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EXHIBIT 2.3
PRODUCTION AND DELIVERY AGREEMENT
between
▇▇▇▇▇▇▇ OIL OF MICHIGAN, INC.
"Grantor"
and
KCS ENERGY MARKETING, INC.
"Grantee"
Dated as of
November 30, 1995
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TABLE OF CONTENTS
Page
----
1. Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2. Taking In Kind: Marketing. . . . . . . . . . . . . . . . . . . . . . . . . . 2
3. Gathering and Transportation . . . . . . . . . . . . . . . . . . . . . . . . 3
4. Rates of Production; Balancing . . . . . . . . . . . . . . . . . . . . . . . 3
5. Scheduling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
6. Quality Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
7. Pressure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
8. Operation of Subject Interests . . . . . . . . . . . . . . . . . . . . . . . 5
9. Development Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
10. Insurance: Damage or Loss . . . . . . . . . . . . . . . . . . . . . . . . . 7
11. Abandonment of ▇▇▇▇▇ . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
12. Drilling of Replacement ▇▇▇▇▇ . . . . . . . . . . . . . . . . . . . . . . . 9
13. Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
14. Access to Subject Interests . . . . . . . . . . . . . . . . . . . . . . . . 12
15. Remedies of Grantee: Mortgage and Security Interest . . . . . . . . . . . . 12
16. Force Majeure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
17. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
18. Indemnity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
19. Successors and Assigns . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
20. Damages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
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21. Cost of Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
22. Entire Agreement: Amendments: Waiver . . . . . . . . . . . . . . . . . . . . 16
23. Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
24. Counterpart Execution . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
25. Partial Invalidity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
26. Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EXHIBITS:
Exhibit A -- Subject Interests and Permitted Encumbrances
SCHEDULES:
Schedule 1 -- Development Activities
Schedule 2 -- Insurance Requirements
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PRODUCTION AND DELIVERY AGREEMENT
This Production and Delivery Agreement (as the same may be amended,
modified, supplemented or restated from time to time, this "Agreement") is made
and entered into as of the 30th day of November, 1995 by and between ▇▇▇▇▇▇▇
OIL OF MICHIGAN, INC., a Delaware corporation ("Grantor"), and KCS ENERGY
MARKETING, INC., a New Jersey corporation ("Grantee").
WHEREAS, pursuant to the Purchase and Sale Agreement dated as of
November 30, 1995, by and between Grantor and Grantee (as the same may be
amended, modified, supplemented or restated from time to time, the "Purchase
Agreement"), and by Conveyance of Production Payment of even date herewith,
from Grantor to Grantee (as the same may be amended, modified, supplemented or
restated from time to time, the "Conveyance"), Grantee has purchased and
acquired from Grantor and Grantor has sold and conveyed to Grantee, a
Production Payment in the Subject Interests which are described in Exhibit A to
the Conveyance.
NOW, THEREFORE, as a material inducement to cause Grantee to purchase
the Production Payment and in consideration of the mutual benefits and
obligations of the parties hereunder, Grantee and Grantor have agreed, and
hereby agree, as follows:
1. Definitions. (a) As used herein, each of the following terms
shall have the meaning set forth below for such term, except as otherwise
expressly provided in this Agreement:
"Affiliate" means any entity which either directly or
indirectly controls or manages, is controlled or managed by or is under common
control or management with the relevant party. For purposes hereof, "control"
means the possession, directly or indirectly, of the right or power to direct
the policies of another through contract, stock ownership, voting rights or
otherwise.
"Development Activities" means those activities listed on
Schedule 1 attached hereto as to one or more of the Subject Interests and shall
include the drilling, completion and equipping of ▇▇▇▇▇ and the construction
and installation of Facilities.
"Gas Purchase Contract" means the Gas Purchase Agreement to be
executed by and between Grantor and Grantee pursuant to the Purchase Agreement,
as the same may be amended, modified, supplemented or restated from time to
time.
"Obligations" means all outstanding obligations of Grantor
under this Agreement and under the Purchase Agreement.
(b) Each capitalized term defined in the Purchase
Agreement and used in this Agreement without definition shall have the meaning
assigned to such term in the Purchase Agreement, unless expressly provided to
the contrary in this Agreement.
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2. Taking In Kind: Marketing.
(a) The Production Payment Hydrocarbons shall be
delivered (subject to the last sentence of Section 1.07 of the Conveyance) to
Grantee in kind or to the credit of Grantee, free of cost, into the facilities
of (a) with respect to Production Payment Gas, the First Transporter at the
relevant Delivery Point and (b) with respect to Production Payment Oil, the
purchaser of such Oil at the relevant Delivery Point, or at such other location
at or near the wellhead that is acceptable to and approved by Grantee.
(b) Grantor agrees that during the term of the Production
Payment, it shall deliver Production Payment Hydrocarbons to Grantee in
accordance with the terms and provisions of the Conveyance and shall not enter
into any new Gas sales contract or amend or renegotiate any existing Gas sales
contract in a manner which is inconsistent with the gas delivery obligations
set forth in the Gas Purchase Contract, unless previously agreed to by Grantee
following Grantor's requests made from time to time. Except for those
agreements listed as Permitted Encumbrances, each Oil sales agreement executed
by Grantor shall be made expressly subject to Grantee's rights pursuant to the
Conveyance to take in kind its share of Oil actually produced.
