(a) it shall be a condition precedent to the obligations of the
Company to take any action pursuant to this Agreement with
respect to each Investor that such Investor shall furnish to
the Company such information regarding itself the number of
Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as
shall be reasonably required by rules of the SEC to effect
the registration of the Registrable Securities. The
information so provided by the Investor shall be included
without material alteration in the Registration Statement
and shall not be materially modified without such investors
written consent. At least ten (10) business days prior to
the first anticipated filing date of the Registration
Statement, the Company shall notify each Investor of the
information the Company requires from each such Investor
(the "Requested Information") if such Investor elects to
have any of such investor's Registrable Securities included
in the Registration Statement. If within five (5) business
days of such notice the Company has not received the
Requested Information from an Investor (a "Non-Responsive
Investor"), then the Company may file the Registration
Statement without including Registrable Securities of such
Non-Responsive Investor. The Non-Responsive Investor shall
then have no continuing right to demand registration of
their unregistered Common Stock, but shall continue to have
the right to include the Registrable Securities in any
subsequent Registration Statement filed by the Company.
(b) Each Investor, by such Investors acceptance of the
Registrable Securities agrees to cooperate with the Company
as reasonably requested by the Company in connection with
the preparation and filing of the Registration Statement
hereunder, unless such Investor has notified the Company in
writing of such Investors election to exclude all of such
investor's Registrable Securities from the Registration
Statement.
(c) In the event Investors holding a majority in interest of the
Registrable Securities being registered determine to engage
the services of an underwriter, each Investor agrees to
enter into and perform such Investor's obligations under an
underwriting agreement in usual and customary form,
including, without limitation, customary indemnification and
contribution obligations, with the managing underwriter of
such offering and take such other actions as are reasonably
required in order to expedite or facilitate the disposition
of the Registrable Securities, unless such Investor has
notified the Company in writing of such Investor's election
to exclude all of such Investor's Registrable Securities
from the applicable Registration Statement. No Investor
shall be obligated to participate in any such underwriting.
(d) Each Investor agrees that upon receipt of any notice from
the Company of the happening of any event of the kind
described in Section 3(f) or 3(g), such Investor will
immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering
such Registrable Securities until such Investor's receipt of
the copies of the supplemented or amended prospectus
contemplated by Section 3(f) or 3(y) and, if so directed by
the Company, such Investor shall deliver to the Company (at
the expense of the Company) or destroy (and deliver to the
Company a certificate of destruction) all copies, other than
file copies, in such Investor's possession, of the
prospectus covering such Registrable Securities current at
the time of receipt of such notice.
(e) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such
Investors Registrable Securities on the basis provided in
any underwriting arrangements approved by the Investors
entitled hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other
documents reasonably required under the terms of such
underwriting arrangements, and (iii) agrees to pay its pro
rata share of all underwriting discounts and commissions and
other fees and expenses of investment bankers and any
manager or managers of such underwriting and legal expenses
of the underwriter applicable with respect to its
Registrable Securities, in each case to the extent not
payable by the Company pursuant to the terms of this
Agreement.
5. Expenses of Registration. All expenses, other than
underwriting discounts and commissions and the fees and
disbursements of counsel selected by the Initial investor
pursuant to Section 3(e) hereof, incurred in connection with
registrations, filings or qualifications pursuant to Sections
2 and 3, including, without limitation, all registration,
listing and qualifications fees, printers and accounting fees,
and the fees and disbursements of counsel for the Company,
shall be borne by the Company.
6. Indemnification. In the event any Registrable Securities
are included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Investor who holds
such Registrable Securities, the directors, if any,
of such Investor, the officers, if any, of such
Investor, each person, if any, who controls any
Investor within the meaning of the Securities Act or
the Exchange Act any underwriter (as defined in the
Securities Act) for the Investors, the directors, if
any. of such underwriter and the officers, if any, of
such underwriter, and each person, if any, who
controls any such underwriter within the meaning of
the Securities Act or the Exchange Act (each, an
"Indemnified Person"), against any losses, claims,
damages, expenses (including legal fees in compliance
with Section 6 (c)) or liabilities joint or several
(collectively "Claims") to which any of them become
subject under the Securities Act, the Exchange Act or
otherwise, insofar as such Claims (or actions or
proceedings, whether commenced or threatened, in
respect thereof) arise out of or are based upon any
of the following statements, omissions or violations
in the Registration Statement, or any post-effective
amendment thereof, or any prospectus included
therein: (i) any untrue statement or alleged untrue
statement of a material fact contained in the
Registration Statement or any post-effective
amendment thereof or the omission or alleged omission
to state therein a material fact required to be
stated therein or necessary to make the statements
therein not misleading, (ii) any untrue statement or
alleged untrue statement of a material fact contained
in any preliminary prospectus if used prior to the
effective date of such Registration Statement, or
contained in the final prospectus (as amended or
supplemented, if the Company files any amendment
thereof or supplement thereto with the SEC) or the
omission or alleged omission to state therein any
material fact necessary to make the statements made
therein, in light of the circumstances under which
the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the
Company of the Securities Act, the exchange Act or
any state securities law or any rule or regulation
(the matters in the foregoing clauses (i) through
(iii) being, collectively, 'Violations"). Subject to
the restrictions Set forth in Section 6(c) with
respect to the number of legal counsel, the Company
shall reimburse the Investors and each such
underwriter or controlling person for any legal fees
or other reasonable expenses incurred by them in
connection with investigating or defending any such
Claim. Notwithstanding anything to the contrary
contained herein1 the indemnification agreement
contained in this Section 6(a): (A) shall not apply
to a Claim arising out of or based upon a Violation
which occurs in reliance upon and in conformity with
information furnished in writing to the Company by
any Indemnified Person or underwriter for such
Indemnified Person expressly for use in connection
with the preparation of the Registration Statement or
any such amendment thereof or supplement thereto1 if
the prospectus contained in such Registration
Statement was timely made available by the Company
pursuant to Section 3(c) hereof, (B) with respect to
any preliminary prospectus shall not inure to the
benefit of any such person from whom the person
asserting any such Claim purchased the Registrable
Securities that are the subject thereof (or to the
benefit of any person controlling such person) if the
untrue statement or omission of material fact
contained in the preliminary prospectus was corrected
in the prospectus, as then amended or supplemented.
if a prospectus was timely made available by the
Company pursuant to Section 3(c) hereof, and (C)
shall not apply to amounts paid in settlement of any
Claim if such settlement is effected without the
prior written consent of the Company, which consent
shall not be unreasonably withheld. Such indemnity
shall remain in full force and effect regardless of
any investigation made by or on behalf of the
Indemnified Persons and shall survive the transfer of
the Registrable Securities by the Investors pursuant
to Section 9.
