Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1 Registration Statement (General Form) HTML 1.14M
2: EX-1.1 Form of Soliciting Dealer Agreement 17 88K
3: EX-1.2 Form of Dealer Manager Agreement 17 88K
4: EX-3.1 Certificate of Limited Parnership 2± 9K
5: EX-4.1 Form of Agreement of Partnership 58 242K
6: EX-4.2 Form of Subscription Agreement 6 27K
7: EX-4.3 Form of Special Subscription Instructions 6 21K
8: EX-4.4 Form of Certificate of Limited Partner Interest 2 11K
9: EX-4.5 Form of Certificate of General Partner Interest 2 11K
10: EX-5.1 Opinion/Consent of Vinson & Elkins LLP 3 16K
11: EX-8.1 Opinion of Vinson & Elkins LLP 3 18K
12: EX-10.1 Form of Drilling Program Agreement 15 72K
13: EX-10.2 Form of Escrow Agreement 5 26K
14: EX-10.3 Tax Partnership Provisions 5 30K
15: EX-10.4 Form of Operating Agreement 62 238K
16: EX-23.1 Consent of Pricewaterhousecoopers LLP 1 7K
17: EX-23.3 Consent of Forrest A. Garb & Associates 1 8K
EXHIBIT 10.4
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
OPERATING AGREEMENT
DATED
_____________, 20____,
OPERATOR _______________________________________________________________________
CONTRACT AREA See Attached Exhibit "A"
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
COUNTY OR PARISH OF ________________, STATE OF ________________________________
COPYRIGHT 1989 ALL RIGHT RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD. FORT
WORTH, TEXAS. 76137. APPROVED FORM.
A.A.P.L NO. 610 - 1989
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
TABLE OF CONTENTS
[Enlarge/Download Table]
Article Title Page
------- ----- ----
I. DEFINITIONS...................................................................................... 2
II. EXHIBITS......................................................................................... 4
III. INTERESTS OF PARTIES............................................................................. 4
A. OIL AND GAS INTERESTS:.................................................................... 4
B. INTERESTS AND PARTIES IN COSTS AND PRODUCTION:............................................ 4
C. SUBSEQUENTLY CREATED INTERESTS:........................................................... 5
IV. TITLES........................................................................................... 6
A. TITLE EXAMINATION:........................................................................ 6
B. LOSS OR FAILURE OF TITLE:................................................................. 6
1. Other Losses......................................................................... 7
V. OPERATOR......................................................................................... 7
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:............................................. 7
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:............................ 7
1. Resignation or Removal of Operator................................................... 7
2. Selection of Successor Operator...................................................... 8
3. Effect of Bankruptcy................................................................. 8
C. EMPLOYEES AND CONTRACTORS:................................................................ 8
D. RIGHTS AND DUTIES OF OPERATOR:............................................................ 8
1. Competitive Rates and Use of Affiliates.............................................. 8
2. Discharge of Joint Account Obligations............................................... 9
3. Protection from Liens................................................................ 9
4. Custody of Funds..................................................................... 9
5. Access to Contract Area and Records.................................................. 9
6. Filing and Furnishing Governmental Reports........................................... 10
7. Drilling and Testing Operations...................................................... 10
8. Cost Estimates....................................................................... 10
9. Insurance............................................................................ 10
VI. DRILLING AND DEVELOPMENT......................................................................... 10
A. SUBSEQUENT OPERATIONS:.................................................................... 10
1. Proposed Operations.................................................................. 10
2. Operations by Less Than All Parties:................................................. 11
3. Stand-By Costs....................................................................... 15
4. Deepening............................................................................ 15
5. Sidetracking......................................................................... 16
6. Order of Preference of Operations.................................................... 17
-i-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
[Enlarge/Download Table]
7. Conformity to Spacing Pattern........................................................ 17
8. Paying Wells......................................................................... 17
B. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:......................................... 17
1. Completion........................................................................... 17
2. Rework, Recomplete or Plug Back...................................................... 18
C. OTHER OPERATIONS:......................................................................... 18
D. ABANDONMENT OF WELLS:..................................................................... 19
1. Abandonment of Dry Holes............................................................. 19
2. Abandonment of Wells That Have Produced.............................................. 20
3. Abandonment of Non-Consent Operations................................................ 21
E. TERMINATION OF OPERATIONS:................................................................ 21
F. TAKING PRODUCTION IN KIND:................................................................ 21
Option No. 1: Gas Balancing Agreement Attached........................................... 21
Option No. 2: No Gas Balancing Agreement................................................. 21
VII EXPENDITURES AND LIABILITY OF PARTIES............................................................ 23
A. LIABILITY OF PARTIES:..................................................................... 23
B. LIENS AND SECURITY INTERESTS:............................................................. 24
C. ADVANCES:................................................................................. 25
D. DEFAULTS AND REMEDIES:.................................................................... 26
1. Suspension of Rights................................................................. 26
2. Suit for Damages..................................................................... 26
3. Deemed Non-Consent................................................................... 27
4. Advance Payment...................................................................... 27
5. Costs and Attorneys' Fees............................................................ 27
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:..................................... 27
F. TAXES:.................................................................................... 28
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST................................................. 28
A. SURRENDER OF LEASES:...................................................................... 28
B. RENEWAL OR EXTENSION OF LEASES:........................................................... 29
C. ACREAGE OR CASH CONTRIBUTIONS:............................................................ 30
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:.............................................. 31
E. WAIVER OF RIGHTS TO PARTITION:............................................................ 31
IX. INTERNAL REVENUE CODE ELECTION................................................................... 32
X. CLAIMS AND LAWSUITS.............................................................................. 32
XI. FORCE MAJEURE.................................................................................... 32
XII. NOTICES.......................................................................................... 33
XIII. TERM OF AGREEMENT................................................................................ 33
-ii-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
[Enlarge/Download Table]
XIV. COMPLIANCE WITH LAWS AND REGULATIONS............................................................. 34
A. LAWS, REGULATIONS AND ORDERS:............................................................. 34
B. GOVERNING LAW:............................................................................ 34
C. REGULATORY AGENCIES:...................................................................... 34
XV. MISCELLANEOUS.................................................................................... 35
A. EXECUTION:................................................................................ 35
B. SUCCESSORS AND ASSIGNS:................................................................... 35
C. COUNTERPARTS:............................................................................. 35
D. SEVERABILITY:............................................................................. 36
XVI. OTHER PROVISIONS................................................................................. 36
-iii-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between __________________________,
hereinafter designated and referred to as "Operator," and the signatory party or
parties other than Operator, sometimes hereinafter referred to individually as
"Non-Operator", and collectively as "Non-Operators."
WITNESSETH:
WHEREAS, the parties to this agreement are owners of Oil and Gas Leases
and/or Oil and Gas Interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these Leases
and/or Oil and Gas Interests for the production of Oil and Gas to the extent and
as hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "AFE" shall mean an Authority for Expenditure
prepared by a party to this agreement for the purpose of estimating the costs to
be incurred in conducting an operation hereunder.
B. The term "Completion" or "Complete" shall mean a single
operation intended to complete a well as a producer of Oil and Gas in one or
more Zones, including, but not limited to, the setting of production casing,
perforating, well stimulation and production testing conducted in such
operation.
C. The term "Contract Area" shall means all of the lands, Oil and
Gas Leases and/or Oil and Gas Interests intended to be developed and operated
for Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases
and Oil and Gas Interests are described in Exhibit "A".
D. The term "Deepen" shall mean a single operation whereby a well
is drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.
E. The terms "Drilling Party" and "Consenting Party" shall mean a
party who agrees to join in and pay its share of the cost of any operation
conducted under the provisions of this agreement.
F. The term "Drilling Unit" shall mean the area fixed for the
drilling of one well by order or rule of any state or federal body having
authority. If a Drilling Unit is not fixed by any such rule or order, a Drilling
Unit shall be the drilling unit as established by the pattern of drilling in the
Contract Area unless fixed by express agreement of the Drilling Parties.
-2-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil
and Gas Interest on which a proposed well is to be located.
F. The term "Initial Well" shall mean the well required to be
drilled by the parties hereto as provided in Article VI.A.
G. The term "Non-Consent Well" shall mean a well in which less
than all parties have conducted an operation as provided in Article VI.B.2.
H. The terms "Non-Drilling Party" and "Non-Consenting Party"
shall mean a party who elects not to participate in a proposed operation.
I. The term "Oil and Gas" shall mean oil, gas, casinghead gas,
gas condensate, and/or all other liquid or gaseous hydrocarbons and other
marketable substances produced therewith, unless an intent to limit the
inclusiveness of this term is specifically stated.
J. The term "Oil and Gas Interests" or "Interests" shall mean
unleased fee and mineral interests in Oil and Gas in tracts of land lying within
the Contract Area which are owned by parties to this agreement.
K. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall
mean the oil and gas leases or interests therein covering tracts of land lying
within the Contract Area which are owned by the parties to this agreement.
L. The term "Plug Back" shall mean a single operation whereby a
deeper Zone is abandoned in order to attempt a Completion in a shallower Zone.
M. The term "Recompletion" or "Recomplete" shall mean an
operation whereby a Completion in one Zone is abandoned in order to attempt a
Completion in a different Zone within the existing wellbore.
N. The term "Rework" shall mean an operation conducted in the
wellbore of a well after it is Completed to secure, restore, or improve
production in a Zone which is currently open to production in the wellbore. Such
operations include, but are not limited to, well stimulation operations but
exclude any routine repair or maintenance work or drilling, Sidetracking,
Deepening, Completing, Recompleting, or Plugging Back of a well.
O. The term "Sidetrack" shall mean the directional control and
intentional deviation of a well from vertical so as to change the bottom hole
location unless done to straighten the hole or to drill around junk in the hole
to overcome other mechanical difficulties.
P. The term "Zone" shall mean a stratum of earth containing or
thought to contain a common accumulation of Oil and Gas separately producible
from any other common accumulation of Oil and Gas.
Q. Unless the context otherwise clearly indicates, words used in
the singular include the plural, the word "person" includes natural and
artificial persons, the plural includes the singular, and any gender includes
the masculine, feminine, and neuter.
-3-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
X A. Exhibit "A" shall include the following information:
(1) Description of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or
substances,
(3) Parties to agreement with addresses and telephone
numbers for notice purposes,
(4) Percentages or fractional interests of parties to
this agreement.
X B. Exhibit "B," Form of Lease.
X C. Exhibit "C," Accounting Procedure.
X D. Exhibit "D," Insurance.
X E. Exhibit "E," Gas Balancing Agreement.
__ F. Exhibit "F," Non-Discrimination and Certification of
Non-Segregated Facilities.
__ G. Exhibit "G," Tax Partnership.
__ H. Other:
If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
A. Oil and Gas Interests:
If any party owns an Oil and Gas Interest in the Contract Area, that
Interest shall be treated for all purposes of this agreement and during the term
hereof as if it were covered by the form of Oil and Gas Lease attached hereto as
Exhibit "B," and the owner thereof shall be deemed to own both royalty interest
in such lease and the interest of the lessee thereunder.
B. Interests and Parties in Costs and Production:
Unless changed by other provisions, all costs and liabilities incurred
in operations under this agreement shall be borne and paid, and all equipment
and materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A."
-4-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
In the same manner, the parties shall also own all production of Oil and Gas
from the Contract Area subject, however, to the payment of royalties and other
burdens on production as described hereafter.
Regardless of which party has contributed any Oil and Gas Lease or Oil
and Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or deliver,
or cause to be paid or delivered, all burdens on its share of the production
from the Contract Area up to, but not in excess of, the amount of such burdens
and shall indemnify, defend and hold the other parties free from any liability
therefor. Except as otherwise expressly provided in this agreement, if any party
has contributed hereto any Lease or Interest which is burdened with any royalty,
overriding royalty, production payment or other burden on production in excess
of the amounts stipulated above, such party so burdened shall assume and alone
bear all such excess obligations and shall indemnify, defend and hold the other
parties hereto harmless from any and all claims attributable to such excess
burden. However, so long as the Drilling Unit for the productive Zone(s) is
identical with the Contract Area, each party shall pay or deliver, or cause to
be paid or delivered, all burdens on production from the Contract Area due under
the terms of the Oil and Gas Lease(s) which such party has contributed to this
agreement, and shall indemnify, defend and hold the other parties free from any
liability therefor.
No party shall ever be responsible, on a price basis higher than the
price received by such party, to any other party's lessor or royalty owner, and
if such other party's lessor or royalty owner should demand and receive
settlement on a higher price basis, the party contributing the affected Lease
shall bear the additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment
or cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. Subsequently Created Interests:
If any party has contributed hereto a Lease or Interest that is
burdened with an assignment of production given as security for the payment of
money, or if, after the date of this agreement, any party creates an overriding
royalty, production payment, net profits interest, assignment of production or
other burden payable out of production attributable to its working interest
hereunder, such burden shall be deemed a "Subsequently Created Interest."
Further, if any party has contributed hereto a Lease or Interest burdened with
an overriding royalty, production payment, net profits interest, or other burden
payable out of production created prior to the date of this agreement, and such
burden is not shown on Exhibit "A," such burden also shall be deemed a
Subsequently Created Interest to the extent such burden causes the burdens on
such party's Lease or Interest to exceed the amount stipulated in Article III.B.
above.
The party whose interest is burdened with the Subsequently Created
Interest (the "Burdened Party") shall assume and alone bear, pay and discharge
the Subsequently Created Interest and shall indemnify, defend and hold harmless
the other parties from and against any liability therefor. Further, if the
Burdened Party fails to pay, when due, its share of expenses chargeable
hereunder, all provisions of Article VII.B. shall be enforceable against the
Subsequently Created Interest in the same manner as they are enforceable against
the working
-5-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
interest of the Burdened Party. If the Burdened Party is required under this
agreement to assign or relinquish to any other party, or parties, all or a
portion of its working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or production free
and clear of said Subsequently Created Interest, and the Burdened Party shall
indemnify, defend and hold harmless said other party, or parties, from any and
all claims and demands for payment asserted by owners of the Subsequently
Created Interest.
ARTICLE IV.
TITLES
A. Title Examination:
Title examination shall be made on the Drillsite of any proposed well
prior to commencement of drilling operations and, if a majority in interest of
the Drilling Parties so request or Operator so elects, title examination shall
be made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of
the well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable Leases. Each party contributing Leases and/or Oil and Gas Interests
to be included in the Drillsite or Drilling Unit, if appropriate, shall furnish
to Operator all abstracts (including federal lease status reports), title
opinions, title papers and curative material in its possession free of charge.
All such information not in the possession of or made available to Operator by
the parties, but necessary for the examination of the title, shall be obtained
by Operator. Operator shall cause title to be examined by attorneys on its staff
or by outside attorneys. Copies of all title opinions shall be furnished to each
Drilling Party. Costs incurred by Operator in procuring abstracts, fees paid
outside attorneys for title examination (including preliminary, supplemental,
shut-in royalty opinions and division order title opinions) and other direct
charges as provided in Exhibit "C" shall be borne by the Drilling Parties in the
proportion that the interest of each Drilling Party bears to the total interest
of all Drilling Parties as such interests appear in Exhibit "A."
