<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission file number 0-16621
GARNET RESOURCES CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 74-2421851
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
11011 RICHMOND, SUITE 650, HOUSTON, TEXAS 77042-6720
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 783-0010
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
As of May 15, 1996, 11,492,162 shares of Registrant's Common Stock, par value
$.01 per share, were outstanding.
<PAGE> 2
GARNET RESOURCES CORPORATION (THE "REGISTRANT" OR THE "COMPANY")
I N D E X
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- - ------ ----
<S> <C> <C>
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 1996 (unaudited)
and December 31, 1995 3-4
Consolidated Statements of
Operations for the Three Months
Ended March 31, 1996 and 1995
(unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the Three Months Ended
March 31, 1996 and 1995 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements-March 31, 1996 (unaudited) 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-14
PART II - OTHER INFORMATION
- - -------
Item 6. Exhibits and Reports on Form 8-K 14-15
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1996 1995
- - ------ ------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,100,294 $ 5,713,191
Accounts receivable 2,759,306 2,302,712
Inventories 1,059,923 986,532
Prepaid expenses 234,484 249,454
------------ ------------
Total current assets 9,154,007 9,251,889
------------ ------------
NET ASSETS HELD FOR DISPOSITION 399,501 403,941
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties
(full-cost method)-
Proved 48,783,325 46,044,011
Unproved (excluded from
amortization) 3,628,421 4,598,001
------------ ------------
52,411,746 50,642,012
Other equipment 137,443 137,343
------------ ------------
52,549,189 50,779,355
Less - Accumulated depreciation,
depletion and amortization (12,995,769) (11,384,135)
------------ ------------
39,553,420 39,395,220
------------ ------------
OTHER ASSETS 842,358 907,978
------------ ------------
$ 49,949,286 $ 49,959,028
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 4
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Continued
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 3,995,063 $ 4,043,758
Accounts payable and accrued
liabilities 2,819,213 2,418,270
------------ ------------
Total current liabilities 6,814,276 6,462,028
------------ ------------
LONG-TERM DEBT, net of current portion 20,151,120 20,151,120
------------ ------------
DEFERRED INCOME TAXES 737,006 640,919
------------ ------------
OTHER LONG-TERM LIABILITIES 401,545 438,156
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 20,000,000
shares authorized, 11,492,162 shares
issued and outstanding as of March 31,
1996 and December 31, 1995 114,922 114,922
Capital in excess of par value 52,491,212 52,491,212
Retained earnings (deficit) (30,760,795) (30,339,329)
------------ ------------
Total stockholders' equity 21,845,339 22,266,805
------------ ------------
$ 49,949,286 $ 49,959,028
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 5
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUES:
Oil sales $ 2,897,089 $ 1,638,947
Interest 70,688 97,706
------------ ------------
2,967,777 1,736,653
------------ ------------
COSTS AND EXPENSES:
Production 868,055 815,398
Exploration -- 16,204
General and
administrative 154,680 387,523
Interest 545,305 367,716
Depreciation, depletion
and amortization 1,607,303 746,622
Foreign currency
translation gain (95,272) (182,239)
------------ ------------
3,080,071 2,151,224
------------ ------------
INCOME (LOSS) BEFORE
INCOME TAXES (112,294) (414,571)
PROVISION FOR
INCOME TAXES 309,172 101,285
------------ ------------
NET LOSS $ (421,466) $ (515,856)
============ ============
NET LOSS PER SHARE $ (.04) $ (.05)
============ ============
WEIGHTED AVERAGE
SHARES OUTSTANDING 11,492,162 11,186,641
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 6
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
----------------------------
1996 1995
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (421,466) $ (515,856)
Exploration costs -- 16,204
Depreciation, depletion and amortization 1,607,303 746,622
Deferred income taxes 96,087 --
Changes in components of working capital (748,144) (990,666)
Other 25,659 54,153
----------- -----------
Net cash provided by (used for)
operating activities 559,439 (689,543)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (916,615) (3,406,500)
Increase in joint venture and contractor advances (223,577) (135,846)
Acquisition of interests in Argosy Energy
International, net of cash acquired -- (92,621)
Other 33,741 (32,727)
----------- -----------
Net cash used for investing activities (1,106,451) (3,667,694)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of debt (48,695) (15,378)
Costs of debt issuances (17,190) --
----------- -----------
Net cash used for financing activities (65,885) (15,378)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (612,897) (4,372,615)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF PERIOD 5,713,191 7,990,605
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,100,294 $ 3,617,990
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for -
Interest, net of amounts capitalized $ 468,994 $ 334,647
Income taxes 164,353 169,635
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 7
GARNET RESOURCES CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
--------------------
(Unaudited)
(1) FINANCIAL STATEMENT PRESENTATION-
The condensed consolidated financial statements include the accounts
of Garnet Resources Corporation, a Delaware corporation ("Garnet"), and its
wholly owned subsidiaries. Garnet and its wholly owned subsidiaries are
collectively referred to as the "Company." These financial statements have
been prepared by the Company without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission, and include all
adjustments (which consist solely of normal recurring adjustments) which, in
the opinion of management, are necessary for a fair presentation of financial
position and results of operations. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations, although the Company believes that the
disclosures are adequate to make the information presented not misleading. It
is suggested that these condensed consolidated financial statements be read in
conjunction with the Company's prior audited consolidated financial statements
and the notes thereto.
(2) COLOMBIAN OPERATIONS-
Through its ownership of interests in Argosy Energy International, a
Utah limited partnership ("Argosy"), the Company has an indirect interest in a
risk sharing contract in Colombia (the "Santana Contract") with Empresa
Colombiana de Petroleos, the Colombian national oil company ("Ecopetrol"). The
Santana Contract currently entitles Argosy and its joint venture partner to
explore for oil and gas on approximately 86,000 acres located in the Putumayo
Region of Colombia (the "Santana Block"), and provides for a 10-year
exploration period expiring in 1997, subject to a requirement for additional
partial relinquishments in 1997, and for a production period expiring in 2015.
Argosy and its joint venture partner also have two association contracts (the
"Fragua Contract" and the "Yuruyaco Contract") with Ecopetrol. The Fragua
Contract covers an area of approximately 32,000 acres contiguous to the
northern boundary of the Santana Block (the "Fragua Block"), while the Yuruyaco
Contract covers an area of approximately 39,000 acres contiguous to the eastern
boundaries of the Santana Block and the Fragua Block (the "Yuruyaco Block").
The 10-year exploration periods provided by the Fragua Contract and the
Yuruyaco Contract will expire in 2002 and 2005, respectively, and the 28-year
contract terms will expire in 2020 and 2023, respectively. Argosy and its
joint venture partner also have the right until 2003 to explore for and produce
oil and gas from approximately 77,000 acres located in the Putumayo Region
(the "Aporte Putumayo Block") pursuant to other agreements with Ecopetrol.
Argosy and its joint venture partner have notified Ecopetrol that they intend
to abandon the remaining wells and relinquish the Aporte Putumayo Block because
declining production rates have made continued operation economically
unattractive.
Argosy serves as the operator of the Colombian properties under joint
venture agreements. The Santana Contract, the Fragua Contract and the Yuruyaco
Contract provide that Ecopetrol will receive a royalty equal to 20% of
production on behalf of the Colombian government and, in the
7
<PAGE> 8
event a discovery is deemed commercially feasible, Ecopetrol will acquire a 50%
interest in the remaining production from the field, bear 50% of the
development costs, and reimburse the joint venture, from Ecopetrol's share of
future production from each well, for 50% of the joint venture's costs of
successful exploratory wells in the field. When accumulated oil production
from the Santana Contract exceeds seven million barrels, Ecopetrol will
continue to bear 50% of development costs, but its interest in production
revenues and operating costs will increase to 65%. If a commercial field on the
Fragua Block produces in excess of 60 million barrels, Ecopetrol's interest in
production and costs will increase in 5% increments from 50% to 70% as
accumulated production from the field increases in 30 million barrel increments
from 60 million barrels to 150 million barrels. If a commercial field on the
Yuruyaco Block produces in excess of 60 million barrels, Ecopetrol's interest
in production and costs will range from 50% to 75%, based on annual
measurements of profitability as defined in the Yuruyaco Contract. The joint
venture paid all costs of the exploration program for the Santana Block during
the first two years of the contract and thereafter the joint venture and
Ecopetrol have been obligated to pay 70% and 30%, respectively, of such
exploration costs. The joint venture bears all costs and risks of exploration
activities on the Fragua Block and the Yuruyaco Block, subject to Ecopetrol's
right to acquire a 50% interest in commercial discoveries. In the event a
discovery is made and is not deemed by Ecopetrol to be commercially feasible,
the joint venture may continue to develop the field at its own expense and will
recover 200% of the costs thereof, at which time Ecopetrol will acquire a 50%
interest therein at no cost to Ecopetrol or further reimbursement by Ecopetrol
to Argosy.
In March 1995 the Company increased its ownership in Argosy by
exchanging 366,625 shares of Garnet's common stock with a value of $3.00 per
share and cash totalling $142,703 for the partnership interests held by certain
of Argosy's limited partners.
The Company's resulting net participation in revenues and costs for
the Santana Contract, the Fragua Contract and the Yuruyaco Contract are as
follows:
<TABLE>
<CAPTION>
PRODUCTION OPERATING EXPLORATION DEVELOPMENT
REVENUES COSTS COSTS COSTS
---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
Santana Contract:
Before seven million barrels
of accumulated production 21.8% 27.2% 38.1% 27.2%
After seven million barrels
of accumulated production 15.3% 19.1% 38.1% 27.2%
Fragua Contract:
Before 60 million barrels
of accumulated production 21.8% 27.3% 54.6% 27.3%
After 150 million barrels
of accumulated production 13.1% 16.4% 54.6% 27.3%
Yuruyaco Contract:
Before 60 million barrels
of accumulated production 22.0% 27.5% 55.0% 27.5%
After 60 million barrels of
accumulated production at
maximum profitability 11.0% 13.8% 55.0% 27.5%
</TABLE>
The joint venture has completed its seismic acquisition and drilling
obligations for the first eight years of the Santana Contract, resulting in the
discovery of four oil fields, all of which have
8
<PAGE> 9
been declared commercial by Ecopetrol. The joint venture has the right to
continue the exploration program through 1997 with an obligation to conduct
exploration programs to be approved by Ecopetrol in 1996 and 1997. The joint
venture has also completed its seismic obligations for the first two years of
the Fragua Contract, but no wells have yet been drilled on the Fragua Block.
Under the terms of a contract with Ecopetrol, all oil produced from
the Santana Block is sold to Ecopetrol. If Ecopetrol exports the oil, the
price paid is the export price received by Ecopetrol, adjusted for quality
differences, less a handling and commercialization fee of $.465 per barrel. If
Ecopetrol does not export the oil, the price paid is based on quoted prices for
Colombia's Cano Limon crude oil, adjusted for quality differences, plus or
minus a sales value differential to be determined by independent analysis, less
Ecopetrol's cost to transport the crude to Cartagena and a handling and
commercialization fee of $.365 per barrel. Under the terms of its contract
with Ecopetrol, 25% of all revenues from oil sold to Ecopetrol is paid in
Colombian pesos which may only be utilized in Colombia. To date, Argosy has
experienced no difficulty in repatriating the remaining 75% of such payments
which are payable in United States dollars.
As general partner, the Company's subsidiary is contingently liable
for any obligations of Argosy and may be contingently liable for claims
generally related to the conduct of Argosy's business.
(3) LONG-TERM DEBT-
Long-term debt at March 31, 1996 and December 31, 1995 consisted of the
following:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
9 1/2% convertible subordinated debentures $ 15,000,000 $ 15,000,000
Notes payable by Argosy to a U.S. bank 9,113,520 9,113,520
Note payable by Argosy to a Colombian bank 32,663 81,359
------------ ------------
24,146,183 24,194,879
Less - Current portion (3,995,063) (4,043,758)
------------ ------------
$ 20,151,120 $ 20,151,120
============ ============
</TABLE>
In 1993 Garnet issued $15,000,000 of convertible subordinated
debentures (the "Debentures") due December 1998. The Debentures bear interest
at 9 1/2% per annum payable quarterly and are convertible at the option of the
holders into Garnet common stock at $5.50 per share. If the Company elects to
prepay the Debentures under certain circumstances, it will issue warrants under
the same economic terms as the Debentures. At the option of a holder, in the
event of a change of control of the Company, the Company will be required to
prepay such holder's Debenture at a 30% premium. The Debentures are secured by
a pledge of all of the common stock of Garnet's wholly owned subsidiary which
serves as the general partner of Argosy (see Note 2). Under the terms of an
agreement with the holders of its Debentures, Garnet has agreed that it will
not pay dividends or make distributions to the holders of its common stock. As
of March 31, 1996, Garnet was not in compliance with the minimum net worth
required by the Debentures. The Debenture holders previously waived
compliance with this requirement through January 10, 1997. In May 1996 Garnet
and the Debenture holders agreed to extend the waiver through July 1, 1997
subject to the termination of such waiver on October 31, 1996 if the ratio of
the aggregate principal amount of outstanding Debentures to the sum of (i) the
number of net barrels of proved oil reserves as of September 30, 1996 plus (ii)
the number of net barrels of oil produced during the period from April 1, 1996
through September 30, 1996 is greater than 4.5 to 1. Such ratio was 4.2 to 1 as
of March 31, 1996.
9
<PAGE> 10
In 1994 Argosy entered into a finance agreement with Overseas Private
Investment Corporation, an agency of the United States government ("OPIC"),
pursuant to which OPIC agreed to guarantee up to $9,200,000 in bank loans to
Argosy. The loans were funded in two stages of $4,400,000 in August 1994 and
$4,800,000 in October 1995. The Company plans to use these funds to drill
development wells and complete the construction of its production facilities in
Colombia. OPIC's guaranty is secured by Argosy's interest in the Santana
Contract and related assets, as well as the pledge of Garnet's direct and
indirect interests in Argosy. The terms of the guaranty agreement also
restrict Argosy's ability to make distributions to its partners prior to the
repayment of the guaranteed loans. The maximum term of the loans is not to
exceed seven years, and the principal amortization schedule is based on
projected cash flows from wells on the Santana Block. The loans bear interest
at the lender's eurodollar deposit rate plus .25% per annum for periods of two,
three or six months as selected by Argosy. The interest rate at March 31, 1996
was 5 15/16%. In consideration for OPIC's guaranty, Argosy pays OPIC a
guaranty fee of 2.4% per annum on the outstanding balance of the loans
guaranteed.
In 1993 Argosy received a loan from a Colombian bank, which is secured
by receivables from Ecopetrol for well costs allocable to Ecopetrol but paid by
Argosy. The loan bears interest at U.S. prime plus 2%, and is repaid in
varying amounts from Ecopetrol's share of production from the wells. The
interest rate at March 31, 1996 was 8 1/4%.
(4) STOCK OPTION PLANS-
Garnet and a predecessor entity have adopted stock option plans (the
"Employees' Plans") pursuant to which an aggregate of 1,483,000 shares of
Garnet's common stock is authorized to be issued upon exercise of options
granted to officers, employees, and certain other persons or entities who
perform substantial services for or on behalf of Garnet or its subsidiaries.
The Stock Option and Compensation Committee of Garnet's Board of
Directors (the "Committee") is vested with sole and exclusive authority to
administer and interpret the Employees' Plans, to determine the terms upon
which options may be granted, to prescribe, amend and rescind such
interpretations and determinations and to grant options to directors. Current
Committee members are not eligible to receive options under the Employees'
Plans.
In addition, Garnet has adopted the 1990 Directors' Stock Option Plan
(the "Directors' Plan") pursuant to which an aggregate of 395,000 shares of
Garnet's common stock were issuable as of March 31, 1996 upon exercise of
options granted thereunder to directors who are not employees of the Company.
As the Directors' Plan expired in accordance with its terms on March 8, 1996,
no further options may be issued thereunder.