(b) In connection with any Registration Statement in
which an Investor is participating, each such
investor, severally and not jointly, agrees to
indemnify and hold harmless, to the same extent and
in the same manner set forth in Section 6(a), the
Company, each of its directors, each of its officers
who signs the Registration Statement, each person, if
any, who controls the Company within the meaning of
the Securities Act or the Exchange Act, its
attorneys, any underwriter and any other stockholder
selling securities pursuant to the Registration
Statement or any of its directors or officers or any
person who controls such stockholder or underwriter
within the meaning of the Securities Act or the
Exchange Act (collectively and together with an
Indemnified Person, an "Indemnified Party"), against
any Claim to which any of them may become subject,
under the Securities Act, the Exchange Act or
otherwise, insofar as such Claim arises out of or is
based upon any Violation, in each case to the extent
(and only to the extent) that such Violation occurs
in reliance upon and in conformity with written
information furnished to the Company by such Investor
expressly for use in connection with such
Registration Statement and such Investor will
promptly reimburse any legal or other expenses
reasonably incurred by them in connection with
investigating or defending any such Claim; provided,
however, that the indemnity agreement contained in
this Section 6(b) shall not apply to amounts paid in
settlement of any Claim if such settlement is
effected without the prior written consent of such
Investor which consent shall not be unreasonably
withheld. Such indemnity shall remain in full force
and effect regardless of any investigation made by or
on behalf of such indemnified Party and shall survive
the transfer of the Registrable Securities by the
Investors pursuant to Section 9 Notwithstanding
anything to the contrary contained herein4 the
indemnification agreement contained in this Section
6(b) with respect to any preliminary prospectus shall
not inure to the benefit of any Indemnified Party if
the untrue statement or omission of material fact
contained in the preliminary prospectus was corrected
on a timely basis in the prospectus; as then amended
or supplemented.
(c) Promptly after receipt by an Indemnified Person
or Indemnified Party under this Section 6 of notice
of the commencement of any action (including any
governmental action)1 such Indemnified Person or
Indemnified Party shall, if a Claim in respect
thereof is to be made against any indemnifying party
under this Section 6, deliver to the indemnifying
party a written notice of the Commencement thereof
and this indemnifying party shall have the right to
participate in) and, to the extent the indemnifying
party so desires, jointly with any other indemnifying
party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to
the indemnifying parties; provided. however, that an
Indemnified Person or Indemnified Party shall have
the right to retain its own counsel, with the fees
and expenses to be paid by the indemnifying party,
if, in the reasonable opinion of counsel retained by
the indemnifying party, the representation by such
counsel of the Indemnified Person or Indemnified
Party and the indemnifying party would be
inappropriate due to actual or potential differing
interests between such Indemnified Person or
Indemnified Party and other party represented by such
counsel in such proceeding. The Company shall pay for
only one separate legal counsel for the Investors;
such legal counsel shall be selected by the Investors
holding a majority in interest of the Registrable
Securities. The failure to deliver written notice to
the indemnifying party within a reasonable time of
the commencement of any such action shall not relieve
such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this
Section 6, except to the extent that the indemnifying
party is prejudiced in its ability to defend such
action.
7. Contribution. If the indemnification provided for in
Section 6 herein is unavailable to the Indemnified Parties in respect
of any losses, claims, damages or liabilities referred to herein (other
than by reason of the exceptions provided therein), then each such
Indemnifying Party, in lieu of indemnifying such Indemnified Party,
shall contribute to the amount paid or payable by such Indemnified
Party as a result of such losses, claims, damages or liabilities as
between the Company on the one hand and any Investor on the other, in
such proportion as is appropriate to reflect the relative fault of the
Company and of such Investor in connection with the statements or
Omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations,
The relative fault of the Company on the one hand and of any Investor
on the other shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material tact or
omission or alleged omission to state a material fact relates to
information supplied by the Company or by such Investor,
In no event shall the obligation of any Indemnifying Party to
contribute under this Section 7 exceed the amount that such
Indemnifying Party would have been obligated to pay by way of
indemnification if the indemnification provided for under Section 6(a)
or 6(b) hereof had been available under the circumstances.
The Company and the Investors agree that it would not be just
and equitable if contribution pursuant to this Section 7 were
determined by pro rata allocation (even if the Investors or the
underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take account of the equitable
considerations referred to in the immediately preceding paragraphs. The
amount paid or payable by an Indemnified Party as a result of the
losses, claims, damages and liabilities referred to in the immediately
preceding paragraphs shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably
incurred by such Indemnified Party in connection with investigating or
defending any such action or claim. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
8. Public Information. With a view to making available to the
Investors the benefits of Rule 144 promulgated under the Securities Act
or any other similar rule or regulation of the SEC that may at any time
permit the Investors to sell securities of the Company to the public
without registration ("Rule 144"), the Company agrees to:
(a) File with the SEC in a timely manner and make and keep
available all reports and other documents required of the
Company under the Exchange Act at such time that the Company
becomes subject to and so long as the Company remains subject
to, such requirements and the filing and availability of such
reports and other documents is required for the applicable
provisions of Rule 144; and
(b) Furnish to each Investor so long as such Investor holds
Registrable Securities promptly upon request, (i) a written
statement by the Company that it has complied with the
reporting requirements of Rule 144 and the Exchange Act (if
and when applicable), (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and
documents so filed by the Company and (iii) such other
information as may be reasonably requested to permit the
Investors to sell such securities pursuant to Rule 144 without
registration.
9. Assignment of Registration Rights. The rights to have the
Company register Registrable Securities pursuant to this Agreement
shall be automatically assigned by the Investors to transferees or
assignees of all or any portion of such securities only if:
(i) the Investor agrees in writing with the
transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company
within a reasonable time after such assignment, (ii)
the Company is, within a reasonable time after such
transfer or assignment furnished with written notice
of the name and address of such transferee or
assignee and the securities with respect to which
such registration rights are being transferred or
assigned, (iii) following such transfer or assignment
the further disposition of such securities by the
transferee or assignee is restricted under the
Securities Act and applicable state securities laws,
(iv) at or before the time the Company received the
written notice contemplated by clause (ii) of this
sentence, the transferee or assignee agrees in
writing with the Company to be bound by all of the
provisions contained herein, (v) such transfer shall
have been made in accordance with the applicable
requirements of the Purchase Agreement and (vi) such
transferee shall be an "accredited investor" as that
term is defined in Rule 501 of Regulation D
promulgated under the Securities Act.
10. Amendment of Registration Rights Provisions of this
Agreement may be amended and the observance thereof may be waived
(either generally or in a particular instance and either retroactively
or prospectively) only with the written consent of the Company and
Investor's holding sixty-five percent of the Registerable Securities.
Any amendment or waiver effected in accordance with this Section 10
shall be binding upon each Investor and the Company.
11. Miscellaneous.
(a) Conflicting Instructions. A person or entity is deemed to
be a holder of Registrable Securities whenever such person or
entity owns of record such Registrable Securities. If the
Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to
the same Registrable Securities, the Company shall act upon
the basis of instructions, notice or election received from
the registered owner of such Registrable Securities.