Each party shall be responsible for securing curative matter and
pooling amendments or agreements required in connection with Leases or Oil and
Gas Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communication agreements as well as the conduct of hearings before governmental
agencies for the securing of spacing or pooling orders or any other orders
necessary or appropriate to the conduct of operations hereunder. This shall not
prevent any party from appearing on its own behalf at such hearings. Costs
incurred by Operator, including fees paid to outside attorneys, which are
associated with hearings before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement, shall
be direct charges to the joint account and shall not be covered by the
administrative overhead charges in Exhibit "C."
No well shall be drilled on the Contract Area until after (1) the title
to the Drillsite or Drilling Unit, if appropriate, has been examined as above
provided, and (2) the title has been approved by the examining attorney or title
has been accepted by Operator.
-6-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
B. Loss or Failure of Title:
1. Other Losses: All losses of Leases or Interests
committed to this agreement, shall be joint losses and shall be borne by all
parties in proportion to their interests shown on Exhibit "A." This shall
include but not be limited to the loss of any Lease or Interest through failure
to develop or because express or implied covenants have not been performed
(other than performance which requires only the payment of money), and the loss
of any Lease by expiration at the end of its primary term if it is not renewed
or extended. There shall be no readjustment of interests in the remaining
portion of the Contract Area on account of any joint loss.
ARTICLE V.
OPERATOR
A. Designation and Responsibilities of Operator:
__________________________________________ shall be the Operator of the
Contract Area, and shall conduct and direct and have full control of all
operations on the Contract Area as permitted and required by, and within the
limits of this agreement. In its performance of services hereunder for the
Non-Operators, Operator shall be an independent contractor not subject to the
control or direction of the Non-Operators except as to the type of operation to
be undertaken in accordance with the election procedures contained in this
agreement. Operator shall not be deemed, or hold itself out as, the agent of the
Non-Operators with authority to bind them to any obligation or liability assumed
or incurred by Operator as to any third party. Operator shall conduct its
activities under this agreement as a reasonable prudent operator, in a good and
workmanlike manner, with due diligence and dispatch, in accordance with good
oilfield practice, and in compliance with applicable law and regulation, but in
no event shall it have any liability as Operator to the other parties for losses
sustained or liabilities incurred except such as may result from gross
negligence or willful misconduct.
B. Resignation or Removal of Operator and Selection of Successor:
1. Resignation or Removal of Operator: Operator may
resign at any time by giving written notice thereof to Non-Operators. If
Operator terminates its legal existence, or is no longer capable of serving as
Operator, Operator shall be deemed to have resigned without any action by
Non-Operators, except the selection of a successor. Operator may be removed only
for good cause by the affirmative vote of Non-Operators owning a majority
interest based on ownership as shown on Exhibit "A" remaining after excluding
the voting interest of Operator; such vote shall not be deemed effective until a
written notice has been delivered to the Operator by a Non-Operator detailing
the alleged default and Operator has failed to cure the default within thirty
(30) days from its receipt of the notice or, if the default concerns an
operation then being conducted, within forty-eight (48) hours of its receipt of
the notice. For purposes hereof, "good cause" shall mean not only gross
negligence or willful misconduct but also the material breach of or inability to
meet the standards of operation contained in Article V.A. or material failure or
inability to perform its obligations under this agreement.
Subject to Article VII.D.1., such resignation or removal shall not
become effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be
-7-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
bound by the terms hereof as a Non-Operator. A change of a corporate name or
structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation or other affiliated entity shall not
be the basis for removal of Operator.
2. Selection of Successor Operator: Upon the resignation
or removal of Operator under any provision of this agreement, a successor
Operator shall be selected by the parties. The successor Operator shall be
selected from the parties owning an interest in the Contract Area at the time
such successor Operator is selected. The successor Operator shall be selected by
the affirmative vote of two (2) or more parties owning a majority interest based
on ownership as shown on Exhibit "A;" provided, however, if an Operator which
has been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or parties owning a majority interest based on ownership as shown
on Exhibit "A" remaining after excluding the voting interest of the Operator
that was removed or resigned. The former Operator shall promptly deliver to the
successor Operator all records and data relating to the operations conducted by
the former Operator to the extent such records and data are not already in the
possession of the successor operator. Any cost of obtaining or copying the
former Operator's records and data shall be charged to the joint account.
3. Effect of Bankruptcy: If Operator becomes insolvent,
bankrupt or is placed in receivership, it shall be deemed to have resigned
without any action by Non-Operators, except the selection of a successor. If a
petition for relief under the federal bankruptcy laws is filed by or against
Operator, and the removal of Operator is prevented by the federal bankruptcy
court, all Non-Operators and Operator shall comprise an interim operating
committee to serve until Operator has elected to reject or assume this agreement
pursuant to the Bankruptcy Code, and an election to reject this agreement by
Operator as debtor in possession, or by a trustee in bankruptcy, shall be deemed
a resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2) members of the operating committee without regard for their interest in
the Contract Area based on Exhibit "A."
C. Employees and Contractors:
The number of employees or contracts used by Operator in conducting
operations hereunder, their selection, and the hours of labor and the
compensation for services performed shall be determined by Operator, and all
such employees or contractors shall be the employees or contractors of Operator.
D. Rights and Duties of Operator:
1. Competitive Rates and Use of Affiliates: All wells
drilled on the Contract Area shall be drilled on a competitive contract basis at
the usual rates prevailing in the area. If it so desires, Operator may employ
its own tools and equipment in the drilling of wells, but its charges therefor
shall not exceed the prevailing rates in the area and the rate of such charges
-8-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
shall be agreed upon by the parties in writing before drilling operating are
commenced, and such work shall be performed by Operator under the same terms and
conditions as are customary and usual in the area in contracts of independent
contractors who are doing work of a similar nature. All work performed or
materials supplied by affiliates or related parties of Operator shall be
performed or supplied at competitive rates, pursuant to written agreement, and
in accordance with customs and standards prevailing in the industry.
2. Discharge of Joint Account Obligations: Except as
herein otherwise specifically provided, Operator shall promptly pay and
discharge expenses incurred in the development and operation of the Contract
Area pursuant to this agreement and shall charge each of the parties hereto with
their respective proportionate shares upon the expense basis provided in Exhibit
"C." Operator shall keep an accurate record of the joint account hereunder,
showing expenses incurred and charges and credits made and received.
3. Protection from Liens: Operator shall pay, or cause
to be paid, as and when they become due and payable all accounts of contractors
and suppliers and wages and salaries for services rendered or performed, and for
materials supplied on, to or in respect of the Contract Area or any operations
for the joint account thereof, and shall keep the Contract Area free from liens
and encumbrances resulting therefrom except for those resulting from a bona fide
dispute as to services rendered or materials supplied.
4. Custody of Funds: Operator shall hold for the account
of the Non-Operators any funds of the Non-Operators advanced or paid to the
Operator, either for the conduct of operations hereunder or as a result of the
sale of production from the Contract Area, and such funds shall remain the funds
of the Non-Operators on whose account they are advanced or paid until used for
their intended purpose or otherwise delivered to the Non-Operators or applied
toward the payment of debts as provided in Article VII.B. Nothing in this
paragraph shall be construed to establish a fiduciary relationship between
Operator and Non-Operators for any purpose other than to account for
Non-Operator funds as herein specifically provided. Nothing in this paragraph
shall require the maintenance by Operator of separate accounts for the funds of
Non-Operators unless the parties otherwise specifically agree.
5. Access to Contract Area and Records: Operator shall,
except as otherwise provided herein, permit each Non-Operator or its duly
authorized representative, at the Non-Operator's sole risk and cost, full and
free access at all reasonable times to all operations of every kind and
character being conducted for the joint account on the Contract Area and to the
records of operations conducted thereon or production therefrom, including
Operator's books and records relating thereto. Such access rights shall not be
exercised in a manner interfering with Operator's conduct of an operation
hereunder and shall not obligate Operator to furnish any geologic or geophysical
data of an interpretive nature unless the cost of preparation of such
interpretive data was charged to the joint account. Operator will furnish to
each Non-Operator upon request copies of any and all reports and information
obtained by Operator in connection with production and related items, including,
without limitation, meter and chart reports, production purchaser statements,
run tickets and monthly gauge reports, but excluding purchase contracts and
pricing information to the extent not applicable to the production of the
Non-Operator seeking the information. Any audit of Operator's records relating
to amounts expended and the appropriateness of such expenditures shall be
conducted in accordance with the audit protocol specified in Exhibit "C."
-9-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
6. Filing and Furnishing Governmental Reports: Operator
will file, and upon written request promptly furnish copies to each requesting
Non-Operator not in default of its payment obligations, all operational notices,
reports or applications required to be filed by local, State, Federal or Indian
agencies or authorities having jurisdiction over operations hereunder. Each
Non-Operator shall provide to Operator on a timely basis all information
necessary to Operator to make such filings.
7. Drilling and Testing Operations: The following
provisions shall apply to each well drilled hereunder, including but not limited
to the Initial Well:
(a) Operator will promptly advise Non-Operators
of the date on which the well is spudded, or the date on which drilling
operations are commenced.
(b) Operator will send to Non-Operators such
reports, test results and notices regarding the progress of operations on the
well as the Non-Operators shall reasonably request, including, but not limited
to, daily drilling reports, completion reports, and well logs.
(c) Operator shall adequately test all Zones
encountered which may reasonably be expected to be capable of producing Oil and
Gas in paying quantities as a result of examination of the electric log or any
other logs or cores or tests conducted hereunder.
8. Cost Estimates: Upon request of any Consenting Party,
Operator shall furnish estimates of current and cumulative costs incurred for
the joint account at reasonable intervals during the conduct of any operation
pursuant to this agreement. Operator shall not be held liable for errors in such
estimates so long as the estimates are made in good faith.
9. Insurance: At all times while operations are
conducted hereunder, Operator shall comply with the workers compensation law of
the state where the operations are being conducted; provided, however, that
Operator may be a self-insurer for liability under said compensation laws in
which event the only charge that shall be made to the joint account shall be as
provided in Exhibit "C." Operator shall also carry or provide insurance for the
benefit of the joint account of the parties as outlined in Exhibit "D" attached
hereto and made a part hereof. Operator shall require all contractors engaged in
work on or for the Contract Area to comply with the workers compensation law of
the state where the operations are being conducted and to maintain such other
insurance as Operator may require.
In the event automobile liability insurance is specified in said
Exhibit "D," or subsequently receives the approval of the parties, not direct
charge shall be made by Operator for premiums paid for such insurance for
Operators's automotive equipment.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. Subsequent Operations:
1. Proposed Operations: If any party hereto should
desire to drill any well on the Contract Area other than the Initial Well, or if
any party should desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a
dry hole or a well no longer capable of producing in paying quantities in which
such party has not otherwise relinquished its interest in the proposed
-10-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
objective Zone under this agreement, the party desiring to drill, Rework,
Sidetrack, Deepen, Recomplete or Plug Back such a well shall give written notice
of the proposed operation to the parties who have not otherwise relinquished
their interest in such objective Zone under this agreement and to all other
parties in the case of a proposal for Sidetracking or Deepening, specifying the
work to be performed, the location, proposed depth, objective Zone and the
estimated cost of the operation. The parties to whom such a notice is delivered
shall have thirty (30) days after receipt of the notice within which to notify
the party proposing to do the work whether they elect to participate in the cost
of the proposed operation. If a drilling rig is on location, notice of a
proposal to Rework, Sidetrack, Recomplete, Plug Back or Deepen may be given by
telephone and the response period shall be limited to forty-eight (48) hours,
exclusive of Saturday, Sunday and legal holidays. Failure of a party to whom
such notice is delivered to reply within the period above fixed shall constitute
an election by that party not to participate in the cost of the proposed
operation. Any proposal by a party to conduct an operation conflicting with the
operation initially proposed shall be delivered to all parties within the time
and in the manner provided in Article VI.A.6.
If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced with the time period
hereafter set forth, and Operator shall, no later than ninety (90) days after
expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be), actually commence the proposed
operation and thereafter complete it with due diligence at the risk and expense
of the parties participating therein; provided, however, said commencement date
may be extended upon written notice of same by Operator to the other parties,
for a period of up to thirty (30) additional days if, in the sole opinion of
Operator, such additional time is reasonably necessary to obtain permits from
governmental authorities, surface rights (including rights-of-way) or
appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance. If the actual operation has
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made. Those parties that did not participate in
the drilling of a well for which a proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed Deepening
or Sidetracking operation, reimburse the Drilling Parties in accordance with
article VI.A.4. in the event of a Deepening operation and in accordance with
Article VI.a.5. in the event of a Sidetracking operation.
2. Operations by Less Than All Parties:
(a) Determination of Participation. If any party
to whom such notice is delivered as provided in Article VI.A.1. or VI.B.1.
(Option No. 2) elects not to participate in the proposed operation, then, in
order to be entitled to the benefits of this Article, the party or parties
giving the notice and such other parties as shall elect to participate in the
operation shall, no later than ninety (90) days after the expiration of the
notice period of thirty (30) days (or as promptly as practicable after the
expiration of the forty-eight (48) hour period when a drilling rig is on
location, as the case may be) actually commence the proposed operation and
complete it with due diligence. Operator shall perform all work for the account
of the Consenting Parties;
-11-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
provided, however, if no drilling rig or other equipment is on location, and if
Operator is a Non-Consenting Party, the Consenting Parties shall either: (i)
request Operator to perform the work required by such proposed operation for the
account of the Consenting Parties, or (ii) designated one of the Consenting
Parties as Operator to perform such work. The rights and duties granted to and
imposed upon the Operator under this agreement are granted to and imposed upon
the party designated as Operator for an operation in which the original Operator
is a Non-Consenting Party. Consenting Parties, when conducting operations on the
Contract Area pursuant to this Article VI.A.2., shall comply with all terms and
conditions of this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise all Parties of the total interest of the parties approving such operation
and its recommendation as to whether the Consenting Parties should proceed with
the operation as proposed. Each Consenting Party, within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party's interest as shown on Exhibit "A" or (ii) carry
only its proportionate part (determined by dividing such party's interest in the
Contract Area by the interests of all Consenting Parties in the Contract Area)
of Non-Consenting Parties' interests, or (iii) carry its proportionate part
(determined as provided in(ii)) of Non-Consenting Parties' interest together
with all or a portion of its proportionate part of any Non-Consenting Parties'
interests that any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election, may
withdraw such proposal if there if less than 100% participation and shall notify
all parties of such decision within ten(10) days, or within twenty-four (24)
hours if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained, the
proposing party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as Operator shall
commence such operation within the period provided in Article VI.A.1., subject
to the same extension right as provided therein.