Each option is exercisable for a period of 10 years and 30 days from
the date of grant. The purchase price of shares issuable upon exercise of an
option may be paid in cash or by delivery of shares with a value equal to the
exercise price of the option. The Committee has determined that the right to
exercise non-incentive options issued to employees vests over a period of four
years, so that 20% of the option becomes exercisable on each anniversary of the
date of grant. Non-incentive options issued to directors and other eligible
participants generally are fully exercisable on and after the date of grant.
The following is a summary of stock option activity in connection with
the Employees' Plans and the Directors' Plan:
10
<PAGE> 11
<TABLE>
<CAPTION>
Shares Price Range
--------- ------------
<S> <C> <C>
Options outstanding at December 31, 1993 1,229,500 $2.50-$13.83
Options granted 140,000 4.05
--------- ------------
Options outstanding at December 31, 1994 1,369,500 2.50-13.83
Options granted 618,000 2.50-2.87
Options expired (658,398) 2.50-13.83
--------- ------------
Options outstanding at December 31, 1995 1,329,102 2.50-13.83
Options granted 480,000 1.19
Options cancelled (336,102) 4.00-11.75
--------- ------------
Options outstanding at March 31, 1996 1,473,000 $1.19-$13.83
========= ============
</TABLE>
As of March 31, 1996, options for 1,020,616 shares were exercisable.
(5) INCOME TAXES-
The provisions for income taxes relate to the Colombian activities of
Argosy. No United States deferred taxes were provided because the tax bases of
the Company's assets exceed the financial statement bases, resulting in a
deferred tax asset which the Company has determined is not presently
realizable.
As of December 31, 1995, the Company had a regular tax net operating
loss carryforward and an alternative minimum tax loss carryforward of
approximately $26,400,000 and $26,000,000 respectively. These loss
carryforwards will expire beginning in 2001 if not utilized to reduce U.S.
income taxes otherwise payable in future years, and are limited as to
utilization because of the occurrences of "ownership changes" (as defined in
Section 382 of the Internal Revenue Code of 1986, as amended) in 1991 and
earlier years. Such loss carryforwards also exclude regular tax net operating
loss carryforwards aggregating approximately $4,500,000 attributable to certain
of Garnet's subsidiaries, which can be used in certain circumstances to offset
taxable income generated by such subsidiaries.
(6) ACQUISITION OF RGO ENERGY INC. AND RGO PARTNERS, LTD.-
In 1991, in transactions accounted for as purchases, Garnet acquired
RGO Energy Inc. and RGO Partners, Ltd., two privately-owned entities (referred
to collectively herein as "the RGO Entities"). At the date of acquisition,
approximately 60% of the assets of the RGO Entities was comprised of cash, with
the balance being primarily working, royalty and mineral interests in producing
and undeveloped oil and gas properties in the United States. All of the
working interests acquired in the mergers were sold in 1993. Because
management intends to sell the remaining royalty and mineral interests when the
market conditions are suitable, these assets are reflected as "Net assets held
for disposition" in the accompanying consolidated balance sheets.
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
LIQUIDITY AND CAPITAL RESOURCES
Since December 31, 1995, the Company has expended approximately
$1,000,000 for the acquisition, exploration and development of its oil and gas
properties. Such expenditures include approximately $900,000 for exploration
and development activities on the Santana Block in Colombia, and approximately
$200,000 for exploration and related costs in Papua New Guinea.
Funding for these activities was provided primarily by cash flow from
operations and by available cash balances. Other than the OPIC guaranty, the
Company has no significant lines of credit.
Argosy and its joint venture partner have completed the seismic
acquisition and drilling obligations for the first eight years of the Santana
Contract, resulting in the discovery of four oil fields. The joint venture has
the right to continue the exploration program through 1997 with an obligation
to conduct exploration programs to be approved by Ecopetrol in 1996 and 1997.
The Company plans to perform additional seismic work on the Santana Block
during 1996, with estimated total costs to the Company of $600,000. The
seismic programs required during the first two years of the Fragua Contract
have also been completed. An additional seismic survey is planned for 1996,
for which the Company's share of the costs is estimated to be $150,000. The
Company also plans to conduct a seismic program on the Yuruyaco Block in 1996,
for which its share of the costs is estimated to be $300,000.
The Toroyaco and Linda fields, the first two fields discovered on the
Santana Block, began producing in 1992. The Mary and Miraflor fields, the last
two fields discovered, were declared commercial by Ecopetrol in 1993.
Production from the four fields is presently approximately 9,000 barrels of oil
per day. The Company's share of such production is 21.8%; it also receives an
additional 21.8% of the production from certain wells until it recovers the
drilling and completion costs for those wells allocable to Ecopetrol but paid
by the Company.
As of March 31, 1996, the Company was completing the construction of
production facilities for the Mary and Miraflor fields, for which the Company's
share of the remaining costs is expected to be approximately $350,000. The
Company also plans to drill at least four additional development wells in the
Toroyaco and Linda fields in 1996 and 1997. The Company's share of the costs
of drilling and completing each of the wells in these fields is expected to
range from $850,000 to $1,050,000.
As described herein, the Company's operations are primarily located
outside the United States. Although certain of such operations are conducted
in foreign currencies, the Company considers the U.S. dollar to be the
functional currency in most of the countries in which it operates. In addition,
the Company has no significant operations in countries with highly inflationary
economies. As a result, the Company's foreign currency transaction gains and
losses have not been significant. Exchange controls exist for the repatriation
of funds from Colombia and Papua New Guinea. The Company believes that the
continuing viability of its operations in these countries will not be affected
by such restrictions.
It is anticipated that the Company's foreign exploration and
development activities will require substantial amounts of capital. To finance
its planned exploration and development
12
<PAGE> 13
activities, the Company intends to utilize its existing working capital, cash
flow from production in Colombia, and cash proceeds expected to be received from
the sale of assets held for disposition, although there can be no assurance that
any of such assets can be sold on terms acceptable to the Company. In 1995 the
Company also identified and implemented more than $1.5 million in annual
reductions of U.S. and Colombian general and administrative expenses and
production costs. The Company may also consider entering into arrangements
whereby certain costs of exploration will be paid by others to earn an interest
in the properties. As of March 31, 1996, Garnet was not in compliance with the
minimum net worth covenant required by the Debentures. The Debenture holders
previously waived compliance with this requirement through January 10, 1997. In
May 1996 Garnet and the Debenture holders agreed to extend the waiver through
July 1, 1997 subject to the termination of such waiver on October 31, 1996 if
the ratio of the aggregate principal amount of outstanding Debentures to the sum
of (i) the number of net barrels of proved oil reserves as of September 30, 1996
plus (ii) the number of net barrels of oil produced during the period from April
1, 1996 through September 30, 1996 is greater than 4.5 to 1. Such ratio was 4.2
to 1 as of March 31, 1996. If Garnet is unable to increase its net worth to the
minimum required by July 1, 1997 (or by October 31, 1996 if the waiver is
terminated as a result of the failure to maintain the aforementioned ratio), it
will be necessary to extend the waiver or renegotiate the terms of the debt.
The present environment for financing the acquisition of oil and gas
properties or the ongoing obligations of an oil and gas business is uncertain
due, in part, to the substantial instability in oil and gas prices in recent
years and to the volatility of financial markets. There can be no assurance
that the additional financing which may be necessary to fund the Company's
operations and obligations will be available on economically acceptable terms.
In addition, the Company's ability to continue its exploration and development
programs may be dependent upon its joint venture partners financing their
portion of such costs and expenses. There can be no assurance that the
Company's partners will contribute, or be in a position to contribute, their
costs and expenses of the joint venture programs. If the Company's partners
cannot finance their obligations to the joint ventures, the Company may be
required to accept an assignment of the partners' interests therein and assume
their financing obligations. If sufficient funds cannot be raised to meet the
Company's obligations in connection with its properties, the interests in such
properties might be sold or forfeited.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
COMPARED WITH THE SAME PERIOD IN 1995
The Company reported net losses of $421,466 ($.04 per share) and
$515,856 ($.05 per share) for the three months ended March 31, 1996 and 1995,
respectively.
Increases in 1996 in oil and gas revenues, production costs and
depreciation, depletion and amortization primarily reflect higher oil prices
and production from new wells and fracture stimulation treatments on existing
wells in Colombia. Production costs per barrel decreased because of higher
production volumes and the effect of the Company's cost reduction program
implemented in the third quarter of 1995. The Company's comparative average
daily sales volumes in barrels of oil per day ("BOPD"), average sales prices
and costs per barrel in Colombia for such periods were as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
1996 1995
------ -------
<S> <C> <C>
Average oil sales (BOPD) 1,786 1,151
Average oil price per barrel $ 17.83 $ 15.82
Production costs per barrel $ 5.34 $ 7.87
Depreciation, depletion and
amortization per barrel $ 9.87 $ 7.18
</TABLE>
13
<PAGE> 14
General and administrative expenses decreased as a result of the
aforementioned cost reduction program. The increase in 1996 in interest
expense, net of amounts capitalized, is attributable primarily to the
OPIC-guaranteed loan received in October 1995. The provision for income taxes,
all of which relates to Colombian operations, was higher because of (i)
increases in the Colombian presumptive income tax resulting from a higher tax
rate effective January 1, 1996 and ongoing capital expenditures related to
productive assets, and (ii) a deferred tax provision recorded in 1996.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(A) EXHIBITS
<TABLE>
<CAPTION>
ITEM EXHIBIT
NO. ITEM TITLE NO.
- - ---- ---------------------------------------------------- -------
<S> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession:
Not Applicable
(3) Articles of Incorporation and By-Laws:
Not Applicable
(4) Instruments defining the rights of
security holders, including indentures:
Not Applicable
(10) Material contracts:
(A) Operating Agrement for the Yuruyaco
Area dated as of November 7, 1995 by
and between Argosy Energy International
and Neo Energy, Inc. 10(A)
(11) Statement regarding computation of per
share earnings is not required because
the relevant computations can be clearly
determined from the material contained
in the Financial Statements included
herein.
(15) Letter re unaudited interim financial
information: Not Applicable
(18) Letter re change in accounting principles:
Not Applicable
(19) Report furnished to security holders:
Not Applicable
</TABLE>
14
<PAGE> 15
<TABLE>
<S> <C> <C>
(22) Published report regarding matters
submitted to vote of security holders:
Not Applicable
(23) Consents of experts and counsel:
Not Applicable
(24) Power of attorney: Not Applicable
(27) Financial Data Schedule. 27
(99) Additional Exhibits: Not Applicable
</TABLE>
(B) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed by Registrant during the three
months ended March 31, 1996.
15
<PAGE> 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GARNET RESOURCES CORPORATION
Date: May 15, 1996 /s/ W. Kirk Bosche'
----------------------------
W. Kirk Bosche',
Vice President and Treasurer
(As both a duly authorized
officer of Registrant and as
principal financial officer
of Registrant)
16
<PAGE> 17
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM EXHIBIT
NO. ITEM TITLE NO.
- - ---- ---------------------------------------------------- -------
<S> <C> <C>
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession:
Not Applicable
(3) Articles of Incorporation and By-Laws:
Not Applicable
(4) Instruments defining the rights of
security holders, including indentures:
Not Applicable
(10) Material contracts:
(A) Operating Agrement for the Yuruyaco
Area dated as of November 7, 1995 by
and between Argosy Energy International
and Neo Energy, Inc. 10(A)
(11) Statement regarding computation of per
share earnings is not required because
the relevant computations can be clearly
determined from the material contained
in the Financial Statements included
herein.
(15) Letter re unaudited interim financial
information: Not Applicable
(18) Letter re change in accounting principles:
Not Applicable
(19) Report furnished to security holders:
Not Applicable
(22) Published report regarding matters
submitted to vote of security holders:
Not Applicable
(23) Consents of experts and counsel:
Not Applicable
(24) Power of attorney: Not Applicable
(27) Financial Data Schedule. 27
(99) Additional Exhibits: Not Applicable
</TABLE>
<PAGE> 1
OPERATING AGREEMENT
FOR THE YURUYACO AREA
<PAGE> 2
TABLE OF CONTENTS
Operating Agreement
For the Yuruyaco Area
<TABLE>
<CAPTION>
Article Page No.
------- --------
<S> <C> <C>
1 Definitions ...................................... 2
2 Participating Interests and Relationship
of the Parties ................................... 9
3 Operating Committee .............................. 11
4 Joint Operations/Scope of Agreement .............. 17
5 Operator ......................................... 18
6 Functions and Duties of Operator ................. 20
7 Programs and Budgets ............................. 26
8 Costs, Expenses and Advances ..................... 28
9 Default and Lien ................................. 32
10 Insurance ........................................ 38
11 Disposition of Petroleum ......................... 38
12 Operations by Less than all Parties .............. 40
13 Arbitration ...................................... 47
14 Assignment or Encumbrances of Interest ........... 48
15 Surrender ........................................ 51
16 Withdrawals ...................................... 52
17 Public Announcements ............................. 54
18 Confidential Information ......................... 55
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Article Page No.
------- --------
<S> <C> <C>
19 Force Majeure .................................... 56
20 Applicable Law ................................... 57
21 Termination ...................................... 58
22 Consequences of Termination ...................... 58
23 Notices .......................................... 59
24 Miscellaneous .................................... 60
Exhibit
-------
"A" Contract Area .................................... 63
"B" Accounting Procedure ............................. 65
</TABLE>
<PAGE> 4
OPERATING AGREEMENT
This Operating Agreement is made and entered into this 7th day of
November, 1995, by and between Argosy Energy International, a Utah limited
partnership ("Argosy"), and Neo Energy, Inc., a Texas corporation ("Neo"),
hereinafter referred to individually as a "Party" and collectively as the
"Parties".
WITNESSETH
WHEREAS, the Parties are joint owners of an Association Contract
("Contract") issued September 20, 1995, but effective November 19, 1995, by the
Empresa Colombiana De Petroleos (Ecopetrol), covering certain acreage located
in the Putumayo Basin region of the Republic of Colombia, S.A.; and,
WHEREAS, the said Association Contract provides for two Seismic
Programs to be undertaken and a subsequent option of drilling Exploration Wells
in an attempt to find a Commercial Field. The Parties hereto agree to obligate
themselves to conduct the Seismic Programs and to abide by the other provisions
of the said Association Contract; and,
WHEREAS, under the aforesaid Association Contract, Ecopetrol will
have, under certain conditions, a Participating Interest in the Contract Area,
which participation will be controlled by the Operating Agreement attached to
the said Association Contract as Annex "B" (Ecopetrol Operating Agreement);
and,
WHEREAS, if there is any conflict between this Agreement and the said
Ecopetrol Operating Agreement, as to the Participating Interest of the Parties
and Ecopetrol, the Ecopetrol Operating
1
<PAGE> 5
Agreement shall control. However, this Agreement shall prevail as to the
Participation Interest of Argosy and Neo; and,
WHEREAS, each of the Parties have agreed to participate in the
exploration and in the development of the Contract Area and in the production
of Oil, Gas and other liquid or gaseous hydrocarbons therefrom upon the terms
and conditions set forth.
NOW THEREFORE, in consideration of the mutual promises and mutual
covenants herein contained, it is agreed by and between the Parties as follows:
ARTICLE 1.
Definitions
As used in this Operating Agreement:
1.1 "Affiliate" means:
(a) A company or corporation which is a direct or
indirect subsidiary of a Party;
(b) An individual, company or corporation of which a
Party is a direct or indirect subsidiary;
(c) A company or corporation which is a direct or
indirect subsidiary of an individual, a company or a corporation of which a
Party is a direct or indirect subsidiary;
(d) Any person or entity which owns more than forty
percent (40%) of a Party; or
(e) Any partnership in which a Party or Parties owns,
directly or indirectly, an interest greater than fifty percent (50%).
2
<PAGE> 6
For the purpose of this definition, a company or corporation is a
"subsidiary" of an individual, company or corporation if the latter owns more
than fifty percent (50%) of all the shares of the former or which holds or
controls voting rights by which its management is controlled.
1.2 "Agreement" means this instrument, any extension, renewal,
amendment, substitution or modification hereof and the exhibits attached hereto
and made a part hereof.