(b) Notices. Any notices required or permitted to be given
under the terms of this Agreement shall be sent by certified
or registered mail (with return receipt requested) or
delivered personally or by courier (including a nationally
recognized overnight delivery service) or by facsimile
transmission. Any notice so given shall be deemed effective
upon receipt if delivered personally, by U.S. Mail or by
courier or facsimile transmission, in each case addressed to a
party at the following address or such other address as each
such party furnishes to the other in accordance with this
Section 11(b). and;
If to the Company:
Beta Oil & Gas, Inc.
901 Dove Street, Suite 230
Newport Beach, CA 92660
Attention: J. Chris Steinhauser
Phone: (949) 752 -5212
Fax: (949) 752 -5757
With copy to:
Horwitz & Beam
Two Venture Plaza, Suite 350
Irvine, CA 92618
Attention: Lynne Buldoc, Esq.
Phone: (949) 453-0300
Fax: (949) 453 - 9416
if to the Investors:
Attn: Aztore Holdings, Inc.
2117 So. 48th St.
Suite 105
Tempe, AZ 85282
Phone: 602-438-7333
Fax: 602-438-7392
With a copy to:
Mr. Tom Morgan
Gallager & Kennedy
2600 N. Central
20th Floor
Phoenix, AZ 85004
(c) Waiver. Failure of any party to exercise any right or
remedy under this Agreement or otherwise, or delay by a party
in exercising such right or remedy, shall not operate as a
waiver thereof
(d) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of
California which would apply if both parties were residents of
California and this Agreement was made and performed in
California. In any legal action involving this Agreement or
the parties' relationship, the parties agree that the
exclusive venue for any lawsuit shall be in the state or
federal court located within the County of Orange, California.
The parties agree to submit to the personal jurisdiction of
the state and federal courts located within Orange County,
California.
(e) Severability. In the event that any provision of this
Agreement is invalid or unenforceable under any applicable
statute or rule of law, then such provision shall be deemed
inoperative to the extent that it may conflict therewith and
shall be deemed modified to conform with such statute or rule
of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or
enforceability of any other provision hereof.
(f) Entire Agreement. This Agreement and the Purchase
Agreement (including all schedules and exhibits thereto)
constitute the entire agreement among the parties hereto with
respect to the subject matter hereof. There are no
restrictions1 promises, warranties or undertakings, other than
those set forth or referred to herein or therein. This
Agreement supersedes all prior agreements and understandings
among the parties hereto with respect to the subject matter
hereof.
(g) Successors and Assigns. Subject to the requirements of
Section 9 hereof, this Agreement shall inure to the benefit of
and be binding upon the successors and assigns of each of the
parties hereto.
(h) Use of Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or
plural, as the context may require.
(i) Headings. The headings and subheadings in the Agreement
are for convenience of reference only and shall not limit or
otherwise affect the meaning hereof.
(j) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original
but all of which shall constitute one and the same agreement.
This Agreement once executed by a party, may be delivered to
the other party hereto by facsimile transmission, and
facsimile signatures shall be binding on the parties hereto.
(k) Further Acts. Each party shall do and perform1 or cause to
be done and performed, all such further acts and things1 and
shall execute and deliver all such other agreements,
certificates, instruments and documents, as the other party
may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation
of the transactions contemplated hereby.
(l) Remedies. No provision of this Agreement providing for any
remedy to a Investor shall limit any remedy which would
otherwise be available to such Investor at law or in equity.
Nothing in this Agreement shall limit any rights a Investor
nay have with any applicable federal or state securities laws
with respect to the investment contemplated hereby. The
Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to a Investor.
Accordingly, the Company acknowledges that the remedy at law
for a breach of its obligations under this Agreement will be
inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Agreement,
that a Investor shall be entitled, in addition to all other
available remedies to an injunction restraining any breach and
requiring immediate compliance, without the necessity of
showing economic loss and without any bond or other security
being required.
(m) Consents. All consents and other determinations to be made
by the Investors pursuant to this Agreement shall be made by
investors holding sixty-five percent of the Registrable
Securities.
IN WITNESS WHEREOF, the parties have caused this
Registration Rights Agreement to be duly executed as of the date
first above written.
COMPANY:
Beta Oil & Gas, Inc.
By ______________________
/s/ Steve Antry
Its: President and Director
INVESTORS:
Aztore Holdings, Inc.
By: ______________________
Its:
<PAGE>
EXHIBIT B
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
SECURITY AGREEMENT
This SECURITY AGREEMENT (this "Agreement') is made and entered into as of this
15th day of March, 1999, by and between Beta Oil & Gas, Inc., a Nevada
corporation ("Debtor") and Aztore Holdings, Inc. Aztore Holdings, Inc.
is referred to herein as the "Secured party".
RECITALS
A. Debtor and the Secured party are parties to that certain Note and Common
Stock Purchase Agreement dated of even date herewith (the "Purchase Agreement").
B. As security for Debtor's obligations to the Secured party under Those certain
Secured Promissory Notes dated of even date herewith issued to the Secured party
pursuant to the Purchase Agreement (the "Secured Promissory Notes"), Debtor has
agreed to execute this Agreement granting to Secured party a security interest
in all of the assets of Debtor.
AGREEMENT
In consideration of the foregoing recitals and the mutual covenants and
conditions contained herein, the parties, intending to be legally bound, agree
as follows:
1. Grant of Security Interest Debtor hereby grants to Secured party, along with
additional secured parties in other recent and current tranches of similar
financing in a combined amount not to exceed $3,000,000, to secure all of
Debtors obligations under the Secured Promissory Notes, a security interest in
all of the assets of Debtor, including, without limitation, all of Debtor's
presently existing or hereafter acquired right, title and interest in and to all
of Debtor's assets, tangible and intangible, including without limitation, the
following: All equipment, inventory, accounts, instruments, documents, oil and
gas leases, productive wells, seismic data, chattel paper, general intangibles,
contracts, money and proceeds and products of the foregoing (collectively, the
"Collateral").
2. Use of Collateral in Absence of Default. Until a Default (as defined in
Section 3 below), Debtor may use the Collateral in any lawful manner not
inconsistent with this Agreement and may sell its inventory in the ordinary
course of business. Debtor will maintain the Collateral in good working order
and condition, normal wear and tear excepted, and will not cause or permit any
waste or unusual or unreasonable depreciation thereof.
3. Default by Debtor. A "Default" shall mean an Event of Default as defined in
the Secured Promissory Notes.
4. Remedies of Secured Party. Upon and after a Default, each Secured Party and
its respective assigns, shall have all of the rights and remedies of a secured
party under the Uniform Commercial Code or other applicable law in all relevant
jurisdictions, all of which rights and remedies shall be cumulative and
nonexclusive to the extent permitted by law.
5. Relationship of the Secured Parties The rights of the Secured Parties
hereunder shall rank pari passu and any action taken by any Secured Party
hereunder shall inure to the benefit of each other Secured Party, pro rata in
accordance with the aggregate amounts due and owing to such Secured Party under
the Secured Promissory Note held by such Secured Party.
6. Notice. Any notice required to be given by any Secured Party on a sale,
lease, other disposition of the Collateral or any other intended action and such
Secured Party, if given ten (10) business days prior to such proposed action,
shall constitute commercially reasonably fair notice thereof to Debtor.