(c) With respect to Production Payment Gas which is on
the date of execution of the Conveyance dedicated and subject to the terms and
provisions of an existing Gas sales agreement listed as Permitted Encumbrances,
Grantor and Grantee shall jointly advise the purchasers of such Gas of the
existence of the Conveyance and Grantee's interests in the Production Payment
Gas and shall instruct the purchaser to honor and abide by payment instructions
which may be issued by Grantee from time to time. To the extent permitted by
the terms of each existing Gas sales agreement and insofar as the Production
Payment Gas is affected thereby, Grantor shall assign to Grantee a proportional
interest in each such sales agreement or contract, with full rights to give
notices as a party seller therein, including, but not limited to, rights to
receive, issue, approve or reject gas pricing elections or notices provided for
in each such agreement. Grantee shall enforce the terms and provisions of each
such existing Gas sales agreement in good faith and as would a prudent
operator, for the mutual benefit of Grantor and Grantee.
(d) All Production Payment Oil marketed by Grantor on
behalf of Grantee, if any, shall be sold pursuant to arm's length contracts
with parties not affiliated with Grantor, and shall contain terms negotiated by
Grantor as a prudent operator. Any such sale of Production Payment Oil from
the Subject Interests by Grantor shall always be subject to the right of
Grantee, upon notice to Grantor, to take in kind and separately dispose of all
or any portion of Production Payment Oil which is deliverable to Grantee
pursuant to the Conveyance and shall not in any event exceed six (6) months.
(e) All proceeds received by Grantor from the sale of
Production Payment Hydrocarbons sold on behalf of Grantee pursuant to Gas or
Oil sales agreements executed or administered by Grantor shall be held in trust
by Grantor for Grantee; provided, however,
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Grantor shall pay such proceeds to Grantee immediately upon Grantee's request,
in the manner and to the account(s) or financial institution(s) designated by
Grantee from time to time. Grantor will diligently enforce the terms of all
sale agreements under which Production Payment Hydrocarbons are sold on behalf
of Grantee, including, without limitation, full and prompt payment of all
amounts due from such sales. In the event of any late payment by any
purchaser, Grantor shall remit to Grantee any interest or penalties collected
by Grantor with respect to the sale of Production Payment Hydrocarbons.
Grantee shall have the right at any time Grantee considers necessary or
advisable to direct the purchasers of any Production Payment Hydrocarbons to
pay the proceeds thereof directly to Grantee by delivering to such purchasers a
letter in lieu of transfer order. In the event Grantee requests direct
payment, Grantor will cooperate in instructing the purchaser(s) to pay such
proceeds directly to Grantee and shall execute such additional instruments as
may be necessary or appropriate to allow such payment. In the event any
Production Payment Hydrocarbons are sold by Grantor, on behalf of Grantee,
under the terms of any agreement between Grantor and Grantee or any of its
Affiliates, Grantee shall at all times be entitled to retain the proceeds of
such sale or to receive direct payment from its Affiliate.
3. Gathering and Transportation. Grantor, at its sole cost and
expense, shall gather or cause to be gathered all Production Payment
Hydrocarbons at the wellheads where produced and transport the same to the
Delivery Points, without any charge or deduction to Grantee for costs, if any,
attributable to preparing and delivering same to the Delivery Points. As
between Grantor and Grantee, Grantor shall be in exclusive control and
possession of the Production Payment Hydrocarbons gathered at the wellheads and
responsible for any loss, damage or injury caused thereby until the same shall
have been delivered to Grantee, or to Grantee's credit, at the Delivery Points.
4. Rates of Production; Balancing.
(a) Grantor shall prudently operate and produce the
Leases and the ▇▇▇▇▇ in accordance with good engineering practices and in
accordance with orders or field rules (if any) established by governmental
authorities having or asserting jurisdiction, and subject to the following
additional requirements: (i) the amount of Hydrocarbons produced from any Well
shall not exceed in any Month the lesser of (x) the amount that the Well is
capable of producing at its maximum efficient rate of flow or (y) the allowable
rate of flow under applicable orders, rules, regulations or laws, if any; and
(ii) the amount of Hydrocarbons produced from the ▇▇▇▇▇ shall be sufficient to
prevent a net migration of Hydrocarbons from the reservoirs underlying the
Subject Interests to other lands or leases not subject to this Agreement or the
Conveyance.
(b) Subject to the provisions of Section 4(a) above,
Grantor shall use its best efforts to cause the Leases to produce each Month a
sufficient quantity of Hydrocarbons to allow Grantee to recover the Scheduled
Amount of Production Payment Hydrocarbons for each Month during the term of the
Conveyance.
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(c) During the term of the Conveyance, Grantor shall take
all appropriate and necessary steps to nominate and deliver at the wellhead of
each Well Grantor's proportionate share of Gas and Oil producible from such
Well and use its reasonable efforts to keep Grantor's deliveries of Gas from
each Lease and Well substantially in balance (plus or minus ten percent (10%)
of Grantor's gross entitlement) during each calendar quarter, in accordance
with applicable operating and gas balancing agreements. In the event one or
more co-owners in the ▇▇▇▇▇ fails to nominate or market its proportionate share
of Gas from any Well, Grantor agrees that, to the extent it has the legal right
and ability to do so, it shall reduce (or cause to be reduced) the total flow
of Gas from such Well, to the extent consistent with prudent operations
(without regard to the Production Payment), such that Grantor's resulting net
share or entitlement of Gas does not exceed, on a volumetric basis, Grantor's
share of production had all owners in such well nominated or marketed their
respective entitlements.