1.3 "Branch" shall mean the branch of Argosy located in the
Republic of Colombia, as registered in document number 5323 inscribed with the
formal requisites of the Republic of Colombia on October 25, 1983.
1.4 "Budget" means the basic planning instrument through which
assignment of resources is made to specific projects to be applied within a
Calendar Year or part thereof in order to attain the goals and objectives
proposed.
1.5 "Calendar Year" means a period of twelve (12) calendar months
commencing with January 1 and ending on the following December 31 according to
the Gregorian Calendar.
1.6 "Commercial Field" means that part of the Contract Area which
is capable of producing Oil in quantities and quality economically exploitable.
1.7 "Completing" means, with respect to a well, installing the
production string of tubulars in the hole (except surface and intermediate
casing) and associated equipment for the well to and including:
3
<PAGE> 7
(a) In the case of a gas well, the wellhead and the
running of adequate back pressure tests.
(b) In the case of an oil well, the wellhead.
1.8 "Contract Area" means the land described in the Exhibit A,
subject to Article 15.
1.9 "Development Well" means any well deemed a Development Well by
Ecopetrol under the Ecopetrol Contract.
1.10 "Drilling Costs" means all money expended (exclusive of
Completing costs and Equipping costs) for drilling, coring, logging and testing
a well for the recovery of Petroleum and in the case of a well which is not
completed for the taking of production of Oil, includes the costs of abandoning
the well pursuant to the Regulations and costs of restoring the drilling site
as required by applicable law, leases or agreements.
1.11 "Ecopetrol" means Empresa Colombiana de Petroleos, an official
economic entity of the Republic of Colombia.
1.12 "Ecopetrol Contract" means the Association Contract with
Empresa Colombiana de Petroleos dated September 20, 1995.
1.13 "Equipping" means equipping a well beyond the wellhead
including, without limitation, the installation of the pump, flow lines and
production tankage and, in the case of a gas well, a heater or dehydrator or
other hydrate control facility.
1.14 "Exploration" or "Exploratory Well" means any well designed as
such by the Parties, to be drilled or deepened in the Contract Area in the
search for hydrocarbons and deemed an Exploratory Well by Ecopetrol under the
Ecopetrol Contract.
4
<PAGE> 8
1.15 "Joint Account" means the set of accounts maintained by the
Operator in accordance with the provisions of this Agreement and of the
Accounting Procedure attached hereto as Exhibit "B" in which the Operator shall
record all charges, expenditures and credits made by it in carrying out the
Joint Operations hereunder which are chargeable or creditable to the Parties as
provided.
1.16 "Joint Lands" means an ownership interest, be it direct or
indirect, in all of the lands, Oil and Gas leasehold or fee interests and other
Oil and Gas interests intended to be explored, developed and operated for Oil
and Gas purposes under this Agreement.
1.17 "Joint Operations" means the activities or work carried out or
in the process of being carried out on the Joint Lands in the name or for
account of all the Parties.
1.18 "Member" or "Members" means the persons or entities comprising
the Operating Committee as defined in Article 3 hereof.
1.19 "Non-Operator(s)" means any Party to this Agreement other than
the Operator.
1.20 "Notice" means a written notice as set forth in Article 23
hereof.
1.21 "Oil", "Gas", or "Oil and Gas" means oil, gas, casinghead gas,
gas condensate and all other liquid or gaseous hydrocarbons and other
marketable substances produced therewith and which may include substances of
any other nature whatsoever combined, in suspension or mixed therewith and
found in a liquid state or gaseous state either at the deposit or after
production under
5
<PAGE> 9
normal conditions of temperature and pressure.
1.22 "Operating Committee" or "Committee" means the committee
established pursuant to Article 3 hereof.
1.23 "Operating Costs" means all money or costs expended, exclusive
of drilling costs, completion costs and equipping costs, to operate a well or
wells on the Contract Area for the recovery of Oil and Gas.
1.24 "Operator" means the Colombian Branch of Argosy Energy
International, who shall carry out directly for the Parties the operations
required to exploit the Petroleum found in the Contract Area.
1.25 "Participating Interest" means the percentage of interest in
the Contract Area owned by a Party.
1.26 "Party" means any Party to this Agreement, or any other entity
acquiring a Participating Interest in a manner consistent with this Agreement.
As of the date hereof the only Parties are Argosy and Neo.
1.27 "Petroleum" means Petroleum and natural gas and every other
mineral or substance, or any of them, otherwise also defined herein as Oil
and/or Gas.
1.28 "Program" means a program for carrying out Joint Operations as
determined by the Operating Committee pursuant to Article 7.
1.29 "Proportionate Share" means, with respect to a Party hereto, a
percentage share equal to that Party's Participating Interest.
6
<PAGE> 10
1.30 "Recovery Petroleum" means:
(a) In the case of a Sole Risk Well that is a Wildcat
Well, as defined in Section 1.35(b), all Petroleum produced from formations
which were penetrated by the well, provided that such formations must be below
the stratigraphic level in which Petroleum was found to be present in any and
all wells previously drilled in the area described in Section 1.35(b);
(b) In the case of a Sole Risk Well that is a Wildcat
Well as defined in Section 1.35(a) all Petroleum produced from the formations
which were penetrated by the well;
(c) In the case of a Sole Risk Well that is a Development
Well and after delivery of all Recovery Petroleum required under Section
1.35(a) and (b), as applicable, all Petroleum produced from such Development
Well.
1.31 "Regulations" means all statutes, laws, rules, orders and
regulations in effect from time to time and made by governmental authorities
having jurisdiction over the Contract Area and over the operations to be
conducted thereon.
1.32 "Retained Proceeds" means the value of the Recovery Petroleum
after deducting (a) royalty payments, if any, to the Colombian government
and/or Ecopetrol on the Recovery Petroleum in question, and (b) taxes (other
than taxes computed by reference to profits, income, distributions, or capital)
and other payments of a like nature, if any, levied by the Colombian Government
or agency thereof on the Recovery Petroleum in question and after deducting the
value of the portion of the Recovery Petroleum in question
7
<PAGE> 11
which is delivered to Ecopetrol on account of its participation, if any.
1.33 "Seismic Program" means the obligations that the Parties have
committed to perform as described in Clause 5.1.1 of the Ecopetrol Contract,
during the first year of the Ecopetrol Contract.
1.34 "Sole Risk Well" and "Sole Risk Development" means those
operations as to which not all Parties participate as set forth in Article 12.
1.35 "Wildcat Well" means any well deemed an Exploratory Well by
Ecopetrol and which additionally meets the following criteria:
(a) A well drilled in the Contract Area which at the time
of spudding is located in an area lying outside the interpreted closure of any
geological structure (or stratigraphic trap) into which a well has been
drilled, in which such last-mentioned well Petroleum in commercial quantities
has been found to be present during a positive test; or
(b) A well drilled or deepened in the Contract Area which
(i) at the time of spudding, deepening or reworking is located in a surface
area lying inside the interpreted closure of any geological structure (or
stratigraphic trap) into which a well has been previously drilled in which such
previously drilled well where Petroleum in commercial quantities has been found
to be present during a positive test, (ii) is drilled or deepened to a depth
below the stratigraphic level in which Petroleum was found to be present within
the interpreted closure and (iii) is not
8
<PAGE> 12
completed in the horizon in which such Petroleum was found to be present.
ARTICLE 2
Participating Interests and Relationship of the Parties
2.1 All rights and obligations in the Ecopetrol Contract (except
for the rights and obligations of Ecopetrol and the Government of Columbia) and
all equipment, materials and facilities owned by or hereafter purchased for the
operation of the Joint Lands shall be owned by the Parties in undivided
interests in the percentages set out in Section 2.2 below, as modified from
time to time in accordance with Section 2.3 below.
2.2 Except as modified by Section 2.3 below, the Parties shall,
during the term of this Agreement, own all rights, interests and benefits
hereunder and under the Ecopetrol Contract and all Petroleum produced pursuant
thereto and shall assume and discharge all of the liabilities and obligations
set forth in the Ecopetrol Contract and this Agreement, according to the
following Participating Interests:
Argosy 55%
Neo 45%
All Joint Account costs shall be shared by the Parties on the basis of
their respective Participating Interests.
2.3 The percentages set forth in Section 2.2 above are the initial
Participating Interests of the Parties. If, from time to time, the
Participating Interest of any Party increases or
9
<PAGE> 13
decreases as provided for in this Agreement, the proportion of the obligations,
liabilities, costs and expenses to be borne and paid by that Party, as well as
its Proportionate Share of the rights and benefits, shall be increased or
decreased correspondingly in accordance with the provisions of this Agreement.
2.4 Except as provided in Article 12 hereof, a Party's
Participating Interest must be the same in all parts of the Contract Area.
Only Participating Interests in the entire Contract Area may be transferred
under Article 14 of this Agreement.
2.5 The liability of the Parties shall be severed, not joint or
collective. Each Party shall be responsible only for its obligations, and
shall be liable only for its Participating Interest or Proportionate Share of
the costs of Joint Operations. Accordingly, the liens granted among the
Parties in Article 9 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.
2.6 Except as provided in Article 12 hereof, all property of every
kind and description acquired pursuant to this Agreement shall be owned in
undivided shares by the Parties in accordance with their respective
Participating Interests. During the term of this Agreement, each Party agrees
that it shall at no time resort to any proceeding or action at law or other
action to partition or divide any such property or any portion thereof jointly
owned by all Parties subject to this Agreement.
10
<PAGE> 14
2.7 Each Party hereby elects to be excluded from the application
of all of the provisions of Subchapter K of Chapter 1 of Subtitle A of the
Internal Revenue Code of 1986, as amended from time to time (the "Code"), as
permitted and authorized by Section 761 of the Code and the regulations
promulgated thereunder. Operator is hereby authorized and directed to execute
such evidence of this election as may be required by the Secretary of the
Treasury of the United States or the United States Internal Revenue Service,
including specifically, but not by way of limitation, all of the returns,
statements and data required by the Code and applicable regulations thereunder.
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 United States Internal Revenue Service. Each Party
further agrees not to give any notice or take any action inconsistent with the
election made hereby and, further, to take such action consistent with the
foregoing election as may be necessary or desirable to effect or evidence the
same result with respect to any other taxing jurisdiction or authority.
ARTICLE 3.
Operating Committee
3.1 To provide for the orderly supervision and direction of the
Joint Operations, the Parties shall pursuant to this Agreement forthwith
establish an Operating Committee in accordance with Section 3.3 hereof. Any
future Members of the Operating Committee,
11
<PAGE> 15
other than the initial Members, shall represent an entity or an individual who
may become a successor to a Party's Participating Interest in the Joint Lands
or who may become a successor to a portion of a Party's Participating Interest
in the Joint Lands.
3.2 In addition to the powers and responsibilities otherwise set
forth in this Agreement, the Operating Committee shall have the following
powers and responsibilities, the exercise of which shall be the proper business
of the Operating Committee:
(a) To establish policies from time to time governing
various aspects or activities of the Joint Operations;
(b) To review, adopt and revise Programs and Budgets;
(c) To select the location for wells to be drilled under
said Programs and to approve the program for drilling, deepening, reworking,
sidetracking, testing, Completing, plugging and abandoning of wells thereunder;
(d) To select areas to be relinquished or surrendered
under the terms of the Ecopetrol Contract.
(e) To appoint such technical, financial, accounting,
legal or other committees as may be appropriate for studies, analyses or
reports on matters pertaining to the Joint Operation;
(f) To consider the advisability of purchasing, selling
or exchanging information from, to or with third parties, other than affiliated
companies, and making of contributions, such as bottom hole or dry hole
contributions, subject to government approval, if required; and,
(g) To consider such other matters pertaining to the
12
<PAGE> 16
Joint Operations as may be specifically referred to the Operating Committee by
the Parties.
3.3 (a) Except as provided in Section 3.3 (b), Argosy and Neo
each shall have the right to appoint two Members to the Operating Committee.
These Members of the Operating Committee appointed by Argosy and Neo are
appointed by agreement of each Party as well as the alternative Member(s) who
shall be authorized to represent and bind such Party at meetings of the
Operating Committee. A party may change its Member from time to time by Notice
to all other Parties. The Members to serve on the Operating Committee are
hereby appointed and identified as follows:
Members Alternates
------- ----------
Argosy: Douglas W. Fry W. Kirk Bosche'
Santiago Gonzalez Edgar L. Dyes
Neo: Ronald Suttill
Robert C. Boyd
Appointment of these Members of the Operating Committee shall require
no additional notice apart from the execution of this Agreement. Such Members
shall serve as Members as provided hereby until they resign or are removed as
provided herein.
(b) Upon the transfer of fifteen percent (15%) or greater
Participating Interest by a Party to an individual or entity ("New Party"), the
New Party shall have the right to appoint a Member to the Operating Committee
who shall be entitled to vote such New Party's Participating Interests.
13
<PAGE> 17
(c) Any Party holding less than a fifteen percent (15%)
of the Participating Interests shall not be entitled to have a Member on the
Operating Committee.
3.4 A Chairman of the Operating Committee ("Chairman") shall be
selected by the Members. For a period of six months from the date hereof a
Member representing Neo shall be Chairman of all meetings of the Operating
Committee. If a Member representing Neo is not present at the commencement of
such a meeting, the Members present shall elect one of their number to be the
chairman of such meeting. After the expiry of the aforementioned six month
period, the Chairman shall be elected for a period of one year by a majority
vote of the Operating Committee.
3.5 The Operating Committee may consider any matter including,
without limitation, those referred to in Section 3.2 above. A meeting shall be
held every other month unless properly called sooner by the Operator or any
Member. Commending with the initial meeting of the Operating Committee and for
each meeting of the Operating Committee thereafter, the time, place and date of
the next subsequent meeting of the Operating Committee shall be set by a sixty
percent (60%) vote of the Operating Committee at its current meeting before
adjournment. Each alternating meeting shall
14
<PAGE> 18
be held in Columbia with the ensuing meeting to be held in a place to be
determined by the Operating Committee. At least fifteen (15) days' Notice of a
meeting hereunder shall be given to the Members unless the Members unanimously
waive their right to such Notice in writing. Any Member may be present and
participate in any meeting of the Operating Committee by conference telephone
call in which all Members participating therein can hear one another. The
Operator, when dispatching Notice of any meeting shall attach an agenda giving
reasonable details of all matters to be considered at the meeting. Any Member
may, by Notice given to the Chairman at least ten (10) days prior to a meeting,
propose additional items which shall be included on the agenda. When a meeting
is called by Operator at the request of a Member, the Operator shall include on
the agenda such matters as are requested by the Member for inclusion on the
agenda. Matters not on the agenda may be voted upon only if all the Members
are present in person or, if not present in person, by telephone, and they
unanimously agree to submit such matters to a vote. Any duly called meeting of
the Operating Committee may be suspended or delayed by a majority vote of the
Members (in person or by telephone) at such meeting but, in any case, a
meeting of the Operating Committee shall be held and completed once in each
quarter of the Calendar Year.
3.6 (a) The Operating Committee shall determine all matters
properly coming before it as follows:
(i) In voting on any matter the Members shall
vote the Participating Interest they represent;
15
<PAGE> 19
(ii) Except as otherwise specifically provided for
in this Agreement, the Members shall determine or approve matters by the
affirmative vote of sixty percent (60%) of the Participating Interest.
(iii) A Member not in attendance at a called
meeting may vote on any matter submitted for a vote at the meeting by Notice
ballot to Operator or by telephone call to the Operator, such oral vote being
confirmed in writing by the Member to the Operator as follows: A Member who
participates in a called meeting by telephone shall confirm his vote by a
telephonic facsimile to the Operator within three (3) business days of such
called meeting.
(iv) Operator may submit any matter, with
reasonable details of any proposed expenditure, to each Member by Notice. Each
Member shall vote by Notice transmitted by telephonic facsimile to the Operator
within twenty (20) days from the date of receipt from the Operator of the
ballot Notice. Such vote shall be binding unless Operator or any Member gives
written Notice of a meeting to consider the item addressed in the ballot Notice
pursuant to Section 3.5 above within twenty-five days from the receipt of the
ballot by the Members. Operator shall promptly notify each Member of the
result of a vote hereunder;
(v) A Member who does not vote at a meeting or by
ballot, as the case may be, on any matter shall be deemed conclusively to have
voted affirmatively;
(vi) A determination of a matter by the voting
Members in accordance with this Agreement shall be binding upon all the
Parties.