7. Financing Statements. Debtor agrees to execute from time to time such
financing statements and such additional instruments as may be reasonably
required by the Secured party to preserve and perfect the security interests
created hereby.
8. Termination of Lien. Upon Debtor's payment in full of all amount:; due and
owing under the Secured Promissory Notes, the Secured party shall cause an
appropriate UCC termination statement or other instruments as required to be
filed with the appropriate government offices in all of the states, counties, or
otherwise in which financing statements or such other instruments were filed
pursuant to Section 7.
9. General Provisions
9.1 Choice of Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California, which would apply if both
parties were residents of California and this Agreement was made and performed
in California. In any legal action involving this Agreement or the parties'
relationship, the parties agree that the exclusive venue for any lawsuit shall
be in the state or federal court located within the County of Orange,
California. The parties agree to submit to the personal jurisdiction of the
state and federal courts located within Orange County, California.
9.2 Severability. Each provision of this Agreement is intended to be severable.
Should any provision of this Agreement or the application thereof be judicially
declared to be or becomes unenforceable, the remainder of this Agreement will
continue in full force and effect and the application of such provision to other
persons or circumstances will be interpreted so as reasonably to effect the
intent of the party hereto. The parties further agree to replace such
unenforceable provision of this Agreement with an enforceable provision that
will achieve, to the extent possible, the economic, business and other purposes
of such unenforceable provision
9.3 Assignability. Except in connection with a change in control or sale of
substantially all of the assets of a party, neither this Agreement nor any
interest herein shall be assignable (voluntarily. involuntarily, by judicial
process or otherwise), in whole or in part, by any party to any other entity
without the prior written consent of the other party. Any attempt at such an
assignment without such consent shall be void.
9.4 Attorneys' Fees. In any action or proceeding brought to enforce any
provision of this Security Agreement, or to seek damages for a breach of any
provision hereof is validly asserted as a defense, the successful party shall be
entitled to recover reasonable attorneys' fees in addition to any other
available remedy.
9.5 Successors and Assigns. Each of the terms, provisions and obligations of
this Agreement shall be binding upon, shall inure to the benefit of, and shall
be enforceable by the parties and their respective legal representatives,
successors and permitted assigns.
9.6 Notices. All notices, demands or other communications which are required or
are permitted to be given hereunder shall be in writing and shall be deemed to
have been sufficiently given in the manner set forth in the Purchase Agreement.
IN WITNESS WHEREOF, each of the parties has executed this Agreement as of the
date first set forth above.
"DEBTOR":
Beta Oil & Gas, Inc.
a Nevada corporation
By: ____________________
/s/ Steve Antry
Its: President and Director
"SECURED PARTY":
Aztore Holdings, Inc.
By: ______________________
Its:
<PAGE>
EXHIBIT C
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT
DATED March 19, 1999
<PAGE>
THIS SECURED PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD OR
TRANSFERRED EXCEPT IN COMPLIANCE WITH THE ACT AND ALL APPLICABLE STATE
SECURITIES LAWS.
SECURED PROMISSORY NOTE
$ 1,000,000 Due March 19, 2000
FOR VALUE RECEIVED, the undersigned, Beta Oil & Gas, Inc., a Nevada corporation
("Maker"), promises to pay to Aztore Holdings, Inc., ("Payee"), the principal
sum of one million dollars ($1,000,000) (the "Principal Amount") before or at
maturity, together with Interest accruing on the unpaid portion of the Principal
Amount from the date hereof until maturity at the annual rate of ten percent
(10%) payable monthly in arrears.
This Secured Promissory Note (this '"Note") is being issued and delivered
pursuant to that certain Note and Common Stock Purchase Agreement dated of even
date herewith (the "Purchase Agreement") by and between Maker and Payee and is
made subject to the terms and Conditions of the Purchase Agreement. Unless
otherwise set forth herein, all capitalized terms used herein without definition
shall have the meanings given to such terms in the Purchase Agreement.
The Principal Amount and all accrued and unpaid interest thereon shall be due
and payable on the sooner to occur of 10 days from the close of the anticipated
Initial Public Offering or March 19, 2000 or the occurrence of an Event of
Default as hereafter defined (the "Maturity Date"). Maker may prepay. at any
time or from time to time prior to the Maturity Date, any portion or all of the
amount due hereunder without penalty; provided, however, that any such
prepayment shall be applied first to the Principal Amount and the balance to
accrued but unpaid interest, in which case, interest shall cease to accrue on
the amount of the Principal Amount so paid; and provided further that, unless
the holders of all of the Notes otherwise consent in writing, unless the full
principal amount of and all accrued and unpaid interest on all of the
outstanding Notes are prepaid in full at such time, any amount paid by Maker in
prepayment of any Note shall be allocated among all outstanding Notes prorated
in accordance with the respective principal amount of and accrued and unpaid
Interest on such Notes. The Maker agrees that the original principal amount of
the Note will be due and payable 10 days from the close of the initial public
offering for which Maker has filed an S-1 Registration Statement.
It shall constitute an event of default ("Event of Default") if any one or more
of the following shall occur for any reason:
(a) A failure by Maker to pay the principal of or interest on this Note
or any portion thereof when due; or
(b) A failure by Maker to perform or observe any term, covenant or
Agreement contained in the Note and Common Stock Purchase Agreement or
the Security Agreement on its part to be performed or observed and such
failure shall continue for more than fourteen (14) days after notice of
such failure is given by Payee to Maker; or
(c) Any representation or warranty in the Note and Common Stock
Purchase Agreement or in any certificate, agreement instrument or other
document made or delivered by Maker to Payee pursuant to the Note and
Common Stock Purchase Agreement proves to have been incorrect when
made; or
(d) Maker shall fall to pay when due (or within any stated grace
period), whether at the stated maturity, upon acceleration, by reason
of required prepayment or otherwise, the principal or any principal
installment of, or any interest on, any present or future indebtedness
of Maker; or
(e) Maker Is the subject of an order for relief by a bankruptcy court,
or is unable or admits in writing its inability to pay its debts as
they mature or makes an assignment for the benefit of creditors, or
applies for or consents to the appointment of any receiver, trustee,
custodian, conservator, liquidator, rehabilitator or similar officer
for it or for all or any part of its business or Property; or any
receiver, trustee., custodian, conservator, liquidator, rehabilitator
or similar officer is appointed without the application or consent of
Maker and the appointment continues a undischarged or unstayed for
sixty (60) calendar days; or institutes or consents to any bankruptcy,
insolvency, reorganization, arrangement, readjustment of debt,
dissolution, custodianship, conservatorship, liquidation,
rehabilitation or similar proceeding relating to it or to all or any
part of its business or property under the laws of any jurisdiction; or
any similar proceeding is instituted without the consent of Maker
(including but not limited to any action taken by any Governmental
Agency that has a material adverse effect on the business, operations
or property of Maker) and continues undismissed or unstayed for sixty
(60) calendar days; or
(e) Any judgment, writ, warrant of attachment or execution or
similar process is issued or levied against all or any
part of the property of Maker end is not released,
vacated or fully bonded within sixty (60) calendar days
after its issue or levy.