(d) Grantor recognizes that quantities of Gas delivered
by Grantor in excess of those required to satisfy the Production Payment and
not currently subject to a Gas sales agreement listed as a Permitted
Encumbrance shall be delivered by Grantor to Grantee in accordance with the
terms of the Gas Purchase Contract.
5. Scheduling.
(a) Not less than 5 days prior to the first day of each
Month, Grantor will notify Grantee of the daily quantities of (i) Gas which
Grantor expects to be produced from each Well during such Month and (ii) the
quantity of Production Payment Gas which Grantor expects to be available for
delivery in kind to Grantee at the Delivery Points during such Month. Grantor
will use its reasonable efforts to cause Gas to be delivered at uniform daily
rates through each Month at the relevant Delivery Points. Production Payment
Gas shall be the first Gas produced and saved each day attributable to the
Subject Interests, as provided in the Conveyance.
(b) In the event any charges, penalties, costs or
expenses are incurred or payable to any transporting pipeline, or any other
party, as a result of Grantor's failure to notify Grantee of any increase or
decrease in daily quantities of Gas to be delivered at the Delivery Points,
then as between the parties hereto, Grantor shall be liable for and shall hold
Grantee harmless from and against such charges, penalties, costs or expenses.
In the event any charges, penalties, costs or expenses are incurred or payable
to any transporting pipeline, or any other party, as a result of Grantee's
failure to notify Grantor of any increase or decrease in daily quantities to be
received at any Delivery Points, then as between the parties hereto, Grantee
shall be liable for and shall hold Grantor harmless from and against such
charges, penalties, costs, or expenses. Each party shall promptly notify the
other of any notice received from any transporting pipeline, or other party,
that indicates an imbalance in deliveries exists or is occurring that may give
rise to any such charges, penalties, costs or expenses.
6. Quality Requirements. All Production Payment Hydrocarbons
delivered to Grantee, or to Grantee's credit, shall satisfy the quality
requirements and specifications as set
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forth in the First Transporter's transportation agreements and/or published
tariffs filed with either the FERC or applicable state agency for acceptance
and transportation of Gas at the relevant Delivery Point or as set forth in the
first purchaser's agreements for acceptance and purchase of Oil, as the same
may be modified from time to time, all without penalty or deduction for
nonconformity. All costs and expenses of treating, dehydrating, or compressing
Production Payment Hydrocarbons to satisfy the foregoing quality requirements
shall be borne and paid by Grantor.
7. Pressure. Grantor shall deliver, or cause to be delivered,
the Production Payment Gas at a pressure sufficient to deliver the same into
the First Transporter's pipeline at each Delivery Point against the operating
pressure of such First Transporter's pipeline in existence from time to time.
Grantee shall inform Grantor, as often as may be necessary, of the required
pressure of Gas delivered to Grantee or to Grantee's credit.
8. Operation of Subject Interests. At all times from the date
hereof until the termination of the Production Payment, and whether or not
Grantor is the operator of the Subject Interests, Grantor, at Grantor's cost
and expense, shall use its best efforts consistent with a prudent operator
standard to:
(i) cause the Subject Interests to be maintained
in full force and effect, and to be
developed, protected against drainage by
offset operations, and continuously operated
for the production of Hydrocarbons in a good
and workmanlike manner as would a prudent
operator (and without regard to the burden of
the Production Payment), all in accordance
with generally accepted industry practices,
applicable operating agreements, and all
applicable federal, state and local laws,
rules and regulations, and shall otherwise
comply with all applicable laws, rules and
regulations; provided, however, Grantor shall
have no obligation to maintain (or cause to
be maintained) any Subject Interest when a
prudent operator under the same or similar
circumstances would not do so, and in such
situation, Grantor may release the relevant
Lease or allow the same to lapse or terminate
in accordance with Section 11 of this
Agreement;
(ii) pay, or use all reasonable efforts to cause
to be paid, no later than 90 days after such
become due and payable, all rentals,
royalties and Production Burdens payable in
respect of the Subject Interests or the
production therefrom, and all costs, expenses
and liabilities incurred in or arising from
the operation or development of the Subject
Interests, or the producing, treating,
gathering, storing, marketing or transporting
of Hydrocarbons therefrom prior to delivery
to Grantee, or the credit of Grantee, at the
relevant Delivery Point;
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(iii) cause (for non-operated properties, use all
reasonable efforts to cause) all ▇▇▇▇▇,
machinery, equipment and facilities of any
kind now or hereafter located on the Subject
Interests, and necessary or useful in the
operation thereof for the production of
Hydrocarbons therefrom, to be provided and to
be kept in good and effective operating
condition as would a prudent operator (and
without regard to the burden of the
Production Payment), and promptly make all
useful or necessary repairs, renewals,
replacements, additions and improvements
thereof or thereto;
(iv) give or cause to be given to Grantee written
notice of every adverse claim or demand made
by any person affecting the Subject Interests
which is known to Grantor, the Hydrocarbons
produced therefrom, the Production Payment
and/or the Production Payment Hydrocarbons in
any manner whatsoever, and of any suit or
other legal proceeding instituted with
respect thereto, and at Grantor's expense