16
<PAGE> 20
(vii) Any Party who is not entitled to appoint a
Member by reason of Section 3.3(c) as above, may arrange to have its
Participating Interests voted by a Member.
(b) The Chairman shall prepare the agenda and keep
minutes of the proceedings of each meeting of the Operating Committee and a
copy thereof shall be forwarded to each Member. The minutes shall include the
names of the Members present or participating by conference telephone call as
described in Section 3.4 and any formal resolutions passed by the Operating
Committee. Unless a Member takes objection to contents of minutes by notice to
Operator and all other Members within twenty days of receipt of the minutes,
the minutes shall be deemed conclusively to be correct.
3.7 Operator shall call an annual meeting of the Operating
Committee on or before November 1st in accordance with Section 3.5 hereof to
consider among other things the matters set forth in Article 7 hereof.
3.8 Each Member of the Operating Committee shall be responsible
for his own travel expenses in connection with attendance at the meetings of
the Operating Committee.
ARTICLE 4.
Joint Operations/Scope of Agreement
4.1 Each Party recognizes that in accepting the Ecopetrol Contract
certain obligations will be required of it and, in furtherance of that
recognition, each Party has agreed to, or will when required of it agree to
contribute to the Joint Operations the
17
<PAGE> 21
sums of money necessary, to satisfy when due, its Participating Interest share
of the minimum expenditures required to satisfy the first year's obligations
under the Ecopetrol Contract. Until those minimum expenditure and work
obligations are satisfied, the Parties agree that the Sole-Risk Drilling
provisions (Article 12 hereof) and the Withdrawal provisions (Article 16
hereof) shall not be applicable.
4.2 The scope and purpose of Joint Operations are limited to
prospecting, exploring and drilling for Petroleum, developing, operating and
producing Petroleum accumulations in the Contract Area, treating and field
processing Petroleum produced under this Agreement. Notwithstanding any
implication which may be drawn from the foregoing or from any other provision
contained herein, this Agreement is not intended to and shall not extend to any
joint financing arrangement or to any joint marketing or joint sales of
Petroleum.
ARTICLE 5.
Operator
5.1 The Branch shall be the Operator for the Joint Operations and
for operations conducted pursuant to Article 12 hereof, and shall conduct and
direct and have full control of all such operations in the Contract Area, as
permitted and required by, and within the limits imposed by this Agreement.
Operator shall conduct all operations in a good workman-like manner in
accordance with this Agreement and with good oil field practice, in compliance
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with all applicable laws, rules and regulations governing such operations, and
in accordance with Programs and Budgets approved by the Parties and the
Ecopetrol Contract. Non-operators shall take all reasonable steps to assist
the Operator in the performance of its obligations set forth herein.
5.2 Except in the case of gross negligence, as provided for in
Section 5.5 below, when the vote shall be sixty percent (60%), the Operator
hereunder may be removed as Operator at any time by a eighty percent (80%)
affirmative vote in interest of all of the Participating Parties. The
Non-Operators shall jointly and promptly give to Operator Notice of such
removal and such removal shall be effective on the date on which a successor
Operator, appointed by the Operating Committee and/or Ecopetrol, shall be ready
and able to assume the obligations of Operator in accordance with the
provisions of this Agreement.
5.3 Subject to compliance with the provisions of the Ecopetrol
Contract, Operator may at any time resign by giving to each of the
Non-Operators Notice of such resignation. Such resignation shall be effective
one-hundred eighty (180) days after the date of Notice thereof or on the date
on which a successor Operator appointed by the Operating Committee and/or
Ecopetrol shall be prepared to assume the obligations of Operator hereunder,
whichever shall first occur.
5.4 Upon removal of the Operator by a vote of the Participating
Parties or resignation of the Operator, a new Operator shall be appointed by a
sixty percent (60%) affirmative
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vote in interest of the Participating parties.
5.5 Operator shall not be liable to any Non-Operator hereto for
anything done or omitted to be done by Operator in the conduct of operations
hereunder except that Operator shall be liable for such acts or omissions in
his capacity as Operator which constitute gross negligence, willful misconduct
or a material breach of this Agreement.
ARTICLE 6.
Functions and Duties of Operator
6.1 In accordance with agreed Programs and Budgets, and subject to
the provisions of this Agreement, the Ecopetrol Contract, Regulations and such
instructions as may be given from time to time by the Operating Committee,
Operator shall have exclusive charge of and shall conduct all operations of the
Joint Lands, and in connection therewith, shall have the following rights,
duties and obligations:
(a) Operator shall represent the Participating Parties
with Ecopetrol and with other agencies of the Government of Colombia and
furnish to them all information, data and notices which the Participating
Parties are required to furnish under the Ecopetrol Contract. Operator shall
promptly furnish the Non-Operators with copies of all communications and
notices which the Operator receives from Ecopetrol or any agency of the
Government of Colombia and any Non-Operator may attend all meetings of Operator
with Ecopetrol or any agency of the Government of Colombia, if he or it so
desires.
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(b) Operator shall secure or have secured and furnish all
supervision, labor, services, contractors and subcontractors, materials and
equipment, permits and rights necessary or appropriate for Joint Operations
hereunder and shall have custody of all materials and equipment. The selection
of employees, the number thereof, their hours of labor and their compensation
shall be determined by Operator.
(c) Operator shall use its best efforts to conduct
diligently all operations in accordance with practices generally followed in
exploration, development and production operations by the petroleum industry,
to confirm to good oil field and production engineering practices and accepted
conservation principles and to perform such operations in an efficient and
economic manner. All operations shall be conducted in compliance with the
terms of the Ecopetrol Contract, this Agreement and Regulations.
(d) Operator shall proceed with due diligence to secure
or cause to be secured for the Joint Account such permits, easements and their
rights to the use of the Joint Lands and other rights as may be required or
appropriate to the conduct of operations in accordance with the Ecopetrol
Contract, this Agreement and Regulations.
(e) Operator shall make a reasonable effort to notify the
Non-Operators of the time of coring and testing of Exploratory and Development
Wells which are undertaken at the direction of the Operating Committee and
shall permit, upon receipt of authorization in writing by any Non-Operator, the
employees and Members of any
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such Non-Operator to have full access to the area of operations at all
reasonable times and at their own risk and expense for the purpose of observing
any and all operations being conducted by Operator and inspecting all
materials, equipment and other properties. Such employees and Members shall at
all times observe Operator's safety Regulations.
(f) Operator shall furnish the Non-Operators at the
earliest possible date, with copies of all reports furnished to Ecopetrol;
copies of drilling and related contracts; reports of crude Oil runs and stocks;
an accurate monthly report showing production and detailed disposition of the
volumes of Oil, condensate, water, associated Gas, non-associated Gas and other
substances; true and legible copies of all electrical logs, gamma ray logs, mud
logs and other well surveys; copies of all production tests, bottom hole
pressure and temperature surveys, reservoir fluid analyses, core analyses, and
any other survey or measurements conducted on said wells; copies of all
geological and geophysical data and information and daily drilling reports.
Operator shall furnish to any Non-Operator any additional information
pertaining
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to Joint Operations on the Contract Area when a special request thereof is
made; however, the cost of gathering and furnishing any additional information
not ordinarily furnished by Operator to the Non-Operators shall be charged to
the Non-Operator whose employees request the information. Each Non-Operator,
through its employees, or agents duly authorized in writing for such purpose,
shall be permitted at reasonable intervals and during usual business hours to
examine and make copies of any and all data and interpretations thereof,
including but not limited to cores, samples, logs and surveys concerning
operations conducted hereunder.
(g) Operator shall use its best efforts to keep the
Contract Area, Joint Lands and associated property free from liens, charges and
encumbrances arising out of the operations hereunder, except as otherwise
provided herein.
(h) Operator shall promptly pay all costs and expenses
incurred in connection with operations hereunder, except as otherwise provided
herein.
(i) Operator shall keep full and complete records of
accounts and technical operations hereunder and prepare and furnish to each of
the Non-Operators such reports, statements, data and information as may be
required from time to time by the Operating Committee concerning the Ecopetrol
Contract or the operations conducted thereunder.
6.2 Operator shall undertake to carry out the Programs provided to
Operator by the Operating Committee (the "Adopted Programs") within the limits
of the respective Budget and approved Authorities for Expenditure ("AFE") for
such Programs approved by the Operating Committee and provided to Operator (the
"Adopted Budgets") and shall not undertake any operations not included in such
Adopted Programs or make any expenditures during a Calendar Year in excess of
the budgeted amounts adopted therefor except as follows:
(a) If necessary to carry out the Adopted Programs for
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a Calendar Year, Operator is hereby authorized to make during such Calendar
Year, expenditures in excess of the Adopted Budget applicable to each Program
therefore in an amount not to exceed ten percent (10%) of the total respective
Adopted Budget or $50,000 whichever is less in such currencies as may be
appropriate. Any expenditures in excess of the Adopted Budget shall be
reported promptly in writing to the Non-Operators by Operator.
(b) Operator is also hereby authorized to expend for
operations on the Contract Area, during the Calendar Year, a sum not to exceed
$50,000 or the equivalent in other currencies, on items not included in the
Adopted Budget for that year, provided that such expenditures are not for
purposes previously rejected by the Operating Committee and provided that an
itemized report of such expenditure shall be submitted for approval to the
Non-Operators as soon as possible following such expenditure, and if the
Operating Committee shall approve such expenditures, the expenditures shall be
considered expenditures included in the Adopted Budget and shall not count
against expenditures allowed by virtue of Section 6.2(a).
(c) Notwithstanding any other provisions under this
Agreement, in the event of explosion, fire, flood or other emergency occurring
on the Contract Area, Operator may take all actions it deems advisable to
protect and safeguard life and property and the operations hereunder. Operator
shall promptly report to the Non-Operators a full description of the event and
the actions taken.
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6.3 In the event an operation has been approved by the Operating
Committee, it shall not be necessary for Operator to obtain additional approval
from such Committee for any third party contract relating to that particular
operation unless the value of such contract exceeds the approved amount by ten
percent (10%).
6.4 Any and all claims and suits by third parties arising out of
the operations of the Joint Lands or relating to the Joint Lands and brought
against Operator or the Non-Operator, or any of them, may to the extent not
covered by insurance be compromised and settled or defended by Operator;
provided, however, that Operator shall not pay more than the equivalent of
$10,000 in the settlement of any such claim or suit without first obtaining the
approval of the Operating Committee. When the amount of any such claim or suit
brought against Operator or the Non-Operators hereto, or any of them, shall
exceed the equivalent of $10,000, Operator shall promptly notify the
Non-Operators in detail of the claim or suit and shall comply with any
directions given by said Operating Committee with respect thereto. Each
Non-Operator shall have the right to participate through its own counsel, at
its own expense, in the settlement, compromise or defense of any claims and
suits hereunder in amount in excess of the equivalent of $10,000, however,
other than as provided in this Agreement, the Ecopetrol Contract and
Regulations all expenditures incurred by Operator in prosecuting, defending,
compromising or settling any such claims shall be borne by the Participating
Parties.
6.5 Operator will maintain such office or offices in Colombia
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as may be necessary, appropriate or required by the Regulations.
6.6 Except as otherwise provided herein or in the Ecopetrol
Contract, Operator shall initially pay for the Joint Account all taxes (except
income taxes) with respect to property held for the Joint Account.
6.7 The Operator shall have a first and preferred lien on the
interests of the Non-Operators in the Contract Area and/or in the Petroleum
produced and saved under this Agreement or the proceeds from the sale of such
Petroleum and on the material and equipment acquired for the Joint Account to
secure for Operator the payment of any sum due the Operator under this
Agreement from the Non-Operators. The Parties agree that further documentation
is unnecessary for the Operator to perfect his interest in such lien against
the Non-Operators under this Section.
6.8 The Operator, subject to the approval of the Operating
Committee, shall hire an exploration manager, who shall reside in Colombia.
ARTICLE 7.
Programs and Budgets
7.1 As soon as practicable after the effective date of this
Agreement, the Operator shall submit to the Parties two proposed Programs and
Budgets for the remainder of the current Calendar Year, the next succeeding
Calendar Year and an estimate for the next four years.
(a) The Operations Program and accompanying Budget shall
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cover the Seismic Program, all operations and related costs, such as the day to
day expenses of the Joint Operations, the costs of operating and maintaining
any production on the Contract Area (including remedial well work under $25,000
per well per occurrence), the allocation of general and administrative expenses
to such operations and any and all other expenses connected with such
operations (the "Operating Program and Budget"). This Budget shall include
forecasts of production and revenue, if any, and costs on a monthly basis.
(b) The Drilling Program and related Budget shall cover
the drilling, deepening, recompleting, significant remedial well work in excess
of $25,000 per well per occurrence and the Completing and Equipping of any well
or wells on the Contract Area together with general and administrative expenses
allocated to such operation (the "Drilling Program and Budget"). This Program
shall include detailed AFE's showing estimated expenditures by project on a
monthly basis.
7.2 On or before the first day of October of each year following
the year in which this Agreement is first effective the Operator shall submit
to the Operating Committee the proposed Drilling and Operation Program and
Budget for the next succeeding Calendar Year and provisional Program and
estimated Budget for the following four Calendar Years.
7.3 The final Drilling Program and Budget will be approved
separately by the Operating Committee before the first day of December prior to
the commencement of the Calendar Year to which it relates.
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(a) Approval of the Operating Program and Budget shall
constitute authority for the Operator to arrange joint Operations and related
expenditure in accordance with the approved Program.
(b) Approval of the Drilling Program and Budget shall not
constitute authority for the Operator to arrange Joint Operations and commence
expenditure until the relevant AFE has been approved.
7.4 The work Programs and Budgets shall be at least sufficient to
satisfy any drilling operations necessary to maintain or perpetuate the
Ecopetrol Contract or the Seismic Program (the "Commitment Expenditures").
7.5 The Operator or any Non-Operator may also from time to time
submit to the Operating Committee revisions of the Programs and Budgets
covering additions, deletions and adjustments which it considers to be in the
interests of Joint Operations.
7.6 The Operator shall not be obliged to perform any work or incur
any expenditure or indebtedness hereunder for the Joint Account until the
corresponding Budgets have obtained all necessary approvals from Ecopetrol and
other governmental agencies.
ARTICLE 8.
Costs, Expenses and Advances
8.1 Except as herein otherwise specifically provided, all costs
and expenses, rewards and benefits, accruing or resulting from Joint Operations
shall be borne and paid by and accrued to the Parties in proportion to their
respective Participating Interests.
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8.2 Except as herein otherwise specifically provided, the Operator
shall pay and discharge all Joint Account costs and expenses and shall charge
the Parties with their respective Participating Interests shares of such costs
and expenses and shall render accounts in respect thereof in accordance with
the Accounting Procedure attached as Exhibit "B" to this Agreement.
8.3 The Operator, at its election, shall have the right to demand
and receive from each Party payment in advance of its respective share of the
estimated amount of expenditures for each month to be incurred in Joint
Operations in U.S. Dollar as required by Operator, which right may be exercised
only by submission to each Party at least ten (10) days but not more than
thirty (30) days prior to the beginning of each month of the Budget period an
itemized statement showing the amount to be advanced (for local expenditures in
Colombian Pesos and for other expenditures in U.S. Dollars) for the particular
month by each Party as its Proportionate Share of the cash expenditures. U.S.