Maker will reimburse Payee on demand for all costs of collection before and
after judgement and the costs of preservation and/or liquidation of any
collateral (including all fees and expenses of counsel to the Payee).
All payments hereunder shall be made in lawful currency of the United States of
America at such place as Holder shall designate in writing and shall be payable
by Maker by check or wire transfer.
Maker's obligations under this Note are secured pursuant to the terms of that
certain Security Agreement of even date herewith between Maker, Payee and
others, securing all of the assets of Maker, tangible and intangible, in favor
of Payee and others.
The validity. construction and performance of this Note, and any action or claim
arising out of or relating to this Note, shall be governed by the laws, without
regard to the laws as to choice or conflict of laws, of the State of California.
The forum for disputes is Orange County, California.
Each of the terms, provisions and obligations of this Note shall be binding
upon. shall inure to the benefit of, and shall be enforceable by the parties and
their respective legal representatives, successors and permitted assigns.
IN WITNESS WHEREOF, Maker has executed this Note in favor of Payee is of the
date first set forth above.
MAKER:
Beta Oil & Gas, Inc.
a Nevada corporation
By:__________________
/s/ Steve Antry
Its: President and Director
PAYEE:
Aztore Holdings, Inc.
By:__________________
Its:
<PAGE>
EXHIBIT D
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
There is no Exhibit D.
<PAGE>
EXHIBIT E
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
There is no Exhibit E.
<PAGE>
EXHIBIT F
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
Attorney Letterhead (Horwitz & Beam)
__________, 1999
Aztore Holdings, Inc.
2117 So. 48th St.
Suite 105
Tempe, AZ 85282
Re: Beta Oil & Gas, Inc.
Ladies and Gentlemen:
We have acted as counsel to Beta Oil & Gas, Inc., a Nevada
corporation (the "Company"), in connection with (i) the execution and
delivery by the Company of the Note and Common Stock Purchase
Agreement, the Secured Promissory Note, the Security Agreement, the
Registration Rights Agreement, all dated as of March 19,1999
(collectively, the "Transaction Documents"), to which Aztore
Holdings, Inc., (the "Purchaser") and the Company are signatories and
(ii) the transactions contemplated to be consummated by the Company
under the Transaction Documents on the date hereof. We are rendering
this Opinion pursuant to Section 7.l (vii) of the Note and Common
Stock Purchase Agreement. Capitalized terms used and not otherwise
defined herein shall have the same meanings as are ascribed thereto
in the various Transaction Documents.
As counsel in this capacity, we have examined the following:
(i) each of the Transaction Documents, (ii) a copy of the Articles of
Incorporation and By-laws of the Company, including any amendments
thereto to date, (iii) records of the proceedings and actions of the
Company's board of directors, (iv) certificates of the Nevada
Secretary of State (dated October 23, 1998), (v) a certificate of an
executive officer of the Company (of even date herewith), and (vi)
such other documents, records, and items as we have deemed necessary
or relevant for purposes of the opinions hereinafter expressed.
For purposes of this opinion, we have also made the following
assumptions and have not made any factual, legal, or other inquiry or
investigation with respect thereto:
(i) that the Transaction Documents have been
duly authorized, executed, and delivered by
the Purchaser and each other party thereto
(other than the Company);
(ii) that all persons signing the Transaction
Documents on behalf of the Purchaser and each
other party thereto (other than the Company)
have the legal existence, power, authority,
and right so to sign;
(iii) that each of the agreements made by
each of the parties in each Transaction
Document executed by the Purchaser is
authorized by all appropriate corporate or
other actions of the Purchaser and each other
party thereto (other than the Company) arid
is in compliance with all applicable laws and
regulations affecting the Purchaser;
(iv) the genuineness of all signatures on
documents not signed in our presence (other
than those of the officers of the Company),
and the authenticity of all documents
submitted to us as originals and the
conformity with original documents of all
documents submitted to us as copies,
(v) that (x) each Transaction Document is
enforceable against the Purchaser and each
other party thereto (other than the Company);
(y) all actions required to be taken and all
conditions and requirements required to be
fulfilled under the Transaction Documents in
order to allow the Purchaser (other than
conditions and requirements to be fulfilled
by the Company) to enforce its rights
thereunder have been fully and effectively
taken and fulfilled; and (r) the Purchaser
has complied with all laws that may be
applicable to it with respect to the
execution and delivery of the Transaction
Documents, and purchasing the Notes and the
Common Shares, and other actions taken or
that may be taken by it thereunder;
(vi) that the representations and warranties
made by the Purchaser within the Transaction
Documents are true and complete in all
material in respects. and do not fail to
state any fact or information, the statement
of which is necessary to make than not
misleading in any material respect; and
(vii) that there are no documents other than
the Transaction Documents and no agreements
other than as contained in the Transaction
Documents between the Purchaser and the
Company or others that expand or otherwise
modify the obligations of the Company with
respect to the transactions contemplated by
the Transaction Documents and would have an
affect on the Opinions Set forth below.
For purposes of this opinion we have relied upon the accuracy
of: (i) the representations and warranties of each of the parties set
forth in the Transaction Documents, but only as to questions of fact,
(ii) the representations of an executive officer of the Company in a
certificate to us, and (iii) the certificates of public officials. In
addition to the assumptions set forth above, this opinion is subject
to the following qualifications and exceptions:
(a) enforcement may be limited by (i) applicable
bankruptcy, insolvency, fraudulent conveyance,
preference, reorganization, moratorium, or other
similar laws of general application affecting
creditors' rights (including equitable
subordination) and (ii) the application of the
rules of equity, including those respecting
availability of specific performance and general
principles of public policy (regardless of
whether enforcement is sought in equity or at
law);
(b) we express no opinion as to (i) the
enforceability of the choice of California law by
a federal court or by a state court outside the
State of California, (ii) conflicts of law
principles generally, (iii) the validity, binding
effect, or enforceability of any provision of the
Transaction Documents purporting to (A) prohibit
oral amendment or waiver of such documents or
limit the effect of a course of dealing between
the parties or (B) indemnify any pawn for its own
negligence, gross negligence, or willful
misconduct or release such person from the
consequences thereof, (iv) the enforceability of
any provision in the Transaction Documents
purporting to relate to delay by any party to the
Transaction Documents to exercise any right,
remedy, or option under the provisions thereof
not operating as a waiver, (v) the enforceability
of any provisions in the Transaction Documents,
as a whole, and in the Notes specifically, in
respect of interest to be charged to, or accrued
or paid by, the Company and whether any
provisions of any of the Transaction Documents,
individually or taken as a whole, if enforced,
would constitute a violation of any
Constitutional, statutory, administrative, or
case law regarding effective interest rates
(usury), and (vi) the priority of any liens or
security interests created by any or all of the
Transaction Documents in any of the Company's
property and whether, if applicable, the
Purchaser has possession of the collateral
described in any or all of the Transaction
Documents sufficient to perfect a security
interest therein;
(c) with respect to our opinions as to the good
standing and foreign qualification of the
Company, we have relied solely on the good
standing certificates referenced above and
delivered to us by public officials from the
State of Nevada; and
(d) the qualification that any right to
indemnification and contribution contained in the
Transaction Documents may be limited by United
States federal or state securities laws or the
policies underlying such laws.