cause all necessary and proper steps to be
taken with reasonable diligence to protect
and defend the Subject Interests, the
Hydrocarbons produced therefrom, the
Production Payment and/or the Production
Payment Hydrocarbons against any such adverse
claim or demand, including (but not limited
to) the employment of counsel for the
prosecution or defense of litigation and the
contest, release or discharge of such adverse
claim or demand;
(v) cause the Subject Interests to be kept free
and clear of liens, charges and Encumbrances
of every character, other than the Permitted
Encumbrances;
(vi) subject to Section 1.07 of the Conveyance,
pay all Taxes when due and before they become
delinquent, and reimburse Grantee for any
Taxes paid by Grantee as a result of the
Production Payment or the Production Payment
Hydrocarbons or the production of same;
(vii) pay, in accordance with Grantor's customary
practices and before failure to pay would
give rise to any lien against any of the
Subject Interests, all operating expenses and
all ▇▇▇▇▇▇▇▇ under applicable joint operating
agreements (except to the extent contested in
good faith);
(viii) not resign as Operator of any of the Subject
Interests operated by Grantor (including
Subject Interests which Grantor becomes the
operator after the effective date of this
Agreement) until and unless such resignation
and the successor operator has been approved
in writing by Grantee;
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(ix) maintain or cause to be maintained sufficient
measurement, storage and receiving facilities
necessary to receive, control, gather and
deliver to the Delivery Points the production
of Oil and Gas from the Leases;
(x) except for ordinary wellbore maintenance
activities and other development activities
described in Schedule 1 to this Agreement,
not conduct any work or operations in the
wellbore of a Well, which work or operation
is related to any horizon, zone, formation or
interval not included in the Subject
Interests, without Grantor's prior written
consent;
(xi) consistent with a prudent operator standard,
use its reasonable efforts to achieve as soon
as possible, and thereafter use its
reasonable efforts to maintain, production of
Hydrocarbons from the Subject Interests at
rates not less than those projected in the
Reserve Report; and
(xii) consistent with a prudent operator standard,
and with applicable law, use its reasonable
efforts to produce and deliver to Grantee
each Month the Scheduled Amounts of the
Production Payment Hydrocarbons.
9. Development Activities.
Grantor agrees to perform timely or cause to be performed
timely each of the Development Activities, including, without limitation, the
drilling, completion and equipping of Gas and Oil ▇▇▇▇▇ located on the Leases;
the construction and installation of production, measurement, treating and
compression equipment or facilities; the construction, installation and
connection of pipelines; and any other type of activity which is necessary for
the prudent operation of the Leases and the ▇▇▇▇▇. Each activity and operation
shall be conducted by Grantor as a prudent operator, in accordance with the
terms and provisions of applicable operating agreements, unit agreements,
contracts for development or other similar agreements. Grantor (in its capacity
as Operator) shall use such efforts as would a prudent operator to cause all
non-operators, to the extent they are legally or contractually obligated to do
so, to bear and pay timely their respective undivided shares of all joint
expenses relating to the Development Activities.
10. Insurance: Damage or Loss.
(a) Grantor shall maintain or cause to be maintained, at
its sole cost and expense and with financially sound and reputable insurers
reasonably satisfactory to Grantee, insurance covering the Leases and all
pipelines, ▇▇▇▇▇, and facilities located thereon and in which Grantor owns an
interest against such liabilities, casualties, risks and contingencies, and in
such
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types as is customary in the case of independent oil companies engaged in the
development and operation of similar properties located in the State of
Michigan, including, without limitation, insurance of the types and coverages
described in Schedule 1 hereto and with limits of coverage no less than those
set out in Schedule 1. Such insurance shall name Grantee as an additional
insured as Grantee's interests appear. Grantor shall furnish certificates of
such insurance to Grantee and shall obtain endorsements to such policies
providing that the relevant insurer will notify Grantee not less than thirty
(30) days prior to the expiration or termination of any such policy of
insurance.
(b) In the event of any damage to or loss of any
pipeline, well, equipment or facility on or benefitting the Leases and in which
Grantor owns an interest, Grantor (at no cost to Grantee) shall promptly
redrill, rebuild, reconstruct, repair, restore or replace such damaged or lost
property, unless to do so would not be economically feasible (without regard to
the burden of the Production Payment, but taking into account insurance
proceeds and recoveries).
11. Abandonment of ▇▇▇▇▇.
(a) Until the termination of the Production Payment,
Grantor shall not, without first obtaining the written consent of Grantee,
abandon any Well or surrender, abandon or release any Lease or Subject Interest
or any part thereof; provided, however, that, without the consent of Grantee:
(i) If and when, in Grantor's reasonable judgment
exercised in good faith and as would a
prudent operator not burdened by the
Production Payment, any Well becomes no
longer capable of producing Hydrocarbons in
paying quantities (without regard to the
burden of the Production Payment) and it
would not be economically feasible (without
regard to the burden of the Production
Payment) to restore the productivity of such
Well by reworking, reconditioning, deepening,
plugging back, or otherwise, Grantor shall
have the right to abandon such Well.