Dollar funds as received shall be maintained in an account administered by the
Secretary and expenses incurred and payable in U.S. Dollars shall be paid from
the Parties account after approval of such payments by the Operator. Peso cash
calls shall be remitted to a joint Colombian bank account established and
maintained for the benefit of the Parties. The monthly cash calls shall be
paid within thirty (30) days after receipt by the Party of such itemized
statement or by the first of the month to which the cash call applies,
whichever comes later. Payment shall be considered made when good funds have
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been received at the place designated by Operator. Proper adjustment of each
monthly cash call shall be made between advances and expenditures in the
currency so advanced as a part of the calculation for the cash call for the
next succeeding month, to the end that each Party shall bear and pay its
Proportionate Share of actual expenditures. The Operator shall prepare and
present to each Party a quarterly statement which shall reflect a summary of
main types of expenditures under appropriate cost headings together with such
other details as may be agreed upon by the Parties. The Operator shall include
a quarterly and cumulative-from-inception summation of costs in the quarterly
statements. Payment of any cash calls pursuant to this Section 8.3 shall not
prejudice the right of any Parties to protest or question the correctness
thereof within the time limits specified in Section 2.20 of the Accounting
Procedure attached hereto as Exhibit "B".
8.4 The Operator shall pay all fees, rental and imposts (except
each Party shall pay to the Colombian Government all taxes computed by
reference to profits, income, distributions or capital) required by the
Regulations to be paid on account of Joint Operations or by the terms and
provisions of the Ecopetrol Contract and shall charge to the Joint Account any
such fees, rentals and imposts so paid.
8.5 Each Party shall timely pay, deliver or cause to be paid or
delivered to the appropriate governmental authority all taxes computed by
reference to income, profits, distributions or capital properly payable by such
Party and such Party shall hold the other
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Parties free from any liability therefrom. Operator shall, in accordance with
Clause 13 of the Ecopetrol Contract, deliver to Ecopetrol the portion of the
production from the Contract Area representing Ecopetrol's royalty. If the
Operator is requested by Ecopetrol to pay a royalty in money as provided for in
Clause 14.6.1 of the Ecopetrol Contract, then Operator shall make such payment,
and each Party shall furnish Operator with all information necessary for it to
do so and shall advance to Operator such funds as are necessary to pay timely
to Ecopetrol the royalty in respect of the share of production taken from the
Contract Area disposed of by such Party.
8.6 The Operator shall use its best efforts to deliver to the
Parties not later than March 31 following the close of each Calendar Year, a
final certified statement of the Joint Account for such Calendar Year, which
shall be deemed to be conclusively accepted by the Parties if not questioned in
writing within twenty-four (24) months of the date of its receipt by the
Parties. The cost for the certified statement shall be paid from the Joint
Account funds.
8.7 An Accounting Procedure making provisions for billings,
payments and allocation of all direct and indirect costs, expenses and overhead
charges and containing the principles to be adopted for all accounting and
fiscal purposes is attached to this Agreement and marked Exhibit "B" and forms
a part of this Agreement.
8.8 If Ecopetrol participates with the Parties in Joint
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Operations under the Ecopetrol Contract, then the proceeds received by the
Parties from Ecopetrol as reimbursement for prior costs pursuant to Clause 9 of
the Ecopetrol Contract shall be owned and shared by the Parties in the same
proportion as each bore such costs subject to the provisions of Article 12
hereof.
ARTICLE 9.
Default and Lien
9.1 If any Party shall fail to advance to Operator its share of
expenditures, or to pay its share of the costs and expenses which are due under
this Agreement within thirty (30) days of the date on which such funds are
payable, such Party shall be in default, and Operator shall immediately so
notify ("Defaulting Party") by telephonic facsimile or registered mail. A copy
of such Notice, specifying the amount, shall be simultaneously forwarded to
each other Party ("Non-Defaulting Party") to acquaint it with the facts
constituting such default.
9.2 Each Non-Defaulting Party shall, within fifteen (15) days of
receiving a copy of the Notice to the Defaulting Party given by the Operator
pursuant to Section 9.1, advance to Operator that proportion of the amount with
respect to which the Defaulting Party is in default which the Participating
Interest of such Non-Defaulting Party bears to the Participating Interest of
all Non-Defaulting Parties. Each Non-Defaulting Party shall continue to
advance to Operator an identical share of all future amounts payable by the
Defaulting Party pursuant to this Operating
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Agreement until the Defaulting Party has fully remedied its default in
accordance with Section 9.3 hereof or the Defaulting Party fails to remedy its
default and the Non-Defaulting Parties start recouping as provided in Section
9.4, or the Defaulting Party's interest under the well and the acreage
allocated thereto shall have been assigned pursuant to Section 9.5 hereof, or
operations shall have been abandoned pursuant to Section 9.5. The failure of a
Non-Defaulting Party to advance any amounts payable pursuant to this Article
shall be deemed to be a failure to pay or advance such Party's share of
expenses under this Agreement, and will result in such Party becoming a
Defaulting Party. All amounts advanced by a Non-Defaulting Party pursuant to
this Article shall thereupon become a debt due by the Defaulting Party, payable
on demand and bearing interest at the annual rate of eighteen percent (18%) or
the maximum legal rate permissible, whichever is the lesser, commencing on the
date such funds are so advanced. Any Non-Defaulting Party shall in addition to
all other rights available under this contract or otherwise have the right to
bring suit to enforce the collection of any sums payable by a Defaulting Party.
9.3 The Defaulting Party may remedy its default within thirty (30)
days following its receipt of the Notice provided for in Section 9.1 above by
paying to Operator all amounts in default and all interest which has accrued
thereon pursuant to Section 9.2 hereof. All amounts so paid to Operator shall
be promptly distributed and paid to the Non-Defaulting Parties proportionately
to the contributions theretofore made by them pursuant to the said Section 9.2.
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9.4 If the Defaulting Party fails to remedy its default within the
thirty (30) day period above referred to in Section 9.3 and if the amount in
default represents Operating Cost, then, in addition to the other legal
remedies available to them, each Non-Defaulting Party shall recoup from any
production on the Contract Area otherwise allocable to the Defaulting Party
three hundred percent (300%) of their respective share of such amount in
default plus any interest which may have accrued as provided in Section 9.2.
9.5 If the Defaulting Party fails to remedy its default within the
thirty (30) day period above referred to in Section 9.3 and if the defaulted
amount represents Drilling and/or Completion and Equipping Cost, then, in
addition to the other legal remedies available to them, each Non-Defaulting
Party shall have the option (but only after consultation with the other
Non-Defaulting Parties) exercisable by giving Notice to all Parties (including
the Defaulting Party) within one hundred twenty (120) days after the expiration
of the said thirty (30) day period referred to in Section 9.3 to have assigned
to said Non-Defaulting Party the entire Participating Interest of the
Defaulting Party in the well and the acreage allocated to it if it is a
Development Well or the Wildcat Area if it is an Exploratory Well. In
addition, each Non-Defaulting Party shall recoup the amount of default as
provided in Section 9.4. Such assignment shall be free of all liens, charges
and encumbrances, except those arising in favor of one or several of the other
Non-Defaulting Parties pursuant to this Agreement. If
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said option is exercised by more than one Non-Defaulting Party, the Defaulting
Party shall assign its Participating Interest to such Non-Defaulting Parties in
proportion to their respective Participating Interests or in such other
proportion as such Non-Defaulting Parties may agree. The Defaulting Party
shall, at its cost, execute and deliver any and all documents and take any and
all action necessary to effect the assignment of its Participating Interest to
such Non-Defaulting Party(ies). If the Non-Defaulting Parties (or any one of
them) have not elected by the end of the said thirty (30) day period referred
to in this Section 9.5 to acquire all of the Defaulting Party's Participating
Interest as set out above, no assignment of the Defaulting Party's
Participating Interest shall be made and, in that event, the Joint Operations
shall be abandoned at the earliest possible date and each Party, including the
Defaulting Party, shall pay its share of all costs of abandoning the Joint
Operations.
9.6 In the event any Party is declared in default on three
consecutive payments due to the Joint Account, the entire Participating
Interest of the Defaulting Party under this Agreement and the Ecopetrol
Contract shall automatically be assigned to the Non-Defaulting Parties without
any further action of either party.
9.7 Until such time as the assignment of its Participating Interest
has been completed pursuant to Section 9.5 or 9.6 hereof, and to the extent
that such cooperation may be necessary or appropriate, the Defaulting Party
shall cooperate with the other Parties to take any action which the
Non-Defaulting Parties wish to
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take within the scope of this Agreement to protect the rights and benefits of
the Parties under the Ecopetrol Contract.
9.8 In addition to the remedies for default set forth above, a
Defaulting Party grants to each Non-Defaulting Party a lien upon its share of
Petroleum when extracted, the proceeds therefrom and its Participating Interest
to secure payment of its share of expenses, together with interest thereon at
the rate provided in Section 9.2 hereof. Upon any party becoming a Defaulting
Party, Operator shall have the right, without prejudice to other rights or
remedies, to apply any proceeds in Operator's possession from the sale of the
Defaulting Party's share of Petroleum against any amounts payable by the
Defaulting Party pursuant to this Agreement. Each purchaser shall be entitled
to rely upon Operator's written statement concerning the amount of any default.
9.9 During any period after Notice is given pursuant to Section 9.1,
the Defaulting Party shall not have the right to receive any data, reports or
information relating to the Contract Area except for Notice of future cash
calls required and shall not have the right to make any representation with
respect to, or vote on, any matters submitted to the Operating Committee, but
shall nevertheless be bound by the decisions of the Operating Committee; and
the voting rights of the Defaulting Party shall inure to the Non-Defaulting
Parties in proportion to their respective Participating Interests.
9.10 The remedies contained in this Article are not exclusive and are
without prejudice to any remedies or actions at law or
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equity that are or may be available to the Non-Defaulting Parties for the
enforcement of their rights and collection of all sums due and owing from a
Defaulting Party. The failure to exercise any right or remedy at any time
shall not constitute a waiver of such right or remedy or estop the future
exercise of such right or remedy with respect to any default or subsequent
defaults in the performance by any Party of its obligations hereunder,
including but not limited to the obligation to advance funds.
9.11 Notwithstanding any other provision of this Agreement, upon the
failure of a Party to pay its Proportionate Share of a Commitment Expenditure,
as defined in Section 7.4 hereof, all parties shall be given notice of such
failure and the Party failing to pay its Proportionate Share of the Commitment
Expenditure (the "Forfeiting Party") shall have ten (10) days thereafter to
make such payment. If such payment is not made within ten (10) days, the
Parties other than the Forfeiting Party shall pay that proportion of the amount
which the Forfeiting Party has failed to pay which the Participating Interest
of such non Forfeiting Party bears to the Participating Interest of all non
Forfeiting Parties and the Forfeiting Party shall assign all of its right title
and interest in and to the Ecopetrol Contract and the Contract Area to the non
Forfeiting Parties as above and the Forfeiting Party shall have no further
participation in the Ecopetrol Contract and the Contract Area.
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ARTICLE 10.
Insurance
10.1 Operator shall purchase for the Joint Account and shall require
contractors to purchase all insurance required to comply with the Regulations
applicable to the Contract Area and any other obtainable insurance approved by
the Operating Committee. Such insurance shall waive all right of recourse
against the Parties. Each policy of insurance obtained pursuant to this
Section 10.1 shall, to the extent of their respective insurable interests,
include all Parties as named insureds and shall, if Parties request, include as
named insureds any mortgagees or other holders of a security interest in this
Agreement.
10.2 It is understood and agreed that any Party may carry any other
insurance for their own account pertaining to the Joint Operations at their own
cost and expense.
ARTICLE 11.
Disposition of Petroleum
11.1 Subject to the terms of the Ecopetrol Contract and the
Regulations, each Party shall have the right at all times to take in kind, own
and sell or otherwise separately dispose of its Participating Interest share of
all Petroleum produced and saved from the Contract Area as a result of Joint
Operations, all in accordance with this Agreement, except for Petroleum which
is unavoidably lost or required to be used by the Operator in Joint Operations.
Any extra expenditure incurred in taking in kind or
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separate disposition by any Party of its Proportionate Share of 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 Joint
Operations facilities which it uses.
11.2 If any Party shall fail to make any arrangements necessary to
take in kind or separately dispose of its Proportionate Share of the Petroleum
produced from the Contract Area, if and when any Party shall have the right to
do so, Operator shall have the right, subject to the prior written revocation
by the Party owning it, but not the obligation, to sell such Party's Petroleum
for the account of the non-taking Party. The Parties hereby appoint Operator
to serve as their representative under this Agreement for the administration,
amendment, renewal and renegotiation thereof, including without limitation,
giving and receiving Notices and requests, making and witnessing tests,
delivering the quantities of Petroleum deliverable, rendering bills for
Petroleum delivered, and receiving payments therefor, allocating and prorating
and distributing payments among the various Parties; and the Parties shall
indemnify and hold Operator harmless for its actions or inactions as such
representative except for those matters attributable solely to Operator's gross
negligence or willful misconduct.
11.3 In the event that different qualities of Petroleum produced from
the Contract Area are segregated so as to form two or more separate grades of
Oil, then all of the estimates, advices and
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declarations required to be given shall specifically relate to each of the
grades of Oil and to the equipment and facilities necessary for making
available each of such grades for delivery to each Party.
11.4 All risk of loss of Petroleum produced from Joint Operations
shall be borne jointly by all Parties up to the point where the Petroleum
passes the outlet flange of the Joint Account facilities, after which point
risk of loss shall be borne by the Party taking delivery.
ARTICLE 12.
Operations by Less than all Parties
12.1 Provided that the principal obligations of the Parties under the
Ecopetrol Contract have been fulfilled, any Party may at any time and from time
to time (subject to Section 12.2 below) propose the drilling, deepening,
Completing, plugging back or reworking of a well by furnishing all other
Parties with a written detailed program for the proposed operations, and an
estimate of the total cost thereof, which shall include, if applicable and
available:
(a) The surface location, the proposed bottom hole location,
seismic section and seismic structure map, and proposed spudding date;
(b) The proposed total depth and casing program and
anticipated stratigraphic section;
(c) The proposed testing and logging Program;
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(d) Types of drilling rigs and/or major facilities to be used
and
(e) Any acreage or cash contribution pledged in support of
the proposed operations.
Any Party may at any time propose the development of an area
lying inside an interpreted closure of any geological structure (or
stratigraphic trap) into which a well has been drilled in which Petroleum has
been found to be present. The proposal shall contain such technical
justifications, cost estimates and other information as are appropriate to the
particular project.
If the drilling, deepening, Completing, plugging back or
reworking of any particular well or the development of an area is proposed to
the Operating Committee and is not approved, then the Party or Parties, or any
of them, who voted in favor of such operations may elect to have such
operations conducted by giving written Notice to that effect to the other Party
or Parties, the Party or Parties making such election being hereinafter called
the "Drilling Party" whether one or more, and the other Party or Parties being
hereinafter called the "Non-Drilling Party", whether one or more; provided that
the deepening or plugging back of a jointly owned producible well may not be
carried out by the Drilling Party unless such operations are approved by the
Operating Committee. Conversely, if the drilling, deepening, completing,
plugging back or reworking of any particular well or the development of an area
is approved by the Operating Committee, then
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any Party not having voted in favor of such operations shall not participate in
such operations notwithstanding such approval, except as provided for in
Sections 12.2 and 12.3 below, the Party or Parties having voted in favor of
such operations being hereinafter called the "Drilling Party", whether one or
more, and the Party or Parties not having voted in favor of such operations
being hereinafter called the "Non-Drilling Party", whether one or more. The
above-mentioned well and such development operations are herein called the
"Sole Risk Well", and "Sole Risk Development", respectively, and operations of
either type or both are herein called "Drilling Operations".
12.2 Within thirty (30) days after receipt of the Drilling Party's
Notice of election, or within thirty (30) days after the approval of the
Drilling Operations by the Operating Committee, as the case may be, each
Drilling Party and each Non-Drilling Party may elect by written Notice to the
Drilling Party and Operator to participate in the Drilling Operations and be a
Drilling Party for the purposes of this Article. The Drilling Party shall,
within sixty (60) days after the expiry of the second Notice period aforesaid,
send written direction to the Operator to commence Drilling Operations. If
such Notice is not sent within said sixty (60) days after the expiration of the
second Notice period, all right of the Drilling Party arising from its notice
of election shall be forfeited.