We express no opinion as to the laws of any jurisdiction other
than (i) the laws of the State of California and (ii) the federal
laws of the United States of America to the extent specifically
referred to herein. We express no opinion as to any ordinances,
administrative decisions, or the rules and regulations of counties,
towns, municipalities, and special political subdivisions
As used herein, the term "knowledge" refers only to the actual
knowledge of our attorneys who participated in our representation of
the Company in connection with the negotiation, execution, and
delivery of the Transaction Documents. Unless otherwise expressly
indicated, the phrase "to our knowledge" does not imply any
investigation or inquiry on the part of our firm or any partner or
employee thereof. As used herein, the word "including" means
"including, without limitation."
Based upon and subject to the foregoing, we are of the opinion
that:
1. The Company is a corporation validly existing and
in good standing under the laws of the State of
Nevada, and is qualified as a foreign corporation in
California to own and operate its properties and
assets and to carry on its business as presently
conducted. The Company is not qualified as a foreign
corporation to do business in any other
jurisdictions.
2. The offer and sale of the Notes and Common Shares
in conformity with the terms of the Transaction
Documents will constitute transactions exempt from
the registration requirements of Section 5 of the
Securities Act.
3. No consent, approval, or authorization of or
designation, declaration, or filing with any court,
governmental authority, regulatory agency,
self-regulatory organization. stock exchange, or
market on the part of the Company is required in
connection with (i) the valid execution and delivery
of the Transaction Documents. (ii) the offer, sale,
or issuance of the Notes or the Common Shares, (iii)
the consummation of any other transaction
contemplated by the Transaction Documents, with the
exception of (A) the filing of one or more Notices
of Sale of Securities Pursuant to Regulation D (Form
D) with the SEC, (B) the filing of appropriate
notices with state securities commissioners (blue
sky authorities), and (C) the filing of a
Registration Statement pursuant to the Registration
Rights Agreement.
4. The Company has all requisite corporate power
and authority to execute and deliver the
Transaction Documents to carry out all of its
obligations thereunder, including the sale and
issuance of the Notes and the Common Shares, in
accordance with the terms of the Transaction
Documents.
5. Each of the Transaction Documents has been duly and
validly authorized by all necessary corporate
action, and has been executed and delivered by, and
constitutes a valid and binding agreement of, the
Company and is enforceable against the Company in
accordance with its terms
6. The authorized capital stock of the Company is as
stated in the Articles of incorporation of the
Company and in Schedule 3.3 of the Note and Common
Stock Purchase Agreement. To our knowledge, there
have not been any shares of the capital stock of
the Company issued that are not validly issued,
fully paid, and non-assessable. All issued and
outstanding shares of Common Stock of the Company
are free of any preemptive or similar rights
contained in the Articles of Incorporation or
Bylaws of the Company or, to our knowledge, in any
agreement by which the Company is bound.
7. Upon payment therefor, the Common Shares will be
validly issued, fully paid, and non-assessable, and
free of any preemptive or similar rights contained
in the Articles of incorporation or the By-laws of
the Company or, to our knowledge, of any agreement
by which the Company is bound.
8. The execution and delivery of, and compliance
with the terms of: the Transaction Documents,
including the issuance of the Common Shares, as
contemplated thereby, do not and will not conflict
with or result in a breach or default by the
Company of any of the terms or provisions of: (i)
the Articles of Incorporation or the By-laws of the
Company, (ii) to our knowledge, any existing
applicable decree, judgment, or order of any court,
federal or state regulatory body, administrative
agency, or other governmental body having
jurisdiction over the Company or any of its
properties or assets, (iii) to our knowledge,
conflict with, or constitute a default (or an event
which with notice or lapse of time or both would
become a default) under, or give to others any
rights of terminations, amendments, accelerations,
or cancellation of, any agreement, indenture, or
instrument to which the Company is a party (except
for such conflicts, defaults, termination,
amendments, accelerations, cancellations, arid
violations as would not, individually or in the
aggregate, have a Material Adverse Effect), or (iv)
federal or California State law. However, we
express no opinion on usury laws and encourage
purchaser to undertake its own investigation into
such laws.
9. To our knowledge, there is no litigation,
pending or threatened, that could or that would
impair the ability of the Company to issue and
deliver the Common Shares, or to comply with the
provisions of the Transaction Documents or
otherwise have a Material Adverse Effect.
This opinion is furnished to the Purchaser solely for its
benefit in connection with the sale and issuance of the Notes and the
Common Shares, as contemplated by the Transaction Documents, and may
not be relied upon by any other person (other than the Company) or
for any other purpose without our prior written consent. This opinion
is limited to matters expressly set forth herein and no opinion may
be inferred or implied beyond the matters expressly stated in this
opinion on the date hereof. We shall have no obligation to update any
of the matters set forth in this opinion.
We bring to your attention the fact that our legal opinions
are an expression of professional judgment and are not a guarantee of
a result.
Very truly yours,
HORWITZ & BEAM
<PAGE>
EXHIBIT G
TO NOTE AND COMMON STOCK PURCHASE AGREEMENT DATED
March 19, 1999
LIST OF COLLATERAL TO BE PLEDGED UNDER THIS AGREEMENT
1. All of the Company's right, title and interest in West Cameron Block 39,
offshore Louisiana, including, but not limited to, the OCS-G 13825 #1 Well,
the OCS-G 13825 #2 Well, and the Company's leasehold interest therein.
2. All of the Company's right, title and interest in the Pressly No. 1 Well
and the applicable spacing unit surrounding the well, Jackson County,
Texas.
3. All of the Company's right, title and interest in the Wilbeck No. 1 Well
and the applicable spacing unit surrounding the well, Jackson County,
Texas.
SOUTHERN
CALIFORNIA
BANK
ESCROW DIVISION
4100 Newport Place, Suite 130, Newport Beach, CA 92660
FAX: (949) 863-2489
HOLDING ESCROW INSTRUCTIONS ESCROW NO: 12794-GG
Gloria Garriott, CSEO,
ESCROW OFFICER DATE: March 16, 1999
Phone: (949) 863-2485
The undersigned delivers herewith, or will cause to be delivered to SOUTHERN
CALIFORNIA BANK, hereinafter called Escrow Holder, the papers, money or
property hereinafter described to be held and disposed of by Escrow Holder in
accordance with the following instructions and upon the terms and conditions
hereinafter set forth.
A.This escrow is established by BETA OIL & GAS, INC., a Nevada corporation
(the "Company").