(ii) Grantor shall have the right to surrender and
release any Subject Interest or part thereof
when, in the reasonable judgment of Grantor
exercised in good faith and as would a
prudent operator not burdened by the
Production Payment, there is no Well located
thereon which is capable of producing
Hydrocarbons in paying quantities and the
drilling of an additional well thereon would
not, in Grantor's reasonable opinion, be
economically feasible (without regard to the
burden of the Production Payment).
(iii) Grantor shall have the right to plug any Well
if required by applicable law, rule or
regulation or the terms of any Lease.
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(b) For all purposes of this Agreement, (i) a Well shall
be deemed to be capable of producing Hydrocarbons "in paying quantities" unless
and until there arises a condition which Grantor reasonably concludes to be
permanent, such that the aggregate value of the Hydrocarbons which are being
produced or which Grantor reasonably concludes will be produced from such Well,
net of Production Burdens and Taxes but without regard to the burden of the
Production Payment, no longer exceeds or will not exceed the costs and expenses
directly related to the operation and maintenance of such Well (excluding
unreasonable general office and management overhead and similar charges), and
(ii) the restoration of the productivity of a Well or the drilling of a Well
shall be deemed to be "economically feasible" whenever (x) the aggregate
discounted present value of the Hydrocarbons which it reasonably appears will
be produced from such Well, net of Production Burdens and Taxes but without
regard to the burden of the Production Payment, will exceed the costs and
expenses directly related to such restoration or drilling and the operation and
maintenance of such Well (excluding unreasonable general office and management
overhead and similar charges) and (y) a reasonably prudent operator would
undertake the restoration or drilling activity in question.
12. Drilling of Replacement ▇▇▇▇▇. Grantor covenants and agrees
that, in the event that any Well shall for any reason (other than depletion of
the reserves otherwise recoverable from such Well) be no longer capable of
producing Hydrocarbons in paying quantities, Grantor shall promptly drill an
Oil or Gas well to replace such Well, unless in Grantor's reasonable judgment,
exercised in good faith and as would a prudent operator not burdened by the
Production Payment, the drilling of such replacement well would not be
economically feasible or unless in Grantee's reasonable judgment the Scheduled
Amount of the Production Payment Hydrocarbons, plus additional quantities
necessary to cover all reasonable costs of production, can be delivered in
accordance with the Conveyance without drilling such replacement well. Grantee
shall confirm in writing any decision made pursuant to this section.
13. Information. (a) At all times from the date hereof until the
termination of the Production Payment, Grantor, at its own expense, shall
furnish to Grantee the following reports and information at the times indicated
below, except to the extent precluded from doing so by the provisions of any of
the Permitted Encumbrances.
(i) Quarterly within 60 days after the end of
each fiscal quarter of Grantor and annually within 120 days after the end of
each fiscal year of Grantor, Grantor shall furnish Grantor's financial
statements as of the end of and for such period, including a balance sheet and
statements of income, stockholder's equity and cash flow, prepared in
accordance with generally accepted accounting principles and, with respect to
the annual financial statements, accompanied by a report of the Grantor's
independent certified public accountants stating that their examination was
made in accordance with generally accepted auditing standards and that in their
opinion such financial statements fairly present Grantor's financial condition,
results of operations and changes in financial position in accordance with
generally accepted accounting principles consistently applied.
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(ii) Annually on or before September 1st of each
year (commencing with September 1, 1996), Grantor shall furnish an engineering
report satisfactory to Grantee prepared as of August 1 of such year by the
Independent Engineer, incorporating all current information and data available
to Grantor pertinent to the estimation of oil and gas reserves attributable to
the Subject Interests and setting forth the following:
(A) an estimation of the oil and gas
reserves, classified by appropriate
categories, as of such date
attributable to the Subject
Interests,
(B) a projection of the rate of
production of, and net income from,
such reserves,
(C) a calculation of the present worth
of such net income from such
reserves,
(D) a calculation of the present worth
of such net income discounted at a
rate or rates designated from time
to time by Grantee, and
(E) a schedule or complete description
of all assumptions, estimates and
projections made or used in the
preparation of such report,
including, without limitation,
estimated future product prices,
capital expenditures, operating
expenses and Taxes.
Each such report shall be prepared in accordance with customary and generally
accepted standards and practices for petroleum engineers, shall be based on
such assumptions as to costs, product prices and similar factors as Grantee
shall designate from time to time. Grantee shall be furnished a copy of any
other reserve report prepared for Grantor by any independent petroleum
engineering firm covering any of the Subject Interests.
(iii) Upon request of Grantee (but not more often
than quarterly), Grantor shall furnish reports concerning the status of
operations affecting each of the Leases and the ▇▇▇▇▇ and the production of
Hydrocarbons, any new drilling or development activity, any proposed method of
secondary recovery by repressuring or otherwise, or any other planned or
proposed action with respect to the Material Properties, the decision as to
which may increase or reduce the quantity of Hydrocarbons ultimately
recoverable from the Material Properties, or the rate of production therefrom,
or which may shorten or prolong the period of time required for recovery of the
Production Payment.