12.3 If the Drilling Operations are for a well on which drilling
equipment is then located and Drilling Operations may be
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commenced immediately, the words "thirty (30) days" in each instance in Section
12.2 above shall be read as "twenty-four (24) hours" and the words "sixty (60)
days" shall be read as "seventy-two (72) hours", each of the Notices in respect
of such periods shall be given by telephonic facsimile, and from the time of
the first Notice given by a Drilling Party under Section 12.1 above or from the
time of approval of the Drilling Operations by the Operating Committee, as the
case may be, all Drilling Parties in respect of such Drilling Operations,
irrespective when they become Drilling Parties, shall bear all risk, cost and
expense relating to such Drilling Operations and shall pay all standby charges,
costs and expenses due to any delay in operations occasioned by the giving and
the receipt of the Notices referred to in said Section 12.1.
12.4 If at the end of the last 30-day period or 24 hour period as
provided for in Sections 12.2 and 12.3 above, as the case may be, there exists
no Non-Drilling Party in respect of such Drilling the following Sections of
this Article shall not have effect with respect to said Drilling Operations and
the operations shall be conducted as Joint Operations. If there exists a
Non-Drilling Party with respect to such Drilling Operations, the following
Sections of this Article shall have effect with respect thereto.
12.5 Operator shall commence the Drilling Operations as soon as
practicable after receipt of direction to do so as provided in Section 12.2
above and in accordance with approved work Drilling
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Programs, if any, and shall perform them continuously and diligently and drill
each well to the depth specified, in a bona fide effort to find and produce
Petroleum and/or shall undertake the development of the area, as applicable.
The entire cost and risk of the Drilling Operations be borne by the Drilling
Party and the Drilling Party shall have the right to make all decisions in
respect to the Drilling Operations. Equipment being used in Joint Operations
may not be employed in Drilling Operations unless approved by the Operating
Committee.
12.6 The Drilling Operations shall be operated by Operator for the
sole account of the Drilling Party and Drilling Party shall advance to
Operator, in accordance with Operator's billing therefor, the costs and
expenses required for such operations.
12.7 The Drilling Party shall be entitled to receive and dispose of
all of the Recovery Petroleum produced and saved until, if it is a Development
Well, the Drilling Party shall have received from the Retained Proceeds and
shall have been credited therefrom with an amount equal to the sum of:
(a) eight hundred percent (800%) of the costs and
expenses incurred and paid by the Drilling Party for the drilling, Completing,
and testing of said well and the Equipping of said well through and including
the well- head equipment.
(b) five hundred percent (500%) of the cost of all
additional equipment required for producing said well, including costs and
expenses incurred and paid by the Drilling Party in providing necessary
storage, transportation and other facilities
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required to deliver such Petroleum in a marketable state to the point where the
Drilling Party receives such production from Operator; and,
(c) five hundred percent (500%) of the costs and expenses
incurred and paid by the Drilling Party for the operation of said well until
such time as the Drilling Party is reimbursed pursuant to clauses (a) and (b)
of this Section.
12.8 Promptly following the election by each Party whether or not to
participate in the drilling of the Sole Risk Wildcat Well, the Parties shall
determine by unanimous agreement the areal extent of the wildcat area
hereinafter called "Wildcat Area". In the event the Parties fail to agree
unanimously as to the areal extent of the Wildcat Area within seventy-five (75)
days after the written Notice, the areal extent of such Wildcat Area shall be
determined by an independent consultant selected by 60% in interest of the
Operating Committee.
12.9 Upon commencement of the drilling operations of a Sole Risk
Wildcat Well the Non-Drilling Party shall transfer and assign to the Drilling
Party (in such form as such Drilling Party may reasonably require) all of its
Participating Interest with respect to the Wildcat Area. If the Drilling Party
has not established a Commercial Field within the Wildcat Area within three
years of the aforementioned assignment, the Drilling Party shall reassign the
Non- Drilling Party's interest in the Wildcat Area to the Non-Drilling Party.
12.10 After the Drilling Party has been reimbursed as
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provided in Section 12.7 above, the drilling operations shall be conducted as
Joint Operations and the Petroleum produced and saved from the applicable well
or wells shall be received by the Parties the same as in the case of a well
drilled for the Joint Account.
12.11 For the purpose of reimbursement under Section 12.7 above, each
Drilling Party shall be credited for Retained Proceeds of the Petroleum
produced and saved and sold or otherwise disposed of from a well during the
pay-out period at the value at the point where the Drilling Party receives such
production from Operator.
12.12 If a Sole Risk Well is dry, it shall be plugged and abandoned
by the Operator at the sole risk, cost and expense of the Drilling Party.
12.13 The Non-Drilling Party shall at its sole risk and cost have
access to each such well drilled by the Drilling Party to observe all Drilling
Operations and the Non-Drilling Party shall, upon request, be furnished with
samples saved in the drilling of such wells and shall, upon completion of the
drilling of any such well, be furnished with true and correct copies of all
well logs and shall be given access to all other information obtained in the
drilling of such wells.
12.14 Notwithstanding any of the other provisions of this Article, no
drilling operations shall be conducted if there is a substantial risk that the
drilling operations would appreciably impair the present or potential future
production from a producing well or one capable of producing nor shall any
drilling operations be commenced if same would adversely affect from an
operating or
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economic standpoint or otherwise any current or contemplated Joint Operations
under this Agreement, it being intended that all Joint Operations shall have
priority over any drilling operations and that drilling operations in which the
concerned Parties have together the highest interest shall have priority.
Without prejudice to the foregoing provisions of this Section if, in the
reasonable judgment of any Party, drilling operations which have not been
approved by the Operating Committee may cause any such risk or adverse
influence on Joint Operations, such Party shall so advise the Operator and the
other Parties stating the reasons substantiating its judgment and the drilling
operations shall not be undertaken unless approved by the Operating Committee.
12.15 Nothing in this Agreement shall entitle a Party to fail or
refuse to bear its share of expenditures required by the Ecopetrol Contract.
ARTICLE 13.
Arbitration
13.1 Any differences or disputes arising out of, concerning or
relating to this Agreement or the breach thereof shall be settled by reference
to three arbitrators to be appointed one (1) each by each of the Parties and
the third arbitrator to be appointed by the other two arbitrators.
13.2 The decision subscribed to by at least two of the arbitrators
shall be final and binding upon the Parties to the arbitration. The
arbitration proceedings shall be governed by the rules of the International
Chamber of Commerce then in force.
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ARTICLE 14.
Assignment or Encumbrance of Interest
14.1 Any Party may at any time transfer, assign or otherwise dispose
of all or a part of its Participating Interest, provided that such transfer,
assignment or other type of disposal is in accordance with the provisions of
this Article 14. A Party shall not transfer any Participating Interest, or a
party thereof, in less than the entire Contract Area. Any attempted assignment
in contravention of this Section 14.1 shall be null and void ab initio.
14.2 Every transfer, assignment or disposal of a Party's
Participating Interest, or part thereof, shall be made expressly subject to
this Agreement. Each transferee taking any such interest shall, either by the
terms of the instrument of transfer or by separate agreement in writing with
the Parties, assume and agree to be bound by all of the transferor's
obligations, liabilities and duties under this Agreement and the Ecopetrol
Contract with respect to the interest taken. A transfer of a Participating
Interest, or part thereof, shall not be effective unless made by an instrument
in writing duly executed by the Parties thereto in accordance with the
Regulations.
14.3 A Party may mortgage or otherwise pledge as security its
interest in the Ecopetrol Contract, provided that such mortgage or pledge is
expressly made subject to this Agreement and such Party complies with the
provisions of this Article 14.
14.4 Notwithstanding any sale, mortgage or other assignment
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or charge or other disposition by any Party of all or a part of its
Participating Interest to a third party, such Party shall remain liable to the
other Parties for obligations and commitments arising under this Agreement in
respect of such interest as though no such sale, mortgage or other assignment
or charge or other disposition had taken place, but only to the extent that a
purchaser, mortgagee or other assignee or charges itself does not pay or
perform such obligations and commitments. Provided, however, in the event a
Party assigns all or a part of its Participating Interest to a third party,
such assigning Party shall be released from the obligations and commitments
assumed by the assignee in respect of the interest assigned but only if the
non-assigning Parties so release such assigning Party in writing, which release
shall not be unreasonably withheld if the assignee is financially and
technically capable of fulfilling all such obligations and commitments.
14.5 No sale, mortgage or other assignment or encumbrance of this
Agreement, the Ecopetrol Contract or the Contract Area shall be made except
subject to and in accordance with such consents and approvals as are required
by this Agreement, the Ecopetrol Contract and the Regulations; provided that as
to transfers of Participating Interests between the Parties which are required
by this Agreement, including transfers contemplated by Article 9 of this
Agreement, the prospective transferee shall, from the time the transfer is to
be effective according to this Agreement and until the aforesaid consents and
approvals are obtained, assume all costs, expenses,
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and obligations attributable to the Participating Interest to be transferred
and shall during such period be entitled to all of the rights and benefits
attributable to the Participating Interests to be transferred.
14.6 If Joint Operations with Ecopetrol are commenced under the
Ecopetrol Contract, then the provisions of this Agreement shall, as among the
Parties, be applicable mutalis mutandis to those operations subject to the
following:
(a) The provisions of Sections 8.2, 8.3, 8.6, 8.7 and
Exhibit "B" (Accounting Procedure) of this Agreement shall not be applicable to
Joint Operations with Ecopetrol except that expenditures made by Operator which
are not covered by the Ecopetrol Contract and the Accounting Procedure attached
thereto but which are incurred by Operator for the conduct of the Joint
Operations shall be charged to the Joint Account and paid by the Parties in
accordance with the Accounting Procedure attached to this Agreement as Exhibit
"B" and subject to the audit rights of the Non-Operators contained therein.
(b) As to any operations which qualify as "Drilling
Operations" pursuant to the provisions of Article 12 of this Agreement, the
Drilling Party shall have the right to vote the Non-Drilling Party's
Participating Interest in any matters in respect of those Drilling Operations
which are presented to Ecopetrol under the Ecopetrol Contract for a vote and
the Non-Drilling Party shall furnish the Drilling Party the documentation which
may be necessary to demonstrate this right.
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ARTICLE 15.
Surrender
15.1 In the event it becomes necessary under the Regulations or the
Ecopetrol Contract to surrender any part of the Contract Area, Operator shall
at least ninety (90) days prior to the date on which Notice of such surrender
is to be given to Ecopetrol give Notice in writing to the Operating Committee
setting forth in detail any and all requirements of surrender. Such Notice
shall include descriptions of the specific area or areas Operators proposes to
surrender, together with descriptions and boundaries of the area or areas to be
retained.
15.2 The Operating Committee shall determine the area or areas to be
surrendered.
15.3 Any surrender of all or a part of the Contract Area, other than
a surrender which is required under the Regulations of the Ecopetrol Contracts,
may only be effected with the unanimous vote of the Parties.
ARTICLE 16.
Withdrawals
16.1 Subject to the following provisions, each Party (hereinafter
referred to as the "Withdrawing Party") shall have the right to relinquish its
entire Participating Interest by giving Notice to such effect to the other
Parties ("Non-Withdrawing Parties"); provided that no Party shall be entitled
to relinquish its Participating Interest or to withdraw from this Agreement if
it
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is a Defaulting Party under Article 9 hereof.
16.2 The effective date of such withdrawal shall be the later to
occur of:
(a) Ninety (90) days from the date Notice thereof is
given to all Parties; or,
(b) the date Ecopetrol has approved such intended
withdrawal.
16.3 Each of the Non-Withdrawing Parties shall have sixty (60) days
from the giving of said Notice to elect whether to take over that proportion of
the Withdrawing Party's Participating Interest which the Participating Interest
of such Non-Withdrawing Party bears to the Participating Interest of all
Non-Withdrawing Parties. If the Non- Withdrawing Parties do not elect within
the said sixty (60) days to take over the Withdrawing Party's entire
Participating Interest in such proportion as may be agreeable to them, all
Parties shall take the appropriate measures to terminate the Ecopetrol Contract
and this Agreement, and each Party shall pay its Proportionate Share of all
costs of abandoning the Joint Operations.
16.4 Such right of withdrawal shall be subject to the following
provisions:
(a) The Withdrawing Party shall, without compensation of
any kind and at its sole risk and expense, prepare and execute all necessary
documents to assign its Participating Interest free and clear of all liens and
encumbrances, take any and all steps necessary to obtain the approval of
Ecopetrol to such assignment, and deliver such documents to the Non-Withdrawing
Parties. The
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latter shall pay to the Withdrawing Party the reasonable salvage value of its
Participating Interest in any existing equipment, facilities and wells, less
the estimated cost of (i) salvaging the same, and (ii) plugging and abandoning
such wells, as determined by the Operating Committee. If the said estimated
costs are in excess of the aforementioned salvage value, the Withdrawing Party
shall pay its Participating Interest share of such excess in cash to the
Operator.
(b) The Withdrawing Party shall pay all expenses incurred
in connection with its withdrawal, including but not limited to, any taxes or
other fees on the assignment of its Participating Interest. Any obligations of
a Withdrawing Party imposed by Ecopetrol shall, however, be reduced to the
extent that they can be reduced or canceled, and the Withdrawing Party shall
pay any penalties required to be paid in order to obtain such reduction or
cancellation. If more than one Party joins in the withdrawal, then such
Parties shall pay all such expenses and penalties in proportion to their
respective Participating Interests.
(c) On the effective date of withdrawal, the Withdrawing
Party shall cease to be a Party to this Agreement, except to the extent
provided herein. The Withdrawing Party shall continue to be responsible for
its share of the claims, costs and expenses incurred or to be incurred pursuant
to Programs and Budgets approved by the Operating Committee prior to the
effective date of withdrawal and for taxes, fees and charges owing to
Ecopetrol.
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(d) Until such time as a valid assignment of the
Withdrawing Party's Participating Interest is completed and the transfer
thereunder is approved by the Ecopetrol, the Withdrawing Party shall remain
obligated to join in any action required of the Parties for the maintenance in
force of the Ecopetrol Contract, it being understood that the Withdrawing Party
shall not, by such joinder or participation in any action following the
effective date of withdrawal, incur any financial responsibility or obligation
accruing after the effective date of withdrawal other than as provided in this
Article 16.
(e) Each Non-Withdrawing Party shall share in the
benefits, obligations and rights attributable to the Withdrawing Party's
Participating Interest in the proportion that such Non-Withdrawing Party's
Participating Interest bears to the total Participating Interests of all
Non-Withdrawing Parties, or in such other manner as may be mutually agreed upon
by the Non-Withdrawing Parties.
ARTICLE 17.
Public Announcements
17.1 No Party shall, without the consent in writing of the other
Parties, issue or make any public announcement or public statement regarding
this Agreement, the Ecopetrol Contract or Joint Operations unless it is
necessary for a Party to make such public announcement or public statement in
order to comply with the Regulations or with the requirements of a duly
constituted
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government agency or an established stock exchange, in which case a copy of
such public announcement or public statement shall be furnished to the other
Parties prior to the publication.
ARTICLE 18.
Confidential Information
18.1 All information and data made available or obtained from Joint
Operations shall be and remain confidential among the Parties during the term
of this Agreement and for two (2) years thereafter, and a Party shall not,
during such period without the prior consent of all Parties disclose such
information and data to any entity which is not a Party to this Agreement
except that a Party may disclose, without having obtained such prior consent,
such information and data to:
(a) Affiliates of a Party,
(b) as required by a stock exchange or similar regulatory
entity or a government agency of pertinent jurisdiction,
(c) lending institution or merchant bankers or
contractors of a Party, and
(d) an entity which is engaged with a Party in good faith
negotiations for the acquisition of all or any part of the Participating
Interest of such Party, provided that in each instance the Party shall obtain a
written commitment from the entity to which the information and data is
disclosed that such entity shall treat such information and data as
confidential and shall obtain any waivers or consents from Ecopetrol which may
be
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required by Clause 6 of the Ecopetrol Contract, provided further that if a
Party is required to disclose such information and data to a government agency
of competent jurisdiction, then the Party may make such disclosure without
having obtained a written confidentiality commitment from such agency.