(b) Relinquishment of Interest for
Non-Participation. The entire cost and risk of conducting such operations shall
be borne by the Consenting Parties in the proportions they have elected to bear
same under the terms of the preceding paragraph. Consenting Parties shall keep
the leasehold estates involved in such operations free and clear of all liens
and encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, then subject to
Articles VI.A.6. and VI.D.3, the Consenting Parties shall plug and abandon the
well and restore the surface location at their sole cost, risk and expense;
provided, however, that those Non-Consenting Parties that participated in the
drilling, Deepening or Sidetracking of the well shall remain liable for, and
shall pay, their proportionate shares of the cost of plugging and abandoning the
well and restoring the surface location insofar only as those costs were not
increased by the subsequent operations of the Consenting Parties. If any well
drilled, Reworked, Sidetracked, Deepened, Recompleted or Plugged Back under the
provisions of this Article results in a well capable of producing Oil and/or Gas
in paying quantities, the Consenting Parties shall Complete and equip
-12-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
the well to produce at their sole cost and risk, and the well shall then be
turned over to Operator (if the Operator did not conduct the operation) and
shall be operated by it at the expense and for the account of the Consenting
Parties. Upon commencement of operations for the drilling, Reworking,
Sidetracking, Recompleting, Deepening or Plugging Back of any such well by
Consenting Parties in accordance with the provisions of this Article, each
Non-Consenting Party shall be deemed to have relinquished to Consenting Parties,
and the Consenting Parties shall own and be entitled to receive, in proportion
to their respective interests, all of such Non-Consenting Party's interest in
the well and share of production therefrom or, the case of a Reworking,
Sidetracking, Deepening, Recompleting or Plugging Back, or a Completion pursuant
to a Article VI.B.1. Option No. 2, all of such Non-Consenting Party's interest
in the production obtained from the operation in which the Non-Consenting Party
did not elect to participate. Such relinquishment shall be effective until the
proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold (after deducting applicable ad valorem,
production, severance, and excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.C. payable out of or measured by the
production from such well accruing with respect to such interest until it
reverts), shall equal the total of the following:
(i) 400% of each such Non-Consenting
Party's share of the cost of any newly acquired surface equipment beyond the
wellhead connections (including but not limited to stock tanks, separators,
treaters, pumping equipment and piping), plus 100% of each such Non-Consenting
Party's share of the cost of operation of the well commencing with first
production and continuing until each such Non-Consenting Party's relinquished
interest shall revert to it under other provisions of this Article, it being
agreed that each Non-Consenting Party's share of such costs and equipment will
be that interest which would have been chargeable to such Non-Consenting Party
had it participated in the well from the beginning of the operations; and
(ii) 400% of (a) that portion of the
costs and expenses of drilling, Reworking, Sidetracking, Deepening, Plugging
Back, testing, Completing and Recompleting, after deducting any cash
contributions received under Article VIII.C., and of (b) that portion of the
cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Non-Consenting Party if
it had participated therein.
Notwithstanding anything to contrary in this Article VI.A., if the well
does not reach the deepest objective Zone described in the notice proposing the
well for reasons other than the encountering of granite or practically
impenetrable substance or other condition in the hole rendering further
operations impracticable, Operator shall give notice thereof to each
Non-Consenting Party who submitted or voted for an alternative proposal under
Article VI.A.6. to drill the well to a shallower Zone than the deepest objective
Zone proposed in the notice under which the well was drilled, and each such
Non-Consenting Party shall have the option to participate in the initial
proposed Completion of the well by paying its share of the cost of drilling the
well to its actual depth, calculated in the manner provided in Article
VI.A.4.(a). If any such Non-Consenting Party does not elect to participate in
the first Completion proposed for such well, the relinquishment provisions of
this Article VI.B.2. (b) shall apply to such party's interest.
-13-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
(c) Reworking, Recompleting or Plugging Back. An
election not to participate in the drilling, Sidetracking or Deepening of a well
shall be deemed an election not to participate in any Reworking or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
amount. Similarly, an election not to participate in the Completing or
Recompleting of a well shall be deemed an election not to participate in any
Reworking operation proposed in such a well, or portion thereof, to which the
initial non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
amount. Any such Reworking, Recompleting or Plugging Back operation conducted
during the recoupment period shall be deemed part of the cost of operation of
said well and there shall be added to the sums to be recouped by the Consenting
Parties 400% of that portion of the costs of operation of said well and there
shall be added to the sums to be recouped by the Consenting Parties 400% of that
portion of the costs of the Reworking, Recompleting or Plugging Back operation
which would have been chargeable to such Non-Consenting Party had it
participated therein. If such a Reworking, Recompleting or Plugging Back
operation is proposed during such recoupment period, the provisions of this
Article VI.A. shall be applicable as between said Consenting Parties in said
well.
(d) Recoupment Matters. During the period of
time Consenting Parties are entitled to receive Non-Consenting Party's share of
production, or the proceeds therefrom, Consenting Parties shall be responsible
for the payment of all ad valorem, production, severance, excise, gathering and
other taxes, and all royalty, overriding royalty and other burdens applicable to
Non-Consenting Party's share of production not excepted by Article III.C.
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting
or Deepening operation, the Consenting Parties shall be permitted to use, free
of cost, all casing, tubing and other equipment in the well, but the ownership
of all such equipment shall remain unchanged; and upon abandonment of a well
after such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening,
the Consenting Parties shall account for all such equipment to the owners
thereof, with each party receiving its proportionate part in kind or in value,
less cost of salvage.
Within ninety (90) days after the completion of any operations under
this Article, the party conducting the operations for the Consenting Parties
shall furnish each Non-Consenting Party with an inventory of the equipment in
and connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Each month thereafter, during the time the
Consenting Parties are being reimbursed as provided above, the party conducting
in the operations for the Consenting Parties shall furnish the Non-Consenting
Parties with an itemized statement of all costs and liabilities incurred in the
operation of the well, together with a statement of the quantity of Oil and Gas
produced from it and the amount of proceeds realized from the sale of the well's
working interest production during the preceding month. In determining the
quantity of Oil and Gas produced during any month, Consenting Parties shall use
industry accepted methods such as but not limited to metering or periodic well
tests. Any amount realized from the sale or other disposition of equipment newly
acquired in connection with any such operation which would have been owned
-14-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
by a Non-Consenting Party had it participated therein shall be credited against
the total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
If and when the Consenting Parties recover from a Non-Consenting
Party's relinquished interest the amounts provided for above, the relinquished
interests of such Non-Consenting Party shall automatically revert to it as of
7:00 a.m. on the day following the day on which such recoupment occurs, and,
from and after such reversion, such Non-Consenting Party shall own the same
interest in such well, the material and equipment in or pertaining thereto, and
the production therefrom as such Non-consenting Party would have been entitled
to had it participated in the drilling, Sidetracking, Reworking, Deepening,
Recompleting or Plugging Back of said well. Thereafter, such Non-Consenting
Party shall be charged with and shall pay its proportionate part of the further
costs of the operation of said well in accordance with the terms of this
agreement and Exhibit "C" attached hereto.
3. Stand-By Costs: When a well has been drilled or
Deepened has reached its authorized depth and all tests have been completed and
the results thereof furnished to the parties, or when operations on the well
have been otherwise terminated pursuant to Article VI.E., stand-by costs
incurred pending response to a party's notice proposing a Reworking,
Sidetracking, Deepening, Plugging Back or Completing operation in such a well
(including the period required under Article VI.A.6 to resolve competing
proposals) shall be charged and borne as part of the drilling or Deepening
operation just completed. Stand-by costs subsequent to all parties responding,
or expiration of the response time permitted, whichever first occurs, and prior
to agreements as to the participating interest of all Consenting Parties
pursuant to the terms of the second grammatical paragraph of Article VI.A.2.(a),
shall be charged to and borne as part of the proposed operation, but if the
proposal is subsequently withdrawn because of insufficient participation, such
stand-by costs shall be allocated between the Consenting Parties in the
proportion each Consenting Party's interest as shown on Exhibit "A" bears to the
total interest as shown on Exhibit "A" of all Consenting Parties.
In the event that notice for a Sidetracking operation is given while
the drilling rig to be utilized is on location, any party may request and
receive up to five (5) additional days after expiration of the forty-eight hour
response period specified in Article VI.A.1. within which to respond by paying
for all stand-by costs and other costs incurred during such extended response
period; Operator may require such party to pay the estimated stand-by time in
advance as a condition to extending the response period. If more than one party
elects to take such additional time to respond to the notice, standby costs
shall be allocated between the parties taking additional time to respond on a
day-to-day basis in the proportion each electing party's interest as shown on
Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the
electing parties.
4. Deepening. If less than all the parties elect to
participate in a drilling, Sidetracking, or Deepening operation proposed
pursuant to Article VI.A.1, the interest relinquished by the Non-Consenting
Parties to the Consenting Parties under Article VI.A.2. shall relate only and be
limited to the lesser of (i) the total depth actually drilled or (ii) the
objective depth or Zone of which the parties were given notice under Article
VI.A.1. plus any deeper zone as may be encountered in drilling to such
additional depth as is drilled to enable completion in
-15-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
the objective depth or zone ("Initial Objective"). Such well shall not be
Deepened beyond the Initial Objective without first complying with this Article
to afford the Non-Consenting Parties the opportunity to participate in the
Deepening operation.
In the event any Consenting Party desires to drill or Deepen a
Non-Consent Well to a depth below the Initial Objective, such party shall give
notice thereof, complying with the requirements of Article VI.A.1, to all
parties (including Non-Consenting Parties). Thereupon, Articles VI.A.1. and 2.
shall apply and all parties receiving such notice shall have the right to
participate or not participate in the Deepening of such well pursuant to said
Articles VI.A.1 and 2. If a Deepening operation is approved pursuant to such
provisions, and if any Non-Consenting Party elects to participate in the
Deepening operation, such Non-Consenting party shall pay or make reimbursement
(as the case may be) of the following costs and expenses:
(a) If the proposal to Deepen is made prior to
the Completion of such well as a well capable of producing in paying quantities,
such Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the
case may be) that share of costs and expenses incurred in connection with the
drilling of said well from the surface to the Initial Objective which
Non-Consenting Party would have paid had such Non-Consenting Party agreed to
participate therein, plus the Non-Consenting Party's share of the cost of
Deepening and of participating in any further operations on the well in
accordance with the other provisions of this Agreement; provided, however, all
costs for testing and Completion or attempted Completion of the well incurred by
Consenting Parties prior to the point of actual operations to Deepen beyond the
Initial Objective shall be for the sole account of Consenting Parties.
(b) If the proposal is made for a Non-Consent
Well that has been previously Completed as a well capable of producing in paying
quantities, but is no longer capable of producing in paying quantities, such
Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the case
may be) its proportionate share of all costs of drilling, Completing, and
equipping said well from the surface to the Initial Objective, calculated in the
manner provided in paragraph (a) above. The Non-Consenting Party shall also pay
its proportionate share of all costs of re-entering said well. The
Non-Consenting Parties' proportionate part (based on the percentage of such well
Non-Consenting Party would have owned had it previously participated in such
Non-Consent Well) of the costs of salvable materials and equipment remaining in
the hole and salvable surface equipment used in connection with such well shall
be determined in accordance with Exhibit "C".
The foregoing shall not imply a right of any Consenting Party to
propose any Deepening for a Non-Consent Well prior to the drilling of such well
to its Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.E.
5. Sidetracking: Any party having the right to
participate in a proposed Sidetracking operation that does not own an interest
in the affected wellbore at the time of the notice shall, upon electing to
participate, tender to the wellbore owners its proportionate share (equal to its
interest in the Sidetracking operation) of the value of that portion of the
existing wellbore to be utilized as follows:
(a) If the proposal is for Sidetracking an
existing dry hole, reimbursement shall be on the basis of the actual costs
incurred in the initial drilling of the well down to the depth at which the
Sidetracking operation is initiated.
-16-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
(b) If the proposal is for Sidetracking a well
which has previously produced, reimbursement shall be on the basis of such
party's proportionate share of drilling and equipping costs incurred in the
initial drilling of the well down to the depth at which the Sidetracking
operation is conducted, calculated in the manner described in Article VI.A.4(b)
above. Such party's proportionate share of the cost of the well's salvable
materials and equipment down to the depth at which the Sidetracking operation is
initiated shall be determined in accordance with the provisions of Exhibit "C."
6. Order of Preference of Operations. Except as
otherwise specially provided in this agreement, if any party desires to propose
the conduct of an operation that conflicts with a proposal that has been made by
a party under this Article VI, such party shall have fifteen (15) days from
delivery of the initial proposal, in the case of a proposal to drill a well or
to perform an operation on a well where no drilling rig is on location, or
twenty-four (24) hours, exclusive of Saturday, Sunday, and legal holidays, from
delivery of the initial proposal, if a drilling rig is on location for the well
on which such operation is to be conducted, to deliver to all parties entitled
to participate in the proposed operation such party's alternative proposal, such
alternate proposal to contain the same information required to be included in
the initial proposal. Each party receiving such proposals shall elect by
delivery of notice to Operator within five (5) days after expiration of the
proposal period or within twenty-four (24) hours (exclusive of Saturday, Sunday
and legal holidays) if a drilling rig is on location for the well that is the
subject of the proposals, to participate in one of the competing proposals. Any
party not electing within the time required shall be deemed not to have voted.
The proposal receiving the vote of parties owning the largest aggregate
percentage interest of the parties voting shall have priority over all other
competing proposals; in the case of a tie vote, the initial proposal shall
prevail. Operator shall deliver notice of such results to all parties entitled
to participate in the operation within five (5) days after expiration of the
election period (or within twenty-four (24) hours, exclusive of Saturday, Sunday
and legal holidays, if a drilling rig is on location). Each party shall then
have two (2) days (or twenty-four (24) hours if a rig is on location) from
receipt of such notice to elect by delivery of notice to Operator to participate
in such operation or to relinquish interest in the affected well pursuant to the
provisions of Article VI.A.2.; failure by a party to deliver notice within such
period shall be deemed an election not to participate in the prevailing
proposal.
7. Conformity to Spacing Pattern: Notwithstanding the
provisions of this Article VI.A.2., it is agreed that no wells shall be proposed
to be drilled to or Completed in or produced from a Zone from which a well
located elsewhere on the Contract Area is producing, unless such well conforms
to the then-existing well spacing pattern for such Zone.
8. Paying Wells: No party shall conduct any Reworking,
Deepening, Plugging Back, Completion, Recompletion, or Sidetracking operation
under this agreement with respect to any well then capable of producing in
paying quantities except with the consent of all parties that have not
relinquished interests in the well at the time of such operation.
B. Completion of Wells; Reworking and Plugging Back:
1. Completion: Without the consent of all parties, no
well shall be drilled, Deepened or Sidetracked, except any well drilled,
Deepened or Sidetracked pursuant to the provisions of Article VI.A.2. of this
agreement. Consent to the drilling, Deepening or Sidetracking shall include:
-17-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
[X] Option No. 1: All necessary expenditures for the drilling,
Deepening or Sidetracking, testing, Completing and equipping of the well,
including necessary tankage and/or surface facilities.
[ ] Option No. 2: All necessary expenditures for the drilling,
Deepening or Sidetracking and testing of the well. When such well has reached
its authorized depth, and all logs, cores and other tests have been completed,
and the results thereof furnished to the parties, Operator shall give immediate
notice to the Non-Operators having the right to participate in a Completion
attempt whether or not Operator recommends attempting to Complete the well,
together with Operator's AFE for Completion costs if not previously provided.