B.This escrow is established for the purpose of receiving and holding the
funds in escrow from the Offering of a minimum of $4,800,000.00 (800,000
Shares) and a maximum of $9,000,000.00 (1,500,000 Shares) pursuant to the
terms and conditions of the Prospectus dated ________________________ (the
"Effective Date") as such prospectus may be amended from time to time
(together with all supplements, the "Prospectus"). The Underwriter has an
option, exercisable within 45 days of the effective date of the
Prospectus, to sell an additional 150,000 shares of the Common Stock at
the public offering price solely for the purpose of covering
overallotments, if any. The Company is offering said shares through its
officers, directors, and selected broker/dealers. An Investor whose funds
are to be deposited in escrow, must send a check or wire funds for the
full amount of the purchase price for the subscribed Shares, with checks
payable to BETA OIL & GAS, INC. ESCROW ACCOUNT #12794-GG.
C. The undersigned hands you herewith or will cause to be handed to you the
following:
a) Copy of the Prospectus;
b) A copy of delivery instructions from participating Broker /
Dealers or other evidence of an authorized purchase;
c) W-9 completed by the Company;
d) Subscription purchase funds pursuant to the Prospectus; and e)
Funds to cover transaction costs set forth in Item "F" below.
D.You are instructed to hold all purchase funds received in trust for the
benefit of the respective investors, in an interest bearing money market
account until you have received evidence that the minimum of 800,000
Shares ($4,800,000/the "Minimum") have been accepted, at which time you
are to release funds, along with interest earned on such funds in the
Escrow Account, to the order of Beta Oil & Gas, Inc., net of commissions
and expenses due the selected broker/dealers and "Blue Sky" fees and
expenses due the Company's counsel, if any. Disbursement shall be made
SUBJECT TO ESCROW'S RECEIPT OF COLLECTED FUNDS AND DISBURSEMENT
INSTRUCTIONS FROM THE COMPANY.
(CONTINUED)
Initials ________________ Initials ______________
<PAGE>
Date: March 16, 1999 Escrow No. 12794-GG
PAGE 2: Additional Instructions made a part of previous page as if fully
incorporated therein.
E.The "Initial Closing Date" shall occur following the acceptance by the
Company of subscriptions for the minimum offered hereby or as soon
thereafter as funds have cleared the banking system in the normal course
of business. The minimum will be offered by the Company on a "best
efforts, minimum / maximum" basis. If the minimum has been subscribed for
by the expiration of 10 business days from the effective date, remaining
shares will be offered and will be issued on one or more closing dates as
you receive evidence that additional subscriptions have been accepted,
until the earlier of the date by which all such shares have been sold or
the expiration of the Offering Period designated to be on or before 90
days from the Effective Date. If subscription for the minimum have not
been accepted by 10 days from the effective date, none of the shares will
be sold and the Offering shall be terminated and the Investors shall be
fully refunded along with a prorata share of any interest earned in the
Escrow Account.
F.For its ordinary services hereunder, the Escrow Holder shall be entitled
to a NON-REFUNDABLE fee of $1,500.00 plus an additional $1.00 per
$1,000.00 of subscription funds deposited herein in excess of $1,500,000.
The $1,500.00, less the $250.00 prepaid review fee, which is to be deemed
a part of the $1,500.00 initial escrow shall be deposited with the
execution of this instruction. The additional $1.00 per $1,000.00
deposited herein in excess of $1,500,000.00, together with additional
compensation for extra services as set forth under the General Provisions
attached hereto and made a part hereof shall be deducted from the accrued
interest and/or paid directly by the Company upon demand by Escrow Holder
(CONTINUED)
Initials ______________ Initials _____________
<PAGE>
Date: March 16, 1999 Escrow No. 12794-GG
PAGE 3: Additional Instructions made a part of previous page as if fully
incorporated therein.
GENERAL PROVISIONS
DEPOSITS - All funds received in escrow shall be deposited with other escrow
funds in an interest bearing account of Southern California Bank.
RESPONSIBILITY FOR DEPOSITED PROPERTY - Escrow Agent is not a party to, or
bound by, any provisions in any Property which may be deposited under,
evidenced by, or arise out of these instructions, and with respect thereto,
acts as a depository only and is not responsible or liable in any manner
whatsoever for the sufficiency, correctness, genuineness, or validity of any
Property or with respect to the form or execution of the same, or the
identity, authority or right of any person executing or depositing the same.
DEFAULTS - Escrow Agent shall not be required to take or be bound by notice
of any default of any person, including any Principal, or to take any action
with respect to such default whether or not such action involves any expense
or liability. These instructions shall not be subject to modification or
rescission except upon receipt by Escrow Agent (at the office named above) of
written instructions from each of the Principals or their successors in
interest, and no such rescission or modification shall be effective unless
and until consented to by Escrow Agent in writing.
NOTICES - Principals hereby indemnify and hold Escrow Agent harmless against
any loss, liability, damage, cost or expense, including reasonable attorneys'
fees, (a) related in any way to Escrow Agent's acting upon any notice,
request, waiver, consent, receipt or other paper or document believed by
Escrow Agent to be signed by Principals or any other proper person, and (b)
incurred in connection with any act or thing done hereunder.
EXERCISE OF JUDGMENT - Escrow Agent shall not be liable for any error of
judgment or for any act done or step taken or omitted by it in good faith or
for any mistake of fact or law or for anything which Escrow Agent may do or
refrain from doing in connection herewith, except its own negligence or
willful misconduct. Escrow Agent shall have duties only to Principals, and no
person shall be deemed a third party beneficiary of these instructions.
COUNSEL - Escrow Agent may consult with legal counsel in the event of any
dispute or question as to the construction of these instructions or Escrow
Agent's duties thereunder, and Escrow Agent shall incur no liability and
shall be fully protected in acting in accordance with the opinion and
instructions of counsel.
DISAGREEMENTS - In the event of any disagreement between the Principals, or
any of them or any other persons whether or not named in these instructions,
and adverse claims or demands are made in connection for any of the Property,
Escrow Agent shall be entitled at its option to refuse to comply with any
such claim so long as such disagreement shall continue, and in so doing,
Escrow Agent shall not be or become liable for damages or interest to the
Principals, or any of them, or to any other person or persons for Escrow
Agent's failure to comply with such conflicting or adverse claims or demands.
Escrow Agent shall be entitled to continue so to refrain and refuse so to act
until:
a. the rights of the adverse claimants have been fully adjudicated in a court
assuming and having a jurisdiction of the claimants and the Property; or b.
all differences shall have been adjusted by agreement, end Escrow Agent shall
have been notified thereof in writing by all persons deemed by Escrow Agent,
in its sole discretion, to have an interest therein.
In addition, Escrow Agent, in its sole discretion, may file a suit in
interpleader for the purpose of having the respective rights of all claimants
adjudicated, and may deposit with the court all of the Property; and the
Principals agree to pay all costs and counsel fees incurred by Escrow Agent
in such action, such costs and fees to be included in the judgment in any
such action.
{CONTINUED)
Initials ________________ Initials _____________
Date: March 16, 199 Escrow No.12794-GG
PAGE 4: Additional instructions made a part of previous pages as if fully
incorporated therein.