ARTICLE 19.
Force Majeure
19.1 In the event a Party is rendered unable, wholly or in part, by
Force Majeure to carry out its obligations under this Agreement or the
Ecopetrol Contract, upon such Party's giving Notice and reasonably full
particulars of such Force Majeure in writing to the other Parties within a
reasonable time after the occurrence of the cause relied upon, the obligations
of such Party, insofar as they are affected by such Force Majeure, shall be
suspended during the continuance of any inability so caused. The suspended
obligations shall be resumed as soon as reasonably practicable after such Force
Majeure has been removed. The provisions of this Article 19 shall not suspend
the obligation of a Party to make timely payment of its share of costs,
expenses and advances under this Agreement and Exhibit "B" or obligation of
Operator to keep the Contract Area free of liens, charges and encumbrances.
19.2 The term "Force Majeure" as used herein shall include acts of
God, fire, unavoidable accidents, acts of war or conditions arising out of or
attributable to war (declared or undeclared),
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laws, rules, regulations and orders of any government or government agency,
strikes, lockouts, and other labor disturbances, delays in transportation,
floods, storms, earthquakes and other natural disturbances, insurrections,
riots and other civil disturbances and all matters reasonably beyond the
control of the Party concerned, whether or not similar to those enumerated.
Force Majeure shall likewise include:
(a) In those instances where any Party is required to
obtain permits, licenses, or permission from the Colombian Government or agency
or company thereof to enable such Party to fulfill its obligations under this
Agreement and such Party has made timely and proper request for same, the
inability of such Party to acquire or the delays on the part of such Party in
acquiring upon not unreasonable terms and conditions (including costs) such
permits, licenses or permission; and
(b) In those instances where any Party is required to
secure or furnish materials, supplies, equipment and labor for drilling,
constructing, installing or maintaining facilities or equipment, and such Party
has made timely and proper attempt to obtain same, the inability of such Party
to secure or furnish upon not unreasonable terms and conditions (including
costs) such materials, supplies, equipment and labor.
ARTICLE 20.
Applicable Law
20.1 This Agreement shall be governed by the laws of the
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State of Texas, U.S.A., except for any matter which is necessarily subject to
and controlled by the applicable laws of the Republic of Colombia. Venue of
any litigation or arbitration proceeding shall be in Salt Lake County, Utah,
U.S.A., unless otherwise required by law. Should venue be so required in
another jurisdiction, it is the intent of the Parties that construction of this
Agreement remain in accordance with the laws of the State of Texas.
ARTICLE 21.
Termination
21.1 With the exception of Article 9, this Agreement shall be
terminated by either:
(a) consent of all Parties; or
(b) the provisions under Section 9.5 of this Agreement; or
(c) the expiration of or surrender or withdrawal by the
Parties of the Ecopetrol Contract.
ARTICLE 22.
Consequences of Termination
22.1 On termination of this Agreement (whether by agreement or
otherwise) such assets as may have been held for the Joint Account shall be
applied in the first instance towards the discharge of the debts and
liabilities of the Joint Account. Any deficiency shall be met by cash calls
upon the Parties in proportion to their respective Participating Interest
immediately prior to such termination.
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22.2 The assets held for the Joint Account shall be distributed to
the Parties in such manner as they may agree or, failing such agreement, the
assets (other than cash) shall be sold and the monies thus available and any
other cash held for the Joint Account shall be distributed to the Parties in
proportion to their respective Participating Interest immediately prior to the
termination of this Agreement.
22.3 Any termination of this Agreement shall be without prejudice to
any accrued rights and remedies of the Parties; and the provisions of this
Agreement with respect to the settlement of disputes by reference to
arbitration and with respect to confidential information shall continue to have
effect notwithstanding such termination.
ARTICLE 23.
Notices
23.1 Any Notice required or permitted to be given under this
Agreement, including but not limited to bills, statements, invoices, cash
calls, reports and Notices, shall be given in writing in the English language
and shall be deemed to have been sufficiently given when received whether
delivered personally, sent by commercial courier service, sent by telegram or
telephonic facsimile with charges prepaid and addressed to the Party at its
address as set forth below or at such other address as such Party may have
designated by Notice given in accordance with this Article to all other
Parties.
Argosy Energy International
333 Clay Street, Suite 4500
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Houston, TX 77002
Attention: Mr. Douglas Fry, President
Telephone (713) 759-1692
Fax No.: (713) 759-9122
Neo Energy, Inc.
8235 Douglas Avenue
Suite 400, LB 84
Dallas, TX 75225
Attention: Mr. Ron Suttill, President
Telephone: (214) 691-3464
Fax No.: (214) 361-0010
23.2 Any Party may from time to time change its foregoing Notice
information by given written Notice thereof to the other Parties.
23.3 A copy of all Notices given under this Agreement by any Party to
any other Party shall be given concurrently to all Parties and Operator by the
same medium of communication as was used in giving the original Notice.
ARTICLE 24.
Miscellaneous
24.1 The topic headings used herein are inserted for convenience only
and shall not be construed as having any substantive significance or meaning or
as indicating that all of the provisions of this Agreement relating to any
particular topic are to be found in any particular Article or Section. The
terms "herein", "hereof" and "hereunder" and like terms are in reference to
this Agreement unless specified as applying to a particular Article or Section.
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24.2 There shall be no modification or amendment of this Agreement
except by written instrument signed by all Parties.
24.3 If any provision of this Agreement conflicts with a provision of
the Ecopetrol Contract or of the Regulations, then this Agreement shall be
deemed modified mutatis mutandis accordingly.
24.4 Except as otherwise provided herein, this Agreement shall be
binding upon and inure to the benefit of the Parties, their respective
successors and assigns.
24.5 If any Party receives a contribution of cash toward the drilling
of a well or other Joint Operations conducted in the Contract Area, except in
return for a part of its Participating Interest, the contribution shall be
owned and shared by the Parties in the same proportion as each bears the costs
of the drilling of such well or other Joint Operations.
24.6 If any Party receives a contribution of acreage towards
the drilling of a well or other Joint Operations conducted in the Contract
Area, except in return for a part of its Participating Interest, the
contributed acreage shall be owned and shared by the Parties in the same
proportion as their respective Participating Interests in the operation that
the contribution is made to.
24.7 No waiver by any Party of any breach of the covenants,
conditions and provisions herein contained shall limit or affect such Party's
right with respect to any other breach.
24.8 The Parties represent and warrant to each other that all
corporate and/or partnership authorities and approvals necessary in
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order to execute and fulfill the obligations set forth in this Agreement have
been obtained.
24.9 No party hereto shall do or cause to be done any act which
violates the Foreign Corrupt Practices Act or the International Boycott Laws of
the United States. Any party who violates the provisions of this Section 24.9
hereby agrees to indemnify and hold harmless the Partnership and the other
Partners from and against any and all liabilities which shall arise by reason
of said parties actions.
IN WITNESS WHEREOF the Parties have caused this agreement to be
executed by their duly authorized Representatives the day and year first above
written.
ARGOSY ENERGY INTERNATIONAL
By Argosy Energy Incorporated,
Managing General Partner
By
----------------------------
Its
---------------------------
NEO ENERGY, INC.
By
----------------------------
Its
---------------------------
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EXHIBIT "A"
Contract Area
The Contracted Area is called "YURUYACO", it consists of an area of
fifteen thousand six hundred fifty-three (15,653) hectares with two thousand
six hundred eighty (2,680) square meters and is located within the municipal
jurisdictions of Santa Rosa in the Department of Cauca and Albania and
Valparaiso in the Department of Caqueta.- This area is described below and, as
appears in the map that is attached as Appendix "A", which forms an integral
part of this contract, as well as the corresponding calculation tables: The
reference point has been taken as the Geodesic Vertex "YAPURAMIA-1323" of the
Agustin Codazzi Geographical Institute whose GAUSS plane coordinates with
origin 3degrees WEST of Santa Fe de Bogota are: N-619,502.81 meters,
E-1,092,804.61 meters which correspond to the geographical coordinates,
Latitude 01degrees 09' 28".651 to the north of the Equator, Longitude 76degrees
14' 49".675 to the West of Greenwich. From this Vertex, one follows a
direction of S 79degrees 04' 30".597 E for a distance of 5,291.29 meters until
arriving at Point "A", starting point, whose coordinates are: N-618,500.00
meters. E-1,098,000.00 meters. From this point "A" one follows in a NORTHERN
direction for a distance of 6,000.00 meters until arriving at Point "B" whose
coordinates are: N-624,500.00 meters, E-1,098,000.00 meters. The straight
line "A-B" borders on part of Line "C-B" of the "FRAGUA" Association Contract
signed with Argosy Energy International. From this Point "B" one continues
with a direction of N 47degrees 29' 22".391 E for a distance of 8,139.41 meters
until arriving at Point "C" whose coordinates are: N-
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630,000.00 meters, E-1,104,000.00 meters. From Point "C" one continues in an
EASTERN direction for a distance of 4,000.00 meters until arriving at Point "D"
whose coordinates are: N-630,000.00 meters, E-1,108,000.00 meters. From this
Point "D" one continues in a SOUTHERN direction for a distance of 6,000.00
meters until arriving at Point E" whose coordinates are: N-624,000.00 meters,
E- 1,108,000.00 meters. From this Point "E" one continues in an EASTERN
direction for a distance of 4,000.00 meters until arriving at Point "F" whose
coordinates are: N-624,000.00 meters, E- 1,112,000.00 meters. From this Point
"F" one continues in a SOUTHERN direction for a distance of 6,000.00 meters
until arriving at Point "G" whose coordinates are: N-618,000.00 meters,
E-1,112,000.00 meters. From this Point "G" one continues in a WESTERN
direction for a distance of 6,000.00 meters until arriving at Point "H" whose
coordinates are: N-618,000.00 meters, E-1,106,000.00 meters. From this Point
"H" one continues in a direction of S 47degrees 47' 00".404 W for a distance of
10,801.90 meters until arriving at Point "I" whose coordinates are:
N-610,741.83 meters, E- 1,098,000.00 meters. From this Point "I" one continues
in a NORTHERN direction for a distance of 7,758.17 meters until arriving at
Point "A", starting point and closing the boundaries. The "I-A" line borders
for its entire length on the "D-C" line of the "SANTANA-B" Association Contract
signed with Argosy Energy International.
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<PAGE> 68
EXHIBIT "B"
Accounting Procedure
Attached to and made a part of the Operating Agreement, covering the
Yuruyaco Area, between Argosy and Neo entered into the 7th day of November,
1995.
The purpose of this Accounting Procedure is to establish equitable
methods for determining charges and credits applicable to operations under the
Operating Agreement. The Parties agree that if any of such methods prove
unfair or inequitable to Operator or Non-Operator(s), the Parties will meet and
in good faith endeavor to agree on changes in methods deemed necessary to
correct any unfairness or inequity.
1. General Provisions
Definitions
"Agreement of Non-Operator(s)" shall mean the unanimous
agreement or action of the Non-Operators.
"Controllable Material" shall mean material which the Operator
subjects to record control and inventory. A list of types of
such materials shall be furnished to Non-Operator(s) upon
request.
"Joint Account" shall mean the account maintained by the
Operator to record all costs and expenses incurred in
connection with Operations. For purposes hereof, charges and
credits accruing because of Operations shall be shared by the
Parties in accordance with their respective Participating
Interests as stated in the Operating Agreement.
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<PAGE> 69
"Material" shall mean movable property, including supplies and
equipment, acquired and held for use in Operations.
"Operating Agreement" shall mean the Operating Agreement to
which this Accounting Procedure is attached.
"Operations" shall mean Operations conducted in or with
respect to Contract Area in accordance with the Ecopetrol
Contract and the Operating Agreement.
Unless the provisions of this Accounting Procedure specifically
provided otherwise, other terms, words or phrases contained herein shall have
the same meaning as defined in the Operating Agreement.
2. Statements, Billings, and Adjustments
2.1 Each Party to the Operating Agreement shall be responsible for
preparing its own accounting and tax reports to meet
Colombia's and other country's requirements except as
otherwise agreed between them. To the extent practical,
Operator shall furnish Non-Operator(s) with statements and
billings in such forms required to discharge such
responsibilities.
2.2 Operator shall bill Non-Operator(s) on or before the 30th day
after the last day of each month for their proportionate share
of Joint Account expenditures for such month. Such billings
shall be accompanied by statements of all charges and credits
to the Joint Account as set forth below for the billing month
and the year-to-date:
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<PAGE> 70
A. Statement of all charges and credits to the Joint
Account, summarized by appropriate classification
indicative of the nature thereof, the portion of such
costs charged to each of the Non-Operators, the
amount of funds advanced to the Operator by each of
the Non-Operators, and the commitments and
expenditures made against such advances.
B. Operator shall furnish a description of such
accounting classifications.
C. Amounts included in the billings shall be expressed
in the currency in which Operator's records are
maintained. In the conversion of currencies, in the
accounting for advances of different currencies as
provided for in Article 3 below, or in any other
currency transactions affecting the Operations, it is
the intent that none of the Parties shall experience
an exchange gain or loss at the expense of, or to the
benefit of, the other Parties. Operator shall
furnish Non- Operator(s) sufficient currency exchange
data to enable Non-Operator(s) to translate the
billings to the currency of their corporate accounts.
D. Payment of any such bills shall not prejudice the
right of any Non-Operator(s) to protest or question
the correctness thereof; however, all bills and
statements rendered to Non-Operator(s) by Operator
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<PAGE> 71
during any year shall conclusively be presumed to be
true and correct after twenty-four (24) months
following the end of any such year, unless within the
said twenty-four 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 section
shall not prevent adjustments resulting from a
physical inventory of the Property acquired for the
Operations.
3. Advances and Payments
3.1 If Operator so requests, Non-Operator(s) shall
advance to Operator their share of estimated cash
requirements for the succeeding month's Operations
according to the procedure set out in Article 8 of
the Operating Agreement.
3.2 Should the Operator be required to pay large sums of
money on behalf of the Operations, which could not be
anticipated at the time of providing the
Non-Operator(s) with said monthly estimates of its
requirements, the Operator may make a written request
of the Non-Operator(s) for special advances covering
the Non-Operator(s) share of such payments.
Non-Operator(s) shall make their proportional special
advances within ten (10) days
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<PAGE> 72
after receipt of such notice.
3.3 If Non-Operator(s) advances exceed their share of
expenditures, the next succeeding cash advance
requirements, after such determination, shall be
reduced accordingly. However, Non- Operator(s) may
request that excess advances be refunded. The
Operator shall make such refund within ten (10) days
after receipt of Non-Operator(s) request. Such
refund shall be made in the currency so advanced.
3.4 If Non-Operator(s) advances are less than their share
of actual expenditures, the deficiency shall, at
Operator's option, be added to subsequent cash
advance requirements or be paid by Non-Operator(s)
within ten (10) days following the receipt of
Operator's billing to Non- Operator(s) for such
deficiency.
3.5 If Operator does not request Non-Operator(s) to
advance their share of estimated cash requirements,
Non-Operator(s) shall pay their share of expenditures
within ten (10) days following receipt of Operator's
billing.
3.6 Payments of advances or billings shall be made on or
before the due date, and if not so paid, the
provisions of Article 9 of the Operating Agreement
shall be applied with respect to the Party or
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<PAGE> 73
Parties not making payment on or before said due date.
4. Audits
4.1 A Non-Operator, upon at least thirty (30) days
advance written notice to Operator and other
Non-Operator(s), shall have the right at its sole
expense to audit the Joint Account and related
records for any year or portion thereof within the
twenty-four (24) month period following the end of
such year; provided, however, that the conducting of
an audit shall not extend the time for the taking of
written exception to and the adjustment of accounts
as provided for in Article 2 above. Where there are
two or more Non-Operators, the Non-Operators shall
make every reasonable effort to conduct joint or
simultaneous audits in a manner which will result in
a minimum of inconvenience to the Operator.