The parties receiving such notice shall have forty-eight (48) hours (exclusive
of Saturday, Sunday and legal holidays) in which to elect by delivery of notice
to Operator to participate in a recommended Completion attempt or to make a
Completion proposal with an accompanying AFE. Operator shall deliver any such
Completion proposal, or any Completion proposal conflicting with Operator's
proposal, to the other parties entitled to participate in such Completion in
accordance with the procedures specified in Article VI.B.6. Election to
participate in a Completion attempt shall include consent to all necessary
expenditures for the Completing and equipping of such well, including necessary
tankage and/or surface facilities but excluding any stimulation operation not
contained on the Completion AFE. Failure of any party receiving such notice to
reply within the period above fixed shall constitute an election by that party
not to participate in the cost of the Completion attempt; provided, that Article
VI.A.6. shall control in the case of conflicting Completion proposals. If one or
more, but less than all of the parties, elect to attempt a Completion, the
provisions of Article VI.A.2. hereof (the phrase "Reworking, Sidetracking,
Deepening, Recompleting or Plugging Back" as contained in Article VI.A.2. shall
be deemed to include "Completing") shall apply to the operations thereafter
conducted by less than all parties; provided, however, that Article VI.A.2.
shall apply separately to each separate Completion or Recompletion attempt
undertaken hereunder, and an election to become a Non-Consenting Party as to one
Completion or Recompletion attempt shall not prevent a party from becoming a
Consenting Party in subsequent Completion or Recompletion attempts regardless
whether the Consenting Parties as to earlier Completions or Recompletions have
recouped their costs pursuant to Article VI.A.2.; provided further, that any
recoupment of costs by a Consenting Party shall be made solely from the
production attributable to the Zone in which the Completion attempt is made.
Election by a previous Non-Consenting Party to participate in a subsequent
Completion or Recompletion attempt shall require such party to pay its
proportionate share of the cost of salvable materials and equipment installed in
the well pursuant to the previous Completion or Recompletion attempt, insofar
and only insofar as such materials and equipment benefit the Zone in which such
party participates in a Completion attempt.
2. Rework, Recomplete or Plug Back: No well shall be
Reworked, Recompleted or Plugged Back except a well Reworked, Recompleted, or
Plugged Back pursuant to the provisions of Article VI.A.2. of this agreement.
Consent to the Reworking, Recompleting or Plugging Back of a well shall include
all necessary expenditures in conducting such operations and Completing and
equipping of said well, including necessary tankage and/or surface facilities.
-18-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
C. Other Operations:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Seventy-Five Thousand Dollars ($75,000.00)
except in connection with the drilling, Sidetracking, Reworking, Deepening,
Completing, Recompleting or Plugging Back of a well that has been previously
authorized by or pursuant to this agreement; provided, however, that, in case of
explosion, fire, flood or other sudden emergency, whether of the same or
different nature, Operator may take such steps and incur such expenses as in its
opinion are required to deal with the emergency to safeguard life and property
but Operator, as promptly as possible, shall report the emergency to the other
parties. If Operator prepares an AFE for its own use, Operator shall furnish any
Non-Operator so requesting an information copy thereof for any single project in
excess of Fifty Thousand Dollars ($50,000.00). Any party who has not
relinquished its interest in a well share have the right to propose that
Operator perform repair work or undertake the installation of artificial lift
equipment or ancillary production facilities such as salt water disposal wells
or to conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.C. (except in connection with an operation required to be proposed
under Articles VI.A.1. or VI.B.1. Option No. 2, which shall be governed
exclusively by those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein. If within thirty (30) days thereof
Operator secures the written consent of any party or parties owning at least 50%
of the interests of the parties entitled to participate in such operation, each
party having the right to participate in such project shall be bound by the
terms of such proposal and shall be obligated to pay its proportionate share of
the costs of the proposed project as if it had consented to such project
pursuant to the terms of the proposal.
D. Abandonment of Wells:
1. Abandonment of Dry Holes: Except for any well drilled
or Deepened pursuant to Article VI.A.2., any well which has been drilled or
Deepened under the terms of this agreement and is proposed to be completed as a
dry hole shall not be plugged and abandoned without the consent of all parties.
Should Operator, after diligent effort, be unable to contact any party, or
should any party fail to reply within forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays) after delivery of notice of the proposal to
plug and abandon such well, such party shall be deemed to have consented to the
proposed abandonment. All such wells shall be plugged and abandoned in
accordance with applicable regulations and at the cost, risk and expense of the
parties who participated in the cost of drilling or Deepening such well. Any
party who objects to plugging and abandoning such well by notice delivered to
Operator within forty-eight (48) hours (exclusive of Saturday, Sunday and legal
holidays) after delivery of notice of the proposed plugging shall take over the
well as of the end of such forty-eight (48) hour notice period and conduct
further operations in search of Oil and/or Gas subject to the provisions of
Article VI.A.; failure of such party to provide proof reasonably satisfactory to
Operator of its financial capability to conduct such operations or take over the
well within such period or thereafter to conduct operations on such well or plug
and abandon such well shall entitle Operator to retain or take possession of the
well and plug and abandon the well. The party taking over the well shall
indemnify Operator (if Operator is an abandoning party) and the other abandoning
parties against liability for any further operations conducted on such well
except for the costs of plugging and abandoning the well and restoring the
surface, for which the abandoning parties shall remain proportionately liable.
-19-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
2. Abandonment of Wells That Have Produced: Except for
any well in which a Non-Consent operation has been conducted hereunder for which
the Consenting Parties have not been fully reimbursed as herein provided, any
well which has been completed as a producer shall not be plugged and abandoned
without the consent of all parties. If all parties consent to such abandonment,
the well shall be plugged and abandoned in accordance with applicable
regulations and at the cost, risk and expense of all the parties hereto. Failure
of a party to reply within sixty (60) days of delivery of notice of proposed
abandonment shall be deemed an election to consent to the proposal. If, within
sixty (60) days after delivery of notice of the proposed abandonment of any
well, all parties do not agree to the abandonment of such well, those wishing to
continue its operation from the Zone then open to production shall be obligated
to take over the well as of the expiration of the applicable notice period and
shall indemnify Operator (if Operator is an abandoning party) and the other
abandoning parties against liability for any further operations on the well
conducted by such parties. Failure of such party or parties to provide proof
reasonably satisfactory to Operator of their financial capability to conduct
such operations or to take over the well within the required period or
thereafter to conduct operations on such well shall entitle Operator to retain
or take possession of such well and plug and abandon the well.
Parties taking over a well as provided herein shall tender to each of
the other parties its proportionate share of the value of the well's salvable
material and equipment, determined in accordance with the provisions of Exhibit
"C," less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface; provided, however, that in the event the
estimated plugging and abandoning and surface restoration costs and the
estimated cost of salvaging are higher than the value of the well's salvable
material and equipment, each of the abandoning parties shall tender to the
parties continuing operations their proportionate shares of the estimated excess
cost. Each abandoning party shall assign to the non-abandoning parties, without
warranty, express or implied, as to title or as to quantity, or fitness for use
of the equipment and material, all of its interest in the wellbore of the well
and related equipment, together with its interest in the Leasehold insofar and
only insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes an Oil and Gas Interest, such party shall execute and
deliver to the non-abandoning party or parties an oil and gas lease, limited to
the wellbore and the Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit "B." The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone then open other than the royalties retained in any lease made under the
terms of this Article. Upon request, Operator shall continue to operate the
assigned well for the account of the non-abandoning parties at the rates and
charges contemplated by this agreement, plus any additional cost and charges
which may arise as the result of the separate ownership of the assigned well.
Upon proposed abandonment of the producing Zone assigned or leased, the assignor
or lessor shall then have the option to repurchase
-20-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
its prior interest in the well (using the same valuation formula) and
participate in further operations therein subject to the provisions hereof.
3. Abandonment of Non-Consent Operations: The provisions
of Article VI.D.1. or VI.D.2. above shall be applicable as between Consenting
Parties in the event of the proposed abandonment of any well excepted from said
Articles; provided, however, no well shall be permanently plugged and abandoned
unless and until all parties having the right to conduct further operations
therein have been notified of the proposed abandonment and afforded the
opportunity to elect to take over the well in accordance with the provisions of
this Article VI.D.; and provided further, that Non-Consenting Parties who own an
interest in a portion of the well shall pay their proportionate shares of
abandonment and surface restoration costs for such well as provided in Article
VI.A.2(b).
E. Termination of Operations:
Upon the commencement of an operation for the drilling, Reworking,
Sidetracking, Plugging Back, Deepening, testing, Completion or plugging of a
well, including but not limited to the Initial Well, such operation shall not be
terminated without consent of parties bearing 75% of the costs of such
operation; provided, however, that in the event granite or other practically
impenetrable substance or condition in the hole is encountered which renders
further operations impractical, Operator may discontinue operations and give
notice of such condition in the manner provided in Article VI.A.1 and the
provisions of Article VI.A. or VI.D. shall thereafter apply to such operation,
as appropriate.
F. Taking Production in Kind:
[X] Option No. 1: Gas Balancing Agreement Attached
Each party shall take in kind or separately dispose
of its proportionate share of all Oil and Gas produced from
the Contract Area, exclusive of production which may be used
in development and producing operations and in preparing and
treating Oil and Gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the taking
in kind or separate disposition by any party of its
proportionate share of the production shall be borne by such
party. Any party taking its share of production in kind shall
be required to pay for only its proportionate share of such
part of Operator's surface facilities which it uses.
Each party shall execute such division orders and
contracts as may be necessary for the sale of its interest in
production from the Contract Area, and except as provided in
Article VII.A., shall be entitled to receive payment directly
from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary
to take in kind or separately dispose of its proportionate
share of the Oil produced from the Contract Area, Operator
shall have the right, subject to the revocation at will by the
party owning it, but not the obligation to purchase such Oil
or sell it to others at any time and from time to time, for
the account of the non-taking party. Any such purchase or sale
by Operator may be terminated by Operator upon at least ten
(10) days written notice to the owner of said production and
shall be subject always to
-21-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
the right of the owner of the production upon at least ten
(10) days written notice to Operator to exercise at any time
its right to take in kind, or separately dispose of, its share
of all Oil not previously delivered to a purchaser. Any
purchase or sale by Operator of any other party's share of Oil
shall be only for such reasonable periods of time as are
consistent with the minimum needs of the industry under the
particular circumstances, but in no event for a period in
excess of one (1) year.
Any such sale by Operator shall be in a manner
commercially reasonable under the circumstances but Operator
shall have no duty to share any existing market or to obtain a
price equal to that received under any existing market. The
sale or delivery by Operator of a non-taking party's share of
Oil under the terms of any existing contract of Operator shall
not give the non-taking party any interest in or make the
non-taking party a party to said contract. No purchase shall
be made by Operator without first giving the non-taking party
at least ten (10) days written notice of such intended
purchase and the price to be paid or the pricing basis to be
used.
All parties shall give timely written notice to
Operator of their Gas marketing arrangements for the following
month, excluding price, and shall notify Operator immediately
in the event of a change in such arrangements. Operator shall
maintain records of all marketing arrangements, and of volumes
actually sold or transported, which records shall be made
available to Non-Operators upon reasonable request.
In the event one or more parties' separate
disposition of its share of the Gas causes split-stream
deliveries to separate pipelines and/or deliveries which on a
day-to-day basis for any reason are not exactly equal to a
party's respective proportionate share of total Gas sales to
be allocated to it, the balancing or accounting between the
parties shall be in accordance with any Gas balancing
agreement between the parties hereto, whether such an
agreement is attached as Exhibit "E" or is a separate
agreement. Operator shall give notice to all parties of the
first sales of Gas from any well under this agreement.
[ ] Option No. 2: No Gas Balancing Agreement:
Each party shall take in kind or separately dispose
of its proportionate share of all Oil and Gas produced from
the Contract Area, exclusive of production which may be used
in development and producing operations and in preparing and
treating Oil and Gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the taking
in kind or separate disposition by any party of its
proportionate share of the production shall be borne by such
party. Any party taking its share of production in kind shall
be required to pay for only its proportionate share of such
part of Operator's surface facilities which it uses.
Each party shall execute such division orders and
contracts as may be necessary for the sale of its interest in
production from the Contract Area, and, except as provided in
Article VII.A., shall be entitled to receive payment directly
from the purchaser thereof for its share of all production.
-22-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
If any party fails to make the arrangements necessary
to take in kind or separately dispose of its proportionate
share of the Oil and/or Gas produced from the Contract Area,
Operator shall have the right, subject to the revocation at
will by the party owning it, but not the obligation, to
purchase such Oil and/or Gas or sell it to others at any time
and from time to time, for the account of the non-taking
party. Any such purchase or sale by Operator may be terminated
by Operator upon at least ten (10) days written notice to the
owner of said production and shall be subject always to the
right of the owner of the production upon at least ten (10)
days written notice to Operator to exercise its right to take
in kind, or separately dispose of, its share of all Oil and/or
Gas not previously delivered to a purchaser; provided,
however, that the effective date of any such revocation may be
deferred at Operator's election for a period not to exceed
ninety (90) days if Operator has committed such production to
a purchase contract having a term extending beyond such ten
(10) day period. Any purchase or sale by Operator of any other
party's share of Oil and/or Gas shall be only for such
reasonable periods of time as are consistent with the minimum
needs of the industry under the particular circumstances, but
in no event for a period in excess of one (1) year.
Any such sale by Operator shall be in a manner
commercially reasonable under the circumstances, but Operator
shall have no duty to share any existing market or
transportation arrangement or to obtain a price or
transportation fee equal to that received under any existing
market or transportation arrangement. The sale or delivery by
Operator of a non-taking party's share of production under the
terms of any existing contract of Operator shall not give the
non-taking party any interest in or make the non-taking party
a party to said contract. No purchase of Oil and Gas and no
sale of Gas shall be made by Operator without first giving the
non-taking party ten days written notice of such intended
purchase or sale and the price to be paid or the pricing basis
to be used. Operator shall give notice to all parties of the
first sale of Gas from any well under this Agreement.
All parties shall give timely written notice to
Operator of their Gas marketing arrangements for the following
month, excluding price, and shall notify to Operator
immediately in the event of a change in such arrangements.
Operator shall maintain records of all marketing arrangements,
and of volumes actually sold or transported, which records
shall be made available to Non-Operators upon reasonable
request.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. Liability of Parties:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally, and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not the
intention of the parties to create,
-23-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
nor shall this agreement be construed as creating, a mining or other
partnership, joint venture, agency relationship or association, or to render the
parties liable as partners, co-venturers, or principals. In their relations with
each other under this agreement, the parties shall not be considered fiduciaries
or to have established a confidential relationship but rather shall be free to
act on an arm's-length basis in accordance with their own respective
self-interest, subject, however, to the obligation of the parties to act in good
faith in their dealings with each other with respect to activities hereunder.
B. Liens and Security Interests:
Each party grants to the other parties hereto a lien upon any interest
it now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas
Interests in the Contract Area, and a security interest and/or purchase money
security interest in any interest it now owns or hereafter acquires in the
personal property and fixtures on or used or obtained for use in connection
therewith, to secure performance of all of its obligations under this agreement
including but not limited to payment of expense, interest and fees, the proper
disbursement of all monies paid hereunder, the assignment or relinquishment of
interest in Oil and Gas Leases as required hereunder, and the proper performance
of operations hereunder. Such lien and security interest granted by each party
hereto shall include such party's leasehold interests, working interests,
operating rights, and royalty and overriding royalty interests in the Contract
Area now owned or hereafter acquired and in lands pooled or unitized therewith
or otherwise becoming subject to this agreement, the Oil and Gas when extracted
therefrom and equipment situated thereon or used or obtained for use in
connection therewith (including, without limitation, all wells, tools, and
tubular goods), and accounts (including, without limitation, accounts arising
from gas imbalances or from the sale of Oil and/or Gas at the wellhead),
contract rights, inventory and general intangibles relating thereto or arising
therefrom, and all proceeds and products of the foregoing.