(iv) Monthly, Grantor shall furnish a report
showing the gross production of Hydrocarbons from each Well or Lease, the gross
production of Hydrocarbons attributable to the Subject Interests (including any
Lease Use Hydrocarbons and Non-Consent
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Hydrocarbons), the quantity of Hydrocarbons sold for Grantor's account or taken
in kind by Grantor, the quantity of Production Payment Hydrocarbons (if any)
sold for Grantee's account, the quantity of Production Payment Hydrocarbons
delivered in kind to Grantee, the Taxes paid by Grantor on production from the
Subject Interests (including the Production Payment), the current status of any
Gas imbalances, if any, affecting the Material Properties, the cumulative
amount of Production Payment Hydrocarbons delivered to Grantee to date, the
number of ▇▇▇▇▇ operated, ▇▇▇▇▇ drilled and ▇▇▇▇▇ abandoned, and the lease
operating expenses (which may be for the month prior to the month for which
production of Hydrocarbons is being indicated in such report).
(v) Upon request, Grantor shall furnish Grantee
copies of plats or maps showing property lines and Well locations, Well logs,
core analysis data, flow and pressure tests, natural gas analyses and casing
programs and other similar information related to the Leases, the Subject
Interests, the ▇▇▇▇▇ and the production therefrom.
(vi) Quarterly, a certificate executed by an
officer of Grantor certifying that to the best of his knowledge after
reasonable investigation Grantor is in compliance in all material respects with
the terms of the Conveyance and this Agreement, or if not, specifying in
reasonable detail any exceptions thereto.
(vii) Upon request, Grantor shall furnish such
other information as Grantee may reasonably request.
(b) Grantee shall have the right, at its sole expense, to
audit the books and records of Grantor from time to time with respect to the
Subject Interests, including, without limitation, all information with respect
to quantities of Hydrocarbons produced from the Leases, the calculation of
Lease Use Hydrocarbons and Non-Consent Hydrocarbons, and the payment by Grantor
of all costs and expenses incurred in connection with the Subject Interests.
Such audits shall be conducted by Grantee so as to result in a minimum
disruption in the ongoing business and affairs of Grantor and shall be
conducted during normal business hours at Grantor's offices or at the offices
where Grantor maintains the records relating to the items set forth above.
This audit right shall be a free and unrestricted right, subject to the
limitations above set forth, and shall survive the termination of the
Production Payment, except that no audit shall cover a period beginning more
than two years prior to the date of the commencement of the audit. If, as a
result of any such audit, it is determined that any amount is due Grantee as a
result of the failure of Grantor to deliver properly all Production Payment
Hydrocarbons, or the proceeds thereof, to Grantee in accordance with the terms
of the Conveyance and this Agreement, Grantor shall deliver to Grantee the
proceeds attributable to the Production Payment Hydrocarbons not delivered or
which Grantor failed to remit, plus interest at the Floating Rate from the date
that such proceeds should have been paid in accordance with the terms of the
Conveyance and this Agreement to the date of payment.
(c) All information provided to Grantee by Grantor
pursuant to this Section 13 and falling within the scope of the Confidentiality
Agreements referred to in the Purchase
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Agreement shall be maintained as confidential and used by Grantee only in
accordance with the provisions of such Confidentiality Agreements.
14. Access to Subject Interests. Grantor shall permit the duly
authorized representatives of Grantee, at any reasonable time, but at Grantee's
risk and expense, to make such inspection of the Subject Interests and the
Assets used in the operation thereof as such representatives shall deem proper.
15. Remedies of Grantee: Mortgage and Security Interest. At any
time and from time to time until the termination of the Production Payment, if
Grantor shall fail to perform or observe any of the covenants or agreements
provided herein or in the Conveyance to be performed or observed by Grantor,
Grantee, in addition to Grantee's right to recover damages and all other
remedies available to Grantee at law or in equity, may, if such failure shall
continue unremedied after 45 days after written notice thereof is delivered to
Grantor:
(i) perform or cause to be performed on behalf of
and at the expense of Grantor, any obligation
which has not been performed or observed by
Grantor, in which event Grantee may advance
funds and incur and pay bills for expenses
for such purpose and shall be reimbursed out
of the proceeds attributable to Grantor's
interest in the Subject Interests, together
with interest on the unpaid amounts thereof
at the Floating Rate, from the date of such
advance or payment by Grantee until the date
reimbursed by Grantor;
(ii) upon written notice to Grantor and only as to
a default in performance of obligations of
Grantor other than those existing under
Section 13 succeed to and exercise any and
all rights of the Grantor as the owner of the
Subject Interests, and use in connection
therewith all property of Grantor as may be
useful or appropriate for the production,
treating, storing or transportation of
Hydrocarbons prior to delivery to the
Delivery Points, and all other properties and
rights of a similar character then held by
Grantor and situated upon or useful or held
for future use in connection with the
exploration, development or operation of the
Subject Interests for the production,
treating, storing, or transportation of
Hydrocarbons prior to delivery to the
Delivery Points and Grantee, and shall have
the right, on behalf and for the account of
Grantor, to sell and utilize all of the
Hydrocarbons attributable to Grantor's
interest in the Subject Interests and to
apply the proceeds thereof to the costs and
expenses of the operation and development of
the Subject Interests and to reimburse
Grantee for any amounts so expended by
Grantee, and Grantor shall reimburse Grantee
upon demand for all amounts so expended by
Grantee, to the extent such amounts are not
paid out
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of Grantor's interest in the proceeds of such
Hydrocarbons, together with interest on such
amounts at the Floating Rate from the date
expended to the date repaid;
(iii) pay any of the costs, expenses, Taxes (which
Taxes are not being contested in good faith
by Grantor) or other amounts which Grantor
has agreed to pay under the Conveyance which
have become delinquent, and to be reimbursed
out of the proceeds of the Hydrocarbons
attributable to the Grantor's interest in the
Subject Interests, together with interest on
the unliquidated amounts thereof at the
Floating Rate from the date of such payment
by Grantee to the date repaid; and/or
(iv) apply to a court of equity for the specific
performance or observance of any such
covenant or condition and in aid of the
execution of any power herein granted and for
the appointment of a receiver of the Subject
Interests and the Hydrocarbons produced
therefrom.