4.2 Subject to prior approval of the Parties, the cost of
any audit or verification of the Joint Account that
is for the benefit of all Parties, shall be
chargeable to the Joint Account.
4.3 When a Sole Risk party has conducted a Sole Risk
Project for which reimbursement is claimed pursuant
to Article 12 of the Operating Agreement, the
Non-Sole Risk Party shall have the right for its own
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<PAGE> 74
account to have auditors consult with the auditors of
such Sole Risk Party with respect to all costs and
expenses for which reimbursement is so claimed.
5. Chargeable Costs and Expenditures
5.1 Operator shall charge the Joint Account for all costs
necessary to conduct Operations in or with respect to
the Contract Area. Such costs shall include, but are
not necessarily limited to:
A. Ecopetrol Contract, License or Permit
Payments All expenditures necessary to
acquire and to maintain rights to the
Contract Area.
B. Labor and Related Costs
The salaries and wages of Operator's (or its
Affiliates') employees who are directly
engaged in Operations, whether on a permanent
or temporary basis, as well as the cost of
employee benefits, customary allowances and
personal expenses under Operator's (or its
Affiliates') usual practices, including all
amounts imposed by governmental authorities
with respect thereto or on account of such
employees.
C. Material
Material purchased or furnished for use in
Operations, as provided under Article 6
below.
D. Transportation and Employee Relocation Costs
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<PAGE> 75
1) Transportation of Material and other
related costs such as expediting,
crating, dock charges, inland and
ocean freight and unloading at
destination.
2) Transportation of employees as
required in the conduct of
Operations.
3) Relocation costs of employees
permanently or temporarily assigned
to the Operations in Colombia except
when the employee is reassigned from
the Operations in Colombia to
another location classified as a
foreign location by Operator. Such
costs shall include transportation
of employees' families and their
personal and household effects and
all of their relocation costs in
accordance with Operator's (or its
Affiliates') usual practice.
E. Services
1) Contract services, professional
consultants and other services
procured from outside sources other
than services covered by 5.1(H).
2) Technical services, such as, but not
limited to, laboratory analysis,
drafting, geophysical and geological
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<PAGE> 76
interpretation, engineering and related
data processing, performed by the
Operator (and/or its Affiliates) for
the direct benefit of the
Operations, provided such costs
shall not exceed those currently
prevailing if performed by outside
technical service companies.
3) Use of equipment and facilities
furnished by Operator (and/or its
Affiliates) at rates commensurate
with the cost of the ownership and
operation thereof, but such rates
shall not exceed those currently
prevailing in the general vicinity
of the Contract Area, or elsewhere
in Colombia.
4) Whenever requested by the
Non-Operator(s), Operator shall
inform Non- Operator(s) in advance
of the rates it proposes to charge,
which charge shall form part of the
relevant Budget and Program. Rates
shall be revised and adjusted from
time to time when found to be either
excessive or insufficient.
F. Damages and Losses to Property
All costs or expenses necessary for the
repair or replacement of property used in
Operations resulting from damages or losses
incurred by
73
<PAGE> 77
fire, flood, storm, theft, accident or any
other cause. Operator shall furnish Non-
Operator(s) written notice of damages or
losses in excess of Twenty-Five Thousand
Dollars (U.S. $25,000) each, as soon as
practicable.
G. Insurance
1) Premiums for insurance required by
the Ecopetrol Contract, the
Operating Agreement or the
Regulations and acquired for the
benefit of the Operations.
2) Credits for settlements received
from the insurance carrier and
others and attributable to the Joint
Account.
3) Actual expenditures incurred in the
settlement of all losses, claims,
damages, judgments and other
expenses for the benefit of the
Operations.
H. Legal Expense
All costs or expenses of handling,
investigating and settling litigation or
claims arising by reason of the Operations or
necessary to protect or recover property used
in Operations including, but not limited to,
attorney fees, court costs, costs of
investigation or procuring evidence and
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<PAGE> 78
amounts paid in settlement or satisfaction of
any such litigation or claims; however, no
charge shall be made for the services of the
legal staff of the Operator (or its
Affiliates) unless by prior agreement of the
Non-Operator(s).
I. Duties and Taxes
All duties and taxes (except taxes based on
income and royalty based on production from
the Contract Area), fees and governmental
assessments of every kind and nature.
J. Offices, Camps and Miscellaneous Facilities
Net cost of maintaining, equipping,
furnishing and operating any offices,
suboffices, camps, warehousing and other
facilities directly serving the Operations
shall be charged to the Joint Account. If
such facilities serve Operations in addition
to the Joint Operations, the net costs shall
be allocated to the properties served on an
equitable basis.
The charge under the foregoing paragraph
shall be for services of all personnel and
offices of Operator and its Affiliates who
are not directly assigned to Operations and
shall be charged each month at the following
rates on
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<PAGE> 79
total expenditures attributable to Operations
in the preceding month:
1) The percentages for such
administrative overhead cost shall
be three and one- half percent (3
1/2%) of all annual joint account
exploration expenditure and shall be
two percent (2%) of all annual joint
account development and production
expenditure. The fee for
administrative overhead shall be
charged to the joint account monthly
in arrears, based upon the direct
expenditures incurred during such
month.
2) The minimum overhead charge per month
shall be U.S. $5,000 per month.
The above administrative overhead rates
shall be reviewed by the Operating
Committee periodically, but not more
frequently than annually. If such
charges are found to be insufficient
or excessive, same will be revised
effective on the month following
that when the agreement is reached,
the intent being that the Operator
recover its actual overhead costs
applicable to Operations and shall
neither gain nor lose by the reason
of the fact that it acts as
Operator.
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<PAGE> 80
K. Other Expenditures
Any other expenditures not covered or dealt
with in the foregoing provisions but which
are incurred by the Operator (or its
Affiliates) for the conduct of the Operations
shall be charged to the Joint Account of the
Parties.
6. Material
6.1 Purchases
A. Cost of equipment, machinery, materials,
articles purchased or furnished by Operator
for the Joint Account, provided such cost
shall not exceed that currently prevailing in
normal arm's-length transactions in the open
market. Such costs shall include export
brokers' fees, transportation charges,
loading and unloading fees, export and import
duties, and license fees associated with the
procurement of material and equipment,
applicable taxes and intransit losses, if
any, not covered by insurance, less any cash,
volume of trade discounts. So far as it is
reasonably practical and consistent with
efficient and economical operation, only such
material shall be purchased for, or
transferred to, the Joint Account as may be
required for immediate use; and accumulation
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<PAGE> 81
of surplus stocks shall be kept to a minimum
considering the distance from source of
supply and the time required to receive
deliveries of materials in remote locations.
6.2 Material Furnished by Operator
A. Material required for operations shall be
purchased for direct charge to the Joint
Account whenever practicable, except that
Operator may furnish such material from its
stock under the following conditions:
1) New material transferred from the
warehouse or other properties of
Operator shall be priced at the
current replacement cost on a
world-wide competitive basis of the
same kind of material, effective at
date of movement and f.o.b. the
supply point nearest the Contract
Area where material of the same kind
is available.
B. Used materials furnished by Operator
(Conditions "B" and "C"):
1) Material and equipment which is in
sound and serviceable condition and
suitable for use without repair or
reconditioning shall be classified
as Condition "B" and, except as
provided hereinbelow, priced at
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<PAGE> 82
seventy-five percent (75%) of
current new price of like material.
2) Material and equipment not meeting
the requirements of subparagraph 1)
above, but which can be made
suitable for use after being
repaired or reconditioned shall be
classified as Condition "C" and
priced at fifty percent (50%) of
current new price of like material.
The cost of reconditioning shall
also be charged to the Joint Account
provided the Condition "C" price,
plus cost of reconditioning, does
not exceed the Condition "B" price;
and provided that material so
classified will meet the
requirements for Condition "B"
material upon being repaired or
reconditioned.
3) Tanks, derricks, buildings, and
other items of material involving
erection costs, if transferred in
knocked-down condition, shall be
graded as to condition as provided
in this paragraph 6.2(B) and priced
on the basis of knocked-down price
of like new material.
4) Material and equipment including
drill pipe, casing and tubing, which
is no
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<PAGE> 83
longer useable for its original
purposes but is further useable for
some other purpose, shall be graded
as to condition as provided in this
paragraph 6.2(B) and valued on the
basis of current new price of items
normally used for such other purpose
if sold to outsiders, and if
retained in the Joint Account valued
at no more than at depreciated
value.
5) Current new price, whenever used in
this paragraph 6.2(B) shall have the
same meaning and be determined in
accordance with paragraph 6.2(A).
6.3 Premium Prices
A. In the event material is not obtainable at
recognized current list prices from general
supply sources due to national emergency,
strikes, governmental regulations or other
unusual circumstances over which Operator has
no control, the provisions of the prior
paragraphs pertaining to pricing materials
and costs of transportation shall not apply
and Operator may supply such scarce materials
from any available source, charging therefor
the current replacement cost, including the
cost of transporting such material to the
Contract
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<PAGE> 84
Area, provided, when practicable, that a
Non-Operator who becomes an undivided
interest owner in such material shall be
given the opportunity to furnish its share in
kind.
6.4 Warranty of Material Furnished by Operator
A. Operator does not warrant the material
furnished beyond the warranty furnished by
the dealer or manufacturer. In case of
defective material, credit shall not be
passed until adjustment has been received by
Operator from the manufacturers or their
agents.
7. Disposal of Equipment and Materials
A. Operator shall be under no obligation to purchase the
interest of Non-Operators in surplus new or used
materials. Unless the removal of surplus equipment
and materials is otherwise restricted in this
Agreement, Operator shall account for the disposition
of surplus equipment and material as follows:
7.1 Material Purchased by Operator or Non-Operator
A. The value of materials and equipment
transferred to Operator shall be included in
the monthly statement of operations for the
month in which the materials or equipment are
removed from the Contract Area.
B. Materials and equipment transferred to Non-
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<PAGE> 85
Operators shall be paid for by Non-Operators
immediately following delivery of materials
and equipment and upon receipt of invoice.
Operator shall thereupon include credit for
the payment in the monthly statement of
Operations for the month in which the
materials or equipment were paid for by
Non-Operators.
7.2 Division in Kind
A. When materials and equipment are divided in
kind between Operator and Non-Operators, each
Party shall be charged individually with the
value of the materials and equipment so
divided in proportion to its Percentage
Interest, and corresponding credits shall be
made currently in the monthly statement.
7.3 Sales to Outsiders
A. Sales to outsiders of materials or equipment
shall be made with the consent of Non-
Operators as to both terms and price, and
when made, proceeds shall be credited by
Operator at the full amount collected from
vendee. Any claims by vendee for defective
materials, or otherwise, shall be charged
back if and when paid by Operator.
7.4 Disposal of Junk
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<PAGE> 86
A. Operator, on behalf of itself and
Non-Operators, shall have the right to remove
from the Contract Area, and dispose of junk
materials and scrap. The net proceeds from
the sale or transfer of all such materials
shall be credited currently in the monthly
statement.
8. Basis of Price Materials Transferred From Joint Account
A. Materials and equipment transferred to either
Operator or Non-Operators or divided in kind among
them, unless otherwise agreed, shall be valued on the
following basis of condition and price:
8.1 New Material
A. New materials and equipment (Condition "A")
acquired for the Joint Account but not used,
at one hundred percent (100%) of current new
price.
8.2 Used Material
A. Materials and equipment which are in sound
and serviceable condition and suitable for
use without repair or reconditioning shall be
classified as Condition "B" and except as
provided hereinbelow shall be priced at
seventy-five percent (75%) of current new
price of like materials.
B. Materials and equipment not meeting the
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<PAGE> 87
requirements of subparagraph 8.2(A) above,
but which, after being repaired or
reconditioned, will meet the requirements for
Condition "B" material, shall be classified
as Condition "C" and, except as provided
below, shall be priced at fifty percent (50%)
of current new price of like materials. When
the Operator desires to take the materials
into its one hundred percent (100%) account,
the Joint Account shall be charged with
repair costs and the Operator shall grant
credit at Condition "B" value in those
instances where the cost of repairs plus the
value of Condition "C" do not exceed the
value at Condition "B".
C. Materials and equipment, including drill
pipe, casing and tubing which are no longer
useable for their original purpose but are
further useable for some other purpose, shall
be graded as to condition as provided in
paragraph 6.2(B) and priced on the basis of
current price of items normally used for such
other purpose.
D. Unserviceable materials and scraps shall be
considered junk, classed as Condition "D"
and, if transferred to Operator, valued at
prevailing junk prices in the district where
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<PAGE> 88
the Contract Area is located. Such items
with an original book value in excess of U.S.
$10,000.00 shall be brought to the attention
of the Operating Committee for review.
E. In cases where items of major equipment due
to unusual circumstances or condition cannot
be graded as to condition as provided in
paragraph 6.2(B) of such items shall be
priced by the Operator on a fair and
equitable basis.
F. Current new price, wherever used in this
paragraph 8.2 shall have the same meaning and
be determined in accordance with subparagraph
6.2(A).
9. Inventories
9.1 Periodic Inventories - Notice and Representation
A. At reasonable intervals, inventories shall be
taken by Operator of all Joint Account
storehouse stock and installed material and
equipment on which detailed accounting
records are normally maintained for material
control purposes. Operator shall give
Non-Operators written notice at least thirty
(30) days in advance of its intention to take
inventory, and Non-Operators, at their sole
cost and expense, shall each be entitled to
have a representative present. The failure
of any
85
<PAGE> 89
Non-Operator to be represented at such
inventory shall bind such Non-Operator to
accept the inventory taken by Operator, who
shall in that event furnish each Non-
Operator with a reconciliation of overage and
shortages. Inventory adjustment to the Joint
Account shall be made by Operator for
overages and shortages but Operator shall be
held accountable to Non-Operators only for
shortages due to lack of reasonable
diligence.
9.2 Special Inventories
A. Whenever there is a sale or change of
interest in the Property, a special inventory
may be taken by the Operator provided the
seller and/or purchaser of such interest
agrees to bear all of the expense thereof.
In such cases, both the seller and purchaser
shall be entitled to be represented and shall
be governed by the inventor so taken.
10. Termination
A. As soon as practical after the termination of this
Agreement, the Joint Account shall be finally settled
and balanced by whatever cash payments among the
Parties are necessary following presentation by
Operator to all Parties of a final statement of the
costs and credits in the Joint
86
<PAGE> 90
Account, subject to any adjustments that may be
required as the result of any final audit performed in
accordance with the procedures provided elsewhere in
this Operating Agreement. Operator shall give
Non-Operators written notice at least thirty (30) days
in advance of its intention to take inventory, and
Non-Operators, at their sole cost and expense, shall
each be entitled to have a representative present.
The failure of any Non-Operator to be represented at
such inventory shall bind such Non-Operator to accept
the inventory taken by Operator, who shall in that
event furnish each Non-Operator with a reconciliation
of overage and shortages. Inventory adjustment to the
Joint Account shall be made by Operator for overages
and shortages but Operator shall be held accountable
to Non-Operators only for shortages due to lack of
reasonable diligence.
87
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<CASH> 5,100,294
<SECURITIES> 0
<RECEIVABLES> 1,889,521
<ALLOWANCES> 0
<INVENTORY> 1,059,923
<CURRENT-ASSETS> 9,154,007
<PP&E> 52,549,189
<DEPRECIATION> (12,995,769)
<TOTAL-ASSETS> 49,949,286
<CURRENT-LIABILITIES> 6,814,276
<BONDS> 20,151,120
<COMMON> 114,922
0
0
<OTHER-SE> 21,730,417
<TOTAL-LIABILITY-AND-EQUITY> 49,949,286
<SALES> 2,897,089
<TOTAL-REVENUES> 2,967,777
<CGS> 868,055
<TOTAL-COSTS> 868,055
<OTHER-EXPENSES> 1,607,303
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 545,305
<INCOME-PRETAX> (112,294)
<INCOME-TAX> 309,172
<INCOME-CONTINUING> (421,466)
<DISCONTINUED> 0
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<CHANGES> 0
<NET-INCOME> (421,466)
<EPS-PRIMARY> (0.04)
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