To perfect the lien and security agreement provided herein, each party
hereto shall execute and acknowledge the recording supplement and/or any
financing statement prepared and submitted by any party hereto in conjunction
herewith or at any time following execution hereof, and Operator is authorized
to file this agreement or the recording supplement executed herewith as a lien
or mortgage in the applicable real estate records and as a financing statement
with the proper officer under the Uniform Commercial Code in the state in which
the Contract Area is situated and such other states as Operator shall deem
appropriate to perfect the security interest granted hereunder. Any party may
file this agreement, the recording supplement executed herewith, or such other
documents as it deems necessary as a lien or mortgage in the applicable real
estate records and/or a financing statement with the proper officer under the
Uniform Commercial Code.
Each party represents and warrants to the other parties hereto that the
lien and security interest granted by such party to the other parties shall be a
first and prior lien, and each party hereby agrees to maintain the priority of
said lien and security interest against all persons acquiring an interest in Oil
and Gas Leases and Interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by
-24-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
this Article VII.B. as to all obligations attributable to such interest
hereunder whether or not such obligations arise before or after such interest is
acquired.
To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they shall
be entitled to exercise the rights and remedies of a secured party under the
Code. The bringing of a suit and the obtaining of judgment by a party for the
secured indebtedness shall not be deemed an election of remedies or otherwise
affect the lien rights or security interest as security for the payment thereof.
In addition, upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party's
share of Oil and Gas until the amount owed by such party, plus interest as
provided in "Exhibit C," has been received, and shall have the right to offset
the amount owed against the proceeds from the sale of such defaulting party's
share of Oil and Gas. All purchasers of production may rely on a notification of
default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.
If any party fails to pay its share of cost within sixty (60) days
after rendition of a statement therefor by Operator, the non-defaulting parties,
including Operator, shall, upon request by Operator, pay the unpaid amount in
the proportion that the interest of each such party bears to the interest of all
such parties. The amount paid by each party so paying its share of the unpaid
amount shall be secured by the liens and security rights described in Article
VII.B., and each paying party may independently pursue any remedy available
hereunder or otherwise.
If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution proceedings
pursuant to the provisions of this agreement, to the extent allowed by governing
law, the defaulting party waives any available right of redemption from and
after the date of judgment, any required valuation or appraisement of the
mortgaged or secured property prior to sale, any available right to stay
execution or to require a marshaling of assets and any required bond in the
event a receiver is appointed. In addition, to the extent permitted by
applicable law, each party hereby grants to the other parties a power of sale as
to any property that is subject to the lien and security rights granted
hereunder, such power to be exercised in the manner provided by applicable law
or otherwise in a commercially reasonable manner and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize
the provisions of Oil and Gas lien law or other lien law of any state in which
the Contract Area is situated to enforce the obligations of each party
hereunder. Without limiting the generality of the foregoing, to the extent
permitted by applicable law, Non-Operators agree that Operator may invoke or
utilize the mechanics' or materialmen's lien law of the state in which the
Contract Area is situated in order to secure the payment to Operator of any sum
due hereunder for services performed or materials supplied by Operator.
C. Advances:
Operator, at its election, shall have the right from time to time to
demand and receive from one or more of the other parties payment in advance of
their respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next
-25-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
succeeding month, which right may be exercised only by submission to each such
party of an itemized statement of such estimated expense, together with an
invoice for its share thereof. Each such statement and invoice for the payment
in advance of estimated expense shall be submitted on or before the 20th day of
the next preceding month. Each party shall pay to Operator its proportionate
share of such estimate within fifteen (15) days after such estimate and invoice
is received. If any party fails to pay its share of said estimate within said
time, the amount due shall bear interest as provided in Exhibit "C" until paid.
Proper adjustment shall be made monthly between advances and actual expense to
the end that each party shall bear and pay its proportionate share of actual
expenses incurred, and no more.
D. Defaults and Remedies:
If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the remedies
provided in Article VII.B. or elsewhere in this agreement, the remedies
specified below shall be applicable. For purposes of this Article VII.D., all
notices and elections shall be delivered only by Operator, except that Operator
shall deliver any such notice and election requested by a non-defaulting
Non-Operator, and when Operator is the party in default, the applicable notices
and elections can be delivered by any Non-Operator. Election of any one or more
of the following remedies shall not preclude the subsequent use of any other
remedy specified below or otherwise available to a no-defaulting party.
1. Suspension of Rights: Any party may deliver to the
party in default a Notice of Default, which shall specify the default, specify
the action to be taken to cure the default, and specify that failure to take
such action will result in the exercise of one or more of the remedies provided
in this Article. If the default is not cured within thirty (30) days of the
delivery of such Notice of Default, all of the rights of the defaulting party
granted by this agreement may upon notice be suspended until the default is
cured, without prejudice to the right of the non-defaulting party or parties to
continue to enforce the obligations of the defaulting party previously accrued
or thereafter accruing under this agreement. If Operator is the party in
default, the Non-Operators shall have in addition the right, by vote of
Non-Operators owning a majority in interest in the Contract Area after excluding
the voting interest of Operator, to appoint a new Operator effective
immediately. The rights of a defaulting party that may be suspended hereunder at
the election of the non-defaulting parties shall include, without limitation,
the right to receive information as to any operation conducted hereunder during
the period of such default, the right to elect to participate in an operation
proposed under Article VI.A. of this agreement, the right to participate in an
operation being conducted under this agreement even if the party has previously
elected to participate in such operation, and the right to receive proceeds of
production from any well subject to this agreement.
2. Suit for Damages: Non-defaulting parties or Operator
for the benefit of non-defaulting parties may sue (at joint account expense) to
collect the amounts in default, plus interest accruing on the amounts recovered
from the date of default until the date of collection at the rate specified in
Exhibit "C" attached hereto. Nothing herein shall prevent any party from suing
any defaulting party to collect consequential damages accruing to such party as
a result of the default.
-26-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
3. Deemed Non-Consent: The non-defaulting party may
deliver a written Notice of Non-Consent Election to the defaulting party at any
time after the expiration of the thirty-day cure period following delivery of
the Notice of Default, in which event if the billing is for the drilling of a
new well or the Plugging Back, Sidetracking, Reworking or Deepening of a well
which is to be or has been plugged as a dry hole, or for the Completion or
Recompletion of any well, the defaulting party will be conclusively deemed to
have elected not to participate in the operation and to be a Non-Consenting
Party with respect thereto under Article VI.A. or VI.B., as the case may be, to
the extent of the costs unpaid by such party, notwithstanding any election to
participate theretofore made. If election is made to proceed under this
provision, then the non-defaulting parties may not elect to sue for the unpaid
amount pursuant to Article VII.D.2.
Until the delivery of such Notice of Non-Consent Election to the
defaulting party, such party shall have the right to cure its default by paying
its unpaid share of costs plus interest at the rate set forth in Exhibit "C,"
provided, however, such payment shall not prejudice the rights of the
non-defaulting parties to pursue remedies for damages incurred by the
non-defaulting parties as a result of the default. Any interest relinquished
pursuant to this Article VII.D.3. shall be offered to the non-defaulting parties
in proportion to their interests, and the non-defaulting parties electing to
participate in the ownership of such interest shall be required to contribute
their shares of the defaulted amount upon their election to participate therein.
4. Advance Payment: If a default is not cured within
thirty (30) days of the delivery of a Notice of Default, Operator, or
Non-Operators if Operator is the defaulting party, may thereafter require
advance payment from the defaulting party of such defaulting party's anticipated
share of any item of expense for which Operator, or Non-Operators, as the case
may be, would be entitled to reimbursement under any provision of this
agreement, whether or not such expense was the subject of the previous default.
Such right includes, but is not limited to, the right to require advance payment
for the estimated costs of drilling a well or Completion of a well as to which
an election to participate in drilling or Completion has been made. If the
defaulting party fails to pay the required advance payment, the non-defaulting
parties may pursue any of the remedies provided in this Article VII.D. or any
other default remedy provided elsewhere in this agreement. Any excess of funds
advanced remaining when the operation is completed and all costs have been paid
shall be promptly returned to the advancing party.
5. Costs and Attorneys' Fees: In the event any party is
required to bring legal proceedings to enforce any financial obligation of a
party hereunder, the prevailing party in such action shall be entitled to
recover all court costs, costs of collection, and a reasonable attorney's fee,
which the lien provided for herein shall also secure.
E. Rentals, Shut-in Well Payments and Minimum Royalties:
Rentals, shut-in well payments and minimum royalties which may be
required under them terms of any lease shall be paid by the party or parties who
subjected such lease to this agreement at its or their expense. In the event two
or more parties own and have contributed interests in the same lease to this
agreement, such parties may designate one of such parties to make said payments
for and on behalf of all such parties. Any party may request, and shall be
entitled to receive, proper evidence of all such payments. In the event of
failure to make proper payment of any rental, shut-in well payment or minimum
royalty through mistake or oversight
-27-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
where such payment is required to continue the lease in force, any loss which
results from such non-payment shall be borne in accordance with the provisions
of Article IV.B.1.
Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well, at
least five (5) days (excluding Saturday, Sunday and legal holidays) prior to
taking such action, or at the earliest opportunity permitted by circumstances,
but assumes no liability for failure to do so. In the event of failure by
Operator to so notify Non-Operators, the loss of any lease contributed hereto by
Non-Operators for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.1.
F. Taxes:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on Leases and Oil and Gas Interests contributed by such
Non-Operator. If the assessed valuation of any Lease is reduced by reason of its
being subject to outstanding excess royalties, overriding royalties or
production payments, the reduction in ad valorem taxes resulting therefrom shall
inure to the benefit of the owner or owners of such Lease, and Operator shall
adjust the charge to such owner or owners so as to reflect the benefit of such
reduction. If the ad valorem taxes are based in whole or in part upon separate
valuations of each party's working interest, then notwithstanding anything to
the contrary herein, charges to the joint account shall be made and paid by the
parties hereto in accordance with the tax value generated by each party's
working interest. Operator shall bill the other parties for their proportionate
shares of all tax payments in the manner provided in Exhibit "C."
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance,
excise, gathering and other taxes imposed upon or with respect to the production
or handling of such party's share of Oil and Gas produced under the terms of
this agreement.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. Surrender of Leases:
The Leases covered by this agreement, insofar as they embrace acreage
in the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
-28-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
However, should any party desire to surrender its interest in any Lease
or in any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice. If all parties do not agree or consent thereto, the party desiring to
surrender shall assign, without express or implied warranty of title, all of its
interest in such Lease, or portion thereof, and any well, material and equipment
which may be located thereon and any rights in production thereafter secured, to
the parties not consenting to such surrender. If the interest of the assigning
party is or includes an Oil and Gas Interest, the assigning party shall execute
and deliver to the party or parties not consenting to such surrender an oil and
gas lease covering such Oil and Gas Interest for a term of one (1) year and so
long thereafter as Oil and/or Gas is produced from the land covered thereby,
such lease to be on the form attached hereto as Exhibit "B." Upon such
assignment or lease, the assigning party shall be relieved from all obligations
thereafter accruing, but not theretofore accrued, with respect to the interest
assigned or leased and the operation of any well attributable thereto, and the
assigning party shall have no further interest in the assigned or leased
premises and its equipment and production other than the royalties retained in
any lease made under the terms of this Article. The party assignee or lessee
shall pay to the party assignor or lessor the reasonable salvage value of the
latter's interest in any well's salvable materials and equipment attributable to
the assigned or leased acreage. The value of all salvable materials and
equipment shall be determined in accordance with the provisions of Exhibit "C,"
less the estimated cost of salvaging and the estimated cost of plugging and
abandoning and restoring the surface. If such value is less than such costs,
then the party assignor or lessor shall pay to the party assignee or lessee the
amount of such deficit. If the assignment or lease is in favor of more than one
party, the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties. If the
interest of the parties to whom the assignment is to be made varies according to
depth, then the interest assigned shall similarly reflect such variances.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to an Operating Agreement in the
form of this agreement.
B. Renewal or Extension of Leases:
If any party secures a renewal or replacement of an Oil and Gas Lease
or Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
proportionate shares of the acquisition cost allocated to that part of such
Lease within the Contract Area, which shall be in proportion to the interests
held at the time by the parties in the Contract Area. Each party who
participates in the purchase
-29-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
of a renewal or replacement Lease shall be given an assignment of its
proportionate interest therein by the acquiring party.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties who
elect to participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in which less than all parties
elect to participate shall not be subject to this agreement but shall be deemed
subject to a separate Operating Agreement in the form of this agreement.
If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or replacement
Leases and their right to receive an assignment of interest shall also reflect
such depth variances.
The provisions of this Article shall apply to renewal or replacement
Leases whether they are for the entire interest covered by the expiring Lease or
cover only a portion of its area or an interest therein. Any renewal or
replacement Lease taken before the expiration of its predecessor Lease, or taken
or contracted for or becoming effective within six (6) months after the
expiration of the existing Lease, shall be subject to this provision so long as
this agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease and shall not be
subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions
of Oil and Gas Leases.
C. Acreage or Cash Contributions:
While this agreement is in force, if any party contracts for a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost of
such drilling or other operation. If the contribution be in the form of acreage,
the party to whom the contribution is made shall promptly tender an assignment
of the acreage, without warranty of title, to the Drilling Parties in the
proportions said Drilling Parties shared the cost of drilling the well. Such
acreage shall become a separate Contract Area and, to the extent possible, be
governed by provisions identical to this agreement. Each party shall promptly
notify all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage outside
the Contract Area which are in support of well drilled inside the Contract Area.
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.
-30-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
D. Assignment; Maintenance of Uniform Interest:
For the purpose of maintaining uniformity of ownership in the Contract
Area in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer or
make other disposition of its interest in the Oil and Gas Leases and Oil and Gas
Interests embraced within the Contract Area or in wells, equipment and
production unless such disposition covers either:
1. the entire interest of the party in all Oil and Gas
Leases, Oil and Gas Interests, wells, equipment and production; or
2. an equal undivided percent of the party's present
interest in all Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production in the Contract Area.
Every sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties, and any transferee of an
ownership interest in any Oil and Gas Lease or Interest shall be deemed a party
to this agreement as to the interest conveyed from and after the effective date
of the transfer of ownership; provided, however, that the other parties shall
not be required to recognize any such sale, encumbrance, transfer or other
disposition for any purpose hereunder until thirty (30) days after they have
received a copy of the instrument of transfer or other satisfactory evidence
thereof in writing from the transferor or transferee. No assignment or other
disposition of interest by a party shall relieve such party of obligations
previously incurred by such party hereunder with respect to the interest
transferred, including without limitation the obligation of a party to pay all
costs attributable to an operation conducted hereunder in which such party has
agreed to participate prior to making such assignment, and the lien and security
interest granted by Article VII.B. shall continue to burden the interest
transferred to secure payment of any such obligations.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the Oil and Gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.
E. Waiver of Rights to Partition:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severally its undivided interest therein.