Grantee's exercise of the remedies provided in subclauses (i) through
(iii) above shall be made in accordance with any and all obligations, duties or
responsibilities of Grantor under any agreement then in effect and covering or
affecting the Subject Interests, including, without limitation, the obligations
and duties of Grantor under any of the Leases. Grantee shall promptly advise
Grantor in writing of any actions it may take according to this Section 15.
In order to secure payment of all amounts advanced or paid by Grantee
under this Section 15 and to secure performance by Grantor of all of the
Obligations, Grantor has, contemporaneously with execution of this Agreement,
granted to Grantee a lien and security interest in and to all of Grantor's
interests in the Subject Interests and all of Grantor's interests in equipment,
fixtures, inventory, goods, accounts, contract rights and general intangibles,
whether presently existing or to arise in the future, now owned or hereafter
acquired, insofar as the same (i) are located on the Leases, (ii) are used in
connection with, or related to the ownership or operation of, the Leases or
Subject Interests, or (iii) arise out of the sale or other conveyance of oil,
gas or other minerals produced and saved from the Leases and attributable to
the Subject Interests, together with any and all products and proceeds of any
of the foregoing. In such regard, Grantee shall be entitled to exercise all of
the rights and remedies of a mortgagee and secured party under applicable laws
in the event of any default by Grantor in the performance or payment (as
applicable) of the Obligations; provided, however, that, prior to the exercise
of its rights to foreclose or other remedies under this Section 15, Grantee
shall, if it has not previously provided any notice to Grantor under this
Section 15 relating to such default, give Grantor notice of any such default
that states in reasonable detail the circumstances which constitute such
default and a period of 45 days (or such longer period, if any, as may be
required by law) after the giving of such notice to cure such default.
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Following any default by Grantor in the performance or payment of the
Obligations and the passage of 45 days of the giving by Grantee to Grantor of
notice of such default without same, having been cured by Grantor, any
purchaser of Hydrocarbons from or attributable to the Subject Interests is
authorized and directed to make payment to Grantee out of the Hydrocarbons
attributable to Grantor's interest in the Subject Interests for any amount
which Grantee shall certify to such purchaser that it has paid and which
Grantor is obligated to pay hereunder. Any insurer is authorized and directed
to make payment to Grantee of proceeds of insurance described in Section 10(a)
for any amount which Grantee shall certify to such insurer that it has expended
in redrilling, rebuilding, reconstructing, repairing, restoring or replacing
damaged or lost property which Grantor has failed or refused to do promptly
pursuant to Section 10(b). Grantor hereby designates Grantee as its agent and
attorney in fact to execute any instruments which may be necessary or
appropriate, including, without limitation, designations of operator, to enable
Grantee to exercise its rights under this Section 15. This designation and
appointment shall be irrevocable as long as the Production Payment remains in
effect.
16. Force Majeure. In the event of either party being rendered
unable, wholly or in part, by Force Majeure to carry out its obligations under
this Agreement other than to make payments due hereunder, it is agreed that on
such party's giving notice and full particulars of such Force Majeure in
writing or by telecopy to the other party as soon possible after the occurrence
of the cause relied on, then the obligations of the party giving such notice,
so far as they are affected by such Force Majeure, shall be suspended during
the continuance of any inability so caused but for no longer period, and such
cause shall as far as possible be remedied with all reasonable dispatch.
17. Notices. All notices, requests, demands, instructions and
other communications required or permitted to be given hereunder shall be in
writing and shall be delivered personally, mailed by certified mail, postage
prepaid and return receipt requested or sent by telecopier, as follows:
If to Grantor, addressed to:
▇▇▇▇▇▇▇ OIL OF MICHIGAN, INC.
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Attention: C.E. "▇▇▇▇▇" ▇▇▇▇▇, President
Telecopy: ▇▇▇-▇▇▇-▇▇▇▇
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If to Grantee, addressed to:
KCS ENERGY MARKETING, INC.
▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇
Attention: ▇▇. ▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇, President
Telecopy: (▇▇▇) ▇▇▇-▇▇▇▇
or to such other place within the United States of America as either party may
designate as to itself by written notice to the other. All notices given by
personal delivery or mail shall be effective on the date of actual receipt at
the appropriate address. Notice give by telecopier shall be effective upon
actual receipt if received during recipient's normal business hours or at the
beginning of the next business day after receipt if received after the
recipient's normal business hours.