INDEMNITY - In consideration of acceptance of this appointment by Escrow
Agent, the Principals agree to and hold Escrow Agent harmless as to any
liability incurred by Escrow Agent to any person, firm or corporation by
reason of its having accepted same or in carrying out any of the terms
hereof, and to reimburse Escrow Agent for all its expenses including among
other things, counsel fees and court costs incurred by reason of its position
or actions taken pursuant to these Escrow Instructions. The Principals hereby
agree that the Escrow Agent shall not be liable to any of them for any
actions taken by Escrow Agent pursuant to the terms hereof.
COURT ORDERS - Escrow Agent is hereby authorized, in its exclusive
discretion, to obey and comply with orders, judgments or decrees issued by
any court or administrative agency affecting any money, documents or things
held by Escrow Agent, Escrow Agent shall not be liable to any of the parties
hereto, their successors, heirs or personal representative by reason of
Escrow Agent's compliance with such writ, judgment or decree is later
reversed, modified, set aside or vacated.
ATTORNEY'S FEES - If any action be brought to interpret or enforce these
instructions, or any part thereof, the Principals jointly and severally agree
to pay to Escrow Agent all Escrow Agent's fees, accounting fees, special and
extra service fees and other costs related to such action.
CANCELLATION - In the event the escrow established hereby is canceled, the
Principals jointly and severally shall nevertheless pay to the Escrow Agent
all costs and expenses of Escrow Agent. Notwithstanding anything in these
instructions to the contrary, Escrow Agent may, in its sole discretion, upon
ten (10) days written notice to any of the Principals, resign as Escrow Agent
shall be entitled to reimbursement for those costs and expenses incurred to
the date of such resignation. Upon cancellation by the Principals or
resignation by Escrow Agent, after deducting Escrow Agent's fees, costs and
expenses, the balance of any funds or Property shall be returned to the
respective Principals who shall have deposited same.
FEES AND CHARGES - In the event that (a) Escrow Agent performs any services
not specifically provided for herein or (b) there is an assignment or
attachment of any interest in the subject matter of the escrow established
hereby or any modification thereof, or (c) any dispute or controversy arises
hereunder, or (d) Escrow Agent is named a party to, or intervenes in, any
litigation pertaining to this escrow or the subject matter thereof, Escrow
Agent shall, in addition to fees and charges for ordinary services, be
reasonably compensated therefore and reimbursed for all expenses, including
attorneys' fees, occasioned thereby. Escrow Agent shall have a first lien on
the Property for such compensation and expenses, and the Principals agree
jointly and severally to pay the same for its ordinary hereunder.
Escrow Agent shall entitled to an initial, non-refundable set-up ("initial
fee") of $1,500.00, payable concurrently with its acceptance, and to
additional compensation for yearly hold-open fee (due if escrow open over 1
year from the date of these instructions) @ $200.00 per year, Wire Fees,
Disbursement Fees, Savings Account Set-Up Fee and any other reasonable and
customary charges for unscheduled services, including messenger fees, federal
express charges or other out-of-pocket expenses.
The Principals understand that Escrow Agent will charge additional fees,
including premium hourly fees, for any services performed according to these
Escrow Instructions, or any modification or any service no specifically
provided therein, that involve concerted effort, employees working overtime,
expedited handling of any aspect of the Escrow, or other similar services.
SIGNATURES - These instructions may be executed in counterparts, each of
which so executed shall be original, irrespective of the date of its
execution and delivery, and said counterparts together shall constitute one
and the same instrument.
(CONTINUED)
Initials ______________ Initials ______________
Date: March 16, 1999 Escrow No. 12794-GG
PAGE 5: Additional Instructions made a part of previous pages as if fully
incorporated therein.
THE UNDERSIGNED HAS READ AND RECEIVED A COPY OF THIS INSTRUCTION ALONG WITH
THE ATTACHED GENERAL PROVISIONS HEREOF AND AGREES TO BE BOUND HEREBY.
THE COMPANY:
BETA OIL & GAS, INC., a Nevada corporation
BY: __________________________________
BY: __________________________________
ADDRESS:
901 Dove Street, Suite 230
Newport Beach, CA 92660
Phone: (949) 752-5212 Fax: (949) 752-5757
Escrow Agent hereby acknowledges receipt of these escrow instructions, of
which the foregoing is a copy, and upon receipt of the papers, money or
property therein referred to, agrees in consideration of the foregoing to
hold and dispose of the same in accordance with said instructions and upon
the terms and conditions set forth.
SOUTHERN CALIFORNIA BANK
Dated__________ BY: ______________________
Gloria Garriott, CSEO A.V.P./Assistant Manager
ATTORNEY'S CONSENT
We consent to the use of our firm's name in AMendment Number 2 to the
Registration Statement of Beta Oil & Gas, Inc.
/s/ Lawrence Horwitz, VP
- ------------------------
HORWITZ & BEAM, INC.
Irvine, California
Dated: April 30, 1999
This document replaces the Exhibit 23.2 previusly filed.
ACCOUNTANT'S CONSENT
The Board of Directors
Beta Oil & Gas, Inc.
We consent to the use of our report dated February 9, 1999, except for the
fourth and fifth paragraph of Note 8 which is as of April 30, 1999 included
herein and to the reference to our firm under the heading "Experts" in the
Prospectus.
/s/ HEIN + ASSOCIATES LLP
Orange, California
April 25, 1999
[Veazey & Associates, Inc. Letterhead]
Petroleum Consultants
4520 Jamestown Ave., Suite 4 March 18, 1999 (504)925-8059
Baton Rouge, LA 70808 FAX: 504-925-8560
Beta Oil & Gas, Inc.
901 Dove Street, Suite #230
Newport Beach, CA 90266
RE: CONSENT OF VEAZEY & ASSOCIATES, INC.
As oil and gas consultants, Veazey & Associates, Inc. hereby consent to: (a) the
use of our reserve report dated February 23, 1999 and (b) all references to our
firm included in or made a part of Beta Oil & Gas, Inc.'s Amendment to Form S-1
to be filed with the Securities and Exchange Commission.
VEAZEY & ASSOCIATES, INC.
/s/Michael J. Veazey
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AS OF AND FOR THE PERIODS ENDED DECEMBER 31, 1997 AND
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JUN-06-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 198,043 3,985,599
<SECURITIES> 0 0
<RECEIVABLES> 9,678 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 222,672 3,988,198
<PP&E> 14,853,995 5,900,794
<DEPRECIATION> 1,670,691 0
<TOTAL-ASSETS> 13,618,471 9,921,057
<CURRENT-LIABILITIES> 319,129 870,474
<BONDS> 0 0
0 0
0 0
<COMMON> 7,029 5,566
<OTHER-SE> 0 0
<TOTAL-LIABILITY-AND-EQUITY> 13,618,471 9,050,210
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 2,429,343 246,982
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,384,500) (201,573)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,384,500) (201,573)
<EPS-PRIMARY> (0.37) (0.05)
<EPS-DILUTED> (0.37) (0.05)
</TABLE>