-31-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as a partnership, and if the parties have not otherwise
agreed to form a tax partnership pursuant to Exhibit "G" or other agreement
between them, each party thereby affected elects to be excluded from the
application of all of the provisions of Subchapter "K," Chapter 1, Subtitle "A,"
of the Internal Revenue Code of 1986, as amended ("Code"), as permitted and
authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, but not by way of limitation, all of the
returns, statements, and the data required by Treasury Regulations Section
1.761. Should there be any requirement that each party hereby affected give
further evidence of this election, each such party shall execute such documents
and furnish such other evidence as may be required by the Federal Internal
Revenue Service or as may be necessary to evidence this election. No such party
shall give any notices or take any other action inconsistent with the election
made hereby. If any present or future income tax laws of the state or states in
which the Contract Area is located or any future income tax laws of the United
States contain provisions similar to those in Subchapter "K," Chapter I,
Subtitle "A," of the Code, under which an election similar to that provided by
Section 761 of the Code is permitted, each party hereby affected shall make such
election as may be permitted or required by such laws. In making the foregoing
election, each such party states that the income derived by such party from
operations hereunder can be adequately determined without the computation of
partnership taxable income.
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or
suit arising from operations hereunder if the expenditure does not exceed
Seventy-Five Thousand Dollars ($75,000.00) and if the payment is in complete
settlement of such claim or suit. If the amount required for settlement exceeds
the above amount, the parties hereto shall assume and take over the further
handling of the claim or suit, unless such authority is delegated to Operator.
All costs and expenses of handling, settling, or otherwise discharging such
claim or suit shall be at the joint expense of the parties participating in the
operation from which the claim or suit arises. If a claim is made against any
party or if any party is sued on account of any matter arising from operations
hereunder over which such individual has no control because of the rights given
Operator by this agreement, such party shall immediately notify all other
parties, and the claim or suite shall be treated as any other claim or suit
involving operations hereunder.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
indemnify or make money payments or furnish security, that party shall give to
all other parties prompt written notice of the force majeure with reasonably
full particulars concerning it; thereupon, the obligations of the party giving
the notice, so far as they are affected by the force majeure, shall be suspended
-32-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
during, but no longer than, the continuance of the force majeure. The term
"force majeure," as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy, war, blockade, public
riot, lightning, fire, storm, flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other cause, whether of the kind specifically enumerated
above or otherwise, which is not reasonably within the control of the party
claiming suspension.
The affected party shall use all reasonable diligence to remove the
force majeure situation as quickly as practicable. The requirement that any
force majeure shall be remedied with all reasonable dispatch shall not require
the settlement of strikes, lockouts, or other labor difficulty by the party
involved, contrary to its wishes; however all such difficulties shall be handled
shall be entirely within the discretion of the party concerned.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
in writing and delivered in person or by United States mail, courier service,
telegram, telex, telecopier or any other form of facsimile, postage or charges
prepaid, and addressed to such parties at the addresses listed on Exhibit "A."
All telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is received.
"Receipt" for purposes of this agreement with respect to written notice
delivered hereunder shall be actual delivery of the notice to the address of the
party to be notified specified in accordance with this agreement, or to the
telecopy, facsimile or telex machine of such party. The second or any responsive
notice shall be deemed delivered when deposited in the United States mail or at
the office of the courier or telegraph service, or upon transmittal by telex,
telecopy or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or 48 hours, such response
shall be given orally or by telephone, telex, telecopy or other facsimile within
such period. Each party shall have the right to change its address at any time,
and from time to time, by giving written notice thereof to all other parties. If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 or 48 hours, the
notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and
Gas Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.
[X] Option No. 1: So long as any of the Oil and Gas Leases subject
to this agreement remain or are continued in force as to any
part of the Contract Area, whether by production, extension,
renewal or otherwise.
-33-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
[ ] Option No. 2: In the event the well described in Article
VI.A., or any subsequent well drilled under any provision of
this agreement, results in the Completion of a well as a well
capable of production of Oil and/or Gas in paying quantities,
this agreement shall continue in force so long as any such
well is capable of production, and for an additional period of
_____________ days thereafter; provided, however, if, prior to
the expiration of such additional period, one or more of the
parties hereto are engaged in drilling, Reworking, Deepening,
Sidetracking, Plugging Back, testing or attempting to Complete
or Re-complete a well or wells hereunder, this agreement shall
continue in force until such operations have been completed
and if production results therefrom, this agreement shall
continue in force as provided herein. In the event the well
descried in Article VI.A., or any subsequent well drilled
hereunder, results in a dry hole, and no other well is capable
of producing Oil and/or Gas from the Contract Area, this
agreement shall terminate unless drilling, Deepening,
Sidetracking, Completing, Recompleting, Plugging Back or
Reworking operations are commenced within _____________days
from the date of abandonment of said well. "Abandonment" for
such purposes shall mean either (i) a decision by all parties
not to conduct any further operations on the well or (ii) the
elapse of 180 days from the conduct of any operations on the
well, whichever first occurs.
The termination of this agreement shall not relieve any party hereto
from any expense, liability or other obligation or any remedy therefor which has
accrued or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all
obligations hereunder, in the event a memorandum of this Operating Agreement has
been filed of record, Operator is authorized to file of record in all necessary
recording offices a notice of termination, and each party hereto agrees to
execute such a notice of termination as to Operator's interest, upon request of
Operator, if Operator has satisfied all its financial obligations.
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. Laws, Regulations and Orders:
This agreement shall be subject to the applicable laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations and
orders.
B. Governing Law:
This agreement and all matters pertaining hereto, including but not
limited to matters of performance, non-performance, breach, remedies,
procedures, rights, duties, and interpretation or construction, shall be
governed and determined by the law of the state in which the Contract Area is
located. If the Contract Area is in two or more states, the law of the state of
Texas shall govern.
-34-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
C. Regulatory Agencies:
Nothing herein contained shall grant, or be construed to grant,
Operator the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production of
wells, on tracts offsetting or adjacent to the Contract Area.
With respect to the operations hereunder, Non-Operators agree to
release Operator from any and all losses, damages, injuries, claims and causes
of action arising out of, incident to or resulting directly or indirectly from
Operator's interpretation or application of rules, rulings, regulations or
orders of the Department of Energy or Federal Energy Regulatory Commission or
predecessor or successor agencies to the extent such interpretation or
application was made in good faith and does not constitute gross negligence.
Each Non-Operator further agrees to reimburse Operator for such Non-Operator's
share of production or any refund, fine, levy or other governmental sanction
that Operator may be required to pay as a result of such an incorrect
interpretation or application, together with interest and penalties thereon
owing by Operator as a result of such incorrect interpretation or application.
ARTICLE XV.
MISCELLANEOUS
A. Execution:
This agreement shall be binding upon each Non-Operator when this
agreement or a counterpart thereof has been executed by such Non-Operator and
Operator notwithstanding that this agreement is not then or thereafter executed
by all of the parties to which it is tendered or which are listed on Exhibit "A"
as owning an interest in the Contract Area or which own, in fact, an interest n
the Contract Area. Operator may, however, by written notice to all Non-Operators
who have become bound by this agreement as aforesaid, given at any time prior to
the actual spud date of the Initial Well terminate this agreement if Operator in
its sole discretion determines that there is insufficient participation to
justify commencement of drilling operations. In the event of such a termination
by Operator, all further obligations of the parties hereunder shall cease as of
such termination. In the event any Non-Operator has advanced or prepaid any
share of drilling or other costs hereunder, all sums so advanced shall be
returned to such Non-Operator without interest. In the event Operator proceeds
with drilling operations for the Initial Well without the execution hereof by
all persons listed on Exhibit "A" as having a current working interest in such
well, Operators shall indemnify Non-Operators with respect to all costs incurred
for the Initial Well which would have been charged to such person under this
agreement if such person had executed the same and Operator shall receive all
revenues which would have been received by such person under this agreement if
such person had executed the same.
B. Successors and Assigns:
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Contract Area.
-35-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
C. Counterparts:
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
D. Severability:
For the purposes of assuming or rejecting this agreement as an
executory contract pursuant to federal bankruptcy laws, this agreement shall not
be severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.
ARTICLE XVI.
OTHER PROVISIONS
Notwithstanding anything contained herein to the contrary:
A. Should it be necessary to conduct hearings before governmental agencies
for the securing of spacing or pooling orders, or for certifying new gas, the
costs attributable to such hearings as well as fees paid attorneys and
witnesses, shall be borne by the Drilling Parties in the proportion that the
interest of each Drilling Party bears to the total interest of all Drilling
Parties as such interests appear in Exhibit "A".
B. In addition to Article VII.C. and D., Operator shall have the right, at
its discretion, to require prepayment of all costs, including dry hole costs
completion costs, recompletion costs or costs associated with remedial work,
based on an Authority for Expenditure for any well drilled on the Contract Area.
Failure by any party to remit its proportionate part of the above referenced
prepayment to Operator in the manner within the time period requested shall be
deemed an election by such party not to participate in the cost of the proposed
operation thereafter, the proposed operation shall be conducted under Article
VI.A.2. of this Agreement.
C. The proceeds from the sale of all hydrocarbons produced, saved and sold
shall be paid to Operator by all purchasing companies purchasing such
hydrocarbons and by the execution of this Agreement, the Non-Operators covenant
and agree to save all purchasing companies harmless from any and all liability
by reason of paying any such proceeds to Operator. Further, Non-Operators
authorize and direct Operator to deduct from their proportionate share of such
sales all Lease Operating Expenses and other expenses owed to Operator provided
for under the terms of this Agreement and remit the balance from such sale to
Non-Operators.
D. This Agreement shall be construed in accordance with and governed by
the laws of the State of Texas, and all sums payable hereunder to Operator shall
be paid at P.O. Box 7698, Tyler, Texas 75711.
E. In the event that any party shall subsequently create against its
interests any additional royalty, overriding royalty, production payment, or
other burden or charge, the party which subsequently creates any such additional
burden or charge shall hold the other parties to this Agreement harmless from
such additional burdens or charges, and shall satisfy and discharge such burdens
and charges out of its own funds. As security for the performance of the
obligations created by this paragraph, the parties entitled to be held harmless
shall have a lien to secure the performance of the obligations created by this
paragraph. Such lien shall exist upon the interest to be owned by the party
charged with performing such obligation.
F. No party shall exercise any right of partition of the Contract Area or
sale thereof in lieu of partition during the term of this Agreement.
-36-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
IN WITNESSES WHEREOF, this agreement shall be effective as of the
______ day of _____________, 20___.
ATTEST OR WITNESS: OPERATOR
----------------------------------------
By
-------------------------------- ----------------------------------------
-------------------------------- ----------------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
----------------------
NON-OPERATORS
----------------------------------------
By
-------------------------------- ----------------------------------------
-------------------------------- ----------------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
-37-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
----------------------------------------
By
-------------------------------- ----------------------------------------
-------------------------------- ----------------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
Tax ID or S.S. No.
----------------------
----------------------------------------
By
-------------------------------- ----------------------------------------
-------------------------------- ----------------------------------------
Type or print name
Title
-----------------------------------
Date
-----------------------------------
-38-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
ACKNOWLEDGMENTS
Note: The following forms of acknowledgment are the short forms
approved by the Uniform Law on Notarial Acts. The validity and effect of these
forms in any state will depend upon the statutes of that state.
Individual acknowledgment:
State of ____________________)
) ss.
County of____________________)
This instrument was acknowledged before me on
________________________________________________________________________________
(Seal, if any)
Title (and Rank)________________
My commission expires:__________
Acknowledgment in representative capacity:
-39-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
State of____________________)
) ss.
County of___________________)
This instrument was acknowledged before me on
________________________________________________________________________________
_________________________________________________________________of ____________
(Seal, if any)
Title (and Rank)___________________
My commission expires:_____________
-40-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
EXHIBIT "A"
Attached to and made a part of that certain Operating Agreement dated ________,
between ____________________, as Operator, and ____________________, as
Non-Operator.
(TO BE COMPLETED AT A LATER DATE)
END OF EXHIBIT "A"
-41-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
EXHIBIT "B"
Producer's 88 - (Producer's Printed and for sale by
Revised 1972) (New Mexico) Form 342P Hall-Peerbough Prom, Roswell, N.M.
OIL & GAS LEASE
THIS AGREEMENT made this _____________ day of _____________, 19____,
between
________________________________________________________________________________
________________________________________________________________________________
____________________________________________________ of
_____________________
(Post Office Address)
herein called lessor (whether one or more) and ____________________, lessee:
1. Lessor, in consideration of TEN AND OTHER DOLLARS in hand
paid, receipt of which is here acknowledged, and of the royalties herein
provided and of the agreements of the lessor herein contained, hereby grants,
leases and lets exclusively unto lessee for the purpose of investigating,
exploring, properties, drilling, and operating for and producing oil and gas,
injecting gas, waters, other fluids, and air into subsurface strata, laying pipe
lines, storing oil, building banks, roadways, telephone lines, and other
structures and things thereon to produce, save, take care of, treat, process,
store and transport said minerals ,the following described land in
____________________ County, New Mexico, to-wit:
For the purposes of calculating the rental payments herein provided
for, said land is estimated to comprise _____________ acres, whether it actually
comprises more or less.
2. Subject to the other provisions herein contained, this lease
shall remain in force for a term of ______ years from this date (called "primary
term"), and as long thereafter as oil, gas or other mineral is produced from
said land or land with which said land is pooled.
3. The royalties to be paid by lessee are: (a) on oil, and on
other liquid hydrocarbons saved at the well, of that produced and saved from
said land, same to be delivered at the wells or to the credit of lessor in the
pipe line to which the wells may be connected; (b) on gas, including casinghead
gas or other gaseous substance produced from said land used off the premises or
used in the manufacture or gasoline or other products, the market value at the
well of _____________ of the gas used, provided that on gas sold on or off the
premises the royalty shall be _____________ of the amount realize from such
sale; (c) and at any time when this lease is not validated by other provision
thereof and there is a gas and/or condensate well on said land, or land pooled
therewith, but gas and/or condensate is not being so sold or used and such well
is shut in, either before or after production therefrom, then on or before 90
days after said well is shut in, and thereafter at annual intervals, lessee may
pay or tender an advance annual shut-in
-42-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
royalty equal to the amount of delay rentals provided for in this lease for the
acreage then held under this lease by the party making such payment or tender,
and so long as said shut-in royalty is paid or tendered this lease shall not
terminate and it will be considered under all clauses hereof that gas is being
produced from the leased premises in paying quantities. Each such payment shall
be paid or tendered to the party or parties who at the time of such payment
would be entitled to receive the royalties which would be paid under this lease
if the well were in fact producing, or be paid or tendered to the credit of such
party or parties in the depository bank and in the manner hereinafter provided
for the payment of rentals. The amount realized from the sale of gas on or off
the premises shall be the price established by the gas sales contract entered
into in good faith by Lessee and gas purchaser for such term and under such
conditions as are customary in the industry. "Price" shall mean the net amount
received by Lessee after giving effect to applicable regulatory orders and after
application of any applicable price adjustments specified in such contract or
regulation orders. In the event Lessee compresses, treats, purifies, or
dehydrates such gas (whether on or off the leased premises) or transports gas
off the leased premises, Lessee in computing royalty hereunder may deduct from
such price a reasonable charge for each of such functions performed.
4. If operations for drilling are not commenced on said land or
on land pooled therewith on or before one (1) year from this date, this lease
shall terminate as to both parties, unless on or before one (1) year from this
date lessee shall pay or tender to the lessor a rental of $____________________
which shall cover the privilege of deferring commencement of such operations for
a period of twelve (12) months. In like manner and upon like payments or
tenders, annually, the commencement of said operations may be further deferred
for successive periods of twelve (12) months each during the primary term.