18. Indemnity. It is understood and agreed that, except as set
forth in Section 1.07 of the Conveyance, under neither this Agreement nor the
Conveyance does Grantee assume or shall Grantee ever be liable or responsible
in any way for the payment of any costs, expenses or liabilities incurred in
connection with developing, exploring, drilling, equipping, testing, operating,
producing, maintaining or abandoning the Subject Interests or any Well or
facility thereon or storing, handling, treating or transporting to the relevant
Delivery Point production therefrom. Grantor shall fully defend, protect,
indemnify and hold Grantee, its officers, employees, representatives and agents
harmless from and against any and all claims, demands, suits and causes of
action of every kind and character, including reasonable attorneys' fees and
costs of defense, which may be made or asserted by any third party or
governmental agency or entity, or by Grantor, Grantor's employees, agents,
contractors and subcontractors and their employees, agents, on account of
personal injury, death or property damage (including, without limitation,
claims for pollution and environmental damage), any civil or criminal fines or
penalties and any causes of action alleging statutory liability, relating to,
arising out of, or in any way incidental to the Subject Interests, the ▇▇▇▇▇
and facilities thereon or used in connection therewith and in which Grantor
owns an interest, the operation thereof and the production therefrom. This
indemnity shall apply, without limitation, to any liability imposed upon any
party indemnified hereunder as a result of any statute, rule, regulation or
theory of strict liability, but excluding the gross negligence, bad faith,
willful misconduct and violations of law by Grantee.
19. Successors and Assigns. All the covenants and agreements of
Grantor and Grantee herein contained shall be deemed to be covenants running
with the land and shall be binding upon the successors and assigns of Grantor's
interest in the Subject Interests and Grantee's interest in the Production
Payment and shall inure to the benefit of Grantor, Grantee, and their
respective successors and permitted assigns. The foregoing notwithstanding,
nothing herein is intended to modify or shall have the effect of modifying the
restrictions set forth in the Conveyance regarding mortgage, assignment,
transfer or pooling of Grantor's interest in the Subject Interests; and the
preceding sentence shall not be deemed to permit any assignment or
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other transfer of the interest of Grantor in any of the Subject Interests that
is not specifically permitted by the provisions of the Conveyance. Nothing
contained in this instrument or in the Conveyance shall in any way limit or
restrict the right of Grantee, or Grantee's successors and assigns, to sell,
convey, assign or mortgage the Production Payment in whole or in part. If
Grantee, or Grantee's successors and assigns, at any time shall execute a
mortgage, pledge or deed of trust covering all or any part of the Production
Payment as security for any obligation, the mortgagee, the pledgee or the
trustee therein named or the holder of the obligation secured thereby shall be
entitled, to the extent such mortgage, pledge or deed of trust so provides and
upon the occurrence or existence of the event or condition therein stated, if
so conditioned, to exercise all of the rights, remedies, powers and privileges
herein conferred upon Grantee, and to give or withhold all consents herein
required or permitted to be obtained from Grantee.
20. Damages. It is recognized that Grantee will look solely to
the Production Payment Hydrocarbons for satisfaction and discharge of the
Production Payment, and that Grantor is not personally liable for the payment
and discharge thereof. However, the foregoing provision shall not relieve
Grantor of any of its separate obligations under this Agreement, the Gas
Purchase Contract, or the Purchase Agreement, nor any obligation to respond in
damages for any breach of any of the provisions of such agreements.
21. Cost of Litigation. In the event of a breach of this
Agreement, or if a dispute arising hereunder is not resolved by mutual
agreement, and either party should ▇▇▇ the other party to enforce its rights
hereunder or for breach hereof, the party prevailing in such litigation shall
be entitled to recover its costs and reasonable attorneys' fees in addition to
any other remedy or recovery to which it may be entitled.
22. Entire Agreement: Amendments: Waiver. This Agreement
constitutes the entire agreement between the parties hereto concerning the
matters addressed herein. This Agreement may not be amended, and no rights
hereunder may be waived, except by a written document signed by the duly
authorized representatives of the parties. No waiver of any of the provisions
of this Agreement shall be deemed to be or shall constitute a waiver of any
other provisions hereof (whether or not similar), nor shall such waiver
constitute a continuing waiver unless otherwise expressly provided.
23. Headings. The headings of the sections of this Agreement are
for guidance and convenience of reference only and shall not limit or otherwise
affect any of the terms or provisions of this Agreement.
24. Counterpart Execution. This Agreement may be executed by
Grantor and Grantee in any number of counterparts, each of which shall be
deemed an original instrument, but all of which shall constitute but one and
the same Agreement.
25. Partial Invalidity. Except as otherwise expressly stated
herein, in the event any provision contained in this Agreement shall for any
reason be held invalid, illegal or unenforceable by a court or regulatory
agency of competent jurisdiction by reason of a statutory
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change or enactment, such invalidity, illegality or unenforceability shall not
affect the remaining provisions of this Agreement.
26. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF MICHIGAN, EXCEPT TO THE
EXTENT THE LAWS OF ANY OTHER STATE ARE MANDATORILY APPLICABLE.
EXECUTED in multiple originals as of the date first above written.
▇▇▇▇▇▇▇ OIL OF MICHIGAN, INC.
By:
--------------------------------
C.E. "▇▇▇▇▇" ▇▇▇▇▇, President
KCS ENERGY MARKETING, INC.
By:
--------------------------------
▇▇▇▇▇ ▇▇▇ ▇▇▇▇▇, President
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