Payment or tender may be made to the lessor or to the credit of the lessor in
the ____________________ Bank at ____________________, which bank, or any
successor thereof, shall continue to be the agent for the lessor and lessor's
heirs and assigns. If such bank (or any successor bank) shall fail, liquidate,
or be succeeded by another bank, or for any reason shall fail or refuse to
accept rental, lessee shall not be held in default until thirty (30) days after
lessor shall deliver to lessee a recordable instrument making provision for
another acceptable method of payment or tender, and any depository charge is a
liability of the lessor. The payment or tender of rental may be made by check or
draft of lessee, mailed or delivered to said bank or lessor, or any lessor if
more than one, on or before the rental paying date. Any timely payment or tender
of rental or shut-in royalty which is made in a bona fide attempt to make proper
payment, but which is erroneous in whole or in part as to parties, amounts, or
depositories shall nevertheless be sufficient to prevent termination of this
lease in the same manner as though a proper payment had been made; provided,
however, lessee shall correct such error within thirty (30) days after lessee
has received written notice thereof by certified mail from lessor together with
such instruments as are necessary to enable lessee to make proper payment.
5. Lessee is hereby granted the right and power, from time to
time, to pool or combine, this lease, the land covered by it or any part or
horizon thereof with any other land, lease, leases, mineral estates or parts
thereof for the production of oil or gas. Units pooled hereunder shall not
exceed the standard proration unit fixed by law or by the New Mexico Oil
Conservation Commission or by other lawful authority for the pool or area in
which said land is situated, plus a tolerance of 10%. Lessee shall file written
unit designations in the county in which the premises are located and such units
may be designated from time to time and either
-43-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
before or after the completion of wells. Drilling operations on or production
from any part of any such unit shall be considered for all purposes, except the
payment of royalty, as operations conducted upon or production from the land
described in this lease. There shall be allocated to the land covered by this
lease included in any such unit that portion of the total production of pooled
minerals from wells in the unit, after deducting any used in lease or unit
operations, which the number of surface acres in the land covered by this lease
included in the unit bears to the total number of surface acres in the unit. The
production so allocated shall be considered for all purposes, including the
payment or delivery of royalty, to be the entire production of pooled minerals
from the portion of said land covered hereby and included in said unit in the
same manner as though produced from said land under the terms of this lease. Any
pooled unit designated by lessee, as provided herein, may be dissolved by lessee
by recording an appropriate instrument in the County where the land is situated
at any time after the completion of a dry hole or the cessation of production on
said unit.
6. If prior to the discovery of oil or gas hereunder, lessee
should drill and abandon a dry hole or holes hereunder, or if after discovery of
oil or gas the production thereof should cease for any cause, this lease shall
not terminate if lessee commences working or additional drilling operations
within 60 days thereafter and diligently prosecutes the same, or (if it be
within the primary term) commences or resumes the payment or tender of rentals
or commences operations for drilling or reworking on or before the rental paying
date next ensuing after the expiration of three months from date of abandonment
of said dry hole or holes or the cessation of production. If at the expiration
of the primary term oil or gas is not being lessee is then engaged in operations
for drilling or reworking of any well, this lease shall remain in force so long
as such operations are diligently prosecuted with no Cessation of more than 60
consecutive days. If during the drilling or reworking of any well under this
paragraph, lessee loses or junks the hole or well and after diligent efforts in
good faith is unable to complete said operations then within 30 days after the
abandonment of said operations lessee may commence another well and drill the
same with due diligence. If any drilling, additional drilling, or reworking
operations hereunder result in production, then this lease shall remain in full
force so long thereafter as oil or gas is produced hereunder.
7. Lessee shall have free use of oil, gas and water from said
land, except water from lessor's wells and tanks, for all operations hereunder,
and the royalty shall be computed after deducting any so used. Lessee shall have
the right at any time during or after the expiration of this lease to remove all
property and fixtures placed by lessee on said land, including the right to draw
and remove all casing. When required by lessor, lessee will bury all pipe lines
on cultivated lands below ordinary plow depth, and no well shall be drilled
within two hundred feet (200 ft.) of any residence or bam now on said land
without lessor's consent. Lessor shall have the privilege, at his risk and
expense, of using gas from any gas well on said land for stoves and inside
lights in the principal dwelling thereon, out of any surplus gas not needed for
operations hereunder.
8. The rights of either party hereunder may be assigned in whole
or in part and the provisions hereof shall extend to the heirs, executors,
administrators, successors and assigns; but no change or division in the
ownership of the land, or in the ownership of or right to receive rentals,
royalties or payments, however accomplished shall operate to enlarge the
obligations or diminish the rights of lessee; and no such change or division
shall be binding upon lessee for any
-44-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
purpose until 30 days after lessee has been furnished by certified mail at
lessee's principal place of business with acceptable instruments or certified
copies thereof constituting the chain of title from the original lessor. If any
such change in ownership occurs through the death of the owner, lessee may pay
or tender any rentals, royalties or payments to the credit of the deceased or
his estate in the depository bank until such time as lessee has been furnished
with evidence satisfactory to lessee as to the persons entitled to such sums. In
the event of an assignment of this lease as to a segregated portion of said
land, the rentals payable hereunder shall be apportioned as between the several
leasehold owners ratably according to the surface area of each, and default in
rental payment by one shall not affect the rights of other leasehold owners
hereunder. An assignment of this lease, in whole or in part, shall, to the
extent of such assignment, relieve and discharge lessee of any obligations
hereunder, and, if lessee or assignee of part or parts hereof shall fail to make
default in the payment of the proportionate part of the rentals due from such
lessee or assignee or fail to comply with any other provision of such lease,
such default shall not affect this lease in so far as it covers a part of said
lands upon which lessee or any assignee thereof shall so comply or make such
payments. Rentals as used in this paragraph shall also include shut-in royalty.
9. Should lessee be prevented from complying with any express or
implied covenant of this lease, or from conducting drilling or reworking
operations hereunder, or from producing oil or gas hereunder by reason of
scarcity or inability to obtain or use equipment or material, or by operation of
force majeure, or by any Federal or state law or any order, rule or regulation
of governmental authority, then while so prevented, lessee's duty shall be
suspended, and lessee shall not be liable for failure to comply therewith; and
this lease shall be extended while and so long as lessee is prevented by any
such cause from conducting drilling or reworking operations on or from producing
oil or gas hereunder; and the time while lessee is so prevented shall not be
counted against lessee, anything in this lease to the contrary notwithstanding.
10. Lessor hereby warrants and agrees to defend the title to said
land, and agrees that lessee, at its option, may discharge any tax, mortgage, or
other lien upon said land, and in the event lessee does so, it shall be
subrogated to such lien with the right to enforce same and apply rentals and
royalties accruing hereunder toward satisfying same. Without impairment of
lessee's rights under the warranty, if this lease covers a less interest in the
oil or gas in all or any part of said land than the entire and undivided fee
simple estate (whether lessor's interest is herein specified or not) then the
royalties, shut-in royalty, rental, and other payments, if any, securing from
any part as to which this lease covers less than such full interest, shall be
paid only in the proportion which the interest therein, if any, covered by this
lease, bears to the whole and undivided fee simple estate therein. Should any
one or more of the parties named above as lessors fail to execute this lease, it
shall nevertheless be binding upon the party or parties executing the same.
11. Lessee, its/his successors, heirs and assigns, shall have the
right at any time to surrender this lease, in whole or in part, to lessor or his
heirs, successors, and assigns by delivering or mailing a release thereof to the
lessor, or by placing a release thereof of record in the county in which said
land is situated; thereupon lessee shall be relieved from all obligations,
expressed or implied, of this agreement as to acreage so surrendered, and
thereafter the rentals and shut-in royalty payable hereunder shall be reduced in
the proportion that the acreage covered hereby is reduced by said release or
releases.
Executed the day and year first above written.
-45-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
EXHIBIT "C"
Attached to and made a part of that certain Operating Agreement dated
_____________, ______, between ____________________, as Operator and
____________________, as Non-Operators.
ACCOUNTING PROCEDURE
I. General Provisions
1. Definitions
"Property" shall mean the real and personal property subject to the
Agreement to which this Accounting Procedure is attached.
"Operations" shall mean any and all operations and activities necessary
or proper for the acquisition, development, operation, protection and
maintenance of the Property and the Affiliated Program.
"Joint Account" shall mean the account showing the charges and credits
accruing because of the Operations and which are to be shared by the
Parties according to their pro rata interests.
"Operator" shall mean the Party designated to conduct the Operations.
"Non-Operators" shall mean the Parties other than the Operator.
"Parties" shall mean Operator and Non-Operators.
"First-level supervisors" shall mean those employees whose primary
function in Operations is the direct supervision of other employees,
service companies, drilling rigs, contract labor, and other personnel
directly employed on the Property in a field operating capacity.
"Technical Employees" shall mean those employees having special
drilling, engineering, geological, production or other professional
skills, and whose primary function in Operations is the handling of
specific operating conditions and problems for the benefit of the
Property.
"Personal Expenses" shall mean travel, meals, lodging, and other
reasonable reimbursable expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired
or held for use on the Property.
"Controllable Material" shall be defined as Material which is
ordinarily so classified and controlled by Operator in the conduct of
its Operations.
-46-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
2. Statement and Billings
Operator shall bill Non-Operators on or before the last day of each
month for their proportionate share of costs and expenses for the
preceding month. Such bills will be accompanied by statements of all
charges and credits to the Joint Account, summarized by appropriate
classifications indicative of the nature thereof.
3. Advances and Payments by Administrators
A. Unless otherwise provided for in the Agreement, the Operator
may require the Non-Operators to advance their share of
estimated cash outlay for the succeeding month's operation
within fifteen (15) days after receipt of the billing or by
the first day of the month for which the advance is required,
whichever is later. Operator shall adjust each monthly billing
to reflect advances received from the Non-Operators.
B. Each Non-Operator shall pay to Operator in Smith County, Texas
its proportion of all bills within fifteen (15) days after
receipt. If payment is not made within such time, the unpaid
balance shall bear interest monthly at a rate of one and
one-half percent (l-1/2%) per month or the maximum contract
rate permitted by the applicable usury laws in the state in
which the Property is located, whichever is the lesser, plus
attorney's fees, court costs, and other costs in connection
with the collection of unpaid amounts.
4. Adjustments
Payment of any such bills shall not prejudice the right of any
Non-Operator to protest or question the correctness thereof; provided
however, all bills and statements rendered to Non-Operators by Operator
during any calendar year shall conclusively be presumed to be true and
correct after twenty-four (24) months following the end of any such
calendar year, unless within the said twenty-four (24) month period a
Non-Operator takes written exception thereto and makes claim on
Operator for adjustment. No adjustment favorable to Operator shall be
made unless it is made within the same prescribed period. The
provisions of this paragraph shall not prevent adjustments resulting
from a physical inventory of Controllable Material as provided for in
Section V.
5. Audits
A. A Non-Operator, upon notice in writing to Operator and all
other Non-Operators, shall have the right to audit Operator's
accounts and records relating to the Joint Account for any
calendar year within the twenty-four (24) month period
following the end of such calendar year; provided, however,
the making of an audit shall not extend the time for the
taking of written exception to and the adjustment of accounts
as provided for in Paragraph 4 of this Section I. Where there
are two or more Non-Operators, the Non-Operators shall make
every reasonable effort to conduct a joint audit in a manner
which will result in a minimum of inconvenience to the
Operator. Operator shall bear no portion of the Non-Operator's
audit cost incurred under this paragraph. The audits shall not
be
-47-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
conducted more than once each year without prior approval of
Operator, except upon the resignation or removal of the
Operator, and shall be made at the expense of those
Non-Operators approving such audit.
B. The Operator shall reply in writing to an audit report within
180 days after receipt of such report.
6. Approval by Non-Operators
Where an approval or other agreement of Non-Operators is expressly
required under other sections of this Accounting Procedure and if the
agreement to which this Accounting Procedure is attached contains no
contrary provisions in regard thereto, Operator shall notify all
Non-Operators of the Operator's proposal and the agreement or approval
of a majority in interest of the Non-Operators shall be controlling on
all Non-Operators.
II. Direct Charges
Operator shall charge the Joint Account with the following items:
1. Ecological and Environmental
Costs incurred for the benefit of the Property as a result of
governmental or regulatory requirements to satisfy environmental
considerations applicable to the Operations. Such costs may include
surveys of an ecological or archaeological nature and pollution control
procedures as required by applicable laws and regulations.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Operations.
3. Labor
Salaries, wages, benefits and related expenses shall be charged an a day-rate
basis (recomputed within a reasonable periodic time period) for:
A. (1) Operator's employees directly employed on the
Property in the conduct of Operations.
(2) First-level supervisors in the field.
(3) Technical employees directly employed on the
Property.
(4) Technical employees either temporarily or permanently
assigned to and directly employed in the Operations
of the Property.
B. Operator's cost of holiday, vacation, sickness and disability
benefits and other customary allowances paid to the employees
whose salaries and wages are chargeable to the Joint Account
under Paragraph 3A of this Section II. Cost
-48-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
under this Paragraph 3B may be charged on a "when and as paid
basis" or by "percentage assessment" on the amount of salaries
and wages chargeable to the Joint Account under Paragraph 3A
of this Section II. If percentage assessment is used, the rate
shall be based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments
imposed by governmental authority which are applicable to
Operator's labor cost of salaries and wages chargeable to the
Joint Account under Paragraphs 3A of this Section II.
D. Personal expenses of those employees whose salaries and wages
are chargeable to the Joint Account under Paragraph 3A of this
Section II.
E. Operator's current costs of established plans for employees'
group life insurance, hospitalization, pension, retirement,
stock purchase, thrift, bonus, and other benefit plans of a
like nature, applicable to Operator's labor cost chargeable to
the Joint Account under Paragraphs 3A of this Section II shall
be Operator's actual cost not to exceed the percent most
recently recommended by the Council of Petroleum Accountants
Societies.
4. Material
Material purchased or furnished by Operator for use on the Property as
provided under Section IV. Only such Material shall be purchased for or
transferred to the Property as may be required for immediate use and is
reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
5. Transportation
Transportation of employees and Material necessary for the Operations,
not previously charged as a part of day-rate basis.
6. Services
The cost of contract services and utilities procured from outside
sources including without limitation auditing and taxation services,
engineering consultant services including engineers, geologists and
landmen, and services in connection with matters before or involving
government agencies or regulatory bodies.
7. Equipment and Facilities Furnished by Operator
A. Operator shall charge the Joint Account for use of Operator
owned equipment and facilities at rates commensurate with
costs of ownership and operation. Such rates shall include
costs of maintenance, repairs, other operating expense,
insurance, taxes, depreciation, and interest on gross
investment less accumulated depreciation not to exceed twelve
percent (12%) per annum. Such rates shall not exceed average
commercial rates currently prevailing in the immediate area of
the Property.
-49-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
B. In lieu of charges in Paragraph 7A above, Operator may elect
to use average commercial rates prevailing in the immediate
area of the Property. For automotive equipment, Operator may
elect to use rates published by the Petroleum Motor Transport
Association.
8. Damages and Losses to Property
All costs or expenses necessary for the repair or replacement of
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting
from Operator's gross negligence or willful misconduct. Operator shall
furnish Non-Operators written notice of damages or losses incurred as
soon as practicable after a report thereof has been received by
Operator.
9. Legal Expense
All costs and expenses of handling, investigating, and settling
litigation or claims arising by reason of the Operations or necessary
to protect or recover the Property, including, but not limited to,
attorney's fees, court costs, cost of investigation or procuring
evidence and amounts paid in settlement or satisfaction of any such
litigation or claims. All costs and expenses necessary for title work,
division order title opinions, transfer orders, deeds, assignments and
conveyances which affect title to the oil and gas estate. All costs and
expenses related to curative matters and representation before
regulatory or governmental agencies.
10. Taxes
All taxes of every kind and nature assessed or levied upon or in
connection with the Property, the operation thereof, or the production
therefrom, and which taxes have been paid by the Operator for the
benefit of the Parties. If the ad valorem taxes are based in whole or
in part upon separate valuations of each party's working interest, then
notwithstanding anything to the contrary herein, charges to the Joint
Account shall be made and paid by the Parties hereto in accordance with
the tax value generated by each party's working interest.
11. Insurance
Net premiums paid for insurance provided for the Operations for the
projection of the Parties. In the event Operations are conducted in a
state in which Operator may act as self-insurer for Worker's
Compensation and/or Employer's Liability under the respective state's
laws, Operator may, at its election, include the risk under its
self-insurance program and in that event, Operator shall include a
charge at Operator's cost not to exceed manual rates.
12. Abandonment and Reclamation
Costs incurred for abandonment of the Property, including costs
required by governmental or other regulatory authority.
13. Communications
-50-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave
facilities directly serving the Property. In the event communication
facilities/systems serving the Property are Operator owned, charges to
the Joint Account shall be made as provided in Paragraph 7 of this
Section II.
14. Additional Services
The cost of all additional services provided by the Operator or by
third parties relating to the Operations, whether direct or indirect,
including without limitation accounting, engineering, land and
administrative services. Such charges to the Joint Account will include
without limitation salaries and benefits of Operator's personnel;
automotive and travel; office rental; utilities; the cost of
furnishing, maintaining, operating or otherwise securing the use of
office equipment, furniture, machines, computers, and other physical
equipment and facilities; Amounts paid to outside parties for
additional services; an allocable part of General and Administrative
Expenses and other indirect cost and all other cost and expense related
to the performance of these additional services.
15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing
provisions of this Section II or in Section III, and which is incurred
by the Operator for the necessary and proper conduct of the Operations.
III. Indirect Charges
1. Overhead - Drilling and Producing Operations
Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
Drilling Well Rate: $7,420.00
Producing Well Rate: $ 780.00
(2) Application of Overhead - Fixed Rate Basis shall be as
follows:
(a) Drilling Well Rate
1) Charges for onshore drilling wells shall
begin on the date well is spudded and
terminate on the date of completion or
abandonment.
2) Charges for wells undergoing any type of
workover or recompletion for a period of
five (5) consecutive workdays or more shall
be made at the drilling well rate. Such
charges shall be applied for the period from
date workover operations, with rig, commence
through date of rig release, except that no
charge shall
-51-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
be made during suspension of operations for
fifteen (15) or more consecutive days.
(b) Producing Well Rates
1) An active well either produced or injected
into for any portion of the month shall be
considered as a one-well charge for the
entire month.
2) Each active completion in a multi-completed
well in which production is not commingled
down hole shall be considered as a one-well
charge providing each completion is
considered a separate well by the governing
regulatory authority.
3) An inactive gas well shut in because of
overproduction or failure of purchaser to
take the production shall be considered as a
one-well charge providing the gas well is
directly connected to a permanent sales
outlet.
4) A one-well charge may be made for the month
in which plugging and abandonment operations
are completed on any well.
5) Each facility serving the Operations other
than a well shall count as a well for this
purpose, such as compressor or dehydration
facilities, or other facilities for
producing (including secondary recovery)
operations or for treating, handling or
marketing production.
6) All other inactive wells (including but not
limited to inactive wells covered by unit
allowable, ____________________ lease
allowable, transferred allowable, etc.)
shall not qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of April,
2001, and each year on the first day of April thereafter. The
adjustment shall be computed by multiplying the rate currently
in use by the percentage increase or decrease in the average
weekly earnings of Crude Petroleum and Gas Production Workers
for the last calendar year compared to the calendar year
preceding as show by the index of average weekly earnings of
Crude Petroleum and Gas Fields Production Workers as published
by the United States Department of Labor, Bureau of Labor
Statistics, or the equivalent Canadian index as published by
Statistics Canada, as applicable. The adjusted rates shall be
the rates currently in use, plus or minus the computed
adjustment.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction
and installation of fixed assets, the expansion of fixed assets, and
any other project clearly discernible as
-52-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
a fixed asset required for the development and operation of the
Property, Operator shall either negotiate a rate prior to the beginning
of construction, or shall charge the Joint Account for overhead based
on the following rates for any Major Construction project in excess of
$25,000.
A. Five percent (5%) of first $100,000 or total cost if less;
plus
B. Three percent (3%) of costs in excess of $100,000 but less
than $1,000,000; plus
C. Two percent (2%) of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the
purpose of this paragraph, the component parts of a single project
shall not be treated separately and the cost of drilling and workover
wells and artificial lift equipment shall be excluded.
3. Catastrophe Overhead
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill,
blowout, explosion, fire, storm, hurricane, or other catastrophes as
agreed to by the Parties, which are necessary to restore the Property
to the equivalent condition that existed prior to the event causing the
expenditures, Operator shall either negotiate a rate prior to charging
the Joint Account or shall charge the Joint Account for overhead based
on the following rates:
A. Five percent (5%) of total costs through $100,000; plus
B. Three percent (3%) of costs in excess of $100,000 but less
than $1,000,000; plus
C. Two percent (2%) of costs in excess of $1,000,000.
Expenditures subject to the overheads above will not be reduced by
insurance recoveries, and no other overhead provisions of this Section
III shall apply.
4. Prospect Screening and Evaluation
The General and Administrative Expenses incurred by the Operator in the
screening, evaluation and acquisition of Prospects. Such charge shall
be based on an allocation system which is in accordance with generally
accepted accounting principles.
5. General and Administrative Expense
Operator shall charge the Non-Operators for General and Administrative
Expenses allocated to the Program or Partnership in accordance with
generally accepted accounting principles.
6. Amendment of Rates
-53-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
The Overhead rates provided for in this Section III may be amended from
time to time only by mutual agreement between the Parties hereto if, in
practice, the rates are found to be insufficient or excessive.
IV. Pricing of Joint Account Material -
Purchases, Transfers and Dispositions
Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Property.
Operator shall provide all Material for use on the Property; however, at
Operator's option, such Material may be supplied by the Non-Operator. Operator
shall make timely disposition of idle and/or surplus Material, such disposal
being made either through sale to Operator or Non-Operator, division in kind, or
sale to outsiders. Operator may purchase, but shall be under no obligation to
purchase, the interest of Non-Operators in surplus Material. The disposal of
surplus Controllable Material not purchased by the Operator shall be for the
highest price offered and where possible Operator shall obtain bids from two or
more parties.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
_____________ deduction of all discounts received. In case of Material
found to be defective or returned to vendor for any other reasons,
credit shall be passed to the Joint Account when adjustment has been
received by the Operator.
2. Transfers and Dispositions
Material furnished to the Property and Material transferred from the
Property or disposed of by the Operator, unless otherwise agreed to by
the Parties, shall be priced on the following basis exclusive of cash
discounts:
A. New Material (Condition "A")
Material shall be priced at the current replacement cost of
the same kind of Material, effective at date of movement.
B. Good Used Material (Condition "B")
Material in sound and serviceable condition and suitable for
reuse without reconditioning:
(1) Material moved to the Property
At seventy-five percent (75%) of current new price,
as determined by Paragraph A.
(2) Material used on and moved from the Property
-54-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
(a) At seventy-five percent (75%) of current new
price, as determined by Paragraph A, if
Material was originally charged to the Joint
Account as new Material or
(b) At sixty-five percent (65%) of current now
price, as determined by Paragraph A, if
Material was originally charged to the Joint
Account as used Material.
(3) Material not used on and moved from the Property
At seventy-five percent (75%) of current now price as
determined by Paragraph A.
The cost of reconditioning, if any, shall be absorbed
by the transferring property.
C. Other Used Material
(1) Condition "C"
Material which is not in sound and serviceable
condition and not suitable for its original function
until after reconditioning shall be priced at fifty
percent (50%) of current new price as determined by
Paragraph A. The cost of reconditioning shall be
charged to the receiving property, provided Condition
"C" value plus cost of reconditioning does not exceed
Condition "B" value.
(2) Condition "D"
Material, excluding junk, no longer suitable for its
original purpose, but usable for some other purpose
shall be priced on a basis commensurate with its use.
Operator may dispose of Condition "D" Material under
procedures normally used by Operator without prior
approval of Non-Operators.
(3) Condition "E"
Junk shall be priced at prevailing prices. Operator
may dispose of Condition "E" Material under
procedures normally utilized by operator without
prior approval of Non-Operators.
D. Obsolete Material
Material is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that which
would justify a price provided above may be specifically priced as
agreed to by the Parties. Such price should result in the Joint Account
being charged with the value of the service rendered by such Material.
3. Warranty of Material Furnished by Operator
-55-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until
adjustment has been received by Operator from the manufacturers or
their agents.
V. Inventories
The Operator shall maintain detailed records of Controllable Material. At
reasonable intervals, inventories shall be taken by the Operator. Adjustments
resulting from the reconciliation of a physical inventory shall be made within
six months following the taking of the inventory. Special inventories may be
taken by the Non-Operators at their expense in accordance with Paragraph 5 of
Section I.
-56-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
EXHIBIT "D"
Attached to and made a part of that certain Operating Agreement dated
_____________, between ____________________, as Operator, and
____________________, et al, as Non-Operator.
INSURANCE
At all times during the conduct of operations hereunder, Operator shall maintain
in force the following insurance, at the expense of and for the benefit of the
joint account:
1. Workmen's Compensation Insurance
A. Statutory Workmen's Compensation coverage to include all areas
involved in operations covered under this contract.
B. Employers liability with a limit of $500,000 each accident.
2. Comprehensive General Liability Insurance (CGL)
A. Standard Comprehensive General, conditions including coverage
for products/completed operations.
B. Contractual Liability insuring contracts between Mewbourne Oil
Company and their contractors; covering assumed tort
liability.
C. Limits of Liability:
General Aggregate Limit $2,000,000
Products and Completed Operations Aggregate Limit $1,000,000
Personal and Advertising Injury Limit $1,000,000
Each Occurrence Limit $1,000,000
3. Aircraft and Automobile Liability Insurance
A. Standard Comprehensive form including all owned, non-owned and
hired automobile equipment.
B. Limits of Liability: $1,000,000
Combined Single Limit
C. If the Operator will use Owned, Hired or Non-owned Aircraft:
Aircraft Public Liability Insurance $25,000,000
-57-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
Combined Single Limit
4. Contractors and Subcontractors
Operator agrees to use its best efforts to assure that its contractors
and subcontractors also comply with the insurance requirements listed
in paragraphs 1-3 above and that certain contractors and subcontractors
engaged in higher risk activities carry appropriate insurance coverage.
5. Umbrella Policy
In addition to paragraphs 1-3 above, Operator also carries $50,000,000
in Excess Umbrella Liability policies.
6. Operator's Extra Expense Insurance
Operator will carry Operator's Extra Expense Insurance covering costs
of well control, clean up, and redrilling, with a limit per occurrence
of $3,000,000 for well depths of 1-10,000' and $10,000,000 for well
depths over 10,000'.
7. Additional Insurance
In addition to the above referenced types of insurance coverage,
Operator may, but is not required to, carry additional types of
insurance coverage including, but not limited to, various types of
additional excess umbrella liability, public property damage, oil lease
property, pollution or contamination, or similar coverage. The actual
premiums paid for all insurance shall be charged on a pro-rata basis to
the Joint account of the parties hereto.
8. Other Provisions
Any liability, loss, damage claim or expense resulting from accidents
or occurrences not covered by insurance of the character referred to
above or in excess of the insurance actually carried under the above
provisions, shall be borne by the parties hereto in the proportions in
which they own in the unit area. In the event Operator is unable to
procure and maintain any of the insurance enumerated above, Operator
shall promptly give written notice thereof to the other parties and in
such event, resulting loss, damage, claim and expense shall be borne by
the parties hereto proportion to their respective interests in the unit
area. Such notice shall also constitute a waiver of the requirement
that Operator procure and maintain the insurance which is the subject
of notice.
-58-
A.A.P.L. FORM 610-MODEL FORM OPERATING AGREEMENT - 1989
EXHIBIT "E"
ATTACHED to that certain Operating Agreement dated ____________________, between
____________________ as Operator, and ____________________, as Non-Operator.
GAS BALANCING AGREEMENT
FOR GAS WELL PRODUCTION
DURING the period or periods when any party hereto has no market for,
or its purchaser is unable to take or if any party fails to take its share of
gas, the other parties shall be entitled to produce each month one hundred
percent of the allowable gas production assigned to the Unit Area by the
appropriate governmental entity having jurisdiction, and each of such parties
shall have the right to take all or any part of its prorata share. All parties
hereto shall share in and own the condensate recovered at the surface in
accordance with their respective interest, but each party taking such gas shall
own all of the gas delivered to its purchaser. Each party unable to market its
share of the gas produced shall be credited with gas in storage equal to its
share of the gas produced, less its share of gas used in lease operations,
vented or lost. Operator shall maintain a current account of the gas balance
between the parties and shall furnish all parties hereto monthly statements
showing the total quantity of gas produced, used in lease operations, vented or
lost, and the total quantity of condensate recovered.
AFTER notice to Operator, any party may begin taking or delivering its
share of the gas produced. In addition to its share, each party, until it has
recovered its gas in storage and balanced its gas account, shall be entitled to
take or deliver a volume of gas equal to fifty (50%) percent of each
overproduced party's share of gas produced. If more than one party is entitled
to the additional gas produced, they shall divide such additional gas in
accordance with Unit participation.
IN, the event production of gas permanently ceases prior to the time
that the accounts of the parties have been balanced, a complete balancing shall
be accomplished by a money settlement. Such settlement shall be based on the
price or prices received by each over-produced party, less taxes, for its share
of the overproduced gas, without interest.
AT all times while gas is produced from the Unit Area, each party shall
make appropriate settlement of all royalties, overriding royalty interest, and
other payments out of or in lieu of production for which it is responsible, as
if each party were taking or delivering to a purchaser its share, and its share
only, of such gas production. Each party hereto agrees to hold each other party
harmless from any and all claims for royalty payments asserted by royalty owners
to whom each party is accountable.
THE provisions of this agreement shall be separately applicable to each
reservoir to the end that production from one reservoir in a gas well may not be
utilized for the purpose of balancing underproduction from other reservoirs.
END EXHIBIT "E"
-59-
↑Top
Filing Submission 0000950134-04-003005 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)
Copyright © 2024 Fran Finnegan & Company LLC – All Rights Reserved.
About — Privacy — Redactions — Help —
Wed., May 1, 5:23:44.1am ET